Post by
incomedreamer11 on Nov 11, 2024 2:20pm
TD up target price
THE TD COWEN INSIGHT
With the Board's decision to seek unitholder approval to sell its remaining assets and wind up the REIT (link), we believe the key metric for investors to focus on is NAV. This note updates our forecast with our NAV estimate remaining unchanged vs Q2 at $4.50. Our new $4.25 target price represents a small discount to our NAV estimate to reflect potential timing delays and wind up costs/taxes.
Impact: NEUTRAL
Sales Process — expect activity to pick up in January. Management noted it currently has some “packages” in the market with the buyer interest coming from private family offices/smaller private equity players looking at the privatization arb (which we view as attractive). The REIT has paused on putting additional portfolios out to the market until its gets unitholder approval in January. Post unitholder approval, we expect a significant increase in the cadence of asset sales.
Portfolio sale update — Closing expected by late January, tax treatment of distribution still to be determined. On September 16, ERE announced agreements to sell ~50% of its portfolio (link) through two transactions. The €44mm sale is now expected to close Dec 2 while the larger, €695mm sale has now received Dutch competition authority approval. Management expects it to close between November and January (based on purchaser option) with a €0.75 special distribution declared shortly thereafter. Tax treatment of the distribution is expected to be a combination of return of capital, capital gains, and taxable income with the proportion of each not yet determined.
Forecast Update — our NAV estimate is unchanged post transaction, earnings estimate no longer relevant, in our view. Our €3.00 ($4.50) NAV estimate is unchanged proforma the sale of the 50% portfolio and prior to the special distribution, and represents ~€240,000/ suite. While we did update our earnings forecast (our 2025/26 AFFO/unit estimates decrease 40%/48%) to reflect announced transactions, with the expected sale of the balance of the portfolio, we do not view them as relevant.
Valuation ERES is trading at 27.2x 2025F AFFO/unit, which compares with its European and Canadian peers at 17.1x and 18.7x, which reflects our lowered estimates on the portfolio sale. On a P/NAV basis, ERES is trading at a 23% discount to our C$4.50 NAV/unit versus its European and Canadian peers trading at 8% and 31% discounts, respectively.
Justification of Target Price Our C$4.25 target price (previously C$3.75) is based on a slight discount to our C$4.50 NAV estimate. It reflects our belief that management will obtain close to fair value through asset sales with the small discount representing timing risk and potential closing costs/taxes.