European Residential Real Estate Investment Trust (EREUN) Earnings Call Transcript & Summary

Thank you, Corinne, and thank you, Mr. Chairman, and good afternoon, everyone. Turning to Slide 6 of the presentation. ERES has now passed its 2 year anniversary. For a significant period since ERES' inception, the business environment has been far from usual due to the COVID-19 pandemic. Despite these circumstances in which we and the rest of the world have been operating over the past year, we still were able to grow our suite count by over 400 units with several accretive acquisitions throughout The Netherlands, representing an increase of 7% in the residential portfolio. Assets under management grew by even more than this, increasing 9%, reflecting the high-quality and inherent value that characterizes our properties. Our strong operational performance continues despite the pandemic but the negative market reaction that came with the widespread onset of COVID-19 continues to impact market sentiment. This is apparent when observing the disconnect between the ERES unit price versus its intrinsic value or NAV. Slide 7 summarizes some of our more significant accomplishments during 2020. Although we proactively paused acquisition activity during Q2 and part of Q3 2020 as a temporary precaution in light of potential unforeseen impacts of the pandemic, we nevertheless were able to recommence accretive expansion in the latter half of 2020. To that end, we grew our suite count by 415 units across 8 properties for an aggregate purchase price of over EUR 80 million. Regarding mortgage financing, ERES secured approximately EUR 108 million in 2020, all at favorable interest rates, which continued to lower our overall weighted average mortgage cost. We are also very proud to have graduated from the TSX Venture Exchange to the Toronto Stock Exchange in July 2020. And we remain confident that this milestone will continue to support ERES' and its growth, increasing liquidity and deepening the investor base in Canada and beyond. On February 23, 2021, in light of ERES' strong operational performance, the Board announced a distribution increase of approximately 5% going forward. This pushes our distribution yield to approximately 4%, subject to unit price and exchange rate fluctuations. Moving on to Slide 8. You can see the rapid growth in our asset base over the years. This growth profile reinforces ERES' strategic focus on the multi-residential asset class in Europe with the current initial concentration on the Netherlands. All of the properties were -- all of the properties we acquired during 2020 were located in various urban centers and towns throughout the Netherlands where circumstances are extremely conducive to the achievement of our investment objectives. For the year ended December 31, 2020, inclusive of the fair value appreciation on our total portfolio of EUR 46 million, the market value of our investment properties grew to EUR 1.47 billion, up 9% from last year. This reflects positively on the strong characteristics of the Dutch multi-residential sector alongside ERES' positioning in this continuously active market. 2020 provided an opportunity for the asset class to demonstrate its defensiveness built upon the cornerstone of countercyclicality. It likewise allowed ERES to prove the resilience of its platform, the high-quality of its property portfolio and its ability to continue operating safely while also accretively growing, all despite the diversity associated with the COVID-19 pandemic. ERES' strategy is predicated upon underlying macroeconomic factors, as shown on Slide 9, together, creating this unique opportunity for profitable investment in the Netherlands. Its robust macroeconomic fundamentals include being one of only a few countries with a strong AAA credit rating. There also exists a growing population in an already densely populated country. Combined with an acute housing shortage, there is very strong demand for rental accommodation. Continuing on to Slide 10. We can see that the Dutch economy continues to show resiliency compared to European and international peers. The economic impact of the pandemic was more muted in The Netherlands and 2021 forecasted annual GDP growth is a healthy 2.3%. As illustrated on Slide 11, the key real estate fundamentals of The Netherlands multi-residential market, including forecasts that demand for housing will continue to outstrip new supply for the foreseeable future, an imbalance which has driven and supported rental increases to date. Furthermore, through organic growth and net new migration, The Netherlands population is expected to continue growing, further exacerbating this housing supply demand disparity. Reflecting these fundamentals, the graph on Slide 11 shows that the Netherlands has had consistent rent increases over the past 40 years, even during harsh economic times. With such strong real estate fundamentals, The Netherlands is a very appealing place to deploy capital and provides ERES with the perfect opportunity to exercise one of our key value propositions, that being to buy well and finance cheaply, thus locking in attractive yield spreads as shown on Slide 12. In the Netherlands, we see CAPREIT or asset yields between 3.25% and 4%. This generates a strong accretive spread between CAPREIT's and mortgage interest rates in The Netherlands at between 200 to 300 basis points due to the attractiveness of the asset yields in the persistently low interest rate environment. We will continue to take advantage of this fragmented market to source further accretive acquisitions as long as such conditions persist via both our own access to capital as well as through the pipeline agreement with CAPREIT. For our 2020 acquisitions, the weighted average CAPREIT was 3.9%, with a mortgage interest rate of only 97 basis points, translating into a 293 basis points yield spread and demonstrating our ability to achieve this goal. ERES' second key value proposition is our rental maximization strategy as shown on Slide 13. In short, we were able to capitalize on the tight housing supply and strong economic growth to drive recurring like-for-like rental growth. At this time, it's important to remind everyone briefly how The Netherlands rental market works. In The Netherlands, the market is regulated and follows a point system whereby suites are defined as either regulated or liberalized. Points are allocated to each suite based upon multiple factors, most importantly, our size and value, followed by energy efficiency and the quality of the finishings. Rental growth must be divided between renewals and turnover. Regulated renewal rates depend upon a tenant's income and where the in-place rent is versus the regulatory maximum for the corresponding number of points. However, effective for the period from July 1, 2021, up until and including June 30, 2022, indexation of all regulated suites has been set at 0% regardless of household income. For renewals pertaining to liberalized suites, the government recently enacted a rental cap on annual increases to CPI plus 1% effective for initial 3-year period. For the current year, this translates into a maximum turnover indexation growth of 2.4% for liberalized units. Notwithstanding these legislative developments, we reaffirm that ERES already has been operating productively within a complex regulatory regime. In fact, this expertise constitutes one of our key competitive advantages, a confidence that is now only becoming increasingly more valuable. Furthermore, these regulations do not apply to rent uplifts on turnover or CapEx-driven increases, including converting regulated suites to liberalized suites, which are significant drivers of our rental growth. Combined with the uniquely diverse composition of our balanced portfolio between urban and suburban, regulated and liberalized and across single-family and multifamily properties, we are well positioned to continue operating efficiently and strategically within this continuously fluid and dynamic Dutch regulatory system. It is also important to highlight that we remain confident of our ability to drive top line rental growth within our targeted range of 3% to 4%. Slide 14 highlights the balanced mixture of our properties that constitute our total portfolio. You can see that over 40% of our current properties are located in the high-growth urban conurbation of the Randstad with approximately 25% 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. Approximately 35% of our portfolio is comprised of single-family homes, also known as Dutch Row Houses, a segment which represents an additional diversifying and unique contributor to our portfolio mix. Importantly, our suites continue to be nearly evenly divided between regulated and liberalized with a modest weighting toward liberalized providing balanced growth in rents on turnover and indexation as well as the opportunity to liberalize more suites. Slide 15 provides more details on our current residential portfolio. Average occupied rents were EUR 858 a month at the end of March 2021, with a high and stable occupancy of 98.3%. A large majority of vacancy, more specifically, 78% was attributable to renovations. Upon completion of these renovations, a significant portion of these suites will convert from regulated to liberalized, demonstrating the execution of our value-add capital investment program. Our turnover for the first quarter was 3.8%. Rental uplift on that turnover was especially strong at 13.7% compared to 7.7% uplift achieved in the comparative period. The ERES portfolio is well diversified by number of bedrooms, ensuring we 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, providing an average age of under 40 years, resulting in lower ongoing repairs and maintenance and driving higher asset values. Now to provide an update on the COVID-19 pandemic and its impact on ERES to date. Slide 17 provides a further update on the Dutch government's response to the government 19 (sic) [ COVID-19 ] pandemic. The substantial government assistance programs enacted since the beginning of the crisis continue in full force as we continue to manage a third wave of the coronavirus. The extension of social restrictions and response to this have been masked with continued support measures provided by the government to sustain the economy and the people of the Netherlands. With the unwavering proactiveness in their response efforts, the Dutch government has been able to mitigate as much as possible the adverse impact of the outbreak. Combined with its strong market fundamentals and an underlying economic stability inherent in the Netherlands, unemployment has remained low and the Dutch economy continues to outperform its European zone counterparts, evidencing the effectiveness of the Dutch government support package alongside the resilience of its economy and the robustness in market dynamics throughout the country. Moving on to our operational and financial performance. As detailed on Slide 19, our operating metrics have not only withstood the challenges of this unprecedented year but have, in fact, improved since last year. Residential occupancy increased to 98.3% at the end of 2020, which evidences the effectiveness of our property management through a focused minimization of inherited vacancy. Occupied average monthly rents on our stabilized portfolio increased by 3%, a result of contractual indexation, turnover and the conversion of regulated suites to liberalized suites. Stabilized portfolio NOI for the 2020 year increased by 3.8%, driven primarily by the aforementioned higher operating revenues from increased monthly rents further complemented by lower property operating cost as a percentage of revenue. Turning to Slide 20. You can see our operating results continued to improve and our performance remained strong throughout 2020 despite the challenging circumstances. For the fiscal year ended 2020 as compared to 2019, operating revenues were up 68% on the contribution from our acquisitions as well as increase in monthly rents in the stabilized portfolio. This revenue increase, combined with lower operating cost on stabilized properties, drove a 69% increase in our NOI with a stronger consolidated NOI margin of 76.2%, quantitatively reflecting our operational strength. FFO per unit decreased slightly compared to 2019, predominantly as a result of the cash drag from our above-average liquidity reserve, which we maintained throughout most of 2020 in response to the uncertainty of the pandemic. AFFO per unit increased by EUR 0.001 due to the overridingly and positive impact of our accretive acquisitions since prior year. We are proud to report our strong operating results continued into 2021, as showed on Slide 21. Accretive acquisitions since the prior year period and strong top line rental growth are the primary drivers behind this operational performance, together accounting for the 10% increase in our operating revenues during the first quarter of 2021 compared to the first quarter of 2020. Net operating income likewise increased by 10% for the first quarter compared to the prior year period, also attributable to contributions from acquisitions and our higher monthly rents. However, this was offset by higher property operating cost as a percentage of revenue, primarily due to higher repairs and maintenance, including an increase in cleaning cost associated with COVID-19 as well as certain onetime recoverable R&M expenses incurred in the REIT's commercial portfolio. In aggregate, our NOI margin remained strong at 75.5% at the end of March. Importantly, NOI margin on the residential portfolio remains stable and unchanged at 75.4% at the end of the first quarter compared to the same period last year. During the first quarter of 2020, FFO and AFFO increased by 9% and 8%, respectively, compared to the first quarter of 2020 on both a total and a per unit basis. FFO per unit increased by EUR 0.003 and AFFO by EUR 0.002, primarily due to the positive impact of increased stabilized NOI and accretive acquisitions since the prior year. As we continue to scale the business, we remain focused on maintaining a conservative financial profile, as you can see on Slide 22. Amid the unpredictability of the capital markets, ERES has been able to maintain its debt to gross book value within its target range of 45% to 50%, lower its weighted average mortgage effective interest rate, reflecting the persistently low financing rates throughout the European Union and maintain the conservative term to maturity on its mortgage portfolio. In addition, with ample liquidity of EUR 96 million at the March 31, 2020, which excludes the pipeline agreement and cash on hand, dedicated to ongoing operational and capital expenditure requirements, we have immediate capacity to acquire over EUR 240 million of assets. Further reinforcing this strong stand-alone financing structure is the significant supplemental source of in-place capital that is provided by the cap -- provided by CAPREIT via the pipeline agreement, which we recently extended which increases acquisition capacity to over EUR 500 million, magnifying ERES' ability to capitalize on attractive acquisition opportunities. Our conservative financial profile not only supports our future growth, but enables us to grow our distributions as well. Thus, we were able to increase our rate of distribution by 5% during the past quarter and going forward. This pushes our distribution yield to approximately 4%, subject to unit price and exchange rate fluctuation. Slide 23 provides more detail on our staggered mortgage portfolio with the nearest debt maturity not occurring until December 2022. You can see that our recently added mortgage, with its 4-year term maturing in 2024, balances well within our existing portfolio. In addition, the majority of our mortgages are nonamortizing. As we continue to grow, we will ensure we maintain this smooth maturity profile in order to reduce renewal risk. Slide 24 further evidences the endorsement of The Analyst Group with the summary of their latest research coverage and estimates. As you can see, despite the recent uncertainty and instability afflicted by the COVID-19 pandemic, our average price target is above $5 per unit, complemented by favorable buy recommendations and an average estimated capitalization rate of 3.95%. Forecasted AFFO per unit for 2021 and 2022 also proved consistent with our endeavor to continue securing accretive acquisitions, whilst managing the operation of our existing portfolio efficiently, and represent AFFO multiples, which reinforce the potential of our business and its future growth. Looking ahead, and in summary, and passing the 2-year milestone since ERES' inception, we are proud to have established a track record of robust performance, which has substantiated the fundamental value and strength inherent in our strategy, operating platform and business model. Although we continue to operate in an extremely atypical circumstances that, over the past year, has had limiting consequences on our ability to achieve fast-paced growth by acquisition, we are confident of ERES' ability to continue to grow organically and strengthen operationally even amid ongoing adversity. Notwithstanding the continuation of these unprecedented times, we do expect that growth will be mirrored externally through accretive acquisitions in the quarters to come. As we look to emerge from the uncertainty of this pandemic and its dampening ramifications, we look forward to realizing ERES' potential and realizing its inherent strategic value to its stakeholders. In this regard, we believe that ERES offers a compelling investment opportunity, as shown on Slide 26. The REIT provides a unique opportunity to invest in a fast-growing and attractive European multi-residential real estate market. Our partnership with CAPREIT brings significant benefits to our unitholders. We are growing our portfolio at very attractive yield spreads with strong and highly accretive organic and external growth opportunities. We've established a strong foothold in the Netherlands multi-residential market, and we are building size and further 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 Board of Trustees. Thank you for your time this afternoon, and I would now be pleased to take any questions you may have.

There are no comments or questions to be addressed. I will now turn the meeting back to Mr. Burns.

Again, thank you for joining us this afternoon, and we look forward to keeping you apprised of our progress in the quarters ahead.

This concludes the meeting. You may now disconnect.