European Residential Real Estate Investment Trust

Good morning. Thank you for attending today's European Residential Real Estate Investment Trust second quarter 2022 results conference call. My name is Frances and I'll be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Philip Burns, CEO, please proceed.

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 position. ERES once again grew stronger during the second quarter of 2022. As displayed on slide 4, our suite count increased by 12% over the past 12 months, including three acquisitions which we completed so far this year for a combined 356 suites across six additional multi-residential properties throughout the Netherlands. The market value of our property portfolio increased by more than double this having grown by 27% during the same period. This was driven by continuously strong marketing portfolio fundamentals, the successful execution of our value enhancing capital expenditure program and our exceptional operating metrics, which we will highlight to you in the coming slides. Further to this, given the uncertainty provoked by recent macroeconomic developments and potential regulatory evolution, we conservatively held the fair value of our residential portfolio steady this quarter, despite the 2% depreciation that was assessed by our external appraiser for the period. Our net asset value per unit reflects the growth which we achieved to date and, notwithstanding the absence of any fair value gain on paper during this past quarter, NAV per unit still increased by 25% versus the prior period end. Contrary to our results, our market capitalization is down by 17% since the prior year period. Albeit a direct product of external factors which are unrelated to the REIT's intrinsic value or operational performance, This decline has a silver lining in its creation of the opportunity for our investors to capture this value. In this regard, we reiterate the uniqueness of the REITs trifecta of value, growth, and income. Slide 5 contains an overview of business development during the second quarter of 2022. starting with our latest acquisition of five multi-residential properties comprised of 110 suites located in Rotterdam, which we acquired for a purchase price of $23 million, excluding transaction costs. With the vast majority of its suites regulated, the portfolio provides significant potential for uplifts on conversions. Also during this past quarter, the REIT secured mortgage financing for its two acquisitions which closed earlier this year, alongside early refinancing of certain existing properties which had mortgages maturing toward the end of this year, and the total principal amount of €118 million. After all refinance activity during the quarter, which Stephen will elaborate on shortly, The REIT has approximately 165 million of available liquidity through a combination of cash as well as capacity on its credit facility and pipeline or promissory note arrangements with CatReit that translates into acquisition capacity in excess of 350 million euros. Although we currently are approaching new acquisitions cautiously, our available liquidity will support our external growth ambitions for the remainder of 2022 and thereafter. Our strong operational and financial results are exhibited through the continuous increases to our key FFO and AFFO metrics. Quarterly FFO per unit was up by 13% to 4.3 euro cents, while AFFO was up by 15% to 3.8 euro cents per unit, both positively driven by our accretive acquisitions and an increase in stabilized NOI contributions since the prior period end. Slide 6 showcases another quarter of strong operating metrics, with the REIT again surpassing its targets. Rental revenues continue to increase significantly, with total portfolio net average monthly rent of €936 as of June 30, 2022, and €952 on an occupied basis. For the stabilized portfolio, net and occupied AMR increased by 4.6% and 4.2%, respectively, as compared to the prior year period. These increases are attributable to the REIT's trifold rent maximization strategy, comprised of its value-adding capital expenditure program, including the conversion of regulated suites to liberalized, as well as increasing rents on indexation and turnover. For rental increases due to indexation effective July 1, 2022, the REIT serves tenant notices to 96% of its residential portfolio. across which the average rental increase due to indexation was 2.95%. Even more meaningfully, average rental uplift on turnover in the current quarter was 22.4% on turnover at 2.6%, which compares exceptionally well to the change in monthly rent of only 17.1% realized in the prior year quarter, despite its higher turnover of 3.6%. Specifically on conversions, eREZ achieved rental uplift of nearly 61% for the past three-month period, compared to 49.5% in the three months ended June 20th, 2021, evidencing the effective execution of the REIT's value-enhancing conversion program in parallel with the untapped uplift potential inherent throughout our portfolio. The REIT's ability to achieve rental growth and rental revenues in excess of its target range of 3% to 4%, as I've just outlined, demonstrates its ability to consistently and profitably operate in a challenging macroeconomic environment and a complex and fluid regulatory regime. Although the Dutch government is currently investigating several proposals for regulatory development affecting the regulated rental market, such as the proposed mid-market regulation and various sustainability measures, We emphasize the fact that the regulatory environment in the Netherlands has historically been iterative in nature over short and long-term periods, including over the past few years since the REITs inception. We have been able to successfully navigate this dynamic and evolutionary regulatory framework to date, which constitutes one of our distinct competitive advantages, and that will continue into e-RES's future. Moving to slide seven, Occupancy for our commercial properties remained strong at 99% at current period end, while occupancy for the residential portfolio increased to 98.4% compared to 98.0% at Q2 2021 for both total portfolio and on a stabilized basis. A significant portion of residential vacancy in the current period is due to renovation, with 70% of vacant suites offline for that reason, which should provide for further rental uplifts once the suites are leased. For the three months ended June 30th, 2022, net operating income increased by a significant 17% compared to the prior year period, up to 17.2 million euros as a result of contributions from acquisitions, higher monthly rents, unstabilized properties, and strong cost control. Total portfolio NOI margin as shown on slide seven was 77.3% for this past quarter, which includes the effect of recoverable service charges that have recently increased due to rising inflation. Importantly, the net amount of service charge income and expense during the quarter and year to date was nil, given that costs are fully recoverable from the tenants. As such, we also evaluate our NOI margin excluding service charges, which was 83.3% for Q2 2022, up from 83.1% in the prior year period. This increase in NOI margin was due to higher monthly rents combined with a decrease in property operating costs as a percentage of operating revenues, primarily due to lower R&M as well as reduction in the landlord levy expense that Stephen will elaborate on shortly. This demonstrates the large extent to which the REIT is insulated from inflation as tenants are responsible for the majority of their own energy and other utility costs. Further, the REIT has no employees and therefore no wage costs, and property management fees are a fixed percentage of operating revenues. Our overhead is also protected from inflation, with the largest contributor being asset management fees, which are based exclusively on historical cost with no allowance for inflation. Slide 8 serves as a reminder of the unique diversification that characterizes our high-quality portfolio. We maintain an approximately 60-40 split between liberalized and regulated units, providing balanced growth in rents on turnover and indexation, as well as the opportunity to liberalize more units. In addition, you can see that over 40% of our current properties are located in the high-growth conurbation of the Randstad, with approximately one-quarter of the portfolio 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, And further to all of this, approximately one-third of our portfolio is comprised of single-family homes, also known as Dutch row houses, a segment which represents an additionally unique contributor to our portfolio mix, and one that is even further protected from inflation, with tenants performing the majority of the R&M work themselves, thus resulting in higher margins. With that, I will now turn the call over to Stephen.

Thank you, Philip. As you can see on slide 10, we continue to deliver on all our key financial and operational targets. On a total portfolio basis, operating revenues and NOI both increased by 19% and 17%, respectively, versus the comparative quarter, primarily due to accretive acquisitions since that period, as well as increase in monthly rents on the stabilized portfolio, as Philip already mentioned. This contributed to the increase in NOI margin, which was 83.3% in the current quarter, excluding service charges, up from 83.1% in the prior year period, which demonstrates the REIT's strong cost control and the extent to which it is protected from inflation. Excluding the impact of these service charges that are fully recoverable from tenants, property operating costs as a percentage of operating revenues decreased this quarter and year to date as compared to the prior year periods. Driven by lower repairs and maintenance, costs as well as a reduction in landlord levy expense. This was due to the utilization of a larger government rebate this year for landlord levies payable. With the REIT's intention to consistently purchase landlord levy rebates along with the potential abolishment of the landlord levy tax rate, the REIT expects to realize the improvements in NOI margin permanently. which is further reinforced by the fact that the REIT's property operating costs are largely insulated from inflation, as Philip explained. This all translates into accretive operational results, which continue to strengthen quarter over quarter. FFO and AFFO per unit were up by 13% and 15% respectively compared to Q2 2021, with both increasing by a significant 15% on the year-to-date basis. driven by the positive impact of increased stabilized NOI and accretive acquisitions. Despite our regular increases to monthly distributions, the REIT's ASFO payout ratio was at the lowest end of its long-term target range, at 80% for the three months ended June 30, 2022, down from 83.3% for the prior year period. Moving to slide 11, we can see that the REIT outperformed on a stabilized basis as well. Similar to the total portfolio, stabilized residential occupancy increased to 98.4%. Stabilized occupied AMR and operating revenues increased by 4.2% and 5.2% respectively, which is, again, in excess of the REITs target range of 3 to 4%. Stabilized portfolio NOI increased by 3.9% for the quarter ended June 30, 2022. with NOI margin excluding service charges increasing to 83.4% in the current period, up from 83.1% in the prior year period for the same reasons as explained earlier for the total portfolio. Slide 12 demonstrates the continuous growth of our creative operational results and strong financial management. FFO and ASFO for the quarter were both up significantly to 4.3 cents and 3.8 cents per unit, respectively. As mentioned, these large increases were driven, primarily driven by higher stabilized NOI, profitable acquisitions, margin expansion, and strong cost control. Our ASFO payout ratio also remains strong, even in the context of the REIT's growing distributions. This preserves eREZ's reputation for its relatively high and regularly increasing distribution yield. which was 4.5% as of June 30, 2022. While the REIT has been able to continuously pass on its accomplishment to its unit holders with increases in its distribution rate, it also simultaneously has maintained a strong and flexible financial position and consistently conservative debt metrics as displayed on slide 13. Inclusive of our latest mortgage financing, the REITs adjusted debt to gross book value was 48.8% as of June 30, 2022, remaining within our long-term target range of 45 to 50%, which we have historically been able to maintain. We also had immediate available liquidity of approximately $165 million as of period end, comprised of cash on hand in excess of that set aside for ongoing operational and capital expenditure requirements, as well as unused capacity on the REITs revolving credit facility and its pipeline or promissory note arrangements with CAPREIT. As Philip mentioned, we currently are approaching new acquisitions cautiously. Nevertheless, assuming on a LTV of 55%, our liquidity provides capacity to acquire in excess of €350 million that will support the REITs growth endeavors. Furthermore, you can see the REIT's demonstrated track record for maintaining its extremely conservative debt metrics. Both its debt service coverage and interest coverage ratios have remained significantly higher than the minimum threshold prescribed by our revolving credit facility. This illustrates the REIT's ability to successfully execute on a strategic objective on the back of a robust yet flexible financial position. And finally, on slide 14, evidences the staggering of our mortgage profile, inclusive of our latest mortgage financing, which was secured on our Q1 acquisitions combined with refinancing of certain existing properties. The combined financing was in the total principal amount of $118 million, excluding transaction costs and carry the fixed effective interest rate of 3.29% over the term of six years. Our well-staggered mortgage profile not only reduces renewal risk, but also stimulates liquidity as the majority of our mortgages are non-amortizing. Importantly, in light of the recent turmoil disrupting the economy, ERAS remains well positioned to absorb the volatility, with the weighted average term to maturity of its mortgage profile being 3.94 years. Further to that, we have no mortgage financings coming due for the remainder of 2022, and less than 10% of our mortgage debt maturing in each of the following two years. On that note, I will thank you for your time this morning and turn things back over to Philip to wrap up.