Q3 2020 Minto Apartment Real Estate Investment Trust Earnings Call
[music].
Third quarter 2020, <unk> results conference call.
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After the speakers remarks, there will be a question and answer session if.
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Before we.
Again, I want to remind listeners that certain statements about future events made on this conference call are forward looking in nature.
Any such information is subject to risks uncertainties and assumptions that could cause actual results to differ materially.
Please refer to the cautionary.
Larry statements on forward looking information on the read some news release and Mdna dated November 10, 2020 for more information.
During the call management will also reference certain non I FRS financial measures. Although the reach believes these measures provide useful.
For mental information about its financial performance there are not recognized measures and do not have standardized meanings under I, if our EPS, but.
Please see the reeds mdna for additional information regarding non IFRS financial measures, including reconciliations to the nearest <unk> measures thing.
Thank you.
Mr. Waters, you May now begin your conference.
Thank you Sylvia and good morning, everyone I'm, Michael waters, Chief Executive Officer of mental apartment REIT, Chile Moran, our Chief Financial Officer is also with me this morning.
I'll begin the call by discussing key highlights from the third quarter Julie.
He will review, our financial and operating results in detail.
And then I'll discuss our business outlook after that we will hold a Q and a session.
In Q3, our portfolio continued to generate solid performance. Despite the ongoing economic uncertainty related to COVID-19.
We generated double digit growth.
In both revenue and Hawaii, well and Hawaii margin improved by 110 basis points to 64.7%.
We continue to generate organic rent growth in all of our markets, except Alberta, we.
We had an average gain of 9.4% on new leases signed during the quarter with both trauma.
When auto are producing double digit gains.
We also renovated 62 suites during the quarter through our portfolio repositioning program, which improved asset quality reduces future repair costs and drive strong growth in rental revenue.
Our rent collections remained strong consistent with our pre pandemic levels.
Finally, we continue to execute successfully on our growth strategy.
We've also maintained our high occupancy throughout this period with approximately 97% of our available unfurnished suites occupied at the end of the third quarter.
In recent weeks the number of COVID-19 cases has increased across Canada.
And certain provincial.
Have reintroduced or imposed stricter restrictions in an attempt to further limit the spread of the virus.
The impact of COVID-19 is continually evolving and we continue to adapt to the new realities.
Our priority remains the health and safety of our residents employees partners and communities.
We are please.
Pleased with our performance to date in 2020, but we also recognize that economic uncertainty continues to be elevated.
Accordingly, we are maintaining significant financial flexibility.
Our total liquidity position is approximately $186 million, representing a liquidity ratio of 22%.
This puts us in a strong competitive position with the flexibility to respond quickly to any opportunities that may arise.
Given this strong liquidity in our superior property portfolio, we're confident that read is very well positioned for continued success.
As the economy emerges from the pandemic.
I will now invite Julie to discuss our third.
Our financial and operating performance in greater detail.
Julie Thanks.
Thanks, Michael let's turn to slide four.
Here, we have broken out the same property results, both including and excluding Furner suite.
Demand for furnace suites has been impacted significantly by the COVID-19 crisis due to reduction.
Options in business travel and corporate relocation restrictions on non essential travel and the closing of the Canadian border as you can see the same property performance of our unfinished suite was solid.
We reported same property portfolio revenue, which excludes the impact of acquisition of 20 point.
$7 million, excluding for suites in the third quarter and $22.5 million, including furnished suites.
Those numbers represent an increase of 1.7% and a decline of 3.5% respectively from the comparable results in Q3 last year.
The year over year.
Year increase in revenue, excluding furnished suite was due to higher rents achieved on new leases higher revenue earned from reposition suites and increased parking revenue. These.
These positive impacts were offset by the reduced occupancy of our furnished suites compared to Q3 2019, I'll provide more detail on for.
Furnished suites later on in the call.
Total revenue in the quarter increased 12.7% year over year to $31.2 million from $27.6 million in Q3 last year.
The increase was mainly due to the contribution from three property acquisitions completed subsequent to June thirtyth.
2019, comprising a total of 1278 suites or 828 suites of the reeds proportionate share as well as higher rental rates, partially offset by the decrease in revenues from furnished suite.
Same property NOI in Q3 2020 with.
<unk> point $3 million, excluding for inner suites, and $14.2 million, including those.
Those figures represent an increase of 2.6% and a decrease of 4.7% respectively from a year ago.
The increase in same property NOI for the unfurnished portfolio primary.
With currently reflects higher same property revenue as well as a decrease in property operating expenses.
The decline in total same property NOI inclusive of the furnace swing reflects the impact of the lower demand from those suites.
Same property NOI margin for the Unfurnished portfolio was 64 point.
1%, an increase of 50 basis points from 63.6% in Q3 last year.
With the furnished suites included same property NOI margin was 63% a decline of 80 basis points from 63.8% in Q3 2019.
Total NOI in the third quarter.
<unk> increased 14.6% to $20.2 million from $17.6 million last year, reflecting the contribution from the property acquisitions I referenced earlier.
And on the margin was 64.7%.
As Michael noted that is an increase of 110 basis points from six.
33.6% in Q3 last year.
FFO was $13.2 million in Q3, 2020, an increase of 22% from $10.8 million last year.
Primarily due to higher and ROI.
A full increased 23.8% to 11.6 million.
Dollars from $9.4 million last year. This prime layer, primarily reflected the higher AFFO, partially offset by an increase in the maintenance capital expenditure reserve due to the Reeves increase we'd count.
84 per unit declined slightly to 19.7 cents compared to 19 point.
Eight cents in Q3 last year as a result of short term dilution from two equity issuance is completed in the second half of 2019 to fund property acquisitions.
The reeds previously announced 3.4 increase in its cash distribution begin with its August distribution and.
We declared total cash distributions in the third quarter of 11 point 25 cents per unit, resulting in an AFFO payout ratio of 57.2%.
Cash distributions were 11 cents per unit in Q3 last year, resulting in a full payout ratio of 54.4%.
As of September Thirtyth 2020, our same property portfolio consisted of 4552 suites with an average monthly rent of $1514 per unfurnished suite and an occupancy rate for available unfurnished suites of 96.8%.
Average monthly rent Inc.
Creased by $56 or 3.8% from Q3 last year.
Occupancy of our same property portfolio, excluding suites held for repositioning was 98.5% as of September Thirtyth 2019.
The total portfolio, including acquisitions consisted of 7000.
243 suites at September Thirtyth, 2020, with an average monthly rent of $1613 per unfurnished suite, and an occupancy rate of 97% average.
Average monthly rent increased by $135 or 9.1% compared to $1478 that.
At the end of Q3 2019.
Occupancy at the end of Q3 last year was 98.6%.
Turning now to our operating expenses on slide five beginning with the same property portfolio property operating cost of $4.1 million declined 4.2% from.
Q3, 2019, due to lower repair maintenance and furnished suite costs, partially offset by higher insurance and marketing costs.
Operating taxes were $2.4 million and utilities expenses were $1.8 million, both marginally higher than last year.
Total property.
30 operating costs property taxes, and utilities increased 9.4%, primarily reflecting the three property acquisitions completed after June Thirtyth 2019.
On slide six you will see our revenue analysis, which breaks down our gains lease activity in Q3 2020.
Along with our estimate of the gain to lease potential for the portfolio.
Beginning with the upper churn, we find 403, new leases during the third quarter upon suite turnover.
The average rent on these suites increased by 9.4% from $1489 to 1630.
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As a result, the regenerated in annualized incremental revenue gain of approximately $477000.
As Michael highlighted we generated strong double digit rent growth in Detroit auto and auto markets. Despite the economic disruption from pulpit 19 rent growth was.
The all its 5.4% in Montreal, and we had a 1.8% decline in Alberta, where low oil prices continued to negatively impact the economy.
While leasing activity was lower than normal in Q3 2020 due to cope with 19, it increased significantly compared to the second quarter of this year when 300.
It's up 39, new leases were signed and it had an average monthly rents that were 9.1% higher than expiring rents.
The lower chart shows the gain to lease potential, but we estimate in our portfolio as of September Thirtyth. We believe we can generate approximately $12.7 million of and.
We realized incremental revenue growth by bringing rents and 6651 suite to market levels.
Our ability to realize on this embedded rent depends on suite turnover.
Turnover in Q3, 2026% on a quarterly basis and 21% on a trailing 12 month basis.
Basis down from 7% on a quarterly basis and 27% on a trailing 12 month basis in Q3 2019.
Notwithstanding this year over year decline, we saw turnover pickup towards the end of Q3 2020 to more normal levels and we are seeing signs of turnover accelerating subs.
Subsequent to quarter end.
Turning to slide seven I'd like to drill a little deeper into the revenue analysis no doubt you've read a lot about the potential impact of issues like the perceived exodus from downtown urban cores, lower immigration and competition from Arab VNB suites. However.
As indicated in the upper part of this slide we continued to generate strong sequential leasing performance from Unfurnished suite and our average monthly rent continues to increase.
While it's true that rental rates for the highest priced condo rental properties, particularly in downtown Toronto have dropped asking.
As for the reeds properties are considerably lower than downtown rental condos and the lease rates that we are achieving are still considerably higher than in place rents and we are continuing to realize on the embedded rent through lease turnover.
The table on the lower part of this slide highlights our average monthly rental.
Rates per square foot the impact of increased supply from air Bnb units and Travato is being felt mostly on smaller units on the lake shore in the downtown core rental rates for higher priced properties. In these locations have been impacted but are still well above $3 per square foot per month.
Into.
Total current mint reads portfolio does not compete directly in that Submarket, and our average rental rates and larger suite sizes compare favorably.
Turning to slide eight you will see that we are continuing to adopt or furnished suite offering to the changes in demand, resulting from COVID-19.
We have been reducing or in.
Inventory of furnished suites and have been leasing the suites on an unfinished basis.
As you can see on the upper chart or furnished lead volume has already declined by 24 suites are 9% since Q4 last year.
We expect to reduce it by another 46, Swedes or 20% by the end of Q1 2021.
Well, we are working on tests, we third or 150, Roehampton property in Toronto and expect to reposition the former furnished suites at that property before releasing them as unfurnished suites in 2021 upper.
Upon completion, the reeds furnished we'd offering will be limited to approximately 187 suites located in mental York Bill.
And mental 185 properties in Toronto, and Ottawa, respectively.
The table on the bottom of the slide shows that furnished with occupancy improved 75% in Q3 2020 from 65% in Q2 2020.
While this is still lower than the 92% occupancy inch it.
Even two 329 team it does show a sequential improvement.
Average monthly rent for furnished suites in Q3, 2020 was $3460 per suite, a reduction of 13% from $3956 achieved in Q2, 2020, and a reduction of 22% from.
The $4410 achieved in Q3 2019.
We reduced average furnished sweet rates to increase occupancy.
Demand from international travel corporate travel and relocation has been replaced with local consumer demand that is more price sensitive we will continue to adjust rates on these.
Suites to maximize occupancy in total revenue.
As the economy recovers from the pandemic, we're confident that these desirable properties will reverse declines in occupancy and rent.
Moving to slide nine we have a summary of our repositioning program, we renovated a total of 60.
Suites in Q3, or 40 of the reeds proportionate ownership share the average cost per renovation was about $37000 per suite. The average annual rental increase following repositioning was $3650 per suite.
Generating a simple return on investment of 10% in.
In Q3, we completed feasibility studies at Hayden Hall, and the 4300 and Montreal and formal repositioning programs have now been issued initiated at both properties.
In total we have 2379 suites remaining to renovate across several of our properties Minto Yorkville Wesley York Mills.
Sales in a high powered village and Travato, the Edmonton portfolio Carlyle in Capitol Hill, and Ottawa and Rock Hill in Montreal. In addition, Tayne Hall and the 4300.
I mentioned the repositioning is on hold until market conditions improve in Alberta.
Subject to availability of suites through.
Crew turnover, we expect to reposition approximately 75 suites in Q4 2020 or approximately 50 at our proportionate share.
Slide 10 highlights three other potential repositioning programs, we have completed renovations for tests, we've said the castle view and skyline minutes properties in Ottawa.
And are evaluating the repositioning potential of these properties, which totaled 409 suites.
In addition, as noted earlier the reduction in demand for furnish suites has presented an opportunity to accelerate the repositioning of 148 suites at the Roehampton property in Toronto.
Tests weeds, there will be coming.
Fleeted in the fourth quarter of 2020 with a plan to begin delivering repositioned suites to the market in the spring of 2021.
Turning to slide 11, we are also focused on generating organic growth through intensification and development concern.
Construction continues that the fifth and.
Bank project and Autodesk leave neighborhood demolition of the existing structure and the excavation and forming of the parking structure are complete and above grade construction has begun ups.
Upon stabilization of this 160 suite property, we will have an exclusive option to purchase it at 95%.
Fair market value.
We are also pursuing development approvals for intensification of the rich growth and Leslie or film properties and rezoning approval for intensification at Highpower Lidge combined these three projects could out of further thousand plus leads to the reeds portfolio.
Turning now to our debt financing and liquidity on slide 12.
Strong liquidity, a conservative leverage ratio and a balanced maturity schedule are the key elements are of our financial strategy as of September Thirtyth 2020, the weighted average term to maturity on our fixed rate debt was 6.1 years.
With a weighted average interest rate of 2.94% approximately 98% of our debt is fixed rate and 78% the CMHC insured debt.
Net to gross book value was 39.6% at September Thirtyth, and total liquidity from our cash reserves and credit facilities was 180.
Point $1 million.
I'll now turn it back over to Michael.
Thanks, Julie moving to slide 13, I'd now like to review our outlook.
Cobot, notwithstanding the underlying long term fundamental supporting multifamily real estate continue to be very strong and we've made the net.
Siri adjustments to run our business effectively day to day through the pandemic, while executing on our growth objectives. We will continue to capitalize on organic growth opportunities, including the continued realization of gain to lease on existing rents in value creation from the repositioning of existing assets with ongoing investment in in Sweet and car.
Thats one area improvements.
We're always exploring opportunities to complete strategic acquisitions in our target urban centres across Canada, our corporate development team continues to assess possible transactions and we're confident that we can continue to execute on attractive acquisitions.
Our relationship with the mental group has already proven to.
To be a tremendous strategic benefit to the reed contributing to our growth both through the intensification of existing properties and by accessing their pipeline of assets and development opportunities such as the exciting fifth and bank project that Julie referenced earlier.
Finally, we'll ensure that environmental social and governance criteria.
Conor remains central to our business strategy. We're currently working on a detailed assessment of our business with the goal of reporting annually on performance against EPS GE targets.
We expect the reporting to begin next year.
That concludes our presentation. This morning.
Julian not and I would now be pleased to answer any questions.
Hearing have Silverlink. Please open the line for questions. Thank you, Sir ladies and gentlemen, if you do have a question. Please press star followed by one on your Touchtone phone. He will then here three tome prompt acknowledging you request and if you would like to withdraw your question simply press Star followed by two and if you are using a speaker.
Loan we do ask that you. Please lift the handset before pressing any Keith. Please go ahead and press Star one now if you do have a question.
And your first question. So it will be from bad So just at the Raymond James. Please go ahead.
Hi, good morning.
Hey, Brad maybe.
Just maybe.
Starting with your repositioning program.
Assuming that you're adding a few more properties to that program next year, what would be your target for.
Repositioning suites for 2021.
We're looking at something in the range of 150 to 200 suites.
Yeah of course, Brad.
Add were sub.
Somewhat limited.
By the by the turnover that we see.
And what we're looking for is is that turnover first turn suites that are not already renovated but that would be our target.
That your interest or like a 100% interest.
I believe thats, a 100% interest.
Okay.
And as.
As you are still working through the municipal approval process on the developed projects and trauma what.
Any guidance or expected timeline right now is the best guess for maybe.
Maybe a shovel in the ground.
It's.
It's really hard to say with any degree of certainty.
Both rich growth and Lastly York Mills have now been resolved and so we're in the final stages of.
Completing the site plan agreement with the city of Toronto, one on those sites and that process has.
Sorry.
Probably drawn out longer than than it would normally be in part owing to covert.
But also very stringent sort of planning.
Processes that the city typically implements.
With high Park village, we are very close Q.
Completing the rezoning, we had a successful.
L. Pat settlement in January and it was subject only to.
Getting agreement on the final wording of the zoning bylaw and Anne.
An agreement around section 37, and they'll both of those are are very well advice.
Vance, so I'm, hoping that we would have.
The draft Stoning Bylaw amendment for high part completed in Q4.
And that we would be in a position.
Very early next.
Next year to to have that completed our site plan application winning.
Earlier in Q3.
So with that I'm, hoping that we'll have the site plan agreement finalized sometime in 2021, which would then allow us to.
Complete the tendering work detailed design and work to to put a shovel in the ground. So I wish I had a more precise answer for you. Unfortunately.
In February we are dealing with the vagaries of of city approvals processes, and timetables and and they are not not strictly within our control.
Okay, maybe last question.
You mentioned pretty strong liquidity position and seeing or reviewing.
In addition, our opportunities.
Sure as you expand on what you're seeing in the market.
From a third party vendor perspective, and then.
Would there be any near term opportunities from a bend in opportunity from Shire or if partners.
Yes, so as we talked about in our Q2.
Greetings call we.
We did see obviously that that the investment property transaction market was in a deep freeze through all the entirety of Q2 in Q3 that.
Really began to change and we began to see significantly more deal flow certainly in.
In the private market, what we're seeing is valuations that are at least as tight if not tighter than they were pre coded.
The number of bidders the.
The quality of the bids have been very very competitive.
And so we are seeing cap rates.
Earn at our.
Quite aggressive them.
The reach has.
Actively underwritten a number of deals we have we have looked at deals seriously, but we remain.
Yes, I'd say cautious in our approach to acquisitions, we don't at me.
We need to grow for growth sake, we want to make sure that we're adding.
The right properties.
You know in improving the overall quality of our portfolio.
So you know.
I think the other issue of course that we've been very mindful of.
Brad is that is our unit price, which.
He has been trading.
It near in the recent past at significant discounts to NAV and notwithstanding we have very substantial liquidity.
We do keep an eye on on our unit price and wanting to make sure that we are.
No.
Looking at deals that will be.
Freedom and of course, when we're underwriting we are looking at at the cost of our equity and we look at it in a range of scenarios at different unit prices.
Ranging from our current.
Creating price all the way up through NAV. So so we're not blind to the fact that that.
Our stock will trade closer to NAV and hopefully.
Get back to back to a premium to NAV as we were pre cove it not.
Not of course, assuming that we get back to sort of $28, where we were on March 5th of course, but.
Cracking through $21 would make would make a big difference for us so what we have been doing.
King is looking at opportunities.
Creatively, where we could work with the Minto group.
Possibly on development deals.
And if you think about the 15 bank transaction, where we used.
The the reeds balance sheet.
Do you know investing.
Mezzanine.
To finance the development of a new building, which is accretive.
AFFO through the development period, Minto group as the developer bears all of the development and construction risk and the reach of course is able to access a brand.
Property in a highly sought after neighborhood.
At a 5% discount to NAV, so its NAV accretive.
We could do more deals like that I think that that is certainly an emphasis for us, especially when the market for existing stabilized properties is so competitive.
Okay great.
Thats great color, Thanks, I'll turn it back.
Thanks, Brad.
In Q.
As a reminder, ladies and gentlemen, if you do have any questions. Please press star followed by one on your Touchtone phone and your next question will be from Kyle Stanley at this half day. Please go ahead.
Thanks, Good morning, everyone.
Hey, Kyle.
Just sticking with acquisition the acquisition market for a second on the composition of bidders and the market changed since.
Since kind of you've seen that deal flow ramp up and lost a little bit.
Well certainly we've seen.
You know.
The usual.
Mix of of the usual cast of characters bidding but.
But so I would say it hasn't there mix hasn't really.
Changed all that much we certainly have seen.
Obviously more competitive pricing I think in several cases, we've seen nonpublic entities.
Whether they're private investors or or maybe private equity backed.
Have emerged.
Successfully on some of these bids but.
I am I think Theres, just really massive demand for for the asset class and.
And a lot of these investors are looking through.
Near term choppiness in the market.
And and I think probably as well when you look at multi raz.
In the context of.
Other potential demands for capital like retail or office.
The multi Reds is I think looking looking relatively strong for some of these investors. So.
It's really hard to say, but as I say I don't think the mix really.
Really hasn't changed all that much. It's just that there was sort of a one and there was one quarter of base.
Luckily no investment activity Theres, probably a little bit of overhang there.
But then again the asset classes is looking relatively strong compared to some of the other real estate.
Opportunities that are out there for investors. So yes, we're seeing right now 10, plus bids on good deals and.
And.
That wasn't that wasn't always the case or pre pre pre Q3. So.
You know, it's just making it you know I think for for groups like mid two apartment Reid.
Yes, we're just having to be more creative.
And look for opera.
And unity in those things, but as I as I said earlier.
In response to Brads question, I don't think that.
We're in a position where we have a gun to our head to do deals at any cost. So we continue to be choosy continue to look for the right assets that that make the portfolio better overall.
Okay. Okay. Thanks for.
Robert.
Maybe just turning over to the repositioning and more specifically the kind of new enhanced turn initiative just wondering what's driving the decision to invest more in suite Capex and the current market and then.
Just maybe how you think about doing enhance turn versus a full scale repositioning.
Yeah.
Yeah.
So the normal turnover patterns that are of course very seasonal turn.
Turnover typically fared.
Fairly quiet in Q1 and normally quite strong in Q2 Q3, we're sort of turned a little bit on their head this year.
And sort of really pushed things out and we began to see.
More turnover.
Sort of pick up in.
Subsequent to quarter end as Julie indicated so we really see it as an opportunity.
With that availability to to to look at.
Things that we hadn't really been been able to in the past and so.
The enhanced turn is sort of.
A lighter version of a of a renovation its typically.
You know a much reduced expenditure.
It might be more in the nature of five or 10000 to suite versus 25 to 45000.
Really the focus on flooring trim kitchen upgrades appliances.
Typically versus a full renovation, which might be substantially more in and what we're looking at it's very ROI driven.
And we're seeing the opportunity deploy capital in the portfolio generate really strong ROI.
So again, it's probably more opportunistic on our part.
And that's sort of what we've been we've been pursuing their comp.
Okay, Great and then just one last one for me here could you just elaborate a little bit on your SG initiative, and how that integrating with your operating strategy and plans going forward.
Yeah.
Yes.
So of course Minto apartment REIT was spun out of the Minto group, which had a very long history of.
Social responsibility and particularly a focus on sustainability.
This year, the Minto group issued its.
Sustainability report, which was the the 11th annual addition of that report and so long had been a leader in that area.
And so with the passage of the IPO.
We began taking that focus to mid two apartment REIT.
And sort of kicked.
Our process.
In early 2019 to begin evaluating NSG strategy.
For mental apartment REIT and in our sort of usual kind of.
Methodical and thoughtful fashion, we've we've used the time over the last little bit we engaged third party consultant Q.
Help us.
Evaluate our current SG posture and survey stakeholders.
Employees customers investors.
And broader community to assess where the gaps might exists and and then we began that process now prior.
[music] whore type thing.
To determine where we can allocate resources to maximum possible effect for for EPS G.
And so it revolves around a number of factors reporting of course is one of them.
And as you know.
There are a variety of competing.
Reporting frameworks out their g. ROI is one but.
SC SBS. Another there are several of them and so some of the work of course is around that but the meat of the work frankly has been.
On the various initiatives that we want.
Pursue and and what we've identified or are just slightly more than 20 targeted initiatives that address each of the dimensions of PSG.
And so that that sort of.
Work is underway course, we've got a long experience in this.
The Minto group has been aggressive be reporting issuer for.
Many years.
And so thats.
Probably as well something that we'd be looking at extending to the right portfolio as well so.
What we hope to do is began reporting on this formally in 2021.
Okay, Great Thats, great color, Thanks, I'll turn it back.
Thanks Kyle.
Thank you and at this time Mr. waters, we have no. Other questions. Please proceed sir.
Thank you so much Sylvie with that said this that concludes our call. This morning I. Thank you for joining us.
And for your interest in mid two apartment REIT, we look forward to speaking with you all again after we report our year end results. Thank.
Thank you and have a great day.
Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today. Once again. Thank you for attending we do ask that you. Please disconnect your lines.
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Mike.
But.
No.
No.
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No.
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