Good morning, ladies and gentlemen. Welcome to the 4th 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 2 and other regulatory filings. Joining me today is our CFO, Scott Kreyer and our VP of Finance, Stephen Cove. 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. Just to remind everyone, Eres was formed on March 29 through the reverse take over of European commercial REIT. The transaction combined CAPREIT's 2000 plus rental units in the Netherlands with European commercial REITs, 3 commercial properties, creating Canada's 1st European focused multi residential REITs. Importantly, CAPREIT is the property manager and asset manager for Erez, bringing their proven value enhancing platform to the REIT. CAPREIT has had a presence in the Netherlands for some time and is fully in line with the interest interest of all Erez unit holders through their majority ownership in Erez.
Slide 5 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 2 portfolio comprising 516 Residential Suites, ancillary commercial space and a garage in the Netherlands, increasing the fair value of our total portfolio to over one point 1,000,000,000 at December 31. Subsequent to year end, we closed on the sale of the commercial property located in Dusseldorf, Germany, for a total gross proceeds of approximately $17,000,000 and an implied capitalization rate of just under 4%. To fund our growth, we completed an offering of 30,900,000 trust units in December, raising approximately 1,000,000 or approximately CAD 138,000,000.
The proceeds were in part used to pay, repay $50,000,000 of our new 1 year bridge revolving credit facility and $23,000,000 of our revolving credit facility, thus increasing our future acquisition capacity and flexibility. And with our portfolio growth over the last 12 months, we generated solid creative growth in both FFO and AFFO per unit for the year 2019, rising 15.6% respectively, despite the 73% increase in the weighted average of units outstanding compared to last year. As seen on Slide 6, 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 632 Suites at December 31, well located in growth markets across the Netherlands. We also own commercial properties in Belgium, Germany, the Netherlands.
In total, fair value of the portfolio was 1,350,000,000 or CAD1.96 billion at December 31, As previously mentioned, 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 7, You can see that our suites are nearly evenly divided between regulated and liberalized suites, providing balanced growth potential in 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 Butjeck. The rest of the portfolio is situated in smaller urban centers throughout the country.
Slide 8 provides more detail on our current residential portfolio as well. Average occupied monthly rents were December with a high and stable occupancy of 97.2 percent. Portfolio is well diversified by number of bedrooms, ensuring meet demand for smaller units as well as for families. You can also see that approximately half of the current portfolio was constructed since 1980 provided 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 9.
With an occupancy of just under 100 percent, a weighted average lease term of 5 point 7 years and low fixed interest rates These properties are expected to provide solid and stable cash flows going forward.
And with that, I will now turn the call over to Scott. Thanks, Philip. 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 31, 2019. As you can see, with our all in cost approximately $173,700,000. The fair value of these purchases has increased to $174,800,000.
A gain of more than EUR 1,100,000 in the 4th 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. 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 percent, 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 a same property basis and accretive acquisitions, which resulted in large spreads against mortgage rates. AFFO on the other hand increased by 3% compared to the prior year, as non discretionary CapEx in 2018 was based on actual spend of only EUR72,000 or EUR 72 per suite. Whereas 2019 is based on non discretionary CapEx reserve of EUR 5.93 per seat. 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 was primarily due to acquisitions during the 3rd 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. 2019 year end increased by 11%, driven by higher operating revenues from increased monthly rents, as well as reduced operating expenses from lower R and M costs and lower property management fees.
Finally, our weighted average interest rate continues 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 cap rates and interest costs. Now turning to Slide 14, we dive into more details on the general administrative costs during 20 18 and what we expect in 2020. We have also provided additional information in the MD and A regarding our unit based comp and income tax expense estimates. For 2020. The G and A costs were higher in the 4th quarter compared to prior quarters.
The increase was primarily due to higher year end tax on a third party valuation of their costs in connection with the REIT's 1st year of operating of which a majority of the expenses were recognized in the 4th quarter. Looking into 2020 year, Based on the existing portfolio properties, we expect the G and A to fall within a 1,000,000 to 1,000,000 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 45.50 percent 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 mature for our portfolio. As previously indicated, the undrawn portion of our revolving credit facility and bridge facility provides us with approximately EUR74,000,000 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 185,000,000 in assets. Slide 16 provides more detail on our mortgage portfolio. We continue to stagger the maturity profile of our mortgages, 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. I'll now turn things back to Philip to wrap up.
Thanks, Scott. In summary, 2019 was a busy and successful year for Erez as we increased the size and scale of the portfolio 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 Erez 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 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 through the growth. And we have in place an experienced management team in the Season 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. Questions. And the first question is from Brad Sturges from IA Securities. Please go ahead.
Thanks for the color on the G and A guidance. Just want to clarify on that. That's based on the portfolio composition today as a run rate.
That's right. Yeah. So, you know, on our 1st year of operations, obviously, we've really been operating for 9 months, but a lot of these costs on it and tax compliance, etcetera, really 12 months worth of costs. So, there's definitely a higher run rate going into going into this year. So we just wanted to make sure people had a good sense of what next year looks like.
But, yeah, that doesn't include any early going forward. Too.
And the plan is still to move the TSX. So would that costs be baked into that, guidance number?
No, that cost is not baked into that number. But there will be disclosure around that one time cost, when we do go up. And it's approximately around 200,000 if you need, 200,000 Canadian if you need that, that cost.
You would bear that cost in the first quarter?
It will be when we graduate, but it's not it's a nonrecurring cost it's a one time fee for graduating. But I would say expected in the second half of the year.
2nd half. Okay.
And then in terms of, expectations for rent growth on renewal, I guess you're in the renewal process now and any thoughts or where you think that could land this year?
Yes, I mean, we are going through the process now. Again, I think our overall rental gross target remains unchanged that, you know, at or near 4%. As as you all know, it's generally a CPI plus environment. CPI last year for indexation purposes was 1.6%. The governments announced the CPI metric for 20 20 at 2.6%.
So that's a a positive tailwind there. But across the across the board, we still expect to be at or near 4%. For our portfolio growth for
question is from Jonathan Kelcher from TD Securities. Please go ahead.
Thanks. Good morning.
Good morning, Jonathan.
First, on on acquisitions, are you guys still seeing a lot of opportunities?
Yes, 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 a 1,000,000,000 just post RTO. But that was quite busy in the summertime and going into the fall. But now as we're sitting here today, the acquisition pipeline and opportunities as increased quite substantially where on the table today, we're reviewing over, 500,000,000 worth of acquisitions.
So we feel very confident about, the product being out there and the opportunity to continue to grow.
Okay. And then 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.
Okay. Now like generally speaking though is like when you're when you're what renovations would be doing on suites that aren't being liberalized?
Again, it can be minor upgrades. We could be putting in you know, new, a new boiler. We could be putting in, new appliances, much more minor. So it just depends upon how long the tenant has been in place.
Okay. And then do you have any expectations, like I guess turnover with the range
sort of flat in the 12% to 13% range with what we would have seen over the past couple of years. Although it is slightly up, I don't see a meaningful movement in that turnover rate.
Thank you. You know,
the asset was delivered in 2012, in the market rental growth, that period of time has been, quite high. And so as, you know, those assets which have a higher turnover rate just given that it's an within market by by nature. We we see an opportunity to bring a lot of those flats that were rented earlier in the assets, life, to to get substantial gains. So we we feel, I'm very confident about the biggest owner actually was doing some minor upgrades, like electronic remote control, the heating control, and things of that nature, all pretty insignificant, CapEx if you will, on the turn, and they were getting meaningful uplifts from that. So again, you know, that's one of the reasons, why we think there's a lot of opportunity there.
Reviewing right now, whether it's even necessary to do those minor up list, but we're talking, you know, handfuls of of money, not, you know, the tens and twenties of thousands that would have seen in some of our conversion type CapEx programs.
Got it. And probably on the same lines, how does the growth profile differ for, let's say, Kamiliant acquisition compared to, say, the Eagle portfolio. And if I remember correctly, Eagle like non VAN STAD mostly regulated. So what's really the delta between like these 2 kind 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, out sides around stat and the cap rate we paid on that would be significantly higher, than the cap rate we paid on the chameleon for us. We're all looking for a good balance, having good high cash earning assets, even if those might be, those would be expect you would be stable less growth. We pay less for those and having a mix of the higher growth assets. And again, on a cap rate basis, you know, on the resi only side, we would have paid a meaningful higher price, for the chameleon asset and we want to have a blend of both of those.
Okay. That's fair enough. And 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? And I know you mentioned the pipeline looks pretty strong.
Yeah. So the team is, just over 40, in the Amsterdam office or 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 close to doubling the size of the portfolio before we would have to meaningfully address that. We will need to, if we go more, bring on more staff from a property management perspective. I think a lot of you guys met our 2 prop portfolio managers over there.
If we grow say another 50%. We would probably bring on a 3rd property manager in terms of a operational manager. Actually, it's somebody that we've already identified, internally, but we would need to bring on more staff, below that level as we continue to scale.
And again, I mean, it's supported by, the CAPREIT platform. And from a costing point of view, it's really baked into that asset management fee. So, scalable, but there's no lumpiness in cost, roughly linear.
Absolutely. And when you said you're looking at like $500,000,000 acquisitions, is that euro or is that dollar? And, I mean, do you think still like 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, their investment period and are looking to, on sell those properties, not in a negative way, but to achieve a cost of capital, a more permanent cost of capital. Which fits perfectly into the U. S. Strategy.
Got it. And maybe just maybe the last question on the financing front. So can you remind me if you have put covenant financing on Kamiliant property? And in general, what kind of financing rates are available in the market right now?
So for the chameleon mortgage, we're still working through that process, but, this one will most likely come in around after Q1. But it's we're looking at, the financing rates on the retail component will be approximately 1.2% on a full year. And the residential component will be 1.4% on a 7 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, I mean, based on the acquisitions that we make, for 300 to 600 is approximately correct for, on the stable portfolio. Going forward. But again, if there's new acquisitions and if we make, share acquisitions from that perspective, there could be, additional income tax, but at that time, we'll,
we'll most likely, disclose that to, to you guys. But 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. Good morning, everyone. Good morning. Good morning. Phil, just a question for you, just regarding sort of scale and what that Himanshu was 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 Erez, 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 And, you know, how big would they be?
I mean, a couple of different ways to answer that. I mean, of course, the E is not an accident. But again, when we can look at the opportunity, again, I wouldn't expect us to win them all, but, you know, if we have, over €500,000,000 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. You know, some of the reports are now coming out year end and terms of demographics and the real estate fundamentals, you know, housing shortage is getting worse, etcetera. And again, there is demonstrably available product Having said that, I would say, you know, looking outside of Europe, you know, we all, you know, Kathy, myself, have significant experience outside of you, so not outside of Europe, but outside of the Netherlands. And and 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?
I mean, again, the, you know, German market is an attractive market in terms of its demographics there. I think France is an attractive market. It's demographics there. Again, I mean, the things that we see in the Netherlands are are broadly, you know, happening everywhere in terms of urbanization, aging, you know, household unit requirements increasing, etcetera. You know, there's variability in terms of the cap rates in those places.
But you can finance, you know, with similar debt rates. So again, that, is attractive for us. But again, I would say that our immediate focus very much continues to be on the Netherlands.
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. And if you have any further questions, Please do not hesitate to contact any of us at any time.
Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.