Mr. Mark Kenney reports

EUROPEAN RESIDENTIAL REIT REPORTS 2023 ANNUAL RESULTS

European Residential Real Estate Investment Trust today released its results for the year ended Dec. 31, 2023.

European Residential's audited consolidated annual financial statements and management's discussion and analysis (MD&A) for the year ended Dec. 31, 2023, can be found at European Residential's or under the company's profile at 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 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 chief executive officer and president of CAPREIT.
• On June 16, 2023, the REIT announced that it was working with CBRE, as financial and real estate adviser, to advise it in connection with a strategic review of ERES. On Dec. 20, 2023, the REIT announced that the strategic review process has been concluded and the proposed transactions would not be proceeded with.
• 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.

Operating metrics

• Strong operating results continued into 2023, fuelled by strong rental growth. Same property portfolio occupied average monthly rents (occupied AMR) increased by 7.2 per cent, from 992 as at Dec. 31, 2022, to 1,063 as at Dec. 31, 2023, demonstrating the REIT's continued achievement of rental growth in excess of its target range.
• Turnover was 13.8 per cent for the year ended Dec. 31, 2023, with rental uplift on turnover remaining strong at 20.4 per cent, compared with rental uplift of 22.0 per cent on turnover of 12.4 per cent for the year ended Dec. 31, 2022.
• Occupancy for the residential and commercial properties increased to 98.5 per cent and 100.0 per cent, respectively, as at Dec. 31, 2023, compared with 98.4 per cent and 99.5 per cent, respectively as at Dec. 31, 2022, and is at the high end of the REIT's target range. Moreover, 50.5 per cent of residential vacancies are attributable to suites undergoing renovation upon turnover, and 27.7 per cent of residential vacancies are due to suites held for potential sale relating to the REIT's continuing capital recycling initiatives.
• Net operating income (NOI) increased by 8.9 per cent for the year ended Dec. 31, 2023, compared with the year ended Dec. 31, 2022, primarily driven by higher monthly rents on the same property portfolio, further supported by the REIT's extensive protection from inflation and strong cost control.

Financial performance

• Funds from operations (FFO) per unit decreased by 4.7 per cent to 16.1 euro cents for the year ended Dec. 31, 2023, compared with 16.9 euro cents for the year ended Dec. 31, 2022, primarily driven by increases 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 2.7 per cent to 14.6 euro cents for the year ended Dec. 31, 2023, compared with 15 euro cents for the year ended Dec. 31, 2022, due to the same reasons mentioned herein for FFO per unit.

Financial position and liquidity

• Over all, liquidity improved from prior year due to the amendment of the revolving credit facility increasing the limit by 25.0 million euros, with immediately available liquidity of 28.9 million euros as at Dec. 31, 2023, excluding the 25.0 million euros accordion feature on the revolving credit facility, acquisition capacity on the pipeline agreement and alternative promissory note arrangements with CAPREIT.
• Debt coverage metrics are within covenant thresholds, with interest and debt service coverage ratios of 2.9 times and 2.4 times, respectively, and adjusted debt to gross book value ratio currently standing at 57.6 per cent.
• The REIT's financial position is additionally supported by its well-staggered mortgage profile, with a weighted average term to maturity of 2.9 years and a weighted average effective interest rate of 2.07 per cent.

"With growing demand for housing in the Netherlands continuing to outstrip the pace of new supply, we're experiencing increasingly tight rental market fundamentals which keep strengthening ERES's operational performance, as we saw again in 2023," commented Mr. Kenney, chief executive officer. "Consistent with our track record to date, we're pleased to report that our occupancies remained as high as possible, while our same property NOI margin expanded to 78.6 per cent for 2023. This year, we also proved our commitment to maximizing value for unitholders in any way that we can, and we're confident that our current strategy achieves that objective. Looking ahead, we remain focused on optimizing our portfolio, enhancing our operational performance and fortifying our platform, and we're excited to continue making progress on each of these initiatives."

"We secured 76.5 million euros in mortgage financing during 2023, and the weighted average effective interest rate on our mortgage portfolio remains low at 2.1 per cent today," added Jenny Chou, chief financial officer. "This reflects our conservative financing strategy as we fix 100 per cent of our mortgage interest costs and stagger our renewals. As such, we're well positioned for next year with only 9 per cent of our mortgage debt coming due in 2024. We'll continue to manage our debt and capital structure pro-actively and prudently going forward, and we have liquidity-generating programs in place to strengthen our balance sheet, reduce volatility and mitigate the impact of mortgages maturing in future years."

Operating results

Occupied AMR increased by 7.2 per cent for both the total and same property multiresidential portfolios, compared with the prior year. 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 5 per cent demonstrates its ability to consistently operate in a complex and fluid regulatory regime.

Suite renewals

Lease renewals generally occur on July 1 for residential suites. Other than the household income adjustment, maximum rent indexation from July 1, 2023, to June 30, 2024, for all regulated units is set at the annual wage development figure of 3.1 per cent. For the period from July 1, 2024, up to and including June 30, 2025, the indexation for all regulated units has been set at the annual wage development figure of 5.8 per cent with a monthly rent of more than 300. 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. The indexation for the period from Jan. 1, 2023, to Jan. 1, 2024, has been capped 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. For the period from Jan. 1, 2024, to Jan. 1, 2025, the rental cap limits indexation for liberalized suites to the annual inflation number (CPI) plus 1.0 per cent, resulting in a maximum indexation of 5.5 per cent based on CPI of 4.5 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, 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 was 3.0 per cent.

There was one lease renewal in the REIT's commercial portfolio during the year ended Dec. 31, 2023 (year ended Dec. 31, 2022 -- three lease renewals).

Operating revenues increased by 7.8 per cent and 7.2 per cent for the three months and year ended Dec. 31, 2023, respectively, compared with the same periods last year, primarily due to increase in monthly rents on the same property portfolio.

NOI increased by 11.2 per cent and 8.9 per cent for the three months and year ended Dec. 31, 2023, respectively, versus the same periods last year. Moreover, for the three months ended Dec. 31, 2023, the NOI margin on the total portfolio increased to 78.9 per cent from 76.5 per cent for the comparable quarter (excluding service charges, total portfolio NOI margin increased to 84.2 per cent from 82.1 per cent for the comparable quarter). For the year ended Dec. 31, 2023, the NOI margin on the total portfolio increased to 78.5 per cent from 77.3 per cent for the prior year (excluding service charges, total portfolio NOI margin increased to 83.8 per cent from 83.1 per cent for the prior year). The increases were primarily driven by higher operating revenues from increased total portfolio occupied AMR and substantial reduction in on-site costs, as a result of the abolishment of landlord levy tax. Service charge expenses are fully recoverable from tenants via service charge income and therefore have a nil net impact on NOI. The increase in the total portfolio NOI margin excluding service charges reflects the REIT's ability to successfully control costs as well as its limited exposure to inflationary pressures.

The increases in same property NOI by 10.6 per cent and 7.8 per cent for the three months and year ended Dec. 31, 2023, respectively, compared with the same periods last year, were primarily driven by higher operating revenues from increased monthly rents and reduction in on-site costs, as a result of the abolishment of landlord levy tax. The increases in same property NOI margin including and excluding service charges for the three months and year ended Dec. 31, 2023, are primarily driven by the same reasons for the increases in same property NOI mentioned herein.

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 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 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, (iv) costs related to the concluded strategic review of the REIT, and (v) expired base shelf prospectus fees. 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 (loss) income and comprehensive (loss) income to FFO is as shown in the attached table.

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

FFO per unit and AFFO per unit for the three months and year ended Dec. 31, 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 annual financial statements or supporting notes, NAV itself is not a standardized financial measure under IFRS (international financial reporting standards) 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 as shown in the attached table.

For the year ended Dec. 31, 2023, European Residential's liquidity improved, as compared with the prior year, primarily driven by the amended revolving credit facility agreement, which increased the limit by 25.0 million euros, with immediately available liquidity of 28.9 million euros as at Dec. 31, 2023, excluding the 25.0 million euros 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 2.9 years and fixed interest payment terms for 100 per cent of its mortgages at a low weighted average effective interest rate of 2.07 per cent. This is further reinforced by compliant debt coverage metrics, with interest and debt service coverage ratios of 2.9 times and 2.4 times, respectively, and adjusted debt to gross book value ratio within its target range at 57.6 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 facility 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 year ended Dec. 31, 2023, the REIT declared monthly distributions of one euro cent per unit (being equivalent to 12 euro cents 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 Mark Kenney, chief executive officer and Jenny Chou, chief financial officer, will be held on Thursday, Feb. 22, 2024, at 9 a.m. ET. 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 380011.

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 at the same link.

The slide presentation to accompany management's comments during the conference call will be available on the European Residential website an hour and a half 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 Dec. 31, 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 commercial property in Germany and one commercial 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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