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Reit's NOI up in Q1/23, but Interest Expense Is Too
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Though continued net operating income growth is expected, management is considering ways to maximize shareholder value, noted an Echelon Capital Markets report.

During Q1/23, European Residential REIT (ERE.UN:TSE) outperformed operationally, but higher interest expense offset net operating income (NOI) growth, reported Echelon Capital Markets analyst David Chrystal in a May 11 research note.

Given the quarterly results, which were as anticipated, Chrystal wrote that Echelon revised some of its estimates on this Canadian owner of residential units in the Netherlands. Ultimately, Echelon lowered its target price on the REIT to CA$4.50 per share from CA$4.90.

Attractive Investment Opportunity

However, Echelon expects the REIT will continue delivering consistent organic NOI growth, Chrystal highlighted. At its current share price of about CA$3.09, he added, the company is still trading "at a steep net asset value (NAV) discount (38%) versus the Canadian multifamily peer group at (13%)."

Therefore, the European Residential REIT is a compelling investment opportunity, offering a roughly 50% return.

Accordingly, it is a Buy.

NOI Growth Continues

The REIT's portfolio performed solidly during Q1/23, posting "organic NOI growth supported by strong rent lifts on turnover, modest lifts on renewal and elevated occupancy," Chrystal wrote.

Specifically, same-property NOI rose 5.2%, and revenue increased 5.4% during Q1/23.

"Slightly higher rental caps in 2023 (3.1% on regulated, 4.1% on liberalized) should allow the REIT to continue to deliver year-over-year rent growth in excess of its 3–4% target range," wrote Chrystal.

Interest Expense a Headwind

As for costs, operating expenses in Q1/23 were up 6.3%, notable among them persisting higher interest. Consequently, funds from operations per unit (FFO/unit) were down by about 6% over FFO/unit in Q1/22.

If the REIT's interest expense remains where it is, in the high 4% range for long-term mortgage debt, Chrystal purported, it will continue impacting the company's NOI growth "over the next few years."

Asset Divestment Possible

Chrystal reported that the REIT's management, at this time, is looking into and considering all possible ways to maximize shareholder value.

"Given the significant NAV discount and elevated interest rate environment, we could see asset dispositions, with proceeds earmarked for debt reduction," Chrystal wrote but added such a transaction would take time to carry out and to have an effect.

Changes to Estimates

To reflect the company's Q1/23 results, Echelon revised some of its estimates on European Residential REIT.

Given the higher interest expense, the wealth management firm lowered, by 1% each, its FFO and adjusted funds from operations forecasts on the REIT for the full year of 2023. It also slightly raised the cap rate it uses to determine NV to 4.25% from 4.15%.

As a result, NAV stayed about the same.

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Important Disclosures:

  1. Doresa Banning wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor.
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Disclosures for Echelon Capital Markets, European Residential REIT, May 11, 2023

Echelon Wealth Partners Inc. is a member of IIROC and CIPF. The documents on this website have been prepared for the viewer only as an example of strategy consistent with our recommendations; it is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investing strategy. Any opinions or recommendations expressed herein do not necessarily reflect those of Echelon Wealth Partners Inc. Echelon Wealth Partners Inc. cannot accept any trading instructions via e-mail as the timely receipt of e-mail messages, or their integrity over the Internet, cannot be guaranteed. Dividend yields change as stock prices change, and companies may change or cancel dividend payments in the future. All securities involve varying amounts of risk, and their values will fluctuate, and the fluctuation of foreign currency exchange rates will also impact your investment returns if measured in Canadian Dollars. Past performance does not guarantee future returns, investments may increase or decrease in value and you may lose money. Data from various sources were used in the preparation of these documents; the information is believed but in no way warranted to be reliable, accurate and appropriate. Echelon Wealth Partners Inc. employees may buy and sell shares of the companies that are recommended for their own accounts and for the accounts of other clients. Echelon Wealth Partners compensates its Research Analysts from a variety of sources. The Research Department is a cost centre and is funded by the business activities of Echelon Wealth Partners including, Institutional Equity Sales and Trading, Retail Sales and Corporate and Investment Banking.

Research Dissemination Policy: All final research reports are disseminated to existing and potential clients of Echelon Wealth Partners Inc. simultaneously in electronic form. Hard copies will be disseminated to any client that has requested to be on the distribution list of Echelon Wealth Partners Inc. Clients may also receive Echelon Wealth Partners Inc. research via third party vendors. To receive Echelon Wealth Partners Inc. research reports, please contact your Registered Representative. Reproduction of any research report in whole or in part without permission is prohibited.

Canadian Disclosures: To make further inquiry related to this report, Canadian residents should contact their Echelon Wealth Partners professional representative. To effect any transaction, Canadian residents should contact their Echelon Wealth Partners Investment advisor.

U.S. Disclosures: This research report was prepared by Echelon Wealth Partners Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. Echelon Wealth Partners Inc. is not registered as a broker-dealer in the United States and is not be subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. Any resulting transactions should be effected through a U.S. broker-dealer.

Company: European Residential REIT | ERE.UN-TSX

I, David Chrystal, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.


Echelon Wealth Partners Inc. and/or one or more entities affiliated with Echelon Wealth Partners Inc. beneficially own common shares (or any other class of common equity securities) of this issuer which constitutes more than 1% of the presently issued and outstanding shares of the issuer.

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