Good morning, ladies and gentlemen. Welcome to the First Quarter 2020 Results Conference Call. I would now like to turn the meeting over to Philip Burns. Please go ahead, Mr. Burns.
Thank you, operator, and good morning, everyone. We hope you are all staying safe and well during the challenging times of the COVID-nineteen pandemic. Before we begin, let me future financial 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 Coe.
After I provide an update on our operational progress during the quarter, Scott will give an overview of our financial results and position. Turning to Slide 4. Erez has had a profoundly transformational and progressive 1st year since it was formed on March 29, 2019. Our portfolio has increased substantially as we set out on our growth oriented journey, driving up our total asset value by 153 percent via acquisitions as well as through uplifts and market value, a testament to the quality of the assets in which we invest. This includes both our multi residential portfolio as well as our commercial portfolio, the ladder now representing less than 12% of our overall investment property value.
The significant growth to date in market capitalization and public float also externally validates fundamentals of our strategy in the future potential of the operating platform we have established alongside our partnership with CAPREIT. To remind everyone, CAPREIT is the property and asset manager for Erez and has had a presence in the Netherlands since its first acquisition in 2016. Its interests are fully aligned with Erez unit holder through their majority ownership of Erez. Slide 5 outlines a few highlights operating stands strong at 1,000,000,000, up a little more than 1,000,000 for the quarter, against a global backdrop of uncertainty. Also, the disposition of our Dusseldorf commercial property further streamlines our strategic focus on the European multi residential asset class.
We also closed on mortgage financing during 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 approximately 1,000,000 in liquidity that reinforces our conservative financial profile amidst current instability impacting global economy. We are proud to report strong operating results in such turbulent times with FFO per unit of and AFFO unit per unit of $0.03 for the first quarter of 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 the adverse impacts of the COVID-nineteen pandemic and protect the welfare of its people and their incomes.
In general, the focus has been to maintain as much as possible people's incomes by measures, which include employer wage contribution, small business loan extension, and government support for payments, even if they have experienced job disruption. Governments recently announced a roadmap for reopening the economy in the coming week month is positive and speaks to the efficacy for the measures which they have implemented in order to safeguard the well-being of the country and its citizens. Slide 7 provides a business update as it relates to COVID-nineteen. Highlighting not only the impact of the assistance measures provided by the government, but also the inherent strength of adult Dutch multi residential sector. DRAS received approximately 100% of residential revenue due for the month of April and residential collections so far in May, likewise, remains in line with our historical average collection rate.
Our residential occupancy also remain high with positive leasing activity continuing to date. With respect to indexation, we serve tenant notices to 95% of the port residential portfolio, across which the weighted average rental increase due to indexation was 2.4%. This is in line with the governments allowed, allowed inflation for the 2020 regulated unit index framework. Consistent with indexation increases being implemented by other large property management companies in the Netherlands. Due to restrictions on suite access in order to protect the safety of tenants and staff, we have deferred temporarily certain non repairs and maintenance and non discretionary capital expenditures where possible.
Our 2 office properties in Germany and Belgium continue to provide stable and consistent cash flows under long term leases with no indication that either we'll encounter financial difficulty to the COVID due to the COVID-nineteen pandemic in the future. We also are working on rental deferral programs with certain retail tenants in our mixed use property in the Netherlands, which contains a significant retail component on the first two floors, who are affected by the COVID-nineteen pandemic as they provide goods and services currently class Vita's nonessential. Notwithstanding this, commercial and retail occupancy holds strong at 100% as of May 11th. Moving to Slide 8. Internally, Erez's organizational structure via CAPREIT's IT platform has facilitated successfully the operational transformation inflicted by COVID-nineteen with minimal disruption to the business.
Due to the nature of Dutch multi residential sector itself, notably its customer and tenant focus, Our business requires rapidly evolving business intelligence surrounding the pandemic and the operating environment and the ability to communicate the impact to our tenants. In this context, Eris has been able to fully utilize CAPREIT's technology platform, allowing its staff in the Netherlands to seamlessly transition to working from home, also continuing to maintain open lines of communication with tenants and third party service providers. In addition to the benefits of having access advanced and modern software. Advanced Erez also include the pre existing ability to manage our tenant correspondence virtually, and the outsourcing of key functions to 3rd party, including leasing and servicing our suite. Despite the COVID-nineteen pandemic and its pervasive direct and indirect impacts, our property portfolio has proven to be robust and stable.
Looking more closely at Slide 9, you can see that our suites are nearly evenly divided between regulated and liberalized providing a balanced tenant profile and growth potential with rent, as well as the opportunity to liberalize more suite. Importantly, about a quarter of our current properties are located in the high growth urban markets of the Randstad, including the cities of Amsterdam, Rotterdam, Behay, view track. The rest of the portfolio is situated in smaller urban centers throughout the country. Slide 10 provides more detail on our current residential portfolio. Average occupied monthly rents were 8 at the end first quarter was 4.1%, which is high on an annualized basis compared to 13.2% turnover achieved in 2019.
However, this is partly a result of higher vacancy going into 2020. The portfolio is well diversified by number of bedrooms providing further balance while ensuring we meet the demand for smaller units as well as family. You can also see that approximately half of the current full current portfolio was constructed since 1980, providing an average age of under 40 years resulting in lower ongoing payers and maintenance costs and driving asset values higher. And with that, I will now turn the call over to Scott.
Thanks, Philip. Turning to Slide 12, you can see that the increasing our size and scale is having a significant and positive impact on our financial and operating results. For the first quarter of 2020 as compared to Q1 of 2019. I will note, however, that for Q1 2019, this period represented, before our RTO and before being a public company. And thus are not perfectly comparable.
So for Q1, twenty twenty, our operating revenues were up 2 14% on the contribution from our acquisitions as well as an increase in monthly rents in the stabilized portfolio. This revenue increase from acquisitions combined with lower operating costs on our stabilized properties drove a 2 24% increase in our NOI. With a much stronger consolidated NOI margin of 76%, reflecting the strength of our acquisitions and efficiencies in operating our existing assets. FFO and AFFO both increased by approximately 175%. However, we're impacted by higher current income tax and general administrative expenses during the quarter, both relating to the structure and growth of the business since inception.
And partially offset by an increase in NOI on our stabilized portfolio as well as 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 this quarter. As detailed on slide 13, our portfolio is generating solid organic growth through higher stabilized occupied AMR. Reduced operating costs and increased scale. Occupancy was strong and stable at 98.3%, Although lower than the same period in 2019, it represents a strong increase from Q4 2019 occupancy of 97.2%.
Which is largely due to improved occupancy and property acquired in the later half of twenty nineteen. Occupied average monthly rent on our stabilized portfolio increased by 4.5%, a result of contractual indexation turnover and the conversion of regulated suites to liberalize suites. Stabilized portfolio NOI for 2019 year end increased by 4.4%, driven by the higher operating revenues from increased monthly rents, as well as reduced operating expenses from lower R and M costs. And lower property management fees. Dollars.
This was a result of a higher vacancy we mentioned coming into the quarter. With Erez having concluded the quarter at a much stronger occupancy, This will drive better rental growth performance in quarter 2 and beyond. Finally, our weighted average interest rate continued to decrease down 34 basis points compared at the same time last year. Evinancing the strong spreads we are achieving between cap rates and interest costs. Notably, while debt markets are in somewhat fluid times today, despite the current economic circumstances, Our latest mortgage financing was secured in April at a weighted average mortgage interest rate of only 1.58%.
As we continue to scale the business, we remain focused on maintaining a conservative financial profile, as you can see on Slide 14. This has been especially important given the recent economic uncertainty onset by COVID-nineteen pandemic. Despite such uncertainty, 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 costs as a result of having secured financing to date by capitalizing the persistent low rates in the European Union. And a conservative 5 point 30 at March 31, which increased to $146,000,000 in the subsequent period as a result of our latest mortgage financing.
Inclusive of 100,000,000 in undrawn lines of credit with the remainder in cash. Even in assumed 60% loan to value ratio on long term mortgage financing, we have immediate capacity to acquire up to €365,000,000 in assets. But we will continue to ensure liquidity and leverage are a priority in these times. With $46,000,000 of cash, We do, however, the ability to grow, our asset base without impacting our leverage. With such ample liquidity during the first quarter of 2020, Erez paid monthly cash distributions of 0.00875 per unit.
Equivalent to on an annualized basis, which we intend to continue declaring subject, of course, to discretion of our board of trustees. Slide 15 provides more detail on our well staggered mortgage portfolio. With the nearest debt maturing not occurring until 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.
Thank you for your time this morning and I'll turn things back to Philip to wrap up.
In summary, the first quarter of 2020 has validated the strength and resilience of our operating platform, high quality and stability of our property portfolio safety and well-being of our staff and tenants. And in this context, we are proud that our operating results this quarter have proven such robustness in the value inherent in our asset class, as well as its ability to withstand such unprecedented circumstances. We remain confident in our long term of the COVID-nineteen pandemic that may materialize. We look forward to restarting our growth initiatives and executing on our stated objectives when able to do so prudently in this regard, we believe European Multi Residential Real Estate Market, our partnership with CAPREIT brings significant benefits to our unitholders, We are growing our portfolio at 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 positions provides the flexibility and resources to drive further growth, and we have in place 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.
You.
You.
The first question is from Brad Sturges from IA Securities. Please go ahead. Your line is now open.
Hi there.
Good morning.
Maybe just, I guess, starting with the potential impacts from the pandemic. In terms of the ability for the REIT to convert regulated suites to liberalize the pandemic delay or put on hold those plans, or do you still expect it to complete, similar level of conversions this year compared to last year?
So, so far, we've been able to maintain conversions in some of our CapEx programs. The lockdown measures announced by the Dutch governments were under the phrase that they used as an intelligent lockdown or stay at home if you can, but that still allowed us to do conversions because we weren't worried about the impact on our tenants or our service providers because by definition those flats are vacant. So that was able to proceed and we were also able to do some of our, discretionary CapEx like continuing work on the elevator programs and some of our Utrecht assets. So, coming out of the 1st quarter, We haven't seen a material impact on the conversions yet.
Okay. In terms of I guess, the turnover rate was a little bit more elevated in Q1, but how do you see that trending for the rest of the year? Does it kind of trend back to normalized or historical levels on an annualized basis?
Yes, I mean, as Scott has mentioned, that was due largely to the, probably higher vacancy that we came into the quarter with. But moving forward, we'd expect it to be more toward trends that we've witnessed over the last couple of years.
Okay. And then from an NOI margin perspective, I guess there was some commentary about lower R and M could be offset by clean costs. So is that fair to say that fairly stable margins overall?
Yes, I think that's a fair comment. Yeah. It's it's obviously, it's hard to gauge the absolute impact on R and M, working into this environment, but we think, you know, we're still looking at positive growth with the indexation, and and and the cost we think would stay relatively flat.
Great. Thank you.
The next question is from Jonathan Telcher from TD Securities. Please go ahead. Your line is now open.
What are your expectations on acquisition volumes as we get past this? Do you think there'll be more sellers in sort of the back half of the year?
For the first quarter, there was still a high volume of activity I think since end of Feb beginning of March, there's been announced over $800,000,000. That's a little bit concentrated in one large portfolio that traded with about $375,000,000, but there still has been quite a bit of activity, at cap rates consistent with or even lower than what we saw at the end of last year. Some of that process was known coming to the end of the year and the beginning of next year. So as we're sitting here today, that volume is probably slightly slower, but we still do see activity. Our primary focus certainly, for the 1st 2 months of the pandemic has absolutely been to protect the staff tenants and liquidity, and we didn't participate in some acquisitions intentionally.
Going forward, I would expect us to their pens and look at acquisitions going forward. But again, just given the overall capital markets environment, by definition, they would be on the smaller side, we wouldn't anticipate doing an acquisition that would require a capital raise, and we would want to do things of size although it would utilize some of our liquidity, it wouldn't use an excessive amount of our liquidity. So we will be open to things that are coming. We do have things in our sites now that people are bringing to market in Q2 and we will stay opportunistic and look for deals that we makes sense in the context of managing our liquidity as well.
Okay. And then just switching gears a little bit. The rent increases that you're putting through of 2.4%. Is that an average between the liberalized and the regulated suites?
Yes.
And do you have, I guess, an average for what, for what you're putting through for each of those separately?
I don't, we can provide it to but I don't know if I have it off the tip of my tongue, but given that we applied the same cap in both groups this year, We applied a 2.6% cap. I would expect those numbers to be closer than they would have been historically. For each group.
Okay. And just at the, the clearly, how many of those tenants are are not the ones that, weren't open. How many are now open that, the Dutch economy seems to be opening mostly this week?
I don't have the exact number, but yes, some of them have reopened. We have a dentist there that's reopened. We have a barbershop 3 opened. So we're dealing with the tenants. The vast majority by rent, has continued to pay because it's far groceries or essentially oriented or essential goods oriented stuff.
So they continue to trade. We did have about 10 tenants that we've been dealing with in terms of negotiating, relaxed terms. We have not waived any rent The most we've done is agreed to defer rent, but in some cases, we've done simple things such as simply allowing people to move to monthly payments instead of quarterly. So I do expect some of those tenants to be able to open up the suite, but given that it's Tuesday, I don't have confirmation exactly how many of those 10 have opened today.
Thank you. The next question is from Himanshu Gupta from Scotia Bank. Please go ahead. Your line is now open.
Thank you, and good morning. So just to follow-up on the rental indexation of 2.4% versus 3.5% last year. Was the reduction made due to lower growth in the liberal life sector or would you say the regulated sector also contributed to the decline?
I mean, it has to keep Again, I don't have the split. We can provide it to you separately, but last year, we would have taken advantage on the liberalized side of our leases of up to CPI plus 5, and our regulated would have been a different CPI plus 2.5 or plus 4 and always subject on the regulated side to, the maximum statutory regulatory rate of the rent. So again, applying the same two point 6 cap to everything this year. My expectation is that would have dampened the liberalized growth more than it dampened the regulated growth.
Got it. Okay. And do you expect, tenants to come back and request a dispute for lower rent growth? Typically what percentage of tenants actually fight back against your printing decision that is?
I mean, we would typically see something in the round. Range of 3% that would challenge it in some way. Half of those would be incorrect numbers that they would have been using and they would disappear quite quickly. The other half, we would, it would be a combination most of making small adjustment. And then there would be a very small few that we might ultimately go to the tribunal on, and we've never lost the tribunal.
We always make certain we have all of our, tools backed up with the right data demonstrating points, etcetera. This year, they've already received their notices because they needed to be out by April 30th. We have not had any, incremental number or percentage of tenant requests or challenges. Even which is a little bit of a first. We had some tenants recognizing through either inbound calls or emails that we did take a prudent and socially aware approach this year in limiting our increases.
So I don't expect us to have, incremental pushback from tenants versus any other year, but there's always some.
Right. So small challenges there. So, so in the context of this 2.4 percent rent indexation, how should we think about same property NOI growth profile? In the year ahead, and do you expect any incremental operating expenses as a result of, COVID or any impact on NOI margins because of that?
Hey, Matthew. So as Scott mentioned, we entered 2020 with higher vacancy, due to that year end. So rental revenue was slightly below what we expected in Q1, but which resulted in stabilized NOI growing by 4%. Given that vacancy has improved, since Q1, we do expect to improve going forward. In terms of your question regarding, some of the COVID 19 expenses, I don't think it's going to be that material.
To, to the business. We've, again, you've been to the properties. The common area is very small. We've set up some hand sanitizers stations in the common area and some, most of our properties. So, they're not large expenses, material to the R and M.
Got it. Okay. And then on
the Just as you mentioned, just to address the other part of your question regarding overall growth, I think if you look back in what happened in 2019, our growth was broken up into multiple components. One is the indexation, one is the, uplift on conversions to liberalize flat and the other is turnover. Coming out of Q1. Again, that isn't a promise for looking forward, but the uplifts from turnover and the uplifts from conversions are consistent with what we've seen in the past.
Got it. Okay. Okay. Thank you. And maybe last question for me on the debt financing, obviously, Kamiliant financing was very attractive.
Has the mortgage spreads or cost of debt gone up since, as a result of COVID crisis, or has the appetite for European Banks to lend to the residential sector or real estate sector change shut off?
Yes, we've been obviously in contact with lenders, but we're not actively pricing anything. So it's a little bit more conversational. They still seem to be very keen and have liquidity for multi res asset class, at fairly similar leverage levels to kind of the 60% what we were doing before. So we would expect, you know, maybe a little bit of conservative, but on leverage, and and little bit of a liquidity premium, today in the debt markets as far as pricing, but they still seem to be pretty close to where we've been doing our deals. So, you know, I don't think it will negatively impact our weighted average, effective interest rate So but, obviously, it's it's fluid situation in Canada.
We saw spreads blow out pretty hard. We didn't actually see that in Europe. But there is, there is a little bit of pressure there.
Thank you. The next question is from Matt Konack from National Bank Financial. Please go ahead. Your line is now open.
Hi guys. I just wanted to quickly go back on the margin front. This quarter was pretty good from a year over year standpoint. And it sounds like there was maybe some deferral of maintenance. Is the anticipation that margins will remain higher throughout the next a few quarters as a result of some of that ongoing deferral or should we expect it to be somewhat similar to what we saw last year?
I think we're gonna see look, what we provide in the range, I think we're going to see a, 75%, 76% margin overall. I mean,
a lot of the
there was a bit of deferral in terms of, the COVID-nineteen. But I think as the economy start opening it up, we will expect, some of the R and R costs to come back. So I think leaving at that margin is a, it's a right choice.
Okay. And then with regards to, income taxes this quarter, I don't think you adjust for the $1,000,000 of current taxes and the bulk of that seems like it was a capital gain. So what would be the sort of normal FFO impact from current taxes going forward for the rest of the year?
So I know we provided, some guidance at year end, and we were just, like, finalized a lot of the transfer pricing arrangements. So I would expect it will be on the higher end of the range. With that guidance, obviously, we withdrew the guidance given the COVID 19 pandemic. But, if we continue with the same path as year end and with the transfer pricing arrangements in place, I would expect it to be on the higher end of the range.
Sorry, can you just refresh me on the range?
Yes, I think we provided, 300 EUR600,000, but I would say it's going to be on
the higher end. Okay. And when you calculate FFO, though you don't strip out the capital gain, tax that you paid in current taxes. Correct?
We did strip it out, the, the, the component of the capital gain. For the current income tax.
Okay. And then with regards to acquisitions and looking at geographies, beyond the Netherlands. Can you speak to whether you'd still entertain acquisitions outside of the Netherlands? And then maybe also speak to whether there are opportunities to use your currency as opposed to issuing equity, but maybe share for share deals with would potentially beat up companies. I don't know if there are many.
It seems like multifamily has held in reasonably well, but Are there any scenarios that you're looking at on that front where you could maybe grow the company by merging with another public entity?
I mean, I think addressing the first question, first, we continue to believe that the CAPREIT platform and the Erez platform is suited to going outside the Netherlands. That I think when people have asked me that in the past, it was, there's still a runway for us in the Netherlands that that was probably a medium term, goal or expected strategy. And so I was still characterize that at medium term. There's nothing pressing they would see us go into another geography. When it comes to, using shares as currency.
It requires a willing buyer or a willing, issue of the shares and a willing acceptor of the shares. So I think we're still quite early, into seeing what the long term or sustainable impact is on people share prices and their discounts to NAV. We're not engaging in any of those conversations yet. I think everybody's still trying to digest what it really means on some sort of, more long term basis than 8 weeks in which we've all been grappling with the COVID pandemic. But it's always a possibility if people can't issue equity to consider other strategic opportunities, but nothing that's immediately pressing.
Okay. Thanks. I'm losing my infant son's attention span here. So I'll turn it back.
We only heard him a little bit from that, Dorne.
Thank
you.
Sir. Please go ahead. Your line is now open.
Thank you. Good morning, Phil and Scott. I'd like to congratulate you. I think it's great place to own real estate in this environment, and it's working out for you. I have a question about the Dutch.
Do you think that they will comply with the way that they want to reopen the country to prevent a second outbreak?
In other words,
are they the type of people that are going to follow all the rules?
Again, this is horrible generalization, but I think it's a positive generalization. So nobody will hopefully take offense by it, but the Dutch tend to be rule followers. Their lockdown was probably more open. Well, not probably, it was certainly more open than you would see in other places in Europe, whether it be France, Germany. It was intelligent lockdowns, stay at home if you could.
There wasn't a mandate that you cannot go to work. They just encourage people not to go to work. We actually had our office open on 2 stations Thursdays with very skeletal staff to deal with, urgent things that we couldn't do from home. And I think the Dutch did follow the rules, and that tends to be more in their nature. And my expectation is things are opening up now and they will continue to do that similar to, people always wonder about moral hazard and government support and what does that get people's put money in people's pocket and do they actually turn out to use that to pay their rent?
The Dutch culture as a culture that we find and confirmed by people on our board that are Dutch and people in our local offices that does people generally follow the rules and do what they say? And you can see that in March April where people pay their rent. So I'm optimistic that, they will follow the rules. And there's been reasonable support for the government in terms of how they've handled it so far. It's a coalition government as it always has been, very consensus space.
So in the context of how people are struggling with it right now. I think the Dutch government and the people are doing reasonably well.
I suspect that the shape of their curve supports what you're saying because they've done a great job bringing the number of cases down. That's it. Thank you.
Thank We have a question from Matthew Gabriel, a private investor. Please go ahead. Your line is now open.
Yes. Congratulations guys on a great quarter, especially in these trying times. I was just wondering if you could give us any update in regards to the REIT possibly graduating onto the TFX later this year.
Yeah. I think, that continues to be a strategic priority for us. I would say what we've done is we've put ourselves in a position, as far as additional requirements, regulatory wise, and engaging with with, you know, with council, etcetera. We feel we're we're in a position that we can do that. There's some advantages.
You know, when you are growing to some of the the more lax rules about being on the GSX V, but, we're, we're still moving forward on the basis that, the TSX is is, you know, our priority, for this this year, or early next year. So That
would be great. Yes. I think it just opened me up to a whole new class of investors. And, I look forward to, your second quarter. Thank you very much.
Great. And we can't agree more. Thank you.
Time. I would like to turn back the meeting over to Mr. Burns.
Well again, thank you for joining us this morning. And if you have any further questions, please do not hesitate to
contact
Thank you.