The rapid increase in interest rates in 2022 spelled doom for Canada’s housing market and sidelined people with buying plans. On the stock market, real estate stocks posted negative returns for the year following a severe sell-off. However, the sector’s performance in 2023 is a vast improvement from last year, as evidenced by the 5.3% year-to-date gain.
While the Bank of Canada has paused its rate hike campaign, the housing boom won’t return soon. Some industry experts even say the affordability crisis is significantly worse today than a year ago. Meanwhile, real estate investment trusts (REITs) remain attractive passive income providers.
This month’s standout and profitable investment prospect is a dividend stock you’ve never heard of. European Residential REIT (TSX:ERE.UN), or ERES, is the only European-focused, multi-residential REIT. Thus far in 2023, the lesser-known real estate stock has shown resiliency with its 12.2% year-to-date gain. At only $3.34 per share, the REIT pays a juicy 5.26% dividend.
The $301.5 million REIT graduated from the TSX Venture Exchange and began trading on the TSX on July 7, 2020. Management is grateful for the strong sponsorship by CAPREIT, one of Canada’s largest residential landlords.
ERES’ multi-year strategy is to build a high-quality portfolio of residential assets in Europe. Management sees substantial opportunities in the region’s highly fragmented multi-residential market. Apart from solid underlying fundamentals, the attractive rental growth provides upside value for investors.
The attractive Netherlands market is the initial focus of ERES and the starting point for future expansion. As of year-end 2022, this growth-oriented REIT has 6,900 residential units, which European Residential Management manages. The portfolio includes an ancillary retail space in the Netherlands plus two commercial properties (one each in Brussels, Belgium and Munich, Germany).
According to management, ERES broke barriers last year and exceeded rent maximization expectations. Besides the exceptional rent growth, the year saw the most substantial rental revenue increase. The average monthly rent rose 5.4% (from €940 to €991), higher than the REIT’s target rental growth range of 3% to 4%.
For the full-year 2022, net operating income increased 16% year over year to €69 million ($102 million CAD), while the residential occupancy rate was 98.4%. Notably, funds from operations (FFO) rose 11% to €39.3 million ($58 million CAD) versus 2021. Because of consistently high occupancies and expanding margins, ERES increased its monthly dividend by 9% in Q1 2022.
Given the solid fundamentals of the Dutch market, ERES expects the low vacancy rate and strong occupancy to remain consistently strong amid the economic headwinds and challenging environment. The REIT also has built-in protection from inflationary pressures as tenants pay for energy and related utility costs.
High income profile
Management considers ERES a hidden gem and adds that it has one of the highest income profiles in the real estate industry for its generous dividend yield. An $11,412.78 investment in this REIT (3,417 shares) will generate $50.02 in monthly passive income.
The REIT is also well-positioned to withstand ongoing macroeconomic adversity due to its healthy financial profile. Lastly, ERES has a competitive advantage from the continued sponsorship of CAPREIT.