Good morning. Thank you for attending the European Residential Real Estate Investment Trust, third quarter 2024 results conference call. My name is Bridget, and I'll be your moderator for today. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. I would now like to pass the conference over to our host, Nicole Dolan, Investor Relations with European Residential REIT. Thank you, Nicole. You may proceed.
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 expected future events and the financial and operating results of ERES, which are subject to certain risks and uncertainties. We direct your attention to slide two and our other regulatory filings for important information about these statements. I will now turn the call over to Mark Kenney, Chief Executive Officer.
Thanks, Nicole, and good morning, everyone. Joining me this morning is Jenny Chou, our Chief Financial Officer. Let's start with an operational update on slide four. Once again, we saw strong growth in our average monthly rent this quarter, which increased by 8.4% to EUR 1,141 across all occupied suites on September 30, 2024. Our vacancies did tick up, with 95.1% of our residential suites occupied at period end. However, this relates to our value maximization strategy, as we are intentionally holding certain suites vacant as part of our strategic disposition program.
That brings me to the business update on slide five . On September 16, we announced the signing of two agreements for the sale of an aggregate 3,179 residential suites in the Netherlands for approximately EUR 739 million. This represents about half of ERES's total portfolio, and we're expecting to have closed on both by no later than early Q1 2025.
With liquidity from these transactions, we're planning to pay down debt and lower ERES's leverage while using the remaining net proceeds to fund a special cash distribution that will return a meaningful amount of capital to unit holders. These upcoming dispositions supplement the strategic sales we've already completed this year to date. We have so far disposed of properties containing a combined 530 residential suites and one office building in the Netherlands for approximately EUR 116 million. We've also sold 80 individual suites to owner-occupiers, generating a further EUR 23 million, as well as one commercial building in Germany for approximately EUR 9 million. We're executing on these transactions at prices that are at or above fair value, which we believe substantiates our robust valuation process, the high quality of our portfolio, and ERES's reported NAV.
During the quarter, we recognized a fair value gain of €39.4 million, and our diluted NAV per unit increased slightly to EUR 3.01 at period end. I will now turn the call over to Jenny to provide an update on our financial performance.
Thank you Mark. slide seven summarizes our performance for the third quarter. As Mark mentioned, we've strategically taken on vacancy, and we had 96.1% of our same property residential suites occupied at period end. Same property rent growth was very strong at 8%. In addition to increases on turnover, this includes the impact of indexation, for which there was an average rental increase of 5.5% effective July 1, 2024. This is up from an increase on indexation of 4% effective in the previous year. Property operating costs did increase as a percentage of operating revenues, and our same property NOI margin decreased to 76.7% for the three months ended September 30, 2024, as compared to 78.4% for the prior year quarter.
Diluted FFO per unit also decreased by 4.8% to EUR 4.00 for the third quarter, primarily due to lower total NOI from dispositions, partially offset by lower interest costs as we've paid down debt using net proceeds from our dispositions. I'll also briefly walk through our financial performance for the nine-month period, as outlined on slide eight. Again, strong rent growth drove the increase in operating revenues and NOI, up by 1.9% and 2.2%, respectively, and our margin increased by 20 basis points to 78.6% for the nine months end of September 30, 2024. Diluted FFO per unit was down 3.3% as year to date. Interest expense remained elevated versus the prior year period. We've highlighted our financial position on slide nine, and you can see that our debt-to-market value ratio has decreased to 53% as a period end, down from 58% at previous year end.
This was achieved through redeployment of net disposition proceeds as we used the capital to repay associate mortgage debt, as well as amounts outstanding on our revolving credit facility. As such, you can see our available liquidity has correspondingly increased to nearly EUR 90 million at period end. Slide 10 shows our staggered mortgage profile. Although our weighted average effective interest rate remains low at just over 2% at present, we remain keenly focused on continuing to mitigate our renewal risk. As Mark mentioned, we're planning to redeploy part of the net proceeds from our upcoming dispositions into paying down our debt, which includes both repayment of associated mortgage principal outstanding as well as prepayment of certain other mortgages maturing in the near term, which will result in a stronger balance sheet for ERES going forward. I will now turn things back to Mark to wrap up.
Thank you Jenny. This past quarter has been instrumental for ERES in terms of advancements being made on our strategic objectives, all of which revolve around the single mission to maximize value for our unit holders. As you can see outlined on slide 12, we're continuing to explore every opportunity to do so. It is for this reason that we've announced a special meeting to take place virtually on January 7, 2025, in order to consider and, if appropriate, pass a resolution that would provide ERES with the flexibility to sell some or all properties without the delays of the potential need for a unit holder meeting. This will allow the REIT to move swiftly and opportunistically and increase our ability to pursue and execute on the most attractive transactions available. We encourage all unit holders to join the meeting and vote for this proposed amendment.
Moving forward, our goal remains the enhancement of value through all means possible, and we're committed to doing everything we can to achieve that. With that, I would like to thank you for your time this morning, and we would now be pleased to take questions, which you may have.
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking a question. We will pause here briefly as questions are registered. The first question comes from the line of Sairam Srinivas with Cormark Securities. Sairam, your line is now open.
Thank you Bridget. Good morning, everybody.
Morning.
Morning. Just from looking at the liberalized suite terms this quarter, the spread in the terms seems to have come down on a year-over-year basis. Can you comment on that in terms of what's driving that, and are you generally seeing spreads around the market lower as well?
Hi, Sairam. This is Jenny. Part of the reason is just our upcoming disposition. So we are intentionally keeping some of our units vacant. So for everything that's already announced, those properties, we're currently not reletting upon vacancy. So that's going to impact our turnover number. And for certain other buildings, we're sometimes just intentionally holding them vacant.
And it's a little bit nuanced because the building sold versus, I'll say, the middle market or controlled rents have an obviously different turnover effect. But if it's just liberalized units, Jenny's right. It's just holding units back. I wouldn't read anything into it. What remains extremely strong and clearly evident in the Netherlands is, in fact, the home sale value of the apartments. That market is definitely outpacing. And I would also say that we are not alone in our strategy of selling buildings for privatization. There's probably going to be less units in the market over time, which will help rents.
That's great, Karla and Jenny. Maybe just looking at the same property portfolio right now versus the overall portfolio, we do see that there's a good chunk of multifamily units now in the portfolio that will remain. Is there a bit of a nuance in the market in terms of investor preferences between single-family or single-unit homes versus multifamily? Is that a trend you're seeing in the market right now?
No. I think early innings here, the single-family home portfolio was identified as perhaps the easiest and most popular to privatize. But the other units have the same attribute of privatization. I would just say it's just a matter of, is the townhouse market stronger than the apartment market? I would say in the Netherlands today, no. So the portfolio that remains, we are being quite intentional on our sales, and we're identifying really buildings that don't belong to a bigger, wider portfolio on one-off transactions, but of course, open to, subject to unit holder approval, the sale of more substantial groupings of buildings.
That's good clarity. Mark, thank you. I'll turn back.
Yeah. Thank you very much.
Thank you, Sairam. The next question comes from the line of Gordon Wen Hafjard with TD Securities. Golden, your line is now open.
Good morning, everyone.
Morning.
Just on the transaction market, maybe if you could talk about what you're seeing in the market today and are you maybe starting to see a pickup in activity versus a few months ago?
Yeah. It's characterized the market as being led by private family offices for the most part or smaller privates, with institutions creeping into the idea of privatizing units as a business plan. So we would have said the market was definitely gaining steam. There are some other portfolios getting released onto the market. So we'll see about the impact of more product available to buy in the market. I'm not too concerned about it because what we have really come across are, again, these private offices in specific geographical areas that have specific interest in an asset by asset. So when you're dealing with privates, it's not like global market dynamics. It's more location dynamics. But we feel positive that there's an opportunity still in the marketplace there to sell.
Great. Thanks for the color. I'll turn it back now.
Thanks.
Thank you Golden. The next question comes from the line of Jimmy Shan with RBC. Jimmy, your line is now open.
Good morning, guys. Just two questions for me. What's the timing and tax treatment of the CAD 0.75 distribution?
In terms of timing, I think the exact timing of when we're going to close our disposition is still a range of dates subject to the purchaser's option. It's anywhere between November and January. The intention is to pay out the special distribution shortly thereafter, but at this time, we don't know the exact date yet. Once we know, we will be disclosing that to the market. As for the tax treatment, it is a combination of return of capital, capital gain, and taxable income, but unfortunately, we also don't have that split as it depends on a number of factors, including timing.
Okay. All right.
It's a bit tricky because we have a big portfolio. Sorry, we have the large portfolio, then we have some other transactions, all of which the closing dates are moving around, and of course, in December, there's implications to things leading into January, but we're obviously daily trying to get clarity on that. As soon as we do know with finalized dates, then we will obviously advise the market immediately.
Okay. And then on the trust amendment that you're seeking, I guess I'm just trying to understand sort of the need to do that sort of now. I guess maybe put it this way. If you did not amend, what could you not do?
It's a great question. So in the Declaration of Trust, there's obviously a requirement to get unit holder approval if you're selling all or substantially all of the portfolio. And this is an unorthodox wind down because we're doing it in pieces. And so the question became, when do we cross that line to selling all or substantially all of the portfolio? And therefore, what stage do you need unit holder approval? And then that brought us to the dilemma as if we get close to that number and want to sell one or two buildings, then what are we going to the market for unit holders for approval for? So this just cleans up our ability to execute on the strategy.
And so what we're really doing is seeking an endorsement from unit holders that they would like to see us continue on the path of this strategy, giving management the flexibility to do so. Because what was happening, Jimmy, is we were bumping up against theoretically the all or substantially all part of the portfolio sales.
I see. And the substantially all would have been, according to your interpretation, what is that percentage?
We could do it offline. It's valuation. It's unit count. There's a whole lot of different factors, and this was in part of the definitional issue that we wanted to avoid, so we're preempting it.
I see. Got it. Okay. Thanks for that.
Yeah.
Thank you, Jimmy. The next question comes from the line of Stephen Sandler. Stephen, your line is now open.
Good morning, everyone.
Good morning.
Good morning. Will the distribution have any effect on the 2024 taxes?
You're speaking from a Unit Holder level?
Yes.
Again, it depends on the timing of when the special distribution will be declared. So my response to Jimmy earlier, if it closes in 2024, we'll likely do the distribution shortly after. So it will be part of the 2024 T3. Otherwise, it might still slip into 2025.
My concern as a retail investor, which I own a large position, is that you leave us enough time to decide whether to sell pre-distribution and then buy it back ex-distribution in case the taxable income on the full tax rate is very high. Because obviously, capital gains rate is quite a bit lower than taxable income.
Understood. We would actually always advise all unit holders to seek advice for their specific personal circumstance and investment objectives, but as Jenny said, what you have our commitment on, it's legal commitment regardless, is to notify the market as soon as we know what the closing dates of the various transactions are, and we will do so, and I understand your question, and it's not that we're moving around. We actually don't actually know because the purchaser in the large transaction does have the flexibility of closing date, as Jenny said, between November and January, so we are obviously doing our best to get clarity on that, and as soon as we actually have it officially and a firm commitment, then we will be making notifications in the market.
Because what I really don't want to see is that four days before the year-end, you finally get the figures. The market's quiet. There's very little volume. And if someone had to sell a fairly big position in order to buy it back ex-distribution, you're just going to affect the market too much.
Yep. We hear your concern. So like Mark and I said, we will be informing the market as soon as we know.
Great. Thank you.
You're welcome.
Thank you, Stephen. The next question comes from the line of Alexander Leon with Desjardins Capital Markets. Alexander, your line is now open.
Hi. Good morning, everyone, and congrats on all the progress being made on the value maximization strategy.
Thank you.
I want to ask some questions here about some of the verbiage in that press release relating to the special meeting of unit holders. First off, maybe it mentioned that there were some portfolios of assets that were currently being marketed. Just wondering if you could maybe give us an indication of the size of those portfolios, how long they've been marketed, and maybe what kind of interest you've received thus far.
Yeah. We have identified, based on broker feedback, ideal packages to put in the market. And there is a little bit of thinking around availability of product in the market at the same time that leads us to make those decisions. We have paused executing on further agreements given the upcoming unit holder approval to proceed. And that is why we are looking forward to having clarity on our ability to actively market. You throw in the fact that marketing new portfolios in December is just not ideal timing. So again, the January, hopefully post-January with approval, should we receive it from unit holders, we'll be able to get out there and give a little bit more clarity. But it really is a dance of how much product is in the market, what buyers are in the market, and being thoughtful to maximize value.
And then, how to go about unwinding. There's some thinking also going on around making sure that there's a core desirability in the remaining portfolio. So, it's balancing all those factors out. Happy to take it offline with additional thinking, but it is a little bit complicated in the thinking process.
Right. I appreciate that color, and maybe another one of a bit more delicate question here, but the press release also mentioned if the business were to shrink to a small enough size, then it would maybe no longer make sense to operate as a public company. Maybe just kind of approximate indication of where you see that sizing maybe being?
It's really impossible to say. And again, I don't even really want to turn my mind to it because, again, the size of the portfolios that are released into the market, whether it be one building, two, six, nine, or all, really depends on a variety of factors. So clearly, we would like, upon receiving unit holder approval, we would like to explore the possibility of all or some of the portfolio, but not in a hasty way that doesn't maximize value. So we're absolutely committed, or I am 100% committed, Jenny is, the ERES team is, to extracting top dollar for the value of the portfolio. And we'll do so in a thoughtful way.
I know that's a bit of a round answer, but it really is specific to how much product is in the market, who's buying in the market, to a certain extent the reality of interest rates, and the reality of privatization opportunity. All of these things are playing into asset interest.
No, I thought I would try it. But thanks for that commentary. I'll turn it back.
Thank you, Alexander. There are no additional questions waiting at this time. I would like to pass the conference over to Mark Kenney for any closing remarks.
Thank you, operator. And thank you to everyone 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 have a great day.
That concludes the European Residential Real Estate Investment Trust Third Quarter 2024 Results Conference Call. Thank you for your participation and enjoy the rest of your day.