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

Good afternoon, everyone, and welcome to the Annual and Special Meeting of Unitholders of European Residential Real Estate Investment Trust. My name is Dr. Gina Parvaneh Cody. I am the Chair of the Board of Trustees of ERES, and I will act as Chair of today's meeting. Before I proceed, I would like to thank our unitholders, who are able to join us virtually for today's meeting. Before we begin, please be aware that certain information to be presented or discussed today may be forward-looking. If you log in to the webcast, I refer you to the cautionary note on the presentation slide. The cautionary note applies to our presentation and discussions this afternoon. For everyone else, I've brought here [ why the ] note is read. During today's meeting and in the management presentation that will follow, certain statements may contain forward-looking information within the meaning of applicable securities laws. Forward-looking information may relate to, ERES' future outlook and anticipated events or results. These statements are based on certain factors and assumptions regarding expected growth, results of operations, performance and business prospects and opportunities. Management's estimates, beliefs and assumptions are inherently subject to significant business, economic, competitive and other uncertainties and contingencies regarding future events and as such, are subject to change. Although the forward-looking statements are based on assumptions and information that is currently available to management, including current market conditions and management's assessment of disposition and other opportunities that are or may become available to ERES, which are subject to change, management believes these statements have been prepared on a reasonable basis, reflecting ERES' best estimates and judgments. However, there can be no assurance actual results, terms or timing will be consistent with these forward-looking statements, and they may prove to be incorrect. Forward-looking statements necessarily involve known and unknown risks and uncertainties, many of which are beyond ERES' control that may cause ERES' or the industry's actual results, performance, achievements, prospects and opportunities in future periods to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties are described in ERES' regulatory filings, including our annual information form and management's discussion and analysis, all of which can be obtained on SEDAR+ at www.sedarplus.ca. Subject to applicable law, ERES does not undertake any obligation to publicly update or revise any forward-looking information. I will begin by introducing Mark Kenney, a member of the Board of [ ERES REIT ] and Chief Executive Officer, who will be speaking today. The format for today's meeting will be divided into thank two parts. First, I will deal with the formal aspects of the meeting, following which there will be a management presentation by Mark Kenney. At the end of that presentation, we will address questions from registered unitholders and duly appointed proxy holders. Such questions may be submitted to the Message tab provided under the portal. Though we may not have time to answer every question, we will do our best to provide a response to as many as possible during the meeting. In the unlikely event that we do not address your question during the meeting, ERES will communicate with you after the meeting, if you have provided your contact information. I will now begin with the formal part of the meeting. I now call the meeting to order. With the concurrence of the meeting, Elise Lenser, ERES' Secretary, will act as Secretary of the meeting. And Wayne Yearwood of TSX Trust Company will act as a scrutineer for today's meeting. The Secretary has advised me that we received the affidavit of mailing from TSX Trust Company, confirming that the notice calling the meeting and related materials were provided to unitholders of record on the record date for the meeting. With the [ concurrence ] of the meeting, I will dispense with the reading of the notice following the meeting. The Secretary has advised me that a quorum is present for the meeting based on unitholders, we know to be in attendance, including by proxy, and documented in the preliminary report of the scrutineer. The final report will be prepared and filed as part of the record of the meeting. On this basis, I declare the meeting to be properly constituted for the transaction of business. On behalf of the Board, I thank those unitholders who have joined us today. Voting results for resolutions to be voted on today will be formally announced by press release following the meeting. For the purpose of today's meeting, voting on all matters will be conducted by a single electronic ballot. Registered unitholders and proxy holders of record can use the electronic ballot feature available on your screen. You are encouraged to complete your electronic ballots during the allotted time prior to the end of the formal portion of today's meeting. If you voted in advance of the meeting and you do not wish to revoke your previously submitted proxy, then you do not need to vote during the meeting. If during the course of the meeting, we encounter any technical difficulties with the webcast, please remain logged on and we will resume as soon as practicable. Based on reporting by the scrutineer, the designated proxy holder for the meeting is holding proxies, demonstrating voting sufficient for all motions to be carried. Accordingly, we will try to move through the formal meeting items quickly. To make the best use of our time, we have designated unitholders that will move and second each of the meeting matters. The polls are now formally open for electronic voting. Voting will going will close once all resolutions have been formally dealt with. Once voting closes, the scrutineer will tabulate the results of the vote for each matter. The first item of business is the presentation of the consolidated financial statement of ERES for the year ended December 31, 2023 and the related auditor's report. A copy of the financial statements was provided to those unitholders who requested it, and the financial statements are available electronically on ERES' website and SEDAR+. Unitholders are not being asked to take any action regarding the financial statements. But if any unitholder has questions relating to the financial statements, they may be sent to ERES' Investor Relations team by e-mail to [email protected]. We will now proceed with the election of trustees. The management information circular sets out information for the 6 nominees for election to the Board. Since I am advised that no further nominations were received by ERES prior to the advanced notice deadline in ERES' fifth amended and restated declaration of trust, the following are the 6 trustee nominees: Harold Burke, myself, Gina Parvaneh Cody, Ira Gluskin, Mark Kenney, Gervais Levasseur and Lisa [ Russell ]. The Toronto Stock Exchange requires trustees to be voted on individually. Consistent with this requirement, unitholders have been provided with the opportunity to vote or withhold their vote for each nominee on an individual basis. I propose that we proceed with the motion to elect the nominees. May I have a motion for the election of trustees?

My name is Stephen Co. I am the Chief Financial Officer of CAPREIT and a beneficial unitholder and proxy holder. Chair, I move for the election of the 6 nominees as trustees.

My name is Jenny Chou. I'm the Chief Financial Officer of ERES and a beneficial unitholder and proxy holder. Chair, I second the motion.

Thank you. We will now vote for the election of trustees. Any registered unitholder or duly appointed proxy holder who has not yet voted or who wishes to change their vote with respect to the election of trustees may do so now by clicking on the Vote Here button on the web portal and following instructions. We will now proceed with the reappointment of auditors for the ensuing year and the authorization of the Board to fix their remuneration. The trustees, on the recommendation of the Audit Committee, propose that Ernst & Young LLP be reappointed as the auditors of ERES until the close of the next annual meeting or until a successor is appointed and that the trustees be authorized to fix their remuneration. May I have a motion for such reappointment and authorization?

I so move.

I second the motion.

Thank you. We will now vote for the reappointment of the auditors and the authorization of the trustees to fix their remuneration. Any registered unitholder or duly appointed proxy holder who has not yet voted or who wishes to change their vote with respect to the reappointment of the auditor may you so now by clicking on the Vote Here button on the web portal and following the instructions. The next item of business is to renew the Unit Option Plan and the RUR plan in order to allow ERES to continue granting incentive securities under such plan until June [ 10 ], 2027. The management information circular sets forth the requirement of the TSX to renew the Unit Option Plan and the RUR plans and the terms under which their renewal is proposed. The full text of the resolution with respect to such renewal is set forth in Appendix A to the management information circular. The trustees propose that the Unit Option Plan and the RUR plan be renewed in accordance with the resolution set forth in Appendix A to the management information circular. May I have a motion for such resolution?

I so move.

I second the motion.

Thank you. We will now vote on the renewal of the Unit Option Plan and the RUR plan. Any registered unitholder or duly appointed proxy holder who has not yet voted or who wishes to change the world with respect to the renewal of the Unit Option Plan and our RUR plan may do so now by clicking on the Vote Here button on the web portal and following the instructions. Now that everyone has had the opportunity to vote, I now declare the polls closed. Based on the preliminary voting results received from the scrutineers, the voting results for each item of business show a abundance of favorability. Accordingly, each of the motions are carried. Therefore, I declare Harold Burke, myself, Gina Parvaneh Cody; Ira Gluskin, Mark Kenney, Gervais Levasseur and Lisa [ Russell ] duly elected as trustees of ERES to hold office until the next Annual Meeting of Unitholders or until successors are duly elected or appointed. I declare that Ernst & Young LLP, already appointed, as the auditor of ERES and that the trustees are authorized to fix their remuneration. And I declare that the renewal of the Unit Option Plan and RUR plans are approved. Thank you, everybody. We have now completed the formal part of the meeting. If there is no further business, I will ask for a motion to terminate end.

I so move.

I second the motion.

Thank you. I declare the motion carried and the Annual and Special Meeting of Unitholders of ERES adjourned. On behalf of management and the Board, I would like to thank you all for attending today. This concludes the formal part of the meeting. With that, I then now ask Mark to provide his remarks.

Thanks, Gina. Thanks, Elise, and a warm welcome to everyone. Let's start off with our financial performance in 2023. Due to strong rent growth and high occupancies, operating revenues increased by 7.2% compared to 2022. On the cost side, our operating expenses decreased as a percentage of operating revenues, primarily due to the abolition of landlord levy tax, which became effective January 1, 2023. Together, this drove the 8.9% increase in our NOI, and our margin expanded to 78.5% for the year ended December 31, 2023, up by 120 basis points versus the previous year. Solid organic growth positively contributed to FFO. However, this was offset by higher interest costs and current income tax. As a result, our diluted FFO per unit decreased by 4.7% and our diluted AFFO per unit was down by 2.6%. We maintained our annual rate of distribution steady in 2023 at EUR 0.12 per unit, and our AFFO payout ratio was 80.1% for the year. Strong performance continued into the first quarter of 2024. Our residential suites were 98.5% occupied as of March 31, 2024, largely consistent with prior periods. Furthermore, I will note that the majority of our vacancy at any given tuning relates to suites which we've intentionally kept offline [ by ] their enhance value through renovation or potentially sell as part of our optimization strategy. For our most recent quarter, our occupied average monthly rent grew by 6.7% versus the same property portfolio on March 31, 2023. This is above our target range of 3% to 5%, reflecting the tight rental conditions which continue to characterize the Dutch housing market, alongside our ability to effectively maneuver within its complex and ever-changing regulatory framework. Strong rent growth and lower property operating costs together drove meaningful margin expansion. Our same-property NOI margin was up by 200 basis points, while our total portfolio margin increased by 190 basis points. This growth continues to mitigate the impact of higher interest rates that we're absorbing. And our diluted FFO per unit was EUR 0.039 for 3 months ended March 31, 2024, which compares to EUR 0.04 in the prior-year period, representing a slight decrease of 2.5%. Finally, our AFFO payout ratio was 80.8% during the first quarter of 2024, remaining within our long-term target range. I will also briefly provide an overview of our financial position as we continue to proactively and prudently manage our liquidity and leverage. Our adjusted debt-to-market value ratio was [ 58% ] as of March 31, 2024, which is consistent with the previous quarter. In addition to our current debt service and interest coverage ratio of 2.4x and 2.9x, respectively, we remain in compliance with our covenant restrictions. On our mortgage portfolio, we fixed nearly all of our interest costs, and we staggered our renewals in order to mitigate interest expense volatility risk. As a result, the portfolio continues to carry a below-market weighted average interest rate of 2.2% as of March 31, 2024. Looking ahead, we remain focused on carefully and optimally managing our platform, financial structure and liquidity in order to enhance cash flows, maintain balance sheet flexibility and minimize the impact of upcoming mortgage maturities. Further to our debt strategy, I want to take a minute to highlight all of the ways which are currently enhancing returns for our unitholders. This includes our tried-and-tested rent growth strategy, which is comprised of uplift on turnover, indexation and the conversion of regulated suites to liberalized. This is further augmented by the opportunity we have had to execute on suite-by-suite privatization. And we're evaluating the net present value of reletting individual unit versus selling the units to end users. We're just getting started with this strategic initiative, and we're excited to ramp up our efforts on this front in order to generate incremental capital, primarily to pay down our credit facility debt and sturdy our future financial position. Beyond this, we're also continuing to explore additional opportunities to optimize our business with a view to ensuring we're ultimately maximizing value for our unitholders. That brings me to our investment highlights. The end of our most recent quarter marked the 5-year anniversary of ERES. We're proud of the progress we've made to date, and we'd like to thank all stakeholders for their long-standing support. Looking ahead, we'll continue to execute on our strategic and financial operational objectives as we reaffirm our active commitment to driving incremental value for our unitholders through all means possible. With that, I would like to thank you for your time this afternoon, and we would now be pleased to take any questions you may have.

We'll now move to the question-and-answer session of the meeting. If you have not yet submitted a question but wish to do so, please do so now by submitting your questions through the Message tab provided on the web portal. As a reminder, only registered unitholders or duly appointed proxy holders in attendance at the meeting will be able to ask questions at this time. There are no comments or questions to be addressed. I will now turn the meeting back to Mr. Kenney.

Thank you, everyone, for attending the meeting and voting online. We look forward to welcoming you again at next year's Annual Meeting. Thank you again, and goodbye.