European Residential REIT T.ERE.UN

TD comments

[incomedreamer11]

Event       Q3/23 results and forecast update.

Impact: NEUTRAL Q3/23 results.

FFO/unit of €0.042 was in-line with our estimate/consensus but 5% lower y/y on elevated interest costs. Dutch apartment market fundamentals remained strong, highlighted by +7.9% SPNOI growth (versus +7.9% in Q2/23 and +5.3% in Q1/23) that was driven by +7.1% AMR growth. We expect a continuation of strong residential operating results and are forecasting 6.1%/5.4% SPNOI growth for 2024/2025.
Occupancy of 98.7% remained at the upper-end of management's target, representing effectively full occupancy with the majority of vacant suites only temporarily offline for value-enhancing initiatives. Uplifts on turnover were strong at +19.5% for the quarter.
Management expects to maintain ~20% uplifts on turnover near term while also benefiting from good growth on renewals (~4% average for 2023).

Update on Individual Unit Sales.
With single family housing pricing holding firm versus price declines in multi-residential properties, management continues to explore single family sales as a way to surface value. On the call, ERES noted it had begun outreach on potential unit sales to existing residents, focusing on buildings that are not wholly-owned and single-family homes. Three single-unit regulated townhouses were sold in Q3 at premiums to IFRS value (despite requiring significant capex). Looking ahead, management expects unit sales volumes to increase in Q4/ Q1 and will use proceeds to reduce leverage. While individual unit sales should be accretive to NAV, we do not anticipate the program becoming large enough to be overly material.

Forecast Update.
Our 2023 AFFO estimates are unchanged while our 2024/2025 estimates decline ~2% largely on higher interest expense. Our NAV is -9% to €2.90 (CAD NAV estimate -9% to $4.30) on a 30bps increase to our weighted average cap rate to 4.5%. Our forecast calls for largely flat earnings with strong NOI growth offset by higher interest costs.

TD Investment Conclusion With the REIT currently trading at a 48% discount to our revised NAV, and 7.9% cash yield, we view the current valuation as attractive. We are maintaining our BUY rating and C$3.25 target price. 

[EstevanOutsider]

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