European Residential REIT

TSX:ERE.UN

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the second quarter 2021 results conference call. I would now like to turn the meeting over to Mr. Phillip Burns. Please go ahead, Mr. Burns.

[Phillip Wesley Burns, CEO & Trustee]

Thank you, operator, and good morning, everyone. Before we begin, let me remind everybody 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 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. We are very pleased to present to you today another quarter of strong operating performance, which we concluded with 2 acquisitions of multi-residential properties in the Netherlands that kick-started our 2021 external growth. In combination with our acquisitions completed during the third and fourth quarter of 2020, we have grown our residential suite count by 552 units across 10 properties, representing an increase of 10% compared to the second quarter of 2020. The fair value of our total investment property portfolio over the same time period increased by even greater 15% to EUR 1.562 billion at June 30, 2021, magnifying the high quality of our properties as well as the ongoing strong and favorable market dynamics in the Dutch residential sector. This resulted in a significant fair value gain of EUR 34.9 million, which we recognized during the 3 months ended June 20. Our market capitalization and public flow also continued to trend upward, most increasing by 6% compared to the same period of last year. However, there continues to be a disconnect between the unit price and intrinsic value despite the strong fundamentals in our portfolio.Slide 5 contains an overview of our business development during the second quarter of 2021, starting with the fair value of our investment properties increasing to just over EUR 1.5 billion at June 30, as I just mentioned, which is comprised of EUR 1.45 billion in the multi-residential properties and EUR 0.11 billion in commercial properties located in Germany, Belgium and the Netherlands. This also includes our 2 newest acquisitions of multi-residential properties in the Netherlands, which both closed on June 30, 2021, comprising an aggregate 137 residential suites as well as ancillary commercial and parking space, acquired for a combined purchase price of EUR 47 million, excluding costs and fees. The term financing activity -- in terms of financing activity and liquidity, the acquisitions were funded using existing sources of liquidity via incremental drawdown of our credit facilities to be replaced with long-term mortgage financing that will be secured during the upcoming third quarter of 2021. With the remaining unused capacity in our credit facilities at June 30, combined with the cash on hand and the EUR 165 million available to use via the pipeline agreement, ERES still has over EUR 200 million in immediately available liquidity. Our strong operating results this quarter translated through to our key metrics, with FFO per unit and AFFO per unit of EUR 0.038 and EUR 0.033, respectively, recognized for the quarter ended June 20, 2021.The Slide 6 contains a high level overview of key characteristics of our latest 2 acquisitions, which closed at the end of the most recent quarter. The Phillip property located at Velperweg, east of the city of City center of Arnhem in the Eastern region of the Netherlands is comprised of 104 residential units, each of the corresponding parking space as well as ancillary commercial space. The property was fully granted in 2019 and is 100% owned by ERES. As at 30 of June, it was 99% occupied and 98% liberalized. Most of the units are leased in the mid-market sector, providing good potential for organic rental growth. In addition, almost all remaining regulated units are eligible for liberalization upon turnover, providing further potential for incremental uplifts of rent upon conversion. The De Horizon property located in the Oostenburg district of Amsterdam is a newly built multi-residential property comprised of 33 residential units. The property is similarly 100% owned by ERES and 100% of the units are liberalized. As a new development, the property was entirely vacant upon acquisition and leasing initiatives are underway with good momentum. We expect to have the building fully leased by the end of October. Both properties are strategically well-located near a significant portion of ERES's existing portfolio, allowing for operational efficiencies and synergies for the properties being managed by ERES, our existing asset and property manager established in the Netherlands.Slide 7 provides some statistics on our current residential portfolio. Average occupied monthly rents were EUR 865 as of June 30, representing an increase of 4% versus Q2 2020. Residential occupancy decreased to 98% at June 30 compared to 98.8% at June 30, 2020. However, 26% of vacancy is attributable to our recently acquired newly built property that was entirely vacant upon acquisition. As mentioned earlier, we plan to have it fully leased by the end of October. The majority of the remaining residential vacancy in the current period is due to renovation. As of June 30, 2021, 67 residential units were under renovation, representing 53% of the total vacancy. Upon completion of this renovation, a significant portion of these suites will be converted from regulated to liberalized, demonstrating the execution of our value-add capital investment program.Turnover was 3.6% for the second quarter of 2021 compared to 3.4% in the prior year period. Rental uplift on that turnover continues to improve, however, at 16.9% compared to the 11.5% uplift achieved in the same period -- same prior year period. The ERES portfolio is well diversified by a number of bedrooms, ensuring we need to demand for smaller units as well as for families. You can also see that approximately half of our current portfolio was constructed since 1980, providing an average age of under 40 years, resulting in lower ongoing repair and maintenance and driving higher asset values. To elaborate further on the balanced mixture of properties that constitute our total portfolio, on Slide 8, 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, Hague and Utrecht. The rest of the portfolio is situated in smaller urban areas throughout the country. Furthermore, approximately 35% of our portfolio was 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 and rents on turnover and indexation as well as the opportunity to liberalize more suites. On that note, for rental increases due -- for rental increases due to indexation beginning on July 1, 2021, during the quarter, ERES served tenant notices to 94% of its liberalized suites across which the weighted average rental increase due to indexation was 2.3%. This was in line with the recently enacted government legislative maxim annual indexation for liberalized suites of CPI plus 1%, that is effective for initial period of 3 years from May 1, 2021, up to and including April 30, 2024, combined with the Dutch government's inflation of 1.4%.The rents of tenants of regulated suites were not indexed in compliance with the Dutch government's maxim indexation for all regulated suites set at 0%, effective for the 1-year period from July 1, 2021, up to and including June 30, 2022. Inclusive of these regulated suites which were not indexed, our weighted average rental increase due to indexation was 1.5% based on tenant notices served on the total portfolio. In the context of these legislative developments, we remind you that our rental growth strategy not only revolves around increased rent on annual indexation, but is rather tri-fold and based also upon turnover and the conversion of regulated suites to liberalized suites. Importantly, these recent set of regulations do not apply to rent uplifts on turnover or CapEx-driven increases. Accordingly, when these uplifts on indexation are combined with our strong trend growth and turnover, especially in the regulated to liberalized category, we still expect to continue to achieve rental growth in our target range of 3% to 4%. Further since inception ERES has been successfully operating within a complex regulatory regime, which constitutes one of our key competitive advantages. A competence that is now becoming increasingly more valuable. Considering the uniquely diverse composition of our balanced portfolio between urban and suburban, regulated and liberalized and across single family and multi-family properties. We are well-positioned to continue operating efficiently and strategically within this continually fluid and dynamic Dutch regulatory system.This brings us to Slide 9 where I can provide a further update on the Dutch government's response to the COVID-19 pandemic, the substantial government assistance programs enacted since the beginning of the crisis have once again been extended and remain in place. As the Netherlands continues to prioritize the sustenance and wellbeing of its people and the recovery of its economy all while simultaneously still confronting an array of spreading variants of the virus. Various social restrictions also remain in place and with these proactive and unwavering measures and the careful reopening of the country and a stage 5 step process, 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 eurozone counterparts, evidencing the effectiveness of these support packages alongside the resiliency of its economy and the robustness and market dynamics throughout the country. And with that, I will now turn the call over to Stephen.

[Stephen Co, Chief Financial Officer]

Operator, we're getting feedback that the line is not open or that the call is silent.

[Operator]

I can hear you very clearly.

[Stephen Co, Chief Financial Officer]

Okay. It's back. Okay. All right. Thank you, Phillip. As you can see on Slide 11, our operating metrics indeed continue to steadily improve. Our operating revenues increased by 9% to EUR 18.7 million in the 3 months ended June 30, 2021, from EUR 17.2 million in the quarter ended June 30, 2020, primarily due to the accretive acquisitions since the prior year period and an increase in average monthly rent on the stabilized portfolio. Our NOI increased by even more, up 11% to 14.6...

[Phillip Wesley Burns, CEO & Trustee]

Stephen. Stephen, I hate to interrupt. But Paul, I also am continuing to receive messages that there's no audio for the investors, the participants. [Technical Difficulty]

[Stephen Co, Chief Financial Officer]

So our NOI increased by -- an even more by 11% to EUR 14.7 million for the 3 months ended June 30. 2021 compared to EUR 13.1 million during the second quarter of 2020. Likewise, driven by contribution from acquisitions since the prior year period as well as higher monthly rents on stabilized properties. This was further complemented by a decrease in property operating costs as a percentage of operating revenues, predominantly due to the recognition of a nonrecurring rebate from the government from landlord levies. The rebate is a result of an acquisition of a shell entity completed last year, which contained rights to a rebate from the government for landlord levy rebates payable, for which we paid EUR 0.51 for every euro of rebate totaling to a credit in the amount of EUR 1.3 million. The net reduction to land or levy expense of EUR 308,000 recognized this quarter represents 50% of the rebate utilized for the first 6 months of fiscal 2021, with the remainder to be recognized in the second half of the year. In aggregate, this drove total portfolio NOI margin to increase to 78.2% for the quarter ended June 30, 2021, compared to 76.2% in the comparative prior year period. Excluding the impact of the landlord levy rebate, NOI margin for the total portfolio still increased to 76.5% for the 3 months ended June 30, 2021. FFO and AFFO increased by 13% and 11%, respectively, compared to the second quarter of 2020. All FFO per unit and AFFO per unit increased by 15% and 10% respectively, compared to Q2 2020. The increases were driven by the positive impact of the increased stabilized NOI and accretive acquisitions since the comparative prior year period. In addition to the partial recognition of the landlord levy rebate, net of taxes of EUR 246,000, it is expected that the remaining landlord levy rebate Net of taxes of approximately EUR 246,000 to positively impact FFO and AFFO in the second half of the year. The resilient trend line established fire consistently improving opera results continues on to Slide 12. As Phillip mentioned, our residential suite count.I'm getting messages again, that our audio is coming in and out operator. Would you be able to check what's happening?

[Operator]

Okay. [Technical Difficulty]

[Stephen Co, Chief Financial Officer]

Okay. As Phillip mentioned, our residential suite count increased by 10%. So the same time last year, evidencing our ability to acquisitively grow and ultimately execute on growth-oriented strategic objectives. Even during these unprecedented times, our residential occupancy did decrease to 98% as at June 30 2021, compared to 98.8% as at June 30th, 2020. However, this is largely due to the recent acquisition of our newly built De Horizon property that was fully vacant as that period ends. On a stabilized basis, residential occupancy was 98.5% of the current period and found only slightly from the 98.8% in the comparative prior year period. Majority of the vacancy in the current period is due to units under renovation pursuant to our execution of our value-enhancing capital expenditure program, stabilize occupied average, monthly rent increased by 4% demonstrating the top line rental growth that we continue to achieve supporting an even higher 5.3% growth in net operating income on our stabilized portfolio, similar to the portfolio, the latter was magnified by the lower property operating cost as a percentage of operating revenues, predominantly due to the recognition of the landlord levy rebate.Together this strobe stabilized NOI margin to increase to 78.1% for the 3 months ended June 30, 2021, compared to 76.3% for the same period last year. Excluding the landlord levy rebate, which I mentioned, NOI margin on the stabilized portfolio still increased to 76.4% for the 3 months ended June 30, 2021. Our liquidity position continues to support our business endeavors and remains conservative and strong as at June 30, 2021, as you can see on Slide 13. Admit the unpredictability of the capital markets, U.S. has been able to maintain a 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 maintained a conservative term to maturity on its mortgage portfolio. Even with the temporary incremental draw on our credit facilities to fund our recent acquisitions, we still have immediate available liquidity of over EUR 200 million as of June 30, 2021, which includes the EUR 165 million pipeline agreement from Capri that provides us with the acquisition capacity in excess of EUR 400 million. Our credit facility draws will be replaced with long-term mortgage financing during the third quarter of 2021, which would free up our lines and therefore further improve our liquidity position.And that brings me to slide 14, which provides more detail on our staggered mortgage portfolio with the nearest debt maturity, not occurring until December 2022. In addition, we expect to close on our new mortgage financing in Q3 of 2021, which will also be combined with a profitable refinancing of an existing mortgage on the initial portfolio, originally expiring in 2023, that will further improve our mortgage renewal profile. In addition, the majority of our mortgages are non-amortizing. As we continue to grow, we will ensure that we maintain this smooth maturity profile in order to reduce renewal risk. Thank you for your time this morning. And I would now turn things back over to Phillip to wrap up.

[Phillip Wesley Burns, CEO & Trustee]

Thanks, Stephen. In summary, I would like to re-emphasize the robustness of ERES' operating model on the strategy, economic and real estate fundamentals of the European multi-residential market and the expertise of management are together continuing to drive consistently strong operating results quarter after quarter, as we continually see work towards spreading that U.S. story, this most recent quarter represents the beginning of only our third year of operations, but has once again, reinforced a growing reputation for reliable, robust, robust growth, both internally and externally. The long-term positive metrics that characterize the Dutch multi-residential market and the abundance of growth opportunity in that market supports each of these endeavors in the short-term and long run achievement of our strategic objectives. In this regard, we believe that ERES offers a compelling investment opportunity, that we provide a unique opportunity to invest in a fast-growing and attractive European multi-residential real estate market. Our partnership with Capri brings significant benefits to our unit holders. 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-res market, and we are building size and scale to drive value going forward. Our conservative balance sheet and financial position provides the flexibility and resources to drive further growth. And we haven't placed an experienced management team and a seasoned board of directors. Thank you for your time this morning. And we would now be pleased to take any questions you may have.

[Operator]

[Operator Instructions] The first question is from Jonathan Kelcher from TD Securities.

[Jonathan Kelcher, Analyst]

First question, just on the De Horizon property, being fully leased by October. Is that faster or slower than it might've otherwise been if there was no changes to the rules on liberalized rents?

[Phillip Wesley Burns, CEO & Trustee]

I don't think there was on -- the liberalized rents has an impact, that only reflects the indexation. It doesn't reflect turnover. So this is basically as if all suites were turned over if you will because it was stuck at zero occupancy so we can bring everything.

[Jonathan Kelcher, Analyst]

Yes, I guess I'm kind of asking if you're going a little bit slower just to sort of make sure you maximize the first rents you get because you are going to be limited on renewals.

[Phillip Wesley Burns, CEO & Trustee]

No, I think our pace is -- we want to get it fully occupied as soon as we can, as soon as pragmatic. And we think the market particularly, and the Amsterdam market at this price point is incredibly strong and robust. So we're not, we're not slowing down to try and push rents a little bit harder. We're going to ensure that we maximize rents with the initial letting.

[Jonathan Kelcher, Analyst]

Okay. And what is the price point? What sort of rents are you looking for?

[Phillip Wesley Burns, CEO & Trustee]

It's going to be in a sort of 1600 range.

[Jonathan Kelcher, Analyst]

Okay. And then the developer you bought this from, are there -- going forward are there opportunities to do more deals?

[Stephen Co, Chief Financial Officer]

There could be. This was actually a unique situation where the developer is a housing association. So as you will know, from our chats, previously housing associations are generally in the business of -- and mandated to provide affordable or regulated housing. And when they started developing this asset, they would have anticipated it being significantly in the affordable space. But just as the market has continued to move on, rents have continued to go up, values have continued to go up as they were approaching completion, they realized that it was going to be a liberalized asset and that's really not part of their mandate. So they are just rotating capital and they are continuing to redeploy that capital. And they're actually developing other assets very close to the De Horizon asset now, whether or not, those will ultimately end up being, regulated or affordable, or they might have the same dynamic happened to them.It's to be to see -- to be seen, but it was also a broken deal, which was very positive for us. So we were able to step in and demonstrate to a housing association that we're a good counterparty. So to the extent that they have something that would be appropriate or that they would be keen to sell, I think that puts us in very good standing, as a international investor, not necessarily Dutch, I think our reputation for being a good counterparty is further enhanced, now that we can successfully transact with the housing authority.

[Jonathan Kelcher, Analyst]

Okay. And then just, my last question would be, it's been a couple of months now since the regulation changes have come in, have you guys seen a difference in the acquisition market either more properties for sale or maybe some buyers pulling back?

[Stephen Co, Chief Financial Officer]

Yes. I mean, sorry, Jon, I missed some of that question, but I think I got it. I mean -- and I apologize to everybody on the line that there's been some audio problems today. I don't know why, but we apologize, but if the question was due to the regulatory changes, have we change? The pipeline was estimated to be slow in 2021, as we discussed just given the high volume that came out in Q4. As I mentioned the De Horizon asset was a broken situation that we stepped into. The Villa 19 was an off-market opportunity that wasn't marketed. So we continue to work on that front to ensure that we can try and get some deal flow outside the normal prophecies, but even within the normal prophecies, the deal flow is picking up. I think it's part of the natural cycle, those people that have traditionally been sellers are still looking to rotate capital and because of the asset classes performed so well over the last 18 months, I don't think it's affecting the deal pipeline, such that people are going to be selling more assets because they're worried about future regulations. I mean regulations, they come and go, as you know. And our results are demonstrating that even with the new constraints or the new parameters, we're still delivering very attractive rental growth. So that makes it and continues to reaffirm that it's a great place to deploy capital. If you can get 3% to 4% top line rental growth and you can buy a good yield spreads, even in a regulatory environment, that's very attractive. So people are going to rotate their assets. And I think the second half of the year we'll see more of that, but again, I don't see any dynamics coming from those regulatory changes that are making people sell when they otherwise wouldn't have.

[Operator]

The next question is from Matt Logan from RBC Capital Markets.

[Matt Logan, Analyst]

Wondering if you can talk about your leasing velocity and how pricing is tracking in your markets.

[Stephen Co, Chief Financial Officer]

Yes. I mean I think you just have to sort of look at our Q2 turnover and turnover uplifts, and you can look at our 6 months year-to-date and everything is trending up from the prior period quarter -- prior periods, whether you look at it on a quarter-over-quarter basis or a 6-month on a 6-month basis. The housing markets in the Netherlands continues to be very, very robust if you will. I mean house price inflation for the past 12 months to June was up very, very substantially, the highest it has been, I think in 10 years, having said that, over the past 10 years, house price inflation has been doubling rental inflation. So from a rental perspective, it's probably becoming more and more of a stronger market because house prices going up so fast, people don't necessarily have an opportunity to do something other than rent. And I think you're seeing that in our turnover numbers and, well not so much in the turnover rate, it's staying pretty, pretty consistent what you're seeing in our turnover uplifts, again, not being insensitive to what that means to our customers and to our tenants, but right now we're, we're seeing the ability to get sustainable uplifts on our turnover.

[Matt Logan, Analyst]

And when we look ahead to perhaps a bit of a more normalized economy, do you expect demand or pricing would increase as the Dutch economy opens up similar to other jurisdictions across the world, or has perhaps, the economy in the Netherlands performed better over the past 12 months? And we wouldn't necessarily see that same re-acceleration.

[Stephen Co, Chief Financial Officer]

Honestly, I don't, I don't anticipate a reacceleration because it's accelerating anyway, right. As I just explained. And that's driven by the housing shortage more than anything else. It still continues to be the case that there is an enormous housing shortage, which isn't being addressed and that's really one of the core fundamentals of why it makes it such a good landlord market. COVID has been very difficult for the Netherlands. I don't want to suggest otherwise, but on a relative basis, the Netherlands has done okay during the COVID period. I mean unemployment rates are about where they were pre COVID. So yes, I think the Dutch economy is going to recover. Of course, there is going to be accelerated economic activity, but does that translate into turbocharging what we're seeing in our market, from our perspective, I don't think so because we're already seeing very, very positive year on year trends in terms of our ability to uplift our rents on, on turnover in particular.

[Matt Logan, Analyst]

And so maybe just rolling it up, when you say big picture, your outlook for top line growth in 3% to 4%, and NOI margins of call it, 76% to 77% would be unchanged from last quarter.

[Stephen Co, Chief Financial Officer]

No, I think that's right. I mean we remain absolutely confident in our ability to stay in that 3% to 4% top line growth. And as we say NOI margins between 75 and 77% are really where we think people should be doing. And we're sort of at the top end of that range on a normalized basis, even if you exclude some of the tax stuff that we did this past quarter.

[Matt Logan, Analyst]

And in terms of your recent acquisitions. So you have the conversion of regulated to liberalized suite set, your Villa property and lease-up of De Horizon. How should we think about the organic growth potential from those assets over the next 3 years, or maybe set down mainly where do you -- where do you think the yield could rise to on, on a 3-year look back?

[Stephen Co, Chief Financial Officer]

Yes, I mean, on those properties, I mean, you have one that's a hundred percent liberalized already and then -- which is Horizon. And then you have Villa 19, which -- it's 100 unchanged units, and there's only a couple of units anyways that are regulated. So we would expect those to -- or there's a good chance that those will be liberalized at turnover with little incremental CapEx because the building was completely refurbished in 2019. So those -- these 2 assets really are in a regulated to liberalized story. These assets are more, a typical already liberalized play, again, where you're seeing our uplifts being in the 10% to 12% range on turnover. These are very good markets. Some people may never have heard of Arnhem, but we have existing assets there, and it's a very strong market in the east of the Netherlands. So I think that these 2 assets should perform consistent with what we're sort of seeing generally across our liberalized suites. And the De Horizon asset is in Central Amsterdam. We were very pleased to be able to buy this asset. It's very close to the central train station. Again, it's sort of a new market, developing market near the docks. So we think the long-term prospects for organic or market rental growth there are very positive as well. So again, not a regulated to liberalized conversion play, but we think the fundamentals of their submarkets are very strong or we would expect that market rents to go up, meaningfully over time.

[Matt Logan, Analyst]

And maybe one last housekeeping item for me. Can you just tell us where you're seeing indicative rates for long-term debt?

[Stephen Co, Chief Financial Officer]

Yes. We're seeing very consistent rates compared to our last financing that we did in December. So we're -- we can get 6-year debt at just 1% now. And there is long-term financing, you can still probably get 7-year like 1.1%. So they're very good financing rates at this point.

[Operator]

The next question is from Kyle Stanley from Desjardins. Please go ahead, your line is open.

[Kyle Stanley, Associate]

Could you elaborate just a little bit more on the landlord levy rebates? And just wondering, are there other opportunities to realize rebates in a similar fashion?

[Stephen Co, Chief Financial Officer]

Yes. Sure. So the landlord lever rebate is -- the government actually provides subsidies to businesses that develop affordable housing. And so what we -- so the rebates are actually tied to the Shell companies. They don't tie to the actual properties. So what we end up doing is, there's actually -- it's a very common practice in the Netherlands, and there's a lot of opportunities out there where we can actually buy these rebates for $0.50 for every euro. So I wouldn't -- I would say that we are looking at this. It is beneficial. And I would say, not in the -- when we do have it, we'll probably mention in our MD&A. But yes, we are looking at this as a good opportunity, good financial management for us.

[Phillip Wesley Burns, CEO & Trustee]

But it's a product of developers not holding the assets for rent to developers and sell on the entire building or the units one at a time. So they end up with the Shell company, as Stephen mentioned, but they're not in the long-term rental business, so you can buy those shelves and then apply those credits?

[Kyle Stanley, Associate]

Okay. Great. And then so in this situation, this would be in addition to any potential rebates offered by the government in relation to the enhanced rent control that was implemented earlier this year?

[Phillip Wesley Burns, CEO & Trustee]

That's correct.

[Kyle Stanley, Associate]

Okay. Are there any updates with regards to that? Any -- I guess, anything that's come out since we last spoke?

[Stephen Co, Chief Financial Officer]

No further up...

[Phillip Wesley Burns, CEO & Trustee]

The -- I mean the government has -- I mean, the new parliamentarians have taken their seats. But as is often the case, and it continues to be, in this case, there still hasn't been a government formed, i.e., the coalition parties are yet to agree with the government. So there's really not a lot of initiatives on any legislative fronts that are moving forward, absent imperative things, including dealing with COVID to the extent required?

[Kyle Stanley, Associate]

Okay. Great. And then just turning over to the lift on turnover. We talked about it a little bit so far, but I was just looking at the significant lift on your suite conversions, I think, closer to 50% this quarter. Was this primarily just a sweet mix phenomenon? Or is rent growth for these new assets just really that strong?

[Phillip Wesley Burns, CEO & Trustee]

It's more of a suite situation, right? I mean it just depends upon where that regulated suite or that regulated unit is geographically, it depends upon how long that tenant has been in there, et cetera. So I don't think you can say extrapolate that across the board, it's running 50% higher or 20% higher. But again, we continue to optimize everything that we can, and we optimize it to the maxim amount that we can. So I think it's probably more a product of sweet mix that we liberalized at that particular time, given the prior periods. But again, we're always in the 30%, 35%, 40% and now we're getting close to 50%. So there's always that really high juice that we can get from that liberalization program as we work through our portfolio of existing assets or as we buy more assets in the future that may have regulated suites that are a candidate for liberalization.

[Kyle Stanley, Associate]

Okay. Great. And just one last one for me. Just on the EUR 35 million fair value gain. Would you be able to just discuss some of the key drivers to that gain?

[Stephen Co, Chief Financial Officer]

Yes. So the key drivers are -- I mean, we see the strong rental uplift. So it's really driven off of the NOI or stabilized NOI in the models. So as you see in the market, and it's reflected in our operating results, there is strong rental uplifts included in that.

[Operator]

The next question is from Himanshu Gupta from Scotiabank.

[Himanshu Gupta, Analyst]

So just on the supply side, I mean you mentioned the De Horizon you bought from housing association. So who is contributing more supply in the market today? I mean is it housing associations or private developers? And then in the light of recent announcements, would private developers slow down, any indication there?

[Phillip Wesley Burns, CEO & Trustee]

Yes. No, I mean, I think that's a bit similar to Jonathan's question. So again, it was quite quiet in the first half of the year, but we're starting to see portfolios come back into the market. And it's -- again, it's the traditional players, right? It's -- of course, there's always new development opportunities where you can forward fund or forward purchase, which, again, there are people doing that, and it doesn't really work for you as a strategy. But if we talk about the vole or the supply of existing product that's available for sale, what we've bought historically have been the pension funds and the insurance companies rotating their portfolios where they have assets that maybe are regulated or a combination of regulated liberalized. It's harder, it's more asset management intensive. They provide to deploy that capital into their liberalized assets, which they perceive as being easier to manage, et cetera. And they brought a lot of that product to the market in the second half of last year. And historically, it's been a little bit more seasonal, if you will. But now you're seeing those pension funds, those insurance companies, those type of players, the Dutch call it the institutional market, but it has a slightly different definition than what we would call it. Now coming back into the portfolio. There's a couple of portfolios that are in the market right now. And according to our sources, there's more to come in the second half of the year. So again, I don't see there being or having been a big rotation in terms of the traditional sellers with whom we transact to, I just or we just have seen or witnessed that there was a pause for the first half of 2021, which was, quite frankly, anticipated. So we think it was very good that we were able to find the off market deals, to build the step in on De Horizon and continue to have some acquisition momentum, even when the overall market was a bit quiet in the first half okay.

[Himanshu Gupta, Analyst]

That's great color. My question was more on the new supply itself. I mean like, who is building new supply? I know you spoke about the investment volumes and the deal flow, but is there any slowdown in the new supply by private developers or housing associations who are contributing new products in the market?

[Phillip Wesley Burns, CEO & Trustee]

No, I don't think there is. I mean I think there continues to be a pipeline of new supply with housing associates being focused more on the regulated affordable side and the other more independent developers being focused on the liberalized market. But we don't feel that, that is hurting our market or our ability to perform with excess supply in any way because it's still falling short of the required new deliveries just to maintain the current position. So the current position is continuing to get worse in terms of required new housing units versus new housing units delivered. So yes, it's still coming. There's some bottlenecks right now in terms of capacity to build, et cetera. It's always quite slow getting planning in the Netherlands. But I haven't -- we haven't seen a dramatic shift in terms of that oncoming supply, but we know and all of the market data suggests that the supply of new units is still insufficient to keep that current housing shortage from getting worse. So we don't perceive it as a problem or a risk.

[Himanshu Gupta, Analyst]

Got it. That's helpful. And then just sticking to the acquisitions there. The cap rate is 3.3% cap rate on the 2 acquisitions combined. So do you assume the full stabilization of De Horizon property in this assumption of 3.3%.

[Phillip Wesley Burns, CEO & Trustee]

Just say that again, Himanshu?

[Himanshu Gupta, Analyst]

So I think the cap rate you are expecting on the 2 acquisitions is 3.3%. So are you assuming full stabilization of the property in this assumption?

[Phillip Wesley Burns, CEO & Trustee]

Yes. Yes. And so that's a blended of the 2 and Horizon would have been on the lower end of that blend and Villa 19 would have been on the higher end of that blend. But yes, that assumes a stabilized Horizon.

[Himanshu Gupta, Analyst]

Yes. And I assume the cap rate is lower because it's a newly developed property? And do you expect like better rent growth profile as well on this property?

[Phillip Wesley Burns, CEO & Trustee]

Yes. I mean it is a new build. Villa 19 was completely refurbished in 2019, but it really reflects the difference in the markets. So you're in Central Amsterdam on one versus a very strong but still non-Randstad location with Villa 19 in Arnhem.

[Himanshu Gupta, Analyst]

Okay. Okay. That's fine. That's fair enough. And then maybe just a follow-up question on the demand side. So can you comment on external factors such as immigration, ex-pat, or foreign students? Like is the border now open for you nationals for Netherlands? And do you see it as a factor which can help demand further?

[Phillip Wesley Burns, CEO & Trustee]

Yes. So as I've often said, I think there's a lot of parallels between the Netherlands and Canada, where you have organic household formation growth as well as immigration. Immigration was globally shut down last year, but immigration is starting to come back into the Netherlands as the European borders are open and then the Netherlands is also more open. Again, they had a bit of a scare a few weeks ago with cases, but that's now coming back down. So most of their restrictions are lifted, some of the big group events are not. So yes, I think that immigration that is historically paid a part and the household growth hustle and formation growth is going to come back in the Netherlands, and we're starting to see that. But again, just recognizing the defensiveness of our portfolio, even when that immigration was shut down because of COVID, we can just -- we continue to move our business in the right direction. And I think that's largely a function of our split. We're really not focused on the ex-pat community so much. We're not focused on students. We're just more than normal Dutch residents working normal jobs, and we have a good split between the Randstad, outside the Randstad. We have a good split between regulated to liberalized and we have our single-family portfolio as well. So I'm all for, and we're very supportive of that immigration and ultimately, of course, helps and increases the positive fundamentals, but we didn't really see a negative impact on our business when that slowed down, but very happy to see it come back, and it can only be positive for us going forward.

[Himanshu Gupta, Analyst]

Got it. Okay. That's helpful. And my last question is on the acquisition pipeline. I mean realistically, how much more you can buy in this year? I mean you kick-started with I think almost EUR 50 million of acquisitions. How much you can do in the rest of the year?

[Stephen Co, Chief Financial Officer]

Quite frankly, from a liquidity perspective, I don't think we're constrained at all because we have our undrawn capacity on our line. When we do the refinancing, that line will almost be completely cutting down again. So that allows us even more capacity, plus we have the pipeline facility. So there's no liquidity capacity whatsoever and our ability to continue to grow. The one thing we can't directly influence is that pipeline of opportunities. But again, what we're seeing and hearing and expecting is that the pipeline will come back to a more normalized amount going into the second half of the year. And again, we're aware that there are certain portfolios coming out now. So I think we should be able to get our fair share of that. And I'm quite optimistic that we'll do further external growth going into the second half of the year. So we have no constraints on our side of the business in terms of the ability to grow.

[Operator]

The next question is from Dean Wilkinson from CIBC.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

And just for the record, I've been able to hear everything fine. There's a lot of consternation after the last quarter, just on the regulatory environment. And perhaps it grossed over the exceptional strength in turnovers. And this quarter was even stronger than 2020, stronger than 2019. And you talk to some of those trends. When you look at how things look going forward and as we come out of COVID, is there an expectation that you think that the turnover metrics could actually increase? And what did you see on July 1?

[Phillip Wesley Burns, CEO & Trustee]

Yes. I mean that's a great question, and we talk about that a lot internally. I mean you have seen a very pronounced, relatively steady but very pronounced quarter-on-quarter over the past couple of years of an increase in turnover uplifts. Our turnover rate has -- within 100 basis points has stayed pretty steady. So I don't see that moving dramatically. Again, if our occupancy goes up a little bit and our turnover goes up a little bit as we remediate it. But I don't expect or anticipate a very pronounced change in our turnover percentage, but we have seen that consistent and material positive trend and the uplifts on turnover. And I really put that down to the housing dynamics, right? I mean there is a massive shortage of housing. House price inflation is extreme. Rental inflation is going up also but at about 50% of house price inflation. So it continues to give us pricing power. Again, I don't necessarily think that's a -- an perpetuity thing we don't know, but so long as there isn't something meaningfully done to address the fundamental problem of a supply shortage, I think, that is a very good place for us to be as a supplier of rental product. So I would expect to see this trend continuing in terms of our ability to drive these type of rental uplifts. And in terms of also -- sorry, I mean, just to finish the point also, as you have the new legislation in place, right, you're building in incremental uplifts, right? So before, on the liberalized side, we had a lot of freedom to index annually and to the extent that we can't index annually. That means there's always going to be that delta between what the then market rate is and what your current index rate is. So as these regulations have come in, yes, they're not preferred, but we really aren't losing that value, we're just pushing that value out a little bit. And that's why you would also expect to see your turnover uplifts going up as well as they're then serving to catch up on the indexation that you didn't achieve.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

And that was sort of my second question because it looks like that that looks to have stabilized now in maybe a low or mid-teen kind of mark-to-market opportunity within most of the revised suites, which is almost double what it was 2 years ago.

[Phillip Wesley Burns, CEO & Trustee]

Yes. I mean I think we need a little bit more data to come to that conclusion, but I do believe that's the right one because keep in mind, last year, we self-imposed a 2.6% cap. I won't -- we got to 2.6%, but we self-imposed that. This year, the government basically imposed a 2.4% cap, right? So we're dealing with that 1-year effect of the self-imposed cap that we put in place. So I think the market is getting stronger, again, fundamentals are very much in our favor. I think there's some of that recapturing the indexation that we chose not to get. And then I think going forward, it would be very expected that because now it's imposed upon us as opposed to being voluntary, that will continue. And so again, I do believe there is a relatively permanent catch-up that we will have in our liberalized turnover for the forgone indexation.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

We called out a Canadian problem over here. And in terms of your ability to convert the regulated to liberalized, that seems to have sort of been pretty consistent 50 to 100 basis points per quarter. Do you think as you go through the back half of the year and into 2022, there may be an increased ability to liberalize those? Or should we be thinking that it's kind of run rate as it has been sort of in the past year or so?

[Phillip Wesley Burns, CEO & Trustee]

Yes. I think that run rate probably stays the same because, again, you will see that the regulated suite turnover is typically much lower. There hasn't been a lot of volatility in that number, and we can only convert when they turn over. So the only thing -- and you have only a portion of your resident or your regulated units that are liberalize-able anyway because of their size, et cetera. So you're always -- we sort of use a general rule of some 50% of our regulated suites are probably liberalize-able, but regardless of that, you still have to wait for them to turn. And so the only thing that would significantly increase that volume or that velocity would be an increase in regulated turnover.

[Operator]

The next question is from Matt Kornack from National Bank Financial.

[Matt Kornack, Analyst]

Just a quick follow-up on Dean's question there with regards to regulated versus liberalized. Liberalized as a portion of your portfolio has crept up, it's approaching, I guess, 60% now. Some of that's on convergence, but I think acquisitions drove it as well. And your thoughts going forward, just as you target acquisitions in the back half of the year, is there a difference in view as to whether you want regulated versus liberalized exposure at this point? Or are you still kind of hoping to be somewhere in the 50-50 range?

[Phillip Wesley Burns, CEO & Trustee]

Yes. I mean it all comes down to price versus expected return or yield on those assets. So we very much like the construction of our portfolio, a good mix between the 2, regulated and liberalized. We like a good mix between Randstad and Nod. We do like the fact that we have a third single-family housing as well. So we were closer to 50-50, as you say, we're now 40-60 regulated liberalized, and we don't have set in stone parameters what we want that mix to be. Some of it depends upon what comes out. If people are selling regulated units, we would as aggressively chase that at the appropriate price and underwriting as we would as aggressively chase liberalized portfolio at the appropriate price and underwriting.So I think 40-60, 50-50, we don't attribute a big difference between that. What is important for us is to continue to have that mix as well as continue to have a mix between Randstad and Nod as well as have that significant component of single-family because we think that overall creates a good portfolio mix, takes a lot of the volatility out of the portfolio in any given economic situation. So we're always going to seek to have a good balance of both, but 40- 60 versus 50-50 isn't a big driver for us in terms of our underwriting strategy or what we're seeking to buy.

[Matt Kornack, Analyst]

Fair enough. No, thanks. And then just a quick accounting one from me. Stephen, on cash taxes, I think it's been around like high EUR 500,000, low EUR 600,000 for the last 2 quarters, but that's a bit above where it was last year. What should we think of for the remainder of the year? And I guess, is this a good run rate?

[Stephen Co, Chief Financial Officer]

Yes. I think this is a good run rate for the back half of the year. So that EUR 500,000 is a good number. But I mean, we tend to -- we are going to manage around that 4% to 8% effective tax rate using FFO as a basis.

[Matt Kornack, Analyst]

Okay. So if you scale the portfolio, it will increase?

[Stephen Co, Chief Financial Officer]

Yes.

[Operator]

[Operator Instructions] The next question is from Brad Sturges from Raymond James.

[Bradley Sturges, MD & Equity Research Analyst]

Maybe just another modeling question. Just on the NOI margin, little bit higher in the quarter. Just thoughts on what the guidance or run rate might be for margin going forward?

[Stephen Co, Chief Financial Officer]

Yes. I think we've been guiding like 75% to 77% NOI margin. I mean this quarter was a bit higher just because of the landlord levies rebate would contribute at about 200 basis points. But I would say for your modeling, I would go with the 76% margin.

[Bradley Sturges, MD & Equity Research Analyst]

Okay. Great. And just one question on the regulatory environment, we've obviously seen some changes. There was some discussion about a proposal on banning private investors to buying houses for the purpose of rental. If that were to come into law fill up, how do you see that impacting the multifamily market and in particular, ERES, would there be any impact also depending on what the law look like on the ownership outside the Dutch rowhouses?

[Phillip Wesley Burns, CEO & Trustee]

No. I mean, again, there's articles on it. I hesitate to put too much credibility for legislation that could be really positive or really negative, particularly in a period of time where the government hasn't been formed. But a lot of what I understand about that legislation is really targeted to the Airbnb "investor." People buying up second houses just so they can rent them on Airbnb, particularly in the big international cities like Amsterdam. So as we understand it is really not targeting professional landlords like us because, again, we have to remember that the housing associations are the biggest players in the game. And so it would be very difficult to pass legislation that would put them out of business or you'd have to pass legislation that gives them some sort of different treatment, which would immediately be challenged. So as again, as much as we can try and understand it when it's generally newspaper articles and rumors and whispers, it's more targeting the Airbnb guys than it is an institutional landlord like ourselves.

[Operator]

Thank you. There are no further questions registered at this time. I will return the call back to Mr. Burns.

[Phillip Wesley Burns, CEO & Trustee]

Well, again, thank you, everybody, for joining us this morning. And if you have any further questions, particularly giving the audio difficulties, which again, we apologize. Please do not hesitate to contact either myself or Stephen at any time. Thank you, and have a great day.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.