Inovalis Real Estate Investment Trust Announces Financial Results for the First Quarter Of 2023

Inovalis Real Estate Investment Trust (the “REIT”) (TSX: INO.UN) today reported strong financial results for the quarter ended March 31, 2023. The Consolidated Financial Statements and Management’s Discussion and Analysis ("MD&A") for Q1 2023 and the quarters ending March 31, 2023 and 2022 are available on the REIT’s website at www.inovalisreit.com and at www.sedar.com1. All amounts are presented in thousands of Canadian dollars or Euros, except rental rates, square footage, per unit amounts or as otherwise stated.

President Stephane Amine commented “As Inovalis REIT marks its tenth anniversary as a TSX listed entity, we are proud of real estate investments that we have identified, acquired, developed, sold and managed, particularly throughout the last three-year period of unprecedented adverse circumstances.”

HIGHLIGHTS

Net Rental Income

For the portfolio that includes assets owned entirely by the REIT (“IP Portfolio”), Net Rental Income (“NOI”) for the three months ended March 31, 2023 (“Q1 2023”), increased significantly to CAD$3,962 (EUR€2,730) compared to CAD$1,873 (EUR€1,318) for the three months ended March 31, 2022 (“Q1 2022”). The increase in NOI came from the full year contribution of the new property acquisitions, Gaia and Delgado, in the amount of CAD$1,237 (EUR€853) that were completed at the end of March 2022, as well as from the lease renewals in the Metropolitain property, fully effective starting Q2 2022 for CAD$215 (EUR€148) and the disposition of Veronese property that were negatively weighting on Q1 2022 NOI for CAD$555 (EUR€383).

In Q1 2023, Net Rental Income, adjusted for IFRIC 212 for the portfolio that includes the REIT’s proportionate share in joint ventures (“Total Portfolio”), was CAD$8,322 (EUR€5,734), compared to CAD$6,353 (EUR€4,471) for Q1 2022, an increase due to the same reasons described above with respect to the IP Portfolio.

The asset recycling program continues, beginning with the sale of Jeuneurs (November 2021), followed by the sale of Courbevoie (December 2022) and the redevelopment-driven lease terminations in the Baldi and Sablière properties properties throughout 2021 and 2022.

Leasing Operations

All of the REIT's lease contracts in France, Germany and Spain have rental indexation that offset the impact of inflation. Rent is increased annually to reflect the rising cost of living which protects returns to Unitholders. The rent indexation applied in Q1 on some leases was approximatively 6%.

Management signed several short-term leases in Q1 2023 on the Baldi and Sabliere properties, to help maintain the NOI before their redevelopment or disposition. For the Total Portfolio, Management signed two major lease contracts as a result of long-term negotiations that were initiated in 2022.

These are:

• a ten-year firm lease, effective July 2023, on 13% on the Duisburg property, as a replacement of the previous tenant who left in January 2023, and
• a five-year extension of a Neu Isenburg tenant lease on 75% of their previous office space.

As at March 31, 2023, occupancy for the REIT’s IP Portfolio was 84.2% and the Total Portfolio was 86.1%. Seven of the properties are at, or close to, 100% occupancy, and excluding two properties in the asset recycling plan (Baldi and Sablière), the occupancy rate would be 89.4%. The portfolio of assets held in joint ventures (“JV Portfolio”) had 91.3% occupancy at March 31, 2023. Gaia's occupancy rate of 86% understates the effective 100% rental revenue stream due to the three-year rental guarantee on the vacant premises that the REIT received in advance at acquisition and which, for accounting purposes, was treated as a reduction in the acquisition price and not as rental income. The 14% vacancy has an impact of 1.1% on Total Portfolio occupancy.

Steady interest from prospective tenants throughout 2022 underscores confidence in our Parisian, German and Spanish portfolio. To bolster leasing efforts, management will selectively complete capital expenditure improvements on vacant areas to attract tenants and maximize rent.

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1 This press release contains certain Non-GAAP and other financial measures. Refer to "Non-GAAP Financial Measures and Other Financial Measures" in this press release for a complete list of these measures and their meaning.
2 Net rental Income adjusted for IFRIC 21 is a Non-GAAP Measure. See the "Net Rental Income" section for further discussion on the composition and usefulness of this metric and as well as a quantitative reconciliation to its most directly comparable financial measure. See the section "Non-GAAP Financial Measures and Other Measures" for more information on the REIT's non-GAAP financial measures.

Capital Market Considerations

The REIT has delivered returns to Unitholders on the basis of:

• Investment diversification via exposure to selected European markets with a deeply experienced local asset manager;
• Compelling risk/return ratio for commercial real estate, compared to 10-year government bonds;
• Lower borrowing costs in the European community compared to Canada, despite interest rate increases by the European Central Bank (“ECB”); and
• A Euro-currency backed hedge on distributions paid in CAD$, covering distributions for the next 2 years.

Unitholders’ equity on March 31, 2023 was CAD$288,307 (EUR€196,716), which implies a book value per Unit at that date of CAD$8.80/Unit or CAD$8.66/Unit on a fully-diluted basis, using the Weighted Average Number of Units for the period.

Funds From Operations and Adjusted Funds From Operations

With one modification, the REIT uses non-GAAP ratios such as Funds from Operations (“FFO”) per unit and Adjusted Funds from Operations (“AFFO”) per unit as defined by the Real Estate Property Association of Canada publication on Funds From Operations & Adjusted Funds From Operations, dated January 2022. Due to the volatility of the Canadian dollar against the Euro, the REIT adjusts FFO by excluding the unrealized gain or loss on the REIT’s cash Euros which are domiciled in Canadian financial institutions.

Non-GAAP ratios do not have standardized meaning under IFRS. These measures as computed by the REIT may differ from similar computations as reported by other entities and, accordingly, may not be comparable to other entities. Refer to the Non-GAAP Financial Measures and Other Measures section of this MD&A for a more detailed discussion on FFO and AFFO.

In Q1 2023, the REIT reported FFO and AFFO2 per Unit of CAD$0.14 each, compared to CAD$0.09 and CAD$0.10 respectively for Q1 2022 due to higher net rental income and finance income. The FFO payout ratio was 75.8%, in line with our internal forecast but increased by finance income from Courbevoie and Metropolitain swap contracts termination.

Financing Activity

The REIT is financed almost exclusively with asset-level, non-recourse financing with an average term to maturity of 3.3 years for the Total Portfolio (3.8 years on the IP Portfolio).

As at March 31, 2023, the weighted average interest rate was 2.51% across the IP Portfolio and 2.46% on the Total Portfolio, Q1 2023 including the additonal interest cost of unhedged contracts on Sabliere, Arcueil and Delizy properties. Management will assess the best hedging options on theses contracts, considering redevelopment plans and hedging pricing opportunities.

To refinance mortgage loans that are maturing in 2023 (Stuttgart, Neu-Isenburg, Walpur) and early 2024 (Kösching), and to mitigate risk in the properties, management is negotiating new senior debt.

Despite increases to the ECB key lending rates, management is confident that the REIT will continue to access financing opportunities through its banking networks in Europe leveraging the quality of its properties, lease terms and high caliber tenants.

Environmental, Social and Governance (ESG)

Integrating ESG objectives and strategies into the REIT’s business reflects the growing importance these factors play with many of our key stakeholders. Investors recognize the risks associated with changing regulatory requirements, tenants are including sustainability considerations in their leasing decisions, and employees want to work for responsible and socially-focused organizations. The REIT is working to improve its long-term environmental performance, and also investing in “human capital” for the implementation and monitoring of all ESG initiatives. A portfolio-wide ESG independent audit of all assets is ongoing with the view to formalizing ESG priorities and identify clear and measurable ESG practices and disclosures. Aside from energy procurement policies, the next measures to be undertaken on the German portfolio of asset are implementation/upgrade of water-saving equipment starting in Q3 2023.

FORWARD-LOOKING INFORMATION

Certain statements contained, or contained in documents incorporated by reference, may constitute forward-looking information within the meaning of securities laws. Forward-looking information may relate to the REIT's future outlook and anticipated events or results and may include statements regarding the future financial position, business strategy, budgets, occupancy rates, rental rates, productivity, projected costs, capital investments, development and development opportunities, financial results, taxes, plans and objectives of or involving the REIT. Particularly, statements regarding the REIT’s future results, performance, achievements, prospects, costs, opportunities, and financial outlook, including those relating to acquisition and capital investment strategies and the real estate industry generally, are forward-looking statements. In some cases, forward-looking information can be identified by terms such as “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “intend”, “estimate”, “predict”, “potential”, “continue” or the negative thereof, or other similar expressions concerning matters that are not historical facts. Forward-looking statements are based on certain factors and assumptions regarding expected growth, results of operations, performance, and business prospects and opportunities.

Although management believes that the expectations reflected in the forward-looking information are reasonable, no assurance can be given that these expectations will prove to be correct, and since forward-looking information inherently involves risks and uncertainties, undue reliance should not be placed on such information.

Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such forward-looking statements. The estimates and assumptions, which may prove to be incorrect, include, but are not limited to, the various assumptions set forth in this press release as well as the following:

The REIT cautions that this list of assumptions is not exhaustive. Although the forward-looking statements contained in this MD&A are based upon assumptions that management believes are reasonable based on information currently available to management, there can be no assurance that actual results will be consistent with these forward-looking statements.

When relying on forward-looking statements to make decisions, the REIT cautions readers not to place undue reliance on these statements, as forward-looking statements involve significant risks and uncertainties. Forward-looking statements should not be read as guarantees of future performance or results and will not necessarily be accurate indications of whether or not, or the times at or by which, such performance or results will be achieved. A number of factors could cause actual results to differ, possibly materially, from the results discussed in the forward-looking statements, including, but not limited to:

• the REIT’s ability to execute its growth and capital deployment strategies;
• the impact of changing conditions in the European office market;
• the marketability and value of the REIT’s portfolio;
• changes in the attitudes, financial condition and demand in the REIT’s demographic markets;
• fluctuation in interest rates and volatility in financial markets;
• the geopolitical conflict in the Ukraine and Russia on the REIT’s business, operations and financial results;
• general economic conditions, including any continuation or intensification of the current economic downturn;
• developments and changes in applicable laws and regulations; and
• such other factors discussed under ‘‘Risk and Uncertainties’’ in the MD&A.

If any risks or uncertainties with respect to the above materialize, or if the opinions, estimates or assumptions underlying the forward-looking statements prove incorrect, actual results or future events might vary materially from those anticipated in the forward-looking statements. The opinions, estimates or assumptions referred to above and described in greater detail under ‘‘Risks and Uncertainties’’ in the MD&A should be considered carefully by readers. Although management has attempted to identify important risk factors that could cause actual results to differ materially from those contained in forward-looking statements, there may be other risk factors not presently known or that management believes are not material that could also cause actual results or future events to differ materially from those expressed in such forward-looking statements.

Forward-looking statements are provided for the purpose of providing information about management’s current expectations and plans relating to the future. Certain statements included in press release may be considered a ‘‘financial outlook’’ for purposes of applicable Canadian securities laws, and as such, the financial outlook may not be appropriate for purposes other than this press release. All forward-looking statements are based only on information currently available to the REIT and are made as of the date of this press release. Except as expressly required by applicable Canadian securities law, the REIT assumes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All forward-looking statements in this press release are qualified by these cautionary statements.

Non-GAAP Financial Measures and Other Measures

There are financial measures included in this MD&A that do not have a standardized meaning under IFRS. These measures include funds from operations, adjusted funds from operations, and other measures presented on a proportionate share basis. These measures have been derived from the REIT’s financial statements and applied on a consistent basis as appropriate. Management includes these measures as they represent key performance indicators to management, and it believes certain investors use these measures as a means of assessing relative financial performance. These measures, as computed by the REIT, may differ from similar computations as reported by other entities and, accordingly, may not be comparable to other such entities. These measures should not be considered in isolation or used in substitute for other measures of performance prepared in accordance with IFRS.

“Accretive Assets” means that, at the time of the asset acquisition, the pro forma (post-deal) net income per Unit is forecast as higher than the REIT’s (pre-deal) net income per Unit.

“Adjusted Funds From Operations” or “AFFO” is a meaningful supplemental measure that can be used to determine the REIT’s ability to service debt, fund expansion capital expenditures, fund property development, and provide distributions to Unitholders after considering costs associated with sustaining operating earnings.

AFFO calculations are reconciled to net income, which is the most directly comparable IFRS measure. AFFO should not be construed as an alternative to net income or cash flow generated from operating activities, determined in accordance with IFRS.

AFFO is defined as FFO subject to certain adjustments, including adjustments for: (i) the non-cash effect of straight-line rents, (ii) the cash effect of the rental guarantee received, (iii) the cash effect of the lease equalization loans, (iv) amortization of fair value adjustment on assumed debt, (v) the non-cash portion of the asset management fees paid in Exchangeable Securities, (vi) capital expenditures, excluding those funded by a dedicated cash reserve or capex financing, and (vii) amortization of transaction costs on mortgage loans.

“AdjustedFunds From Operations / Unit” or “AFFO / Unit” is AFFO divided by the issued and outstanding Units, plus Exchangeable Securities (fully diluted basis).

“AFFO Payout Ratio” is the value of declared distributions on Units and Exchangeable Securities excluding any Participatory Distribution, divided by AFFO.

“Average term to maturity” refers to the average number of years remaining in the lease term.

“Book value per Unit” refers to the REIT’s total equity divided by the Weighted Average number of Units and Exchangeable Securities (on a fully diluted basis).

“Debt-to-Gross-Book Value” refers to the REIT’s apportioned amount of indebtedness respectively in the IP Portfolio and the Total Portfolio. Indebtedness on a IP and Total Portfolio basis is calculated as the sum of (i) lease liabilities, (ii) mortgage loans, (iii) lease equalization loans, (iv) other long-term liabilities, and (v) deferred tax liabilities. Indebtedness does not include certain liabilities as is the case for the Exchangeable Securities and at the joint venture level for the contribution from the REIT and its partners.

“Effective occupancy” means the occupancy including the vacant spaces covered by the rental guarantee.

“Exchangeable Securities” means the exchangeable securities issued by CanCorp Europe, in the form of interest bearing notes, non-interest bearing notes, share premium and common shares.

“Fully diluted basis” refers to a nominal value divided by the issued and outstanding Units, plus Exchangeable Securities.

“Funds From Operations” or “FFO” follows the definition prescribed by the Real Estate Property Association of Canada publication on Funds From Operations & Adjusted Funds From Operations, dated January 2022 with one exception.

Management considers FFO to be a meaningful supplemental measure that can be used to determine the REIT’s ability to service debt, fund capital expenditures, and provide distributions to Unitholders.

As an exception, considering the significant amount of cash held in Euros in Canada and the volatility of the Canadian dollar against the Euro, the unrealized gain (loss) recognized for the three and twelve months ended December 31, 2022, and 2021, have been excluded from the FFO calculation. Finally, non-recurring administrative expenses relating to items that are not reasonably likely to occur within two years prior to, or following the disclosure, are adjusted have also been excluded from FFO.

FFO is reconciled to net income, which is the most directly comparable IFRS measure. FFO should not be construed as an alternative to net income or cash flow generated from operating activities, determined in accordance with IFRS.

FFO for the REIT is defined as net income in accordance with IFRS, subject to certain adjustments including adjustments for: (i) acquisition, eviction and disposal costs (if any), (ii) net change in fair value of investment properties, (iii) net change in fair value of derivative financial instruments at fair value through profit and loss, (iv) net changes in fair value of Exchangeable Securities, (v) finance costs related to distribution on Exchangeable Securities, (vi) adjustment for property taxes accounted for under IFRIC 21 (if any), (vii) loss on exercise of lease option (if any), (viii) adjustment for foreign exchange gains or losses on monetary items not forming part of an investment in a foreign operation (if any), (ix) gain or loss on disposal of investment properties or an interest in a subsidiary (if any), (x) finance income earned from loans to joint ventures (if any), (xi) loss on extinguishment of loans (if any), (xii) deferred taxes, (xiii) non-controlling interest, (xiv) goodwill / bargain purchase gains upon acquisition, and (xv) income taxes on sale of investment properties and provision for tax reassessment.

Exchangeable Securities are recorded as liabilities. Exchangeable Securities are recorded at fair value through profit and loss in accordance with IFRS. However, both are considered as equity for the purposes of calculating FFO and AFFO, as they are economically equivalent to the REIT’s Units, with the same features and distribution rights, that are economically equivalent to the distribution received by Unitholders.

“Funds From Operations / Unit” or “FFO / Unit” is FFO divided by the issued and outstanding Units, plus Exchangeable Securities (fully diluted basis).

“Gross book value” refers to the total consolidated assets for the IP Portfolio and Total Portfolio.

“Investments in Joint Ventures” refers to the REIT’s proportionate share of the financial position and results of operation of its investment in joint ventures, which are accounted for using the equity method under IFRS in the consolidated financial statements, are presented below using the proportionate consolidation method at the REIT’s ownership percentage of the related investment. Management views this method as relevant in demonstrating the REIT’s ability to manage the underlying economics of the related investments, including the financial performance and the extent to which the underlying assets are leveraged, which is an important component of risk management.

For the purpose of the proportionate consolidation, the initial investment of both partners in the joint ventures were considered as being equity investments as opposed to a combination of equity and loans and accordingly, the related proportionate consolidation balance sheet items were eliminated as well as the associated finance income and finance costs. As the loans to the joint ventures were considered equity for proportionate consolidation purposes, any impairment recorded on the loans in accordance with IFRS 9 has been reversed for MD&A purposes. As such, any impairment recorded for IFRS purposes results in a difference in equity when reconciling IFRS and proportionate consolidation reporting.

“Investment Properties Portfolio” or “IP Portfolio” refers to the eight wholly owned properties of the REIT.

“Net Rental Income Adjusted for IFRIC 21” refers to Net Rental Income excluding property taxes recorded under IFRIC 21 rules.

“Net Rental Income” refers to the rental income plus operating cost recoveries income plus other property revenue, less property operating costs and other costs.

“Participatory Distribution” means a special distribution paid to Unitholders based on 50% of the cash attributable to the excess of the sale price of assets over IFRS fair market value, in addition to the regular monthly distribution to Unitholders.

“Total Portfolio” refers to the eight properties referred to as the IP Portfolio and the five properties of the REIT held in joint-ownership with other parties.

“Weighted average lease term” or “WALT” is a metric used to measure a property portfolio’s risk of vacancy and refers to the average period in which all leases in a property or portfolio will expire. It is calculated as the sum of the percentages of rentable area multiplied by the number of years in each remaining lease term.

“Weighted Average number of Units” refers to the mean of periodic values in the number of issued and outstanding Units over a specific reporting period.

FFO and AFFO Calculation

The reconciliation of FFO and AFFO for the three-month periods ended March 31, 2023 and 2022, based on proportionate consolidation figures including REIT’s interest in joint ventures (see section Consolidated statement of earnings - Reconciliation to consolidated financial statements), is as follows:

Overview – GAAP and Non-GAAP

The REIT has identified specific key performance indicators to measure the progress of its long-term objectives. These are set out below:

About Inovalis REIT

Inovalis REIT is a real estate investment trust listed on the Toronto Stock Exchange in Canada. It was founded in 2013 by Inovalis and invests in office properties in primary markets of France, Germany and Spain. It holds 13 assets. Inovalis REIT acquires (indirectly) real estate properties via CanCorpEurope, authorized Alternative Investment Fund (AIF) by the CSSF in Luxemburg, and managed by Inovalis S.A.

About Inovalis Group

Inovalis S.A. is a French Alternative Investment fund manager, authorized by the French Securities and Markets Authority (AMF) under AIFM laws. Inovalis S.A. and its subsidiaries (Advenis S.A., Advenis REIM) invest in and manage Real Estate Investment Trusts such as Inovalis REIT, open ended funds (SCPI) with stable real estate focus such as Eurovalys (for Germany) and Elialys (Southern Europe), Private Thematic Funds raised with Inovalis partners to invest in defined real estate strategies and direct Co-investments on specific assets

Inovalis Group (www.inovalis.com), founded in 1998 by Inovalis SA, is an established pan European real estate investment player with EUR 7 billion of AuM and with offices in all the world's major financial and economic centers in Paris, Luxembourg, Madrid, Frankfurt, Toronto and Dubai. The group is comprised of 300 professionals, providing Advisory, Fund, Asset and Property Management services in Real Estate as well as Wealth Management services.

SOURCE Inovalis Real Estate Investment Trust

1 FFO and AFFO are non-GAAP measures. See the section "Non-GAAP Financial Measures and Other Measures" for more information on the REIT's Non-GAAP measures. A reconciliation of FFO and AFFO to Net Income can be found under the section Non-GAAP Reconciliation (FFO and AFFO).

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