European Residential REIT Reports Third Quarter 2024 Results
TORONTO, Nov. 06, 2024 (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, 2024.
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, 2024 can be found at www.eresreit.com or under ERES's profile at SEDAR+ at www.sedarplus.ca.
SIGNIFICANT EVENTS AND HIGHLIGHTS
Strategic Initiatives Update
- On September 16, 2024, the REIT announced that it has entered into two separate agreements to sell a total of 3,179 residential suites in the Netherlands for gross proceeds net of estimated adjustments of approximately €738.6 million. The proceeds will be paid in cash, with a portion to be used to repay approximately €421.3 million associated mortgage principal outstanding. Remaining net proceeds are intended to be used for the repayment of amounts on the Revolving Credit Facility, the repayment of certain mortgages maturing in the near term, and the payment of a special cash distribution of an estimated €0.75 per Unit. Following completion of the announced dispositions, subject to the satisfaction of closing conditions, the REIT intends to reduce its monthly rate of distribution by approximately 50% to better align distributions with the REIT's remaining portfolio.
- On September 13, 2024, the REIT disposed of a commercial building being part of its German property for €8.6 million (excluding transaction costs and other adjustments).
- On July 15, 2024, the REIT disposed of 19 residential properties containing 464 suites in the Netherlands for €100.7 million (excluding transaction costs and other adjustments) and one office building being part of a residential property in the Netherlands for gross proceeds of €1.1 million.
- On June 18, 2024, the REIT disposed of one residential property containing 66 suites in the Netherlands for €14.2 million (excluding transaction costs and other adjustments).
- During the nine months ended September 30, 2024, the REIT disposed of 80 individual suites, which generated €22.8 million in gross proceeds.
Operating Metrics
- Strong operating results continued into 2024, fuelled by strong rental growth. Same property portfolio Occupied Average Monthly Rents ("Occupied AMR") increased by 8.0%, from €1,131 as at September 30, 2023, to €1,222 as at September 30, 2024, demonstrating the REIT's continued achievement of rental growth.
- Same property turnover was 2.5% for the three months ended September 30, 2024, with rental uplift on turnover of 14.7%, compared to rental uplift of 21.7% on same property turnover of 4.2% for the same quarter last year. For the nine months ended September 30, 2024, same property turnover was 9.2% with rental uplift on turnover of 16.4%, compared to rental uplift of 21.1% on same property turnover of 11.9% for the same period last year.
- Same property occupancy for the residential properties decreased slightly to 96.1% as at September 30, 2024, compared to 98.8% as at September 30, 2023. The residential vacancies were primarily related to suites intentionally held vacant to maximize value. Same property occupancy for commercial properties decreased to 91.3% as at September 30, 2024, from 100.0% as at September 30, 2023, due to the expiration of one of the commercial leases.
- Same property Net Operating Income ("NOI") increased by 2.1% and 4.5% for the three and nine months ended September 30, 2024 compared to the same periods last year, primarily driven by higher monthly rents on the same property portfolio and further supported by the REIT's extensive protection from inflation and strong cost control.
Financial Performance
- Diluted Funds From Operations ("FFO") per Unit decreased by 4.8% for the three months ended September 30, 2024 compared to the prior year quarter, predominantly due to lower total portfolio NOI as a result of dispositions, partially offset by lower interest costs being incurred following repayment of debt with net disposition proceeds received. Diluted FFO per Unit for the nine months ended September 30, 2024 decreased by 3.3% from prior year period, primarily due to increases in interest and other financing costs.
- Diluted Adjusted Funds From Operations ("AFFO") per Unit for the three months ended September 30, 2024 stayed consistent with the same quarter last year, whereas diluted AFFO per Unit for the nine months ended September 30, 2024 decreased by 3.4% compared to the same period last year, due to the same reason mentioned above for diluted FFO per Unit.
Financial Position and Liquidity
- Liquidity improved significantly from prior year end by €59.8 million as a result of proceeds from dispositions being used to partially repay the Revolving Credit Facility.
- During the nine months ended September 30, 2024, the REIT repaid €79.2 million of mortgages payable with a weighted average effective interest rate of 3.41% as a result of dispositions..
- On March 27, 2024, the REIT renewed the mortgage financing on one of its commercial properties for a three-year period ending March 27, 2027, with a total principal amount of €18.7 million and a fixed contractual interest rate of 4.70%.
- On April 30, 2024, the REIT renewed the mortgage financing on one of its commercial properties for a one-year period ending March 31, 2025, with a total principal amount of €14.4 million and interest rate at three-month Euro Interbank Offered Rate plus a margin of 2.0%.
- On June 19, 2024, the REIT amended its Revolving Credit Facility to replace the Canadian Dollar Offered Rate with the Canadian Overnight Repo Rate Average as the benchmark interest rate for Canadian dollar borrowings, if any. The amendment also extends the maturity date of the Revolving Credit Facility from January 26, 2026 to June 14, 2027.
- 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 standing at 52.3%.
- The REIT's financial position is additionally supported by its well-staggered mortgage profile, with a weighted average term to maturity of 2.2 years and a weighted average effective interest rate of 2.08%.
"This past quarter has been instrumental for ERES in terms of advancements being made on our strategic objectives, all of which revolve around the single mission to maximize value for Unitholders,” commented Mark Kenney, Chief Executive Officer. “So far this year, we've closed on the sale of 610 residential suites for gross proceeds of approximately €138 million, and we've also announced two upcoming dispositions of an aggregate 3,179 residential suites for approximately €739 million. We're selling this large portion of our portfolio to surface the embedded value, and redeploy the liquidity into the repayment of debt, while also returning a significant amount of capital to Unitholders. As we move ahead, we remain committed to continuing to explore every opportunity to enhance value, as we've been demonstrating to date."
"Operationally, we had another quarter of robust rent growth with same property occupied AMR increasing by 8% to €1,222 as of period end, driven by uplifts on turnover combined with 2024 indexation effective at the outset of the quarter,” added Jenny Chou, Chief Financial Officer. “As a result, our same property NOI margin remained strong at 76.6%. However, our diluted FFO per Unit decreased to €0.040, primarily due to dispositions, partly offset by lower interest costs as we're using net disposition proceeds to pay down debt. As evidenced, it is important for us to retain focus on further mitigating the impact of higher interest rates on the Revolving Credit Facility and minimizing renewal risk on mortgages maturing in the near term, and we're looking forward to making additional progress on this initiative."
OPERATING RESULTS
Rental Rates
| Total Property Portfolio | Suite Count | Occupied AMR/ABR1 | Occupancy % | |||||||||||
| As at September 30, | 2024 | 2023 | 2024 | 2023 | AMR | 2024 | 2023 | |||||||
| € | € | % Change | ||||||||||||
| Residential Properties | 6,276 | 6,896 | 1,141 | 1,053 | 8.4 | 95.1 | 98.7 | |||||||
| Commercial Properties2 | 17.9 | 19.4 | (7.7 | ) | 91.3 | 100.0 | ||||||||
| 1 | Average In-Place Base Rent ("ABR"). |
| 2 | Represents 392,904 square feet of commercial gross leasable area as at September 30, 2024 (September 30, 2023 — 450,911 square feet). |
| Same Property Portfolio | Suite Count1 | Occupied AMR/ABR | Occupancy % | ||||||||
| As at September 30, | 2024 | 2023 | AMR | 2024 | 2023 | ||||||
| € | € | % Change | |||||||||
| Residential Properties | 3,097 | 1,222 | 1,131 | 8.0 | 96.1 | 98.8 | |||||
| Commercial Properties2 | 17.9 | 20.1 | (10.9 | ) | 91.3 | 100.0 | |||||
| 1 | Same property suite count includes all suites owned by the REIT as at both September 30, 2024 and September 30, 2023, and excludes properties and suites disposed of or classified as assets held for sale as at September 30, 2024. |
| 2 | Includes 392,904 square feet of same property commercial gross leasable area, which excludes commercial gross leasable area disposed of since September 30, 2023. |
Occupied AMR for the total portfolio increased by 8.4%, while Occupied AMR for the same property portfolio increased by 8.0%, compared to the prior year periods. The increases were mainly driven by indexation, turnover and the conversion of regulated suites to liberalized suites. The REIT's achievement of strong growth in rental revenues demonstrates its ability to consistently operate in a complex and fluid regulatory regime. The Occupied ABR for the commercial properties for the total and same property portfolio decreased from €19.4 and €20.1, respectively, as at September 30, 2023 to €17.9 as at September 30, 2024, due to a reduction in rent after lease renewal in one of the commercial properties.
Suite Turnovers
Total Portfolio Turnover
| For the Three Months Ended September 30, | 2024 | 2023 | ||
| Change in Monthly Rent | Turnovers2 | Change in Monthly Rent | Turnovers2 | |
| % | % | % | % | |
| Regulated suites turnover1 | 13.7 | 0.5 | 13.5 | 0.3 |
| Liberalized suites turnover1 | 3.2 | 0.2 | 18.0 | 2.9 |
| Regulated suites converted to liberalized suites1 | 20.3 | 0.5 | 55.7 | 0.3 |
| Weighted average turnovers1 | 14.7 | 1.2 | 20.4 | 3.5 |
| Weighted average turnovers excluding service charge income | 15.7 | 1.2 | 19.5 | 3.5 |
| 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 total residential suites held during the period. |
| For the Nine Months Ended September 30, | 2024 | 2023 | ||
| Change in Monthly Rent | Turnovers2 | Change in Monthly Rent | Turnovers2 | |
| % | % | % | % | |
| Regulated suites turnover1 | 11.9 | 1.0 | 10.0 | 0.9 |
| Liberalized suites turnover1 | 13.0 | 4.2 | 17.3 | 8.2 |
| Regulated suites converted to liberalized suites1 | 31.8 | 1.1 | 55.2 | 1.2 |
| Weighted average turnovers1 | 15.9 | 6.3 | 20.4 | 10.3 |
| Weighted average turnovers excluding service charge income | 16.7 | 6.3 | 19.5 | 10.3 |
| 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 total residential suites held during the period. |
Same Property Turnover
| For the Three Months Ended September 30, | 2024 | 2023 | ||
| Change in Monthly Rent | Turnovers2 | Change in Monthly Rent | Turnovers2 | |
| % | % | % | % | |
| Regulated suites turnover1 | 13.7 | 1.0 | 15.8 | 0.4 |
| Liberalized suites turnover1 | 3.2 | 0.4 | 19.6 | 3.4 |
| Regulated suites converted to liberalized suites1 | 20.3 | 1.1 | 58.2 | 0.4 |
| Weighted average turnovers1 | 14.7 | 2.5 | 21.7 | 4.2 |
| Weighted average turnovers excluding service charge income | 15.7 | 2.5 | 20.3 | 4.2 |
| 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 same property residential suites held during the period. |
| For the Nine Months Ended September 30, | 2024 | 2023 | ||
| Change in Monthly Rent | Turnovers2 | Change in Monthly Rent | Turnovers2 | |
| % | % | % | % | |
| Regulated suites turnover1 | 12.9 | 1.5 | 9.7 | 0.9 |
| Liberalized suites turnover1 | 12.5 | 6.0 | 17.9 | 9.7 |
| Regulated suites converted to liberalized suites1 | 33.0 | 1.7 | 65.0 | 1.3 |
| Weighted average turnovers1 | 16.4 | 9.2 | 21.1 | 11.9 |
| Weighted average turnovers excluding service charge income | 17.3 | 9.2 | 19.8 | 11.9 |
| 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 same property residential suites held during the period. |
Suite Renewals
Lease renewals generally occur on July 1 for residential suites. On July 1, 2024, the REIT renewed leases for 94% of its residential suites, to which the average rental increase due to indexation and household income adjustments was 5.5% (July 1, 2023 — renewal of 97% of its residential suites with 4.0% average rental increase due to indexation and household income adjustments).
There was no lease renewal in the REIT's commercial portfolio during the nine months ended September 30, 2024 (nine months ended September 30, 2023 — one lease renewal).
Total Portfolio Performance
| Three Months Ended, | Nine Months Ended | |||||||||||
| September 30, | September 30, | |||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||
| Operating Revenues (000s) | € | 23,432 | € | 24,214 | € | 72,327 | € | 70,967 | ||||
| NOI (000s) | € | 18,401 | € | 19,247 | € | 56,847 | € | 55,626 | ||||
| NOI Margin1 | 78.5 | % | 79.5 | % | 78.6 | % | 78.4 | % | ||||
| Weighted Average Number of Suites | 6,347 | 6,898 | 6,676 | 6,899 | ||||||||
| 1 | Excluding service charge income and expense, the total portfolio NOI margin for the three and nine months ended September 30, 2024 was 84.1% and 84.0%, respectively (three and nine months ended September 30, 2023 — 84.3% and 83.6%, respectively). |
Operating revenues decreased by 3.2% for the three months ended September 30, 2024, compared to the prior year period, primarily due to property and suite dispositions as well as vacancies related to assets held for sale. For the nine months ended September 30, 2024, operating revenues increased by 1.9%, compared to the same period last year, primarily driven by increased monthly rents on the same property portfolio, partially offset by the impact of dispositions.
For the three months ended September 30, 2024, NOI decreased by 4.4% from the comparative prior year quarter and the NOI margin on the total portfolio decreased slightly to 78.5% from 79.5% for the comparable prior year quarter, mainly due to decrease in revenue from investment properties as a result of the property and suite dispositions and increases in recoverable service charge expenses and onsite costs. For the nine months ended September 30, 2024, NOI increased by 2.2% from the comparative prior year period and the NOI margin on the total portfolio increased to 78.6% from 78.4% for the comparative prior year period, primarily driven by higher occupied AMR and decrease in advertising expenses. Service charge expenses are fully recoverable from tenants via service charge income and therefore have a nil net impact on NOI.
The following table reconciles same property NOI and NOI from dispositions and assets held for sale to total NOI, for the three and nine months ended September 30, 2024 and September 30, 2023.
| (€ Thousands) | Three Months Ended | Nine Months Ended | ||||||||||
| September 30, | September 30, | |||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||
| Same property NOI | € | 10,152 | € | 9,941 | € | 30,157 | € | 28,850 | ||||
| NOI from dispositions and assets held for sale | 8,249 | 9,306 | 26,690 | 26,776 | ||||||||
| Total NOI | € | 18,401 | € | 19,247 | € | 56,847 | € | 55,626 | ||||
Same Property Portfolio Performance1
| Three Months Ended, | Nine Months Ended | |||||||||||
| September 30, | September 30, | |||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||
| Operating Revenues (000s) | € | 13,234 | € | 12,682 | € | 39,366 | € | 37,524 | ||||
| NOI (000s) | € | 10,152 | € | 9,941 | € | 30,157 | € | 28,850 | ||||
| NOI Margin2 | 76.7 | % | 78.4 | % | 76.6 | % | 76.9 | % | ||||
| 1 | Same property portfolio includes all properties and suites continuously owned by the REIT since December 31, 2022, and excludes properties, buildings and suites disposed of since December 31, 2022 and properties classified as assets held for sale as at September 30, 2024. For the three and nine months ended September 30, 2024 and 2023, same property portfolio includes 3,097 residential suites and 392,904 square feet of commercial gross leasable area. |
| 2 | Excluding service charge income and expense, the same property portfolio NOI margin for the three and nine months ended September 30, 2024 was 84.4% and 84.5%, respectively (three and nine months ended September 30, 2023 - 85.2% and 84.6%, respectively). |
The increases in same property NOI by 2.1% and 4.5% for the three and nine months ended September 30, 2024, respectively, compared to the same periods last year, were primarily driven by higher monthly rents on the same property portfolio. Same Property NOI margin decreased to 76.7% and 76.6%, respectively, for the three and nine months ended September 30, 2024, compared to 78.4% and 76.9%, respectively, for the comparable prior year periods. The decreases in the same property NOI margin for the three and nine months ended September 30, 2024 were mainly due to the increases in recoverable service charge expense, which has no net impact on same property NOI, and R&M costs for the same property portfolio.
The REIT is focused on continuing to further improve same property NOI 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.
FINANCIAL PERFORMANCE
Funds from Operations and Adjusted Funds from Operations
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 most recent recommendations of the Real Property Association of Canada ("REALpac"), with the exception of certain adjustments made to the REALpac defined FFO, which relate to (i) senior management termination and retirement costs; (ii) gain from Unit Options forfeited on senior management termination; and (iii) mortgage repayment 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.
A reconciliation of net (loss) income and comprehensive (loss) income to FFO is as follows:
| (€ Thousands, except per Unit amounts) | Three Months Ended | Nine Months Ended | ||||||||||
| September 30, | September 30, | |||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||
| Net (loss) income and comprehensive (loss) income for the period | € | (52,126 | ) | € | 24,784 | € | (11,898 | ) | € | (78,312 | ) | |
| Adjustments: | ||||||||||||
| Net movement in fair value of investment properties and assets held for sale | (39,352 | ) | 24,768 | (48,149 | ) | 194,892 | ||||||
| Net movement in fair value of Class B LP Units | 80,240 | (39,339 | ) | 55,469 | (54,517 | ) | ||||||
| Fair value adjustments of Unit-based compensation liabilities | 203 | (463 | ) | 1,155 | (1,117 | ) | ||||||
| Interest expense on Class B LP Units | 4,261 | 4,261 | 12,783 | 12,783 | ||||||||
| Deferred income tax expense (recovery) | 8,725 | (6,332 | ) | 10,872 | (49,141 | ) | ||||||
| Foreign exchange loss (gain)1 | — | 213 | 442 | (792 | ) | |||||||
| Net loss on derivative financial instruments | 4,480 | 640 | 4,040 | 2,940 | ||||||||
| Transaction costs and other activities2 | 1,547 | 1,197 | 2,052 | 1,815 | ||||||||
| Tax on property and suite dispositions3 | 277 | 80 | 1,397 | 80 | ||||||||
| Mortgage repayment costs4 | 1,206 | — | 1,168 | — | ||||||||
| Gain from Unit Options forfeited on senior management termination5 | — | — | (1,552 | ) | — | |||||||
| Senior management termination and retirement costs6 | — | — | — | 74 | ||||||||
| FFO | € | 9,461 | € | 9,809 | € | 27,779 | € | 28,705 | ||||
| FFO per Unit – diluted7 | € | 0.040 | € | 0.042 | € | 0.119 | € | 0.123 | ||||
| Total distributions declared | € | 7,029 | € | 6,991 | € | 21,059 | € | 20,947 | ||||
| FFO payout ratio | 74.3 | % | 71.3 | % | 75.8 | % | 73.0 | % | ||||
| 1 | Relates to foreign exchange movements recognized on remeasurement of Unit-based compensation liabilities as well as on remeasurement of the REIT's US$ draw on the Revolving Credit Facility as part of effective hedging. |
| 2 | Represent transaction costs incurred on property and suite dispositions as well as costs associated with the concluded strategic review of the REIT. |
| 3 | Included in current income tax expense in the consolidated interim statements of net (loss) income and comprehensive (loss) income. |
| 4 | Relate to mortgage repayment fees and write-off of deferred financing costs and fair value adjustment related to mortgages repaid as a result of dispositions. |
| 5 | Represents Unit-based compensation financial liabilities written off during the nine months ended September 30, 2024 due to 3,000,000 Unit Options forfeited as a result of senior management termination. |
| 6 | Relate to €59 of accelerated vesting of previously granted Unit Options and €15 in associated legal fees for the nine months ended September 30, 2023. |
| 7 | Includes Class B LP Units and the dilutive impact of unexercised Unit Options and RURs. |
| The table below illustrates a reconciliation of the REIT's FFO and AFFO: | ||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||
| (€ Thousands, except per Unit amounts) | September 30, | September 30, | ||||||||||
| 2024 | 20231 | 2024 | 20231 | |||||||||
| FFO | € | 9,461 | € | 9,809 | € | 27,779 | € | 28,705 | ||||
| Adjustments: | ||||||||||||
| Actual non-discretionary capital investments | (509 | ) | (756 | ) | (1,240 | ) | (1,386 | ) | ||||
| Leasing cost reserve2 | (127 | ) | (139 | ) | (382 | ) | (417 | ) | ||||
| AFFO | € | 8,825 | € | 8,914 | € | 26,157 | € | 26,902 | ||||
| AFFO per Unit – diluted3 | € | 0.038 | € | 0.038 | € | 0.112 | € | 0.116 | ||||
| Total distributions declared | € | 7,029 | € | 6,991 | € | 21,059 | € | 20,947 | ||||
| AFFO payout ratio | 79.6 | % | 78.4 | % | 80.5 | % | 77.9 | % | ||||
DFSDF
| 1 | Certain 2023 comparative figures have been restated to conform with current period presentation. |
| 2 | Leasing cost reserve is based on annualized 10-year forecast of external leasing costs on the commercial properties. |
| 3 | Includes Class B LP Units and the dilutive impact of unexercised Unit Options and RURs. |
Diluted FFO per Unit for the three months ended September 30, 2024 decreased by 4.8% from the same quarter last year, predominantly due to lower total portfolio NOI as a result of dispositions, partially offset by lower interest costs being incurred following repayment of debt with net disposition proceeds received. Diluted FFO per Unit for the nine months ended September 30, 2024 decreased by 3.3% from prior year period, primarily due to increases in interest and other financing costs. Diluted AFFO per Unit for the three months ended September 30, 2024 stayed consistent with the prior year quarter, whereas diluted AFFO per Unit for the nine months ended September 30, 2024 decreased by 3.4%, from the prior year period, due to same reason mentioned above for diluted FFO per Unit.
Net Asset Value
Net Asset Value ("NAV") represents total Unitholders' equity per the REIT's consolidated balance sheets, adjusted to include or exclude certain amounts in order to provide what management considers to be a key measure of the residual value of the REIT to its Unitholders as at the reporting date. NAV 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.
| A reconciliation of Unitholders' equity to NAV is as follows: | |||||||||
| (€ Thousands, except per Unit amounts) | |||||||||
| As at | September 30, 2024 | December 31, 2023 | September 30, 2023 | ||||||
| Unitholders' equity | € | 408,251 | € | 427,247 | € | 465,376 | |||
| Class B LP Units | 306,023 | 250,554 | 242,336 | ||||||
| Unit-based compensation financial liabilities | 311 | 187 | 146 | ||||||
| Net deferred income tax liability1 | 3,106 | 14,869 | 25,409 | ||||||
| Net derivative financial asset2 | (11,161 | ) | (15,901 | ) | (22,205 | ) | |||
| NAV | € | 706,530 | € | 676,956 | € | 711,062 | |||
| NAV per Unit – diluted3 | € | 3.01 | € | 2.90 | € | 3.05 | |||
| NAV per Unit – diluted (in C$)3,4 | C$ | 4.54 | C$ | 4.24 | C$ | 4.38 | |||
| 1 | Represents deferred income tax liabilities of €14,321 net of deferred income tax assets of €11,215 as at September 30, 2024 (December 31, 2023 — deferred income tax liabilities of €28,217 net of deferred income tax assets of €13,348, September 30, 2023 — deferred income tax liabilities of €35,125 net of deferred income tax assets of €9,716). |
| 2 | Represents non-current and current derivative financial assets of €10,992 and €169, respectively, as at September 30, 2024 (December 31, 2023 — non-current derivative financial assets of €15,901, September 30, 2023 — non-current derivative financial assets of €22,205). |
| 3 | Includes Class B LP Units and the dilutive impact of unexercised Unit Options and RURs. |
| 4 | Based on the foreign exchange rate of 1.5085 on September 30, 2024 (foreign exchange rate of 1.4626 on December 31, 2023 and 1.4360 on September 30, 2023). |
Other Financial Highlights
| (Thousands) | Three Months Ended | Nine Months Ended | ||
| September 30, | September 30, | |||
| 2024 | 2023 | 2024 | 2023 | |
| Weighted Average Number of Units – Diluted (000s)1 | 234,442 | 232,995 | 234,142 | 232,705 |
| As at | September 30, 2024 | December 31, 2023 | September 30, 2023 | ||||||
| Closing Price of REIT Units3 | € | 2.15 | € | 1.76 | € | 1.71 | |||
| Closing Price of REIT Units (in C$) | C$ | 3.25 | C$ | 2.58 | C$ | 2.45 | |||
| Market Capitalization (millions)2, 3 | € | 505 | € | 412 | € | 398 | |||
| Market Capitalization (millions in C$)2 | C$ | 761 | C$ | 602 | C$ | 571 |
1 Includes Class B LP Units and the dilutive impact of unexercised Unit Options and RURs.
2 Includes Class B LP Units.
3 Based on the foreign exchange rate of 1.5085 on September 30, 2024 (foreign exchange rate of 1.4626 on December 31, 2023 and 1.4360 on September 30, 2023).
FINANCIAL POSITION
| As at | September 30, 2024 | December 31, 2023 | September 30, 2023 | ||||||
| Ratio of Adjusted Debt to Gross Book Value1 | 52.3 | % | 57.6 | % | 56.4 | % | |||
| Weighted Average Mortgage Effective Interest Rate4 | 2.08 | % | 2.07 | % | 2.07 | % | |||
| Weighted Average Mortgage Term (years) | 2.2 | 2.9 | 3.2 | ||||||
| Debt Service Coverage Ratio (times)1,2 | 2.5 | x | 2.4 | x | 2.5 | x | |||
| Interest Coverage Ratio (times)1,2 | 3.0 | x | 2.9 | x | 3.0 | x | |||
| Available Liquidity (000s)3 | € | 88,656 | € | 28,893 | € | 27,729 |
1 Please refer to the "Basis of Presentation and Non-IFRS Measures" section of this press release for further information.
2 Based on trailing four quarters.
3 Includes cash and cash equivalents of €8.7 million and unused credit facility capacity of €80.0 million as at September 30, 2024 (cash and cash equivalents of €6.9 million and unused credit facility capacity of €22.0 million as at December 31, 2023, cash and cash equivalents of €9.0 million and unused credit facility of 18.8 million as at September 30, 2023).
4 Includes impact of deferred financing costs, fair value adjustment and interest rate swaps.
For the nine months ended September 30, 2024, ERES's liquidity substantially improved by €59.8 million, as compared to the prior year end, as a result of net proceeds from property and suite dispositions being used to pay down the Revolving Credit Facility balance. The REIT's immediately available liquidity of €88.7 million as at September 30, 2024 excludes the €25.0 million accordion feature on the Revolving Credit Facility, acquisition capacity on the Pipeline Agreement and alternative promissory note arrangements with CAPREIT. The REIT's financial position is additionally strengthened by its well-staggered mortgage profile, with a weighted average term to maturity of 2.2 years and fixed interest payment terms for substantially all of its mortgages at a low weighted average effective interest rate of 2.08%. This is further 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 52.3%.
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 fifth amended and restated declaration of trust dated May 2, 2024 (the "Declaration of Trust") and the amended and renewed credit agreement dated June 19, 2024 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 facility and available cash on hand to fund its ongoing operational and capital commitments and distributions to Unitholders.
DISTRIBUTIONS
During the nine months ended September 30, 2024, 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.
On September 16, 2024, the REIT announced that it has entered into strategic disposition agreements to sell approximately half of its residential suites, with a portion of the net disposition proceeds intended to be used for the payment of a special cash distribution of an estimated €0.75 per Unit (refer to "Significant Events and Highlights" within this press release for details). Following completion of the strategic dispositions, which are subject to the satisfaction of closing conditions and anticipated to close by no later than early in the first quarter of 2025, the REIT intends to reduce its monthly rate of distribution by approximately 50% to better align distributions with the REIT's remaining portfolio.
CONFERENCE CALL
A conference call hosted by Mark Kenney, Chief Executive Officer and Jenny Chou, Chief Financial Officer, will be held on Thursday, November 7, 2024 at 9:00 am EST. The telephone numbers for the conference call are: Canadian Toll Free: +1 (833) 950-0062 / International Toll: +1 (929) 526-1599. The conference call access code is 217681.
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 one 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 portfolio of high-quality, multi-residential real estate properties in the Netherlands. As at September 30, 2024, ERES owned approximately 6,300 residential suites, including approximately 3,200 suites classified as assets held for sale, and ancillary retail space located in the Netherlands, and owned one commercial property in Germany and one commercial property in Belgium, with a total fair value of approximately €1.6 billion, including approximately €0.7 billion of assets held for sale.
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, 2024, 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 unaudited condensed consolidated interim financial statements and MD&A for the three and nine months ended September 30, 2024, 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, 2024.
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 and Revolving Credit Facility require 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:
| (€ Thousands) | |||||||||
| As at | September 30, 2024 | December 31, 2023 | September 30, 2023 | ||||||
| Mortgages payable1 | € | 808,461 | € | 889,749 | € | 890,217 | |||
| Credit facility | 44,711 | 102,741 | 105,947 | ||||||
| Total Debt | € | 853,172 | € | 992,490 | € | 996,164 | |||
| Fair value adjustment on mortgages payable | (440 | ) | (816 | ) | (917 | ) | |||
| Total Debt Adjusted for Declaration of Trust | € | 852,732 | € | 991,674 | € | 995,247 | |||
| Ratio of Adjusted Debt to Gross Book Value2 | 52.3 | % | 57.6 | % | 56.4 | % | |||
1 Represents non-current and current mortgages payable of €627,249 and €181,212, respectively, as at September 30, 2024 (December 31, 2023 — €809,215 and €80,534, respectively, September 30, 2023 — €854,610 and €35,607, respectively).
2 Gross 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 and assets held for sale.
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:
| (€ Thousands) | ||||||||||||||||||||||||
| For the Three Months Ended, | Q3 24 | Q2 24 | Q1 24 | Q4 23 | Q3 23 | Q2 23 | Q1 23 | Q4 22 | ||||||||||||||||
| Net (loss) income and comprehensive (loss) income | € | (52,126 | ) | € | 17,407 | € | 22,821 | € | (35,917 | ) | € | 24,784 | € | 3,252 | € | (106,348 | ) | € | (48,790 | ) | ||||
| Adjustments: | ||||||||||||||||||||||||
| Net movement in fair value of investment properties and assets held for sale | (39,352 | ) | (11,107 | ) | 2,310 | 35,337 | 24,768 | 45,398 | 124,726 | 93,599 | ||||||||||||||
| Net movement in fair value of Class B LP Units | 80,240 | (5,506 | ) | (19,265 | ) | 8,218 | (39,339 | ) | (31,964 | ) | 16,786 | (15,443 | ) | |||||||||||
| Fair value adjustments of Unit-based compensation liabilities | 203 | (226 | ) | 1,178 | (194 | ) | (463 | ) | (513 | ) | (141 | ) | (1 | ) | ||||||||||
| Net loss (gain) on derivative financial instruments | 4,480 | 198 | (638 | ) | 6,304 | 640 | (728 | ) | 3,028 | (2,496 | ) | |||||||||||||
| Foreign exchange loss (gain) | — | 228 | 214 | 224 | 213 | 210 | (1,215 | ) | 1,148 | |||||||||||||||
| Interest expense on Class B LP Units | 4,261 | 4,261 | 4,261 | 4,261 | 4,261 | 4,261 | 4,261 | 4,261 | ||||||||||||||||
| Interest on mortgages payable | 4,373 | 4,832 | 4,558 | 4,608 | 4,607 | 3,843 | 3,777 | 3,832 | ||||||||||||||||
| Interest on credit facility | 734 | 1,210 | 1,335 | 1,422 | 1,336 | 1,237 | 797 | 576 | ||||||||||||||||
| Interest on promissory notes | — | — | — | — | — | 70 | 234 | 197 | ||||||||||||||||
| Amortization | 176 | 138 | 144 | 246 | 150 | 202 | 173 | 130 | ||||||||||||||||
| Transaction costs on dispositions | 1,547 | 380 | 125 | 58 | 19 | — | — | — | ||||||||||||||||
| Costs associated with repayment of mortgages | 1,206 | — | — | — | — | — | — | — | ||||||||||||||||
| Income tax expense (recovery) | 10,481 | 5,253 | 1,308 | (8,143 | ) | (5,081 | ) | (9,647 | ) | (30,718 | ) | (21,926 | ) | |||||||||||
| EBITDAFV | € | 16,223 | € | 17,068 | € | 18,351 | € | 16,424 | € | 15,895 | € | 15,621 | € | 15,360 | € | 15,087 | ||||||||
| Cash taxes | 1,756 | 2,436 | 1,978 | 2,395 | 1,251 | 1,235 | 1,209 | 1,018 | ||||||||||||||||
| Tax on property and suite dispositions | (277 | ) | (731 | ) | (389 | ) | (234 | ) | (80 | ) | — | — | — | |||||||||||
| EBITDAFV less cash taxes | € | 14,744 | € | 15,363 | € | 16,762 | € | 14,263 | € | 14,724 | € | 14,386 | € | 14,151 | € | 14,069 | ||||||||
| Principal repayments1 | € | 444 | € | 444 | € | 444 | € | 550 | € | 550 | € | 549 | € | 549 | € | 548 |
| 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, credit facility 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.
| (€ Thousands) | ||||||||
| As at | September 30, 2024 | December 31, 2023 | September 30, 2023 | |||||
| EBITDAFV less cash taxes1 | € | 61,132 | € | 57,524 | € | 57,330 | ||
| Debt service payments1,2 | € | 24,954 | € | 24,129 | € | 22,702 | ||
| Debt Service Coverage Ratio (times) | 2.5x | 2.4x | 2.5x | |||||
1 For the trailing 12 months ended.
2 Include principal repayments as well as interest on mortgages payable, credit facility and promissory notes, and exclude 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, credit facility 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.
| (€ Thousands) | ||||||||
| As at | September 30, 2024 | December 31, 2023 | September 30, 2023 | |||||
| EBITDAFV1 | € | 68,066 | € | 63,300 | € | 61,963 | ||
| Interest expense1,2 | € | 23,072 | € | 21,931 | € | 20,506 | ||
| Interest Coverage Ratio (times) | 3.0x | 2.9x | 3.0x | |||||
1 For the trailing 12 months ended.
2 Includes interest on mortgages payable, credit facility and promissory notes, and excludes interest expense on Class B LP Units.
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 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 2023 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:
| Mark Kenney | Jenny Chou |
| Chief Executive Officer | Chief Financial Officer |
| Email: m.kenney@capreit.net | Email: j.chou@capreit.net |
Category: Earnings
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