European Residential REIT Reports Third Quarter 2023 Results

TORONTO, Nov. 06, 2023 (GLOBE NEWSWIRE) — European Residential Real Estate Investment Trust (“ERES” or the “REIT”) (TSX: ERE.UN) announced today its results for the three and nine months ended September 30, 2023.

ERES’s unaudited condensed consolidated interim financial statements and management’s discussion and analysis (“MD&A”) for the three and nine months ended September 30, 2023 can be found at www.eresreit.com or under ERES’s profile at www.sedarplus.ca.

SIGNIFICANT EVENTS AND HIGHLIGHTS

Business Update

• On January 24, 2023 the REIT amended and renewed its existing revolving credit facility, providing up to €125 million for a three-year period ending on January 26, 2026, as well as an accordion feature to increase the limit a further €25 million upon satisfaction of conditions set out in the agreement and consent of applicable lenders.
• On March 31, 2023, pursuant to the departure of Phillip Burns, Mark Kenney assumed the role of Chief Executive Officer and trustee. Mr. Kenney is currently also the Chief Executive Officer and President of CAPREIT.
• On June 16, 2023, the REIT announced that it is working with CBRE, as financial and real estate advisor, to advise it in connection with a strategic review of ERES, which remains ongoing.
• On June 26, 2023, the REIT secured mortgage financing on its May 2, 2022 acquisition property, combined with refinancing of certain existing properties, in the total principal amount of €76.5 million (excluding financing costs and fees). The new mortgage financing matures on June 26, 2029, and carries a fixed contractual interest rate of 4.66%.

Outperforming Operating Metrics

• Strong operating results continued into 2023, fuelled by strong rental growth. Same property portfolio Occupied Average Monthly Rents (“Occupied AMR”) increased by 7.1%, from €983 as at September 30, 2022, to €1,053 as at September 30, 2023, demonstrating the REIT’s continued achievement of rental growth in excess of its target range.
• Turnover was 10.3% for the nine months ended September 30, 2023, with rental uplift on turnover remaining strong at 20.4%, compared to rental uplift of 20.0% on turnover of 8.5% for the nine months ended September 30, 2022.
• Occupancy for the residential and commercial properties increased to 98.7% and 100.0%, respectively, as at September 30, 2023, compared to 97.8% and 99.0%, respectively, as at September 30, 2022 and is at the high end of the REIT’s target range. Moreover, 68.9% of residential vacancies are 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 8.2% for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily driven by the aforementioned higher monthly rents, further supported by the REIT’s extensive protection from inflation.

Financial Performance

• Funds From Operations (“FFO”) per Unit decreased by 4.5% to €0.042 for the three months ended September 30, 2023, compared to €0.044 for the three months ended September 30, 2022, primarily driven by increase in interest and other financing costs and current income tax expense, partially offset by the positive impact of increased same property NOI.
• Adjusted Funds From Operations (“AFFO”) per Unit decreased by 2.5% to €0.039 for the three months ended September 30, 2023, compared to €0.040 for the three months ended September 30, 2022, due to the same reasons mentioned above for FFO per Unit.

Firm Financial Position and Liquidity

• Overall, liquidity improved from prior year due to the amendment of the Revolving Credit Facility increasing the limit by €25.0 million, with immediately available liquidity of €27.7 million as at September 30, 2023, excluding the €25.0 million accordion feature on the Revolving Credit Facility, acquisition capacity on the Pipeline Agreement and alternative promissory note arrangements with CAPREIT.
• Debt coverage metrics are within covenant thresholds, with interest and debt service coverage ratios of 3.0x and 2.5x, respectively, and adjusted debt to gross book value ratio currently standing at 56.4%.
• The REIT’s financial position is additionally supported by its well-staggered mortgage profile, with a weighted average term to maturity of 3.2 years and a weighted average effective interest rate of 2.07%.

“We’re pleased to report another quarter of strong operational performance, resulting in the expansion of our same property NOI margin to 79.5% for the three months ended September 30, 2023, up by 110 basis points compared to the prior year period,” commented Mark Kenney, Chief Executive Officer. “Alongside this accomplishment, we’ve continued to prioritize our commitment to providing a safe and enjoyable living experience for all of our residents, while we also maintain our focus on diligently exploring the universe of strategic opportunities available to us, with a view to attaining the maximization of value for all of our Unitholders.”

“Incorporating the impact of rising interest rates, our quarterly diluted FFO per Unit decreased to €0.042 versus the prior year period, however it increased from €0.041 achieved in the second quarter of 2023,” added Jenny Chou, Chief Financial Officer. “This was driven by our ability to remain operationally tight, which offset higher interest costs arising from our most recent mortgage financing that closed in June 2023. Inclusive of that, our weighted average mortgage effective interest rate remains low at 2.07%, and we have no mortgages maturing for the remainder of this year and less than 9% of the portfolio maturing in 2024. Backed by our staggered mortgage profile, we will continue to actively and vigilantly manage our balance sheet position to ensure it remains solid going forward.”

OPERATING METRICS CONTINUE TO STRENGTHEN

Rental Rates

Occupied AMR increased by 7.1% for both the total and same property multi-residential portfolios, compared to the prior year period. The increase was mainly driven by indexation, turnover and the conversion of regulated suites to liberalized suites. 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.

Suite Turnovers

Suite turnovers in the residential portfolio during the three and nine months ended September 30, 2023, resulted in monthly rent increasing by approximately 20.4%, compared to 17.7% and 20.0%, respectively, for the same periods last year. Rental uplifts on conversions were 55.7% and 55.2% for the three and nine months ended September 30, 2023, respectively, compared to 50.8% and 54.1% for the three and nine months ended September 30, 2022, respectively.

Suite Renewals

Lease renewals generally occur on July 1^st for residential suites. Other than the household income adjustment, 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, 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, 2023, the REIT served tenant notices to 6,659 suites, representing 97% of the residential portfolio, across which the average rental increase due to indexation and household income adjustments is 4.0%. In the prior year period, the REIT served tenant notices to 6,499 suites, representing 96% of the residential portfolio, across which the average rental increase due to indexation and household income adjustments is 3.0%.

There was one lease renewal in the REIT’s commercial portfolio during the nine months ended September 30, 2023 (nine months ended September 30, 2022- no lease renewals).

Total Portfolio Performance

Total operating revenues increased by 6.1% and 7.0% for the three and nine months ended September 30, 2023, respectively, compared to the same periods last year, primarily due to increase in monthly rents.

NOI increased by 7.4% and 8.2% for the three and nine months ended September 30, 2023, respectively, versus the same periods last year, primarily driven by higher operating revenues from increased total portfolio occupied AMR and reduction in onsite costs, as a result of the abolishment of landlord levy tax, partially offset by increases in repairs and maintenance (“R&M”) costs. For the three months ended September 30, 2023, the NOI margin on the total portfolio increased to 79.5% compared to 78.5% for the comparable quarter (excluding service charges, total portfolio NOI margin remained stable at 84.3% compared to the prior year period). For the nine months ended September 30, 2023, the NOI margin on the total portfolio increased to 78.4% compared to 77.6% for the comparative period (excluding service charges, total portfolio NOI margin increased to 83.6% from 83.4% for the comparative period). Service charge expenses are fully recoverable from tenants via service charge income and therefore have a nil net impact on NOI.

Same Property Portfolio Performance

The increases in same property NOI contribution by 7.8% and 6.9% for the three and nine months ended September 30, 2023, respectively, compared to the same periods last year, were primarily driven by higher operating revenues from increased same portfolio occupied AMR and aforementioned changes in onsite and R&M costs. For the three months ended September 30, 2023, same property NOI margin increased to 79.5% compared to 78.4% for the comparable quarter (excluding service charges, same property NOI margin increased to 84.5% from 84.2% for the comparable quarter). For the nine months ended September 30, 2023, same property NOI margin increased to 78.5% compared to 77.4% for the comparable period (excluding services charges, same property NOI margin increased to 83.7% compared to 83.3% for the comparable period).

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 incurs 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 NOI margin.

Financial Performance

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 certain 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 relate to (i) acquisition research costs, (ii) mortgage refinancing costs, (iii) senior management termination and retirement costs, and (iv) costs related to the strategic review of the REIT. 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.

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

FFO per Unit and AFFO per Unit for the three and nine months ended September 30, 2023 decreased from the same periods last year primarily due to increases in interest and other financing costs and current income tax expense, partially offset by the positive impact of increased same property NOI.

Net Asset Value

Net Asset Value (“NAV”) represents total Unitholders’ equity per the REIT’s consolidated balance sheets, 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 an ongoing basis. Management believes that this measure reflects the residual value of the REIT to its Unitholders on an ongoing 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. While NAV is calculated based on items included in the consolidated financial statements or supporting notes, NAV itself is not a standardized financial measure under IFRS and may not be comparable to similarly termed financial measures disclosed by other real estate investment trusts or companies in similar or different industries. Please refer to the “Basis of Presentation and Non-IFRS Measures” section within this press release for further information.

Other Financial Highlights

FINANCIAL POSITION REMAINS FIRM

For the nine months ended September 30, 2023, ERES’s liquidity improved and leverage remained firm, as compared to the prior year, primarily driven by the amended revolving credit facility agreement, additionally supported by the REIT’s staggered mortgage profile with a weighted average term to maturity of 3.2 years and a weighted average effective interest rate of 2.07%. The REIT has immediately available liquidity of €27.7 million as at September 30, 2023, excluding the €25.0 million accordion feature on the Revolving Credit Facility, acquisition capacity on the Pipeline Agreement and alternative promissory note arrangements with CAPREIT, reinforced by compliant debt coverage metrics, with interest and debt service coverage ratios of 3.0x and 2.5x, respectively, and adjusted debt to gross book value ratio within its target range at 56.4%.

Management aims to maintain an optimal degree of debt to gross book value 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 January 24, 2023, between the REIT and three Canadian chartered banks, providing access to up to €125.0 million with an accordion feature to increase the limit a further €25.0 million upon satisfaction of conditions set out in the agreement and the consent of applicable lenders (the “Revolving Credit Facility”).

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 for future growth in its business.

DISTRIBUTIONS

During the nine months ended September 30, 2023, the REIT declared monthly distributions of €0.01 per Unit (being equivalent to €0.12 per Unit annualized). 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 Mark Kenney, Chief Executive Officer and Jenny Chou, Chief Financial Officer, will be held on Tuesday, November 7, 2023 at 9:00 am EST. The telephone numbers for the conference call are: Canadian Toll Free: (833) 950-0062 / International Toll: +1 (929) 526-1599. The conference call access code is 038615.

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. As at September 30, 2023, ERES owns a portfolio of 158 multi-residential properties, comprised of approximately 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 unaudited condensed consolidated interim financial statements and the notes thereto for the three and nine months ended September 30, 2023, 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 Interim Financial Statements and MD&A for the three and nine months ended September 30, 2023, which are available on the REIT’s website at www.eresreit.com and on SEDAR+ at www.sedarplus.ca. 

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 three and nine months ended September 30, 2023.

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.

A reconciliation from total debt is as follows:

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) and comprehensive income (loss) to EBITDAFV is as follows:

¹  _{For use in the 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.

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.

Forward-Looking Disclaimer

Certain statements contained in this press release constitute forward-looking statements within the meaning of applicable Canadian securities laws which reflect the REIT’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”, “intend”, “estimate”, “anticipate”, “believe”, “consider”, “should”, “plan”, “predict”, “forward”, “potential”, “could”, “would”, “should”, “might”, “likely”, “approximately”, “scheduled”, “forecast”, “variation”, “project”, “budget” or “continue”, or similar expressions suggesting future outcomes or events. Management’s estimates, beliefs and assumptions are inherently subject to significant business, economic, competitive and other uncertainties and contingencies regarding future events and, as such, are subject to change. Although the forward-looking statements contained in this press release are based on assumptions and information that are available to management as of the date on which the statements are made in this press release, including current market conditions and management’s assessment of acquisition, disposition and other opportunities that are or may become available to the REIT, which are subject to change, management believes these statements have been prepared on a reasonable basis, reflecting the REIT’s best estimates and judgement. However, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in this press release. Accordingly, readers should not place undue reliance on forward-looking statements. For a detailed discussion of risks and uncertainties affecting the REIT, refer to the Risks and Uncertainties section in the MD&A contained in the REIT’s 2022 Annual Report.

Except as specifically required by applicable Canadian securities law, the REIT 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 the REIT’s views as of any date subsequent to the date of this press release.

For further information:

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