European Residential Real Estate Investment Trust

Hello, everyone, and welcome to the European Residential Real Estate Investment Trust fourth quarter 2022 results conference call. My name is Bruno, and I will be operating your call today. During the presentation, you can register to ask a question by pressing star one on your telephone keypad. I will now hand over to your host, Mr. Philip Burns. Mr. 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, Jenny Chu. After I provide an update on our operational progress during the quarter, Jenny will provide an overview of our financial results and positions. 2022 was yet another year of unprecedented circumstances, and so we are especially pleased to reporting another year of strong performance, despite the many challenges. Slide 4 provides an overview of e-Res's growth since inception, where you can see that we have more than tripled our suite count, having increased our asset base at a compounded rate of 37% per annum. This includes the six high-quality multi-residential properties in the Netherlands, which we added to our portfolio this past year, demonstrating our ability to accretively grow by acquisition even amid adverse conditions. This accounts for the annual increase of the market value over the portfolio, which was offset by widespread interest rate impact on fair values. As a result, our NAV decreased compared to the prior year end to €3.87 per unit. Nevertheless, it still remains well above the pricing of our publicly traded units, therefore prolonging the opportunity for investors to participate in a clear value play which E-Res currently offers. Slide 5 contains a snapshot of the fourth quarter, and as explained, our fair values declined by approximately 4%, landing at €1.9 billion at December 31st, 2022, of which 95% represents our residential properties in the Netherlands. That said, we were able to close out the year operationally strong, having grown both FFO and AFO per unit by 10% annually. This was attributable to the success of our selective external growth earlier in the year alongside major organic growth achieved throughout the year with sizable quarter-over-quarter increases in same-property NOI contribution, which I will elaborate on shortly. We are exercising caution when it comes to new acquisitions, and prioritizing the preservation of our acquisition liquidity, which supplements our solid financial position. As at year-end, we had €156 million in immediately available liquidity through cash and unused credit that translates into a theoretical acquisition capacity of approximately €350 million. This was reinforced last month by the amendment of our revolving credit facility, which increased the commitment from €100 million to €125 million for a three-year period. This further strengthened our financial profile and liquidity, which Jenny will expand on. Turning to slide six, we are pleased to showcase the effective execution of our rent maximization strategy in the Netherlands, our core market that is characterized by increasingly favorable and robust long-term fundamentals. Our net and occupied average monthly rent increased last year by 5.3% and 5.4% respectively on a total portfolio and same property basis. These are the highest increases achieved to date, and further to that, they are significantly in excess of our target rental growth range of 3% to 4%. Notably, since inception, we have been able to achieve a constant annual growth rate in AMR in excess of 4%. These strong gains demonstrate the success of our rent growth strategy, comprised of increasing rents on indexation, securing market uplifts on turnover, and our value-add capital expenditure program, including the conversion of regulated suites to liberalized. We recorded an average uplift on turnover of 23.8% and 22% during the past quarter and year respectively, which included an exceptional 82.2% and 65% increase, which we realized on conversion for the fourth quarter and fiscal 2002 respectively. For context, in 2021, our turnover rate was modestly higher while we achieved an average uplift of 16.3%, which is still significant, but at six percentage points, or one-third lower than the average achieved in 2022. Indexation then adds an additional tailwind. As of July 1, 2022, the REIT served tenant notices to 96% of the residential portfolio, across which the average rental increase due to indexation was 2.95%. This was in line with Dutch government's cap on indexation for regulated and liberalized units, which was set at 2.3% and 3.3% respectively in 2022. In relation to the record growth we achieved last year, we are stepping into 2023 on positive footing, with the Dutch government having set maximum indexation for the coming year at 3.1% for regulated units and 4.1% for liberalized units effective for the upcoming year. We expect this alone to drive rental growth in 2023 toward the high end of our target range, excluding the effects of turnover which, as demonstrated, contribute significantly to additional growth. It is important to acknowledge that these rental revenue accomplishments were all achieved within a regulatory regime in flux. Dutch housing regulations have historically been fluid and iterative in nature, and their ever-changing and complex parameters continue to evolve over the year. ERAS has specialized in being able to profitably operate and grow rents within this framework, a skill that constitutes one of its key competitive advantages. In the face of regulatory evolution and change that, based on precedent we can expect going forward, we will remain strategic, adaptable, and proactive in preserving our positive trajectory on our rent maximization strategy and targets. Moving on to slide seven, you can see that our commercial occupancy was near full at 99.5%, while our residential occupancy remained high at 98.4% at year end. This is again at the higher end of our target occupancy range, which is where we've constantly held it since inception. This further underscores the fundamentals of the Dutch residential market and its ability to transcend economic headwinds, even during the pandemic. Spearheaded by strong rent growth and high occupancies, along with contribution from our acquisitions, we increased our net operating income by 16% to $69 million for the year ended December 31, 2022. As Jenny will discuss shortly, strong cost control also played a key role, contributing to the substantial 100 basis points increase in our NOI margin, excluding fully recoverable service charges, which expanded to 83.1% for the year, up from 82.1% in 2021. Importantly, this highlights another critical cornerstone of ERIS's unparalleled platform, that being its limited exposure to inflationary pressures. As I have reiterated throughout the past year of high inflation, our tenants are responsible for all of their own energy and other utility costs. 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. In the context of a particularly challenging macroeconomic environment, this represents an invaluable safeguard and ensures our ability to continue delivering organic growth. Slide 8 serves as a reminder of the unique diversification that characterizes our high-quality portfolio. Approximately two-thirds of our portfolio is currently 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 the majority of the R&M 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 on slide 10, our quarterly results were solid. Operationally, our performance was strong, with operating revenues increasing by 14.5%. and NOI up by 12.2%. This was attributable to our accretive acquisitions, as well as the increase in monthly rent on the stabilized portfolio, as outlined by Philip. Our NOI margin remained high and relatively level with the fourth quarter of 2021, while our FFO per unit decreased by 2.4% to 4 Eurocent per unit. This was primarily a result of higher interest being incurred on our revolving credit facility which was likewise the main driver of the decrease in the REITs quarterly AFFO per unit. However, our AFFO payout ratio was at almost 85% for the three months ended December 31st, 2022, which is exactly within our target range of 80 to 90%. Slide 11 shows the strong results we achieved on an annual basis. For the total portfolio, operating revenue and NOI were both up by 16% for reasons already outlined. This was combined with a decrease in property operating costs as a percentage of operating revenue that was driven by lower repairs and maintenance costs, as well as the reduction in landlord levy expense, the latter a result of lower levy tax rate effect in 2022. In aggregate, this increased our NOI margin to 83.1% for the year ended December 31, 2022, up from 82.1% last year. This excludes service charges, which have a net zero impact on NOI as they're fully recoverable from tenants. Since the Dutch government abolished the landlord levy tax effect of January 1, 2023, we anticipate being able to maintain this expanded margin on a normalized basis, which is further reinforced by the fact that the REIT's property operating costs are largely insulated from inflation, as explained. This all trickled into improved financial returns for our unit holders, with FFO and AFFO per unit both up by 10% compared to the prior year. Slide 12 exhibits the REIT's outperformance on a stabilized basis as well. Residential occupancy was high and relatively stable, with the majority of our vacancy being deliberate and attributable to suites undergoing renovations upon turnover, pursuant to our productive capital investment program. As of December 31, 2022, 71% of our residential units were offline for this reason, which should provide for further rental lifts when the suites are leased. As a testament to that assertion, I will remind everyone on the high uplift in rent which we secured on turnover throughout this past year, as Philip highlighted earlier. Stabilized occupied AMR grew from €940 as of December 31, 2021, to €991 at the end of the current period and representing an increase of 5.4% that is significantly in excess of our target range of 3% to 4%. Again, demonstrating our success at executing on a robust rent maximization strategy. This field increases in operating revenues and NOI of approximately 5%. Combined with our focus on cost control and mitigation, and our limited exposure to inflation, we expanded our same property NOI margin to 83.2%, excluding service charges. I am pleased to be reporting that this 100 basis point margin growth on both the total portfolio as well as the stabilized basis, which is indicative of its recurring nature and long-term inclination. Slide 13 represents the increasingly accretive results which we are achieving as regrowth. Through higher stabilized NOI, well-considered and accretive acquisition, margin expansion, and strong cost control, you can see that our FFO and AFFO per unit continues to rise. Alongside that, through vigorously growing our revenues, we were able to increase our monthly distribution by 9% in the first quarter of 2022, establishing ERAS as a sector leader in terms of distribution yield. In spite of this, our AFFO payout ratio fell below its long-term target range to 78.9% for the year ended December 31st, 2022, a result of the REIT surpassing its performance expectation. As we turn to slide 14, I will re-emphasize the importance that we attribute to maintaining a conservative and flexible financial position, which forms the pillar upon which the REIT's best-in-class platform stands. We have immediately available liquidity of over €21 million, comprised of cash on hand and unused capacity on our revolving credit facility. Although we are looking at external growth through a cautious lens, this does exclude additional acquisition capacity available to us through the pipeline agreement or alternative promissory note arrangements with CAPRE. This also excludes additional capacity which we secure through the post-year end amendment of our revolving credit facility, which Philip mentioned earlier, that increased the commitment by 25 million euros and provided an additional 25 million euros accessible via the accordion feature. Further to this, our debt metrics remain conservative with an adjusted debt-to-portfolio market value ratio of 51% as at year end, which is well below the 60% covenant prescribed by our revolving credit facility. Our coverage ratios also remain high and safely in access of covenant thresholds. And finally, slide 15 displays the well-staggered disposition of our mortgage profiles. which is critically important in today's interest rate environment, as it minimizes our renewal risk while also sustaining our liquidity. The majority of our mortgages are non-amortizing, and 100% are financed with terms and arrangements that result in fixed interest payments. With a weighted average term to maturity of three and a half years, combined with the fact that we have less than 10% of our mortgage debt maturing in each of the upcoming two years, We are well-positioned to withstand ongoing macroeconomic and interest rate volatility in the medium term. On that note, I will thank you for your time this morning and turn things back to Philip to wrap up.