European Residential REIT

European Residential REIT (TSX: ERE.UN) is a publicly traded unincorporated, open-ended real estate investment trust focused on aggregating a portfolio of high quality, multi-residential real estate assets in key European markets with solid fundamentals.

Key Highlights

• Improving operating matrix: The group reported an impressive occupancy rate of 98.3% in Q4FY20 in the residential segment (v/s 97.2% in Q4FY19), while the commercial segment reported 100% occupancy during Q4FY20 rate (improved from 97.2% in Q4FY19), which is commendable considering the current operating environment.

Source: Company

• Forayed in Netherland: The REIT grew its assets under management by 9.4% in 2020. During the second half of FY20, the company solidified its presence across the Netherlands by purchasing 415 residential suites across 8 properties amounting to € 81 million, excluding transaction costs and fees.
  
  

Source: Company

• Substantial presence in high growth urban markets: The group has an impressive presence across the urban locations, which has a track record of strong rental growth. Thus, we expect that the above would lead to strong cash flow growth in the coming quarters.

Source: Company

• Increase in cash generated from operating activities: The group reported an impressive performance from its operative activities, which increased to € 41.2 million in FY2020, against € 23.0 million in the previous corresponding period.

Source: Company

• An income play: The group continues with a track record of dividend payment. Recently, the company announced a monthly dividend of €0.00917per unit payable on May 17, 2021. Moreover, at the last closing price, the stock was offering a dividend yield of ~3.8%, which is decent considering the current interest rate environment. 

Financial overview of FY2020

Source: Company

• The REIT announced its annual result, wherein it posted operating revenues of € 69.88 million, significantly higher than € 41.67 million in FY19. The increase was driven by higher revenue from investment properties (€ 65.74 million v/s € 38.80 million in FY19).
• Net Rental Income stood at € 53.26 million v/s € 31.51 million in the previous year.
• The period was marked by higher general and administrative expense (€ 8.7 million v/s 5.6 million in FY19) coupled with higher interest and other finance costs of € 11.42 million v/s € 8.44 million in FY19. Net movement in fair value of investment properties stood at € 46.00 million v/s € 52.47 million in FY19.
• Net income stood at € 118.65 million, significantly improved from a net loss of € 16.80 million in the previous year. 

Risks associated with investment

Change in consumer preferences of relocating from city centers to suburbs would lead to lower demand from the urban areas, which might be a key concern as the group derives a substantial portion of its revenue from the urban region.

Valuation Methodology (Illustrative): EV to Sales

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

Stock recommendation

The company reported a decent liquidity level of € 97 million, including Cash on Hand and undrawn Credit Facilities, which seems to be sufficient to fund its working capital needs. During FY20 company’s operations remained encouraging as 68% growth was reported in operating revenues and 69% in net operating income, which is impressive. Moreover, the NOI margin improved to 76.2% in FY20 v/s 75.6% in FY19. Further, the multi-residential asset class in Europe seems resilient and highly defensive in nature, which indicates stable cash flow generation. The stock carries a dividend yield of 3.8%, which is decent considering the current interest rate scenario. Based on technical analysis, the stock has support at CAD 3.48 level. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 4.30 as on May 4, 2021. We have considered Artis Real Estate Investment Trust, Melcor Real Estate Investment Trust, Boardwalk Real Estate Investment Trust etc as the peer group for the comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

One-year Price Chart (as on May 04, 2021). Source: Refinitiv (Thomson Reuters)

Slate Office REIT

Slate Office REIT (TSX: SOT.UN) is a Canadian based open-ended real estate investment trust which focuses on acquiring, holding, developing, maintaining, improving, leasing, managing or otherwise dealing with office properties in Canada. The REIT's portfolio consists of approximately 34 commercial properties located in Canada.

Key highlights 

• An Income Play: The group continues with a healthy record of dividend payment. Recently, it announced a monthly dividend of CAD 0.0333 per unit payable on May 17, 2021. Moreover, at the last traded price, the stock was offering a dividend yield of 9.00%, which is huge considering the current interest rate dynamics. This would attract several investors looking for a consistent income stream.

Source: Refinitiv (Thomson Reuters)

• Stable income: Despite the challenging environment, the REIT collected a market-leading 96% to 98% of the rent in cash each month. These substantial cash rent collections are a function of the portfolio’s resilient tenancies, which comprised of 60% government or credit-rated tenants.

• Improved indebtedness: The REIT's indebtedness ratio on December 31, 2020, was 58.0% which was down by 71 basis points compared to December 31, 2019. The management's medium-term target is to maintain total indebtedness at approximately 55%.

Source: Company 

• Increased Liquidity: The company reported improved liquidity of CAD 54.765 million in FY20, compared to CAD 37.238 million in FY19. The current liquidity level includes a cash balance of CAD 8.520 million and undrawn revolving facilities of CAD 46.245 million, which seems sufficient to meet its business objectives and commitments.

Source: Company 

• Event update: The company would release its Q1 2021 results on May 13, 2021. 

Financial overview of FY2020 (In thousands of CAD)

Source: Company 

• For FY2020, the company posted its rental revenue at CAD 183.5 million, reflecting a decline of 14.8% on y-o-y basis. The decline was primarily due to a significantly lower income from the Canada segment.
• Net operating income stood at CAD 91.5 million, lower than CAD 103.0 million in FY19. The decline was primarily due to lower revenue, partially offset by lower property operating expenses (CAD 97.6 million versus CAD 114.8 million in FY19).
• Adjusted EBITDA was recorded at CAD 87.1 million, as compared to CAD 98.9 million in FY19.
• The company reported a net income of CAD 13.6 million, lower than CAD 62.4 million in FY19. 

Risks associated with investment

Due to the current economic slowdown, the group reported a slide in its occupancy rate at 84.2% in Q4FY20, lower from 85.4% in Q3FY20. Continuation of such trend would affect the group’s revenue. 

Valuation Methodology (Illustrative): EV to EBITDA 

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

Stock recommendation

From April 2020 to December 2020, the group witnessed an encouraging rent collection within the range of 96% to 98%, despite the ongoing challenges led by the COVID-19 pandemic. Also, despite a relatively lower occupancy, the company reported cash from operations of CAD 46.450 million in FY20, slightly lower than CAD 49.296 million in FY19, which reflects company is prudently managing its costs to bolster its cash position. Moreover, the stock is offering a lucrative dividend yield amid a low-interest rate environment. Based on technical analysis, the stock has support at CAD 3.5 level. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 4.44 as on May 4, 2021. We have considered Dream Industrial REIT, Artis REIT as the peer group for the comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

1-Year Price Chart (as on May 4, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.