Good morning, ladies and gentlemen. Welcome to the fourth quarter 2019 results conference call. I would now like to turn the meeting over to Mr. Burns. Please go ahead.
Thank you, operator, and good morning, everyone. Before we begin, let me remind everyone that during our conference call this morning, we may include forward-looking statements about our future financial and operating results. I direct your attention to slide two and other regulatory filings. Joining me today is our CFO, Scott Cryer, and our 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. Turning to slide four, just to remind everyone, ERES was formed on March 29 through the reverse takeover of European Commercial REIT. The transaction combined CAPREIT's 2,000+ rental units in the Netherlands with European Commercial REIT's three commercial properties, creating Canada's first European-focused multi-residential REIT. Importantly, CAPREIT is the property manager and asset manager for ERES, bringing their proven value-enhancing platform to the REIT.
CAPREIT has had a presence in the Netherlands for some time and is fully aligned with the interests of all ERES unit holders through their majority ownership of ERES. Slide five outlines a few highlights from the quarter and how we are achieving our stated objectives. Our main goal is to rapidly and accretively increase our size and scale in our target markets. During the fourth quarter, we acquired another two portfolios comprising 516 residential suites, ancillary commercial space, and a garage in the Netherlands, increasing the fair value of our total portfolio to over EUR 1.3 billion at December 31st. Subsequent to year-end, we closed on the sale of the commercial property located in Düsseldorf, Germany, for a total gross proceeds of approximately EUR 17 million at an implied capitalization rate of just under 4%.
To fund our growth, we completed an offering of 30.9 million trust units in December, raising approximately EUR 95 million or approximately CAD 138 million. The proceeds were in part used to repay EUR 50 million of our new one-year bridge revolving credit facility and EUR 23 million of our revolving credit facility, thus increasing our future acquisition capacity and flexibility. With our portfolio growth over the last 12 months, we generated solid accretive growth in both FFO and AFFO per unit for the year 2019, rising 15% and 2.6% respectively, despite the 73% increase in the weighted average number of units outstanding compared to last year. As seen on slide six, we continue to increase the size and scale of our portfolio and look for further growth in the quarters ahead.
With our property purchases since inception, our residential portfolio totaled 5,632 suites at December 31st, well located in growth markets across the Netherlands. We also own commercial properties in Belgium, Germany, and the Netherlands. In total, the fair value of the portfolio was EUR 1.35 billion or CAD 1.96 billion at December 31st. As previously mentioned, subsequent to year-end, we closed on the sale of the commercial property in Düsseldorf, Germany. This disposition is in line with our pursuit of our multi-residential growth strategy as we continue to make strategic alignments and capitalize on opportunities to enhance the value of ERES. Looking more closely at our residential portfolio on slide seven, you can see that our suites are nearly evenly divided between regulated and liberalized suites, providing balanced growth potential and rents, as well as the opportunity to liberalize more suites.
Importantly, about a quarter of our current portfolios are located in the high-growth urban markets of the Randstad, including the cities of Amsterdam, Rotterdam, The Hague, and Utrecht. The rest of the portfolio is situated in smaller urban centers throughout the country. Slide eight provides more detail on our current residential portfolio as well. Average occupied monthly rents were EUR 825 at the end of December, with a high and stable occupancy of 97.2%. The 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 repairs and maintenance costs and driving higher asset values. As mentioned, our portfolio also includes commercial properties in Germany, Belgium, and the Netherlands, as detailed on slide nine.
With an occupancy of just under 100%, a weighted average lease term of 5.7 years, and low fixed interest rates, these properties are expected to provide solid and stable cash flows going forward. With that, I will now turn the call over to Scott.
Thanks, Phillip. Slide 11 highlights another strong quarter of acquisitions, along with the spread between the cost of our acquisitions and the fair value of these properties at December 31st, 2019. As you can see, with our all-in cost of approximately EUR 173.7 million, the fair value of these purchases has increased to EUR 174.8 million, a gain of more than EUR 1.1 million in the fourth quarter. This gain speaks to the strength of the residential markets in the Netherlands and confirms that we are buying the right kind of residential properties. Turning to slide 12, you can see that the increase in our size and scale is having a significant and positive impact on our financial and operating results. For the 2019 year-end, operating revenues were up 100% 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 stabilized properties, drove 114% increase in our NOI, with a strong consolidated NOI margin of 76%, reflecting the strength of our acquisitions as well as the commercial property contribution. FFO per unit increased by 15% for the 12 months ended compared to the prior period, due to higher NOI on the same property basis and accretive acquisitions, which resulted in large spreads against mortgage rates. AFFO, on the other hand, increased by 2.6% compared to the prior year, as non-discretionary CapEx in 2018 was based on actual spend of only EUR 72,000 or EUR 72 per suite, whereas 2019 is based on non-discretionary CapEx reserve of EUR 593 per suite. As detailed on slide 13, our portfolio is generating solid organic growth through higher stabilized occupied AMR, reduced operating costs, and increased scale.
Our residential suite count more than doubled in 2019 due to the significant increase in the size of our portfolio resulting from our acquisitions over the last 12 months. Occupancy was strong and stable at 97.2%. The decrease compared to last year was primarily due to acquisitions during the third and fourth quarters of 2019, which had slightly lower occupancies than the rest of the portfolio when brought in. Occupied average monthly rents on our stabilized portfolio increased by 4%, a result of contractual indexation and renewal uplifts, along with our operating strategy of maximizing in-place rents. Stabilized portfolio NOI for the 2019 year-end increased by 11%, driven by higher operating revenues from increased monthly rents, as well as reduced operating expenses from lower R&M costs and lower property management fees.
Finally, our weighted average interest rate continued to decrease, down 38 basis points at year-end compared to the same time last year, and further supporting the strong spread we are seeing between cap rates and interest costs. Now turning to slide 14, we dive into more details on the general administrative costs during 2019 and what we expect in 2020. We have also provided additional information in the MD&A regarding our unit-based comp and income tax spend estimates for 2020. The G&A costs were higher in the fourth quarter compared to prior quarters. The increase was primarily due to higher year-end tax audit, third-party valuation, and other costs in connection with the REIT's first year of operations, of which a majority of the expenses were recognized in the fourth quarter.
Looking into 2020 year, based on the existing portfolio properties, we expect the G&A to fall within a EUR 7.8 million-EUR 8.5 million range. As we continue to scale the business, we remain focused on maintaining a conservative financial profile, as you can see on slide 15. Despite the rapid and significant increases in the size of our asset base, we are seeing conservative leverage, which we expect to keep somewhere between 45% and 50% as we continue to grow, lower interest costs as a result of persistent low rates in the European Union, and a conservative 5.3 year term to maturity for our portfolio. As previously indicated, the undrawn portion of our revolving credit facility and bridge facility provides us with approximately EUR 74 million in liquidity heading into the 2020 period.
Using an assumed 60% LTV ratio on long-term mortgage financing, we have immediate capacity to acquire up to EUR 185 million in assets. Slide 16 provides more detail on our mortgage portfolio. We continue to stagger the maturity profile of our mortgages with nothing due until 2022. As we continue to grow, we will ensure we continue to have a smooth maturity profile in order to reduce renewal risk. I thank you for your time this morning, and I'll now turn things back to Phillip to wrap up.
Thanks, Scott. In summary, 2019 was a busy and successful year for ERES as we increased the size and scale of the portfolio and generated strong and accretive growth in all of our key performance metrics. As we continue to grow and execute on our stated objectives, we believe ERES offers a compelling investment opportunity. The REIT provides a unique opportunity to invest in the fast-growing and attractive yield spreads with strong and highly accretive organic and external growth opportunities. We 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.
Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift the handset before 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 for questions. Thank you for your patience. The first question is from Brad Sturges from iA Securities. Please go ahead.
Hi, good morning.
Morning, Brad.
Thanks for the color on the G&A guidance. Just want to clarify on that. That's based on the portfolio composition today as a run rate?
That's right. Yeah. In our first year of operations, obviously, we've really been operating for nine months, but a lot of these costs, audit and tax compliance, et cetera, are really 12 months worth of costs. We just wanted to make sure people had a good sense of what next year looked like. Yeah, that doesn't include any really going forward. Yeah.
The plan is still to move the TSX. Would that cost be baked into that guidance number?
No, that cost is not baked into that number. There will be disclosure around that one-time cost, when we do go up. It's approximately around CAD 200,000, if you need that cost.
You would bear that cost in the first quarter?
It will be when we graduate, but it's a non-recurring cost. It's a one-time fee for graduating. I would say expect it in the second half of the year.
Second half, okay. In terms of expectations for rent growth on renewal, I guess you're in the renewal process now. Any thoughts on where you think that could land this year?
We are going through the process now. Again, I think our overall rental growth target remains unchanged at or near 4%. As you all know, it's generally a CPI plus environment. CPI last year for indexation purposes was 1.6%. The government's announced the CPI metric for 2020 at 2.6%, so that's a positive tailwind there. Across the board, we still expect to be at or near 4% for our portfolio growth for the year.
Okay, great. Thank you.
Thank you. The next question is from Jonathan Kelcher from TD Securities. Please go ahead.
Thanks. Good morning.
Morning, Jonathan.
First, on acquisitions, are you guys still seeing a lot of opportunities?
Yeah, we definitely are. I think at the last call, I might have mentioned toward the end of the year, it slowed down a bit. In total, we reviewed well over EUR 1 billion just post-RTO. That was quite busy in the summertime and going into the fall. Now as we're sitting here today, the acquisition pipeline and opportunities has increased quite substantially. Where on the table today, we're reviewing over EUR 500 million worth of acquisitions. We feel very confident about the product being out there and the opportunity to continue to grow.
Okay. Just turning, you guys have, I guess 33 suites undergoing renovation and 31 that you just finished. How many of those are being converted or liberalized?
I don't have the number off the top of my head, Jonathan. We can send you an email on that.
Generally speaking, though, what renovations would you be doing on suites that aren't being liberalized?
It can be minor upgrades. We could be putting in a new boiler or we could be putting in new appliances, much more minor. It just depends upon how long the tenant has been in place.
Okay. Do you have any expectations, like, I guess turnover?
Range sort of flat in the 12%-13% range with what we would've seen over the past couple of years. Although it is slightly up, I don't see a meaningful movement in that turnover rate.
Okay, thanks. I'll turn it back.
Thank you. Once again, please press star-
The asset was delivered in 2012. The market rental growth, since that period of time has been quite high, as those assets which have a higher turnover rate, just given that it's in the Amsterdam market by nature, we see an opportunity to bring a lot of those flats that were rented earlier in the asset's life to get substantial gains. We feel very confident about the previous owner actually was doing some minor upgrades, like electronic remote controlled heating control and things of that nature, all pretty insignificant CapEx, if you will, on the term. They were getting meaningful uplifts from that. Again, that's one of the reasons why we think there's a lot of opportunity there.
We're reviewing right now whether it's even necessary to do those minor uplifts, but we're talking handfuls of money, not the 10s and 20s of thousands euro that you would've seen in some of our conversion-type CapEx programs.
Got it. Probably on the same lines, how does the growth profile differ for, let's say, Kameleon acquisition compared to, say, the Eagle Portfolio? If I remember correctly, Eagle was non-Randstad, mostly regulated. What's really the delta between these two kinds of portfolios in terms of your growth expectations?
Again, I can't tell you the exact delta between those two portfolios, but as you rightly say, Eagle is a portfolio that's outside the Randstad, and the cap rate we paid on that would be significantly higher than the cap rate we paid on the Kameleon. For us, we're always looking for a good balance, having good high cash-draining assets, even if those we expect to be stable, less growth, we pay less for those. Having a mix of the higher growth assets, and again, on a cap rate basis, on the resi-only side, we would've paid a meaningful higher price for the Kameleon asset, and we want to have a blend of both of those.
Okay. That's fair enough. Maybe just on the scalability of the platform, how big is the team now in Amsterdam? What size of new acquisitions can you handle from a property management and leasing perspective? I know you mentioned the pipeline looks pretty strong.
The team is just over 40 in the Amsterdam office, the local team. In terms of, not in any negative way, but more on the back office side, we are completely scalable, and I would expect we could come close to doubling the size of the portfolio before we would have to meaningfully address that. We will need to, if we grow significantly more, bring on more staff from a property management perspective. I think a lot of you guys met our two portfolio managers over there. If we grow, say, another 50%, we would probably bring on a third property manager in terms of an operational manager. Actually, it's somebody we've already identified internally. We would need to bring on more staff below that level as we continue to scale.
Again, it's supported by the CAPREIT platform, and from a costing point of view, it's really baked into that asset and property management fee. Scalable, but there's no lumpiness in cost. Pretty linear.
Absolutely. When you said you're looking at EUR 500 million of acquisitions, is that EUR or is that USD? Do you think still the pension funds are the biggest seller in this market?
It is euro. It is a mix of pension funds, as well as there are financial sponsors that continue to come to the end of their investment period and are looking to onsell those properties, not in a negative way, but to a cheaper cost of capital, a more permanent cost of capital, which fits perfectly into the ERES strategy.
Got it. Maybe the last question on the financing front. Can you remind if you have put permanent financing on Kameleon properties? In general, what kind of financing rates are available in the market right now?
For the Kameleon mortgage, we're still working through that process, but this one will most likely come in around after Q1. We're looking at the financing rates on the retail component will be approximately 1.2% on a four-year, and the residential component will be 1.4% on a seven-year term.
Okay. Thank you. Is that a good run rate, or do you think it can vary depending upon the future property acquisitions?
It will definitely vary from the acquisition type, based on the acquisitions that we make. For EUR 300,000-EUR 600,000, it's approximately correct on the stable portfolio going forward. Again, if there's new acquisitions and if we make share acquisitions from that perspective, there could be additional income tax. At that time, we'll most likely disclose that to you guys.
Historically, we've been very successful in structuring our acquisitions to minimize the tax as much as possible.
Sure. Thank you, guys. I'll turn it back.
Thank you. The next question is from Dean Wilkinson from CIBC. Please go ahead.
Thanks. Morning, everyone.
Morning.
Morning.
Welcome.
Just a question for you just regarding sort of scale and whatnot that Himanshu touched on. You've kind of hit a point where I wouldn't say maybe critical mass, but you're at a point where you've got a substantial portfolio now in the Netherlands. In the context of the E in ERES, have you looked at other markets at this point, or is there enough of a growth runway that you're just going to sort of stay where you are for now, or are there other opportunities, and how big would they be?
A couple of different ways to answer that. Of course, the E is not an accident. Again, when we can look at the opportunity, again, I wouldn't expect us to win them all, but if we have over EUR 500 million of acquisition opportunity in front of us now, and we're only in February in the Netherlands, we think the Netherlands, there's still a lot of room to run there. The opportunity continues to be as compelling as it was when we first went there. Some of the reports are now coming out year-end in terms of the demographics and the real estate fundamentals. Housing shortage is getting worse, et cetera. Again, there is demonstrably available product. Having said that, I would say, looking outside of Europe, we all, CAPREIT and myself, have significant experience outside of the Netherlands.
We think there are interesting opportunities there as well, but it's not a primary focus for us yet.
Could you identify any of those markets at this point, or is it too early?
The German market is an attractive market in terms of its demographics there. I think France is an attractive market, its demographics there. The things that we see in the Netherlands are broadly happening everywhere in terms of urbanization, aging, household unit requirements increasing, et cetera. There's variability in terms of the cap rates in those places, but you can finance with similar debt rates.
Right.
Again, that is attractive for us. Again, I would say that our immediate focus very much continues to be on the Netherlands.
Okay, great. I'll hand it back. Thanks, guys.
Thank you. There are no further questions registered at this time. I'd now like to turn the meeting back over to Mr. Burns.
Again, thank you, everybody, for joining us this morning. If you have any further questions, please do 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, and we thank you for your participation.