European Residential REIT T.ERE.UN

Scotia comments on results

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Q4/21 Glance: Big FV Gains; Trading At A Big Discount to NAV

OUR TAKE: Positive. IFRS NAVPU (excl. deferred tax liability) increased to $6.06 (up 10% q/q), and now ERES is trading at 29.7% discount to its reported NAV. This is a very large discount for a multi-family residential REIT. ERES recorded FV gains of $0.55/unit in Q4/21 which equates to 12.8% of current unit price. (Even if we include deferred tax liability, discount to IFRS NAV is still 23%).

Q4 FFOPU was in line with our estimate as operating metrics (Exhibit 1) continue to look good. FFOPU grew +13% y/y in full year 2021 as SP rents grew 3.8% y/y in 2021 despite restrictive regulatory environment and at the upper-end of management guidance. Distribution was increased 9% effective Mar’22. Distribution yield will be 4.1% (from 3.7% previously). Full update post conference call tomorrow @ 9am.

KEY POINTS

IFRS NAVPU grew ~10% q/q to €4.21/unit (C$6.06 at current f/x rate): We exclude deferred tax liability of €0.38/unit in this calculation. ERES recorded FV gains of €86.7M in Q4/21 (€0.38/unit), similar to €76.9M in Q3/21 (€0.33/unit), and well above €34.9M of gains reported in Q2/21 (€0.15/unit) and €4.0M FV loss in Q1/21 (€0.02/unit). IFRS cap rates on the residential portfolio were reduced by 20 bps to 3.33% this quarter vs. 3.53% in Q3/21.

In-line quarter: Q4 FFOPU was €0.041 (vs. €0.035 last year) and in line with Scotia estimate of €0.042 and consensus estimate of €0.040. SP NOI grew +5.2% in full year 2021 led by SP rent growth of +3.8%. NOI margin increased to 77.4% vs 76.2% last year. Excluding impact of landlord levy rebate (€634k in full year), NOI margin would have been 76.6% (still 40bp higher than last year). Effective Jan’22, landlord levy will be reduced, and we should see NOI expansion in the next couple of years as levy is eventually abolished.

Occupancy up slightly over last quarter: Total portfolio occupancy came in at 98.6% vs 98.2% in Q3/21. SP Occupancy at 98.7% vs 98.5% last quarter and 98.3% last year. Occupancy has remained steady throughout the pandemic.

Strong rent growth on turnovers: growth remained strong on turnovers (unrestricted rental units). ERES' rent growth was 19% on turnovers in Q4/21 vs 16% range in last two quarters. For full year, rent growth on suite turnover has accelerated to 16.3% this year vs 9.9% last year. As a reminder, rent growth on regulated suites has been set at 0% for July 1, 2021 to June 30, 2022. The government has set a rental cap on annual indexation for Liberalized suites at CPI +1% for three years (May 1, 2021 to 30 April, 2024). Turnovers remain a key source of rental revenue growth moving forward. We note, management has previously guided for a +3 to +4% rent growth in 2022.

Acquisition activity – very active lately: ERES completed €115.5M of acquisitions in Q4/21, and announced another €65M of acquisitions in Q1/22. We assume these acquisitions will be financed with debt. Leverage (Debt to GBV) at 46.8% as of Q4/21. Based on current liquidity, ERES can complete another €400M of acquisitions (although leverage will go up higher). We are fine if leverage increases to 50% range in the near-term. Weighted average interest rate is 1.52% p.a. and recent financing came in at low-1% range and continues to be attractive.