Good morning. Thank you for attending today's European Residential Real Estate Investment Trust second quarter 2022 results conference call. My name is Francis, and I'll be your moderator today. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Phillip Burns, CEO. Please 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 our future financial and operating results. I direct your attention to slide two and our other regulatory filings. Joining me today is our CFO, Stephen Co. After I provide an update on our operational progress during the quarter, Stephen will provide an overview of our financial results and position. ERES, once again, grew stronger during the second quarter of 2022. As displayed on slide three, our suite count increased by 12% over the past 12 months, including three acquisitions which we completed so far this year for a combined 356 suites across six additional multi-residential properties throughout the Netherlands.
The market value of our property portfolio increased by more than double this, having grown by 27% during the same period. This was driven by continuously strong market and portfolio fundamentals, the successful execution of our value-enhancing capital expenditure program, and our exceptional operating metrics, which we will highlight to you in the coming slides. Further to this, given the uncertainty provoked by recent macroeconomic developments and potential regulatory evolution, we conservatively held the fair value of our residential portfolio steady this quarter despite the 2% appreciation that was assessed by our external appraiser for the period. Our net asset value per unit reflects the growth which we achieved to date. Notwithstanding the absence of any fair value gain on paper during this past quarter, NAV per unit still increased by 25% versus the prior period end.
Contrary to our results, our market capitalization is down by 17% since the prior year period. Albeit a direct product of external factors which are unrelated to the REIT's intrinsic value or operational performance, this decline has a silver lining in its creation of the opportunity for our investors to capture this value. In this regard, we reiterate the uniqueness of the REIT's trifecta of value, growth, and income. Slide five contains an overview of business development during the second quarter of 2022, starting with our latest acquisition of five multi-residential properties comprised of 110 suites located in Rotterdam, which we acquired for a purchase price of EUR 23 million, excluding transaction costs. With the vast majority of its suites regulated, the portfolio provides significant potential for uplifts on conversion.
Also during this past quarter, the REIT secured mortgage financing for its two acquisitions, which closed earlier this year alongside early refinancing of certain existing properties which had mortgages maturing toward the end of this year in the total principal amount of EUR 180 million. After all refinance activity during the quarter, which Stephen will elaborate on shortly, the REIT has approximately EUR 165 million of available liquidity through a combination of cash as well as capacity on its credit facility and pipeline or promissory note arrangements with CAPREIT that translates into acquisition capacity in excess of EUR 350 million. Although we currently are approaching new acquisitions cautiously, our available liquidity will support our external growth ambitions for the remainder of 2022 and thereafter.
Our strong operational and financial results are exhibited through the continuous increases to our key FFO and AFFO metrics. Quarterly FFO per unit was up by 13% to EUR 4.3, while AFFO was up by 15% to EUR 3.8 per unit, both positively driven by our accretive acquisitions and an increase in stabilized NOI contribution since the prior period end. Slide six showcases another quarter of so strong operating metrics, with the REIT again surpassing its targets. Rental revenues continued to increase significantly with total portfolio net average monthly rent of EUR 936 as of June 30th, 2022, and EUR 952 on an occupied basis. For the stabilized portfolio, net and occupied AMR increased by 4.6% and 4.2% respectively as compared to the prior year period.
These increases are attributable to the REIT's threefold rent maximization strategy comprised of its value-adding capital expenditure program, including the conversion of regulated suites to liberalized, as well as increasing rents on indexation and turnover. For rental increases due to indexation effective July 1st, 2022, the REIT served tenant notices to 96% of its residential portfolio, across which the average rental increase due to indexation was 2.95%. Even more meaningfully, average rental uplift on turnover in the current quarter was 22.4% on turnover at 2.6%, which compares exceptionally well to the change in monthly rent of only 17.1% realized in the prior year quarter, despite its higher turnover of 3.6%.
Specifically on conversions, ERES achieved rental uplift of nearly 61% for the past three-month period, compared to 49.5% in the three months ended June 20th, 2021, evidencing the effective execution of the REIT's value-enhancing conversion program in parallel with the uncapped uplift potential inherent throughout our portfolio. The REIT's ability to achieve rental growth and rental revenues in excess of its target range of 3%-4%, as I've just outlined, demonstrates its ability to consistently and profitably operate in a challenging macroeconomic environment and a complex and fluid regulatory regime.
Although the Dutch government is currently investigating several proposals for regulatory development affecting the regulated rental market, such as the proposed mid-market regulation and various sustainability measures, we emphasize the fact that the regulatory environment in the Netherlands has historically been iterative in nature over short and long-term periods, including over the past few years since the REIT's inception. We have been able to successfully navigate this dynamic and evolutionary regulatory framework to date, which constitutes one of our distinct competitive advantages, and that will continue into ERES's future. Moving to slide seven, occupancy for our commercial properties remained strong at 99% at current period end, while occupancy for the residential portfolio increased to 98.4% compared to 98.0% at Q2 2021 for both total portfolio and on a stabilized basis.
A significant portion of residential vacancy in the current period is due to renovation, with 70% of vacant suites offline for that reason, which should provide for further rental uplifts once the suites are leased. For the three months ended June 30th, 2022, net operating income increased by a significant 17% compared to the prior year period, up to EUR 17.2 million as a result of contributions from acquisitions, higher monthly rents on stabilized properties, and strong cost control. Total portfolio NOI margin, as shown on slide seven, was 77.3% for this past quarter, which includes the effect of recoverable service charges that have recently increased due to rising inflation. Importantly, the net amount of service charge income and expense during the quarter and year- to- date was nil, given that costs are fully recoverable from the tenants.
As such, we also evaluate our NOI margin excluding service charges, which was 83.3% for Q2 2022, up from 83.1% in the prior year period. This increase in NOI margin was due to higher monthly rents combined with a decrease in operating costs as a percentage of operating revenues, primarily due to lower R&M, as well as reduction in the Landlord Levy expense that Steven will elaborate on shortly. This demonstrates the large extent to which the REIT is insulated from inflation, as tenants are responsible for the majority of their own energy and other utility costs. Further, the REIT has no employees and therefore no wage costs, and property management fees are a fixed percentage of operating revenues.
Our overhead is also protected from inflation, with the largest contributor being asset management fees, which are based exclusively on historical cost with no allowance for inflation. Slide eight serves as a reminder of the unique diversification that characterizes our high-quality portfolio. We maintain an approximately 60/40 split between liberalized and regulated units, providing balanced growth in rents on turnover and indexation, as well as the opportunity to liberalize more units. In addition, you can see that over 40% of our current properties are located in the high-growth conurbation of the Randstad, with approximately one quarter of the portfolio directly located in the cities of Amsterdam, Rotterdam, The Hague, and Utrecht. The rest of the portfolio is situated in smaller urban areas throughout the country.
Further to all of this, approximately one-third of our portfolio is comprised of single-family homes, also known as Dutch row houses, a segment which represents an additionally unique contributor to our portfolio mix and one that is even further protected from inflation, with tenants performing the majority of the R&M work themselves, thus resulting in higher margins. With that, I will now turn the call over to Stephen.
Thank you, Phillip. As you can see on slide 10, we continue to deliver on all our key financial and operational targets. On a total portfolio basis, operating revenues and NOI both increased by 19% and 17% respectively versus the comparative quarter, primarily due to accretive acquisitions since that period, as well as increase in monthly rents on the stabilized portfolio, as Phillip already mentioned. This contributed to the increase in NOI margin, which was 83.3% in the current quarter, excluding service charges, up from 83.1% in the prior year period, which demonstrates the REIT's strong cost control and the extent to which it is protected from inflation.
Excluding the impact of these service charges that are fully recoverable from tenants, property operating costs as a percentage of operating revenues decreased this quarter and year- to- date as compared to the prior year periods, driven by lower repairs and maintenance costs, as well as a reduction in Landlord Levy expense. This was due to the utilization of a larger government rebate this year for Landlord Levies payable. With the REIT's intention to consistently purchase Landlord Levy rebates, along with the potential abolishment of the Landlord Levy tax rate, the REIT expects to realize improvements in NOI margin permanently, which is further reinforced by the fact that the REIT's property operating costs are largely insulated from inflation, as Phillip explained. This all translates into accretive operational results, which continue to strengthen quarter-over-quarter.
FFO and AFFO per unit were up by 13% and 15% respectively compared to Q2 2021, with both increasing by significant 15% on a year-to-date basis, driven by the positive impact of increased stabilized NOI and accretive acquisitions. Despite our regular increases to monthly distributions, the REIT's AFFO payout ratio was at the lowest end of its long-term target range at 80% for the three months ended June 30th, 2022, down from 83.3% for the prior year period. Moving to slide 11, we can see that the REIT outperformed on a stabilized basis as well. Similar to the total portfolio, stabilized residential occupancy increased to 98.4%. Stabilized occupied AMR and operating revenues increased by 4.2% and 5.2% respectively, which is again in excess of the REIT's target range of 3%-4%.
Stabilized portfolio NOI increased by 3.9% for the quarter ended June 30th, 2022, with NOI margin excluding service charges increasing to 83.4% in the current period, up from 83.1% in the prior year period for the same reasons as explained earlier for the total portfolio. Slide 12 demonstrates the continuous growth of our accretive operational results and strong financial management. FFO and AFFO for the quarter were both up significantly to EUR 4.3 And EUR 3.8 per unit respectively. As mentioned, these large increases were primarily driven by higher stabilized NOI, profitable acquisitions, margin expansion, and strong cost control. Our AFFO payout ratio also remains strong even in the context of the REIT's growing distributions.
This preserves ERES' reputation for its relatively high and regularly increasing distribution yield, which was 4.5% as at June 30th, 2022. While the REIT has been able to continuously pass on its accomplishment to its unit holders with increases in its distribution rate, it also simultaneously has maintained a strong and flexible financial position and consistently conservative debt metrics as displayed on slide 13. Inclusive of our latest mortgage financing, the REIT's adjusted debt to gross book value was 48.8% as at June 30th, 2022, remaining within our long-term target range of 45%-50%, which we have historically been able to maintain.
We also had immediate available liquidity of approximately EUR 165 million as at period end, comprised of cash on hand in excess of that set aside for ongoing operational and capital expenditure requirements, as well as unused capacity on the REIT's revolving credit facility and its pipeline of promissory note arrangements with CAPREIT. As Phillip mentioned, we currently are approaching new acquisitions cautiously. Nevertheless, assuming an LTV of 55%, our liquidity provides capacity to acquire in excess of EUR 350 million that will support the REIT's growth endeavors. Furthermore, you can see the REIT's demonstrated track record for maintaining its extremely conservative debt metrics. Both its debt service coverage and interest coverage ratios have remained significantly higher than the minimum three thresholds prescribed by our revolving credit facility.
This illustrates the REIT's ability to successfully execute on its strategic objectives on the back of a robust yet flexible financial position. And finally, on slide 14 evidences the staggering of our mortgage profile inclusive of our latest mortgage financing, which was secured on our Q1 acquisitions, combined with refinancing of certain existing properties. The combined financing was in the total principal amount of EUR 118 million, excluding transaction costs, and carries a fixed effective interest rate of 3.29% over the term of six years. Our well-staggered mortgage profile not only reduces renewal risk, but also stimulates liquidity as the majority of our mortgages are non-amortizing. Importantly, in light of the recent turmoil disrupting the economy, ERES remains well positioned to absorb the volatility with the weighted average term to maturity of its mortgage profile being 3.94 years.
Further to that, we have no mortgage financings coming due for the remainder of 2022 and less than 10% of our mortgage debt maturing in each of the following two years. On that note, I will thank you for your time this morning and turn things back over to Phillip to wrap up.
Thank you, Stephen. ERES did not just have another quarter of strong results. The REIT exceeded expectations in prior quarters, and yet still its results for Q2 2022 have again eclipsed its prior outperformance. ERES has been growing both in size and in fundamental strength, and expects to be able to continue along this flight path even amid the macroeconomic and regulatory turbulence. Of course, the current environment requires us to exercise heightened scrutiny towards external growth and regulatory evolution and continued vigilance around operational performance. Even in today's environment, however, our optimism towards ERES' future remains undiminished. The immense value which is offered through the REIT's platform, as presented to you today and summarized by our investment highlights on the next slide, is proof of the robustness of our platform and strategy.
In this context and in summary, during the second quarter of 2022, the REIT grew in every capacity, and we are confident in its ability to continue to navigate forward in each quarter to come. With that, I would like to thank you for your time this morning, and we would now be pleased to take any questions which you may have. Operator, back to you.
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you'd like to remove your question, 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 your question. Our first question comes from Jonathan Kelcher with TD Securities. Please go ahead.
Thanks. Good morning.
Morning, Jonathan.
First question, just on the MD&A, I guess, you talked about potential changes to the regulatory environment pertaining to the mid-market. I know you said it's a little early to quantify, but can you maybe give us some color on what those might be and how many suites of yours could be impacted?
Actually, I mean, the government announcements so far have been very high level and lack any level of specificity, so it doesn't allow us to come up with a quantification or a sensitivity. The government, you know, in parallel with having to execute its supply increase program where they want to provide another million houses by 2030, which require 100,000 a year, they're also trying to again consider, you know, how to slow down house price inflation as well as rental price inflation. They have not given any guidance into what it might be. They said that they would like to provide or they would consider stretching the regulations to include mid-market up to EUR 1,000 or up to EUR 1,250.
In parallel, they've also said that they want to consider revising or, quote-unquote, "modernizing" the points calculation. They've also said in parallel that they want to encourage people to increase the energy efficiency measures, as we approach 2030 because of EU directives. They've put out a lot of really broad statements, and it's unclear how they're going to tackle it at this point in time. Having said that, historically speaking, as they have always and consistently tweaked and pushed and pulled on the system over time, we find that it is reasonable and manageable. You know, two years ago, you know, they put rental inflation in the regulatory environment at zero. Then the very next year, you know, they've now allowed us to get 2.3% for regulated and 3.3% for liberalized.
I think there's generally a level of pragmatism that has historically shown through, and we would expect that to be the case today. They also cannot lose sight, either from common sense or the uproar that would transpire with the populace if they don't start delivering more supply. I think that will deter them from doing anything too draconian.
Okay. That's helpful. Switching gears, just on the acquisition, I guess you said a couple of times you guys are being more cautious. Is that more internally driven or has the pipeline slowed down? Maybe give us an update on what you're seeing out there and what we could expect for the back half of this year for you guys.
Yeah. I mean, that caution is driven really by the market. One, being patently aware that interest rates have gone up, and so, you know, that needs to be reflected in anything that we would underwrite. Then also, you know, going back to your first question, with some level of regulatory uncertainty, we would not want to be increasing our exposure to, you know, that uncertainty if we can avoid it. To the extent that we are reviewing acquisitions currently, we're looking at acquisitions that would be 100% regulated, with, you know, limited conversion ability. Again, those are like the bond-like assets that we've always had as part of our portfolio. We continue to believe that those are attractive. Even though they're lower growth historically, the pricing on those is much more attractive.
You know, those are things that we're looking at. Then we would say on the other side, if you have a portfolio that is, you know, very much liberalized, i.e., high levels of points, that you wouldn't think would be subject to any regulatory risk, we would be keen on looking at those. There are a lot of, you know, portfolios in the market today, but the acquisition activity or the closing of acquisitions has slowed down dramatically in Q2 as a result of the two things that I just highlighted that's precipitating our caution.
Have you seen people walk away from acquisitions?
It's hard to know if people walk away. We have seen portfolios come that haven't closed, and just the nuance being, I don't know if they were close with somebody else, and then they didn't close or if they just didn't get any interesting bids. The two biggest portfolios that were on the market this year, which you all would have heard us talk about, is there was a EUR 700 million all Dutch deal, and then there was over a EUR 1 billion, 50% German, 50% Dutch deal that were pulled from the market just because the bids weren't interesting vis-à-vis the seller's expectations. But again, I can't say people are walking away, but I can say that there are portfolios that have been marketed that have not closed.
Okay. That's helpful. I'll turn it back. Thanks.
Thank you for your questions. Our next question comes from Brad Sturges with Raymond James. Please proceed.
Hi, guys. Maybe just to follow on to Jonathan's questions there. I think you talked about a EUR 200 million acquisition target for the year, but given, I guess, a little bit more of a cautious approach, would you be revising that target down from that, from the EUR 200 million mark? Or how do you think about the volume for ERES in the second half of the year?
Yeah. I mean, we've already got in close EUR 85-90 million. So, you know, directionally speaking, we're halfway there. You know, again, I would hope that we do acquire more assets this year. But again, you know, we are exercising more caution. Will we hit that EUR 200 million? Not certain. But again, we're still in the market. We're still looking. CAPREIT's still supporting us. We're still underwriting portfolios. But again, we just need to be aware of certainly the interest rate environment, which affects pricing, and, you know, the sellers have to come to terms with that. And then the regulatory thing, again, I mean, that is uncertain, but, you know, that is something that we can manage as well.
I can't tell you what I think our new revised number is, but again, I'm optimistic that we will find things to acquire in the second half of the year.
Just to go back to the mid-market regulation commentary you had. I guess if there were changes to be made or new regulations, would that be more of a 2024 event if at this stage?
Yeah. I mean, everything the government. Well, not everything. There's many things that they're processing through. You know, you've heard us talk about, you know, cap on WOZ points, et cetera. That's now in effect. It has a de minimis impact on us. But as they're talking about, you know, the bigger potential changes, they've already articulated that would be for 2024 and onward.
Yeah. You know, given some of the uncertainty and maybe the expansion in the mid-market, does that change your thinking around suite renovations or conversion from regulated to liberalized?
No, it doesn't. I mean, again, number one, it's 2024, so that's 18 months away. You guys can see, you know, in our MD&A, our uplifts on conversion are extraordinarily high, extraordinarily profitable. What we will do or are doing is, again, there are expected energy measures that the government's gonna push through. So as we are refurbing our suites, we're ensuring that we upgrade the energy diagnostic levels. We're ensuring that we get deeper into the liberalized points calculations as they exist today. But no, we would not expect to significantly change our regulated to liberalized conversion strategy.
Okay. That's great. I'll turn it back.
Thank you for your questions. Our next question is from Himanshu Gupta with HoldShare Bank. Please go ahead.
Thank you, good morning. I see the new debt financing done at over 3%. Just wondering how's the availability of credit for your asset class, and have you seen any change in terms of lending appetite from the banks?
Hey, Himanshu. I would say there's been an acute increase of interest rates since, you know, our Q1 conference call. It pretty much peaked in the month of June, and then we actually have seen rates come down. It is a very rapid and changing environment, but there is significant appetite from our banks and our lenders to secure for, especially for multi-residential assets. What we are doing internally is really seeking best execution and, you know, if we take a look at our debt maturity profile, we don't have much coming up for 2023 and 2024. As I already mentioned in my conference call, it's like less than 10% of our debt maturity maturing in the next two years.
To your point, what we have seen is rates have come down. There is abundant liquidity for multi-residential product, and we don't see any problems with our lenders if we were to secure financing.
Got it. Just to clarify, this 3.29%, I think, this is six-year term and fixed interest rate?
That's correct.
Awesome. Okay. Thank you. You know, how will the cap rates get impacted as a result of the new debt financing? You know, the question is, will you see the first impact on regulated non-Rent Stabilized, you know, like the lowest quality, or it will be the other way around, like liberalized Rent Stabilized is likely to see first impact in terms of cap rates?
For us, we. You know, there. I guess there's two things to it. There's, you know, the discount rate and growth rate. I mean, for us, as you already seen in our operational results, they're very strong. We actually see growth rates increasing. That's, you know, with our discussion with our valuators. I don't think there right now we see much impact on cap rates due to the equity financing increasing, but we also have seen rates come down. I think we're in a very transitory environment in terms of where cap rates and interest rates are gonna converge. I think right now, from what we see in our portfolio, cap rates is reflective of what the market is.
The other thing that I would add, just going more back to the financing component as well, again, it is a rapidly changing environment. Even with our new financing, if you compare that to the blended cap rate at which we bought those assets that were refinanced, we're still delivering positive yield spreads. Not to the magnitude that we were before, but leverage is still accretive for us, even at that level. Again, we would like to see it come down again, but there is still positive yield spreads for us in our market.
Got it. Yeah, that makes sense. Just to follow up on the additional regulations. The cap on the WOZ value, I think now that is in effect. You mentioned it's pretty much no impact or de minimis impact on you. Why is that? I mean, would that change or limit your ability to convert a regulated suite into liberalized? Like, how the impact will unfold there?
I'm sorry, your question wasn't clear, Himanshu. What's the question?
Philip, the question is the cap on WOZ value, that change in regulation is now in effect from May 2022, I think. You said there will be minimum impact on your portfolio. Can you elaborate on that? My understanding is that it will limit the ability to convert a regulated suite into liberalized.
Not so much really. I mean, not so much. It'll have virtually no impact. What that's trying to do is in certain areas where you would have high value areas where you had small suites, because the values had been going up so much that the WOZ contribution, which is the second largest contributor after the size of the flat, was overly contributing. They originally installed the WOZ component in 2013, 2014, just because it wasn't making a differentiation geographically where you have higher values generally in the Randstad versus in the other areas. The unintended consequence of that was if you had, you know, small flats in these high value areas, they were going up quite dramatically, and the WOZ value were contributing more than people had anticipated.
When they put it in place in 2013 and 2014, it was expected to be 25%-30%. What they're really doing is trying to bring it back. If you had a significant number of small sized flats in the Randstad area that were in your liberalized component, then you know, those would be at risk. But those aren't. You know, we don't have a lot of those, number one, and the stuff that we're converting is generally not small flats. The stuff that we're converting are larger, bigger flats. I truly, across all components of our business, don't see any material impact from this WOZ value cap.
Got it. Okay. Thanks for clarification, by the way. Thank you. Last question from me. Rent growth target range was 3%-4%. I mean, clearly you exceeded in Q2. Q3 likely to be even higher, you know, just by virtue of better indexation. Are you increasing your target range, what you had provided earlier, 2%-4%?
I think.
Four for the second. Yeah.
We're not explicitly moving our targeted range or guidance, but I mean, you all are very smart people, and you can see that we're beating our target, and there's no reason to believe that our performance is going to change. We feel very confident being at or above our target.
Fair enough. I'll turn it back. Thanks. Thanks everyone.
Thank you. Our next question comes from Kyle Stanley with Desjardins. Please go ahead.
Thanks. Good morning, guys. Just looking at the, you know, the macro headwinds in Europe, higher rates, the energy crisis, do you expect this to have any impact on leasing demand or activity? I mean, the turnover spreads have, of course, remained very strong as we saw this quarter, but, you know, do you expect these factors to start impacting spreads, maybe as we advance through the year? Or is the, you know, supply demand imbalance just too acute?
It's the latter. I mean, again, I don't want to diminish or be insensitive to the macroeconomic or geopolitical issues that are, you know, people are grappling with globally, but, you know, probably more intense in Europe. There is nothing that changes the extreme acute supply demand imbalance in the Netherlands. I mean, so much so that through the first four months of this year, there was 22,000 planning permits issued. That's an annualized 60,000-65,000. They need to deliver 100,000 a year to even come close to their target. They're nowhere close.
You know, you guys have probably seen in the papers with the farmers and their tractors blocking routes because of CO2 emissions and all of these other things that the government is trying to do. It's actually hamstringing them from delivering more supply. More supply is the only solution to slowing down, you know, rental growth. They're making no progress. They're actually running behind. Actually, I've seen some recent statistics saying that, you know, immigration into the Netherlands is near all-time high in the past quarter. The macroeconomic uncertainty in Europe is real. The energy issues are very, very real. But again, we're not affected from an inflation perspective that, as we've explained before, people are always gonna need a place to live, and there's not enough houses in the Netherlands.
That's why we feel very comfortable, and you can see it in our performance. Our turnover uplifts continue to increase. Now, they can't increase at that pace indefinitely, but they continue to go from strength to strength. I don't see any way to arrest that trend until we start really delivering more supply, which the government is making no progress toward.
Okay. Okay. Maybe just shifting to the, you know, the regulatory environment a little bit. You know, in the past, I think you'd mentioned there is, you know, some rumblings of potentially adjusting the CPI-based indexation for 2023, just given, you know, the elevated level of inflation in Europe. Has there been any more discussions on that, or is that still likely to be kind of an early 2023 event if it does occur?
Yeah, no, that's a very good question. I didn't mention that one when I think Jonathan was asking questions. Another proposal or thing that's been tabled, again, no legislation yet, is remember when they put the CPI +1% in for liberalized non-regulated units, that was a three-year measure. I think, you know, on these calls, I had often suggested that, you know, it was a headwind that turned into a tailwind, which was indeed the case. When I was saying that, and what I would continue to feel strongly about is in a 7%-10% inflationary environment, I was very confident that the government would not push through 7+1, 8+1, 9+1, or 10+1 in terms of headline rental inflation. That was never gonna happen.
There is a proposal being discussed that would go into effect in 2023, where they would remove that temporary legislative construct and instead give the regulator the flexibility to set the residential or the non-regulated indexation as he or she does for regulated now. That is addressing the exact point that you raised. I've mentioned previously, having a hardened rule of CPI +1 could be political suicide as well as not helpful for the people living in flats. I would be very confident that that comes in because, again, I've suggested I just didn't see a way where they would let that CPI +1 stand. I would feel very confident that actually comes through.
Okay. Thanks for that. Just the last one and, you know, talking through, you know, the potential for more regulation in the mid-market. Does that make you look maybe outside of the Dutch borders a little more aggressively now, or just kind of waiting to see what comes of it at this point?
No, I don't think it accelerates us. Again, I've mentioned before, you know, we have been making ourselves aware of the other markets. We think it's interesting. We think our platform and CAPREIT's presence in Europe is mature enough now where we're ready to do that. Again, in a macroeconomic interest rate environment, geopolitical environment that we're in now, because again, keep in mind, to go to a new jurisdiction, you have to do it in some scale to make it justified. It's certainly not accelerating our move outside the Netherlands. Historically, you know, we have performed very well in the Netherlands as that regulatory environment has changed.
Our history, you know, tells us that regulations are always changing, and over a more elongated period of time, you know, regulations are manageable so long as they're transparent. We have a core competence and skill set that demonstrates we can do that, whether it be across the provinces in Canada, whether it be in Ireland, whether it be in the Netherlands, and we remain confident that we can do that.
Okay, great. That's it for me. I'll turn it back. Thanks.
Thank you, Kyle. Our next question comes from Matt Kornack with National Bank Financial. Please go ahead.
Hey, guys. Just two quick ones for me. First, Stephen, can you quickly give us a sense as to where a similar term and type of financing would be today? I mean, bond yields are moving like tech stocks, so the downward drift, are you getting sort of the 25-50 basis point savings versus what you did the mortgage at recently?
Yeah. I actually priced it out yesterday. I think it's, we've seen basically a 40 basis points drop in this on the six years. If you use a 3.2%, it will be around 2.7%-2.8% right now.
Perfect. No, that's helpful. Just on the sustainability measures, and again, understand that it sounds like there's no certainty around this legislation yet, but E, F, and G energy labels, can you let us know if any of your properties fall into those categories? Excuse my ignorance.
Oh, no, it's okay. No, I mean, this is another one that I would say is highly likely to be passed. There's an EU directive that basically mandates this, and each member of the EU has to pass it. It's not due to come into force until 2030, but it basically means that as of 2030, to the extent that you had a flat with less than D, you would no longer be able to rent it on turnover. We do have a component of our portfolio that is E, F, G or unrated. I think I'm just trying to think of the number off the top of my head. It's probably gonna be, you know, 10% or 15%, but we've already started a program to upgrade those.
Again, we do significant in-suite CapEx at turnover, not only to convert, but also, you know, to increase market rents if it's already liberalized. We've instituted a new protocol that going forward, whenever we are doing in-suite CapEx, we need to improve the energy label, ideally to at least a C, because it takes time to, you know, turn over your entire portfolio, and we want to get ahead of that, as opposed to waiting to deal with it as 2030 draws close. If we have 10%-12% turnover, you know it takes eight to 10 years to get through our portfolio. That is something that we're adjusting into our capital investment and in-suite CapEx program now. Again, the Netherlands doesn't really have a choice. It has to follow the EU directive.
It's just a matter of time of when that legislation becomes finalized.
That absolutely makes sense. I guess as you look to acquire, and it sounds like it's pretty modest issue within your existing portfolio, but if you're acquiring regulated suites at this point, I guess you'd hope to get ones that meet the energy efficiency requirements? Are these small enough investments that their economic returns are okay?
Yeah. I mean, in an ideal world, yes, we would prefer them all to be at D or above now. But, you know, depending upon, you know, where it was, what we thought the rental growth was, how far below its regulatory or statutory maximum would be. You know, we also do invest in our regulated suite, so you know, it is not a no-go, but it is something that we will certainly be more cognizant of, as we move forward. It's something that's very transparent. You can go on a government website, plug in, your apartment and, you know, it's published what your rating is. So, you know, that is something that we can easily due diligence.
Okay. No, that's interesting. I think that's coming soon to everywhere in the world, so good to be ahead of it.
I mean, that's a fair point as well, right? I mean, you know, ESG is here to stay. I mean, everybody's dealing with, you know, droughts and heat waves. Climate change is here. We don't need to argue who causes it or what caused it, but you know, we believe it's the right thing to do also to further invest in our assets and, you know, increase their energy efficiencies, et cetera. We are trying to get ahead of it, the best that we can. You know, that's how we're gonna move forward.
Okay, great. Thanks, guys.
Thank you, Matt. Our next question comes from Jimmy Shan with RBC Capital Markets. Please proceed.
Hey, thanks. Good. Just a quick follow-up on the potential rent control in the mid-market. I know there's a lot of uncertainty on the threshold and the various parameters, but what would be the kind of a rough percentage of liberalized suites within your portfolio that has a monthly rent higher than EUR 1,000 or EUR 1,250 that you think may not qualify or may not have enough points to qualify as liberalized? Is there a rough percentage that you can share?
We probably have. I don't have the number in front of me, but I would say 30%-40% of our portfolio would be above EUR 1,000. We have very limited that would be above EUR 1,250.
Okay.
Again, I would be careful.
That's helpful.
I'd be careful to take an extrapolation, right? Because then you have
Yeah
35% of our portfolio is regulated. To then say that the other third is at risk isn't necessarily the case, because at the same time they're talking about stretching the umbrella, if you will. They're also talking about changing the way you calculate points, because it isn't the rent that drives it's the points that drive it. Whenever they're publishing these things, they always publish the rental number, but that's actually the inverse of the way that it works. It's the number of points that you need to be focused on, which they're simultaneously talking about changing the way we calculate points.
Okay. The points parameters, I think they've published that, right? Like a range of points that you need to have-
No, they have.
I thought I saw a number. No, okay.
No, this is where all the uncertainty comes. If you look at the matrix today, you know, EUR 1,000 would equate to 185-190 points.
Mm-hmm. Mm-hmm
Two or EUR 1,250 would equate to between 220 and 230 points. You know, it changes a little bit every year. They're not publishing anything that's focusing on points, which is why it's even more or less clear than it otherwise would be. They're just saying, "We wanna capture rents in this area." Again, if they change the entire way that points are calculated, it's really uncertain. That's why I would caution people to say, you know, using the questions you just answered, okay, that means there's a third that falls in this area that, you know, that could be at risk.
That's not necessarily the case because, again, if they start, you know, recalculating the way points are done and they start giving you more credit for energy labels and all these different things, it would require quite a reset in the way it's all calculated now. Again, it remains, you know, lacking specificity, but I would just caution people to, you know, take too quick of broad brush assumptions or extrapolations.
Okay. Fair enough. Is there any lobby efforts or discussions, you know, underway including by yourselves to sort of work with the government to come up with a solution? Or is this really going to be one where one day we're gonna get a press release and these are the new rules?
No, I mean, I hope it's not the latter, but. No, the biggest industry group is called IVBN. We're a member of that. We work with them. We've worked with them on other measures when they were, you know, changing the buy-to-let rules at the beginning of this year. We're very actively engaging with them, trying to explain to them the consequences. A lot of developers are very much engaging with the government, saying that if you were to do something, you know, if we read your press releases to the most draconian extent, it would shut down the entire development pipeline. You know, they're approaching it from a different angle.
You know, as we engage alongside IVBN with the government, we're like, "Listen, you know, we understand what you're trying to achieve." Again, it would be appropriate to modernize the points calculation because it's incredibly esoteric as it is now. If you want to stimulate people to increase the energy performance, then provide more points for energy labels. You know, we're trying to be, you know, constructive and combative. You know, the government will certainly need to do something, ostensibly, so they can be perceived as doing something, but they also can't further destroy a supply that is woefully inadequate. We are engaging with them. We're trying to be constructive. There will be changes.
Again, all of the changes that they've made historically, even in, you know, the five, six years since we've been there, we've been able to manage through them and continue to deliver, and we remain confident about that, even though at this juncture, some of their announcements remain quite unclear.
Okay. Thank you.
Thank you, Jimmy. Our next question comes from David Chrystal with Echelon Capital Market s. Please go ahead.
Thanks. Good morning, guys. Not to beat the regulations horse to death and, you know, keeping in mind that we're probably all in the dark to some extent, would you say the big concern is existing liberalized suites that are, you know, in that, you know, maybe a 185-point range that may have rents in excess of the regulatory figure that could then actually come down significantly in rent? Or, is it more just that your future revenue growth could be constrained versus an actual erosion in revenue?
Well, no, I mean, the market rental growth, in my mind, will continue on its path without reflecting these new regulations. It is more what you say. You could have liberalized flats today that would become or return to being regulated upon turnover. Again, I hesitate to even start throwing out point numbers because at the same time that they're talking about, you know, where they might wanna go, they're talking about, you know, revising or quote-unquote, "modernizing" the points calculation. It's very difficult to look at our portfolio and say, "Okay, at 187, we have this amount of risk," because, you know, the points might be very differently calculated. Again, we think the market fundamentals remain extraordinarily tight in our favor. We believe the market rents will continue to go up.
Again, we and the others simply have no further visibility on how this is all going to collectively work out. I personally, from a pragmatic perspective, you know, expect them to do something that allows them a political win that says they're adjusting the market, but does not do anything horrific because that would destroy their primary goal of delivering more supply. If they start rebasing people's income, you know, erosion of revenue, as you suggested, they're gonna face long-term court battles as happened in Berlin when they put in rent freeze and retroactive rent reductions that ultimately got overturned. Again, the Dutch government historically is coalition-led. It takes a long time for things to happen, but there generally is delivered some form of pragmatism.
Fair. You mentioned that your, you know, your acquisitions would tilt maybe to a bit of a barbell where you would look at existing regulated suites or very high-end on the liberalized side. Would that translate into any asset dispositions and recycling out of, you know, some mid-market assets that may be more at risk into either of those other strategies?
No. One, you know, again, we've worked very hard to aggregate our portfolio. We've selected the assets that we own. We're comfortable with them. Additionally, I would say, the portfolios that are on the market today, any of them that are sort of in this zone of potential implication are the ones that aren't trading. You know, now would not be a time in my mind with this uncertainty to try and sell the very flats that other people would consider equally uncertain. We're not in the disposal program. Again, we would, you know, focus on the barbell ends, as you say, you know, assuming that the price is right versus our then current cost of capital.
Okay. Given your, you know, maybe your medium or longer term debt target is in the 45%-50% range and you're, you know, bumping towards the upper end of that, would you be comfortable exceeding this in the near term, or is the 50% a near term cap?
I mean, we've talked about that also in the past, you know, collectively on these calls and other meetings where we still want to grow. If we have an opportunity to grow at asset pricing that we like, given where our stock price is and our unwillingness to raise capital at such severe discounts, we would be comfortable with our, you know, debt to LTV going above 50 modestly, for a period of time and that strategy hasn't changed.
Okay, perfect. Thanks. I'll turn it back.
Thank you, David. Our next question comes from Johan Rodriguez with Industrial Alliance. Please go ahead.
Hi, I just wanted to clarify, one small thing. Is your expectation you said they tabled a proposal for the CPI +1 to be removed and then have it be, you know, up to the discretion of the regulator. Is your expectation that for 2023 they scrap the CPI +1 , or is it the expectation for 2024?
If they do it, I think it'll be for 2023. Again, depending on which number you wanna look at in Europe, you know, inflation between 7% and 10%. I just don't think that the government, and certainly the housing minister, would let, you know, CPI +1 with CPI being between 7% and 10%.
Yeah
You know, go through. Having said that, you know, this year we got 2.3% for regulated and 3.3% for non-regulated liberalized, which, you know, I'm very fine with that result, and I would be surprised if it were less than that when we come around for the 2023 cycle. If they do this, which again, I believe they will, it will be for the next indexation cycle.
Gotcha. Okay, thanks. I'll turn it back.
Thank you for your question. There are currently no questions registered, so as a reminder, it is star one if you'd like to ask a question. There are no further questions at this time, so I'll pass the conference back over to the management team for any further remarks.
Thank you, operator, and again, thank you everyone for your joining us this morning and for your time. If you have any further questions, as always, please do not hesitate to come back to either Stephen or myself at any time. Have a great day, and thank you.
That concludes the European Residential Real Estate Investment Trust second quarter 2022 results conference call. Thank you for your participation. You may now disconnect your line.