Mr. Stephane Amine reports

INOVALIS REAL ESTATE INVESTMENT TRUST ANNOUNCES FINANCIAL RESULTS FOR THE THIRD QUARTER OF 2023 AND THE SUSPENSION OF DISTRIBUTIONS

Inovalis Real Estate Investment Trust has released financial results for the quarter ended Sept. 30, 2023. The consolidated financial statements and management's discussion and analysis for third quarter 2023 are available on the REIT's website and at SEDAR+.

Chief executive officer Stephane Amine commented: "The office real estate sector around the world is experiencing challenging financial, economic and social change. Our seasoned management team has weathered similar real estate cycles in the past. Following management's recommendation and advice from external advisers, the board of trustees decided that after payment of the November distribution, it will suspend the REIT's distributions until further notice to provide the REIT with greater financial strength and flexibility to continue advancing short- and long-term objectives."

Highlights

Net rental income

For the portfolio that includes assets owned entirely by the REIT, net rental income for the three months ended Sept. 30, 2023, decreased significantly to $4.83-million (3,314,000 euros) compared with $6,337,000 (4,645,000 euros) for the three months ended Sept. 30, 2022, in line with its expectations regarding the full vacancy of the Arcueil property since July 1, 2023.

In Q3 2023, net rental income, adjusted for international financial reporting interpretations committee 21 for the portfolio that includes the REIT's proportionate share in joint ventures, was $5,783,000 (3,968,000 euros), compared with $7,191,000 (5,271,000 euros) for Q3 2022, a decrease due to the same reasons described above with respect to the IP portfolio.

Leasing operations

As at Sept. 30, 2023, occupancy for the REIT's IP portfolio was 54.6 per cent, and the total portfolio was 64.6 per cent, largely affected by total vacancy in Arcueil and the space vacated by the main tenant at the Neu-Isenburg property.

Management is also considering short- and long-term rental opportunities for the Sabliere office property to offset the protracted city hall approval process for redevelopment.

Steady interest from prospective tenants throughout the year 2023 underscores confidence in its Parisian, German and Spanish portfolio. To bolster leasing efforts, management is selectively undertaking capital expenditure improvements on properties with the highest vacancy to attract tenants and maximize rent.

On June 5, 2023, the Municipality of Paris adopted a new town planning regulation (plan local d'urbanisme -- PLU) to reform city building rules in light of climate change impacts and to increase the social housing offering, beginning in 2024.

The PLU defines the rules for building and land use, including the property's use (residential, retail, offices, public equipment and natural land), building materials and architecture, and authorization to repurpose a property. In particular, the PLU bioclimatic implements a new mechanism whereby some buildings with low housing capacity and with a surface area exceeding 5,000 square metres will have to devote 10 per cent of their surface area to the creation of housing. Management will be monitoring the application of the new regulation and will adapt the REIT's plans accordingly.

Capital market considerations and the suspension of distributions

There is significant downward pressure on net asset values due to volatile economic conditions driven by high inflation and energy costs in the euro zone. Unitholders equity on Sept. 30, 2023, was $279.1-million (194.4 million euros), which implies a book value per unit at that date of $8.53 per unit or $8.37 per unit on a fully diluted basis, using the weighted-average number of units for the period.

The board of trustees has carefully considered the results of management's analysis and advice from its advisers regarding the REIT's distribution payments. The board today announced that following payment of the distribution on Dec. 15, 2023, to unitholders of record on Nov. 30, 2023, it will be suspending monthly distribution to unitholders until further notice.

Management will continue to address volatile risks in the current capital markets by managing the debt to gross book value ratio for the total portfolio (49.6 per cent at Sept. 30, 2023) and seeking fixed-rate mortgages.

Funds from operations and adjusted funds from operations

In Q3 2023, the REIT reported FFO and AFFO per unit of six cents and seven cents, respectively, compared with 18 cents for Q3 2022, due to lower net rental income as a consequence of Arcueil property full vacancy. The FFO payout ratio was 173.7 per cent in line with the internal forecast.

Over the three quarters of 2023, the cumulative FFO per unit was 42 cents, which is sufficient to cover distributions through to the November distribution.

Financing activity

The REIT is financed almost exclusively with asset-level, non-recourse financing with an average term to maturity of 3.7 years for the total portfolio (3.4 years for the IP portfolio).

Subsequent to the quarter-end, the $17,765 mortgage loan on the Stuttgart property that matured in May, 2023, was extended for one year until August, 2024. This short-term extension will allow management to reassess and obtain improved financing terms in second quarter 2024.

In the first nine months of 2023, the weighted-average interest rate was 2.57 per cent across the IP portfolio and 2.60 per cent on the total portfolio, and reflects the increased interest margin on the Stuttgart mortgage loan and the additional interest cost of unhedged contracts on the Sabliere, Arcueil and Pantin properties. Management will assess the best hedging options on these contracts, considering redevelopment plans and hedging pricing opportunities.

Several mortgage loans are maturing in 2023 (Neu-Isenburg) and early 2024 (Kosching and Trio). The management team is negotiating new senior debt with short-term conditions, extending time to reassess financing terms with lower borrowing costs by the end of 2024.

Despite increases to European Central Bank 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.

Environmental, social and governance

Integrating ESG objectives and strategies into the REIT's business reflects the growing importance these factors play with many of its 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.

The Spanish property Delgado has been nominated for an LEED gold certification.

On the German portfolio, offers for a green electricity procurement policy are to be received beginning 2024, in addition to the implementation of smart water-saving equipment.

The social aspect of the ESG policy is also a critical point in the coming redevelopment projects of Sabliere and Arcueil as reforms become effective in 2024 to the City of Paris building rules to address climate change impacts and new ESG standards and increase social housing.

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 by the CSSF in Luxemburg and managed by Inovalis SA.

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