European Residential REIT T.ERE.UN

Alternate Symbol(s): EREUF

European Residential REIT is a Canada-based open-ended real estate investment trust. The Company’s objectives are to maintain strong financial management with a conservative approach to its capital structure, leverage and coverage ratios to provide Unitholders with long-term, stable and growing cash distributions and maintain a focus on maximizing occupancy and responsibly growing occupied AMR in accordance with local conditions in each of its markets. It owns a portfolio of 158 multi-residential properties, comprised of approximately 6,900 suites and ancillary retail space located in the Netherlands, and owns one office property in Germany and one office property in Belgium. Its Commercial properties are located in Belgium and Germany and managed by Maple Knoll. Its commercial properties include Brussels, Belgium and Greater Munich, Germany. Its residential properties include Gelderland, Doorwerth; Groningen, Hoogezand; Limburg, Vaals; Limburg, Venray, and others.

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Post by retiredcfon May 04, 2022 7:56am

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Post# 34654063

RBC

Their upside scenario target is $7.25. GLTA

May 3, 2022

European Residential REIT Q1 in line; a safe place to be

Our view: European Residential REIT (“ERES”) reported an in-line Q1, with FFO/unit of $0.042, +17% y/y. Turnover spread continues to accelerate, now at +21%, reflective of the acute housing shortage. Management’s well-articulated ‘inflation protection’ nature of its operating cost structure continues to prove out with NOI margin up 110 bps y/y. Maintain Outperform rating and target of $6.00.

Key points:

• Operating performance: Q1 SP NOI +5.3% y/y (SP-Rev +3.8%, SP-Exp -0.7%); Resi SP-Occupancy: 98.6%, +30bps y/y. Turnover spreads: +21% vs +19% in Q4/21 and +16% in Q3/21 (2.6% of suites turned in the Q1 or ~10% annualized). Renewal spreads: Notices were served on 96% of portfolio for a 2.95% rent increase effective July 1, 2022. The continued acceleration in leasing spreads is reflective of the acute housing shortage in the Netherlands. ERES looks comfortably on track to hit at least 5% SP NOI growth in 2022.

No margin pressure here: Consistent with management’s message and guide, ERES is fairly insulated from inflation pressures given utility and energy costs are mostly borne by tenants, property management is based on a fixed percentage of revenue and there is no wage pressures as external asset management cost is based on historical costs. Indeed, SP NOI margin was up 110 bps y/y to 76.6%, due to lower repairs & maintenance and lower landlord levy tax. NOI margin guide of 76-79% remains unchanged.
Capital allocation: Acquired 246 suites for €62m in the quarter and 110 suites in Rotterdam for €23m post quarter. The Rotterdam portfolio has a going-in cap rate of 3.35% but with significant upside to convert to liberalized suites. It was financed short term via a CAPREIT promissory note at 1.5%, which will be refinanced at 2.5%. Management noted no change to cap rates, positive investing spread still achievable and continuing to take a “thoughtful” acquisition stance.
Debt is now more expensive: D/GBV was 47.7%. Average debt cost is 1.5%, 3.7-year term, with ~14% of mortgages maturing at 1.24% in 2022 and 2023. We estimate that based on current debt cost of 2.5%, this impacts FFO/unit by €0.006 annualized.
Estimates change: 2022 FFOPU estimate is unchanged at €0.18; our 2023 FFOPU is decreased slightly to €0.18 from €0.19, reflecting higher interest expense. Our NAVPU is largely unchanged at €4.10 based on a relatively conservative 3.65% cap rate.
Maintain Outperform rating: Our target of $6.00 is based on parity to one year hence NAV. ERES trades at an implied cap rate of 4%, which is still comfortably above the sharply-risen 10-year bond yield in the Netherlands of 1.25%. In the context of today’s inflationary environment, we believe that ERES is a safe place to be in, especially if the NOI keeps growing at ~5%/annum and the cost structure is largely inflation- protected