European Residential Real Estate Investment Trust

Good morning and a warm welcome to today's European Residential Real Estate Investment Trust third quarter 2022 results conference call. My name is Candice and I will be a moderator for today's call. All lines will be placed on mute during the presentation portion of the call with an opportunity for question and answer at the end. If you'd like to ask a question, please press start followed by one on your telephone keypad. I would now like to pass you over to our conference host, Philip Burns, CEO, The floor is yours. 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 new CFO, Jenny Chow, who was appointed in August of this year. Jenny has been extensively involved with eREZ since inception, and we welcome her expertise to the team. After I provide an update on our operational progress during the quarter, Jenny will provide an overview of our financial results and position. This third quarter of 2022 again showcased the ability of eREZ to operationally outperform despite the tumultuous environment in which we have been operating and arguably one of the most challenging circumstances in eREZ's history to date. Slide 4 provides a snapshot of the REIT's growth since inception, as well as since the prior year period. ERAS has increased its suite count by 12% since Q3 of 2021, with three acquisitions in Q4 of last year and three acquisitions in the first half of 2022. That said, considering prevalent uncertainty associated with the current regulatory and financing conditions, ERAS is proceeding with caution on the acquisition front. Nevertheless, on the flip side of that external growth, you can see that the fair value of our property portfolio increased almost twofold as compared to the increase in unit count, up by 21% since the prior year period. Excluding the impact of acquisitions, our portfolio value appreciated by €134.2 million versus the prior year period, representing an increase of 8% on a stabilized basis. This uplift in market value is supported by the ongoing strength of our portfolio metrics with the REIT's continued realization of strong increases in monthly rents, high occupancies, and substantial uplifts on our conversion program. This gain contributed to the 13% increase in our net asset value per unit, which grew to $4.26 as of September 30, 2022. In spite of this uninterrupted internal growth, Current capital market pressures continue to prevail, and as a result, the REITs market capitalization and public flow decreased by 32% since the prior year period. As we reiterated in previous quarters, in the context of our operational strength and positive industry fundamentals, this creates the opportunity for investors to arbitrage this spread and capture ERES' intrinsic value alongside its core growth and income orientations. Slide 5 provides an overall update on the business during the third quarter of 2022. As compared to Q2, the fair value of our investment portfolio remained relatively stable at €1.98 billion, of which 95% represents our residential properties, with the remaining 5% attributable to our commercial segment. Fair value of the residential portfolio, which is reassessed each quarter by our external appraiser based in the Netherlands, was reported to be €1.885 billion as at Q2 and Q3. eRisk continues to take a conservative approach to its financing with a staggered mortgage profile, targeted leverage and robust debt metrics, all of which Jenny will discuss in detail shortly. The REIT has immediately available liquidity of €29 million through cash on hand and unused capacity on its revolving credit facility excluding additional capacity available to acquire properties via the pipeline agreement or promissory note arrangements with CAPRI. Although we currently are exercising caution with respect to new acquisitions, our liquidity position translates into theoretical acquisition potential in excess of €300 million. Operationally, the REIT's accretive quarter and year-to-date date resulted in significant gains in funds from operations and adjusted funds from operations. FFO per unit increased by 4.4 euro cents for the three months ended September 30th, 2022, up by 13% since Q3 of 2021, while AFFO per unit grew even more meaningfully up by 18% to 4 euro cents over the same period. These increases are attributable to successful external growth from acquisitions combined with strong organic growth with a sizable increase in stabilized NOIs since the prior period end. Speaking of organic growth, slide six summarizes some of our outstanding operating metrics. Overall growth in rental revenue again has surpassed target with an increase in occupied average monthly rent of 5.2% on the stabilized portfolio. Including impact of our acquisitions, net and occupied AMR on the total portfolio increased even more substantially over the same period by 5.5% and 5.9% respectively. These increases are attributable to the REIT's tri-fold rent maximization strategy comprised of its capital expenditure program, including the conversion of regulated suites to liberalized, as well as increasing rents on indexation and turnover. Regarding the latter, average rental uplift in the current quarter was 18.2%, excluding service charge income, on turnover of 3.3%, which compares very favorably to the change in monthly rent of 15.7% on comparable turnover of 3.5% in Q3 of 2021. Specifically on conversions, eRES achieved rental uplift of over 50% during the past three-month period, compared to 44% in the three months ended 30 September 2021, evidencing the effective execution of the REIT's value-enhancing conversion program in parallel with the untapped uplift potential inherent throughout our portfolio. As a reminder, indexation in the Netherlands is effective on July 1st of every year and is subject to the Dutch government's maximum rent indexation caps, which are reset on an annual basis. For rental increases due to indexation beginning on July 1st, 2022, the REIT served tenant notices to 96% of its residential portfolio, across which the weighted average rental increase due to indexation was 2.95%. This exceeds our weighted average rental increase due to indexation in the prior year, which was 1.5% on the total portfolio, in line with the significantly lower caps at that time. Within a dynamic and evolutionary regulatory regime, the REIT is consistently achieving growth in rental revenues in excess of our targeted range of 3 to 4%. We aim to continue to outperform on this key metric as we remain strategic and adaptable in the short and long run, in proactive response to this historically fluid and iterative regulatory system. Moving on to slide seven, you can see that the occupancy remains strong at 97.8% on the residential portfolio and 99% across our commercial properties. For the three months ended September 30th, 2022, net operating income increased to 17.9 million euros, up a significantly 19% from 15 million euros in the prior year quarter, due to contribution from acquisitions, higher monthly rents on stabilized properties, and strong cost control. With a further decrease in property operating costs as a percentage of operating revenues, NOI margins significantly increased to 84.3% for the third quarter of 2022, up from 82.1% in Q3 of 2021, which Jenny will elaborate on shortly. In the context of current macroeconomic conditions, This evidences the REIT's limited exposure to inflationary pressures as tenants are responsible for the majority of their own energy and utility costs. In addition, 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 on historical costs with no allowance for inflation. Slide 8 serves as a reminder of the unique diversification that characterizes our high-quality portfolio. Approximately two-thirds of our portfolio is liberalized, with over 40% of our properties located in the high-growth conurbation of the Randstad region. Moreover, approximately one-third of our portfolio is comprised of single-family homes, also known as Dutch row houses, a segment that is even further protected from inflation as tenants perform a majority of the repairs and maintenance work themselves, thus resulting in higher margins. With that, I will now turn the call over to Jenny.

Thank you, Philip. As you can see in slide 10, our financial results continue to strengthen. On a total portfolio basis, operating revenues and NOI both increased versus Q3 of 2021 by 18% and 19% respectively, due to accretive acquisitions since that period, as well as an increase in monthly rent on the stabilized portfolio, as outlined by Philip earlier. Combined with a decrease in property operating costs as a percentage of operating revenues, a result of lower R&M costs and reduced landlord levy tax rate, the REITs NOI margin increased by a significant 220 basis points to 84.3% for the three-month end of September 30 of 2022, which includes service charge income expense. Including service charges, which have a net impact of nil on NOI as they're fully recoverable from tenants, total portfolio NOI margin still increased meaningfully to 78.5% for the quarter ended September 30 of 2022, from 77.9% in Q3 of 2021. With the Dutch government expected to abolish the Landlord Levy Tax Effect of Jan 1, 2023, the REIT expects to achieve its NOI margin in this improved range in the long run, which is further reinforced by the fact that the REIT's property operating costs are largely insulated from inflation . This all translated into a creative operational result with FFO increasing by 13% to 0.044 Eurocent per unit, while AFFO increased even more meaningfully, up to 18% to 4 Eurocent per unit, as compared to a prior year quarter. Slide 11 exhibits the REITs outperformance on a stabilized basis as well. Although stabilized residential occupancy decreased to 97.8%, this is probably This was primarily due to a greater proportion of suites undergoing renovations upon turnover, with 77% of vacant suites offline for that reason, which should provide for a further rental uplift once the suites are leased. Stabilized occupied AMR grew from €926 as of September 30, 2021, to €974 as of Q3 2022. representing an increase of 5.2% that is significantly in excess of our target range of 3% to 4%, attributable to the great successful execution of our rent maximization strategy. This field increases in operating revenues and net operating income up by 6.4% and 6.8%, respectively, compared to the prior year period. Combined with the REITs active program of lower property operating costs as a percentage of rental revenue, as well as its limited exposure to inflation. This resulted in a substantial increase in NOI margin to 84.4%, excluding service charges. This 220 basis point growth in margin, as reported on both the total portfolio and on a stabilized basis, evidences the REIT's ability to achieve such improvement on a normalized basis. Slide 12. presents the REIT's consistency in achieving its accretive operational results to date. Through higher stabilized NOI, profitable acquisition, margin expansion, and strong cost control, you can see that our FFO and AFFO per unit increase in every quarter. As a result, our AFFO payout ratio has overall trended downward, notwithstanding the 9% increase in our distribution rate earlier this year, while our distribution yield continues to trend upward hitting 5.5% as of September 30, 2022. Importantly, the REIT consistently maintains a conservative financing structure as displayed in slide 13. We have immediately available liquidity of 29 million euros through cash on hand and unused capacity on the REIT's revolving credit facility, excluding additional capacity available to apart properties via the pipeline agreement or the promissory note agreement. although we currently are exercising caution with respect to new acquisitions. Our adjusted debt to gross book value ratio remains the REITs target range at 48.7%, and our interest and debt service coverage ratio remain high and safe at four times and 3.3 times, respectively, significantly in excess of the minimum threshold prescribed by our revolving credit facility. And finally, slide 14 evidence evidences the staggered disposition of our mortgage profile, which reduces renewal risk while also stimulating liquidity, as the majority of our mortgage are non-amortizing and approximately 100% are financed with terms and arrangements that result in fixed interest payments. With a weighted average term to maturity of 3.7 years, combined with the fact that we have no mortgage refinancing coming due for the remainder of 2022 and less than 10% of our mortgage debt maturing each of the following two years, ERAS is well-precision to withstand forthcoming volatility. On that note, I'll thank you for your time this morning and turn things back to Philip to wrap up.