Good morning, ladies and gentlemen. Welcome to the Second Quarter 2020 Results Conference Call. I would now like to turn the meeting over to Mr. Phillip Burns. Please go ahead, Mr. Burns.
Thank you, operator, and good morning, everyone. Before we begin, let me remind everybody 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, Scott Cryer, and VP of Finance, Stephen Coe.
After I provide an update on our operational progress during the quarter, Scott will give an overview of our financial results and position. From inception on the 29th of March 2019, ERES' journey has been characterized by a formidable trajectory of accretive acquisition.
External growth via acquisitions was paused temporarily during the first half of 2020 by the emergence of the COVID-19 pandemic and the corresponding onset of economic instability internationally. Most recently, ERES has restarted its acquisition initiatives.
As shown on slide four, in the past 12 months, we grew our suite count by 1,773 units, up 46% from this time last year, a considerable increase, particularly given our pause on acquisitions, which I just mentioned.
This pause was implemented to protect our liquidity amidst increasing global uncertainty. Despite this, our asset value increased by an even greater 54% from the compounding effect of market value uplifts, which we have recognized every quarter to date since inception, including a gain of EUR 25.4 million for the first six months of 2020, a testament to the high quality of assets in which we invest.
The significant growth in market capitalization and public float to date also externally validates the fundamentals of our strategy and the future potential of the operating platform we have established alongside our partnership with CAPREIT, not only the property and asset manager for ERES, but also its majority unitholder, thereby fully aligning CAPREIT's interests with ERES unitholders.
Slide five outlines a few highlights from the quarter and how we are achieving our stated objectives. The fair value of our investment property stands at EUR 1.355 billion, up EUR 7.2 million for the quarter. We are excited to have recently entered into an agreement to acquire a multi-residential property of 120 residential suites in the Netherlands for EUR 20.5 million, which speaks positively to the gradual reopening and recovery of the Dutch and European economies.
We also closed on mortgage financing during the period at favorable interest rates in line with our low weighted average mortgage interest rate and used the proceeds to repay our credit facility and promissory note borrowings, thereby making available EUR 141 million in liquidity as at period end that reinforced our conservative financial profile as a defense against unknown future disruption.
We are proud to report strong operating results at such turbulent times with FFO per unit of EUR 0.033 and AFFO per unit of EUR 0.03 for the second quarter 2020. That brings us to slide six, which outlines the extensive measures that have been put in place by the Dutch government in order to mitigate the adverse impacts of the COVID-19 pandemic and to protect the welfare of its people and their incomes.
In general, focus has been to maintain as much as possible people's incomes by measures which include employer wage contributions, small business loan extension, and government support for international trade, to name a few. Such measures have assisted tenants during these challenging times to maintain their rental payments, even if they've experienced job disruption.
The government's roadmap for reopening the economy was accelerated and speaks to the efficacy of the measures which they implemented in order to safeguard the well-being of the country and its citizens, known as an intelligent lockdown approach. With the extension of many measures by several months until at least the fall, the government continues to prioritize the protection of tenant welfare while remaining prepared for any adverse turn in condition.
It must be noted that similar to many other geographies globally, there has been a resurgence in COVID cases in the Netherlands over the past weeks, but so far remain well below the peak earlier in the pandemic. To highlight some key aspects of our portfolio, on slide seven, you can see that our suites are nearly evenly divided between regulated and liberalized, providing balanced growth potential and rents, as well as the opportunity to liberalize more suites.
Importantly, over 40% of our current properties are located in the high growth urban conurbation of the Randstad, with approximately 25% 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. Slide eight provides more detail on our current residential portfolio.
Average occupied monthly rents were EUR 832 at the end of June, with high and stable occupancy of 98.8%. Our turnover was 7.5% for the first month of 2020, which is high on an annualized basis compared to the 13.2% turnover achieved in 2019. This, however, is partly a result of higher vacancy going into 2020 due to portfolios acquired toward the end of 2019.
The ERES portfolio is well diversified by number of bedrooms, ensuring we meet the demand for smaller units as well as for families. You can also see that approximately half of the current portfolio was constructed since 1980, providing an average age of under 40 years, resulting in lower ongoing repair and maintenance costs and driving higher asset values. With that, I will now turn the call over to Scott.
Thanks, Phillip. We are proud to continue to report strong operating results as we progress through 2020, despite such trying times, which have been particularly prevalent through the second quarter. As shown on slide 10, operating revenues and NOI have both increased significantly compared to the prior year period, predominantly driven by acquisitions, but also higher monthly rents on the stabilized portfolio.
Our NOI margin has also remained strong, albeit impacted by higher property and costs compared to the prior year period, including higher R&M, insurance, and advertising costs in connection with the aforementioned reduction in vacancy coming into 2020. We also had a relatively minor impact from the increased bad debt expense relating to the retail portion of our mixed-use property in the Netherlands. FFO and AFFO have increased by approximately 70% for the second quarter of 2020 as compared to quarter two of 2019.
However, we are impacted by higher current income tax and general and administrative expenses during the quarter. This is partially offset by an increase in NOI on our stabilized portfolio, and as well by acquisitions to date, which have been accretive.
FFO and AFFO per unit were significantly impacted by a greater weighted average number of units outstanding during 2020. As detailed on slide 11, our operating metrics have preserved against the backdrop of unprecedented challenges to conventional operating conditions.
Residential occupancy increased to 98.8% 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 5%, the result of contractual indexation, turnover, and the conversion of regulated suites to liberalized suites.
Stabilized portfolio NOI decreased slightly compared to the prior year due to several of the increased property and costs described earlier and partially offset by higher monthly rents. I'll remind that last year in Q2, we had a significantly and abnormally high NOI margin, thus the difference for this quarter.
Finally, our weighted average interest rate continues to decrease, down 30 basis points compared to the same time last year, substantiating the strong spreads we are achieving between cap rates and interest costs, including on our mortgage financing obtained during the quarter.
As we continue to scale the business, we remain focused on maintaining a conservative financial profile, as you can see on slide 12. This has been especially important given the recent economic uncertainty onset by COVID-19 pandemic.
Despite such uncertainty and in combination with the rapid and significant increase in the size of our asset base, we are seeing conservative leverage, which we expect to keep between 45% and 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 persistent low rates in the European Union and a conservative 4.9 year term to maturity for our mortgage portfolio.
In addition, we had approximately EUR 141 million of immediate available liquidity as at June 30th, inclusive of EUR 100 million in undrawn lines of credit, with the remainder sitting in cash. Using an assumed 60% LTV ratio on long-term mortgage financing, we could have immediate capacity to acquire over EUR 300 million in assets. Accounting for the anticipated cash acquisition of the Doorwerth property quarter three, this will slightly be reduced.
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 to maintain our smooth maturity profile in order to reduce granular risk. Thanks for your time. I'll turn things back to Phillip to wrap up.
Thanks, Scott. In summary, such challenging times have provided ERES with the opportunity to test the operating platform we have established and the team that manages it, which thus far has proven proficient. Our liquidity and risk profiles have remained robust as we continue to navigate through complex operating conditions, both prudently and strategically.
While remaining focused on the well-being of our staff and tenants as a first priority. We remain confident in our long-term ability to safely and responsibly address and absorb the regulatory, economic, social, and health impacts of the COVID-19 pandemic that may materialize going forward.
With the gradual reopening of the Dutch economy and our recent graduation to the Toronto Stock Exchange, we remain optimistic about the opportunities which the multi-residential sector in Europe continue to provide, and our ability to capitalize on such prospects. In this regard, we believe that ERES continues to offer a compelling investment opportunity.
The REIT provides a unique opportunity to invest in the fast-growing and attractive European multi-residential real estate market. Our partnership with CAPREIT brings significant benefits 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 trustees. Thank you for your time this morning, and we would now be pleased to take any questions you may have. Operator, over to you, please.
Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset prior to making your selection. If you have a question, please press star one on your telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while the participants register. Thank you for your patience. The first question is from Jonathan Kelcher with TD Securities. Please go ahead.
Thanks. Good morning.
Good morning.
First question, just on the repairs and maintenance that is obviously up this quarter. Was there anything in there that was sort of one time related to COVID, like extra cleaning or anything like that?
Yes, there were some COVID related costs. It's approximately EUR 50,000. That relates to the sanitization cleaning services.
Jonathan, I'll just point out again that last year was kind of a very low R&M run rate during the quarter. It's kind of a little bit exacerbated when you do quarter-over-quarter. That is part of the change year-over-year.
Okay. I'd assume that EUR 50,000 goes on into Q3, Q4?
It certainly goes on to Q3.
Okay. Just on the revenue, the same property revenue was only up 2.5%. I'm just trying to figure the math behind that, given that your same property occupancy was up over 100 basis points and your average monthly rents were up 4% or 5%. I'm just curious on why that number is just 2.5%.
Just in terms of revenue, last year was a bit of a busy year, and there was some cleanup, you can say, and that impacted the revenue number. Which looks like there was a higher revenue, but there was some adjustments that were made in the prior year. If you look at going forward, I would just stick with the go forward current year's revenue as a run rate.
Okay. That's helpful. Lastly, just on the acquisition that you've announced, when did you start looking at that, and what's the current acquisition market like?
The acquisition that we've already announced was part of a larger portfolio that was brought to market pre-COVID. It actually didn't end up trading, and then it was broken up into pieces. We actually took one asset, three buildings out of it, sort of as a semi off market with the vendor.
We really were looking at it at the very beginning of the year, but then we paused all of our acquisitions, and then as we came back to starting looking or starting to be prepared to look at doing acquisitions again, it's an opportunity that we were very familiar with. We have assets in the market. Again, I think we signed it July 31st. I don't know the exact date, but I'm guessing we started looking at that in mid-June.
Okay. In the current market.
In terms of the current market, it's been a fairly robust year. Honestly speaking, there was a sort of a six-week pause where some things that had just been launched were sort of elongated, and some things that were anticipated to be launched were probably delayed.
By our calculations, so far, first six months of this year, there's been over EUR 1 billion worth of properties brought to market, almost 6,000 units. There really has not been a noticeable, or there's been no softening in yields.
Even some of the assets, I would say, have probably experienced flat or even slightly tighter yields to what we were seeing at the end of last year. I don't want to dismiss COVID as not having impacted the market, but from the acquisitions and the supply side and the opportunity side, I still think there's a great runway for us.
Obviously, we need to be very cognizant of liquidity. We're certainly looking at things now, but we just need to be aware that we can't exhaust all of our liquidity on acquisitions given the remaining uncertainty around COVID and being honest, where our stock price trades versus NAV.
Okay. That's helpful. Thanks. I'll turn it back.
Thank you. The next question is from Himanshu Gupta with Scotiabank. Please go ahead.
Thank you, good morning.
Good morning, Himanshu.
Good morning.
Just on the residential occupancy, so that increase compared to the last quarter. Just wondering, what are the factors that led to the positive increase despite the COVID crisis? In general, do you think market occupancy is trending differently for Randstad versus non-Randstad regions, or maybe liberalized versus regulated categories?
I don't think we've seen a noticeable bifurcation. Keeping in mind that our average renter still would be considered middle income, sort of between EUR 800 and EUR 900. Our most expensive is still not getting into luxury. We're very much in that middle segment. We're seeing very strong occupancy across all of our segments.
I think as Stephen has said, as we've discussed before, some of our occupancy uplift was just getting back to what we think is a more normal run rate because we started the year a bit high. We also saw continued positive leasing throughout the COVID crisis. We did some rationalization of our broker network and brought in a new broker who's really performed well.
I think it's a real testament to the platform and the ground on the team that we're running it where we are now at sort of only 1.2% vacancy. We're also seeing, because the vacancy is so low, an ability on turnover to perhaps maximize rents a little bit more than you would have seen in the comparable three or six month periods of last year.
Whether or not it's an overall trend, I hesitate to say. Our platform and our team, I think, are doing very well on the top line revenue side. There's nothing that I see that would cause a dramatic impact on that. We remain cautious of any lag on effect that might happen or delayed effect that might happen from COVID. So far, the government has already extended their measures into the autumn. I would expect us to stay sort of where we're at for the time being.
Got it. On the rent collection, I mean, obviously very strong. Do you know what the percentage of your tenants are on some kind of government assistance programs? As and when the stimulus stops or slows down, you said until autumn, do you expect any change in rate of collection then?
Our collection rates have been very consistent throughout the COVID period as they were before the COVID period. It's just been very much steady as she goes. On one side, I think it's just the place where our rents are positioned very much in the middle income market. The biggest government program that helps is really the wage subsidy by small medium sized enterprises.
It was originally going to end in June, now it's ending in October. Maybe that is the reason, we don't have visibility on that. Across all of our account receivable duration bucket, we've been able to trend those down slightly as well. I don't want to overlook COVID in any way.
I do have some fear, particularly you see resurgence everywhere, whether there's a lag on effect, but so far our portfolio has been incredibly defensive and the collections have come in consistent with past performance.
Got it. Just on acquisition, the Doorwerth property, EUR 20 million acquisition. How competitive is the market at this price range? Do you think better pricing is available at this range compared to the portfolio transactions? Traditionally you have done mostly portfolio transactions.
Yeah. We bought this, in my mind, at a very attractive cap rate, 4.3-ish. That's very attractive. I think that's more of a one-off. It's being opportunistic. It's a single asset. It's not in the Randstad. I think there's people out there that wouldn't be interested in it because it's not great for privatization, but we already have assets nearby.
It's easy for us operationally to integrate. It's high occupancy. We really like that asset, and the pricing on it was very attractive. I don't think that's representative necessarily of single asset deals versus portfolio deals. Again, I had seen the cap rates remain steady or tighten slightly, which you've seen in our own portfolio throughout the first half of this year. I don't think there's necessarily amazing bargains out there.
We're going to be prudent whether we're bidding on a EUR 100 million deal or a EUR 10 million deal. I think if you get too much smaller, then you have the moms and pops, single investors that can invest. I think it's a robust liquid market across the size profile, but you just need to be prudent in the way that you underwrite it, and you have to assume there's going to be competition. I think in the 18 months since inception, we've demonstrated our ability to grow and to at least get our appropriate share of that deal pipeline.
Got it. Maybe just final question from me in terms of any legislation. I mean, in terms of any potential end freeze. Is there any legislation in progress at the Senate level or any discussion in this regard? My question is simply, how solid is the 2.4% rent indexation increase in the next 12 months?
In every country, I think globally, there's discussions about how do you protect the tenants in this environment, particularly in the Netherlands, it's already supply constrained. There was a discussion in parliament about rent freezes earlier in the year. The Ministry of Housing has very firmly pushed back on that because she does not believe that that's the right approach.
She recognizes it's more of a supply side problem. She also recognizes that if they were to implement something like that, it would have dramatic impact on the investment that people are prepared to put into the assets. They also would have a dramatic effect on the housing associations, which used to be government-owned. They're pseudo-government entities now. She's very forcefully pushed back on a rent freeze. I don't see that coming. She's been advocating other measures.
I think we've discussed it in the past, potentially bringing in a cap on the contribution that the WOZ value, the municipal tax value, can add to your point. If something like that comes in, it doesn't have a major impact on our portfolio. I think that would be more likely than a rent freeze as I see it today.
All right, cool. Thank you. Thank you for all the color, and I'll turn it back. Thank you, guys.
Thank you. Once again, please press star one at this time if you have a question. The next question is from Matt Kornack with National Bank Financial. Please go ahead.
Hi, guys. Just wanted to quickly clarify one of the responses to Jonathan's question with regards to same property revenue. Should we be focusing more on the occupancy gains and the rent growth on the same property portfolio? There's no noise in those figures, correct? The noise would be in the revenue for the prior year period for the same property portfolio.
Yeah, that's correct, Matt.
Okay. With regards to turnovers, you got some pretty good rents on turnover. I assume that speaks to market strength, particularly in the liberalized conversions. Can you speak to maybe where market rents on liberalized suites have been moving? Has there been a COVID impact? We've seen a bit of rent issues here in Toronto on the higher end, but I'm wondering what rents have done on a market basis in the Netherlands.
Yeah. We've found, again, I'm trying to ensure that we remain sensitive to the dynamic that we're in, but you can look and see that our turnover uplifts, either across the regulated, across the liberalized, or across the conversions, have outperformed both in the six month and the three month period to date versus last year.
I think, one, it's because the assets that we bought are well located. I think they're in high demand. I think we continue to improve our leasing ability, with our occupancy being as tight or as high as it is, or our vacancy being as tight as it is, it also gives us the ability to increase testing elasticity of that price.
We continue to see the ability in our markets, and in our assets, particularly on the regulated to liberalized conversions, to test the pricing, and you're seeing that come through in a noticeable way when you compare to what we were doing last year. Again, I would hesitate to say that the overall market is seeing enormous rental uplifts at the moment. I just think our conversion program works well.
I think us rationalizing our broker relationship has been working well, and the team just continues to work better as we get more mature. As we also have had so many acquisitions, the one good thing, if you will, the first half of this year has allowed us to really bed in and remediate any of the operational items that we'd set out for ourselves from the acquisitions that we did in September, October, and December.
Makes sense. You mentioned supply side has been an issue. Has COVID impacted supply at all on the multifamily side? I understand that the quasi-government entities are providing some of that, but have they had employment issues or anything that would've slowed supply?
It was already slowing down in 2020 anyway, because you have all of the green, you know the nitrogen legislation and all that. The permits were coming down far below where they needed to be, to be running at a rate that would start to reduce the shortage. All people expect that the shortage is getting worse. You had the incremental environmental legislation coming in, and then with the COVID, virtually everything truly shutting down for that eight-week period.
Nobody was submitting applications, and even if they were, the government wasn't able to process those planning applications. Again, I think it will be another substantial underperforming year in terms of delivering new supply. Again, the Minister of Housing, her name is Ollongren. She seems aware of that, and she is on record stating that rent freezes, to Manshu's question, would be very disruptive and counterproductive to address the supply side.
I don't see it getting better. I think this year the shortage will increase, which again, plays to the landlord favor and certainly ERES's favor.
Fair enough. Last question from me. In terms of underwriting on the financing side, any change in approach on lenders in terms of acquisitions, in terms of interest rates versus LTVs, et cetera, on mortgage debt?
No, I don't think so. I think we've seen, obviously in all markets during the initial phase of COVID, we saw you know, some potential pressure. It seems like everything's kind of settled back in, and we're looking at similar LTVs to what we would've been doing before at 60% non-amortizing and with great rates. There was a quick little moment in time where there was some pressure on that, but it seems to be back in line.
Okay, great. Thanks guys. No baby noises this time. I'm back in the office.
Good stuff.
Thank you. There are no further questions registered at this time, I'll turn the meeting back over to Mr. Burns.
Once again, thank you everybody for joining us, and we wish you to have a great day.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.