Mr. David Giraud reports

INOVALIS REAL ESTATE INVESTMENT TRUST ANNOUNCES FINANCIAL RESULTS FOR THE SECOND QUARTER OF 2023

Inovalis Real Estate Investment Trust has released strong financial results for the quarter ended June 30, 2023. The consolidated financial statements and management's discussion and analysis (MD&A) for Q2 2023 are available on the REIT's website and at SEDAR+.

President Stephane Amine commented, "In Q2, the team successfully negotiated a 1.6-million-euro ($2.3-million) financial settlement from the departing Arcueil tenant, advancing the REIT's FFO well ahead of forecast."

Highlights

Net rental income

For the portfolio that includes assets owned entirely by the REIT (IP portfolio), net rental income (NOI) for the three months ended June 30, 2023 (Q2 2023), increased significantly to $10.3-million (7.1 million euros) compared with $6.7-million (4.8 million euros) for the three months ended June 30, 2022 (Q2 2022). The $2.3-million indemnity negotiated upon Arcueil's single tenant departure positvely impacted this quarterly NOI, in addtion to rent indexations and a slightly positive $324 foreign exchange impact.

In Q2 2023, net rental income, adjusted for IFRIC 212 for the portfolio that includes the REIT's proportionate share in joint ventures (total portfolio), was $11.6-million (8.5 million euros), compared with $7.6-million (5.1 million euros) for Q2 2022, an increase due to the same reasons described above with respect to the IP portfolio.

The asset recycling program continues, beginning with the sale of Jeuneurs (November, 2021), followed by the sale of Courbevoie (December, 2022) and the redevelopment-driven lease terminations in the Baldi and Sabliere properties throughout 2021 and 2022.

Leasing operations

All of the REIT's lease contracts in France, Germany and Spain have rental indexation that offset the impact of inflation. Rent is increased annually to reflect the rising cost of living which protects returns to unitholders. The rent indexation applied on some leases was approximatively 6 per cent in the first half of 2023. In Q2 2023, a new five-year lease was signed on the Duisburg property, effective March, 2024, that will backfill the January, 2024, departure of the main tenant from one floor of the building. This lease represents 7 per cent of the building's GLA (gross leasable area).

As at June 30, 2023, occupancy for the REIT's IP portfolio was 84.5 per cent and the total portfolio was 86.4 per cent. Following the July 1, 2023, complete vacancy in Arcueil and the spaces vacated by the main tenant at the Neu-Isenburg property, the total portfolio occupancy rate will drop to 64.5 per cent.

Gaia's occupancy rate of 86 per cent understates the effective 100-per-cent rental revenue stream due to the three-year rental guarantee on the vacant premises that the REIT received in advance at acquisition and which, for accounting purposes, was treated as a reduction in the acquisition price and not as rental income. The 14-per-cent vacancy has an impact of 1.1 per cent on total portfolio occupancy.

Steady interest from prospective tenants throughout 2022 and the first half of 2023 underscores confidence in the trust's Parisian, German and Spanish portfolio. To bolster leasing efforts, management will selectively complete capital expenditure improvements on vacant areas to attract tenants and maximize rent.

Capital market considerations

The REIT has delivered returns to unitholders on the basis of:

• Investment diversification via exposure to selected European markets with a deeply experienced local asset manager;
• Compelling risk/return ratio for commercial real estate, compared with 10-year government bonds;
• Lower borrowing costs in the European community compared with Canada, despite interest rate increases by the European Central Bank (ECB);
• A euro-currency-backed hedge on distributions paid in Canadian dollars, covering distributions for the next two years.

Unitholders equity on June 30, 2023, was $283.3-million (196.0 million euros), which implies a book value per unit at that date of $8.64/unit or $8.50/unit on a fully diluted basis, using the weighted average number of units for the period.

Funds from operations and adjusted funds from operations

With one modification, the REIT uses non-GAAP (generally accepted accounting principles) ratios such as funds from operations (FFO) per unit and adjusted funds from operations (AFFO) per unit as defined by the Real Estate Property Association of Canada publication on Funds From Operations & Adjusted Funds From Operations, dated January, 2022. Due to the volatility of the Canadian dollar against the euro, the REIT adjusts FFO by excluding the unrealized gain or loss on the REIT's cash euros which are domiciled in Canadian financial institutions.

In Q2 2023, the REIT reported FFO and AFFO per unit of 22 cents each, compared with 14 cents for Q2 2022 due to higher net rental income, notably the $2.3-million Arcueil indemnity; and higher finance income. The FFO payout ratio was 46.1 per cent, in line with the trust's internal forecast but increased by non-recurring indemnity obtained from Arcueil single tenant, and finance income from Courbevoie and Baldi restructuration of derivative contracts.

Financing activity

The REIT is financed almost exclusively with asset-level, non-recourse financing with an average term to maturity of 3.2 years for the total portfolio (3.6 years for the IP portfolio).

As at June 30, 2023, the weighted average interest rate was 2.45 per cent across the IP portfolio and 2.41 per cent on the total portfolio, the first semester of 2023 including the additonal interest cost of unhedged contracts on Sabliere, Arcueil and Pantin properties. Management will assess the best hedging options on these contracts, considering redevelopment plans and hedging pricing opportunities.

To refinance mortgage loans that are maturing in 2023 (Stuttgart, Neu-Isenburg) and early 2024 (Kosching), and to mitigate risk in the properties, management is negotiating new senior debt.

Despite increases to the ECB key lending rates, management is confident that the REIT will continue to access financing opportunities through its banking networks in Europe leveraging the quality of its properties, lease terms and high-calibre tenants.

NCIB

Beginning in June, the REIT implemented its normal course issuer bid, buying back 140,100 units on the TSX by the end of June 30, 2023, at an average price of $3.28/unit. These units were cancelled in July, 2023.

Environmental, social and governance (ESG)

Integrating ESG objectives and strategies into the REIT's business reflects the growing importance these factors play with many of the company's key stakeholders. Investors recognize the risks associated with changing regulatory requirements, tenants are including sustainability considerations in their leasing decisions, and employees want to work for responsible and socially focused organizations. The REIT is working to improve its long-term environmental performance, and also investing in "human capital" for the implementation and monitoring of all ESG initiatives. A portfolio-wide ESG independent audit of all assets is ongoing with the view to formalizing ESG priorities and identify clear and measurable ESG practices and disclosures. Aside from energy procurement policies, the next measures to be undertaken on the German portfolio of asset are implementation/upgrade of water-saving equipment starting in Q3 2023.

About Inovalis Real Estate Investment Trust

Inovalis is a real estate investment trust listed on the Toronto Stock Exchange in Canada. It was founded in 2013 by Inovalis and invests in office properties in primary markets of France, Germany and Spain. It holds 13 assets. Inovalis acquires (indirectly) real estate properties through CanCorpEurope, an authorized alternative investment fund (AIF) by the CSSF in Luxemburg and managed by Inovalis SA.

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