European Residential Real Estate Investment Trust

Hello, everyone, and welcome to the European Residential Real Estate Investment Trust third quarter 2021 results conference call. My name is Charlie, and I'll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. If you'd like to register a question, please press star followed by one on your telephone keypads. I will now hand over to your host, Philip Burns, CEO of European Residential Real Estate Investment Trust, to begin. Philip, please go ahead.

Thank you, Operator, and good morning, everyone. Before we begin, let me remind everyone that during our conference call this morning, we may include forward-looking statements about our future financial and operating results. I direct your attention to slide two and our other regulatory filings. Joining me today is our CFO, Stephen Koh. After I provide an update on our operational progress during the quarter, Stephen will provide an overview of our financial results and positions. September 30th, 2021 concludes another quarter of extremely strong operational and financial results that continue to trend consistently in a positive and accretive direction. Compared to Q3 2020, our suite count has increased by almost 8% to 6,183 suites, including an additional nine residential property acquisitions of over $107 million, excluding transaction costs and fees, which closed since the comparable prior year period. The market value of our investment portfolio increased by an even greater 17%, which demonstrates the high quality of our diverse portfolio, their outperforming operating metrics, the increasingly favorable conditions in the Dutch market, including ongoing compression of capitalization rates, and the successful execution of ERES' value-adding capital expenditure programs. As a result, the REIT recognized a large fair value gain on investment properties in the amount of almost $77 million during the three months ended September 30th, 2021, an increase of 5% compared to Q2 2021. Our market capitalization and public float increased by 3% and 4% respectively compared to the prior year period, but yet still exhibits a persistent disconnect between the REIT's unit price and its true underlying value, both on an absolute basis and relative to our peers. Slide five contains an overview of business development during the third quarter of 2021, starting with the fair value of our investment properties increasing significantly to 1.64 billion euros as of September 30th, 2021. As I just mentioned previously, which is comprised of 1.54 billion in multi-residential properties. It represents 94% of our portfolio value, with the remaining 6% constituted by the 100 million euros in commercial properties, which we have located in Germany, Belgium, and the Netherlands. In terms of financing activity and liquidity, during the period, E-Res obtained mortgage financing for its acquisitions, which closed last quarter on the 30th of June. in addition to refinancing of certain existing properties and total principal amount of 92 million euros. The new mortgage bears a six-year term to maturity with a weighted average interest rate of 1.12% over the term of the mortgage, which lowered the REIT's weighted average effective interest rate by eight basis points to 1.53%. Incorporating this new mortgage financing as a period end, the REIT had available 255 million euros in immediate liquidity through cash on hand undrawn credit facilities, and the 165 million euro pipeline agreement with Caprate. Our strong operating results this quarter translated through to our key financial metrics, with FFO per unit increasing significantly by 15% to 0.039 euros compared to the prior year period. The FFO per unit similarly increased significantly by 13% to 0.034 euros compared to last year, both measures powerfully evidencing the REIT's overall creative financial performance. Slide 6 provides some statistics on our current residential portfolio. Average occupied monthly rents were 884 euros as of September 30th, representing an increase of 3.8% since Q3 2020. Residential occupancy remained strong at 98.2% this quarter end compared to 98.4% in the prior year period. It is important to note this includes the REITs recently acquired new built property that was in the process of being leased at September 30th, but which has now been completed at rental levels exceeding the REITs business plan. Further, a significant portion of the residential vacancy in the current period is due to renovation. with 66 suites under renovation as of September 30th, representing over 60% of the vacancy. Upon completion of the renovations, a significant portion of these suites will convert from regulated to liberalized, demonstrating the execution of our value-add capital investment program. Turnover was 3.5% for the third quarter of 2021, comparable to 3.2% in the prior year period. Rental uplift on that turnover continues to improve meaningfully at 15.7% compared to only 8.2% uplift achieved in the same prior year period, thus contributing significantly to the REIT's achievement of its top-line rental growth objectives. The eREIT's portfolio is well diversified by number of bedrooms, ensuring we meet the demand for smaller units as well as for families. We can also see that approximately half of the current portfolio was constructed since 1980, providing an average age of under 40 years, resulting in lower ongoing repairs and maintenance and driving higher asset values. To elaborate further on the balanced mixture of our properties that constitutes our total portfolio, on slide 7, you can see that over 40% of our current properties are located in the high-growth urban counterbation of the Randstad, with approximately 25% directly located in the cities of Amsterdam, Rotterdam, The Hague, and Utrecht. The rest of the portfolio is situated in smaller urban areas throughout the country. Further, approximately 35% of our portfolio is comprised of single-family homes, also known as Dutch row houses, a segment which represents an additional diversifying and neat contributor to our portfolio mix. Importantly, our suites continue to be nearly evenly divided between regulated and liberalized, with a modest weighting toward liberalized, providing balanced growth in rents on turnover and indexation, as well as the opportunity to liberalize more suites. On that note, you might remember from the last quarter, the registered tenant notices to 94% of its liberalized suites for indexation, which became effective on July 1st, 2021, across which the weighted average rental increase due to indexation was 2.3%. This was in line with the recently enacted government-legislated maximum annual indexation for liberalized suites of CPI plus one, which is effective for an initial period of three years from May 1, 2021, up to and including April 30, 2024, combined with the best government-allowed inflation of 1.4%. The rent of tenants of regulated suites were not indexed. In compliance with the Dutch government's maximum indexation for all regulated suites set at 0%, effective for the one-year period from July 1, 2021, up to and including June 30, 2022. Inclusive of these regulated suites which were not indexed, our weighted average rental increase due to indexation was 1.5% based upon tenant notices served on a total portfolio. Knowing that the regulatory and legislative developments continue to be a hot topic in light of the recent changes, I will take this opportunity to reiterate that eRETS has been productively operating within this regime to date and will continue to do so. Indexation constitutes only one component of our rental growth strategy, a strategy that is also fueled by rental outputs on turnover and our conversion of regulated suites to liberalized pursuant to our capital expenditure initiatives. It is therefore important to reemphasize that these caps do not apply to rent increases on turnover, nor do they apply to increases driven by incremental points from CapEx. As such, we still expect to continue to achieve rental growth in our target range of 3% to 4% going forward, and this is already evident with our 3.8% occupied AMR growth compared to Q3 of 2020, which incorporates the latest indexations at the start of the third quarter on July 1st. On slide eight, I can provide a further update on the COVID-19 pandemic and the Dutch government's actions. As of October 1st, the majority of the support measures previously introduced by the government were not renewed as a direct response to the improvement in economic conditions and continually low unemployment rate with a view to fostering organic economic recovery and growth. There are a small amount of support measures which will remain in place to help facilitate this recovery when deemed necessary But overall, the Netherlands has fared well in their withstanding of the pandemic, especially compared to many of their Eurozone counterparts. Although the Dutch government almost fully relaxed all previously imposed coronavirus restrictions as of this past September in the final stages of their reopening plan, the recent surge in cases has resulted in a number of restrictions being put back in place, as announced on November 2nd, that include proof of vaccination and mandatory face masks for public places. all of which are commonplace in many countries already. With the Dutch government's approach to managing the crisis to date, having protected both its people and its economy to a great extent, we expect that this track record will continue. And with that, I will now turn the call over to Stephen.

Thank you, Philip. As you can see on slide 10, our operating metrics remain consistently strong, and on top of that, continue to improve quarter over quarter. operating revenues increased by 10% from $17.6 million to $19.3 million this past quarter, due partially to acquisitions since the prior year period end, but also largely driven by higher monthly rent. These higher operating revenues contributed to the increase in net operating income, which was up by an even greater 13% from $13.3 million to $15 million in Q3 of 2021. That was additionally positively driven by a decrease in property operating costs as a percentage of revenues. This was in part due to the recognition of the non-recurring landlord levy rebate, which reduced the REITs landlord levy expense this year to date. In aggregate, this resulted in a significant increase in our total portfolio NY margin, up from 75.6% in Q3 of 2020 to 77.9% in Q3 of 2021. Excluding the impact of the landlord levy rebate, however, property operating costs as a percentage of operating revenues still decreased, predominantly as a result of lower commercial R&M costs. and therefore total portfolio and Y margin excluding the rebate still increased substantially to 77.1% for the three months ended September 30th, 2021, representing an increase of 1.5% from Q3 of 2020. Funds from operations and adjusted funds from operations also both increased significantly, up 15% from the comparable prior year period. mainly due to the positive impact of the creative acquisitions, which similarly drove the 15% and 13% increases in FFO per unit and AFFO per unit, respectively, compared to Q3 of 2020. The ASFO payout ratio remained in our long-term target range, but decreased to the lower end, that at 80.4% for the three months ended September 30th, 2021, compared to 87.6% in the prior year period, and reflecting the 5% increase in monthly distributions, which were effective from March 2021 onward. Slide 11 continues to showcase E-Res's outperformance, which translates into the consistently high and strong operational metrics shown here. As Philip briefly mentioned earlier, our residential suite count has increased by almost 8% since Q3 of 2020, and now includes nine additional residential properties, inclusive of 432 suites, which have now been acquired since the prior period end. The REIT has also just recently signed a new purchase and sale agreement to acquire another multi-residential property comprised of 63 suites located in Rotterdam that will further grow our property portfolio. And we expect that we will be able to act on securing more acquisition opportunities before the new year that will propel our growth-oriented trajectory. The occupancy thrill of our portfolio remains consistently high and stable as well. Residential occupancy was 98.2% as at the current period end, relatively in line with the residential occupancy of 98.4% at Q3 of 2020. However, as mentioned, a significant portion of the current period's residential vacancy is due to renovation, which will provide further rental uplifts once suites are leased out again. It also includes the REITs recently acquired newly built property that was in the process of being leased as at September 30th, 2021, and which has now been completed at rental levels exceeding the REITs business plan. If we exclude that property and all other properties acquired since September 30th, 2020, residential occupancy on a stabilized basis increased to 98.5% as at Q3 of 2021. Occupied AMR on a stabilized basis increased by 3.6%, demonstrating that top-line rental growth that we continue to achieve. This is supported by an even higher 5.7% growth in net operating income on our stabilized portfolio. Similar to the total portfolio, higher operating revenues were magnified by lower property operating costs as a percentage of operating revenues, predominantly due to the recognition of the landlord levy rebate. Together, this drove stabilized NOI margin to increase to 78% compared to 75.6% for the same period last year. Excluding this positive impact of the landlord levy rebate, however, NOI margin on the stabilized portfolio still increased by 1.6% to 77.2% for the three months ended September 30, 2021. Our liquidity and leverage continue to remain strong and flexible at quarter end, as you can see on slide 12. E-RES has been able to maintain its debt to gross value within its target range of 45% to 50%. We continue to lower the REIT's weighted average mortgage effective interest rate, which you can see went down by 12 basis points since Q3 of 2020. And that includes the effects of both the Q4 2020 mortgage financing that was secured at a stated interest rate of just under 1%, as well as the latest mortgage financing, which closed on September 29, 2021, at a weighted average interest rate of 1.12%. This evidence is our ability to continue to secure financing in the persistently low interest rate environment prevalent throughout the European Union. which itself is a fundamental component of our ability to secure acquisitions at high yield spreads. We also continue to maintain a conservative term to maturity on our total mortgage portfolio that currently has a weighted average of a four-year term. As of September 30th, 2021, accounting for the post-quarter repayment of our credit facilities with excess cash from our mortgage financing, we have immediate available liquidity of over $250 million, comprised of approximately 85 million in undrawn credit facilities, 165 million via the pipeline agreement, and the remaining 5 million in cash and cash equivalents. This liquidity provides us with acquisition capacity in excess of 500 million euros dedicated to fueling our growth initiatives. Reinforcing the above, on October 29, 2021, the re-amended and renewed existing credit facilities that resulted in combining the revolving credit facility and bridge revolving credit facility into a single new facility, providing access to up to $100 million for a three-year period ending on October 29, 2024, and with better pricing. This therefore ensures that eRES continues to have the means to act on upcoming acquisition opportunities. Slide 13 provides more detail on our staggered mortgage portfolio, with the nearest debt maturity not occurring until December 2022. Our latest mortgage financing is highlighted here as well, which you can see favorably complements our renewal profile. In addition, the majority of our mortgages are not amortizing. So as we continue to grow, we will ensure we maintain this smooth maturity profile in order to reduce renewal risk. Thank you for your time this morning, and I will now turn things back to Philip to wrap up.