Mr. Mark Kenney reports

EUROPEAN RESIDENTIAL REIT REPORTS THIRD QUARTER 2023 RESULTS

European Residential Real Estate Investment Trust has released its results for the three and nine months ended Sept. 30, 2023.

European Residential's unaudited condensed consolidated interim financial statements and management's discussion and analysis (MD&A) for the three and nine months ended Sept. 30, 2023, can be found on the REIT's website or under European Residential's profile on SEDAR+.

Significant events and highlights

Business update:

• On Jan. 24, 2023, the REIT amended and renewed its existing revolving credit facility, providing up to 125 million euros for a three-year period ending on Jan. 26, 2026, as well as an accordion feature to increase the limit a further 25 million euros 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 CEO and president of Canadian Apartment Properties REIT.
• On June 16, 2023, the REIT announced that it is working with CBRE, as financial and real estate adviser, to advise it in connection with a strategic review of European Residential, which remains continuing.
• 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 euros (excluding financing costs and fees). The new mortgage financing matures on June 26, 2029, and carries a fixed contractual interest rate of 4.66 per cent.

Outperforming operating metrics:

• Strong operating results continued into 2023, fuelled by strong rental growth. Same-property portfolio occupied average monthly rents (AMRs) increased by 7.1 per cent, from 983 euros as at Sept. 30, 2022, to 1,053 euros as at Sept. 30, 2023, demonstrating the REIT's continued achievement of rental growth in excess of its target range.
• Turnover was 10.3 per cent for the nine months ended Sept. 30, 2023, with rental uplift on turnover remaining strong at 20.4 per cent, compared with rental uplift of 20.0 per cent on turnover of 8.5 per cent for the nine months ended Sept. 30, 2022.
• Occupancy for the residential and commercial properties increased to 98.7 per cent and 100.0 per cent, respectively, as at Sept. 30, 2023, compared with 97.8 per cent and 99.0 per cent, respectively, as at Sept. 30, 2022 and is at the high end of the REIT's target range. Moreover, 68.9 per cent of residential vacancies are attributable to suites undergoing renovation upon turnover, which should provide for further rental uplifts once the suites are leased.
• Net operating income (NOI) increased by 8.2 per cent for the nine months ended Sept. 30, 2023, compared with the nine months ended Sept. 30, 2022, primarily driven by the aforementioned higher monthly rents, further supported by the REIT's extensive protection from inflation.

Financial performance:

• Funds from operations (FFO) per unit decreased by 4.5 per cent to 0.042 euro for the three months ended Sept. 30, 2023, compared with 0.044 euro for the three months ended Sept. 30, 2022, primarily driven by increase 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 2.5 per cent to 0.039 euro for the three months ended Sept. 30, 2023, compared with 0.040 euro for the three months ended Sept. 30, 2022, due to the same reasons mentioned above for FFO per unit.

Firm financial position and liquidity:

• Over all, liquidity improved from the prior year due to the amendment of the revolving credit facility, increasing the limit by 25.0 million euros, with immediately available liquidity of 27.7 million euros as at Sept. 30, 2023, excluding the 25.0-million-euro accordion feature on the revolving credit facility, acquisition capacity on the pipeline agreement and alternative promissory note arrangements with Canadian Apartment.
• Debt coverage metrics are within covenant thresholds, with interest and debt service coverage ratios of 3.0 times and 2.5 times, respectively, and adjusted debt to gross book value ratio currently standing at 56.4 per cent.
• The REIT's financial position is additionally supported by its well-staggered mortgage profile, with a weighted average term to maturity of 3.2 years and a weighted average effective interest rate of 2.07 per cent.

"We're pleased to report another quarter of strong operational performance, resulting in the expansion of our same-property NOI margin to 79.5 per cent for the three months ended Sept. 30, 2023, up by 110 basis points compared to the prior-year period," commented Mark Kenney, chief executive officer. "Alongside this accomplishment, we've continued to prioritize our commitment to providing a safe and enjoyable living experience for all of our residents, while we also maintain our focus on diligently exploring the universe of strategic opportunities available to us, with a view to attaining the maximization of value for all of our unitholders."

"Incorporating the impact of rising interest rates, our quarterly diluted FFO per unit decreased to 0.042 euro versus the prior-year period, however, it increased from 0.041 euro achieved in the second quarter of 2023," added Jenny Chou, chief financial officer. "This was driven by our ability to remain operationally tight, which offset higher interest costs arising from our most recent mortgage financing that closed in June, 2023. Inclusive of that, our weighted average mortgage effective interest rate remains low at 2.07 per cent, and we have no mortgages maturing for the remainder of this year and less than 9 per cent of the portfolio maturing in 2024. Backed by our staggered mortgage profile, we will continue to actively and vigilantly manage our balance sheet position to ensure it remains solid going forward."

Operating metrics continue to strengthen

Rental rates

Occupied AMR increased by 7.1 per cent for both the total and same-property multiresidential portfolios, compared with the prior-year period. 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 per cent to 4 per cent demonstrates its ability to consistently operate in a complex and fluid regulatory regime.

Suite turnovers

Suite turnovers in the residential portfolio during the three and nine months ended Sept. 30, 2023, resulted in monthly rent increasing by approximately 20.4 per cent, compared with 17.7 per cent and 20.0 per cent, respectively, for the same periods last year. Rental uplifts on conversions were 55.7 per cent and 55.2 per cent for the three and nine months ended Sept. 30, 2023, respectively, compared with 50.8 per cent and 54.1 per cent for the three and nine months ended Sept. 30, 2022, respectively.

Suite renewals

Lease renewals generally occur on July 1 for residential suites. Other than the household income adjustment, for the period July 1, 2023, to June 30, 2024, the indexation of all regulated units is set at wage inflation of 3.1 per cent. 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. For the period from Jan. 1, 2023, to Jan. 1, 2024, the rental cap limits indexation for liberalized suites to the annual wage development figure plus 1.0 per cent, resulting in a maximum indexation of 4.1 per cent based on the annual wage development figure of 3.1 per cent.

Accordingly, for rental increases due to indexation beginning on July 1, 2023, the REIT served tenant notices to 6,659 suites, representing 97 per cent of the residential portfolio, across which the average rental increase due to indexation and household income adjustments is 4.0 per cent. In the prior-year period, the REIT served tenant notices to 6,499 suites, representing 96 per cent of the residential portfolio, across which the average rental increase due to indexation and household income adjustments is 3.0 per cent.

There was one lease renewal in the REIT's commercial portfolio during the nine months ended Sept. 30, 2023 (nine months ended Sept. 30, 2022 -- no lease renewals).

Total portfolio performance

Total operating revenues increased by 6.1 per cent and 7.0 per cent for the three and nine months ended Sept. 30, 2023, respectively, compared with the same periods last year, primarily due to increase in monthly rents.

NOI increased by 7.4 per cent and 8.2 per cent for the three and nine months ended Sept. 30, 2023, respectively, versus the same periods last year, primarily driven by higher operating revenues from increased total portfolio occupied AMR and reduction in on-site costs, as a result of the abolishment of landlord levy tax, partially offset by increases in repairs and maintenance (R&M) costs. For the three months ended Sept. 30, 2023, the NOI margin on the total portfolio increased to 79.5 per cent compared with 78.5 per cent for the comparable quarter (excluding service charges, total portfolio NOI margin remained stable at 84.3 per cent compared with the prior-year period). For the nine months ended Sept. 30, 2023, the NOI margin on the total portfolio increased to 78.4 per cent, compared with 77.6 per cent for the comparative period (excluding service charges, total portfolio NOI margin increased to 83.6 per cent from 83.4 per cent for the comparative period). Service charge expenses are fully recoverable from tenants via service charge income and therefore have a nil net impact on NOI.

Same-property portfolio performance

The increases in same-property NOI contribution by 7.8 per cent and 6.9 per cent for the three and nine months ended Sept. 30, 2023, respectively, compared with the same periods last year, were primarily driven by higher operating revenues from increased same portfolio occupied AMR and aforementioned changes in onsite and R&M costs. For the three months ended Sept. 30, 2023, same-property NOI margin increased to 79.5 per cent, compared with 78.4 per cent for the comparable quarter (excluding service charges, same-property NOI margin increased to 84.5 per cent from 84.2 per cent for the comparable quarter). For the nine months ended Sept. 30, 2023, same-property NOI margin increased to 78.5 per cent, compared with 77.4 per cent for the comparable period (excluding services charges, same-property NOI margin increased to 83.7 per cent, compared with 83.3 per cent for the comparable period).

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 that 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; and (iv) costs related to the strategic review of the REIT. FFO and AFFO may not, however, be comparable with 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.

A reconciliation of net income (loss) and comprehensive income (loss) to FFO is provided in an attached table.

An attached table illustrates a reconciliation of the REIT's FFO and AFFO.

FFO per unit and AFFO per unit for the three and nine months ended Sept. 30, 2023, decreased from the same periods last year primarily due to increases in interest and other financing costs and current income tax expense, partially offset by the positive impact of increased same-property NOI.

Net asset value

Net asset value (NAV) represents total unitholders' equity per the REIT's consolidated balance sheets, adjusted to exclude certain amounts in order to provide what management considers to be a key measure of the intrinsic value of the REIT on a continuing basis. Management believes that this measure reflects the residual value of the REIT to its unitholders on a continuing basis and 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 with similarly termed financial measures disclosed by other real estate investment trusts or companies in similar or different industries.

A reconciliation of unitholders' equity to NAV is provided in an attached table.

Financial position remains firm

For the nine months ended Sept. 30, 2023, European Residential's liquidity improved and leverage remained firm, as compared with the prior year, primarily driven by the amended revolving credit facility agreement, additionally supported by the REIT's staggered mortgage profile with a weighted average term to maturity of 3.2 years and a weighted average effective interest rate of 2.07 per cent. The REIT has immediately available liquidity of 27.7 million euros as at Sept. 30, 2023, excluding the 25.0-million-euro accordion feature on the revolving credit facility, acquisition capacity on the pipeline agreement and alternative promissory note arrangements with Canadian Apartment, reinforced by compliant debt coverage metrics, with interest and debt service coverage ratios of 3.0 times and 2.5 times, respectively, and adjusted debt to gross book value ratio within its target range at 56.4 per cent.

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 fourth amended and restated declaration of trust dated April 28, 2020, and the amended and renewed credit agreement dated Jan. 24, 2023, between the REIT and three Canadian chartered banks, providing access to up to 125.0 million euros with an accordion feature to increase the limit a further 25.0 million euros upon satisfaction of conditions set out in the agreement and the consent of applicable lenders.

The REIT manages its overall liquidity risk by maintaining sufficient available credit facilities and available cash on hand to finance its continuing operational and capital commitments and distributions to unitholders, and to provide for future growth in its business.

Distributions

During the nine months ended Sept. 30, 2023, the REIT declared monthly distributions of 0.01 euro per unit (being equivalent to 0.12 euro 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.

Conference call

A conference call hosted by Mr. Kenney and Ms. Chou will be held on Tuesday, Nov. 7, 2023, at 9 a.m. EST. The telephone numbers for the conference call are Canadian toll-free at 833-950-0062 or international toll at 1-929-526-1599. The conference call access code is 038615.

The call will also be webcast live and accessible through the European Residential website; 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 on the same link.

The slide presentation to accompany management's comments during the conference call will be available on the European Residential website 1.5 hours prior to the conference call.

About European Residential Real Estate Investment Trust

European Residential is an unincorporated, open-ended real estate investment trust. European Residential's units are listed on the Toronto Stock Exchange under the symbol ERE.UN. European Residential is Canada's only European-focused multiresidential REIT, with a current initial focus on investing in high-quality, multiresidential real estate properties in the Netherlands. As at Sept. 30, 2023, European Residential owns a portfolio of 158 multiresidential properties, comprising approximately 6,900 suites and ancillary retail space located in the Netherlands, and owns one office property in Germany and one office property in Belgium.

European Residential's registered and principal business office is located at 11 Church St., Suite 401, Toronto, Ont., M5E 1W1.

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