European Residential REIT (“ERES”) reported FFOPU of €0.036, up 9% YoY and in line with RBC/consensus at €0.035E/€0.030E.
• IFRS NAV (pre-tax): €3.26, -€0.01 QoQ (nil-%) and +€0.15 (+5%) YoY • Resi SP-NOI growth: +4.0% YoY (SP-Rev. +4.2%; SP-Exp. +4.7%)
• Resi SP-AMR: €862, +€34 YoY (+4.1%) from €828
• Resi SP-Occupancy: 98.3%, flat YoY from 98.3%
• Resi SP-AMR x SP-Occupancy = Net SP-AMR: €847, +3.9% YoY • D/GBV: 47.3%, +10 bps QoQ and +250 bps YoY
First Impression
Our view: ERES delivered a strong and in-line Q1 print, with FFOPU growth of 9%, driven by SP-NOI growth of 4.0% (in line with the 4.0% TTM average) and the contribution from acquisitions completed over the past year. More importantly, we see growing mark-to-market potential providing sufficient cushion to offset substantially all of the more stringent rent control measures introduced thus far in 2021. For context, ERES’s average renewal spread on suite turnover now stands at 14%, up from 8% in Q1/20 and an average of 10% in 2020. C/C Wednesday, May 5, at 9AM ET; dial- in 416-406-0743 (passcode: 5247379#)
FFOPU in line with our forecast. Relative to our call, FFOPU of €0.036 was 4% ahead of our €0.035E, driven primarily by higher-than-expected NOI (€0.001) and lower-than-expected G&A costs (€0.001). Residual variances to our forecast were immaterial. ERES recorded a nominal net fair value markdown in Q1 of €4MM (-€0.02/unit), following €46MM (€0.20/unit) of fair value gains in 2020.
SP-NOI growth outlook effectively unchanged despite more stringent rent control measures. The Dutch government has set its 2021 rent indexation caps at: 1) nil-% for regulated suites (~43% of total) from July 1, 2021 to June 30, 2022 (i.e., 1Y “rent freeze”); and, 2) CPI+1.0% or 2.4% for liberalized suites (~57% of total) for three years, from May 1, 2021 to April 30, 2024. While the “rent freeze” for regulated suites was expected, the maximum increase for liberalized suites is down from our prior estimate of ~3.5%. While the latter is likely to shave ~60 bps off our blended ~3.1% AMR growth forecast (see Exhibit 3 in our last note), we expect ERES’s growing mark-to-market potential to provide a ~40 bps offset.
Acquisition activity pauses in Q1. Following the acquisition of 415 suites in 2020 for €81MM, activity paused in Q1/20. In March, ERES extended its €165MM pipeline agreement with CAPREIT by two years, adding to its already healthy corporate liquidity position of €101MM (via €11MM in cash and €90MM in available credit). In the press release, CEO Phillip Burns commented, “we continue to aim to grow externally through accretive acquisitions in the quarters to come.”