European Residential REIT Reports 2023 Annual Results

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TORONTO, Feb. 21, 2024 (GLOBE NEWSWIRE) — European Residential Real Estate Investment Trust (“ERES” or the “REIT”) (TSX:ERE) announced today its results for the year ended December 31, 2023.

ERES’s audited consolidated annual financial statements and management’s discussion and analysis (“MD&A”) for the year ended December 31, 2023 can be found at www.eresreit.com or under ERES’s profile at SEDAR+ 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 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 was working with CBRE, as financial and real estate advisor, to advise it in connection with a strategic review of ERES. On December 20, 2023, the REIT announced that the strategic review process has been concluded and the proposed transactions would not be proceeded with.
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%.

Operating Metrics

Strong operating results continued into 2023, fuelled by strong rental growth. Same property portfolio Occupied Average Monthly Rents (“Occupied AMR”) increased by 7.2%, from €992 as at December 31, 2022, to €1,063 as at December 31, 2023, demonstrating the REIT’s continued achievement of rental growth in excess of its target range.
Turnover was 13.8% for the year ended December 31, 2023, with rental uplift on turnover remaining strong at 20.4%, compared to rental uplift of 22.0% on turnover of 12.4% for the year ended December 31, 2022.
Occupancy for the residential and commercial properties increased to 98.5% and 100.0%, respectively, as at December 31, 2023, compared to 98.4% and 99.5%, respectively as at December 31, 2022, and is at the high end of the REIT’s target range. Moreover, 50.5% of residential vacancies are attributable to suites undergoing renovation upon turnover, and 27.7% of residential vacancies are due to suites held for potential sale relating to the REIT’s ongoing capital recycling initiatives.
Net Operating Income (“NOI”) increased by 8.9% for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily driven by higher monthly rents on the same property portfolio, further supported by the REIT’s extensive protection from inflation and strong cost control.

Financial Performance

Funds From Operations (“FFO”) per Unit decreased by 4.7% to €0.161 for the year ended December 31, 2023, compared to €0.169 for the year ended December 31, 2022, primarily driven by increases 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 2.7% to €0.146 for the year ended December 31, 2023, compared to €0.150 for the year ended December 31, 2022, due to the same reasons mentioned above for FFO per Unit.

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 €28.9 million as at December 31, 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 2.9x and 2.4x, respectively, and adjusted debt to gross book value ratio currently standing at 57.6%.
The REIT’s financial position is additionally supported by its well-staggered mortgage profile, with a weighted average term to maturity of 2.9 years and a weighted average effective interest rate of 2.07%.

“With growing demand for housing in the Netherlands continuing to outstrip the pace of new supply, we’re experiencing increasingly tight rental market fundamentals which keep strengthening ERES’s operational performance, as we saw again in 2023,” commented Mark Kenney, Chief Executive Officer. “Consistent with our track record to date, we’re pleased to report that our occupancies remained as high as possible, while our same property NOI margin expanded to 78.6% for 2023. This year, we also proved our commitment to maximizing value for Unitholders in any way that we can, and we’re confident that our current strategy achieves that objective. Looking ahead, we remain focused on optimizing our portfolio, enhancing our operational performance and fortifying our platform, and we’re excited to continue making progress on each of these initiatives.”

“We secured 76.5 million in mortgage financing during 2023, and the weighted average effective interest rate on our mortgage portfolio remains low at 2.1% today,” added Jenny Chou, Chief Financial Officer. “This reflects our conservative financing strategy as we fix 100% of our mortgage interest costs and stagger our renewals. As such, we’re well positioned for next year with only 9% of our mortgage debt coming due in 2024. We’ll continue to manage our debt and capital structure proactively and prudently going forward, and we have liquidity-generating programs in place to strengthen our balance sheet, reduce volatility and mitigate the impact of mortgages maturing in future years.”

OPERATING RESULTS

Rental Rates

Total and Same Property Portfolio
Suite Count1
Occupied AMR/ABR2
Occupancy %

As at December 31,
2023
2022
2023
2022
AMR
2023
2022

 
 
 


% Change
 
 

Residential Properties
6,886
6,900
1,063
992
7.2
98.5
98.4

Commercial Properties3
 
 
19.4
18.2
6.6
100.0
99.5

1
Same property suite count only includes the properties owned by the REIT as at both December 31, 2023 and December 31, 2022, and therefore does not take into account the impact of any property acquisitions completed between the two dates.

2
Average In-Place Base Rent (“ABR”).

3
Represents 450,911 square feet of commercial gross leasable area.

 
 

Occupied AMR increased by 7.2% for both the total and same property multi-residential portfolios, compared to the prior year. 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 5% demonstrates its ability to consistently operate in a complex and fluid regulatory regime.

Suite Turnovers

For the Three Months Ended December 31,
2023
2022

 
Change in
Monthly Rent
Turnovers2
Change in
Monthly Rent
Turnovers2

 
%
%
%
%

Regulated suites turnover1
11.9
0.3
2.2
0.4

Liberalized suites turnover1
18.6
2.7
18.5
3.2

Regulated suites converted to liberalized suites1
41.8
0.4
82.2
0.4

Weighted average turnovers1
20.3
3.4
23.8
3.9

Weighted average turnovers excluding service charge income
19.2
3.4
23.1
3.9

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

2
Percentage of suites turned over during the period based on the weighted average number of residential suites held during the period.

 
 

For the Year Ended December 31,
2023
2022

 
Change in
Monthly Rent
Turnovers2
Change in
Monthly Rent
Turnovers2

 
%
%
%
%

Regulated suites turnover1
10.5
1.1
1.7
1.3

Liberalized suites turnover1
17.7
11.0
18.6
9.7

Regulated suites converted to liberalized suites1
51.8
1.6
65.0
1.4

Weighted average turnovers1
20.4
13.8
22.0
12.4

Weighted average turnovers excluding service charge income
19.5
13.8
21.4
12.4

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

2
Percentage of suites turned over during the period based on the weighted average number of residential suites held during the period.

 
 

Suite Renewals

Lease renewals generally occur on July 1st for residential suites. Other than the household income adjustment, maximum rent indexation from July 1, 2023 to June 30, 2024 for all Regulated Units is set at the annual wage development figure of 3.1%. For the period from July 1, 2024 up to and including June 30, 2025, the indexation for all Regulated Units has been set at the annual wage development figure of 5.8% with a monthly rent of more than €300. 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. The indexation for the period from January 1, 2023 to January 1, 2024 has been capped 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%. For the period from January 1, 2024 to January 1, 2025, the rental cap limits indexation for Liberalized Suites to the annual inflation number (“CPI”) + 1.0%, resulting in a maximum indexation of 5.5% based on CPI of 4.5%.

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, 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 was 3.0%.

There was one lease renewal in the REIT’s commercial portfolio during the year ended December 31, 2023 (year ended December 31, 2022 — three lease renewals).

Total Portfolio Performance

 
Three Months Ended,
Year Ended

 
December 31,
December 31,

 
2023
 
2022
 
2023
 
2022
 

Operating Revenues (000s)

        24,717
 

22,932
 

        95,684
 

89,252
 

NOI (000s)

        19,505
 

17,546
 

        75,131
 

68,980
 

NOI Margin1
78.9
%
76.5
%
78.5
%
77.3
%

Weighted Average Number of Suites
6,894
 
6,900
 
6,898
 
6,811
 

1
Excluding service charge income and expense, the total portfolio NOI margin for the three months and year ended December 31, 2023 was 84.2% and 83.8%, respectively (three months and year ended December 31, 202282.1% and 83.1%, respectively).

 
 

Operating revenues increased by 7.8% and 7.2% for the three months and year ended December 31, 2023, respectively, compared to the same periods last year, primarily due to increase in monthly rents on the same property portfolio.

NOI increased by 11.2% and 8.9% for the three months and year ended December 31, 2023, respectively, versus the same periods last year. Moreover, for the three months ended December 31, 2023, the NOI margin on the total portfolio increased to 78.9% from 76.5% for the comparable quarter (excluding service charges, total portfolio NOI margin increased to 84.2% from 82.1% for the comparable quarter). For the year ended December 31, 2023, the NOI margin on the total portfolio increased to 78.5% from 77.3% for the prior year (excluding service charges, total portfolio NOI margin increased to 83.8% from 83.1% for the prior year). The increases were primarily driven by higher operating revenues from increased total portfolio occupied AMR and substantial reduction in onsite costs, as a result of the abolishment of landlord levy tax. Service charge expenses are fully recoverable from tenants via service charge income and therefore have a nil net impact on NOI. The increase in the total portfolio NOI margin excluding service charges reflects the REIT’s ability to successfully control costs as well as its limited exposure to inflationary pressures

Same Property Portfolio Performance

 
Three Months Ended,
Year Ended

 
December 31,
December 31,

 
2023
 
2022
 
2023
 
2022
 

Operating Revenues (000s)

        23,522
 

        21,887
 

        91,162
 

        86,076
 

NOI (000s)

        18,576
 

        16,799
 

        71,680
 

        66,492
 

NOI Margin1
79.0
%
76.8
%
78.6
%
77.2
%

Same Property Number of Suites2
6,542
 
6,545
 
6,542
 
6,545
 

1
Excluding service charge income and expense, the same property portfolio NOI margin for the three months and year ended December 31, 2023 was 84.2% and 83.9%, respectively (three months and year ended December 31, 202282.4% and 83.1%, respectively).

2
The number of suites for same property NOI is based on the weighted average number of suites owned by the REIT during the current and comparative prior year periods, respectively, excluding property acquisitions or property dispositions completed during 2022 and 2023.

 
 

The increases in same property NOI by 10.6% and 7.8% for the three months and year ended December 31, 2023, respectively, compared to the same periods last year, were primarily driven by higher operating revenues from increased monthly rents and reduction in onsite costs, as a result of the abolishment of landlord levy tax. The increases in same property NOI margin including and excluding service charges for the three months and year ended December 31, 2023 are primarily driven by the same reasons for the increases in same property NOI mentioned above.

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, (iv) costs related to the concluded strategic review of the REIT, and (v) expired base shelf prospectus fees. 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 (loss) income and comprehensive (loss) income to FFO is as follows:

(€ Thousands, except per Unit amounts)
Three Months Ended
Year Ended

 
December 31,
December 31,

 
2023
2022
2023
2022

Net (loss) income and comprehensive (loss) income for the period

        (35,917
)

        (48,790
)

        (114,229
)

        116,416
 

Adjustments:
 
 
 
 
 
 
 
 

Net movement in fair value of investment properties
35,337
 
93,599
 
230,229
 
79,449
 

Net movement in fair value of Class B LP Units
8,218
 
(15,443
)
(46,299
)
(148,289
)

Fair value adjustments of Unit Option liabilities
(194
)
(1
)
(1,311
)
(1,850
)

Interest expense on Class B LP Units
4,261
 
4,261
 
17,044
 
16,809
 

Deferred income taxes
(10,538
)
(22,944
)
(59,679
)
(10,240
)

Foreign exchange loss (gain)1
224
 
1,148
 
(568
)
10,544
 

Net loss (gain) on derivative financial instruments
6,304
 
(2,496
)
9,244


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