European Residential REIT T.ERE.UN

Scotia comments on result

[incomedreamer11]

In Line Q; Operating Metrics Look Good

OUR TAKE: Neutral. Reported FFOPU came in at €0.039, in line with Scotia estimate of €0.040, and consensus estimate of €0.040. See Exhibit 1 for variance. FFOPU slightly decreased by 1.3% y/y in Q1/24 (-5.3% in Q4/23) due to higher y/y interest expense and current income tax expense, partially offset by higher NOI and lower G&A expense.

ERES continued with the suite-by-suite privatization program as articulated previously on Q2/23 conf call. In total, 24 more individual suites were sold for €7.6M (14 individual suites were sold in 2023 for €5.1M). ERES mentioned that they plan to accelerate their progress on this initiative in 2024. Will look for more updates on the conference call tomorrow @ 9 am.

Negligible FV write-down in Q1/24: ERES recorded FV loss of €2.3M in Q1 (after FV loss of €230.2M in 2023). Reported IFRS NAVPU was essentially unchanged q/q at €2.89 (C$4.23) vs last quarter at €2.90 (C$4.24). Cap rates continued to expand. IFRS cap rate (residential) was adjusted 17bp higher on q/q basis to 4.56% vs Scotia cap rate of 4.85%. Leverage remains elevated at 57.3% (up 300bp q/q).

SP rents grew a solid +6.7% (+7.2% y/y in 2023). The higher growth is also a function of higher indexation rate of 4.0% (effective 1st July 2023) versus 3.0% in 2022. We think suite conversions and capturing mark-to-market uplifts on turnover played an important role here. Residential portfolio continues to perform very well on the operational side.

SPNOI growth was +7.6% (+7.8% y/y in 2023). Acceleration on SPNOI growth was driven by higher revenues from increased SP rents and largely flat operating expenses. SPNOI margins were up by 200bp y/y at 78.3%.

Continued strong rent growth on turnovers: Growth remained robust on turnovers (unrestricted rental units). Turnover was 3.1% in Q1/24 (3.9% in Q1/23). ERES’ rent growth on suite turnovers was ~16% in Q1/24. This was driven by rent increases in liberalized suites.

SP Occupancy at 98.5%, flat from last quarter. Overall occupancy has consistently remained strong at the 98-99% level. We note that 20% of vacancies are due to ongoing renovations upon turnover, these suites will provide uplifts once leased. Furthermore, 36.8% of vacancies are due to suites held for potential sale.

Update on financing activity: ERES renewed the mortgage financing on one of its commercial properties for a 3-yr term until March 27, 2027 for a total amount of €18.7M at a fixed rate of 4.70% p.a.

Leverage remains elevated: Debt to GBV increased by 300bp y/y at 57.3% – this was mainly due to write down on the portfolio value. ~32% of total mortgage is coming due in 2024 & 2025. Weighted avg. effective interest rate was 2.22% as of Q1/24 (+15bp q/q). Liquidity available of €36.5M cash-in-hand and unused credit facility - liquidity improved as proceeds from suite dispositions were used to partially paydown the credit facility.

[EstevanOutsider]

thanks for posting, i added more today. a large position for me now. feeling much better as the fair market writedowns have pretty much come to a halt. as rates go down the leverage ratio should naturally reverse course and the nav will go up further. great opportunity here and low risk.