European Residential Real Estate Investment Trust (TSX: ERE.UN) is an unincorporated, open-ended real estate investment trust. The group is Canada's only European-focused multi-residential REIT, with a focus on investing in high-quality multi-residential real estate properties in the Netherlands. It owns a portfolio of 139 multi-residential properties, comprised of 6,047 suites and ancillary retail space located in the Netherlands, and owns one office property in Germany and one office property in Belgium.

Investment Rationale

• Increased Occupancy: For the full year ended December 31, 2020, the company's occupancy for the residential properties increased to 98.3% for the total portfolio and remained stable and high at 100.0% for commercial properties as of December 31, 2020.

Source: Company Presentation

• Significant Improvement in NOI in FY20: Net Operating Income ("NOI") was €13.9 million for the three months ended December 31, 2020, up from €11.9 million recorded in the three months ended December 31, 2019. NOI was €53.3 million for the year ended December 31, 2020, up from €31.5 million for the year ended December 31, 2019. The increases were driven by contribution from acquisitions as well as improved occupancy and higher monthly rents on stabilized properties, coupled with proportionally lower property operating costs.

• Steady Rent Collection throughout 2020: The REIT continues to collect residential rental revenue at a rate consistent with its historical average, and its two office properties also provide stable and consistent cash flows. For the year ended December 31, 2020, property revenues were €69.9 million, up from €41.7 million for the year ended December 31, 2019. For the three months ended December 31, 2020, property revenues were €18.0 million, up from €16.0 million for the three months ended December 31, 2019.

• Strong Fund Flow from Operations: Funds from Operations for the three months and year ended December 31, 2020 were €8.1 million (€0.035 per Unit) and €31.2 million (€0.135 per Unit), respectively, compared to €6.5 million (€0.032 per Unit) and €19.2 million (€0.136 per Unit) in the prior year periods. The increases in FFO were driven by accretive acquisitions and increased stabilized NOI since the prior year.

• Liquidity and leverage remain strong: The REITs Liquidity and leverage remain strong, supported by its staggered mortgage profile with a four-year weighted average term to maturity and a weighted average effective interest rate of 1.61%. The REIT has immediately available liquidity of €102 million as of December 31, 2020, and its total debt to gross book value is 47.2%.
  
  

Source: Company Presentation 

• RSI and Bollinger Band© Indicates a Potential Pullback: On the daily price chart, ERE.UN shares moved below the lower Bollinger Band© in the Tuesday session and then recovered slightly above the lower band, which is a 2-times deviation from the 20-day SMA; typically, a price below the lower Bollinger band implies a pullback in the stock. Moreover, 14-day RSI is hovering in a steep oversold zone, implies a potential pullback from the current trading levels.

Technical Chart (as on February 23^rd, 2021). Source: Refinitiv (Thomson Reuters)

• Risk Associated with the Investment: The company’s business model is exposed to a lower occupancy rate in the wake of the resurgence in the COVID-19 cases and also exposed to volatility on the currency exchange prices.

Financial Highlights: FY20

Source: Company Presentation

• During the full year ended December 31st, 2021, the company's operating revenue surged by 68% to €69.88million.
• NOI was €53.3 million for the year ended December 31, 2020, up from €31.5 million for the year ended December 31, 2019. The increases were driven by contribution from acquisitions as well as improved occupancy and higher monthly rents on stabilized properties, coupled with proportionally lower property operating costs.
• NOI increased by 5.3% and 3.9% for the three months and year ended December 31, 2020, to €4.3 million and €16.9 million, respectively. The increases are primarily attributable to higher operating revenues from increased AMR as described above, driving an increase in stabilized NOI margin to 75.3% and 75.0% for the three months and year ended December 31, 2020, respectively, compared to 72.8% and 74.3% in the same prior year periods.
• Funds from Operations ("FFO") for the year ended December 31, 2020 were €31.2 million (€0.135 per Unit), respectively, compared to €19.2 million (€0.136 per Unit) in the prior year periods.
• Adjusted Funds from Operations ("AFFO") for the year ended December 31, 2020 were €7.3 million (€0.031 per Unit) compared to 6.9 million (€0.120 per Unit) in the same prior year periods. Driven by accretive acquisitions and increased stabilized NOI since the prior year, while FFO per Unit and AFFO per Unit were impacted by higher current income tax and general and administrative expenses.
• During the year ended December 31, 2020, the REIT declared monthly distributions of €0.00875 per Unit (equivalent to €0.105 per Unit annualized).
• The REIT closed on four acquisitions of multi-residential properties in the Netherlands during the third and fourth quarters of 2020, for a combined purchase price of €80.9 million (excluding transaction costs and fees). Mortgage financing was secured for these acquisitions in aggregate, in the principal amount of €45.0 million, with an interest rate of 0.97% and bearing a four-year term to maturity.

Q4FY20 Operational Highlights

Source: Company Presentation

• As at December 31, 2020, the REIT has made available ~€97 million of liquidity through Cash on Hand and undrawn Credit Facilities.
• The REIT continues to collect residential rental revenue at a rate consistent with its historical average, and its two office properties also provide stable and consistent cash flows.
• For the three months ended December 31, 2020, property revenues were €18.0 million, up from €16.0 million for the three months ended December 31, 2019. The increases were primarily due to accretive acquisitions, improved occupancy and an increase in Net Average Monthly Rent ("AMR") on the stabilized portfolio.
• Net Operating Income ("NOI") was €13.9 million for the three months ended December 31, 2020, up from €11.9 million for the three months ended December 31, 2019.
• NOI margin for the periods stood at 77.1% for the three months ended December 31, 2020 compared to 74.6% in the quarter ended December 31, 2019.
• Funds from Operations ("FFO") for the three months ended December 31, 2020 were €8.1 million (€0.035 per Unit) compared to €6.5 million (€0.032 per Unit) in the same period of the previous financial year.
• The group’s liquidity and leverage remain strong with immediately available liquidity of €102 million as at December 31, 2020, and its total debt to gross book value is 47.2%.

Top-10 Shareholders

Top-10 shareholders highlighted in the below table together holds approximately 42.94% stake in the company. 1832 Asset Management L.P.  and CAPREIT L.P.  are the major shareholder in the company with holding 15.93% and 11.51% stake, respectively.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): Price to Earnings Based Valuation Metrics

Note: All forecasted figures and peers have been taken from Thomson Reuters

Peer Comparison

Source: Refinitiv (Thomson Reuters) 

Stock Recommendation:  The year just passed has brought unforeseen challenges, and in this unprecedented environment, the group was able to solidify and prove the robustness of its strategic vision. The company exited the FY20 with a stronger balance sheet and financial profile, with the company's operating revenue surged by 68%, NOI zoomed by 69%, NOI margin improved by 60bps to 76.3%, FFO surged by 63%. Also, the company has adequate liquidity to fund its future projects and operations.

The company is offering a significantly higher LTM ROE of 55%, which is gigantically higher. A higher ROE suggests that a company's management team is more efficient when it comes to utilizing investment financing to grow their business. Further, ROE is more than a measure of profit: It's also a measure of efficiency. A rising ROE suggests that a company is increasing its profit generation without needing as much capital. It also indicates how well a company's management deploys shareholder capital.

However, the company's business model is exposed to a lower occupancy rate in the wake of the resurgence in the COVID-19 cases and also exposed to volatility on the currency exchange prices.

Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating at the closing price of CAD 4.25 on February 23, 2021.

Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at February 24, 2021 price as well

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