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. Philip 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 2 and our other regulatory filings. Joining me today is our CFO, Scott Kreier, and VP of Finance, Stephen Co. After I provide an update on our operational progress during the quarter, Scott will an overview of our financial results and position.
From inception on 29th March 2019, Eres' journey has been characterized by a formidable trajectory of accretive acquisitions. External growth via acquisitions was paused temporarily during the first half of twenty twenty by the emergence of the COVID-nineteen pandemic in this corresponding onset of economic instability internationally. But most recently, Erez has restarted its acquisition initiatives. As shown on slide 4, in the past 12 months, we grew our suite count by 1773 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 effective market value uplift which we have recognized every quarter to date since inception including a gain of $25,400,000 for the 1st 6 months of 2020 a testament to the 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 Erez, but also its majority unitholder, thereby fully aligning CAPREIT's interests with Erez unitholders. Slide 5 outlines a few highlights from the quarter and how we are achieving our stated objectives. The fair value of our investment property stands at 1,000,000,000, up 1,000,000 for the quarter, and we are excited to have recently entered into an agreement to acquire a multi residential property of 120 Residential Suite in the Netherlands were 1,000,000, 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 use the proceeds to repay our credit facility and promissory note borrowings, thereby making available million in liquidity as that period ends that reinforced our conservative financial profile as a defense against unknown future disruption.
We are proud to report strong operating of $0.03 and AFFO per unit of $0.03 for the second quarter 2020. That brings us to Slide 6, which outlines the extensive measures that have been put in place by the Dutch government in order to mitigate impacts of the COVID-nineteen 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, mall business loan extensions and government support for international trade to name a few. Such measures have assisted tenants during these challenging times to maintain The government's roadmap for reopening the economy was accelerated and speaks to the efficacy 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 turning 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 7, 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 around the STAD 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 8 provides more detail on our current residential portfolio.
Average occupied monthly rents were at the end of June, with high and stable occupancy of 98.8 percent. Our turnover was 7.5% for the 1st month of 2020, which is high on an annualized basis compared This, however, is partly a result of higher vacancy going into 2020 due to portfolios acquired towards the end of 2019. The Erez 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 dryer being higher asset values. And with that, I will now turn the call over to Scott.
Thanks, Philip. We are proud to continue to report strong operating results. 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 and M, insurance and advertising costs. In connection with the aforementioned reduction in vacancies coming into 2020. We also had a relatively minor impact from the increased bad debt expense relating to the retail portion increased by approximately 70% 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 a stabilized portfolio increased by 5% a result of contractual indexation, turnover and the conversion of regulated suites to liver life 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 between cap rates and interest costs, including on a 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% 50% as we continue to grow down the line. Lower interest cost 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 1,000,000 of immediate available liquidity as at June 30th. Inclusive of 100,000,000 Euro and undrawn lines of credit with the remainder sitting in cash. Using an assumed 60% LTV ratio on long term organ financing, we could have immediate capacity to acquire over 1,000,000 in assets. Accounting for the anticipated CAS acquisition of the Doorwood property, quarter 3 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 Philip to wrap up.
Thanks, Scott. In summary, such challenging times have provided Erez with the opportunity 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. Remain confident in our long term ability to safely and responsibly address and absorb the regulatory economic, social, and health impacts of the COVID-nineteen pandemic that may materialize going forward. With the gradual reopening of the Dutch economy and our recent graduation to Toronto Stock Exchange, We remain optimistic about the opportunities which the multi residential sector in Europe continued to provide and our ability to capitalize on such prospects.
In this regard, we believe that 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 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, we are building size and scale to drive value going forward. Our to drive further growth and we haven't placed an experienced management team in the seasoned board of trustees. Thank you for your time this morning, and we would now be pleased to take any questions you may have.
We will now take questions from the telephone lines. You. Session. The first question is from Jonathan Kelcher with TD Securities. Please go ahead.
First question, just on the the repairs and maintenance 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, some COVID related costs. It's approximately, EUR 50,000. That relates to the sanitization of heating services.
John, I'll just point out again. That, you know, last year was kind of a very low R and M run rate during the quarter. So it's kind of a little bit exacerbated when you do quarter over quarter. So that is part of the change, year over year.
Okay. I'd assume that $50,000 goes on into Q3, Q4?
It certainly goes on to the Q3.
Okay. And then just, and this might just on the revenue, the same property revenue was only up 2.5%. And I'm just trying to figure the math behind that given that your same property it was up over 100 basis points and your average monthly rents were up, 4 or 5%. So just curious on why that number is just 2.5.
There was some, just in terms of revenue, last year was a bit of a, a busy year. And there was some clean up you can say in the, that impacted the revenue number. So, which looks like there was a higher revenue, but there was some, adjustments that were made in the prior year. So, but if you look at going forward, I would just stick with the go forward the current year's revenue as a run rate.
Okay. That's helpful. And then lastly, just on on the acquisition that you've announced, when did you start looking at that and what's the current acquisition market like?
It actually we 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. And so we actually took one asset, 3 buildings out of it. Sort of as a semi off market with the vendor. So we really, we're looking at it at the very beginning of the year, but then we paused all of 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. So 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 terms of the
current market, I mean, it's been a fairly robust year especially speaking, there was a sort of a 6 week pause where some things that had just been launched were sort of elongated and something that were anticipated to be launched will probably, delayed, but by our calculations so far, first month of this year, there's been over 1,000,000,000 worth of properties brought to market, almost 6000 units. So that the ability, the supply of product is still there, even though we did take a pause. And there really has not been a noticeable there's been no softening in yields. Even some of the assets, I would say, and probably experienced flat or even slightly tighter yields to what we were seeing at the end of last year. So I don't want to dismissed COVID is 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 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 Himanshi Gupta with Scotiabank. Please go ahead.
Thank you and good morning. Just on the residential occupancy. So that increased compared to the last quarter. Just wondering what are the factors that led to the positive increase despite the COVID crisis? And 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 rents are still would be considered middle income sort of between €800 and our most expensive is still not getting into luxury. So we're very much in that middle segment. So 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. But we also saw continued positive leasing throughout the COVID crisis.
We did some RAS realization of our brokered network and brought in a new broker who's really performed well. And I think it's a real testament for the platform and the ground on the team that we're running where we are now at sort of only 1.2% vacancy. And we're also seeing, because the vacancy is so low, ability on turnover to perhaps maximize rents a little bit more than you would have seen in the comparable, 3 or 6 months periods of last year. Whether or not it's an overall trend, I hesitate to say, but our platform and our team, I think, are doing very well on the top line revenue side. And 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, but so far the government has already extended their measures into the autumn. So, I would expect us to stay sort of where we're at for the time being.
Got it. And then on the rent collection, I mean, obviously very strong, do you know what percentage of your tenants are on some kind of government assistance programs And as and when the stimulus stops or slows down, you said until autumn, do you expect any change in date of collection then?
Again, our collection rates have been very consistent throughout the period as they were before the COVID period. So we it's just been very much, steady as she goes. Again, once I 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, in June, now attending, you know, in October.
So maybe that is the reason, but we don't have visibility on that. But across all of our account receivable duration buckets, we've been able to trend those down slightly as well. So, I don't want to overlook, COVID in any way, and I do have some fear, particularly see resurgence everywhere, where 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. And then, just on the acquisition, the downwards property's $20,000,000 acquisition, So how competitive is the market at this dollar price range? And do you think better pricing is available at this range compared to the portfolio transactions because you know traditionally you have done mostly portfolio transactions?
Yes. I mean, we bought this in my mind at a very attractive cap rate, you know, 4.3 ish. That's very attractive. But I think that's more of a one off us being up optimistic. It's a single asset.
It's not in the round spad. 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, really liked that asset and the pricing on it was very, very attractive, but I don't think that's representative necessarily of single at deals versus portfolio deals. Again, I had seen that the cap rates remain steady or tightened slightly, which you've seen in our own portfolio, throughout the first half of this year. So I don't think there's necessarily amazing bargains out there. But I also we're going to be prudent whether we're bidding on a $100,000,000 deal or a $10,000,000 deal. I think if you get too much smaller, then you have like the the moms and pump single investors that can invest.
So 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. But 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. And maybe just final question for me. In terms of any legislation,
I
mean, in terms of any potential and freeze, is there any legislation in progress at the Senate level or any discussion in this regard? I mean, my question is how solid is the 2.4% spend indexation increase in the next 12 months? I mean,
in every country, I think globally there's discussions about how do you protect the tenants and in this environment, particularly the you are in the Netherlands. It's already supply constrained. And there was a discussion in parliament about rent freezes, earlier in the year, but the ministry of housing has very firmly pushed back recognizes it's more of a supply side problem. She also recognizes that if they were to implement something like that or 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 are used to be government owned their pseudo government entities now.
So she's very forcefully pushed back on a rent free. So I don't see that coming. She's been advocating other measures. We've discussed it in the past, potentially bringing in a cap on the contribution, that the woes value, the initial tax value can add to your points. 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.
Thank you guys.
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?
Yes, that's correct, Matt.
Okay. And then 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 the liberalized suites have been moving? Has there been a COVID impact mean, 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?
Yes, I mean, we've found, again, I'm trying to, in sure 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 6 month 3 months period to date versus last year. I think 1, it's because the assets that we bought are well low I think we continue to improve our leasing ability And 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 the elasticity of that price. So 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. And a noticeable way when you compare to what we were doing last year. But again, I would hesitate to say that the overall market is seeing, enormous rental lips 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 continue to work better as half of this year has allowed us to really bed in and remediate any of the operational items we'd set out for ourselves from the acquisitions that we did in September, October December.
Makes sense. You mentioned supply side has been an issue. Has COVID impacted supply at all on the multifamily side? I understand that you're the quasi government are providing some of that, but have they had employment issues or anything that would have slowed supply?
I mean, it was already slowing down in 2020 anyway because you have all of the green, the nitrogen legislation and all that. The permit were coming down, far below where they needed to be to be running at a rate that would start to reduce the shortage. And also, all people expect the shortage is getting worse. So then you had the incremental environmental legislation coming in. And then with the COVID virtually everything, truly shutting down for that 8 week period.
Nobody was submitting applications. And even if they were, the government wasn't able to process those planning applications. So again, I think it is it will be another, substantial underperforming year in terms of delivering new supply And again, I mean, the minister of housing, her name's Olegrin, she seems aware of that. And she is on record, stating that rent freezes, demand choose question would be very disruptive and counterproductive. To address the supply side.
So I don't see it getting better. I think this year, the shortage will increase, which again, plays, plays to the landlord, favor and certainly eretz's favor.
Fair enough. And last question for 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, etcetera, on mortgage debt?
No, I don't think so.
I think, we've seen, obviously, during, in all markets, during the initial phase of COVID, we saw you know, some potential pressure. But it seems like everything's kind of settled back in and we're we're looking at, similar LTVs to what we would have been doing before at 60% non amning and and with with great rates. So there was a 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 noise. This is time back in the office.
There are no further questions registered at this time. So 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. Please disconnect your lines at this