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

Good morning, and a warm welcome to today's European Residential Real Estate Investment Trust Third Quarter 2022 Results Conference Call. My name is Candice and I'll be your moderator for today call. [Operator Instructions] I would now like to pass you over to our conference host, Phillip Burns, CEO. The floor is yours. 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 our other regulatory filings. Joining me today is our new CFO, Jenny Chou, who was appointed in August of this year. Jenny has been extensively involved with ERES since inception, and we welcome her expertise to the team. After I provide an update on our operational progress during the quarter, Jenny will provide an overview of our financial results and position. This third quarter of 2022 again showcased the ability of ERES to operationally outperform despite the tumultuous environment in which we have been operating and arguably one of the most challenging circumstances in ERES' history to date. Slide 4 provides a snapshot of the REIT's growth since inception as well as since the prior year period. ERES has increased its suite count by 12% since Q3 of 2021, with 3 acquisitions in Q4 of last year and 3 acquisitions in the first half of 2022. That said, considering prevalent uncertainty associated with regulatory -- with the current regulatory and financing conditions, ERES is proceeding with caution on the acquisition front. Nevertheless, on the flip side of that external growth, you can see that the fair value of our property portfolio increased almost twofold as compared to the increase in unit count, up by 21% since the prior year period. Excluding the impact of acquisitions, our portfolio value appreciated by EUR 134.2 million versus the prior year period, representing an increase of 8% on a stabilized basis. This uplift in market value is supported by the ongoing strength of our portfolio metrics with the REIT's continued realization of strong increases in monthly rents, high occupancies and substantial uplifts on our conversion program. This gain contributed to the 13% increase in our net asset value per unit, which grew to EUR 4.26 as of September 30, 2022. In spite of this uninterrupted internal growth, current capital market pressures continue to prevail and as a result, the REIT's market capitalization and public float decreased by 32% since the prior year period. As we reiterated in previous quarters, in the context of our operational strength and positive industry fundamentals, this creates the opportunity for investors to arbitrage this spread and capture ERES' intrinsic value alongside its core growth and income orientation. Slide 5 provides an overall update on the business during the third quarter of 2022. As compared to Q2, the fair value of our investment portfolio remained relatively stable at EUR 1.98 billion, of which 95% represents our residential properties, with the remaining 5% attributable to our commercial segment. Fair value of the residential portfolio, which is reassessed each quarter by our external appraiser based in the Netherlands, was reported to be EUR 1.885 billion as at Q2 and Q3. ERES continues to take a conservative approach to its financing with a staggered mortgage profile, targeted leverage and robust debt metrics, all of which Jenny will discuss in detail shortly. The REIT has immediately available liquidity of EUR 29 million through cash on hand and unused capacity on its revolving credit facility, excluding additional capacity available to acquire properties via the pipeline agreement or promissory note arrangements with CAPREIT. Although we currently are exercising caution with respect to new acquisitions, our liquidity position translates into theoretical acquisition potential in excess of EUR 300 million. Operationally, the REIT's accretive quarter and year-to-date date resulted in significant gains in funds from operations and adjusted funds from operations. FFO per unit increased by EUR 0.044 for the 3 months ended September 30, 2022, up by 13% since Q3 of 2021, while AFFO per unit grew even more meaningfully, up by 18% to EUR 0.04 over the same period. These increases are attributable to successful external growth from acquisitions combined with strong organic growth with a sizable increase in stabilized NOI since the prior period end. Speaking of organic growth, Slide 6 summarizes some of our outstanding operating metrics. Overall growth in rental revenue again has surpassed target with an increase in occupied average monthly rent of 5.2% on the stabilized portfolio. Including the impact of our acquisitions, net and occupied AMR on the total portfolio increased even more substantially over the same period by 5.5% and 5.9%, respectively. These increases are attributable to the REIT's trifold rent maximization strategy comprised of its capital expenditure program, including the conversion of regulated suites to liberalized as well as increasing rents on indexation and turnover. Regarding the latter, average rental uplift in the current quarter was 18.2%, excluding service charge income on turnover of 3.3%, which compares very favorably to the change in monthly rent of 15.7% on a comparable turnover of 3.5% in Q3 of 2021. Specifically on conversions, ERES achieved rental uplift of over 50% during the past 3-month period compared to 44% in the 3 months ended 30th September 2021, evidencing the effective execution of the REIT's value-enhancing conversion program in parallel with the untapped uplift potential inherent throughout our portfolio. As a reminder, indexation in the Netherlands is effective on July 1 of every year and is subject to the Dutch government's maximum rent indexation caps, which are reset on an annual basis. For rental increases due to indexation beginning on July 1, 2022, the REIT served tenant notices to 96% of its residential portfolio across which the weighted average rental increase due to indexation was 2.95%. This exceeds our weighted average rental increase due to indexation in the prior year, which was 1.5% on the total portfolio, in line with the significantly lower caps at that time. Within a dynamic and evolutionary regulatory regime, the REIT is consistently achieving growth in rental revenues in excess of our targeted range of 3% to 4%. We aim to continue to outperform on this key metric as we remain strategic and adaptable in the short and long run in proactive response to this historically fluid and iterative regulatory system. Moving on to Slide 7, you can see that the occupancy remains strong at 97.8% on the residential portfolio and 99% across our commercial properties. For the 3 months ended September 30, 2022, net operating income increased to EUR 17.9 million, up a significantly 19% from EUR 15 million in the prior year quarter due to contributions from acquisitions, higher monthly rents on stabilized properties and strong cost control. With a further decrease in property operating costs as a percentage of operating revenues, NOI margin significantly increased to 84.3% for the third quarter of 2022, up from 82.1% in Q3 of 2021, which Jenny will elaborate on shortly. In the context of current macroeconomic conditions, this evidences the REIT's limited exposure to inflationary pressures as tenants are responsible for the majority of their own energy and utility costs. In addition, the REIT has no employees and therefore no wage costs and property management fees are fixed percentage of operating revenues. Our overhead is also protected from inflation with the largest contributor being asset management fees, which are based on historical costs with no allowance for inflation. Slide 8 serves as a reminder of the unique diversification that characterizes our high-quality portfolio. Approximately 2/3 of our portfolio is liberalized with over 40% of our properties located in the high-growth [ conterbation ] of the Randstad region. Moreover, approximately 1/3 of our portfolio is comprised of single-family homes, also known as Dutch Roll Houses, a segment that is even further protected from inflation as tenants perform a majority of the repairs and maintenance work themselves, thus resulting in higher margins. With that, I will now turn the call over to Jenny.

Thank you, Phillip. As you can see on Slide 10, our financial results continue to strengthen. On a total portfolio basis, operating revenues and NOI both increased versus Q3 of 2021 by 18% and 19%, respectively, due to accretive acquisitions since that period as well as an increase in monthly rents on the stabilized portfolio, as outlined by Phillip earlier. Combined with the decrease in property operating costs as a percentage of operating revenue, a result of lower R&M costs and reduced landlord levy tax rate, the REIT's NOI margin increased by a significant 220 basis points to 84.3% for the 3 months ended September 30, 2022, which excludes service charge income and expense, including service charges, which have a net impact of nil on NOI as they are fully recoverable from tenants. Total portfolio NOI margin still increased meaningfully to 78.5% for the quarter ended September 30, 2022, from 77.9% in Q3 of 2021. With the Dutch government expected to abolish the landlord levy tax effective Jan 1, 2023, the REIT expects to achieve its NOI margin in this improved range in the long run, which is further reinforced by a fact that the REIT's property operating costs are largely insulated from inflation [indiscernible]. This all translated into accretive operational results with FFO increasing by 13% to EUR 0.044 per unit, while AFFO increased even more meaningfully, up to 18% to EUR 0.04 per unit as compared to the prior year quarter. Slide 11 exhibits the REIT's outperformance on a stabilized basis as well. Although stabilized residential occupancy decreased to 97.8%, this was primarily due to a greater proportion of suites undergoing renovations upon turnover. With 77% of vacant suites offline for that reason, which should provide for further rental uplift once the suite are leased. Stabilized occupied AMR grew from EUR 926 as at September 30, 2021 to EUR 974 as at Q3 2022 representing an increase of 5.2% that is significantly in excess of our target range of 3% to 4%, attributable to the great successful execution of our rent maximization strategy. This field increases in operating revenues and net operating income up by 6.4% and 6.8%, respectively, compared to the prior year period. Combined with the REIT's active program of lower property operating costs as a percentage of rental revenue as well as its limited exposure to inflation, this resulted in a substantial increase in NOI margin to 84.4%, excluding service charges. This 220 basis point growth in margin as reported on both the total portfolio and on a stabilized basis, evidences the REIT's ability to achieve such improvement on a normalized basis. Slide 12 presents the REIT's consistency in achieving its accretive operational results to date. Through higher stabilized NOI, profitable acquisition, margin expansion and strong cost control, you can see that our FFO and AFFO per unit increased in every quarter. As a result, our AFFO payout ratio has overall trended downward, notwithstanding the 9% increase in our distribution rate earlier this year, while our distribution yield continues to trend upwards, heading 5.5% as at September 30, 2022. Importantly, the REIT consistently maintains a conservative financing structure as displayed in Slide 13. We have immediately available liquidity of EUR 29 million through cash on hand and unused capacity on the REIT's revolving credit facility. Excluding additional capacity available to a part properties via the pipeline agreement or a promissory note agreement although we currently are exercising caution with respect to new acquisition. Our adjusted debt to gross book value ratio remains the REIT's target range at 48.7%, and our interest and debt service coverage ratio remained high and safe at 4x and 3.3x, respectively, significantly in excess of the minimum threshold prescribed by our revolving credit facility. And finally, Slide 14 evidences the staggered disposition of our mortgage profile, which reduces renewal risk while also stimulating liquidity as the majority of our mortgage are nonamortizing and approximately 100% are financed with terms and arrangements that result in fixed interest payments with a weighted average term to maturity of 3.7 years, combined with the fact that we have no mortgage refinancing coming due for the remainder of 2022 and less than 10% of our mortgage debt maturing in each of the following 2 years. ERS is well positioned to withstand forthcoming volatility. On that note, I'll thank you for your time this morning and turn things back to Phillip to wrap up.

Thank you, Jenny. In summary, looking back on this past quarter and year-to-date, we continue to demonstrate our ability to overachieve with respect to all of our operational targets. This has not been accomplished in circumstances wholly conducive for such outperformance. Although macroeconomic and financial headwinds will continue to cast a shadow on the industry in upcoming quarters, we expect to simultaneously continue overachieving such challenges -- overcoming such challenges and uncertainty equipped with vigilance experience and resources needed to navigate any potential muddy waters as evidenced to date. During this morning's call, we have again reemphasized the stable pillars upon which ERES stands. Our rents continue to grow and despite a regulatory regime that is far from static, we achieved the highest growth in rent to date during this past quarter. Occupancy is high with the majority of any vacancy attributable to the execution of our value-enhancing and rent growing capital expenditure program. Uplifts on turnover continued to increase, especially on conversions on which we achieved an average uplift of 54% this year-to-date and margins continue to run higher, supported in the long term by the REIT's insulation from inflationary pressures. These operational results reaffirm the REIT strategy, while its capital markets valuation remains notably disconnected from such results in the underlying sector fundamentals. In this respect, the capital market currently is magnifying the opportunity for investors to capitalize on all that I have just highlighted. Thus, the ability to benefit from growth, income as well as value. We now head toward the new year with operational and strategic diligence necessary to ensure that we continue to put our best foot forward in all directions as we have demonstrably done today. 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, over to you, please.

[Operator Instructions] So our first question comes from the line of Jonathan Kelcher of TD Securities.

First question, just on the NOI margin, I think in the MD&A, you guys cited lower R&M charges as one of the reasons for the increase in margins. Is that -- is it a lower-than-normal quarter Q3 this year? Or was it an easier comp versus last year, and this is a more sort of normal run rate?

I think right now, we're probably at a more normalized run rate with this quarter.

Okay. So if we look ahead to next year and excluding the service fees and the levy -- the thing on the levy taxes is somewhere in the mid-80s a sort of way to think about margins for you guys?

Yes. I mean I think, yes, low to mid-80s. I don't think we're going to get to 85%. But I think where we came in, in Q3 is a good proxy, excluding service charges.

Right. Yes, excluding the service charges. Okay. And then secondly, I guess, last quarter, you said that you didn't think the government would do CPI plus 1 for renewals for next year. It looks like they've brought something else. And can you maybe let us know how that annual wage development figures sort of what that is and how it -- more importantly, I guess, how it's calculated?

Yes. I mean, I certainly will, but I'll answer what I'm certain are going to be more questions, just a little bit of an update on the regulatory framework. So when we spoke at the August quarter, there was a lot of uncertainty. Some of that uncertainty has been removed, but they're -- probably the biggest piece is still out there. So the one thing that they have now clarified. And again, I thought I was clear that it probably wouldn't be CPI plus 1 for the upcoming years simply because CPI is running so high. And so what they've now done -- well, the legislation hasn't passed, but we certainly expect it to is that for -- again, to be clear, the liberalized suites, nonregulated indexation will be the lower of CPI plus 1 or the annual wage index plus 1. Both of those are published in the government database websites. If you were to look at -- well, inflation is running very high in the Netherlands. But if you were to look at the annual wage index, it will be done on a calendar year period, a 12-month calendar year period. So we don't have the rest of this year. But if we were to look at what that is to date through September of this year, it would be 2.8%. But yet October is 3.5. So it's probably going to be in the very high 2s. It might touch 3 as it pertains to next year. And so it would be that number plus 1 is what we would expect the indexation on the nonregulated suites to be. And that compares to last year when it was 2.3 plus 1. So even though they have put in this lower boundary, which almost certainly will be relative for next year, we expect it still to give us a tailwind versus last year. The other thing that I would say on the regulatory front is that some of the pronouncements from the minister were that he was seeking to expand the scope of the regulatory regime up to EUR 1,000 a month, which would have been 187 points or maybe even 1,250, which would have been closer to 230 points. He's now clearly stated that he is not going to go to that upper boundary. He's going to be going to the EUR 1,000 a month boundary. So again, that is a change. It's more inclusive of the regulation. But again, it moves us away from a worst-case scenario. The other thing that the regulator has said is that it will only apply on new leases, so we don't have to worry about retroactive effect. So that is good news in the context of what could have been a worst case scenario. And the last thing that he's -- he hasn't clarified, the last thing that he's recognized is that in connection with this new tweak or evolution, they need to revisit, come up with some changes, some supplements to how the points are calculated, which again, is good news in the sense that if they would have just stuck with the old regime and how points were calculated, which is incredibly esoteric and complex, it would have meant there would be no way to bridge that gap where it currently is 142 points to be regulated. If it just went to 187 points, there would be that gap. But he's made it clear that he is looking at or they are looking at ways to recalculate those points to help offset that difference, including incentives for energy investment to increase your energy labels, which we'll need to reach certain levels by 2030, potentially overall investment. So that is, again, good news because he is recognizing that he needs something to offset this incremental reach, but that's the one area that is still left unclear. They're working on it now. They're hoping to announce something by the end of the year. So again, we are engaged with the ministry through our industry bodies, very much putting forward rewarding investment, rewarding efforts for energy investment, rewarding quality of suites, and we're optimistic that those will be reflected in the new points, but that is the remaining gray area.

Okay. So just a couple of quick follow-ups on that. So how many suites would be impacted if this moves to the 187 points? How many years do you think?

I don't have that number in front of me, Jonathan. I'll have to send it to you.

Okay. And then secondly, for -- that's good for what you'd expect to kind of 4%, I guess, for liberalized suites next year. What are you sort of thinking for the regulated?

Again, that's the tricky part is that he, over the historic regime for many years, he or they have complete discretion. So last year, it was CPI, which was 2.3 for regulated. And for nonregulated, it was CPI plus 1. If, say, this year, the annual wage index is going to be 3 or 2.8 plus 1, it's not a huge leap in my mind to think that to be consistent with last year, the regulator would just take the index and ignore the plus 1. But that's just a little bit of speculation on our part. But I also believe that it would be very difficult for them to justify having regulated suite index being less than last year, given the inflationary environment. So again, I don't anticipate them doing anything draconian like they did in 2021 when they set it at 0. But again, I just believe or we believe that it will be at or in excess of what last year was.

Our next question comes from the line of Jimmy Shan of RBC Capital Markets.

Yes, I think just to reiterate John's question, I think it would be helpful to know how many suites or maybe help us quantify the impact if it's 187 points and 1,000, I think that would be super helpful. And then maybe my question is just on the cost of debt. Just kind of what are you seeing there? And what's the availability?

On the first question, the reason why we were not to date explicit about that number because if somebody just says, okay, we'll take all of the flats that our portfolio has between 142 and 187 and take whatever their existing rent style to the now regulatory maximum, we think that would be misleading because they are going to change the way in which those points are calculated. And so that's what makes it difficult for us and has been since they made these unsubstantiated announcement or unspecified announcements in April, May. It won't be just taking that collection of units, which, again, it would be less than 20% of our units and taking to the statutory maximum. It will be better than that, but we just don't know what. So we're very hesitant to provide that guidance until we have more clarity, which we hope comes by the end of the year. I'm sorry, Jimmy, could you repeat your second question? It was about weighted average cost of debt?

Just yes, cost of debt and availability of debt today.

Yes. I mean, debt continues to be available. Again, we had no issues refinancing the portfolio. This summer, we're already looking forward to the debt we have coming due next year, which isn't significant, but just making certain that there's lender appetite there. There is both with the Dutch banks and the German banks. The margins are staying the same, but of course, the base rates have moved up significantly. But we have no concern that, that debt will be available.

And can you remind me what the margin is? And so what are we looking at an all-in basis?

Well, again, our last financing in June was around 3.3. On a similar terms basis today, that would certainly be starting with a 4.

Okay. All right. And then lastly, just in terms of capital allocation prices. Are you looking to recall on the tour, it was mentioned about perhaps some of the single-family homes and Dutch home, real houses being able to sell them at a higher price in the owner-occupier market. Is that something that you guys are looking to do here and there and perhaps use the proceeds to pay down debt or something else? Maybe if you could comment on that.

Yes. No, I mean we continue to believe that there is untapped value in a privatization program. Again, we -- to date, we've sold 2 units not year-to-date, since inception. Because when those units came due, they had a significant amount of required CapEx that if we were to spend that money, we would have got an unacceptable low return on capital. So we just chose to sell those units into the owner-occupier market. Again, similarly, we currently have 2, it might be 3 units in the market today, which we're trying to sell. But that's very much the exception rather than us going down a new strategy of privatization. And again, although we still think there's significant value, one also has to reflect the fact that for your owner-occupier, their mortgage rates have gone up very dramatically in the past 12 months. So although it still is a robust market, it's definitely cooling some from where it would have been 12 or even 18 months ago. But again, it's something that we will always keep our eye on as we have units turn, whether or not they can generate a significant -- or the required return on capital as we look to relet them. And if they don't, then we would consider selling them in the owner occupier market.

[Operator Instructions] Our next question comes from the line of Matt Kornack of National Bank Finance.

On the renovation front, it sounds like you were a bit more active this quarter with it resulting in a bit higher vacancy. How should we think -- I mean, obviously, the mark-to-market potential on those units is probably pretty significant. But how should we think about that activity level for the balance of the year? Is there a seasonal aspect or an opportunity aspect to that? Or any color you can provide there?

No, there's no real seasonality. I mean, there's 2 things that affected it a bit this quarter. Number one is you'll see that our overall turnover rate, not uplift, but turnover rate tickled up a bit. So that impacts it. And again, we were running for a very long time around an annualized rate of 12% to 13%. And for the first 6 months of this year, that was tickling down to an annualized rate of 10% to 11%. And again, we went back and did some historical analysis in '16, '17, '18, '19, that was where it was and it looked like the 2021 years of COVID, it tickled it up a bit. Again, maybe that's false science, but now we've seen over the last 4 to 5 months, it's ticked back up to an annualized rate of 12% to 13%. So if we have more turnover, that's going to potentially put more suites into the conversion -- not conversion program, but the capital investment program. And then we also had some modest delays in terms of taking delivery of some of the things we needed to complete the suite renovations. So those 2 factors caused that vacancy to tickle up a little bit. But again, I don't think it's a new trend. We feel very confident that our vacancy is going to be, in general, around 2%, and it's always going to be 2/3, maybe 3/4 of that will be attributed to off-line for CapEx. But not a meaningful movement should be taken away from this quarter.

Okay. No, I appreciate that. And then just following up on Jimmy's question with regards to financing costs. I think post quarter, the cross-currency interest rate swap matured. Can you give us a sense as to, I think, it implied that imputed rate of 1.93% on the credit facility. Would that have changed materially? I don't know how the derivative market ultimately has evolved on that front.

Matt, it's a monthly rolling swap. So our rate on our credit facility is just going to be based on what today's interest rate is.

Okay. Do you have a sense as to what that would be for the credit facility? If not, I can follow up after.

It's based on new rival.

Jenny will send you the exact calculation afterwards, Matt. I think it's 135 basis points on whatever period we fix it, and we generally are fixing it at one month right now.

Fair enough. Last one for me, just a bit more on the not M&A, but acquisition front and maybe just a broader market commentary. Have you seen much trading in the market at this point to give some sense as to where pricing has gone? Or is it still pretty quiet at this point?

I mean it is very, very quiet, and that has been confirmed by our broker contacts. It's been confirmed by our valuers. There's just such level of uncertainty, not so much because of leverage. That's a fixed input that one would put in their model, and that just changes your price to achieve your returns. But what is really causing that uncertainty is people waiting to see what the final regulatory framework will look like. It's very difficult to underwrite an acquisition or even underwrite a development, if you're not certain what your top line rents are going to be. So it's caused the stabilized asset transaction market to almost grind to a halt. And at the same time, it's caused the development market to grind to a halt. These are all the unintended consequences of the minister's broad pronouncement with no specificity. And you're seeing that dramatically in new planning applications. I mean historically, I probably mentioned many, many times, the Dutch government is trying to build 100,000 units a year, and their planning applications have been running in the 70,000 to 80,000 a year. It looks like they're going to only have 30,000, maybe 40,000 submitted planning applications this year and a lot of the existing projects have put on hold until there's more regulatory certainty. And another new twist in the story is there's been some very onerous nitrogen emissions regulations in the Netherlands that were then suspended by lawsuits, but their top court just overturned that and said that those nitrogen emission standards are valid. So that's causing even more pressure on existing sites. And finally, they've accepted over 300,000 incremental immigrants on top of their already high immigrant rate from the Ukraine. So you're having a situation where you have such a horrific supply-demand imbalance in terms of available housing and you're having a regulatory environment, which is causing it to be worse, and you're having an immigration challenge that's causing it to be worse, and you're having environmental regulations that are causing it to be worse. So this is truly bad for the housing situation in the Netherlands. But ultimately, it is a great fundamental dynamic of having rental stock that we can provide to the market.

Well, that sounds like an avoidable but not great for the renter situation. Out of that, though, just one last quick one. I don't know what the development market looks like in the Netherlands or whether there would have been any sort of merchant developers that may be in tougher shape but is that an opportunity for deploying capital? Or is the developer group pretty well capitalized in the Netherlands?

Yes. I mean the developer group is reasonably well capitalized and I'll -- remind me to come back to the acquisition front. So largely how developments are done in the Netherlands are either through forward funding or forward purchasing. And unlike other geographies, those forward funding or forward purchasing don't have cost of carry associated with them because the insurance companies, the pension funds would gladly forward fund the developers so that they could secure those assets at the end. So it's not my impression that there is a coming reckoning for the developers but it's still relatively early days. I mean all of the narrative is that the developers are suspending their projects until there's more clarity. Now the cost of capital is affecting that as well to the extent that they haven't forward funded it or even if they did, there's still debt funding in some context. So that's also putting pressure on the developers. But again, I don't see -- or there's not a narrative coming out of the Netherlands that there is some big, distressed event coming. Coming back to the acquisitions and our aim to deploy capital, we were quite definitive last quarter and during the tour, and you will see the commentary in our MD&A and other disclosure this quarter, we're really, really cautious on the acquisition front. And it's twofold, capital markets, where our stock price is, of course, also the debt markets, which, again, still available, but significantly more expensive. So that would have an impact on what we'd be able to pay. But most importantly, on the regulatory front, it's just very, very difficult. I know uncertainty is frustrating for you all. It's also frustrating for us. I do think we're getting closer on the calendar to having that clarity, but it's very difficult to underwrite a portfolio if you don't have certainty of what the top line rent growth or the rent profile and certainly the rent growth profile will be. So you can see we haven't done anything since May. And I don't anticipate as doing anything between now and the end of the year.

Okay. No, that makes sense. It does seem like they're skewing a little bit more to the sensible, but we'll wait and see. But I appreciate the color.

Our final question comes from Himanshu Gupta of Scotiabank.

So a follow-up on the liberalized indexation. And you mentioned a whole region index plus 1%. So is that permanent now? Or is it only for the next year?

Again, they haven't passed the legislation yet, so we don't know. It's -- the way it's worded now, it looks like it's through the upcoming year. Keep in mind, there's still a 3-year legislation from 18 months ago that goes to the end of 2024. That says CPI plus 1. The way it appears to be going now is they're just going to modify that legislation, which would suggest that it would also be ending in 2024. But I also think it would be -- it wouldn't be prudent to assume that if inflation stays high, that they would immediately revert to CPI plus 1 or that they would revert to having no controls whatsoever. So I think practically speaking, prudently speaking, we would expect them to continue to keep this framework in place with some sort of lower boundary that they can migrate to should CPI remain elevated. So again, very long-winded question. We anticipated from understanding where the draft legislation is going to be just a revision to the existing CPI plus 1, which would have expired in 2024. But I just have no -- I just can't counsel people that that's all going to go away once we get to 2024.

Right. So no -- nothing has been passed so far. But sounds like you are expecting that this might continue beyond 2024 as well the indexation period as well?

Yes. So the legislation is in process to take the CPI plus 1 and have it be the lower of CPI plus 1 or the annual wage index plus 1. That hasn't been passed yet, but I think we have a high degree of confidence that will be passed at the beginning of the year. But again, that is just modifying the legislation that was originally temporary for 3 years, but we never really believed at that point in time that they would just automatically resend it. So I believe going forward for the foreseeable future, we're probably going to have a CPI plus 1 or wage index plus 1, which is ever lower, which is ever the lowest. But I also, I just want to remind people, this is a tailwind for us versus last year and certainly the year before. The past year was 2.3 plus 1. This year, I think it's going to be 2.8%, maybe 3.0 plus 1. So that is a rental growth tailwind from indexation versus where we were last year and even more so versus the previous year.

Got it. Okay. So that's fair enough. And then just a follow-up on the NOI margin expectation question. I think you mentioned something like 2023, very similar to Q3 as my margin. So I'm just wondering like the -- have you realized most of the benefit of lower landlord levy tax here in this year? Or maybe put differently, do you think the benefit of landlord levy tax abolition will be offset by a pickup in R&M expenses? So just wondering why we are not seeing more expansion in NOI because of this revolution?

Hi, Himanshu, even though we are hugely inflated, there is still going to be some inflationary pressure on the R&M, which will be offset by the savings on the landlord levy. That's why we're expecting that the margins will stay fairly consistent to Q3.

And it's also -- we have to remind you guys that we have been doing some -- I don't mean any pejorative way, but financial engineering to offset a significant portion of the landlord levy tax over the past 18 months. So it's a positive. We're glad it's removed. But again, it won't all go directly to the bottom line or to the NOI margin. But again, just to reiterate what we said before, we think the Q3 NOI margin, excluding service charges is a good proxy going forward.

Got it. Okay. That's fair enough. And then is it with the landlord levy tax gone, or I mean abolish. So it's more attractive to bi-regulated units now? I mean it feels like the least amount of uncertainty is there in the regulated side of things now. Do you think it's becoming more relatively attractive further?

Again, if we leave aside my commentary about our acquisition activity currently or towards the end of the year. If we speak more generically at a higher level, does it make a huge difference? It might make a modest difference. But again, that is -- that was just a fixed cost for us. And so if that fixed cost goes away, yes, that increases the cash flow capacity or in turn, it might allow us to pay a bit more for regulated units because the margins are slightly higher. But also in a lot of our regulated portfolios, we were doing a conversion program, which ultimately eliminated that anyway over the medium to long term. So I don't think all other things being equal and on a more normalized environment, the elimination of the landlord levy would result in a huge title wave of incremental regulated portfolios. We've always been keen to buy them at the right price because we like that diversification. But I can't say -- or I'm certain that, that landlord levy in and of itself was a no go for us in terms of going to regulated portfolio. So maybe on the margin, it makes a difference, but I don't think it will be noticeable.

Got it. Okay. And then just on the conversion program. Obviously, earlier focus was less than 142 points, making regulated to liberalized, would that focus more in the range of like 142 to 187 points now? I mean given that, that also has become like -- or eventually it will become some kind of regulated category as well?

Yes. Again, it's -- we can't say yet because we still don't know how the new points or I should say, the revised points are going to be determined. Again, we're already implementing a program now that if we touch any unit on turnover, if we do any CapEx whatsoever, we also have to migrate its energy label to a C or above. We're hopeful that the regulator changes the points that one gets for the higher the energy label is, which, again, rewards us, but we have not currently changed significantly our target CapEx for this year in our conversion program. Now once we have more clarity, then we might have to modify that to reflect the new points calculations. But again, it's a bit of a black box. It's very frustrating, but we just have to wait. But we're hopeful the way it is coming to an end. But for this current year, we're continuing to operate under the regime that we see and which we know. And we also have some comfort because he's now stated that these new rules will only apply on turnover and that our turnover rate is only 10% to 12%. If we've done something, we've liberalized something now that might come up slightly short, again, we still have another 8 to 10 years before it comes up again. So for the remainder of 2022, we've been continuing to execute our existing conversion program. As we get more clarity, it might require us to tweak it to some extent. But again, we have confidence that there will be a change in the way the points are calculated, which will mitigate some of that difference, but we don't know how significant that will be yet until the regulator provides more clarity.

Sure, sure. And maybe just a last question. Again, on regulation, a proposal that REIT structure in the Netherlands will be subject to corporate taxes. I think that's effective 2024, if passed. And it looks like it does not impact you so far. So have this -- or do you think this regulation will impact some other players in the market? And as a result, would you see like more products coming to the market or any impact on the market overall because of this?

Just to be clear, it won't impact us at all. We're not a Dutch REIT. We're a Canadian REIT. So it has 0 impact on us whatsoever. And there's actually a very limited number of actual Dutch REITs because it's been such a convoluted process over the past years with the government constantly waffling. The biggest residential players, they're not REITs either. Our biggest transaction partners are in the insurance companies and pension funds and some of the open fund managers, they're not REITs. Our biggest competitors like Heimstatn, et cetera, they're not Dutch REIT. So it has 0 impact on us. And again, I don't believe it's going to result in a huge title wave of new acquisitions. I think it's largely a nonevent.

Our final question comes from David Chrystal of Echelon.

Just quickly on your balance sheet. In terms of your kind of approach to -- sorry.

Does that mean he like -- does that mean he like our balance sheet or he doesn't like our balance sheet.

I don't think he likes anything. He like squirrels, that's about it. If you look at your capacity to fix either for the long term, the promissory note or some of your facility, how do you look at your kind of debt strategy fixed versus floating in the near term?

So 100% of our mortgages are all fixed terms, either directly or from swaps. So as we are refinancing our mortgage in 2023, we'll most likely be also looking to do a fixed term.

And similar to the promissory note, you'll see that we just refinanced the promissory note, which is largely carrying the balance of our acquisition in May. And so we fixed that for 6 months because within the coming 6 months, plus or minus, that's when we expect to migrate that to fixed long-term mortgage financing. So we will -- we're not in the business of speculating on interest rates. And so whenever we have mortgage financing coming due or putting in place mortgage financing, we will aim to fix that for the period or the tenure of that debt. The thing that we might try and tweak to the extent that it can be helpful as we might try and move where that fits within our maturity portfolio, our maturity profile. But in today's world, the difference between 4 and 7, which is generally where we navigate isn't hugely different by the shape of the curve. But we'll always try and stay fixed just because we don't want to have that interest rate risk. That's not what our investors are expecting us to do.

Okay. And then just quickly, the lift on turnover in the third quarter, there was a bit of a dip relative to the first half. Is there any read through to this? Or would this just be the mix of units that happen to turn in Q3? And should we expect to see a return to kind of 20% lift on turnover going forward?

Yes. I mean I think it's just a little bit of the mix more than anything else. We expect going into next year to be around that 20% blended rate. Again, there's a little bit of noise. It depends upon which suites you're converting, where they were before you converted them to liberalize. There's also an effect from if a liberalized suite that you've already done a lot of investment in is turning over a second time, you don't normally get as much uplift. But in general, we're expecting next year to run at around the 20% rate in terms of uplift.

Perfect. That's it for me.

As there are no more questions registered at this time. I'd like to hand the conference back over to the management team for closing remarks.

Again, thank you for joining us this morning. As always, if you have any further questions, please do not hesitate to contact either Jenny or myself. Thank you again, and have a great day.

Ladies and gentlemen, that concludes today's conference call. You may now disconnect your lines.