Q3 2020 Canadian Apartment Properties Real Estate Investment Trust Earnings Call
<unk> conference call at this time, all participants are in a list.
After the speaker's presentation, there will be a question and answer session to ask a question during the session, we'll need to press star one and your telephone if you require any previous question press Star Zero I wouldn't know whats in the call over to David Miller. Please go ahead.
Good morning, and thank you Denise before we begin let me remind everyone that the following discussion may include comments that constitute forward looking statements about expected future results.
The financial operating results a copy <unk> actual results may differ materially from these forward looking statements such statements are subject to certain risks and uncertainties discussions concerning these risk factors. The forward looking statements the factors and assumptions on which they are based can be found in <unk> regulatory filings, including our annual information form and Mdna, which can be obtained at shoot our dog.
I'll now turn things over to Mark Kenney, President and Chief Executive Officer.
Thanks, David Good morning, everyone and thank you for joining us.
Scott Crier, our Chief Financial Officer is also with me this morning.
We continue to generate very solid performance during the pandemic.
And with the innovations implemented by our team and our continuing strong relationships with our residents.
We are confident this growth and performance will continue.
Our goal through this challenging time I've been to preserve capital.
Maintaining a strong and flexible financial position mid.
Mitigate risk and generate the best operating results possible I.
I believe we're meeting these objectives and will emerge from this period stronger than ever.
Our growth over the last 12 months, it's had a positive impact on our third quarter results as you can see on slide four.
Revenues were up 11% for the same quarter last year driven.
Driven by positive contributions from our acquisitions increased monthly rent and continuing high occupancy.
And why rose 12%.
And if that's all what 13% generated the strongest ever and AFFO payout ratio of 59%.
Our growth also remains accretive to unit holders with an AFFO per unit up 5.6%.
Looking ahead, we remain confident that this solid quarterly performance will continue.
As economies returned slowly we expect to see improved results as we build on our presence as the preferred housing provider in our chosen markets.
Turning to slide five you can see that our results for the first nine months of 2020 have remained strong and stable with solid increases in revenue.
In Hawaii and NFV FFO.
We're also pleased to see another period of strong 4.1% same property NOI growth.
We believe this continuing solid performance. Despite the COVID-19 pandemic is proof that we can generate strong and growing returns for our unit holders through both good and bad economic times.
For more than 22 years, we have built the team the asset base and the operating platform that can and will continue this track record of performance as the pandemic eases in the future.
Our continuing strong performance is off to a testament to the exceptional commitment and contribution our team is making.
The experience and expertise a cap rate is truly demonstrated through.
Through these challenging times.
Slide six shows we significantly enhance the size and scale of our property portfolio in 2019.
Acquiring 9241 residential suites and MHC sites for approximately $1.4 billion.
These acquisitions made a solid contribution to our results this year.
In the first nine months of 2020, we continued to grow with the purchase of another 2233 suites for $574 million.
We also sold certain non core properties, including an underperforming asset in Calgary.
Including the most recent biased in October we were also pleased to have completed the bite at the 12 of our 15 operating leases in the greater Toronto area over the last 12 months for a total of approximately $173 million.
We acted on these by earlier than schedule, resulting in a 31% discount to the agreed upon price for these properties.
The transition to fee simple ownership for these properties add material, new financing capacity meaningful new asset value accretion and unlocks the potential for future new development opportunities.
From an operating perspective, we maintained our track record of solid performance in our stabilized portfolio as you can see on slide seven.
Occupancy remained at effectively full level in the residential portfolio of our business.
Well that average monthly rent rose driven by increases on turnovers and renewal.
Our track record of organic growth also continues with same property NOI up 4.1%, while maintaining a strong 65% and or emerging.
Despite the constraints placed on us by the COVID-19 pandemic, we continued to generate solid increases in rents on turnover and renewal as shown on slide eight.
Clearly turnovers are being impacted.
By the ability of our residents to move were personally visit our properties.
Still almost 9% increases in the Canadian portfolio and over 8% in the Netherlands on turnover our solid results.
We expect to return to our more traditionally higher increases once the pandemic eases.
Renewal have been affected by the rent increase freeze we implemented on April one to help our residents work through these challenging times.
As economies begin to open we are now beginning to implement modest rent increases in certain markets in consultation with our residents.
Looking back on the past few months I'm extremely proud of our team.
And how they've responded to the COVID-19 pandemic arc.
Our continuing growth and solid performance is a testament to our resiliency and ability to quickly and effectively adapt to these challenges.
I can't think our team enough for their efforts their professionalism and their dedication.
I also want to thank our residents for working with US. These are unprecedented times for everyone and we appreciate being able to open we consult with our residents and understand the issues they face.
Since the pandemic began in March we have responded with programs that are helping us to build on our relationships with our residents and with our employees. This employee and resident centric approach is helping us meet our goals of preserving capital maintaining a strong and flexible financial position and Jeff.
In reading the best operating results.
Turning to slide 10 of our compassionate care program continues across the country. Since March we have been reaching out to our residents checking in on them and discussing any rental payment issues. They may face.
On average we are making 3000 calls per month with approximately 50 people dedicated.
To the reach of our highly and adding.
To our highly engaged onsite staff.
Our onsite staff have worked tire tirelessly through this crisis.
And for this we are very grateful.
With the started the pandemic, we also implemented a rent payment program for certain residents facing severe economic hardship.
By working with these residents and understanding their needs. We have approved payment plans for approximately 8.7% of our total resident base. This.
This amounts to only about $570000 of deferred rent as of September thirtyth.
With most.
NBC, where the province has mandated deferral plans for all residents with payment rears during the crisis between March and August.
Looking at other issues in our business related to the pandemic you can see on slide 11 that we are managing our business optimally.
We have seen very little bad debt.
Our bad debt policy is any amount of rent it standing over 30 days.
Every cent over 30 days.
Clearly the majority of our residents value their home and are paying the rent on time.
Government intervention in our business has been a topic and well mandating no rent increases has been a popular political move and one we support the impact on our revenues is not major.
For example, the Ontario government mandated rent freeze for 2021, well only impacted revenue by the $2.5 million in the upcoming year.
In the meantime, mark to market increases in continue in 2020, averaging almost 9% a very solid results year to date.
To further build on our relationships with our residents we started to roll out our resident portal earlier this year as detailed on slide 12.
Today, almost 60% of our units are now signed up and accessing our portal.
A key feature of this new technology is to encourage automatic payment of rent using our pre authorize payment plans well.
Launched at the beginning of the third quarter, we're now seeing a very strong take up to this convenient way of paying rent.
We are also encouraged more.
Online and electronic means the paying rent, including electronic fund transfers credit and debit systems and others approximately 85% of our rent roll is now collected electronically improving the timing of collections and our ability to react to individual resident issues.
With face to face meetings difficult during the pandemic. We also launched our virtual property tours and online lease applications between March and September when personal visits were all but impossible, we saw right over 5000 leases virtually.
Moving to slide 13 during the pandemic, we've characterized our business as back to basics.
It's been a focus on receivables apartment renting excellence and investigating all areas, where we might find operating efficiencies.
Our key focus has been on rent collection and as you can see we continue to collect the majority of our ret positive.
As of October 31st we have collected over 99% of the monthly rent outstanding year to date.
And while we continue to work with our residents facing economic hardship, we are taking steps to deal with those residents who will not be willing to engage with us.
In this light we are we are pleased that the rental tribunal boards are reopening in certain markets. So that we can take a more serious approach to the small number of problem residents.
As you can see on slide 14, we have experienced very stable occupancy since the pandemic kit.
We also believe our small vacancy rate is not a reflection of the state of the overall rental market, but rather the challenges of renting during a pandemic.
As we emerge from these challenging times, we are confident occupancy will increase quickly to our historical near full levels.
We also believe that our properties offer a highly affordable place to live in these new uncertain times.
As you can see on slide 15, compared to call into rental and new build apartment properties, our apartments in town homes rent for considerably less than these other rental alternatives.
Very low average rent of approximately $1.60 per foot across the country.
This compares to between three and $5 per foot for smaller condo rentals and new build apartment properties.
On average suite size is also larger at approximately 800 square feet.
Well located well maintained our properties continue to offer Canadians the best value in the rental market.
A key factor in our success over the last 22 years has been our focused asset allocation strategy as detailed on slide 16.
On the apartment side, we are targeting primarily value add properties in the mid tier segment. These properties are being acquired at well under 50% of replacement cost.
We know how to invest in them to increase value and their stability is driven by their very affordable rental rates.
On average, we're renting or apartments at around $1.60 per foot affordable on the average 70000 dollar and no annual household income the Canadians have.
Keeping occupancy is high and ride collection stable during the pandemic.
We also really like the MHC business, a highly stable low risk business with very strong potential to increase cash flows.
Our European presence is driven significant and growing dividend and fee income dividends to date from E. Reds and iras totaled $26.7 million, while our fee income through the first nine months of 2020 has risen 66% to $15.4 million.
As the only professionally managed operating platform in Europe, the opportunities for further growth and enhance value our significant however.
However, we will target our exposure to the European market at approximately 15% of value.
Investors can always increase their own investment in units in these two quality rates.
As I mentioned, the key element of our asset allocation strategy is to increase our presence in the MHC business as detailed on slide 17.
We really like this sector.
Revenues are highly stable and with residents owning their own homes capital requirements and maintenance or significantly reduced M. C properties provide another level of diversification within our portfolio, allowing us to enter more rural and smaller markets than our residential focus on large urban regions.
We're also investigating the opportunity to increase cash flows by ramping up our program of selling manufactured homes, we're acting as a broker to generate commissions and fees to generate additional fees by sourcing mortgage financing for MHC residents is another option.
We believe another reason for our success is can it's our commitment to diversity and I am very pro proud of the progress that we've made.
As you can see on slide 18, we hold an almost equal gender split between men and women on average women. It represented over 47% of our hires annually since 2017.
We also celebrate over 61 languages spoken among our employees.
A reflection of the diverse makeup of the Canadian population and our resident communities.
Additionally, we have a highly multi generational workforce.
The focus on diversity helps us to better interact and support the communities in which we live and work.
Enabling us to deliver innovative approaches and solutions, both within and outside the organization.
We're also very proud to be working with social housing agencies and programs and programs leasing suites to them, where we can and where needed today almost 2100 apartments are leased to these agencies for people in need.
Later this month, we will be noting our respi results, an exciting milestone and strong signal of our commitment to ESG.
I'll now turn things over to Scott.
Thanks Mark.
Turning to slide 20, you can see that we are clearly in a strong financial position.
The strongest in our history.
At the end of the second quarter and a conservative debt to gross book value of 36% an increase total liquidity available on approximately 372 million.
We also $783 million in Canadian unencumbered properties available to generate signs.
If you need it.
Looking at our financing to September Thirtyth, we have locked in a very low weighted average interest rate of 1.7% on $578 million in new financing many.
Many of these with a long duration of 35 year amortization.
Locking in these savings for much longer.
And we expect we will continue to benefit from the current low interest rate environment for some time.
At quarter end, 99.2% of our Canadian market as incurred.
Interest rate.
We're also confident that debt markets and financing will remain highly available for our properties given their stability and the strong fundamentals of the rental residential business.
As of September Thirtyth, 98.5% of our properties holds CMHC insured mortgages in Canada.
Slide 21 outlined the various sources of liquidity from an alternative perspective available to us.
Clearly, we have no intentions of accessing all of the source and that one's however, you can see that we are in a very strong and flexible financial position.
In addition to our strong cash position and credit lines available. We also have the ability to generate 737 million by taking advantage of low interest rate.
Increased mortgage on low 11 properties and the operating lease buyouts.
As mentioned before we have $718 million.
Properties, we can use to generate further capital.
In total if we were to access all these sources of capital we have available liquidity of approximately $1.6 million and even if we did debt our leverage ratio would still remain a conservative 41%.
Strong recipe for growth in the future.
Turning to our balance sheet on slide 22, you can see we continue to maintain a strong and flexible financial position at quarter end consumer.
Conservative leverage strengthen coverage ratios and historically low interest cost on a mortgage portfolio.
We've obviously stress testing these covenants and we conclude there is significant room in this environment.
That to JV deal with the solid and conserve and 36% at quarter end even.
Even lower when you take the impact of the Reds consolidated on our books at 100%.
This will provide the financial resources and flexibility to work these challenging times.
Our mortgage portfolio remains well balanced as shown on slide 23.
Looking ahead, our current ability to top up renew mortgages through 2034 will provide further significant liquidity.
As of September Thirtyth, we expect raised we raised approximately $1.2 billion and total CMHC mortgages renewals and refinancings this year.
And includes topped up from conversion of the 11 operating lease properties to fee simple ownership to date.
You can also see on this graph, we have considerable or opportunity to reduce our long term interest costs and today's attractive interest rate environment.
The current five and 10 year estimated rates of approximately 1.3, and 1.8% well below expiring mortgage rates between two and a half and 3.7% over the next three or four years.
Slide 24 shows that our portfolio is also well positioned surrounding Canada as major cities.
One thing we have been noting to our investors is that while our strata had GE has been and will continue to be focused on the major Canadian cities.
A large majority of our portfolio is centered in knees.
Cities greater surrounding suburbs or nearby cities or towns with short comments.
We believe that the affordability of our year until units as well as this geographical allocation has been part of the resilience and growth of our portfolio. During these unusual and changing times.
A key reason for the prime focus of our capital allocation strategy on the Canadian residential renter sector is the track that spread between cap rates and interest rates.
As you can see on slide 24, historically, there have been very strong spreads over the last three to four years.
Which had tightened at the end of Q4 2018.
With forecast for interest rates to remain low for the foreseeable future. We are now seeing quite high overall spreads between 202 hundred 50 basis points.
Clearly spreads lower in key markets like Toronto, and Vancouver, but there is still good accretive deal flow available to US we continue to evaluate and act on the opportunity to acquire.
You add and brand new properties in our target markets.
I'll now turn things over to Mark to wrap up.
Thanks Scott.
In closing we are confident that our long term focus on making cap rate the best place to live work and invest will take us through this challenging time and emerge stronger than ever.
We remain committed to building strong relationships with our residents and providing them with a safe and affordable place to live.
Again, I want to thank our residents through the support over the last few months.
Our team continues to capitalize on are efficient and well tuned operating platform to deliver the best possible result, and I, especially want to thank everyone at cap rate for their hard work and commitment.
And from an investment perspective, we believe the apartment industry remains a very defensive sector and one that has proven its ability to generate solid returns in both good times and in bad occur.
Capri, we remain very optimistic about our future we have a highly conservative balance sheet with low leverage strong liquidity with numerous sources of capital and our operating results remain strong and stable. Thank.
Thank you for your attention. This morning, and we would now be pleased to take any questions that you may have.
Ladies and gentlemen to ask a question. Please press Star then the number one on your telephone keypad. Your first question comes from Mark Rothschild with Canaccord. Your line is open.
Thanks, Good morning, guys.
In regards to Corning.
In regards to the apartments, where you're applying for H.T.I.s. Obviously that number has increased can you a little more color on how that process is going now how you see it evolving maybe over the next year and you expect that number to remain elevated for some time, just because of how things have changed.
Yeah, I think that you know, Ontario, it's very possible that we could see and negotiation there of sorts with government.
The idea of deferring the implementation of by IGI ice has been floated a and I don't think anything can be taken for granted right now.
So I don't want it would be the question Mark, but it's it's an uncertain environment and until we get through the bulk of this second wave I think it will be difficult to know exactly how the AI issue will play out.
Okay, Great I'll leave it on that question is more about something else.
Yeah. Overall, you had good operating numbers in the quarter, but one area, where we're seeing some pressure just generally the market is at the high end in particular on the condo units that are for rent. What are you seeing at the high end of your portfolio. The fund some of your properties that might compete with some of those.
I thought you know you have the slide show your average rent is much lower but you have some higher end building. So are you seeing any softness notable there and would you anticipate anything to trickle down so a larger part of the market.
Yeah. It's it's a there's there's three markets student rental today that are really kind of evolving theres. The high end, which is incredibly challenged.
Theres the mid tier, which is in my mind, the best place to be and there is affordable where there's political pressure. Okay. At the high end you know in Toronto, you're if it's new rental construction, you're probably talking four to $5 rents, which means you're probably talking about income earners have one.
Hundred 20 to 150000 and up.
And those that's the market where people are working from home and commuting that's the market that's being challenged with new condo supply and new air Bnb supply.
So theres many many headwinds in that new rental construction market.
It's a very very different story in the mid tier market.
People are moving down into the $2 range, it's because there possibly trading down from their $4 rents.
Two to $3 rents and people are realizing that the quality of the locations are really what probably matters. The most if you're going to live in the city and it's for that reason the cap rate to seem like tremendous.
Interest in our product.
So I do think it's a tale of three very different markets.
Rental is not just rental and mid tier is clearly the best place to be when you're entering a counter cyclical environment.
Okay, great. Thank you.
Welcome.
Your next question comes from Brad Lundy was I in Securities. Your line is open.
Thanks, and good morning.
Two high level questions for me and just looking at your development pipeline.
What could be a relatively strong pent up demand for rental products me and also into context as you know I mean, new supply has been relatively limited and 2020 would you consider becoming a bit more aggressive on the development side at this stage.
No I'd say, we're more cautious than anything else. So.
For the reasons that we just talked about with challenges in the high end of the market.
But that not to be confused at all with our enthusiasm in getting our properties entitled Once the entitlement and density is approved and we are in a position to write a pro formas, we might find yourself in a different position you.
You know everything is still so incredibly uncertain with respect to the economy that we would be making no development decisions on the on the apartment side in the next few months, but would be having a look at what the environment looks like in 2021.
But I would say our enthusiasm to build has cooled, but our enthusiasm to get entitlement remains high.
No that that's totally fair and second from me how would you characterize your appetite for the Netherlands today.
Does your how big is your acquisition pipeline today.
The pipeline is robust not unlike Canada, we've seen an increase in potential deals coming to market and we're we remain very bullish on the Netherlands and very bullish on Canada. This the spreads that Scott was talking about between.
Cap rates and interest rates have actually widen more in Canada. So our conviction around Canada has a has definitely moved up the temperature.
Scale, but our conviction to the value in the Netherlands is as strong as it was the day we went there.
Just the opportunity editors feeling right now.
Any I would just say the deal flow.
Just going to say the deal flow is very strong and the amount of deals that we've underwritten.
In the Netherlands is varied.
Very substantial.
And just to add to the spread discussion.
Something we love is that 90% of the portfolio.
Hi, renewals that in access to tune out percent so.
Topline growth is very.
Very very good on a global basis. When you look when you look at that year over year.
HM Oh, that's great any indications on on <unk>.
Then shows execution on an acquisition and then announce any timeline maybe.
Our conviction remains as strong as ever.
Is all that I can really say both in both markets.
Perfect. Thank you I'll leave it there thank.
Thank you.
Again to ask a question. Please press Star then the number one on your telephone keypad. Your next question comes from Jonathan told you. Please state your company. Your line is open.
Thanks.
Securities.
The the vacancy slipped.
Slipped 30 basis points in mid October.
Is that seasonal and how do you expect that to bake into to trend over the winter period.
The the the point that I was trying to to making the presentation is the Q2 and Q3.
Our I would characterize it as logistical issues. It's we became very difficult for people to go in view apartments in Q2.
And we don't confuse that at all with with demand, we know that demand is falling off.
Slightly immigrations re ignition will definitely change that quite quickly.
We're managing Jonathan very very high occupancy levels in cap rate.
In particular is Ics has always excelled at high occupancy with balancing rent increases so.
I I'm not calling a a demand a trend change here I think what we have is a pandemic effect that will quickly readjust once people can go out and view apartments again and feel safe.
But but I can't stress enough the high occupancy that we went into this pandemic with and how that strategy is played well.
Okay. So so you think that you can maintain your occupancy in and around the current level over over the winter.
Yeah, we think so like we know the Q4.
Is that is Q4 as of December in January are by far the slowest months of the year January in particular, so to call the quarter, it's difficult, but we know that December in January because to be very very slow this year, but but the renting is a is actually quite quite good right now.
So we're already into Q4 don't see a big trend change might be minor slippage, but it's very hard to call.
Okay Fair enough and then just switching gears the.
The mortgages that you.
Guys look that you're going to be putting on the the operating leases in in Q4.
It is that it.
Anticipation of being very active on acquisitions are you really just want to lock in but the low rates and just.
Use of cash to pay down your your operating lines.
I mean, where we will pay down our operating lines as one source I mean, the cost in our Canadian mines or are more expensive Stan.
Then mortgage debt so for sure we are executing decree.
Kind of capacity we.
We think we could easily.
Easily create 350.
Millions of capacity on our lines by year end.
And again locking in the interest rates and something Weve tried to do these spiked up recently.
Again, we're focused on doing 35 year and keeping as much debt outstanding for as long as possible, we'd be doing 10 to 15 year mortgages.
At sub 2% so definitely its a combination of the two but Tom next year.
2021, we actually have unbelievable liquidity again.
Coming out of our portfolio. So we we do but we have a ton of room to be.
Acquiring assets right now.
Okay and they like it was going to say, we just like the Canadian environment like this.
Can't say enough that it is a widening spread yep.
The topic and the growth is still there. So it's not just widening spreads with flat broke this widening spreads with optimistic horizon, when you're looking at mid tier.
And then and are there lots of acquisition opportunities out there right now.
There is but I wouldn't confuse theres, a there's a a wave of opportunity that we haven't seen in quite some time.
I predict that will settle in in Q1, there seems to be a rush to get deals completed by year end and that is the theme that we're hearing from sellers.
I don't think that will continue at the same pace in Q1, I think we have a temporary a wave of sellers trying to execute transactions before the end of the year.
Followed by a return to kind of a normalized acquisition market.
Okay. Thanks, I'll turn it back.
Thanks.
Your next question comes from Neil Downey with RBC capital markets. Your line is open.
Thanks, so much good morning, everyone.
One question.
One question really relates to.
Bad debt over the last several quarters.
I believe the numbers in round terms were 700000 in Q1 2.4 million in Q2 and.
Back to 700000 in Q3, so 30 basis points.
Uh huh.
110 basis points to 30 basis points.
Can you just comment on how those bad debts were recorded and what your expectation is.
Looking to 2021.
It's a great question.
The question the hyper focus on rents collected for the month I think has become a misleading one.
Clearly in the first few months of the pandemic people wanted to understand the impact but at this stage of the game, it's all about bad debt.
And the cap rate our debt bad debt policy is every penny of rent to outstanding over 30 days, we provide for.
So what that basically means is if people pay their balance that's been accrued accrued for in bad debt over 30 days that number comes down.
So the money that moves around in terms of outstanding rent in the current month.
It's not always a future indicator of what's going to be over 30 days people just tough circumstances that happen. So the under 30 days stuff is one issue. It's the over 30 day stuff that people should be back to looking out like we always have historically and for cap rate, we're seeing numbers.
But.
Around that half a percentage point number so it's quite strong.
So looking forward.
Into a 2021.
I can only be answered by how bad the economy.
And all I can refer to is.
Early stages of my career.
In the early nineties.
When I recall at CMH see either underwriting for bad debt was somewhere in the neighborhood of 1% of revenue.
So if you think we're headed to a highly damaged economy.
From a well positioned.
Physician balanced well managed portfolio I.
I think that the a risk could become as high as 1% I could be wrong in that we could have.
An economy far worse than we saw in the early nineties, but.
But it's in that quantum and we're seeing that that's playing out during this pandemic.
And this is the reason the cap rate has had from the very beginning a focus obviously on apartments and mid tier is that we understood. This resiliency by doing historical look back and if history tells us anything it's that people pay their rent in Canada.
Great.
Thank you very much.
Thank you.
Your next question comes from Mike market, that's with please state your company. Your line is open.
Thanks, Good morning, everybody, which is dessert and capital markets were employed [laughter].
Yeah look in the Mdna you guys.
It's not necessarily new disclosure, but the 20% mark to market. The closure does that assume a normalization in the market or is that something where you think it's actually at a given the softening rents that you and I save shopping with a modest softening, but you've experienced yeah weve of course.
We've we've challenged that one for sure obviously with our turnover rates not being as high as that.
We've actually gets aggregated some of that data into the links in term of the lease.
And you know.
Then the the shorter you know one to two to three year leases that are there obviously have a lot lower mark to market on them. The London's four plus years, we're seeing rents that are on their market 25 plus percent.
So what it is is an indicator that a lot of the same units are turning over so we don't necessarily see 20% national turnover.
Right now because it's a lot of the same same units.
That is our best indication of the current rates.
What's in place.
Okay Fair enough and just you know a.
I appreciate your comments mark on thinking that the.
I've heard a wave of opportunities you're seeing right now maybe settles out next year, but.
In the event that we are seeing a bit of a sea change in acquisition volume remains robust I'm curious on your thoughts on the balance sheet and how much you guys would be willing to to lean on your existing equity base and take leverage higher right opportunities where there.
For me thank you.
Another great question Hello.
Comes up or.
With investors on a regular basis, it's not a matter for me of targeting leverage.
Although there is a high point that I start to get nervous not nervous, but I think his recap rate should be and I put that in the low fortys.
But I'm not driven to go there at all unless the acquisition opportunities are accretive to the portfolio with a better than category growth horizon.
So.
Clearly in this interest rate environment acquisitions can be can be helpful. But.
But what the real question for me is is what is the value proposition is it accretive on an existing income and does it have a better than cap rate growth profile and is it in the markets. Obviously that we can add value in the most and those are the real consideration. So if we can.
Find those opportunities then we have a responsibility to act on those opportunities.
But to just set the target I don't think is so from a leverage point of view is in the best interest of copper unit holders.
That being said if you were to ask me a number notwithstanding an incredible opportunity I see no reason why low fortys is of concern to a to the safety of our investment.
Thank you.
[noise]. Your next question comes from generally Chemo capital markets. Your line is open.
Thank you and good morning.
Morning.
Well I wanted to dig a little bit into the composition of the turnover I think Scott sort of alluded to it in a previous question, but have you noticed any changes in the pattern of your turnover in terms of the vintage Hi, Darryl.
There are a lot more people, who have signed leases more recently, who are leaving either within or outside the portfolio or has it remained fairly consistent over the pandemic, but.
It's consistent the only difference the only exception to that is new rental construction [laughter] IR everybody that market. So otherwise it's consistent there's no. There's no trend change there it's very good to understand.
How we arrive at that what potential mark to market is in Scotts, 100% lease term has everything to do with that but at the end of the day. It ultimately generated by averages and the average is haven't changed because the trend hasn't changed.
Can you imagine if you have 30% you know mark to market on your lease and its four years old you are not very incentivized to lead to leave no quality.
Qualitatively it makes sense that it's the new leases that are turning over we're trying to get more data around that but.
Yeah for sure, Okay, and Mark you talked about the value proposition of the cap rate properties and I think that that's well known but have you been offering any select incentives in buildings, where you might need a little bit more pushing occupancy or certain markets like in western Canada.
Yeah, we are.
Yeah.
And.
Managing our can you quantify to any extent.
Yeah, so managing occupancy.
Especially going into the fourth quarter and the first is critical and the reason for that is if you Miss January you've missed the mark and until spring.
So it's essentially focused around buildings that have beacon units and so the incentives are really a give there they're really just vacant units that were trying to minimize and mitigate future vacancy expansion. So if we can get a high quality residents into the unit.
As we near the end of the year, we know that to be a sensible strategy. Because then you're not fighting from behind.
So it's all of the fighting from behind once your vacancy grows for 234, you get increasingly desperate to lower rent and that increasingly desperate measure has longer term rent roll effects, whereas.
Whereas if you can do you have any cap rate is not historically a believer in incentives.
We are a believer in value proposition, but this is a very very different market, where the use of incentives I see being a very short term measure.
So would it be structured as a certain payment or Monday.
Monday off a 12 month lease.
Right, we have a variety of incentives that ranged from a zero cost incentive which is basically you don't have to pay your l. tomorrow to your last month's rent, which is essentially a zero give other than.
You know that's a that's a zero give but it makes renting easier.
And and I personally that's my favorite one because.
The rent an apartment. So when you think it's going to pay the rent or not.
To move in our early so mid month will give away the balance of the month.
And that really is just making moving on the building easier.
To what we would sometimes call two months, which is bound to the month is free and then to the following month is no cost, but those incentive then get amortized over the duration of the lease. So when you see the obviously you see the impact Youre seeing a.
When you are amortized incentive.
Mhm.
And what markets have you been offering some of these incentives that.
New construction is where it's this office and.
We've had some.
Softness in the core where we do have some properties at.
And ER and Western Canada has been tough.
Our western Canada is a difficult one to read though because in <unk>.
Salaries actually doing quite well.
And Edmonton, it's a marketplace.
For us, we're getting really hit because two of our properties are student base like one buildings on the University of Alberta campus. So it's real trouble and ER and another one is also serves a student market in the third one was a brand new construction asset that we were doing lease up and when the pandemic it.
So everything is not really a true reflection of what's going on in Edmonton. It's Unfortunately were caught with the worst attributes of the pandemic there, but generally speaking it's a we're trying to manage the buildings that are most affected by the pandemic.
Okay, Great and then my last question is on the renewals in the quarter. It looks like it was down quite a bit year over year at about 21%. This year versus 29 can you just share a little bit on what was behind it was it that make into stock equal would be helpful.
Yeah, we have voluntarily halted rent increases and the cap rate portfolio in March in March. So we actually took effect April one.
And we just felt a coast to coast.
Halting a rent increases was the right thing to do.
You know, we recently renewed reignited some of those increases, but you've got no renewal increase for Ontario, and it looks like for.
At least half of the year of DC next year. So.
So rent increases on renewals are not going to be a driver here, but.
But what it really ultimately does Johnny is it just widens the mark to market for the future.
So it's a it's a give on cash flow. It's it's a headwind for sure. It's not material. When you look at our overall revenues, but its if anything shore up a future mark to market.
Okay. So it's really just converting month to month as opposed to locking in a tenant for another 12 months.
Yes, we're not yeah, we're not if we're not able to give those increases whether they stay monthly or whether they go on an annual basis. The way the legislation basically worked across the country is once you've done your first year and you get a room to increase its basically at your option.
To stay on a monthly basis.
Okay, great. Thank you very much.
[noise] again to ask a question. Please press Star then the number one on your telephone keypad. Your next question comes from not quite up with National Bank Financial Your line is open.
Good morning, guys apologies, if you already answered this because I missed the beginning of the call, but it seemed a noticeable in terms of your trust expenses that they've come down and that seems to be like that seems to be a trend can you speak to whether there is anything in that figure if and.
In fact expense savings both there and in op costs are.
Goal of yours.
Scott, Yes, Yeah, I was just going to say I mean, we have had massive savings in interest expense category.
I would like to say I hope that doesn't can continue that we get back to traveling in conferences and you know we definitely stopped rehiring positions.
During the pandemic so.
I think that that trend will continue for a while but we we actually hope it doesn't continue.
For much much longer we want we definitely want to.
Reinvigorate a lot of the projects and get back.
Back to work so.
For the foreseeable future and we you know I think that is the trend, but that will reverse at one point.
Okay. So maybe keep the sub 10 million through a lobbyist to Q4, there's some variability but.
Keeps up 10 million maybe through the first half of next year and the next expect some return to normal hopefully but to second half 2021.
Yeah, exactly I mean, I think we were.
As of Q3, I think we are five.
Plus million ahead of budget on our DNA fell.
You know, we're not paying it will necessarily go back there, but we do it definitely hope it ramps up again, I think thats a good estimate.
And then with regards to the committed and expected the financing for the remainder of 2020 do you have discretion as to when.
720 million of up financing would come in at or and is that a.
Factual things like said thing or do you think.
Could you take less than that amount.
So what we do our strategy is to get the CMHC certificate with lenders.
Making sure we're coming up to the renewal date.
And that gives us a six month window, what CMHC before we have to go back and get that certificate revived so.
So that's those are real numbers and those are applications, where basically locked up for this year, we'll pay down our line of credit.
And as you know and use proceeds that way in the in the near term but.
We yeah, we have flexibility in the timing of when we can when we can top that and we also have the ability to pay down a bunch of our our facility. So.
But locking in those rates today is as important to us and.
And showing real liquidity I mean, I think we probably don't get credit for our liquidity because if it's not a line of credit our cash people don't really think of that as liquidity. If it's dependent upon future mortgages. So we think we have probably the highest if not the second highest liquidity of all that read but it probably doesn't show in the statistics.
Okay. I mean, you did $1 billion of cash on the balance sheet. If you did nothing else other than yes, we will not be doing that we will not be doing that we definitely have flexibility to push it out. So that's not a concern for US okay. No that's fair and what portion of the credit facility I mean, some of that's in euros as a hedge against the.
Yes, your European Holdings is that fair and are so.
Well, yeah, we're paying them.
To be honest, we're changing our strategy of how we deal with the Euro. It you know we were basically borrowing under our Canadian or <unk> or U.S. and swapping it out.
We're replacing that facility with Canadian debt.
So I can.
Conceptually, we could actually pay it completely down now because we swap out we have a year a liability on the back backend through the swaps.
We actually think we can bring our interest rate down on these euros.
Even considerably below where it is today I think today, our average borrowing for a euro is at about 1.1%.
And by by.
By doing this strategy, we think we can bring it KLH.
Closer to <unk>, I'll say half a percent.
So.
There could be some decent interest rate savings on that kind of coming through 2021.
Okay, great. Thanks, guys.
Your next question comes from Dean will come from CNBC. Your line is open.
Thanks morning, guys good.
Morning.
Thanks, Mark as you look back over your.
Long and storied career now on the issue of spreads I mean, you've kind of seen a cycle or two you've seen them come in you've seen them come out.
Where you look at it right now simple question should interest rates borrowing rates be higher or cap rate to be lower.
I think that cap rate should be lower than they are.
Interest rates need to be where they are for a whole variety of reasons.
Thursday.
A disconnect.
The broader market on cap rates.
It is.
A limited number of people that know how to add value that know how to.
Put put capital to work.
But in the long game of apartments.
The going in spread is really important okay. In the short term, it's a bit obviously the growth of the asset and it's it's not just a bit spreads its present growth together. So you know Dean you can come up with the new metric and tell us what that hole, but really that is the most important thing what's the spread what.
Expected growth that is the high indicator of success now huh.
How far out do you go if you just look at historic growth then the most important thing is spread [laughter] because if you go long term. It's all about the spread you go in with and when I say spread its 10 year money.
And cap rate.
And if those spreads are wide and you believe historic growth then you found the perfect place to enter the market.
No I mean, it it totally makes sense I mean, I look at your 2021 debt maturities and they're at a rate that is probably where.
The transaction could happen.
In the threes, so it's yeah.
Yeah, It's just interesting right, okay, yeah, but it but I think a lot of conviction and it takes resilience like rate today, we're talking about moments in market and moments in market couldn't can cause a anxiety, but but clearly when you take a long view like cap rate cap rate has and you look at the cap rate.
Rates today, they're not where they should be in certain markets I would argue.
There are examples of cap rates in the <unk> in the one.
That may be more closely.
Fully priced but.
But those deals are primarily driven around development opportunities. So.
It's in the long game, it's a bit growth.
And what your conviction is around the growth in the market that you're investing in and you want that risk reward between the cap rate and the cost and all in cost of tenure money.
With that I think it's important to note we underwrite at 40% leverage so the impact of interest rates to us is different than it might be to someone else.
Too and we use 10 year money for our underwriting so if you put in five year money.
And you can lever at the 70, 70% you've got a different return them how cap rates going on there and so we're.
The cap rate is more you know is very important to us regardless of interest rates and because we don't lever at the family on a portfolio wide basis.
Well, we can only.
Only look at you can only look at the cap rates and growth. When you look at a really long view, we try to mitigate that long view.
With with 10 year money in 10 year money on our renewals is critical.
And five year money, we're open to wouldn't when it comes to repositioning because it really takes in my mind with low turn over five years to reposition that asset properly.
When you're looking at 1.1% money today, a three and a half cap represents 250 basis points of spread.
That that's pretty.
Pretty incredible when you're buying assets of 50% of replacement cost. So there is a well we're getting old into whole tutorial here no GAAP.
Yeah, I agree thinks about apartments, but you know I, it's all a bit location because that's what real estates all the boat. It's all of the growth, which is all that location. It's all about the spread in the growth rate and for me I love to focus on replacement cost because that's an indicator of future competition.
How do you build apartments today at $1.60 a foot.
Well you can't right, that's where you're seeing the pressure we bought the high end rents, yes, just mathematically impossible yeah.
Okay, well I mean, we could go on for hours here, but I I imagine well I'm working himself [laughter] edit their right yep. Thanks, Steve.
And there are no further questions queued up at this time I'll turn the call back over to Mr. Kenny for closing remarks.
Well I like to thank everybody again for their time and attention today and if you have any further questions. Please do not hesitate to contact us at any time, thanks have a great day and everybody stay safe.
This concludes today's conference call you may now disconnect.
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