European Residential REIT T.ERE.UN

Raymond James report says ERE sale at $4.50 likely (below)

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European Residential REIT  (ERE.UN-TSX) 

Real Estate | Residential

3Q24 Results: Asset Sales may Come Fast & Furious Once Unitholder Approval is Received

Recommendation

European Residential REIT (ERES) reported 3Q24 FFO as expected at €0.040/unit, but down ~5% YoY from €0.042/unit in 3Q23. ERES generated +2.1% 3Q24 SP-NOI growth YoY.

Reducing Portfolio Size by 50% with Targeted Strategic Asset Dispositions: ERES has announced 2 pending transactions, which include: 1) a portfolio sale of ~2,947 residential suites to a consortium that comprises TPG Angelo Gordon (TPG), Dream Unlimited Corporation, Stadium Capital Partners, and several other co-investment partners for ~€695 mln or ~€236k/suite; 2) the sale of ~232 residential suites for ~€44 mln (or ~€190k/suite). Once completed, ERES’ Dutch MFR portfolio shrinks by ~50% to ~3,097 suites (vs. ~6,276 suites at Sept-30). ERES’ pending transactions could close in late 4Q24, or early 1Q25, subject to a purchasers’ option with respect to closing dates, and the receipt of all regulatory approvals including the Dutch Competition Act.

Seeking Unitholder Blessing at an Upcoming Special Meeting to Strategically Execute Additional Asset Sales as Market Conditions Allow: For now, ERES has paused any further asset sales, as ERES has announced plans to hold a special unitholder meeting on January 7, 2025 to seek approval to amend its Declaration of Trust (DOT). ERES seeks the authority to: 1) to sell ERES’ remaining assets in 1 or more deals as market conditions allow; 2) to distribute the net cash sales proceeds at a time determined by ERES’ Board; and 3) to wind-up, liquidate, dissolve or take any such similar action to terminate ERES on such terms and conditions determined by its Board.

Pro Forma Balance Sheet Expected to be Right Sized; Announces Planned Special Cash Distribution and Monthly Distribution Rate Adjustment Post Deal Closings: ERES intends to utilize cash proceeds from pending asset sales to repay over ~€421 mln in outstanding secured debt (average interest rate: ~2%) with an average term to maturity of ~2 years and to repay amounts drawn from the REIT’s revolving credit facilities. Notably, ERES’ pro forma financial leverage is estimated to be ~33-35% (vs. ~52% at Sept-30). ERES anticipates paying a special cash distribution of €0.75/unit (or ~$1.12/unit based on an ~1.49 EUR/CAD F/X rate at Nov-8) shortly after the portfolio sale transaction closes (either in late 4Q24 or in early 1Q25). ERES intends to adjust its monthly distribution rate by ~50% to reflect its smaller Dutch MFR portfolio size.

Key Takeaway

ERES’ pro forma Dutch residential asset portfolio is weighted towards MFR suites within the urban Randstad area (~66% of pro forma suites), with also a greater weighting to regulated suites versus liberalized suites. If unitholder approval is received in Jan-25, additional asset divestitures could come fast and furious, in our view. We believe ERES’ smaller Dutch MFR portfolio may be more accessible to a greater potential pool of buyers to execute a near-term M&A/privatization event.

Valuation

ERES trades at 32.0x 2025E AFFO (F/X adjusted), vs. ~16.8x for its Cdn MFR peers, ~23% below our $4.50 NAV estimate (4.75% cap rate), and yields 2.6% (2025E AFFO payout: ~90%). ERES trades at an implied ~5.9% cap rate or ~€223k/suite. Our new C$4.50 price target equals our pre-distribution NAV estimate given a higher probability in our view of a near-term M&A/privatization event.