Post by
incomedreamer11 on Aug 07, 2024 3:56pm
CIBC upgrade
ERE reported an in-line quarter as the Netherlands rental market continues to mirror that here in Canada (on many levels). The rental environment continues to remain tight due to a chronic undersupply of affordable housing, with rental regulations delaying the current mark-to-market opportunity and placing a heavy reliance on unit turnover.
Despite the above, we believe ERE remains poised to grow within its 3%-5% target and may very well exceed it by the end of 2024. For now, focus will remain on the suite conversion program and we should see turnover continue to drive higher growth. Additionally, the continuing sales of individual suites (unique to the Netherlands market) should serve as a long-term driver of unearthing value, as should a potential shift in the European bond market towards a more accommodative stance (i.e., following the trajectory of Canada).
As such, we maintain our Outperformer rating and increase our NAV estimate to €3.00; accordingly, we increase our price target to C$3.50 (prior C$3.00), implying a modest historical discount to our F/X-adjusted NAV estimate.
Key Points
Earnings Results: ERE reported Q2/24 diluted FFO per unit of ~€0.04, in line with our estimate and consensus. FFO per unit was down ~5% Y/Y, largely due to increases in interest and other financing costs, and partially offset by positive increases in SP-NOI.
Balance Sheet And Liquidity: Reported D/GBV was 56.2%, an increase of 50 bps Y/Y, and remains high in comparison to international residential peers at an average of ~40%; however, we do anticipate that leverage will fall in subsequent quarters as asset sales are utilized to reduce debt outstanding. Credit metrics also remain within the REIT’s covenant and internal requirements, with a debt service coverage ratio (DSCR) of 2.4x (1.35x minimum) and interest coverage ratio of 2.8x (1.5x minimum). Total liquidity was ~€55MM, and improved an additional ~€35MM as a result of asset dispositions subsequent to quarter-end. IFRS NAV per unit was €2.94.
Debt And The Rate Environment: ERE’s current weighted-average interest rate of 2.21% compares to the most recent refinancing at a three-month Euro Interbank offered rate plus a margin of 2.0% (albeit a commercial mortgage that may not be fully comparable). ERE has ~€45MM of mortgage debt maturing in 2024 at a 1.15% weighted-average interest rate that will ostensibly increase its financing costs through 2025. We note that the REIT has an additional ~€234MM (~27% of total debt) of debt maturing in 2025 at a 2.15% interest rate.
Distribution Sustainability: The REIT reported an AFFO payout ratio of ~81.1% based on a €0.12 annual distribution, in line with its long-term payout target of 80%-90%. With a yield of ~6.6%, the REIT remains one of the highest-yielding residential REITs within our coverage universe (vs. a ~3.5% average for the peer group), and continues to be an attractive investment for both value- and income-oriented investors, in our view.