Q4 2020 Canadian Apartment Properties Real Estate Investment Trust Earnings Call
Good morning, and welcome to the Canadian apartment properties REIT fourth quarter and year end 2020 conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone please be advised that.
Today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to David Mills. Please go ahead Mr Mills.
Thank you Denise reported to begin let me remind everyone that the following discussion may include comments that constitute forward looking statements about expected future events from the financial and operating results of cap rate.
Actual results may differ materially from these forward looking statements such statements are subject to certain risks and uncertainties.
Discussions concerning these risk factors forward looking statements from the factors and assumptions on which they are base can be found in our regulatory filings, including our annual information form and MD&A, which can be found on SEDAR dot com and.
I'll now turn things over to Mr. Mark <unk>, President and Chief Executive Officer, Chief Executive Officer.
Thanks, David Good morning, everyone and thank you for joining us.
Scott Pryor, our Chief Financial Officer is also with you this morning.
As we look back from 2020, I'm very proud of how our teams have responded effectively and in a timely manner through the significant challenges presented by the COVID-19 pandemic.
As we've discussed over the last few quarters with the advent of the pandemic last.
March our teams began implementing programs at warp speed aimed.
<unk> aimed at ensuring that our residents and employees remain safe and healthy.
Preserving capital and maintaining a strong and flexible financial position mitigating risk and generating the best operating results possible looking.
Looking back I believe we were successful in achieving these objectives generating many significant achievements during this year.
Like to touch on a few of these accomplishments this morning.
The second wave of the pandemic last fall had an impact on our fourth quarter results as you can see on slide five.
Nevertheless revenues were up over 8% on the same quarter last year driven.
Driven by the causative positive contribution from our acquisitions increased monthly rents and continued high occupancies.
NOI rose nine 5% with and if it flow up approximately 12% generating another very conservative <unk> payout ratio of just under 60% in the quarter.
Our growth also remains accretive to unitholders with <unk> per unit up six 2%. Despite the five 4% increase in units outstanding.
Turning to slide six.
<unk> pandemic affecting our operations for most of last year, we still achieved record financial and operating performance in 2020.
A testament to the skill and dedication of our people.
The stability of our asset base and the resiliency of the rental residential sector.
In real estate in Canada.
As you can see we generated strong increases in revenues NOI and <unk> in 2020 compared to the prior year.
These record results once again demonstrated the cap rate can generate strong stable and growing returns for our unit holders.
Both good and bad economic times.
Payable occupancies through the pandemic.
It is important to note that our vacancy at year end is primarily related to a very small number of properties impacted by impacted the most by the pandemic.
Luxury properties in the downtown core locations and properties in pockets by reduced student demand and lower immigration due to foreign travel restrictions.
Not only.
And just a small number of properties, it's actually less than 10 across the majority of our portfolio.
The bulk of the portfolio the remainder remains at near full levels.
We also believe that our small vacancy rate is not reflected on the overall rental market.
<unk> of renting empty suites during the pandemic.
As we emerge from this challenging time, we are confident occupancies will increase quickly to our historic near full levels across the entire portfolio.
Despite the constraints placed on us.
During the pandemic, we continue to generate increases on turnover and renewals as shown on slide nine.
Clearly turnovers are.
We're being impacted by the ability of residents to move for personally visit our properties people just don't move around as normal during a pandemic.
Still almost 8% in the Canadian portfolio and over 9% in the Netherlands on turnovers are solid results.
And we expect to return to our more traditionally high increases once the pandemic eases.
The renewals have been affected by the rent increase freeze that we implemented in Canada on April one last year to help our residents work through these challenging times.
We are now beginning to implement modest rent increases in certain markets in constant consultation with our residents.
As slide 10 shows we significantly enhanced the size and scale of our Canadian property portfolio in 2020 with the purchase of another 2847 suites and sites.
$690 million.
We also sold some non core properties, including an underperforming asset in Calgary.
We were also pleased with the completed the buyout of 12 of our 15 operating leases in the greater Toronto area as detailed on slide 11.
For a total cost of approximately $173 million.
We have taken a highly opportunistic approach to our portfolio through the pandemic and these buyouts are an excellent example.
We acted on these buyouts earlier than scheduled resulting in a 31% discount to the agreed upon price of the properties, creating long term value for our unitholders.
Importantly, the transition to fee simple ownership for these properties as material new financing capacity to fund our growth going forward.
Meaningful net asset value accretion and unlocks the potential for potential new developments in the future.
Also we have discussed over the last few quarters, we successfully implemented many key initiatives last year to mitigate the impacts from the pandemic.
As you can see on slide 12, these programs allowed us to generate solid performance. Despite the many issues that we faced.
The most important program began in the early days with the pandemic.
The strategies to get closer to our residents communicate with them and understand the issues that they were facing and help them stay safely in their homes.
While at the same time, ensuring that we collected.
Many of our rents as possible.
Our compassionate care program saw an average to 3500 to 4000 calls to residents each month.
<unk> not being able to have prospective new tenants visit our properties by moving our leasing activities on line, we still generated over 2700, new leases on average each quarter.
And to facilitate more efficient rent collections today more than 85% of our residents now pay electronically.
These programs have had a lasting and positive impact on our cash flows.
As of yesterday bad debts stood at only <unk>, 6% of revenues well over 99% of our rents have been collected.
We are very proud of these achievements and remain confident that these programs will result in stable collections moving forward.
We have also made significant progress on our ESG program.
This commitment is important not only because it's the right thing to do but also because it's strong it's a strong business case to meet need for reducing cost attract.
Attracting and retaining the best people adopting strong governance policies, and allowing us to provide innovative solutions to our market.
A key element of this program is to focus on diversity and inclusion.
As you can see on slide 13, we hold an equal gender split between men and women in 2020, 52% of new employees hired were women.
We also celebrate over 55 language spoken amongst our employees a reflection of the diverse makeup of the Canadian population and the residents that live in our communities.
Additionally, we only have highly highly.
Highly multi generational workforce.
This focus on diversity helps us to better interact with and support the communities that we serve.
The communities in which we live.
Where people work and.
People are now investing.
It enables us to deliver innovative approaches and solutions, both within and outside the organization.
But that is detailed on slide 14, our environmental social and governance programs are helping us reduce costs attract and retain the best people and ensure cap rate maintained strong governance policies and transparency.
Our commitment to reducing our environmental footprint is enhancing the resiliency of our properties.
It's building healthy communities and delivering strong returns on investment.
In November we were honored with a green star designation by the 2020 global real estate sustainability benchmark program and the ranking of six amongst our North American real estate peers.
Our employee recognition programs courses and conferences and our career development programs continue to generate very strong engagement scores amongst our employees.
While our satisfaction surveys ensure that we meet the standards and needs of our residents.
We're pleased to be recognized for the seventh consecutive year in the top tier of candidates that's important.
I'll now turn things over to Scott.
Yeah.
Thanks Mark.
Turning to slide 16, you can see that we are clearly in a strong financial position at year end with a conservative debt to gross book value and historically high liquidity.
We have $750 million of liquidity available through our credit facility and cash on hand.
And in addition.
We had $974 million and Canadian unencumbered properties to provide additional liquidity.
It should be needed.
In total if we were to access all of these sources of capital we have available liquidity of approximately $1 9 billion.
And even if we did that our leverage ratio would still remain a very conservative 42%.
Looking at our financings in 2020, we locked in a very low interest rate of 184% on our total refinancings and top ups and we expect we will continue to benefit from the current low interest rate environment for some time.
At year end 99, 3% of our mortgages incurred a fixed interest rate.
We are also confident that that markets and financing or main highly available for our properties given their stability and the strong fundamentals of the rental residential business.
As of December 31, 2000, 2098, 7% of our properties.
All of the CMA sea insured mortgages.
At year end, we recorded an almost one 3 billion increase in the fair value of our property portfolio, including.
Including 600 million in fair market value gains.
Another strong indication of the stability of our business and the value of our properties.
We bring to the unit holders.
Turning to our balance sheet on slide 17, you can see that we continue to maintain a strong and flexible financial position at year end with conservative leverage at 36%.
Strength in covered ratios such as an almost four times interest coverage ratio.
And in 2020, we continued to decrease.
Interest costs on a large portfolio.
Two 5%, 6% and a weighted average term debt maturity of five eight years.
We expect to continue this trend in 2021.
Slide 18 outlines our debt strategy for 2020 and 2021.
Starting in 2020 management modified its debt strategy to have longer amortization terms on at CMA Sea insured mortgages.
Extending the amortization period to 30 or 35 years compared to the 25 years historically used.
By executing on the strategy cap rate cap rate has been able to increase the amount of debt. We can fund at the refinancing date.
And the total average debt outstanding over the term of such mortgages.
Thereby locking in more total debt at the current attractive long term interest rates.
Management believes this strategy will allow cap rate to use the same AC top up program in future years, which will reduce the overall see may see costs related to premiums.
In 2020, we accelerated our refinancing and acquisition financing.
And expect to continue to do so in 2021.
Cap rate completed $1 4 billion of total mortgages in 2020.
Which is approximately 30% of our total mortgage portfolio.
And we expect to refinance another $850 to $900 million in 2021.
Quarter to lock in very low interest rates for long term debt.
With the 2020 refinancing cap rate repaid the credit facility and made it available.
Potential future investment.
Yeah.
Again on slide 19, we significantly accelerated our refinancing in 2020 compared to the prior year.
And this has significantly reduced our interest costs and extended the average term to maturity. We had a total top up of over $900 million in 2020.
Are exceeding the amounts provided in 2019.
We have been very proactive in capitalizing on these low interest rates and we will continue to do so this year with rates coming off previous refinancing.
So at the current rate all dropping straight to the bottom line.
Our mortgage portfolio remained well balanced as shown on slide 20.
And in any given year no more than 11% of the total mortgages come due.
Reducing risk in a rising interest rate environment.
Looking ahead, our current ability to top up renewing margins through 2035.
I'll provide further significant liquidity.
The event a major capital needs.
You can also see on this graph.
Have considerable opportunity to reduce our long term interest cost and today's attractive interest rate environment for years to come.
The current five year and 10 year estimated rate of approximately one 5% to 2% are well below expiring mortgage rates of between three one and three 3% over the next three or four years.
Turning to slide 21.
Our European exposure is managed by utilizing a number of different tactics with very favorable impacts including.
Including obtaining local Euro third party mortgages up variable at very favorable interest rates.
<unk> entered into cross currency swaps on our local debt.
Our European assets are currently 81% hedged using euro debt and cross currency swaps.
So officer now staggered between one to five years to take advantage of the low swap rates and make sure that they continue long into the future.
In total $676 million of Canadian debt.
Currently swapped with euro debt.
All in effective rate between 24 basis points, and 80 basis points, depending on the assumed mortgage term.
As such we have locked in significant interest savings while hedging European exposure.
A key reason for our prime focus on the Canadian residential sector.
Is the attractive spread between cap rates and interest rates.
As you can see on slide 2000 22022.
Directly there have been very strong spreads over the last three to four years.
The forecast for interest rates to remain low for the foreseeable future. We are now seeing quite high overall spread between 202 hundred 50 basis points.
Clearly spreads are lower in key markets like Toronto, and Vancouver, but there is still good accretive deal flow of available to us.
And we continue to evaluate and act on the opportunity to acquire properties in our target markets.
I'll now turn things over to Mark to wrap up.
Thanks Scott.
Looking back over the past few months as I've said in the presentation I'm extremely proud of our teams and how they've responded to the COVID-19 pandemic.
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 thank our team enough for their efforts their professionalism and their dedication.
Looking ahead I'm confident that the programs that we've put in place will continue to generate strong and stable performance in the coming months.
And will contribute to even stronger growth as the pandemic eases.
A key factor in our success has been our focused asset allocation strategy as detailed on slide 24.
On the apartment side, we continue to generate.
And target I should say value add properties in the mid tier segment.
These properties are acquired at well under 50% of replacement cost.
Have proven our ability to invest in them to increase value and their stability is driven by their very affordable rental rates.
We also continue to like the MHC sector.
Highly stable low risk business with very strong potential increased cash flows.
Revenues are highly stable.
And with residents owning their own homes capital requirements and the maintenance needs are significantly reduced.
C properties also provide another level of diversification within our portfolio.
Allowing us to enter more rural and smaller markets than a residential focused on large urban regions.
Our European presence is driving significant and growing dividend and fee income.
Dividends in 2020 from erosion Iras total $32 9 million.
While our fee income for property management services increased five 2% to $22 1 million.
As the only professionally managed operating platform in Europe, the opportunities for further growth and enhance value are significant.
However.
We will target our exposure to European markets and keep our exposure to Europe at approximately 15 personnel.
Okay.
Another key attribute of our growing property portfolio is there a focus on candidates three largest and most vibrant rental markets.
Auto Montreal and Vancouver.
As you can see on slide 25.
In addition to offering quality rental accommodation in these high demand markets our rents.
Constitute a very manageable percentage of total disposable income for our residents.
Our rental rates are between $1 50, and $2 per square foot.
Our clearly affordable.
There could be compared to other rental alternatives that are much more expensive for example, Toronto.
Rents for Newbuild and condo rentals are going upwards of three to $5 a foot.
Clearly makes our product attractive to the mass mid tier market.
Quality properties and more space at affordable rent. This is the cap REIT value proposition.
Yeah.
Further this value proposition our main growth focus going forward is on the mid tier segment and suburban markets that offer size and affordability.
With these mid tier properties, we are providing quality suites at rates of around $1 75 per square foot.
Below the suburban average.
Our apartment properties contain namely two bedroom homes.
Base that is seeing strong demand.
We're also the largest owner of town home rental properties.
And the second largest owner of manufactured housing communities in Canada.
Enters today want more space in our properties provide a range of affordable options for them.
Our recent acquisition in Halifax is a key example, these.
These brand new properties around the downtown core contained many two and three bedroom suites with lots of living space.
They rent for an average of only $1 20 per square foot.
Again values being created by offering quality rental suites with more space at affordable rates.
We continue to target these fundamentals going forward.
Further to this point you can see on slide 27 that are residential suite portfolio is predominantly positioned in suburban markets around Canada three largest cities are presence in downtown cores is minimal.
For example, you can see in the GTA that approximately 22% of our total portfolio.
Is located in suburban GTA markets with only 5% of the portfolio being located downtown.
Looking ahead, we will continue to build on our presence in more suburban markets or in nearby population centers with short commutes.
We believe the affordability of our suites as well as the geographical allocation will continue to experience strong demand.
After the pandemic.
In summary.
Looking ahead, we're very excited a better opportunity.
With further growth and enhanced unit holder value.
Our focus on the mid tier sector due to increased demand for affordable high quality homes.
Our predominantly suburban locations outside downtown cores, and our larger sized suites townhomes and MHC sites are meeting the needs for renters seeking more space.
We are experiencing a strong pipeline of accretive acquisition opportunities and expect to see solid portfolio growth in the quarters ahead.
The continuing low interest rate environment provides significant opportunities to acquire properties with strong cap rate spreads and to reduced interest costs on our refinancing initiatives.
And most importantly, as our markets returned to more normal conditions. We are confident we will see another year of record performance in 2021 and going forward.
Thank you for your attention this morning, and we'd 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 and your telephone keypad who pass.
So just a moment to compile the Q&A roster.
First question comes from Dean Wilkinson.
<unk> Your line is open.
Good morning, guys.
Good morning Deane.
Mark maybe just talk a little about sort of market rents in that that 20% differential I mean market rents is a bit of a nebulous term can you remind us what goes into your assessment of that of that 20% GAAP.
Yeah. So in our case when we look at our in place rents.
Versus what we survey the BD opportunity in the market. That's clearly the GAAP, how we how we do that.
As we're constantly ranking lower quality of offering versus the quality of offerings of buildings in the immediate location and we priced ourselves accordingly, okay. So for the number.
Three quality offering in competition for the local Eric as apartments or a local business.
We wanted to drive for being at least.
That rent level or higher.
And constantly updated on a monthly basis.
So how should we think about I guess COVID-19 kind of put us all on our on our heads in 2020.
And your Mark on terms, which was 8% versus the 20 and I guess in 2019, it was worth more than the mid teens.
What should we be thinking about for 2021 is it going to be more of a self regulating gear around.
Bumps on turns.
And maybe 2022, it's more back to sort of that that normal year that we would have saw some pre pandemic.
Yeah, I'll give you a very qualified to answer.
Because it's completely co related to the vaccine rollout and the easy out of the pandemic okay.
I wouldn't call anything that you see in the numbers are strong trend at this point other than the strong results, you're seeing from us, but I wouldn't read too much into rent and I'll tell you why.
As we've all gone through this.
This pandemic and I mean, all the apartment community has gone through it we really struggled to find how to find residents. When there are no residents there for certain situations. So I call. It like we've been fighting on lowering rents incentives and improvements the reality is people just aren't moving.
They're staying at home there's been this massive household consolidation go on okay.
We don't know the numbers, Steve, but theres more kids living with their mom and dad's right now than ever before in Canadian history, and that's not a trend either.
We brought I hope not.
We believe it is.
In September is a magic month, well day, whereas when you get closer to September.
And the reason why is that's when the government is calling for a vaccine rollout to be substantially complete.
That's when Theres a return to school.
And that's why we believe things will start to get back to normal.
I believe that that marks the beginning of what we're going to see in terms of new trend.
If everything stays the way, we think it's gonna stay today and it could move around I think we could see back to normal rents.
<unk> in Q4 of this year and most likely Q1 of next.
When I'm talking about like pre pandemic rent levels, if not higher when the real.
Reason I say that again strange effects are going on in the marketplace. We've seen home value prices surged. So the affordability for homeownership has actually grown significantly during this pandemic because you see even further acceleration in home price valuation and a decrease in rents so the GAAP.
As the largest GAAP.
Ever witnessed.
And being distant bridges the gap between the let's.
Let's take last last year being 2019 at 13 or 14% on turnover versus 'twenty for the portfolio that we do see that the higher.
GAAP between market and in place rents are less likely people are to leave so we actually have more built up demand and older leases that are of a higher mark to market. So that's kind of that bridge the gap between our turnover than our mark to market, yes, no that totally makes sense.
And then my second question and it might not be one day that you can answer I guess you know there has been some growing concern around.
Just.
The veracity of these new variance do you have an ability to track the incidences of positive case counts in your buildings and have there have there been any sort of outbreaks or anything or is that true is that something that's that.
Maybe a little too.
Invasive to track.
So it's we have the ability to track it we don't have the information it's quite public health Okay from.
For privacy reasons, we don't know what's going on but.
Health guidelines across the country are basically the same when declaring an outbreak an apartment building you have to be more than three cases, and we've only had two of those.
<unk> three <unk>.
And in very short very short lived.
Went into quarantine that decline so we do know, but we only know true public health and the incidence of the outbreak has been virtually nonexistent, though okay 30, very well it would be I'm sure. We had more flu cases in the past, we certainly aren't aware of any any.
Any deaths.
Okay, that's great I will hand it back.
Yep.
Your next question comes from Lorne Kalmar with TD Securities. Your line is open.
Thanks, Good morning, everyone.
Good morning.
Sure.
On on vacancy you guys are still doing pretty well, but.
What are your thoughts on sort of letting it drift a little bit higher over the course of the pandemic and at what point would you start pushing pushing occupancy.
Well, it's a little bit of science in a little bit of ours.
Because if you if you play the vacancy game too soon you can really get behind that it's very very hard to catch up with them.
And in the context of the pandemic if the return to normal is expected to be September.
And that isn't quite right and you've lost your leasing season, because you get low lease velocity in January <unk>.
Really only got the fourth quarter to make up all the ground you've lost with accumulating vacancy okay.
So.
My mind has changed on this because I'm the one that's been saying don't hold trend.
It's not a trend, it's a pandemic effect and I believe that wholeheartedly.
So when it comes to.
Holding out for value, but will be more inclined to do that over the second and third quarter.
Because our numbers arent too bad and we don't have that many properties that need to catch up and I really feel confident in the case of cap rate. If you look at the 10 buildings that we've got trouble in.
The majority of those are student University focused buildings and they will fill up quickly. So we will hold off on on value offering on those for sure.
Okay. Yeah, you painted a pretty compelling picture of what you guys are expecting in September.
Maybe just switching gears to acquisitions or are there any other.
Big portfolios out there that are in your in your wheelhouse.
There are.
We will be will remain real.
Screened on value and what we pay.
<unk> got a very.
Refine sophisticated acquisition Department team does a great job.
And we will stick to our modeling.
The market will determine.
What the market will pay always but I've never upset when we lose a deal it is.
It's validation that we're sticking to a disciplined approach.
Okay and are there any markets, where you're really seeing more opportunities than others.
I would say.
With the pandemic has taught us and moved our mine too.
These space.
And so probably.
The results and our continued focus on suburbs as I said in the presentation.
In sum the open mindedness to smaller markets.
Smaller markets I mean.
200000 population markets.
We've seen how incredibly resilient those those markets have been and depend on it and.
And I think that people have more flex work options will be more likely to.
Maybe themselves.
Thanks.
Sure.
And then just one last one from me have you guys from any increase in demand in the Townhomes in MHC sites as a result of the pandemic or a sustained increase I guess.
Totally sustained yeah.
Yeah.
Yeah.
Okay, great that's.
Thats all from me thanks, guys.
Your next question comes from Matt Logan with RBC capital markets. Your line is open.
Thank you and good morning.
Hey, Matt.
Maybe just following up on Lauren's question. When you talk about acquisition opportunities in smaller markets can you give us a sense for which market share might be considering like would those be in Ontario, Quebec or across the country.
Yes, we've been pretty open.
We like the <unk>.
<unk> market as an example.
You can pretty much take any market across Canada described population of call it $200 from people.
And we've just got to see what the opportunities are in those markets.
In terms of supply growth and demand.
And in terms of acquisition volume would it be fair to say you're targeting something in line with what we've seen in 2020 or perhaps a bit core.
Yeah I think.
That's fair.
We really have this very disciplined approach to valuation.
And bid in the market and what happened to us and so whats been consistently revealing itself.
Is that you know we're successful.
You know.
5% of the time and.
And if we continue to be successful 5% at the time.
Given 300 deals of underwriting last year, we'll probably see yourself from the same kind of.
Space of acquisition.
It wouldn't be unreasonable to assume.
$400 million to $800 million of acquisitions.
It's really hard to say.
For what you're doing certainly seems to be working and maybe just changing gears to your letter to unit holders.
<unk> talked about some growth opportunities in your MHC business to increase revenues could you give us some color on what that might entail.
Well.
The pandemic has also taught us.
Is that the whole topic of affordable home ownership.
Is on the minds of every government pretty much everywhere.
So we know that.
MHC market.
<unk> offers a very affordable home ownership option for people.
And so it's our intention.
To build on the development.
And intensification I should say of our existing MHC sites.
And look to get into developing new MH NMC sites.
It's the one area of development that I believe is under serviced an underappreciated and it's an area that we have high expertise in.
Great color and maybe a question for Scott in terms of the fair value marks in the quarter.
Can you talk a little bit about what drove the higher normalized NOI assumptions and where you're seeing the most cap rate compression in your portfolio.
Yeah for sure I mean I think.
Realistically we came into Q1.
With some very strong cap rate compression and we are cautious on that.
And obviously in underwriting or evaluations in Q2 and Q3.
We are again very cautious on.
What we were projecting from a stabilized NOI point of view, so I think.
Really it's reflective in Q4 are more confident having.
And that's for a year.
That may be our underwriting on the NOI side was too conservative.
And then the cap rate side I mean, we get we continue to see incredible cap rate compression.
I wouldn't say I would say, we think it's going to continue.
Obviously, the interest rate environment is a huge huge driver of that as well as the asset class is showing its resilience. So.
Q4, the majority of it for the year was a cap rate compression.
Third cap rate compression of about one word stabilized NOI impact.
As far as where the compression greater definitely kind of it.
The odd GTA, and Ontario market would probably be where it was.
The strongest compression.
That's great color and maybe one more from me and alternative back.
We're about two months into 2021 has there been any material improvement or deterioration in the rental markets. So far this year.
So I would say moderate deterioration.
It.
It's directly related to case count is all I can say, but.
But it's not as severe as these accounts.
So you can see that our traffic.
Honestly slows down with key accounts increases.
Increases in improves when Keith count drops off.
The second wave.
Has been softer and that probably.
A far more quiet market.
Because it was built on top of the slowest quarter of renting in the year first quarter.
So.
Hi.
I'm expecting.
Improvements in in Q2.
But all of this is in the context and backdrop of calories incredibly strong results.
We're still as I said in the presentation bad debt.
At year end stood at <unk>, 6% and vacancies are obviously strong and until it increases on turnover.
Well I appreciate the commentary. Thank you very much I'll turn the call back.
Thanks.
Your next question comes from volume Cracker.
Please state your company name your line is open.
Alright, thank you.
<unk>, Inc.
<unk>.
A couple of a couple of follow up questions.
Maybe first off on the 20% mark to market.
It's probably hard to quantify but.
Within mountain, where true remember what would you estimate would be the required capex spend per suite.
That's about 20% are you, saying the 20% was simply.
The GAAP.
True market rent.
The condition of admin expenses are.
I just go to traditional numbers marriage with the pre pandemic spend on.
And sweet I would apply those kind of assumptions.
As has been the normalized.
We are getting at that mark to market.
The Mark to market is just a very difficult number right now because we believe that the market has been truly indicative of what the market is.
Because of the pandemic and this is why I keep saying would be very careful about looking at trend.
The difference between pandemic effect in trend and I think in the case of cap range, you'll see a very very fast reversal.
Which again it won't reverse with the trajectory that change forever. It just the end of the pandemic effect.
It will result in a very quick.
Normalization.
Yeah.
Okay.
And I recognize that.
The student population in your portfolio.
Hello, you mentioned roughly about 10 buildings.
But I do think.
One of the reason one multifamily on your silicon creditors curb if you will.
A bit of pressure recently in terms of unit prices.
And sort of competing with respect to the vaccine.
The rollout of fishing fever.
The permanent true laid out.
I'm kind of September being a.
It's hard to boot from the government.
Income result from the start of the New school year.
Just a.
A couple of points here are a couple of questions number one from your portfolio of international students.
When they get when they do come into.
And from the countries for the school year that typically well in advance with September.
Or do you typically see them come in kind of no longer sort of a probably a little bit it would be August we'll have a we'll have.
End of July.
First week of August, we'll know exactly where we're at with the with the situation.
In your view.
Sorry, I can't say it enough like first of all we've got we've got 10 buildings on cap rates case, we're talking about six 6%.
You could argue eight because buildings that are just in the downtown core always had students, but the six that are direct.
And we're talking about 700000 foreign students returning to the country and an unlimited, but we don't know so you can't unlimited, we can't quantify the double cohort effect of kids that didn't go to University.
Did courses online last year that are going to re enroll this year.
And then the biggest one by far is the household consolidation line.
Maybe I'm using the wrong, we're just kids living at home with mom and dad.
That are not going to stay there.
And anecdotally I think we all have friends that have <unk>.
Teenager Twenty's early 30 kids at home right now that they are looking to stay.
And the only home for safety reasons.
That release of consolidation.
Of household, but it's gonna be profound.
But all the rent, even though were not core core I very much I'm of the belief that.
You'll see a really pronounced recovery in the core.
Across the country.
Once it's safe to live there you the city's it becomes anti lifestyle.
<unk> cities have grown and urbanize because of their lifestyle offering.
You know the exact reasons why young people live in the Big cities has become the exact reason you don't want to be there because of the deadly pandemic attack anti lifestyle.
Alright, I appreciate about the cash.
<unk> is really where I'm from universities from colleges.
From one in person classes, we will commence work in your view do you view that.
The government hitting their targeted the vaccination program.
Is that sufficient for university to commence in person core who could number.
Any thoughts on when we might get clarity on that.
I I like this has been confirmed it can be check universities are starting to announce now.
In class learning.
I could have this wrong, but I was told yesterday Mcgill was either about to announce or HUD announced that returned to in Clos in September.
That's a positive sign at this early stage I think we'll get real good clarity of universities.
In the next quarter.
Perfect.
Yes.
Maybe shifting just one quick question on the image.
Our discussion.
Of a broad kind of from contributed timeline with respect to the country.
Formulating your average fee strategy.
Alright, three to five years.
Yeah.
So what we will be doing what cap rate has been doing has been adding.
Somewhere in the neighborhood of 50 to 70 homes per year to our existing MHC portfolio by infill.
What we are doing hopefully in the spring, it's all permit pending.
On our existing lands is looking at developing out.
Hence define the development on four locations I'm.
I'm, hoping that gives us an additional 100 homes.
And we're actively.
Trying to understand.
The zoning process, that's the single biggest stumbling block.
Two rolling at an affordable home ownership and candidates finding land that we can add zone with this news.
But but politically.
The people we've been engaging with its had a remarkably positive response and so we're hopeful we've got a track record of doing it.
The second largest in Canada, and there's been very little MHC development in this country for decades.
And I think there's.
Plenty of room for capacity.
Right. So would it be fair to say, Mike for year 2021 event, but also it might be something that you have to wait for five years for in terms, yes. It won't be five years, but we hope to give give examples and evidence of our ability to develop these communities in 2021, Thats My hope to get get some.
Actual.
Intensification going on in our existing sites.
Okay.
My last question is just on the distribution.
Okay.
I believe in 2019.
Tribunal increase with Q4 results.
The pandemic, obviously true.
Over to our chairman pointing in the park and the mountain contribution increases are part of the AGM more often than with Q4 result from just curious.
In terms of what the board copco circled on the distribution.
Whether it's a timing issue or whether it's kind of a waiting for your approach in terms of how 'twenty one transpire.
Yeah, we're incredibly proud of the fact that not only we lowing lowering guidance on our distribution range now moved it from 60% to 70%.
Touching the bottom of that range.
As I said in the presentation.
And.
The board feels very comfortable that we're moving in that direction. It's great stability, we are going into a second wave.
We're moving.
With caution obviously when these kind of decisions you made but.
It's clear that we have the capacity.
We consider that that option.
Okay, great. Okay for me thank you.
Thanks Mario.
Your next question comes from Bad sorry, Brad since it's a freemium games. Your line is open.
Hi, good morning.
Yeah.
This was the full on Mario's question Army C.
Thanks.
So it sounds like.
If you do pursue some of the enduring specification opportunities that could be on your own but.
If you are going to be sort of more a larger formal program would that still be potentially with a partner.
Well.
We haven't gone as far as two announced partnership yet, but you know when it comes to.
Apartment transactions, it's just fall low cap rates thinking there.
We've been very comfortable with buying apartment buildings in the final stages of construction or the early stages of lease up.
When we can properly assess rents and we de risked.
The development costs and our track record.
At buying those apartment buildings at good cap rates is strong okay, and we think.
So whatever development profit, we can be saved by developing apartment buildings, our existing strategy. It's been a good one.
And so we'd be very open to applying the same thinking when it comes to MHC development.
Development.
The cap rate is.
You've heard me say I believe one of Canada's greatest return.
And we've done a fantastic job of adding value in place income opportunities and don't proclaim to be development experts and we would always as everything proceed with caution here.
It's being thoughtful mindful and planned in our approach to a development program.
What we need right now is political will and once we feel there is political will on the rezoning process.
And then we will consider.
How to proceed with the strategy, but it's a hyper hypersound strategy. Brad once you have zoning, it's not like building an apartment building you're building land infrastructure as you know.
And then the homes are manufactured in and brought in quite quickly.
The development cycle is as hyper thoughts relative to apartment.
Is everything geared around zoning.
Uh huh.
I guess in the past too.
Capital recycling has been more opportunistic than anything.
<unk>.
This year or going forward could you be a little bit more active from a location perspective orders are still going to be very opportunistic.
I think it's the new cap rate.
To take a hard look.
At where we think we created.
From our perspective, the most amount of value.
And if somebody else sees more value in that opportunity then then thats fine.
But we're extremely open minded to.
Good day.
And it's not really a change of thinking it's more of the size of the platform.
And we're big enough.
That we don't need.
To just growth.
But we have a great track record of doing that with acquisitions.
So our again our acquisition team, it's a big team, it's a great team and they do a wonderful job at analyzing our existing properties and core.
Following our opportunities to to look at disposal.
But.
We wouldn't call any of this major deviation from strategy. It's just building what's worked.
So I'd say the same thing with MHC development.
We're easing into it.
Probably with more conviction and apartment development.
And when it comes to dispositions.
We're open minded.
No no fundamental change in strategy there.
That opened recycling capital.
Got it great. Thank you.
Next.
Your next question comes from Mike Makinen.
Shannon Your line is open.
Hey, everyone.
I just want one quick technical one here in a couple of high level ones just on your.
Mark you don't want us to dwell too much on.
Some of the cost of services.
Of course.
Question <unk>.
For instance included in that spread are you lowering it or is that something inefficiency.
Scott If you can answer the question I'm not sure I get it technically correct, but but yes.
Yep Yep.
Turnover numbers or the mark to market would not include any level of incentive so okay.
Yeah, that's not incorporated we do have good disclosure on kind of the levels of incentive line.
<unk> increased the shareholder.
We are starting to move away from them and I think we talked about being more comfortable with vacancy.
To some degree of engagement adjusted level of vacancy, but yeah.
Excluding.
Mike if I can if I can address that if I can address that point, because what you're raising is actually an important important point and this is going to sound a little bit confusing because it's not a trend environment. Okay.
What we found was into incentives weren't working like it from just not moving the needle and lowering rents really isn't moving the needle either so so what we didn't know is the duration of this pandemic.
Conservative approach to calculate always takes is how long is this going to go on for and we have to hold.
Our revenues intact, and so we tried to combat that with traditional tools like rental rate adjustment incentives and quite frankly.
Not effective in the long run there's just people not moving as I said because of the pandemic.
So Scott just alluded to it.
We're taking a very hard look now that we believe that our prime ministers, giving us good guidance on September we have something more solid we can work towards and.
And we will be reviewing those very very carefully despite the fact that traffic.
Traffic will be probably more impaired over the next few weeks than they were when it was in the first wave of the pandemic.
We won't be as.
Open to using those tools as we were.
Okay. So if I understand in the short term.
That number increases quickly.
Last couple of quarters.
Yeah, there's a 12 theres a 12 month run rate on some of those incentives. So they have to bleed off but yes, the rate at which youre using and you're totally right that that is unlikely to continue at the same rate.
Okay, which leads to my next question is a clarification can you remind us from.
From a growth allowable guideline incurs perspective.
Q3 months and I'm sure you're able to.
Does that factor into your line.
If you are able to bring those off.
Correct.
The restricted.
All right.
Net.
So it's like I Couldnt quite hear you if you could repeat that question.
I'm just trying to make sure I'm clear on the Max from level increase being set at zero percent next year in Ontario and to the extent that you used incentives is it three months or is that like whats the rules again on that.
In terms of can you burned off some indication 123 months or your line or not often that doesn't count as a.
The increase under the guidelines.
We don't we don't use our incentives I know, what you're referring to but we do not use our incentives outweigh.
There is a.
Scott you can give more color to it but.
Some people use those incentives.
We don't do that.
So the guideline is.
On the existing rent and that's it's just straight line. So if your rent was 1200 Bucks you were.
To get a one 4% guideline increase government, saying zero zero for the year.
You can't offset it with any sort of other number.
Ontario.
Okay.
Just with respect to regulatory concern.
Stacey intervention, obviously unprecedented times unprecedented measures by governments to intervene.
When we come out of the pandemic has your thought process about that.
Sure will.
Sort of update somewhat or are you expecting to have more regulatory.
Sure.
We emerged from EBITDA.
Well.
It's an interesting question because traditionally.
If you go into disturbed economic times, which we all thought we were going to.
<unk> seen real evidence of that yet.
You would expect to see rents.
Recede and political pressure.
Ease off.
But what we've had to happen here.
Is this low interest rate environment has really as I said accelerated the homeownership market to.
Clearly heated levels.
And so there is no political pressure to that arena, there should be but there is not okay.
And so where the political pressure then moves is to is to rental. So I think it has a lot to do with the anxiety levels of number one people that are frozen noted the homeownership market.
The fuel fuel dropped by that.
And how.
How bad the recession, if there is one.
It's on people.
But you know when you look at our collection rate and yes, there's government assistance.
It's been quite strong so is not that evident of government intervention even be necessary at this point.
It's I think just been.
Highlighted before.
There's a lot of anxiety out there and understandably so when there's uncertainty these issues all escalate.
But the government seems to understand the only real solution to what we're talking about here is supply.
And they do seem to understand that.
And I'm hopeful that.
The anxiety is just just com.
Okay, and Thats actually a great segue into my last question just from what we've talked about under supply.
Even now, but leading up to the pandemic and how that's causing less inflation in market rent inflation.
But you've also talked to the fact that new supply comes on and it was a net three to $5 per square foot range in select markets, where they're not sure what day.
What are you seeing demand is for some of that products. So I guess given that thats been only delivered a certain costs.
What is going to give I mean, how do we how do we address that going forward.
I think there needs to be.
Creativity, and that's why I use the manufactured home ownership as an example.
The problem is that.
We've all been trying to solve the affordable housing problem by looking at how we can make concrete buildings half price and.
And there is no way to do that and as a result has been very little progress made you can't build something for half price.
So how do you charge off price rents.
That is the heartbeat of white cap rate is such a great value offering is because we're buying the income.
Which really creates a valuation of less than 50% of replacement cost and that is why we're so strong.
But I don't think there is a clear cut answer.
As to how.
We get out of this with a high government conviction and possibly intervention.
To solve the zoning issue, it's all about the length of time for zoning, it's just far too long.
For the.
Population ambitions.
The federal government has does not align with the conviction to zone at the municipal level and quite frankly, I feel bad for the provinces. They tend to be stuck in the middle of the problem that they regulate.
It is a bit of a complicated.
Issued that needs government unity.
And if we're going to move through.
A period of growing our population as I think we should we need to have strong housing policy fits lead at a federal level.
Can can coordinate the thinking and activities of provincial and municipal governments.
Dislocation between those three levels of government, which has made our portfolio so valuable.
And it's a dislocation and unity of those three government, which will help ease the supply problem.
Okay. Thank you I appreciate your comments and congrats on an incredible year.
Great. Thanks, Mike.
Your next question comes from Julian Chan with BMO capital markets. Your line is open.
Hey, good morning, guys.
Morning.
And just I'm, sorry, I thought you wouldn't necessarily impact non core.
That 400.
Relative acquisitions in 2021.
Okay.
That would be more skewed towards Canada.
I'm sure.
Yeah, Yeah, no yeah, when I quote that number I'm quoting the Canadian the Canadian.
Okay. Thanks.
It really is a tough one.
Probably seen in our investor deck.
We have that little pyramid that shows how many deals we underwrite and how many transactions that we do.
And quite frankly, our success rate is a is not so impressive.
But when you look at the dollar value of that success rate.
During a pandemic here, we put almost $700 million of acquisitions into the into the portfolio year before it was over $1 billion.
So we're incredibly disciplined.
Our true strength is our ability to cover the country and underwrite so many deals with a disciplined approach.
<unk>.
I would just look at that track record in 2019, and 2020 and I can't see a reason why it would be different in 2021, but you don't know what's.
What's going to come to the market.
Don't know how much.
Frost is going to be out there from multifamily assets given what's happened during the pandemic.
So we'll stay disciplined but I'm hopeful that we can.
We continue to find value, but if we can't find value, we've got a great portfolio and I'm not driven to growth.
Good bad and just add that we are still very bullish on Europe.
After the support <unk> and their growth.
Strong operating happen I mean, I think from a cap rate line here, we like the European market and then you'll see from the slides our ability to.
Hedge.
Yeah.
Yeah, and create incredibly low interest rate.
Levered up to close to 100% makes our European strategy extremely accretive so definitely not afraid that to grow there as well.
The opportunities I guess.
Further increase in cash.
And any iras that level or.
Yes, I I used to listen.
Our attention.
A really and primary focus has been in the support of the road.
And.
We continue to support our <unk> investment.
The value of that investment.
But looking at the track record the.
The support.
In the last couple of years.
It's been welcomed.
<unk>.
By the <unk> Board has been has been supporting that entity.
And as Scott says, we really like the dynamics and deal flow.
Opportunities in the Netherlands.
And we.
We're very happy with our Irish investment.
Okay.
And maybe just circling.
Just going back to the regulatory risk.
A question.
Giving the peso.
Yes, Sir.
Get hearing out of Canada, It seems like it's being pushed back.
It's getting pushed back hopefully.
And the next one could go from clients.
Folks around.
I'm wondering how you're thinking maybe in terms of I guess specific to Ontario, the possibility for the extension of that.
We enter 2022 right now at this juncture.
I think it's hard to say.
The magnitude of that.
But the impact I should say of that inventories in 2021 isn't great, but it's not.
It's not.
Overly material to cap rates.
It's not something that.
That we would.
Ultimately I guess welcome because we have costs that are growing.
And residents that we need to service and employees, who need to take care of.
But it's not of concern to me.
I think we are in the environment, we're in and until it's stable.
It's hard to it's.
It's hard to call what's going to happen.
Okay. Okay no that's helpful.
That's it from me I'll turn it back thank you.
Your next question comes from that Carnac with National Bank Financial Your line is open.
Good morning, guys.
She's got roughly popular here today.
Got it.
Okay.
Clicking a button.
Hopefully the tail end.
Yes.
A few quick questions.
Six properties or any of those we also saw the announcement from Mcgill University.
Any of those your assets in close proximity to Mcgill yes.
And I mean that one property that you have in the Mega Legato is about as core and central to the University is that you can get to talk to kind of the quantum of vacancy in those six properties sure, but all onto your chair and remember that cap rate range.
She is extremely low overall levels.
But we have.
We have been hardest hit in.
Halifax, Edmonton and then Montreal.
Okay.
Those numbers in those buildings are plus 30% to 40%.
And theres really not much that can be done about that the good news on that front is that theyre going to fill up fast.
September is back in place learning and if the vaccine is rolled out mom and dad are comfortable letting their kids go to school.
There will be no lack of students who are trying to catch the overall market and solve problems of that magnitude you can't but when you've got a returning market it'll fully return, especially with the double cohort.
Effect that we think is out there we don't know for sure, but we think that there's a number of kids that didn't go way to school last year that wanted to but we're gonna be enrolling first year this year as.
As well as the foreign student effect. So I think these high vacancies bode well for Capri [laughter] I've never said that before in the history of our company, but I think that it allow us to get.
Market range and it allows us to improve vacancy very very quickly.
Alright, I think Thats, a fair point I know that property in particular any material yeah going to be in high demand eventually when Miguel is back and you've got some of their concordia as well.
One of my favorite Canadian cities now [laughter], and then quickly on mortgage I mean, you were able to basically term out your mortgage 25% of your mortgages at sub 2% for over 10 years.
It sounds like you plan on doing a fair bit just wondering I mean bond yields have moved a bit of late do you have any net.
Sort of.
Or what is that the amount of mortgages that you kind of have a lock on and at what rate at this point and what that I mean, you don't have much variable debt to repay but when you look at using some of your existing mortgages to repay them at this point.
Yes.
Luckily we were super aggressive and we broke mortgages and did everything they could to create as much liquidity in 2020.
Definitely spread thats come out.
It's not 180, we're looking closer to $2 20 today.
215, so I mean, just on <unk>.
Doing that in advance, we would probably say $50 million of interest.
Today's rate so we will look at a little bit more some short term stuff.
Now to fill in our portfolio and I think I did.
Pro forma kind of where we are focused on term for next year about.
We really think being aggressive right now as there is the right from the daily even if that means sitting on a little bit of cash.
The acquisition pipeline has been robust cell.
We're not afraid.
To be fair, we don't have much room on the line.
Left to pay down from about $100 million.
But we're sitting on cash flow kind of net neutral so it will be.
Utilizing cash for acquisitions.
But we'll continue to be aggressive getting out those today, because we don't want to Miss this low rate environment.
Okay fair enough and not to echo some prior guys.
Impressive quarter in the context of where we are today.
No it's not.
Bob Matt.
There are no further questions queued up at this time up from the call back over to Mr. King for closing remarks.
Well that would be a great catch up of questions probably one of the longest question sessions that I can remember I would just use that as a reminder, that Scott and I are always available to.
To answer questions throughout the quarter. Please just reach out on what day.
We've done significant investor.
Investor outreach and they're always there for people that are showing further interest in cap rate and a better understanding so I'd like to thank you again for your time and attention today.
And if you have any further questions like I said, please don't hesitate to contact us at any time, thanks, again and goodbye.
This concludes today's conference call you may now disconnect.
Oh.
[music].