European Residential REIT Reports Record Operational Results in 2022

TORONTO, Feb. 15, 2023 (GLOBE NEWSWIRE) -- European Residential Real Estate Investment Trust ("ERES" or the "REIT") (TSX: ERE.UN) announced today its results for the year ended December 31, 2022.

ERES’s audited consolidated annual financial statements and management's discussion and analysis ("MD&A") for the year ended December 31, 2022 can be found at www.eresreit.com or under ERES's profile at www.sedar.com.

REACHING NEW HEIGHTS

• Accomplished another year of increasingly excellent operating metrics, achieving the highest growth in rents to date alongside consistently high occupancies and expanding margins
• Acquired six multi-residential properties in the Netherlands across three separate acquisitions, increasing the REIT's suite count by 5% since the prior year end
• Realized significant growth in Funds From Operations ("FFO") and Adjusted Funds From Operations ("AFFO") per Unit, both up by 10% compared to the prior year
• Increased monthly distributions by 9%, thereby maintaining a high and sector-leading distribution yield
• Subsequent to year end, strengthened the REIT's financial position with the amendment of its Revolving Credit Facility to provide an increased commitment of up to €125 million for a three-year period
  

SIGNIFICANT EVENTS AND HIGHLIGHTS

Business Update

• Since January 1, 2022, the REIT closed on three separate acquisitions consisting of a total of six additional multi-residential properties in the Netherlands for a combined purchase price of €85.4 million (excluding transaction costs and fees), representing an aggregate of 356 suites that increased its suite count by 5% since the prior year end.
• Mortgage financings were secured for the REIT's first quarter 2022 acquisition properties, combined with refinancing of certain existing properties, in the total principal amount of €118 million (excluding transaction costs and fees).
• On February 17, 2022, the Board of Trustees approved an increase of 9% to the REIT's monthly distribution from its previous rate of €0.00917 per Unit (equivalent to €0.11 per Unit annualized) to €0.01 per Unit (equivalent to €0.12 per Unit annualized).
  

Outperforming Operating Metrics

• Strong operating results continued throughout 2022, fuelled by accretive acquisitions since the prior periods and strong rental growth. Stabilized portfolio Occupied Average Monthly Rents ("AMR"), increased by 5.4%, from €940 as at December 31, 2021, to €991 as at December 31, 2022, demonstrating the REIT's continued achievement of rental growth in excess of its target range, despite various developments in the regulatory regime.
• Turnover was 12.4% for the year ended December 31, 2022, with rental uplift on turnover accelerating to 22.0%, representing a strong increase from rental uplift of 16.3% on turnover of 13.9% in the prior year.
• Occupancy for the residential properties remained high and stable at 98.4% as at December 31, 2022, relatively consistent with occupancy of 98.6% as at December 31, 2021 and at the high end of the REIT's target range. Moreover, the majority of vacancy is deliberate and attributable to suites undergoing renovation upon turnover, which should provide for further rental uplifts once the suites are leased.
• Net Operating Income ("NOI") increased by 15.9% for the year ended December 31, 2022, primarily driven by contribution from accretive acquisitions, the aforementioned higher monthly rents and strong cost control, further supported by the REIT's extensive protection from inflation.

Accretive Financial Performance

• Funds From Operations ("FFO") per Unit increased significantly by 10.5% to €0.169 for the year ended December 31, 2022, compared to €0.153 in the prior year period, positively driven by accretive acquisitions and increased stabilized NOI contribution.
• Adjusted Funds From Operations ("AFFO") per Unit increased significantly by 10.3% to €0.150 for the year ended December 31, 2022, compared to €0.136 in the year ended December 31, 2021.

Strong Financial Position with Ample Liquidity

• Overall, liquidity and leverage remain stable, with immediately available liquidity of €21.4 million as at December 31, 2022, excluding acquisition capacity on the Pipeline Agreement or alternative promissory note arrangements with CAPREIT. This liquidity position is before considering the Revolving Credit Facility amendment on January 24, 2023, as described below, which strengthens the overall liquidity of the REIT.
• Debt metrics are conservative, with an adjusted debt to gross book value ratio at 51.0%, and interest and debt service coverage ratios of 3.8x and 3.1x, respectively.
• The REIT's financial position is additionally supported by its well-staggered mortgage profile, with approximately three and a half-year weighted average term to maturity and a weighted average effective interest rate of 1.77%.
  

Subsequent Events

• On January 24, 2023, the REIT amended its existing Revolving Credit Facility to extend the maturity date to January 26, 2026 and to provide for, among other things, (i) an increase in the Revolving Credit Facility limit from €100 million to €125 million, (ii) an accordion feature to increase the Revolving Credit Facility limit a further €25 million upon satisfaction of conditions set out in the agreement and the consent of applicable lenders, (iii) the replacement of USD LIBOR with Adjusted Term SOFR as a benchmark interest rate and (iv) the addition of another Canadian chartered bank to the lender base.
  

"Throughout 2022, ERES again achieved strong operational results that overcame widespread uncertainty and unprecedented volatility, thereby showcasing the strength and resolve of the REIT and its best-in-class platform,” commented Phillip Burns, Chief Executive Officer. “Between achieving record-breaking rent growth, consistently high occupancy, strong cost control and stabilized margin expansion, ERES excelled amid the adversity. We will continue to forge ahead, remain operationally robust and execute on our strategic objectives, regardless of any persisting macroeconomic or regulatory turbulence, as we have demonstrated to date."

OPERATING METRICS CONTINUE TO STRENGTHEN

1Average In-Place Base Rent ("ABR").
2Represents 450,911 square feet of commercial gross leasable area.

1Excludes one suite disposition and six residential properties (356 suites) acquired, which were not continuously owned by the REIT since December 31, 2021
2Represents 450,911 square feet of commercial gross leasable area.

Net and Occupied AMR for both the total multi-residential portfolio and the stabilized portfolio, increased by 5.3% and 5.4%, respectively, compared to the prior year period. The increases were driven by increased rents on annual indexation, turnover and conversion of regulated suites to liberalized suites, as well as due to acquisitions. The REIT's achievement of growth in rental revenues significantly in excess of its target range of 3% to 4% demonstrates its ability to consistently operate in a complex and fluid regulatory regime.

1Represents the percentage increase in monthly rent inclusive of service charge income.

1Represents the percentage increase in monthly rent inclusive of service charge income.

For the three months and year ended December 31, 2022, turnover was 3.9% and 12.4%, respectively, with average rental uplift (including service charge income) of 23.8% and 22.0%, respectively. This represents a strong increase versus average rental uplift (including service charge income) of only 19.1% and 16.3% for the three months and year ended December 31, 2021, respectively, on turnover of 3.0% and 13.9%. Rental uplifts were significantly higher on conversions, at 82.2% and 65.0% for the current quarter and year to date, compared to 56.7% and 45.2% for the three months and year ended December 31, 2021, respectively.

Suite Renewals

Lease renewals generally occur on July 1 for residential suites. Maximum rent indexation on July 1, 2022 for Regulated Suites was set at the Dutch government's determined inflation rate of 2.3%. For the period July 1, 2023 to June 30, 2024, the indexation of all Regulated Units is set at wage inflation of 3.1%. Annual rental increases due to indexation for Liberalized Suites are also capped, as per the previously enacted Dutch government legislation, effective for an initial period of three years from May 1, 2021 up to and including April 30, 2024. For the period from January 1, 2022 to January 1, 2023, the regulations limit indexation for Liberalized Suites to CPI + 1.0%, resulting in a maximum indexation of 3.3% based on the Dutch government's allowed inflation of 2.3%. For the period from January 1, 2023 to January 1, 2024, the rental cap limits indexation for Liberalized Suites to the annual wage development figure + 1.0%, resulting in a maximum indexation of 4.1% based on the annual wage development figure of 3.1%.

Accordingly, for rental increases due to indexation beginning on July 1, 2022, the REIT served tenant notices to 6,499 suites, representing 96% of the residential portfolio, across which the average rental increase due to indexation is 2.95%.

1Excluding service charge income and expense, the total portfolio NOI margin for the three months and year ended December 31, 2022 was 82.1% and 83.1%, respectively (three months and the year ended December 31, 2021 — 82.2% and 82.1%, respectively).

Operating revenues increased by 14.5% and 16.1% for the three months and year ended December 31, 2022, respectively compared to the prior year periods, primarily due to accretive acquisitions and an increase in monthly rents on the stabilized portfolio, as described above.

NOI increased by 12.2% and 15.9% for the three months and year ended December 31, 2022, versus the same periods last year, likewise driven by contribution from acquisitions since the prior year periods and higher monthly rents on stabilized properties. For the year ended December 31, 2022, the NOI margin on the total portfolio, including service charges, remained relatively stable at 77.3% compared to 77.4% last year, with an increase in recoverable service charges negatively impacting margins, offset by reduced repairs and maintenance ("R&M") and landlord levy expense. Excluding recoverable service charges, NOI margin on the total portfolio increased to 83.1% from 82.1% last year, thus reflecting the REIT's ability to successfully control costs, as well as its limited exposure to inflationary pressures. Service charge expenses are fully recoverable from tenants via service charge income and therefore have a nil net impact on NOI. The NOI margin decreased to 76.5% for the three months ended December 31, 2022, from 78.1% in the comparable prior year period, primarily due to an increase in recoverable service charges. Excluding recoverable service charges, NOI margin for the three months ended December 31, 2022 remained relatively stable at 82.1% compared to 82.2% in the comparable prior year period.

1Excluding service charge income and expense, the stabilized portfolio NOI margin for the three months and year ended December 31, 2022 was 82.7% and 83.2%, respectively (three months and year ended December 31, 2021 — 82.3% and 82.2%, respectively).
2Includes all properties owned by the REIT continuously since December 31, 2020, and therefore does not take into account the impact of acquisitions or dispositions completed during 2021 or 2022.

The increases in stabilized NOI contribution by 3.2% and 4.8% for the three months and year ended December 31, 2022 respectively, compared to the prior year periods, were primarily driven by higher operating revenues from increased monthly rents. Stabilized NOI margin decreased to 77.0% for the three months ended December 31, 2022, compared to 78.2% in the prior year period due to higher service charges and an increase in R&M as percentage of revenue, partially offset by reduction in landlord levy expenses. Excluding service charges, stabilized NOI margin increased to 82.7% for the three months ended December 31, 2022, compared to 82.3% in the comparable prior year period. For the year ended December 31, 2022, NOI margin for the stabilized portfolio decreased minimally to 77.3%, compared to 77.5% in the prior year primarily due to higher service charges. Excluding service charges, stabilized NOI margin increased to 83.2% from 82.2% last year due to reduced R&M and landlord levy expenses from 2021 to 2022.

The REIT is focused on continuing to further improve NOI and NOI margin through a combination of rental growth and cost control, and investment in capital programs to enhance the quality and value of its portfolio. In addition, the REIT notes that its property operating costs are largely insulated from inflation, as tenants are responsible for all of their own energy and other utility costs, the REIT has no employees and therefore no wage costs, and property management fees are a fixed percentage of operating revenues. This further preserves the REIT's property operating costs and, combined with its strong growth in rental revenues, improves its normalized NOI margin.

Financial Performance

A reconciliation of net income (loss) to FFO is as follows:

1Relates to foreign exchange movements recognized on remeasurement of Unit Option liabilities as well as on remeasurement of the REIT's US Dollar draw on the Revolving Credit Facility as part of effective hedge.
2Includes break fees of nil and €9 for the three months and year ended December 31, 2022 (€128 for the three months and year ended December 31, 2021), as well as accelerated amortization of deferred financing costs of nil and €112 for the three months and year ended December 31, 2022 (nil and €59 for the three months and year ended December 31, 2021), associated with mortgage refinancings and repayments.
3Includes Class B LP Units.

The table below illustrates a reconciliation of the REIT's FFO and AFFO:

1Non-discretionary capital expenditure reserve has been calculated based on the normalized annual 2022 forecast which equates to approximately €580 per weighted average number of residential suites during the period (2021 — normalized annual 2021 forecast of €607 per weighted average number of residential suites). The adjustments are based on the reserve amount as the REIT considers this to be more normalized on a long-term basis and therefore more relevant.
2Leasing cost reserve is based on annualized 10-year forecast of external leasing costs on the commercial properties.
3 Includes Class B LP Units.

The increases in FFO and AFFO were driven by the positive impact of increased stabilized NOI and accretive acquisitions since the prior year periods.

FFO is a measure of operating performance based on the funds generated by the business before reinvestment or provision for other capital needs. AFFO is a supplemental measure which adjusts FFO for costs associated with capital expenditures, leasing costs, and tenant improvements. FFO and AFFO as presented are in accordance with the recommendations of the Real Property Association of Canada ("REALpac") as published in January 2023, with the exception of certain adjustments made to the REALpac defined FFO, which in the current period relate to (i) acquisition research costs, and (ii) mortgage refinancing costs. FFO and AFFO may not, however, be comparable to similar measures presented by other real estate investment trusts or companies in similar or different industries. Management considers FFO and AFFO to be important measures of the REIT’s operating performance. Please refer to "Basis of Presentation and Non-IFRS Measures" within this press release for further information.

Net Asset Value

A reconciliation of Unitholders' equity to Net Asset Value ("NAV") is as follows:

1Represents deferred income tax liability of €77,474 net of deferred income tax asset of €2,931 (December 31, 2021 — deferred income tax liability of €87,435 net of deferred income tax asset of €2,651).
2Represents non-current derivative financial assets of €23,771 and, net of current derivative financial liabilities of €840 (December 31, 2021 — non-current and current derivative financial liabilities of €722 and €494, respectively, net of non-current derivative financial assets of €930).
3Includes Class B LP Units and the dilutive impact of unexercised Unit Options, calculated based on the treasury method.
4Based on the foreign exchange rate of1.4498 on December 31, 2022 (foreign exchange rate of 1.4391 on December 31, 2021).

NAV represents total Unitholders' equity per the REIT's consolidated statements of financial position, adjusted to exclude certain amounts in order to provide what management considers to be a key measure of the intrinsic value of the REIT on a going concern basis. Management believes that this measure reflects the residual value of the REIT to its Unitholders on a going concern basis and is therefore used by management on both an aggregate and per Unit basis to evaluate the net asset value attributable to Unitholders, and changes thereon based on the execution of the REIT's strategy. Please refer to the "Basis of Presentation and Non-IFRS Measures" section within this press release for further information.

1Includes Class B LP Units.
2As at December 31.
3Based on the foreign exchange rate of 1.4498 on December 31, 2022 (foreign exchange rate of 1.4391 on December 31, 2021).

FINANCIAL POSITION REMAINS FIRM

1Please refer to the "Basis of Presentation and Non-IFRS Measures" section of this press release for further information.
2For the rolling 12 months ended.
3Includes cash and cash equivalents of €10.9 million and unused credit facility capacity of €10.5 million as at December 31, 2022 (cash and cash equivalents of €10.3 million and unused credit facility capacity of €29.1 million as at December 31, 2021).

ERES's liquidity and leverage remain stable, supported by the REIT's staggered mortgage profile with approximately three and a half-year weighted average term to maturity and a weighted average effective interest rate of 1.77%. The REIT has immediately available liquidity of €21 million as at December 31, 2022, excluding acquisition capacity on the Pipeline Agreement or alternative promissory note arrangements with CAPREIT, reinforced by conservative debt metrics, including an adjusted debt to gross book value ratio within its target range at 51.0%.

Management aims to maintain an optimal degree of debt to gross book value ("GBV") of the REIT’s assets, depending on a number of factors at any given time. Capital adequacy is monitored against investment and debt restrictions contained in the REIT’s fourth amended and restated declaration of trust dated April 28, 2020 (the "Declaration of Trust") and the amended and renewed credit agreement dated October 29, 2021, between the REIT and two Canadian chartered banks, providing access to up to €100.0 million (the "Revolving Credit Facility"). Subsequent to year end, on January 24, 2023, the REIT amended its existing Credit Facility - refer to "Subsequent Events" in the Highlights Section for details. The REIT manages its overall liquidity risk by maintaining sufficient available credit facilities and available cash on hand to fund its ongoing operational and capital commitments and distributions to Unitholders, and to provide future growth in its business.

"ERES’s financial position remained resilient throughout the entirety of 2022, further fortified with the post-period end amendment and three-year renewal of the Revolving Credit Facility, which provides an increased commitment of €125 million plus an additional €25 million through an accordion feature,” commented Jenny Chou, Chief Financial Officer. “This accomplishment reinforces the strength and longevity of the REIT’s liquidity, which is supplemented by its well-staggered mortgage profile that has less than 10% of its mortgage debt maturing in each of the upcoming two years. In the context of ongoing, pervasive capital challenges, this represents an invaluable safeguard."

DISTRIBUTIONS

During the year ended December 31, 2022, the REIT declared monthly distributions of €0.00917 per Unit (equivalent to €0.11 per Unit annualized) in respect of January and February, and €0.01 per Unit thereafter (equivalent to €0.12 per Unit annualized) thereafter, following an increase of 9% in the REIT's monthly distribution rate. Such distributions are paid to Unitholders of record on each record date, on or about the 15th day of the month following the record date. The REIT intends to continue to make regular monthly distributions, subject to the discretion of its Board of Trustees.

CONFERENCE CALL

A conference call hosted by Phillip Burns, Chief Executive Officer and Jenny Chou, Chief Financial Officer, will be held on Thursday, February 16, 2023 at 9:00 am EST. The telephone numbers for the conference call are Canadian Toll Free: (833) 950-0062 / International: +1 (929) 526-1599. The Passcode for the call is 651497.

A replay of the call will be available for 7 days after the call, until Thursday, February 23, 2023. The telephone numbers to access the replay are Canadian Toll Free: (226) 828-7578 or International +44 (204) 525-0658. The Passcode for the replay is 508412.

The call will also be webcast live and accessible through the ERES website at www.eresreit.com — click on "Investor Info" and follow the link at the top of the page. A replay of the webcast will be available for 1 year after the webcast at the same link.

The slide presentation to accompany management's comments during the conference call will be available on the ERES website an hour and a half prior to the conference call.

About European Residential Real Estate Investment Trust

ERES is an unincorporated, open-ended real estate investment trust. ERES's REIT Units are listed on the TSX under the symbol ERE.UN. ERES is Canada’s only European-focused multi-residential REIT, with a current initial focus on investing in high-quality, multi-residential real estate properties in the Netherlands. ERES owns a portfolio of 158 multi-residential properties, comprised of 6,900 suites and ancillary retail space located in the Netherlands, and owns one office property in Germany and one office property in Belgium.

ERES’s registered and principal business office is located at 11 Church Street, Suite 401, Toronto, Ontario M5E 1W1.

For more information please visit our website at www.eresreit.com.

Basis of Presentation and Non-IFRS Measures

Unless otherwise stated, all amounts included in this press release are in thousands of Euros, the functional currency of the REIT. The REIT's audited consolidated annual financial statements and the notes thereto for the year ended December 31, 2022, are prepared in accordance with International Financial Reporting Standards ("IFRS"). Financial information included within this press release does not contain all disclosures required by IFRS, and accordingly should be read in conjunction with the REIT's Annual Financial Statements and MD&A for the year ended December 31, 2022, which is available on the REIT's website at www.eresreit.com and on SEDAR at www.sedar.com.

Consistent with the REIT's management framework, management uses certain financial measures to assess the REIT's financial performance, which are not in accordance with IFRS ("Non-IFRS Measures"). Since these Non-IFRS Measures are not recognized under IFRS, they may not be comparable to similar measures reported by other issuers. The REIT presents Non-IFRS Measures because management believes Non-IFRS Measures are relevant measures of the ability of the REIT to earn revenue, generate sustainable economic earnings, and to evaluate its performance and financial condition. The Non-IFRS Measures should not be construed as alternatives to the REIT's financial position, net income or cash flows from operating activities determined in accordance with IFRS as indicators of the REIT’s performance or the sustainability of distributions. For full definitions of these measures, please refer to "Non-IFRS Measures" in Section I and Section IV of the REIT's MD&A for the year ended December 31, 2022.

Where not otherwise disclosed, reconciliations for certain Non-IFRS Measures included within this press release are provided below.

Adjusted Debt and Adjusted Debt Ratio

The REIT's Declaration of Trust requires compliance with certain financial covenants, including the Ratio of Adjusted Debt to Gross Book Value. Management uses Total Debt Adjusted for Declaration of Trust and the Ratio of Adjusted Debt to Gross Book Value as indicators in assessing if the debt level maintained is sufficient to provide adequate cash flows for distributions and for evaluating the need to raise funds for further expansion.

A reconciliation from total debt is as follows:

1Represents non-current and current mortgages payable of €813,733 and €61,882, respectively (December 31, 2021 — €762,318 and €52,104, respectively).
2Gross book value is defined by the REIT's Declaration of Trust as the gross book value of the REIT's assets as per the REIT's financial statements, determined on a fair value basis for investment properties.

Earnings Before Interest, Tax, Depreciation, Amortization and Fair Value

Earnings Before Interest, Tax, Depreciation, Amortization and Fair Value ("EBITDAFV") is calculated as prescribed in the REIT's Revolving Credit Facility for the purpose of determining the REIT's Debt Service Coverage Ratio and Interest Coverage Ratio, and is defined as net income (loss) attributable to Unitholders, reversing, where applicable, income taxes, interest expense, amortization expense, depreciation expense, impairment, adjustments to fair value and other adjustments as permitted in the REIT's Revolving Credit Facility. Management believes EBITDAFV is useful in assessing the REIT's ability to service its debt, finance capital expenditures and provide for distributions to its Unitholders.

A reconciliation of net income (loss) to EBITDA is as follows:

1For use in Debt Service Coverage Ratio calculation.

Debt Service Coverage Ratio

The Debt Service Coverage Ratio is defined as EBITDAFV less cash taxes, divided by the sum of interest expense (including on mortgages payable, bank indebtedness and promissory notes) and all regularly scheduled principal payments made with respect to indebtedness during the period (other than any balloon, bullet or similar principal payable at maturity or which repays such indebtedness in full). The Debt Service Coverage Ratio is calculated as prescribed in the REIT's Revolving Credit Facility, and is based on the trailing four quarters. Management believes the Debt Service Coverage Ratio is useful in determining the ability of the REIT to service the principal and interest requirements of its outstanding debt.

1For the trailing 12 months ended.
2Includes principal repayments as well as interest on mortgages payable, bank indebtedness and promissory notes, and excludes interest expense on Class B LP Units.

Interest Coverage Ratio

The Interest Coverage Ratio is defined as EBITDAFV divided by interest expense (including on mortgages payable, bank indebtedness and promissory notes). The Interest Coverage Ratio is calculated as prescribed in the REIT's Revolving Credit Facility, and is based on the trailing four quarters. Management believes the Interest Coverage Ratio is useful in determining the REIT's ability to service the interest requirements of its outstanding debt.

1For the trailing 12 months ended.
2Includes interest on mortgages payable, bank indebtedness and promissory notes, and excludes interest expense on Class B LP Units.

Forward-Looking Information

Certain statements contained in this press release constitute forward-looking statements within the meaning of applicable Canadian securities laws which reflect ERES’s current expectations and projections about future results. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “outlook”, “objective”, “may”, “will”, “expect”, “intent”, “estimate”, “anticipate”, “believe”, “consider”, “should”, “plans”, “predict”, “estimate”, “forward”, “potential”, “could”, “likely”, “approximately”, “scheduled”, “forecast”, “variation” or “continue”, or similar expressions suggesting future outcomes or events. The forward-looking statements made in this press release relate only to events or information as of the date on which the statements are made in this press release. Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this press release. Any number of factors could cause actual results to differ materially from these forward-looking statements as well as future results. Although ERES believes that the expectations reflected in forward-looking statements are reasonable, it can give no assurances that the expectations of any forward-looking statements will prove to be correct. Such forward-looking statements are based on a number of assumptions that may prove to be incorrect. Accordingly, readers should not place undue reliance on forward-looking statements.

Except as specifically required by applicable Canadian securities law, ERES does not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. These forward-looking statements should not be relied upon as representing ERES’s views as of any date subsequent to the date of this press release.

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Category: Earnings