All participants. Your meeting is ready to begin. Good morning, ladies and gentlemen. Welcome to the 3rd Quarter 2020 Results Conference Call. Would now like to turn the meeting over to Philip Burns.
Please go ahead, Mr. Burns.
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 2 and our other regulatory filings. Joining me today is our CFO, Scott Kreyer and VP of Finance, Stephen Co. After I provide an update on our operational progress during the quarter, Scott will give an overview of our financial results and position.
Erids was formed only 1.5 years ago on March 29, 2019. In such a short time, it already is experiencing an unprecedented disruption of global markets. From a strong and stable economy, to the challenging downturn onset by the COVID 19 pandemic. Eris has been tested, but it is pleased to report another solid quarter performance amidst this global of growth, Eres now has recommenced accretive expansion. Our suite count has increased by 12% in the 12 months since the quarter 3 of 2019 to 5752 Suites at September 30, 2020.
Which includes our latest acquisition on September 1 120 Residential Suites. This growth has been enhanced. This growth has been enhanced by fair value appreciation of our property portfolio, which we have been able to recognize each quarter to date increasing our asset value by which closed post period on 1st October, comprised of 113 residential units, bringing our pro form a suite count to 5865 units. Our market capitalization in public float also have increased compared to September 30, 2019, by 6% 37%, respectively. A positive trend in our market cap that can be seen in 2019, which reflects the external validation of the Erez platform, has been negatively impacted in 2020 by the stock market's overriding response to the unpredictability of the COVID-nineteen pandemic, which has inflicted volatility on stock prices as global economies entered into recessionary territory.
Erez's units continue to trade influenced by this market wide sentiment, remain disconnected from its operational performance and underlying fundamentals. Nevertheless, On July 7, it marked significant milestone for the REIT as we graduated from the TSX Venture Exchange to the Toronto Stock Exchange. Which should further increase Erez's liquidity and open a wider and deeper investor base in Canada and beyond. Slide 5 outlines a few highlights from the quarter and how we are achieving our stated objectives. For the 3 9 months ended September 30, 2020, our property portfolio increased in value by 1,000,000 and 1,000,000 respectively to 1,000,000,000 as at period end.
Not only reflecting countercyclical and defensive characteristics of the Dutch multi residential market, but also the high quality of Erez's portfolio. As I mentioned previously, we are pleased to announce the closing of a successful acquisition during the period of Folio in the province of GELDerlin in the Netherlands for a purchase price of 1,000,000, excluding transaction costs. This was followed shortly by a subsequent acquisition on October 1st of another multi residential portfolio in the Netherlands comprised of 113 suites and purchased for 20 point 1,000,000. We hope and expect to continue this recent trend in accretively adding to our multi residential portfolio by prudently capitalizing on the abundance of near term attractive opportunities currently present in I will let Scott speak more specifically to the details of our liquidity measures, but to briefly touch upon our financing activities at a high level, We ended the quarter on September 30, reporting EUR 120,000,000 in immediately available liquidity, which included a draw on our revolving credit facility of 20,000,000 euros to finance the post period and acquisition of the Carol's portfolio closing on the 1st October. Subsequently and currently, we have $90,000,000 available in remaining liquidity including $80,000,000 in undrawn continue to present solid operating results for another quarter with FFO of 0 point 0 $3.4 per unit and $3 per unit, respectively.
While benefiting from accretive acquisitions since the prior period, both FFO and AFFO have been negatively impacted by the lower return, which we earned on excess cash as we conserved our liquidity amidst the uncertainty surrounding the COVID-nineteen pandemic, ultimately resulting in stable metrics. That brings us to Slide 6, which outlines that extensive measures have been put in place by the Dutch government in order to mitigate the adverse impacts of COVID-nineteen and protect the welfare of its people and their incomes. In general, the focus has loan extensions and government support for international trade to name a few. Such measures have assisted tenants during these challenging times to maintain the rent payments even if they've experienced job disruption. Government to accelerate their roadmap for reopening the economy.
However, as the pandemic enters its 2nd stage with the recent rise in new cases, certain restrictions, certain restrictions have been reinstated and there can be no certainty that additional restrictive measures will not be imposed. To highlight some key aspects of our portfolio, on Slide 7, you can see that our suites continue to be nearly evenly divided between regulated and liberalized. Providing balanced growth of our current properties are located in the high growth urban conservation of the Randstad, with approximately 25% directly located in the cities of Amsterdam, Rotterdam, Beghag and Utrecht. The rest of the portfolio was situated in smaller urban areas throughout the country. Slide 8 provides more detail on our current residential portfolio.
Average occupied Monthly rents were at the end of September, with a high and stable occupancy of 98.4%. Our turnover was 10.8% for the 1st 9 months of 2020, which is slightly high on an annualized basis compared to 13.2 percent turnover achieved in 2019. This, however, is partly a result of higher vacancy going into 2020. Due to portfolios acquired as well as for families. You can also see that approximately half of under 40 years, resulting in lower ongoing repair and maintenance costs and driving higher asset values.
And with that, I will now turn the call over to Scott.
As you can see on slide 10, our solid operating performance this quarter has been driven by rapid acquisition growth coupled with strong rental growth, with operating revenues up 50% since the prior year period, an especially impressive metric in the context of this pandemic. The increase is attributed to contribution from acquisitions as well as higher monthly rents and higher occupancy on stabilized properties. Net operating income has followed suit increasing by 49%. However, it was impacted by some higher property operating costs this year. Mainly due to heightened repair and maintenance costs as well as increased advertising costs associated with turnover and vacancy reduction.
In aggregate, this has resulted in a slight decrease in our NOI margin, which nonetheless remained strong at 75.6%. In line with our long term expected average. FFO and AFFO increased by 43% 47% respectively. Compared to the third quarter of 2019. FFO per unit remained stable compared with the prior period at 0 point 034 per unit.
While AFFO per unit increased by 3 percent 2.030 per unit. This exhibits the positive impact of accretive acquisition since the prior year period, offset by higher current income tax and general and administrative expenses. As well as lower return earned from above average cash maintained on hand this year. As a result of the REITs, precautionary liquidity conservation. FFO and AFFO per unit were also impacted by a greater weighted average number of units outstanding during 2020 up 43% from the comparative period, primarily from the REIT's equity offer in December of 2019.
As detailed on Slide 11, our operating metrics have presurveered against the backdrop of unprecedented challenges, conventional operating conditions. Our suite count increased by 12% and to reiterate our pro form a suite count further increased post period end to 5865 Suites with the closing of our acquisition on October 1st. Residential occupancy increased to 98.4% compared to the same period last year. In part evidencing the effectiveness of our property management through a focused minimization of inherited vacancy. Occupied average monthly rents on our stabilized portfolio increased by 3.9%, a result of contractual indexation, turnover and the conversion of regulated suites to liberalized suites.
Stabilized portfolio NOI also increased significantly by
8
driven primarily by higher operating revenues from increased average monthly rents. Finally our weighted average interest rate continues to decrease, down 7 basis points compared to the same time last year, substantiating the strong spreads we continue to achieve between cap rates and interest costs. Although we have now returned prudently by actively pursuing accretive expansion, We do so while maintaining an unwavering focus on preserving our conservative financial profile, as you can see on slide 12. This has been especially important given the continued economic uncertainty with the Netherlands, like many other countries, experiencing a second wave of the pandemic. Despite the unpredictability and in combination with the rapid and significant increase, and the size of our asset base, we are seeing conservative leverage, which we expect to keep between 45% 50% as we continue to grow down the line.
Lower interest costs as a result of having secured financing to date by capitalizing on the persistently low rates in the year 18 union and a conservative 4.7 year term to maturity for our mortgage portfolio. In addition, after funding the acquisition of the Kayros portfolio on October 1, Erez currently has 1,000,000 in immediate Lee available liquidity, inclusive of $80,000,000 in undrawn lines of credit, with the remainder in available cash. Easing an assumed 60% loan to value ratio on long term mortgage financing, we have immediate capacity to acquire up to EUR 225,000,000 in assets. Slide 13 provides more detail on our well staggered mortgage portfolio. With the nearest debt maturity not occurring until December 2022.
In addition, the majority of our mortgages are non amortizing. As we continue to grow, we will ensure we maintain our smooth maturity profile in order to reduce renewal risk. You for your time this morning. I'll now turn things back Hello?
Thanks, Scott. In summary, Eris has remained steadfast and turbulent times. These extraordinary economic circumstances have allowed for the REIT to quickly establish track record of resilience and adaptability underpinned by the high quality of our portfolio. The robustness well to continue safely and accretively growing even in adverse market conditions. In this regard, we believe that Erez offers a compelling investment opportunity.
The REIT provides unique opportunity to invest in the fast growing and attractive European multi residential real estate market. Our partnership with CAPREIT brings significant benefit to our unit holders. We are growing our portfolio at very attractive yield spreads with strong and highly accretive organic and external growth opportunities. We have established a strong foothold in the Netherlands multi residential market, and we are building size and scale to drive value going forward. Our conservative balance sheet and financial position provides the flexibility and resources to drive further growth.
And we have in place an experienced management team and a seasoned Board of Directors. Thank you for your time this morning, and we will now be pleased to take any questions you may have. Operator, please open the lines
The first question is from Mr. Brad Stojes from Raymond James.
Hi there.
Good morning, Brad. Good morning.
I wanted to touch on the acquisition environment and strategy at the moment. As you've noted, couple of, called tuck in acquisitions completed over the last couple of months. How is the pipeline for that opportunity looking right now? And could we see a few more of those type of transactions in the short term?
Yes, I mean, honestly, I think 2020 will probably notwithstanding there was a slower period, around the 1st wave of the pandemic think 2020 could very well break a record in terms of volume of residential transactions in the Netherlands. The second half of the year. There's been a lot of product, come to the market, and even more so, it continues to be just in the Q4 alone, we've reviewed over 700,000,000 worth of product in about 3000 units. So, the opportunity to grow absolutely there continues to be there and I see that continuing unabated going forward. I think looking at how our portfolio and I assume others have performed.
It just demonstrates to people that this is a great defensive asset class, as well as an asset class that even in trying times has top line growth associated with it. So, we will, remain in, acquisition mode. I do like the the tuck in acquisitions. Given that we have a big well diversified portfolio, it gives us more flexibility to do some of those tuck in acquisitions. I believe you get slightly better pricing there.
The pricing we've had, you know, on the 2 so far has been, a track particularly when you look at how we're going to finance them, we're well, well, well above 200 basis point spread. And in some cases, closer to 300, And I think there is, the the possibility that we will do a few more of those, in the the short term. And I think going into next year, again, capital markets dependent, I think we'll also be in the the mode to do bigger acquisitions if they're sensible and the metrics line up with the portfolio?
Okay. So short term could see leverage tick up towards the higher end of your target range right now? That a fair assumption?
Yes, I mean, speaking, you know, candidly, you know, I don't see us issuing equity right now. We do have capacity as Scott explained, in connection with that, if if our, leverage were to go up to the higher end of our range, you know, we've always said we want to be in the 45 to 50% range. I certainly think that's that's the right decision to maintain our external growth?
Is there a minimum baseline liquidity position that you'd like to see the REIT maintain on the balance sheet?
There isn't a minimum number where we've drawn the line in the sand. Again, we put our pens down on acquisitions in Q2, and we had $140,000,000 worth of liquidity in terms of cash in in credit facilities. We have spent some of that, and I feel very comfortable having done that. We don't have a baseline number that we won't go between or go below. We just have to always have a look at how the portfolio is performing, where the pandemic is, what the new measures are.
Again, in the Netherlands, the government has been very supportive, providing, you know, backstops for people. And and that's why you've, you know, seen that our our top line, collections have remained very consistent with the historical performance. So from a cash generative capacity, the business is doing well. So again, you know, we we wouldn't go down to 0, we haven't defined an exact number of how low we would go.
In terms of the acquisition environment that you just highlighted, has there been, you know, any evidence to, with the transactions you're seeing in terms of change in valuation, you know, play lower cap rate or change on price per door basis?
Yes, I mean, I think cap rates are tightening. I think you're going to see that probably globally for the most offensive assets, multi residential and, I guess, industrial. And we're seeing that in the Netherlands as well that there has been some tightening on the cap rates, but you're also seeing the interest rates move almost in lockstep. You know, right now, the team regularly updates themselves on, you know, where the interest rates are and, you know, between 4 and 7 years, you're sub-one hundred and twenty right now, for all in interest rates. So we can still maintain that, you know, loose rule of thumb that we want to be in the 200 basis points plus yield spread when we're looking at doing acquisitions, but there definitely has been some objective compression of cap rates as the asset classes performed so well.
The next question is from Kai Stanley from Desjardins Capital Markets. Your line is open. Please go ahead.
Thanks. Good morning, guys. Good morning. Good morning, Kyle. Good morning.
Would you be able to just provide a bit more color on the same property OpEx inflation we saw during the quarter and just maybe kind of how you're thinking about the NOI margin going forward?
So just in terms of, the OpEx, it's, again, it's just a bit of a timing. There was a bit slightly higher, R and M costs And some of that also had to do with, advertising costs in connection with, reduction in vacancy. But just in terms of, margins, we were kind of projecting 75%, 76% going forward. And that's kind of what we were looking at on the long basis.
Okay, great. Thanks for that. And then I was just looking, so 54 suites vacant for renovation at quarter end. Would all of these qualify for conversion to liberalize? And then maybe, you know, what would the timeline for that conversion, or renovation to be completed be?
Those are not all conversions. There might be just a turnover investment, even if it's regulated in stay regulated or if it's already liberalized and going to stay liberalized, we might be doing other investments to either maintain its legibility at a good rate or to substantially reposition it at a higher AMR, but they're not all regulated to liberalized conversions. And the timing associated with that depends upon the the magnitude of the works that we're doing, but to do a full conversion, that's probably going to be offline for 3 to 4 months.
Okay, okay, great. Thanks for that. Just wondering, are you seeing any changes in the profile of your potential tenants, maybe from an income perspective or are you seeing any specific attributes within your portfolio attract new tenants at this point?
I wouldn't say that we've seen a dramatic change really in the profile. I mean, you hear things about airbnb flats coming online and that tends to be in the more central Amsterdam, maybe eCheck area, which are the higher price point product. You know, if you keep in mind that, you know, our average AMR is, you know, sub 900, you know, that puts us, you know, very much on average in the mid market space. And and those are, you know, guys, girls, you know, people making average incomes. You know, they're less likely to be the expatriates, they're less likely to be the students, you know, people that have just ordinary jobs.
And and we're seeing, a high level of consistency if you look at our turnover rates, they're online with ignoring Q1, which Stephen addressed was due to higher vacancy at the end of year end and very consistent with what we've seen over the past couple of years. We are seeing a little bit higher, uplifts on turnover across of the buckets regulated to liberalize and regulated to liberalize, but I don't identify that with, a change in, in demographic our target tenants. I just think it's, attracting the same tenant base, but we're just able to demand higher because we're either doing works or because our product is well located and there's the continuing shortage of supply?
Okay. That makes sense. That's it for me. I'll turn it back. Thanks guys.
The next question is from Lorne Kalmar from TD Securities. Please go ahead. Your line is open.
Thanks very much. Good morning, everyone. Quick question on, in Canada, we're hearing a lot about the urbanization in the U. S. Are you guys seeing any of that in the Netherlands?
And if so, is that, a concern about or would that kind of augment sort of your choice of product in terms of brand stat versus non brand stat?
Well, you have to remember that the, the Netherlands is already the most densely populated country in Europe. And if you exclude city states. I think it's in the top 5 globally. So, de urbanization is much more challenging in the Netherlands than it would be in a geographically expansive place such as Canada. So we have not been experiencing anything that validates that.
I I won't opine on whether it's happening generally or not or whether the pandemic is accelerating that. I still think from our portfolio mix, it's broadly defined ground stud area, you know, 40% or just slightly above and in the core cities, 25% I like that, dynamic. We wouldn't be afraid and we'd be happy to buy more in the Ronstadt for the right price. You know, for us, it's always managing or triangulating between probably a lower cap rate in the Ronstadt versus the growth profile versus a higher cap rate and maybe slightly less growth profile outside the Randstad. But so there's some very strong, locations in the north and in the south, whether it be, grouting them or that's in the north, the Eindhoven in the south, where we have, units that we're very happy there as well.
But, you know, the de urbanization, is not currently influencing, our appetite to take on more Ronstadt assets at the right price of course.
Okay. And then kind of slipping back maybe to acquisitions, we heard that there may be a proposal to increase the tax acquisition, so I think 2% to 8% or something on those lines. Could you maybe give a little more color on that and sort of how you expect that to influence the acquisition activity going forward?
Yes. So at the time of the global financial crisis, real estate transfer tax and residential portfolios was 8% and post crisis. They lowered it to 2. And it's been on the legislative agenda to eventually re address that. And it has now been readdressed.
It's in the budget for next year. And so, I don't think they've signed the law yet, but for it's reasonably certain that the real estate transfer tax will be going from 2% to 8% going forward, starting in 2021. For our existing portfolio, it has limited impact, again, we're we're a holder for perpetuity. So, you know, we wouldn't envision, you know, having, you know, tax liabilities on our balance sheet or anything like that. For the, acquisitions, it is an increased cost.
That will be reflected in our underwriting, whether or not, you know, the buyer absorbs it all or seller absorb some of it. You know, it's difficult really to know. We will underwrite it. It will be reflected in our cash flows and our anticipated yields and we'll price accordingly, but it is a near certainty that that tax change will be coming to pass as of January.
Do you expect any impact on cap rates?
There wasn't a noticeable impact on cap rates when they lowered it. Quite frankly, I don't see a meaningful push out of cap rates because of the incremental tax.
Okay. I guess that makes sense. And then maybe just lastly for me, maybe just a little bit more details on the Cairo's portfolio in terms of location and cap rate. If you can.
Yes, I mean, it's, it's six buildings. It a a a seller that that we know well that we we've bought from previously. So they're all in good condition. We think there's, you know, some some real value add opportunities that we can do within that portfolio to to drive the existing AMR on turnover. The going in cap rate on that was around 3.9, just under 3.9.
Okay.
And was this marketed or was this off market?
It was a little bit of both. It was part of a broader portfolio and then this sub portfolio was taken out, and then we bought the sub portfolio. But I would say it was marketed.
Okay, great. Thank you guys very much. I'll turn it back.
Thank you. The next question is from yamenshu Gupta from Scotiabank.
Just staying on the Cairo's portfolio. So 87% of the suites are liberalized. So what kind of rent growth are you underwriting on this property? And in general, has the rent growth expectations for liberalized properties, I mean, changed due to COVID?
Again, if you look at our, our turnover numbers, for, I guess, if you wanted to look at Q3 3, the turnover that we're getting on the liberalized suite, you know, the Turner uplift has still been, you know, quite positive. Pretty much in line with last year. So again, we are not seeing any negative impact in our ability to take suites that are turning over either on the regulated side or the liberalized side to take them to market. Again, we're or doing even better on the regulated suites as well. The Kyros portfolio, again, we do believe that there is embedded growth there, and we think that it would be overall accretive to the growth of the portfolio that we've been seeing so far.
Got it. Okay. And then overall portfolio occupancy, it was slightly down, on a sequential basis. What led to the change? I mean, I noticed there were both suites under renovation in the last quarter.
Is that the main reason there? And in general, what has been the COVID impact on those using demand?
Yes, I mean, honestly, I think last quarter was 98.2% and this year, this time it's 98 or 98.8. Now it's 98.4. So again, to me, that's not, a meaningful movement. Again, it could be at any point in time where we had a little bit more turnover. We've taken something offline.
Again, I think 60% of the vacancy right now currently is attributed to stuff offline for CapEx. So again, we've not seen a material impact yet, on our collections or on our occupancy. Driven from COVID. Again, I don't want to sound too confident, because COVID is still here, but year to date and certainly, you know, post Q1, Our collections have been very consistent. Our occupancy has been very consistent, less than 2%.
Of course, there's going to be some movement there, depending upon turnover is not a straight line scale. And again, taking things offline for CapEx measures as well, which again, we would have taken fewer things offline when, you know, we were, in, in phase 1 of COVID. Because we weren't able to, to to address them immediately. But now even though they've reimplemented some of the measures, construction and CapEx works in those things can still progress under the current restrictions.
Absolutely. And in terms of leasing trends, is there any indication in the the lands, for residents to prefer single family or multi family apartments because of COVID. And just curious, what percentage of your portfolio is townhouses or single family versus the traditional multifamily product?
Just under 25% is single family houses. Again, just, I mean, you've seen them in they're not necessarily standalone single family houses that that you would see in Canada or the US, but they are single family houses, single, parcels, but oftentimes they're connected, you know, row houses or terrace houses. We also have some very much single, standalone houses as well, but about 25% of our portfolio is what we call single family houses versus multi family units. Again, we've not seen a noticeable movement toward that dynamic versus our multifamily units. Again, when we're running at, you know, vacancy rates of less than 2 percent, there's not a lot of choice to be made there.
It's demonstrating that all of our product is still holding up and being very defensive, are both asset subclasses.
Sure. Thank you for the color. And maybe just on the IFRS valuation, I think there was some fair value gives recorded this quarter, was it only cap rate adjustments or did you change your overall NOI growth assumptions as well on the portfolio?
Yes. So sorry, go ahead. Go ahead.
No, go ahead.
Okay.
Yeah, so the investment properties did increase, and that's majority of it has to do with, some assumptions in terms of, the increases in stabilized residential NOI. And we did see a bit of cap rate compression, but otherwise, it was mainly driven by, the assumptions in NOI.
Got you. And maybe just last question for me. Philip, you mentioned in terms of pipeline you have looked at I think if I got it correct, $700,000,000 of product almost 3000 units. So just wondering, who are these seller groups now? And have you seen any distressed sellers or any motivated sellers because of COVID or is it, you know, nothing must have changed in terms of like the dynamics of Ideanomics.
Sure. And just going back to the valuation question and what Steve was saying about NOI, I mean, even in the context of, of COVID, I mean, we still see and expect going into next year to get very meaningful top line growth coming through and maintaining, as Stephen said, what we anticipate to be our, solid NOI margin, we definitely see NOI growth and we see that translating into, to earnings or FFO growth, you know, probably, in the high single digits. So again, it is challenging times, but the portfolio is holding up and we're still, optimistic about the way it's gonna form going into next year. And then coming back to your question, there is not distress selling. There is a high amount of volume.
I think a lot of that volume is perhaps some of the processes were slowed or delayed due to COVID. I think there's probably also some people they're trying to sell some product to before, the the tax change comes in that I think it was Kyle mentioned. But there's not distressed pricing out there. I think if anything, this asset class is proving, exactly what people that it's very defensive, but yet still offers objective and subjective, attractive top line growth and there are, there are buyers out there, including ourselves. And, there's a high volume.
There's other competitors, but we certainly are confident that we will get our fair share of that pipeline applying our underwriting rigor.
Sure. And maybe just, sorry, the last ones from me, how should we model income taxes for the next year? And when do you plan to put permanent financing on the Kayloos portfolio? And what kind of interest rates are you expecting?
So maybe I'll just address the income tax side. Just in terms of, we do expect probably higher income taxes compared to the current year, just because, the tax appreciation deduction that we arrive at, taxable income is a function of the municipal tax value. So, a lot of the properties have increased, quite quite a bit since we acquired it. So a lot of the tax appreciation that we would have, been able to utilize in the past, but likely you'll not be able to do that in the future. So we do see tax, taxable income going up.
But, however, like, in terms of, you know, when we look at effective tax rate is still very low compared to, the rate that we pay in the Netherlands. We are looking at ways to reduce tax income tax expense.
What do you expect to expect tax rate to be approximately Steven, what's the range?
Yes, I think it's around 5% to 8% is what we expect.
Sure. Thank you. Thank you. And anything on the permanent financing on cables?
Yes. I mean, that's going to
be a source of financing, in the very near term, I would say. And like Philip mentioned, we can do debt close to 1%, depending on duration. We're we're kind of targeting the 4 year term just given maturity profile, but that will we are actively talking to lenders right now and the price is very strong. Awesome.
Thank you. And that would include the door worth asset and the Carol's asset, I'm not sure.
Okay, sure. Thank you. Thank you for all the color and I'll turn it back. Thank
There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Burns.
Again, thank you all for joining us this morning. And if you have any further questions, please not hesitate to contact any of us at any time. Thank you again and goodbye.
Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you. The conference has now ended.
Please disconnect your lines at this time.