Mr. Stephane Amine reports

NOVALIS REAL ESTATE INVESTMENT TRUST ANNOUNCES FINANCIAL RESULTS FOR THE FOURTH QUARTER AND YEAR ENDED DECEMBER 31, 2023

Inovalis Real Estate Investment Trust today released its financial results for the quarter ended Dec. 31, 2023. The audited consolidated financial statements and management's discussion and analysis (MD&A) for Q4 2023 are available on the REIT's website and at SEDAR+. All amounts except rental rates, square footage and per-unit amounts are presented in thousands of Canadian dollars or euros, or as otherwise stated.

Stephane Amine, chief executive officer and president of the REIT, commented: "Two thousand twenty-three was a challenging year in the office real estate market here in Europe and around the world. Maintaining the REIT's positive cash flow, negotiating competitive debt renewals and ensuring sufficient liquidity to cover operational expenses and financial obligations will be key in 2024. Unitholders can be reassured that our commitment to their investment and the long-term success of our REIT remains unwavering."

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 Dec. 31, 2023 (Q4 2023), decreased significantly to $4,084 (2,798 euros) compared with $6,705 (4,894 euros) for the three months ended Dec. 31, 2022 (Q4 2022). This aligned with the company's expectations given the vacancy of the Arcueil property since July 1, 2023.

For the year ended Dec. 31, 2023, the IP portfolio NOI was $23,216, an increase of $1,583 compared with the same period last year. The main contributing factors to this increase were the full 2023 impact of the two acquisitions that took effect at the end of Q1 2022, Gaia and Delgado, for a total of $1,341 (919 euros), added to a $1,413 (968 euros) positive foreign exchange impact. The Orange indemnity, negotiated in Q2 2023 ($2,320 1,590 euros) upon the sole tenant's departure from the Arcueil property, partly offset the negative rental income impact of the half year vacancy of the Arcueil property.

Leasing operations

As at Dec. 31, 2023, occupancy of the REIT's IP portfolio was 54.1 per cent and occupancy of the REIT's total portfolio was 64.2 per cent, largely affected by the half year vacancy of Arcueil and the 20-per-cent space vacated by the main tenant at the Neu-Isenburg property.

Management is considering short- and long-term rental opportunities for the Sabliere office property to generate revenue during the City Hall approval process for redevelopment. Subsequent to the quarter, a new two-year lease was signed representing 13 per cent of the Sabliere leaseable space, replacing a departing tenant and increasing the building's net rental income and service charge recoverability.

Steady interest from prospective tenants throughout 2023, for both long- and short-term leases, reaffirms confidence in the company's Parisian, German and Spanish portfolio. To bolster leasing efforts, notably with on-field brokers, management is selectively undertaking tenant improvements to attract tenants and maximize rent.

Asset recycling plan

The Arcueil (fair value $85,703), Sabliere (fair value $27,493) and Baldi properties (fair value $26,762) are being marketed for sale as part of the REIT's previously announced asset recycling plan. These are mature assets where management believes value can be maximized. Upon the sale of these properties management and the board will consider the best uses of the new capital including the options to pay down debt, make capital investments to support leasing, invest in redevelopment opportunities and make opportunistic acquisitions.

Joint venture (JV) arrangement wind-up

Management is executing on its previously announced commitment to wind up the current joint ventures in accordance with their respective agreements. Seller representation agreements were signed in January, 2024, for each of the Stuttgart and Duisburg properties and the properties are being actively marketed. JV arrangements for the Kosching and Neu Isenburg properties had expiry terms in early 2025 however a one-year extension has been arranged for the Kosching property and negotiations are under way for an extension of the Neu Isenburg JV arrangement. The JV arrangement for Delizy does not expire until 2029.

Capital market considerations

Throughout 2023, there was 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 as at Dec. 31, 2023, was $246,397 (168,488 euros), which implies a book value per unit at that date of $7.54/unit or $7.38/unit on a fully diluted basis, using the weighted average number of units for the period.

The REIT has addressed the volatile risks in the current capital markets by implementing short-term leasing initiatives for properties in the REIT's asset recycling plan, maintaining a conservative debt-to-gross-book value ratio (currently 43.6 per cent) and securing fixed rate mortgages.

Funds from operations and adjusted funds from operations

In Q4 2023, due to the vacancy and increased finance costs, the REIT reported FFO and AFFO per unit of one cent and full year 2023 FFO of 43 cents which was in line with management's forecast.

Financing activity

The REIT is financed almost exclusively with asset-level, non-recourse financing with an average term to maturity of 2.9 years for the total portfolio (3.2 years for the IP portfolio).

In Q4 2023, after an interim extension, the $17,765 mortgage loan on the Stuttgart property that matured in May, 2023, was successfully extended for one year until August, 2024. This short-term extension will allow management to reassess the strategy and try and obtain improved financing terms before this new expiration date.

For the year ended Dec. 31, 2023, the weighted average interest rate across the total portfolio was 2.75 per cent compared with 1.93 per cent at Dec. 31, 2022. For the year ended Dec. 31, 2023, the weighted average interest rate across the IP portfolio was 2.62 per cent for compared with 1.91 per cent at Dec. 31, 2022. This increase reflects the higher interest rate on the Stuttgart mortgage loan and the additional interest cost of unhedged contracts on Sabliere, Arcueil and Delizy properties. As at Dec. 31, 2023, 52.1 per cent of the REIT's debt for the total portfolio was at fixed interest rates (47.6 per cent on the IP portfolio).

In early March, 2024, the European Central Bank (ECB) announced that key lending rates remained unchanged and inflation has declined further. ECB staff have revised their growth projection for 2024 down to 0.6 per cent, with economic activity expected to remain subdued in the near term. Thereafter, the ECB expects the economy to pick up and to grow at the rates of 1.5 per cent in 2025 and 1.6 per cent in 2026, supported initially by consumption and later also by investment. With this outlook, management will continue to seek financing opportunities through its banking networks in Europe, leveraging the quality of its properties, lease terms and high-calibre tenants.

General and administrative expenses

In 2023, management successfully reduced general and administrative expenses by 8.2 per cent to $6,405 from $6,974 in 2023, primarily due to the streamlining of administrative processes and a reduction in legal fees.

Subsequent events

Subsequent to year end, on March 15, 2024, the Trio mortgage loan in the amount of 29,673 euros ($43,394) matured and the REIT was given notice that the three Trio entities are in breach of their obligation to repay the loan. The lender has exercised its right to charge 5-per-cent default interest on the loan in addition to the Deutsche Bundesbank base interest rate of 3.62 per cent until negotiations on a mortgage renewal conclude. The liquidity risk associated with this default is confined to default interest payments during the default period. If recourse is made to the guarantees provided by the REIT, the risk would entail the loss of Trio's contribution to the REIT's equity, without compromising its liquidity.

Management has been and remains in discussions with the lender regarding its options to extend the loan or refinance the Trio property. The REIT has scheduled further negotiations with the lender in early April.

Subsequent to year-end, one-year mortgage extensions for the Neu Isenburg and Kosching mortgage loans that had matured at the end of 2023 and January, 2024, were secured. This strategy to obtain such mortgage extensions is intended to facilitate the eventual exit from the joint venture ownership of these properties.

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.

The Spanish property Delgado is pursuing LEED Platinum certification.

On the German portfolio, offers for a green electricity procurement policy are to be received in 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 upcoming redevelopment projects of Sabliere and Arcueil, where not only bioclimatic zoning plan are or should be adopted, but also where a social diversity and a diversified office-residential equilibrium is requested by the city mayors.

About Inovalis Real Estate Investment Trust

Inovalis REIT 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 REIT acquires (indirectly) real estate properties via CanCorpEurope, authorized Alternative Investment Fund (AIF) by the CSSF in Luxemburg and managed by Inovalis S.A.

FFO and AFFO calculation

The reconciliation of FFO and AFFO for the three-month periods ended Dec. 31, 2023, and 2022, based on proportionate consolidation figures including REIT's interest in joint ventures, is as shown in the attached table.

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