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spk00: 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.
spk06: 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.
spk10: 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.
spk06: Thank you, Stephen. ERAS did not just have another quarter of strong results. The REIT exceeded expectations in prior quarters, and yet still, its results for Q2 2022 have again eclipsed its prior outperformance. ERAS has been growing both in size and in fundamental strength and expects to be able to continue along this flight path even amid the macroeconomic and regulatory turbulence. Of course, the current environment requires us to exercise heightened scrutiny towards external growth and regulatory evolution and continued vigilance around operational performance. Even in today's environment, however, our optimism towards ERAS' future remains undiminished. The immense value which is offered to the REITs platform as presented to you today and summarized by our investment highlights on the next slide is proof of the robustness of our platform and strategy. In this context and in summary, during the second quarter of 2022, the REIT grew in every capacity and we are confident in its ability to continue to navigate forward in each quarter to come. With that, I would like to thank you for your time this morning and we would now be pleased to take any questions which you may have. Operator, back to you.
spk00: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you'd like to remove your question, press star followed by two. Again, to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. Our first question comes from Jonathan Kelter with TD Securities. Please go ahead.
spk02: Thanks. Good morning. Good morning, Jonathan. First question, just on the, I guess, in the MD&A, you talked about potential changes to the regulatory environment pertaining to the mid-market. And I know you said it's a little early to quantify, but can you maybe give us some color on what those changes might be and how many suites of yours could be impacted?
spk06: Actually, I mean the government announcements so far have been very high level and lack any level of specificity. So it doesn't allow us to come up with a quantification or a sensitivity. The government, in parallel with having to execute its supply increase program where they want to provide another million houses by 2030, which require $100,000 a year, they're also trying to, again, consider how to slow down house price inflation as well as rental price inflation. but they have not given any guidance into what it might be. They said that they would like to provide or they would consider stretching the regulations to include mid-market up to 1,000 euros or up to 1,250. In parallel, they've also said that they want to consider revising or quote-unquote modernizing the points calculation. And they've also said in parallel that they want to encourage people to increase the energy efficiency measures as we approach 2030 because of EU directives. So they've put out a lot of really broad statements, and it's unclear how they're going to tackle it at this point in time. Having said that, historically speaking, as they have always and consistently tweaked and pushed and pulled on the system, over time, we find that it is reasonable and manageable. Two years ago, they put rental inflation at the regulatory environment at zero. And then the very next year, they've now allowed us to get 2.3% for regulated and 3.3% for liberalized. So I think there's generally a level of pragmatism that has historically shown through, and we would expect that to be the case today. And they also cannot lose sight either from common sense or the uproar that would transpire with the populace if they don't start delivering more supply. And so I think that will deter them from doing anything too draconian.
spk02: Okay, that's helpful. Switching gears, just on the acquisition, I guess you said a couple of times you guys are being more cautious about Is that more internally driven or has the pipeline slowed down? Maybe give us an update on what you're seeing out there and what we could expect for the back half of this year for you guys.
spk06: Yeah, that caution is driven really by the market. One, being patently aware that interest rates have gone up. And so that needs to be reflected in anything that we would underwrite. And then also, going back to your first question, with some level of regulatory uncertainty, we would not want to be increasing our exposure to that uncertainty if we can avoid it. So to the extent that we are reviewing acquisitions currently, we're looking at acquisitions that would be 100% regulated. with limited conversion ability. Again, those are like the bond-like assets that we've always had as part of our portfolio. We continue to believe that those are attractive, even though they're lower growth historically, the pricing on those is much more attractive. So those are things that we're looking at. And then we would say on the other side, if you have a portfolio that is very much liberalized, i.e. high levels of points, that you wouldn't think would be subject to any regulatory risk, we would be keen at looking at those. There are a lot of portfolios in the market today, but the acquisition activity or the closing of acquisitions has slowed down dramatically in Q2 as a result of the two things that I just highlighted that's precipitating our caution.
spk02: Have you seen people walk away from acquisitions?
spk06: It's hard to know if people walk away. We have seen portfolios come that haven't closed. And just the nuance being, I don't know if they were close with somebody else and then they didn't close or if they just didn't get any interesting bids. The two biggest portfolios that were on the market this year, which you all would have heard us talk about is There was 700 million all Dutch deal, and then there was over a billion 50% German, 50% Dutch deal that were pulled from the market just because the bids weren't interesting vis-a-vis the seller's expectations. But again, I can't say people are walking away, but I can say that there are portfolios that have been marketed that have not closed.
spk02: Okay, that's helpful. I'll turn it back. Thanks.
spk00: Thank you for your questions. Our next question comes from Brad Sturgis with Raymond James. Please proceed.
spk11: Hi, guys. Maybe just to follow on Jonathan's questions there, I think you talked about a $200 million acquisition target for the year, but given, I guess, a little bit more of a cautious approach, would you be revising that target down from the $200 million mark? Or how do you think about the volume for E-RES in the back half of the year?
spk06: I mean, we've already got in close $85 million, $90 million. So direction speaking, we're halfway there. Again, I would hope that we do acquire more assets this year. But again, we are exercising more caution. Will we hit that $200 million? Not certain. But again, we're still in the market. We're still looking. CAPREIT is still supporting us. We're still underwriting portfolios. But again, we just need to be aware of certainly the interest rate environment, which affects pricing and the sellers have to come to terms with that. And then the regulatory thing, again, I mean, that is uncertain, but that is something that we can manage as well. So I can't tell you what I think our new revised number is, but again, I'm optimistic that we will find things to acquire in the second half of the year.
spk11: And just to go back to the mid-market regulation commentary you had earlier, I guess if there were changes to be made or new regulations, would that be more of a 2024 event at this stage?
spk06: Yeah, I mean, everything, the government, well, not everything. There's many things that they're processing through. You know, you've heard us talk about, you know, cap on woes points, et cetera. That's now in effect. It has a de minimis impact on us. But as they're talking about the bigger potential changes, they've already articulated that that would be for 2024 and onward.
spk11: Yeah. And then, you know, given some of the uncertainty and maybe the expansion in the mid market, does that change your thinking around suite renovations or conversion from regulated to liberalized?
spk06: No, it doesn't. I mean, again, number one, it's 2024, so that's 18 months away. You guys can see, you know, in our MD&A, our uplifts on conversion are extraordinarily high, extraordinarily profitable. What we will do or are doing is, again, there are expected energy measures that the government's going to push through. So as we are refurbing our suites, we're ensuring that we upgrade the energy diagnostic levels. We're ensuring that we get deeper into the liberalized points calculations as they exist today. But no, we would not expect to significantly change our regulated to liberalized conversion strategy.
spk11: Okay, that's great. I'll turn it back.
spk00: Thank you for your questions. Our next question is from Himanshu Gupta with HoldShare Bank. Please go ahead.
spk01: Thank you and good morning. So I see the new debt financing done at over 3%. So just wondering, how's the availability of credit for your asset class? And have you seen any change in terms of lending appetite from the banks?
spk10: So, hey Himanshu, so I would say there's been an acute increase of interest rates since our Q1 conference call. It pretty much peaked in the month of June, and then we actually have seen rates come down. It is a very rapid and changing environment, but there is significant appetite from our banks and our lenders to secure, especially for multi-residential assets. So what we are doing internally is really seeking best execution and You know, if we take a look at our debt maturity profile, we don't have much coming up for 2023 and 2024. As I already mentioned in my conference call, it's like less than 10% of our debt maturity during the next two years. But to your point, what we have seen is rates have come down. There are abundant liquidity for multi-residential product, and we don't see any problems with our lenders if we were to secure financing.
spk01: Got it. And just to clarify, this 3.29, this is six-year term and fixed interest rate.
spk03: That's correct.
spk01: Awesome. Okay. Thank you. And then, you know, how will the cap rates get impacted as a result of the new debt financing? You know, the question is, Will you see the first impact on regulated non-Randstad, you know, like the lowest quality, or it will be the other way around, like liberalized Randstad is likely to see first impact in terms of cap rates?
spk10: For us, we – you know, I guess there's two things to it. There's, you know, the discount rate and growth rate. I mean, for us, as you already seen in our – operational results, they're very strong. We actually see growth rates increasing. That's, you know, with our discussion with our evaluators. I don't think right now we see much impact on cap rates due to the acute financing increasing, but we also have seen rates come down. I think we're in a very transitory environment in terms of where cap rates and interest rates are going to converge. But I think right now, from what we see in our portfolio, cap rates is reflective of what the market is.
spk06: And the other thing that I would add, just going more back to the financing component as well, again, it is a rapidly changing environment. But even with our new financing, If you compare that to the blended cap rate at which we bought those assets that were refinanced, we're still delivering positive yield spreads, not to the magnitude that we were before, but leverage is still accretive for us, even at that level. Again, we would like to see it come down again, but there is still positive yield spreads for us in our market.
spk01: Correct. Yeah, that makes sense. And then just to follow up on the additional regulations. So the cap on the WAS value, I think now that is in effect. And you mentioned it's pretty much no impact or de minimis impact on you. Why is that? I mean, would that change or limit your ability to convert a regulated suite into liberalized? Like how the impact will unfold there?
spk06: I'm sorry, your question wasn't clear, Himanshu. What's the question?
spk01: So, Philip, the question is the cap on WAS value, that change in regulation is now in effect from May 2022, I think. And you said there will be minimum impact on your portfolio. So can you elaborate on that? My understanding is that it will limit the ability to convert a regulated suite into liberalized. No, not so much really.
spk06: I mean, not so much. It'll have virtually no impact. What that's trying to do is in certain areas where you would have high value areas where you had small suites, because the values had been going up so much that the woes contribution, which is the second largest contributor after the size of the flat, was overly contributing They originally installed the WOES component in 2013-2014 just because it wasn't making a differentiation geographically where you have higher values generally in the Randstad versus in the other areas. But then the unintended consequence of that was if you had small flats in these high-value areas, they were going up quite dramatically and the WOES value were contributing more than people had anticipated. And when they put it in place in 2013-2014, it was expected to be 25% to 30%. What they're really doing is trying to bring it back. So if you had a significant number of small-sized flats in the Randstad area that were in your liberalized component, then those would be at risk. But we don't have a lot of those, number one. And the stuff that we're converting is generally not small flats. The stuff that we're converting are larger, bigger flats. So I truly, across all components of our business, don't see any material impact from this WOS value cap.
spk01: Got it. Okay. Thanks for clarification, by the way. Thank you. Last question from me. Rent growth target range was 3% to 4%. I mean, clearly you exceeded in Q2. And Q3 is likely to be even higher, you know, just by virtual better indexation. So are you increasing your target range, what you had provided earlier, 3% to 4%?
spk06: I think we're not explicitly moving our targeted range or guidance, but I mean, you all are very smart people, and you can see that we are beating our target, and there's no reason to believe that our performance is going to change. So we feel very confident being at or above our target.
spk01: Fair enough. I'll turn it back. Thanks, everyone.
spk00: Thank you. Our next question comes from Kyle Stanley with Desjardins. Please go ahead.
spk05: Thanks. Good morning, guys. Just looking at the macro headwinds in Europe, higher rates, the energy crisis, do you expect this to have any impact on leasing demand or activity? I mean, turnover spreads have, of course, remained very strong as we saw this quarter. But do you expect these factors to start impacting spreads maybe as we advance through the year? Or is the supply-demand imbalance just too acute?
spk06: It's the latter. I mean, again, I don't want to diminish or be insensitive to the macroeconomic or geopolitical issues that people are grappling with globally, but probably more intense in Europe. But there is nothing that changes the extreme... acute uh supply demand imbalance in the netherlands i mean so much so that the the through the first four months of this year there was 22 000 uh planning permits uh issued so that's an annualized uh you know 60 to 65 000 and they need to deliver a hundred thousand a year to even come close to their target they're nowhere close And, you know, you guys have probably seen in the papers with the farmers and their tractors blocking routes because of CO2 emissions and all these other things that the government is trying to do. It's actually hamstringing them from delivering more supply and more supply is the only solution to slowing down, you know, rental growth. And they're making no progress. They're actually running behind. And actually, I've seen some recent statistics saying that immigration into the Netherlands is near all-time high in the past quarter. So the macroeconomic uncertainty in Europe is real. The energy issues are very, very real. But again, we're not affected from an inflation perspective that as we've explained before, people are always going to need a place to live and there's not enough houses in the Netherlands. So that's why we feel very comfortable and you can see it in our performance. Our turnover uplifts continue to increase. Now they can't increase at that pace indefinitely, but they continue to go from strength to strength. And I don't see any way to arrest that trend until we start really delivering more supply, which the government is making no progress toward.
spk05: Okay, okay. Maybe just shifting to the regulatory environment a little bit. In the past, I think you'd mentioned there is some rumblings of potentially adjusting the CPI-based indexation for 2023, just given the elevated level of inflation in Europe. Has there been any more discussions on that, or is that still likely to be kind of an early 2023 event if it does occur?
spk06: Yeah, no, that's a very good question. I didn't mention that one when I think Jonathan was asking questions. Another proposal or thing that's been tabled, again, no legislation yet, is remember when they put the CPI plus 1% in for liberalized non-regulated units, that was a three-year measure. And I think on these calls, I had often suggested that it was a headwind of that turned into a tailwind, which was indeed the case. But when I was saying that and what I would continue to feel strongly about is in a 7% to 10% inflationary environment, I was very confident that the government would not push through 7 plus 1, 8 plus 1, 9 plus 1, or 10 plus 1 in terms of headline rental inflation. That was never going to happen. And so there is a proposal being discussed that would go into effect in 2023 where they would remove that temporary legislative construct and instead give the regulator the flexibility to send the non-regulated indexation as he or she does for regulated now. And that is addressing the exact point that you raised and I've mentioned previously, having a hardened rule of CPI plus one could be political suicide as well as not helpful for the people living in flats. I would be very confident that that comes in. Because again, I've suggested I just didn't see a way where they would let that CPI plus one stand. So I would feel very confident that that actually comes through.
spk05: Okay, thanks for that. And then just the last one, talking through the potential for more regulation in the mid-market, does this potential out there, does that make you look maybe outside of the Dutch borders a little more aggressively now or just kind of waiting to see what comes of it at this point?
spk06: No, I don't think it accelerates us. Again, I've mentioned before, you know, we have been making ourselves aware of the other markets, you know, portfolios are specifically come. We think it's interesting. We think our platform and Capri's presence in Europe is mature enough now where we're ready to do that. But again, in a macroeconomic interest rate environment, geopolitical environment that we're in now. Because again, keep in mind, to go to a new jurisdiction, you have to do it in somewhat scale to make it justified. So it's certainly not accelerating our move outside the Netherlands. Historically, we have performed very well in the Netherlands as that regulatory environment has changed. uh our history you know tells us that regulations are always changing and over a more elongated period of time uh you know regulations are manageable so long as they're transparent and we have a core competence and skill set that demonstrates we can do that whether it be across the provinces in canada whether it be in ireland whether it be in the netherlands and we we remain confident that we can do that okay great that's it for me i'll turn it back thanks thank you kyle
spk00: Our next question comes from Matt Cornack with National Bank Financial. Please go ahead.
spk03: Hey, guys. Just two quick ones for me. First, Stephen, can you quickly give us a sense as to where a similar term and type of financing would be today? I mean, bond yields are moving like tech stocks, so the downward drift, are you getting sort of the 25 to 50 basis points savings versus what you did the mortgage at recently?
spk10: Yeah, I actually priced it out yesterday. I think we've seen basically a 40 basis points drop on the sixth year. So if you use a 3.2%, it will be around 2.7% to 2.8% right now.
spk03: Okay, that's helpful. And then just on the sustainability measures, And again, I understand that it sounds like there's no certainty around this legislation yet, but EF and G energy labels, can you let us know if any of your properties fall into those categories? Excuse my ignorance.
spk06: No, it's okay. This is another one that I would say is highly likely to be passed. There's an EU directive. that basically mandates this and each member of the EU has to pass it. And it's not due to come into force until 2030, but it basically means that as of 2030, to the extent that you had a flat with less than D, you would not be able to, you would no longer be able to rent it on turnover. We do have a component of our portfolio that is EFG or unrated. I think, I'm just trying to think of the number off the top of my head. It's probably going to be 10 or 15%, but we've already started a program to upgrade those. Again, we do significant in-suite CapEx at turnover, not only to convert, but also to increase market rents if it's already liberalized. And we've instituted a new protocol that going forward, whenever we are doing in-suite CapEx, we need to improve the energy label, ideally to at least a C, because it takes time to turn over your entire portfolio. And we want to get ahead of that as opposed to waiting to deal with it as 2030 draws close. If we have 10% to 12% turnover, it takes 8 to 10 years to get through our portfolio. So that is something that we're adjusting. into our capital investment and in-suite CapEx program now, because again, the Netherlands doesn't really have a choice. It has to follow the EU directive. It's just a matter of time when that legislation becomes finalized.
spk03: That absolutely makes sense. And then I guess as you look to acquire, and it sounds like it's a pretty modest issue within your existing portfolio, but if you're acquiring regulated suites at this point, I guess you'd hope to get ones that meet the energy efficiency requirements, or are these small enough investments that their economic returns are okay?
spk06: In an ideal world, yes, we would prefer them all to be at D or above now, but depending upon where it was, what we thought the rental growth was, how far below its regulatory or statutory maximum would be, You know, we also do invest in our regulated suite. So, you know, it is not a no-go, but it is something that we will certainly be more cognizant of as we move forward. And it's something that's very transparent. You can go on a government website, plug in your apartment, and, you know, it's published what your rating is. So, you know, that is something that we can easily do diligence.
spk03: Okay. No, that's interesting. I think that's coming soon to everywhere in the world, so. Good to be ahead of it.
spk06: I mean, and that's a fair point as well, right? I mean, ESG is here to stay. I mean, everybody's dealing with droughts and heat waves. Climate change is here. We don't need to argue who causes it or what caused it. But we believe it's the right thing to do also to further invest in our assets and increase their energy efficiencies, et cetera. So we are trying to get ahead of it the best that we can. And that's how we're going to move forward.
spk03: Okay, great. Thanks, guys.
spk00: Thank you, Matt. Our next question comes from Jimmy Chen with RBC Capital Markets. Please proceed.
spk08: Hey, thanks, Scott. Just a quick follow-up on the potential rent control in the mid-markets. I know there's a lot of uncertainty on the threshold and the various parameters, but what would be the kind of a rough percentage of liberalized suites within your portfolio that has a monthly rent higher than the 1,000 or 1,250 euros that you think may not qualify or may not have enough points to qualify as liberalized? Is there a rough percentage that you can share?
spk06: We probably have, I don't have the number in front of me, but I would say 30% to 40% of our portfolio would be above $1,000. We have very limited that would be above $1,250. Okay. But again, I would be careful. I'd be careful to take an extrapolation, right? Because then you have 35% of our portfolio is regulated. So to then say that the other third is at risk isn't necessarily the case because at the same time, they're talking about stretching the umbrella, if you will. They're also talking about changing the way you calculate points because it isn't the rent that drives it. It's the points that drive it. But whenever they're publishing these things, they always publish the rental number. But that's actually the inverse of the way that it works. So it's the number of points that you need to be focused on, which they're simultaneously talking about changing the way we calculate points.
spk08: Okay. And then the points parameters, I think they've published that, right? Like a range of points that you need to have.
spk06: No, they haven't. No, this is where all the uncertainty comes. So if you look at the matrix today, 1,000 would equate to 185 to 190 points. 1,250 would equate to between 220 and 230 points. It changes a little bit every year. But they're not publishing anything that's focusing on points, which is why it's even more or less clear than it otherwise would be. They're just saying, we want to capture rents in this area. And so again, if they change the entire way that points are calculated, it's really uncertain. So that's why I would caution people to say, you know, using the questions you just answered, okay, that means there's a third that falls in this area that, you know, that could be at risk. That's not necessarily the case because, again, if they start, you know, recalculating the way points are done and they start giving you more credit for energy labels and all these different things, it would require quite a reset in the way it's all calculated now. Again, it remains lacking specificity, but I would just caution people to take too quick of broad-brush assumptions or extrapolations.
spk08: Fair enough. Is there any lobby efforts or discussions underway, including by yourselves, to work with the government to come up with a solution, or is this really going to be one where one day we're going to get a press release and these are the new rules.
spk06: No, I hope it's not the latter. The biggest industry group is called IDBN. We're a member of that. We work with them. We've worked with them on other measures when they were changing the buy-to-let rules at the beginning of this year. We're very actively engaging with them, trying to explain to them the consequences. A lot of developers are very much engaging with The government saying that if you were to do something, you know, if we read your press releases to the most draconian extent, it would shut down the entire development pipeline. So, you know, they're approaching it from a different angle. You know, as we engage alongside IVBN with the government, we're like, listen, you know, we understand what you're trying to achieve. Again, it would be appropriate to modernize the points calculation because it's incredibly esoteric as it is now. If you want to stimulate people to increase the energy performance, then provide more points for energy labels. So we're trying to be constructive and combative. The government will certainly need to do something ostensibly so they can be perceived as doing something, but they also can't further destroy a supply that is woefully inadequate. So we are engaging with them. We're trying to be constructive. There will be changes, but again, all of the changes that they've made historically, even in the five, six years since we've been there, we've been able to manage through them and continue to deliver, and we remain confident about that, even though at this juncture, some of their announcements remain quite unclear.
spk08: Okay. Thank you.
spk00: Thank you, Jimmy. Our next question comes from David Crystal with Echelon Capital Markets. Please go ahead.
spk07: Thanks. Good morning, guys. Not to beat the regulations horse to death and keeping in mind that we're probably all in the dark to some extent. Would you say the big concern is existing liberalized sweeps that are in that maybe 185-point range that may have rents in excess of the regulatory figure that could then actually come down significantly in rent? Or is it more just that your future revenue growth could be constrained versus an actual erosion in revenue?
spk06: Well, I mean, the market rental growth, in my mind, will continue on its path without Tad Piper- reflecting these new regulations, it is more what you say you could have liberalized flat today that would be calm or return to being regulated upon turnover. Tad Piper- But again, I hesitate to even start throwing out point numbers, because at the same time that they're talking about. where they might want to go, they're talking about revising or quote-unquote modernizing the points calculation. So it's very difficult to look at our portfolio and say, okay, at 187, we have this amount of risk because the points might be very differently calculated. So again, we think the market fundamentals remain extraordinarily tight in our favor. We believe the market rents will continue to go up. But again, we and the others simply have no further visibility on how this is all going to collectively work out. I personally, from a pragmatic perspective, expect them to do something that allows them a political win that says they're adjusting the market, but does not do anything horrific because that would destroy their primary goal of delivering more supply. And if they start rebasing people's income, erosion of revenue, as you suggested, they're going to face long-term court battles as happened in Berlin when they put in rent freeze and retroactive rent reductions that ultimately got overturned. So again, the Dutch government historically is coalition-led. It takes a long time for things to happen, but there generally is delivered some form of pragmatism.
spk07: Fair. And you mentioned that your acquisitions would tilt maybe to a bit of a barbell where you would look at existing regulated suites or very high end on the liberalized side. Would that translate into any asset dispositions and recycling out of some mid-market assets that may be more at risk into either of those other strategies?
spk06: No. One, again, we've worked very hard to aggregate our portfolio. We've selected the assets that we own. We're comfortable with them. And additionally, I would say the portfolios that are on the market today, any of them that are sort of in this zone of potential implication are the ones that aren't trading. So now would not be a time in my mind with this uncertainty to try and sell the very flats that other people would consider equally uncertain. So we're not in the disposal program. And again, we would, you know, focus on the barbell ends, as you say, you know, assuming that the price is right versus our then current cost of capital.
spk07: Okay. And given your, you know, maybe your medium or longer term debt target is in the 45 to 50% range and you're bumping towards the upper end of that, Would you be comfortable exceeding this in the near term? Or is the 50% in near term top?
spk06: I mean, we've talked about that also in the past, you know, collectively on these calls and other meetings where we still want to grow. And if we have an opportunity to grow at asset pricing that we like, Given where our stock price is and our unwillingness to raise capital at such severe discounts, we would be comfortable with our debt to LTV going above 50 modestly for a period of time, and that strategy hasn't changed.
spk07: Okay, perfect. Thanks. I'll turn it back.
spk00: Thank you, David. Our next question comes from Johan Rodriguez with Industrial Alliance. Please go ahead.
spk09: Hi, I just wanted to clarify one small thing. So is your expectation, you said they tabled a proposal for the CPI plus one to be removed and then have it be up to the discretion of the regulator. So is your expectation that for 2023 they scrap the CPI plus one or is the expectation for 2024?
spk06: If they do it, I think it'll be for 2023. Again, depending on which number you want to look at in Europe, you know, inflation between seven and 10%. I just don't think that the government and certainly the housing minister would let, you know, CPI plus one with CPI being between seven and 10%, you know, go through, go through. Having said that, this year we got 2.3 for regulated and 3.3 for non-regular liberalized, which I'm very fine with that result. And I would be surprised if it were less than that when we come around for the 2023 cycle. But if they do this, which again, I believe they will, it will be for the next indexation cycle.
spk09: Gotcha. Okay. Thanks. I'll turn it back.
spk00: Thank you for your question. There are currently no questions registered, so as a reminder, it is star 1 if you'd like to ask a question. There are no further questions at this time, so I'll pass the conference back over to the management team for any further remarks.
spk06: Thank you, operator. And again, thank you everyone for your joining us this morning and for your time. If you have any further questions, as always, please do not hesitate to come back to either Stephen or myself at any time. Have a great day, and thank you.
spk00: That concludes the European Residential Real Estate Investment Trust Second Quarter 2022 Results Conference Call. Thank you for your participation. You may now disconnect your lines.
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