February 24, 2021
European Residential REIT
Strong finish to 2020, distribution hike signals confidence for year ahead
Impact: Modestly positive
European Residential REIT ("ERE") reported FFOPU of €0.035, up 9% YoY, in line with RBC/consensus at €0.034E/€0.029E.
• IFRS NAV (pre-tax): €3.27, +€0.03 QoQ (+1%) and +€0.22 (+7%) YoY • Resi SP-NOI growth: +5.3% YoY (SP-Rev. +5.1%; SP-Exp. +4.1%)
• Resi SP-AMR: €870, +€33 YoY (+3.9%) from €837
• Resi SP-Occupancy: 98.8%, +90 bps YoY from 97.9%
• Resi SP-AMR x SP-Occupancy = Net SP-AMR: €859, +4.9% YoY
• D/GBV: 47.2%, +100 bps QoQ and +130 bps YoY
• Distribution increase: +4.8% to €0.11/unit annualized in Mar-2021
First impression
Our view: ERE delivered a strong and in-line Q4 print, underpinned by same-property revenue growth of 5.1%, compared with 3.9% in 2020 and 5.0% in 2019 (excluding pass-through revenues). With €102MM of available liquidity and reasonable financial leverage, ERE remains focused on capitalizing on attractive acquisition opportunities in the Netherlands (and possibly beyond). Where yield spreads remain 2.3–3.0%, in line with its 2020 and 2019 acquisitions at 2.9% and 2.4%. C/C Wednesday, February 24, at 9AM ET; dial-in 416-406-0743 (passcode: 8612870#)
FFOPU in line with our forecast. Relative to our call, FFOPU of €0.035 was 3% ahead of our €0.034E, driven almost entirely by higher-than-expected NOI (€0.001). Residual variances to our forecast were immaterial. While ERE's net fair value gains in Q4 were modest at €5MM (€0.02/unit), they bring the 2020 total to €46MM (€0.20/unit). Of which, 70% was recorded since the onset of the pandemic (i.e., Q2–Q4), including 47% in Q3.
Counter-cyclical and defensive characteristics still shining. In our view, ERE's same-property results highlight resilient demand in the Netherlands amid the ongoing housing shortage. While year-over-year figures reflect annual rent indexation on July 1st, turnover, and the conversion to liberalized suites, the portfolio was stable on a sequential basis with occupancy and AMR of 98.8% (-20 bps) and €870 (+0.5%).
€61MM of Q4 acquisitions lift 2020 tally to €81MM. During the quarter, ERE completed three transactions in the Netherlands with 295 suites for €61MM (€206,000/suite) at a 3.8% cap rate. The properties were financed with cash on hand, draws on the REIT's credit facility, and €34MM of mortgage debt at a 1.0% interest rate. This brings ERE's 2020 acquisition total to eight properties with 415 suites for €81MM (€195,000/suite) at a 3.9% cap rate—through four transactions in H2/20. This compares to 91 properties with 3,541 suites and 106,000 sf of ancillary commercial GLA acquired in 2019 for €751MM (~€203,000/suite) at a ~3.9% cap rate.