Q1 2021 Canadian Apartment Properties Real Estate Investment Trust Earnings Call
Hello, and thank you for standing by and Bakken to the Canadian apartment properties REIT first quarter cash.
And then 'twenty one results conference call.
After the speaker's presentation, there will be a question and answer session to ask a question. During this time simply press star and the number one on your telephone keypad and you require any further assistance. Please press star zero and I would now like to turn the call over to Mr. David <unk>.
Please go ahead.
Thank you Michelle and good morning, everyone. Before we begin let me remind everyone that the following discussion may include comments that constitute forward looking statements about expected future events and the financial and operating results of cap REIT and our actual results may differ materially from these forward looking statements as such statements are subject to certain risks and uncertainties discussions concerning these risks.
There is the forward looking statements and the factors and assumptions on which they are base can be found and cap rates regulatory filings, including our annual information form and MD&A, which can be obtained at SEDAR dot com and now.
I'll turn things over to Mark Kenny President and Chief Executive Officer. Please go ahead Sir.
Thanks, David Good morning, everyone and thank you for joining us.
Prior our Chief Financial Officer is also with me this morning.
To quickly review 2020.
Despite operating for almost a full year under the COVID-19 pandemic cap REIT produced another record year of results for its unit holders.
All of our key performance benchmarks were up over the prior year.
Organic growth was strong we.
We continue to expand our property portfolio and the ongoing strong fundamentals of the residential rental real estate sector.
Salted in a significant increase in the value of our asset base.
Clearly our focused and proven asset allocation strategy is working to.
Delivering solid and stable returns for unitholders and both good and bad times.
Over the last 24 years, we've built the team yeah assets and the operating platform to continue our growth and strong performance and.
And we look for we look for continued success this year and going forward.
Turning to slide five and.
And our results for the first quarter of 2021.
You can see we continue to adapt very well to the pandemic.
We have maintained our track record of solid growth and performance are stability and resiliency.
During these challenging times is a testament to the skill and dedication of our people.
The strength of our asset base and.
And during strong fundamentals of the residential rental real estate sector.
For the three months ended March 31st 2021 <unk>.
We generated solid accretive growth and revenues and.
NOI and and F F O.
It is important to remember that it wasn't until the end of last year's first quarter, the pandemic began to affect our markets.
Okay.
From an operating perspective.
Our ability to generate solid performance in both good times and bad is clearly demonstrated by the results for our stabilized portfolio.
You can see on slide six.
Occupancies remained strong while net average monthly rents rose again.
Driven by modest pandemic affected increases on turnovers and renewals.
Our track record of organic growth also continues with same property NOI up a solid two 4% driven by same property revenue growth of one 9%.
While maintaining a strong NOI margin of 64.5%.
Our leasing and marketing programs. Despite the pandemic continued to generate a track record of solid Occupancies as you can see on slide seven.
After over a year of operating under significant restrictions placed on us by the by the pandemic.
Our occupancy has only declined by less than 1% since the pandemic started.
We believe this is solid performance.
Having said that we are not out of the woods yet and.
And the third wave of the pandemic continues to negatively affect our markets and our business.
We don't see a return to better times until the rollout and vaccines is substantially completed.
And we can quickly return to our historical near full levels across the entire portfolio.
We are hoping to see a return to strong growth.
And the later half of 2021.
It is also important to note.
Experienced very few collection issues as we work with our residents to ensure we collect our rents as efficiently as possible.
Bad debt as a percentage of total revenues remains a small and manageable and generally and keeping with our normal collection track record.
And.
A key factor and our ability to generate solid returns during the pandemic is the solid increase in rents on turnover.
Achieving as shown on slide eight.
Clearly turnovers continued to be impacted by the ability of our residents to move where personally visit our properties.
It's still a three 4% increase on turnover and the Canadian portfolio is a solid result.
And we expect to return to a more traditionally higher increases once the vaccine rollout.
Abstentious complete and the pandemic eases.
Also remember.
The higher increases and last year's first quarter reflect the fact that the pandemic has not really impacted our business through that period.
Renewals have been affected by rent increases freezes, we implemented and Canada on April one last year to help our residents work through these challenging times.
We have slowly been implementing modest rent increases in certain markets, where possible and <unk>.
Consultation with our residents.
And the Netherlands, all these renewals occur only once a year and July power.
However, we expect to see another solid year of rent increases in this portfolio in 2021 with the blended increases of between three and 4% on suite supported by strong rental uplifts on turnover.
Slide nine summarizes the many successful initiatives that we've introduced to mitigate the impacts of the pandemic.
And as you can see these programs continued to mitigate the issues we face due to the pandemic.
As we discussed over the last year, we began early in 2020 to implement programs aimed at getting closer to our residents communicating with them and understanding the issues that they're facing and helping them to stay in their homes, while at the same time collecting as much rent as possible.
Clearly these initiatives have proven effective.
Our compassionate care program, you're seeing and average of 3500 to 4500 calls to residents each month.
We generated over 2400, new leases in the first quarter of 2021.
This was accomplished by continuing to support much of our leasing activities online.
In addition to safely arranging in person and viewings.
To facilitate more efficient rent collections.
They were then 85% of our rents are now paid electronically.
These programs have a lasting and positive impact on cash flows and as I.
And that.
Net debt stood at only <unk>, 6% of revenues as of quarter and.
While over 99% of our rents have been collected.
We are very proud of these achievements and remain confident that these programs will result, and stable collections moving forward I will now turn things over to Scott.
Thanks Mark.
Turning to slide 11, you can see that we maintain a strong financial position at quarter and conservative debt to gross book value and continuing high liquidity.
Our almost $1 2 billion and Canadian unencumbered properties provide additional liquidity should it be needed.
In addition, we have $580 million and liquidity available through our credit facility.
And total and weird and access all of these sources of capital we have available liquidity of over one 7 billion and.
And even if we did debt our leverage ratio would still remain a very conservative and 43%.
Looking at our financing and the first quarter, we locked in and very low interest rate of two 2% on average on a refinancing and top ups and we expect we will continue to benefit from the current low interest rate environment for some time.
At quarter and over 99% of our mortgages and core to fixed income.
Our strength.
We're also confident that the debt markets and financing will be will remain highly available from our properties given their stability and strong fundamentals of the rental residential business.
As of March 31, 2021, 99% of our Canadian properties hold CME be insured mortgages.
Yeah.
And you can see on slide 12, we continued to maintain strong and flexible financial position.
With a reduced and consumer book leverage ratio of 135, 2% strength and coverage ratios, including and almost four times interest coverage and.
And historically low interest cost on our mortgage portfolio.
Up to eight 2% for the Canadian portfolio with a weighted average term to maturity increasing to close to six years.
Our mortgage portfolio remains well balanced as shown on slide 13.
And in any given year and no more than 13% and the total mortgages come due and thereby reducing risk and a rising interest rate environment.
Looking ahead, our current ability to top up ringing and mortgages through 2035 will provide further significant and liquidity.
For the future.
You can also see on this graph that we have considerable opportunity to reduce our long term interest cost and today's very attractive interest rate environment.
With the current five year and 10 year estimated rates between 175 and two 6%.
Ah well below expiring and mortgages.
Mortgage rates and between $2 eight per cent and three 3% over the next three or four years.
Now turn things back to Mark to wrap up.
Thanks Scott.
Looking ahead, we see a number of very positive value drivers that we are confident will generate strong and growing returns for our unit holders over the long term.
In addition to portfolio growth.
We continue to see very strong acquisition pipeline and our key markets.
We believe value will be driven by our successful asset allocation strategy.
Our focus on strong urban markets rebounding immigration.
And the return to in class learning and the younger demographic moving back to apartments and away from home.
The increasing size of the seniors population.
And with all of these fundamentals generating further appreciation.
Our asset base, let's have a quick look at each of these value drivers.
A key factor and our success has been our focused asset allocation strategy as detailed on slide 15.
We continue to target value add apartment properties in the mid tier segment.
These properties can be acquired at well under 50% of replacement cost.
<unk> proven our ability to invest in them to increase value.
And there is stability is driven by the very affordable rental rates that the buildings offer.
We also like the MHC sector.
Our highly stable low risk business with very strong potential to increase cash flows.
Revenues are highly stable and with residents owning their own homes capital requirements and maintenance needs are significantly reduced.
MHC properties also 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. Additionally.
Mhc's provide the real alternative as per.
Prices have not appreciated to the same extent.
Our European presence is also driving real value.
Dividends from our ownership interest and <unk> are strong and stable while fee income through our asset and property management services, and both Netherlands, and Ireland continue to grow.
As the only professionally managed operating platform in Europe, the opportunities for further growth and enhance value are significant.
We are also able to capitalize on the very low cost European debt to finance our growth at attractive returns.
Okay.
A second key value driver is our focus on candidates three largest and most vibrant rental markets Toronto, Montreal and Vancouver as.
As we have noted before our focus is on the more suburban markets rather than seeking downtown locations.
Properties that are attracting increased demand as family seek more space at affordable levels.
As you can see on slide 16 in addition to offering quality rental accommodation and these high demand markets. Our rents constitute a very manageable percentage of total disposable income for our residents.
Our rates between $1 50, and $2 per foot are clearly affordable compared to other rental alternatives.
For example, and.
Toronto rents for Newbuild and condo rentals are going for upwards of three to $5 per square foot.
While the properties more space at affordable rents.
The cap REIT value proposition.
Immigration has always been a demand driver and our markets, but at significantly reduced over the last year due to the pandemic and travel restrictions as you can see on slide 17. However.
However, the pace is picking up and we believe this trend will accelerate in the months ahead.
The number of international students in Canada and has also been impacted through the pandemic normally numbering and isn't it about 650000 number and Canada International students have declined significantly during the pandemic.
Compounding. These issues is the closing of in class learning and what we call household consolidation.
And people have returned home to live during the pandemic to manage costs and we don't see them returning to the rental market until vaccines have been fully rolled out.
And as I stated earlier, we don't believe we will see a return to more normal markets until the rollout of vaccines is substantially complete.
Young people, returning to rental living and away from home and international students as they return.
We believe the demographics are also on our side.
Seniors increasingly look to the rental market to meet their needs with significant equity in their homes and seeking a single floor living space is the best place to age aging millennials are another strong and growing demand driver in our markets.
As you can see on slide 18, the population of Canadians age 65, and older continues to grow accounting for over 23 per cent of the population or more than $9 5 million people by 2030.
We believe that our quality and well positioned portfolio offering more space and more affordable rates and smaller condos will see and increased demand from this demographic group.
Finally, we believe all of the strong market fundamentals.
Increase the value of our property portfolio going forward.
19 details.
Cap rates for our own properties and the three.
Of our key markets.
Over the past few months, we have seen significant compression and comparable market cap rates for completed transactions and these cities.
Pension funds and other increasingly others increasingly recognize the positive fundamentals in the residential rental sector.
For example, recent transactions and the GTA and it seems stabilized cap rates as low as 3%.
And even lower at two 1% for properties with development potential.
Sure you all have seen purchases as low as three 6% and around 3% for properties with development potential and.
In Vancouver rates are as low as two 3% and.
And even lower for properties with development potential.
We recorded a significant 600 million dollar increase and the fair value of our portfolio in 2020.
And expect to see further increase in asset value going forward with.
And with increasing demand and little new supply of rental accommodation in these and other markets. We believe the value of our property portfolio will only grow and provide another strong driver per unit holder returns over the long term.
In summary, we are very excited a better opportunities for future growth and enhanced unit unit holder value or.
Our focus on the mid tier sector meet increased demand for affordable high quality homes.
Our predominantly suburban location outside downtown cores, and and our larger size 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 reduce interest rate costs on our refinancing initiatives.
And our industry, leading balance sheet leverage and liquidity position.
All add up.
Going forward.
And with demographic trends and increasing immigration. We are confident we will continue to drive value for our unit holders in the years ahead.
In closing I want to thank everyone at cap rate for their hard work and dedication over the last 18 months and also to our residents for their patience during these challenging times.
We are very proud of our results this quarter a period when we experienced the height of the pandemic brought on by the third wave.
Considering that last year's first quarter was partially strong, particularly strong given the pandemic did not affect our markets until the end of March our performance. This quarter has been even more exceptional.
Thank you for your attention. This morning, and we would now be pleased to take any questions that you may have.
Thank you and if anybody would like to ask a question. Please press star one on your telephone keypad and.
Our first question comes from Matt Logan from RBC capital markets. Your line is open.
Thank you and good morning.
And your math.
As we start to get closer to a reopening can you talk about how you expect your portfolio will perform by region and maybe if I put it a little bit differently do you think the operating performance over the next 12 months will be driven by.
The few areas in your portfolio, where you have some vacancy or if the vaccine progress and immigration will be the key drivers going forward.
Net immigration and it's just the the foundation for strong growth in the years to come.
It's household consolidation debt is going to be the absolute driver. So.
And what we believe is that and there are no statistics is that there is unprecedented household consolidation of people 30 years and younger living at home during the pandemic.
What I tell investors is basically moms had come home and until this thing is over and you get a vaccine.
So the thinking is we try and no change and supply during the pandemic and we've had our population has only grown so where where is everybody well overwhelmingly they're at home and that is what's created weakness and the rental market.
And as moms and dads get comfortable that kids are safe with vaccines, you will see a very strong wave of return to the sector and quite frankly, we had a housing crisis and Q1 and 2020 that Hasnt changed as kids are at home and that's where the people are.
So I guess the focus really will be on how market rents move and if turnover starts to pick up as we all get vaccinated.
Yeah, and I think you know and.
In case of cap rate.
You know what.
And we're holding in there with only 3% vacancy which is really focused on a book 10 assets.
So the return of occupancy.
It will be very very fast and specific to the areas where people get vaccines.
And in terms of rental growth. There's no reason to believe we wouldnt return to pre pandemic levels, if not higher.
Cost of housing has accelerated tremendously during this pandemic.
And if anything apartment to become even more affordable.
<unk>.
And this is the situation that we find ourselves in.
Which is very unusual it's it's it's for the most part it's kids at home and international students and arent here and and cap rate piece, it's really restricted to about 10 assets.
Agreed and if we think about your leasing traction year to date.
Give us a sense for either how occupancy or lead subtract on a monthly basis and if we've seen the bottom for demand.
No we are and it right now.
It's absolutely co related to case, count and traffic and when you think about it. It's just common sense like and third wave hit us harder than the first and the second because lockdown measures and just fear of looking for an apartment during lockdown.
As we see case counts go down we see a direct correlation of our traffic going up. So in recent weeks, we have seen an increase and traffic is keith's counts have dropped off.
But we found during the first and second waves traffic is a 100% correlated the case counts.
It makes sense to me and maybe last question and why and with significant transaction activity and your markets you talked about where you're seeing some of those cap rates going sub 3% and the GTA. If we think about your $3 39 <unk> cap rate.
And that same market, how much cap rate compression could we see over the course of the next say six to 12 months.
There appears to be.
Major lessons learned by investors during the pandemic.
And the wall of capital for multifamily debt was high.
Pre pandemic is higher today.
And as more conviction around multifamily than I've ever seen throughout my career, I've been saying theres more interest and multifamily than I've ever seen but we've learned during the pandemic.
That wall of capital and interest and multifamily has grown even more.
So.
We're seeing a.
Window here of private.
Owners selling into lower cap rates and and institutional capital.
Highly interested and sector.
I appreciate the commentary that's all from me I'll turn it back. Thank you. Thanks.
Thanks, Matt.
And your next question will come from Jonathan Culture from TD Securities. Your line is open.
Thank you good morning.
Morning, Jonathan.
First question, just those 10 assets Mark that you said.
I guess the majority of your vacancy.
Like what type of assets are those student focused buildings downtown core.
So.
We had a couple of assets that are in very close proximity to universities.
And.
One on the University of Alberta campus, and Edmonton, and a couple and Halifax.
And then when you move into.
The next year.
Some downtown located buildings.
Wherever the pandemic and its been hit the strongest as its again that cohort of 30 under that mom and dad said come home and so wherever you see my case count it's that cohort exactly that.
And it's caused weakness it's not the seniors it's not families. It's the cohort of under 30 so.
And final place we saw it was in the.
The luxury and.
So you know when we have one brand new asset.
And the targets that cohort downtown Toronto, and it's also been quite.
Quite impaired.
But again Youll see a fast.
Rise to demand.
In those markets because of the unusual thing that has happened.
And in places like Toronto and.
Vancouver Montreal.
Is that investors that owned individual units.
Sold a lot of those units in the end user hands during the pandemic. So we believe the stats will come out, but I I hold the belief.
And that the rental universe has actually gotten smaller as per.
<unk> sellers that couldnt and through Airbnb units or couldn't rent, they're higher priced condos sold into end user hands and that we'll see.
That plays itself out, but anecdotally this is what I'm hearing.
Across the board a lot of investors sold there.
<unk> units during the pandemic because they had too.
And so much tighter markets coming out of this.
And it's all fundamentals, we're going to be good for.
For new construction fundamentals would be good obviously for mid tier portfolio the cap rates.
Okay just.
On the your your tenant inducements they have ticked up the last two or three quarters or is it are you using them more and submarkets that other than others and then how do you see that playing out going forward.
Well cap rate has not been a tenant inducement culture and our 24 here your history we've been.
Chasing ghosts tenants during this pandemic because traffic levels it plummeted as each wave showed up.
But as the.
The case counts go just like traffic you can expect to see a falling off of our new tenant incentives and our tenant incentives that we put in place we amortize over the first year of the lease so theres going to be a bit of a run rate.
And that will last I believe until first quarter of next year, but.
<unk> initiated incentives I expect to fall off dramatically and.
And in the third quarter, we're already starting to see a.
A reduction and us we monitor them very very closely.
But again directly related to case count reports and directly related obviously to our traffic.
Okay. That's that's helpful I'll turn it back thanks.
And your next question will come from Brad Sturges from Raymond James Your line is open.
Hi, there.
Just to follow on those questions I guess, if you see an uptick on our leasing activity is that the.
And the tipping point in terms of maybe.
Willing to take on a little bit more vacancy and hold out for a better rate.
And it's great question Rod so.
Throughout the pandemic, we've tried to call vaccine rollouts.
When we got clarity.
And the pandemic coming to and and that in my mind, it's the time to build vacancy to properly capture market rents. So we thought we were seeing it and the first.
And the and the first quarter. There we thought jeez. This is gonna vaccine rollouts are going to hit us and we're gonna be b and great shape.
We had a couple of weeks of confusion I now believe that we're gonna be.
Marching towards.
50% vaccination sooner than later, we're almost there.
And we'll see what happens with key accounts and the next few weeks I think the next few weeks are critical and.
And as we see that happened and we know that rental market is going to light up kit.
Kids are kids are under thirties, and do not want to be at home. This is not a a rental trend.
It's just a matter of getting vaccinated and getting back to life.
Okay, and then I guess, the Lockdowns have an impact on R&M costs do.
Do you see that.
And as they catching up and the back half of the year when we do open up.
A significant sleeker our teams have been as I said like we're so proud of the Calgary team they've been working tirelessly through this pandemic and while they can't go into units and some cases, the I don't expect to be in.
And lag effect and cost.
Okay.
And at this point I guess, you're seeing a very strong deal pipeline.
I guess the last call you talked about similar volumes to 2020 in terms of annual volume or I guess any change in expectations here based on what Youre seeing or you stick to your original commentary.
Yeah, well if volumes are out there, it's a matter of us targeting value and and so like it's really a situation of how much capital is chasing and how aggressive the capital is going to be.
So, we'll we'll stay disciplined.
And in our accretive hurdles.
There's a lot of opportunities to underwrite, it's whether or not.
The aggression around pricing.
Pieces cap rate.
And I'm quite confident that there's enough opportunities across the country that we will.
And to underwrite deals and in and be successful you you've seen our Brad our success rate, where it's quite low.
But fortunately we're underwriting so many deals we tend to be.
Able to bring in you know decent decent amounts of of growth.
But not at the expense of anything.
Earnings per share as our focus of cap rate not not growing the number of units and the size of the portfolio.
Okay, Great I'll turn it back thank you.
Thanks.
And your next question comes from Joanne Chen from BMO capital markets. Your line is open.
Hey, good morning, maybe just thinking on the acquisition pipeline.
In terms of kind of the opportunities that you're seeing or would these be kind of.
You know it kind of more one off deals or are you are there.
Increasing opportunities with respect to larger portfolio sales.
It's a mix of both you got.
Really what you have is the private sector seeing valuations pad.
At extremely high levels, and then generalized fear.
Around the future of capital gains taxes, So I think and a lot of cases families are looking at their portfolios.
Portfolios Big and small.
And and are thinking that may be a time to.
To liquidate if theres not secession and owning the portfolios for the next generation.
It's just it's just a matter of the.
Valuations being so so so robust.
And capital gains fears.
But it's not unique to one particular.
Demographic of ownership and apartments, and its large portfolios and it's small.
Got it.
Maybe just shifting back to the operations side of things with <unk>.
And a comment on how you know I know, we're still and a locked down and all but kind of how turnover activity post quarter has trended.
There is no sort of I wouldn't call a trend of any sort.
You've got a combination of.
People that were going to move and moved.
And it's not a great time to be moving in or out during a.
A wave of the pandemic.
So I expect the trend will emerge as the <unk>.
Third wave completes I do think there's a lot of.
Pent up activity, but if theres more inbound activity at this point and outbound activity people that we're going to move.
Had the ability to give either 30 or 60 day notice, depending what province urine and.
And they've made those decisions and so it's really.
It'll be a rapid return to <unk>.
Market rents and and vacancy shore up.
Alright.
And I guess just from that with respect to market rents. What are you hearing now and terminals are kind of your opportunity there and mark to market.
And and perfect Submarkets right now.
We're seeing a mild.
Increase because we're essentially.
At this point.
Comfortable with building a little more vacancy because we do see this third wave subsiding.
I would not call a trend on that quite yet, but it's getting pretty close.
But I can assure you that as this pandemic eases case count wise.
And again, you will see a very rapid return to mark to market rents I.
I think I've said pre pandemic levels and the reason being is the population has grown and Canada and the supply has not.
So like where is everybody.
Theres one cohort that's at home.
The under Thirty's and you could talk to pretty much anybody you know, that's 50 year old and up and they've got kids at home for the most part so it.
It's not students.
It's just that cohort of age.
And they are not planning to stay at home with mom and dad for the next 20 years. They are ready to go and that there is enough.
Is that that's the belief that we hold.
Alright.
Okay now that's helpful. But maybe just one last one from me on a per picture of high level question and recycling.
And that makes your line is now.
Yeah, so free.
Sure.
But you know kind of you're on with.
Back to the overall industry on the regulatory front with respect to.
Now and it's all good so special and perhaps.
And all the players.
What are you guys thinking in terms of the potential for <unk>.
And and extension and some of the rent increases and caps and preferring to 'twenty two or is it too still too early to tell at this point.
I think it's too early to tell and things could have a lot to do with unemployment is going to have a lot to do with.
Pressures on.
And how the economy is doing in general.
And.
And it's going to have a lot to do with affordability I guess going forward you know.
And <unk>.
The strongest attribute of our portfolios that the affordability proposition has actually gotten stronger during the pandemic for cap rate like the cost of homes and we all know has just skyrocketed.
So the alternative housing sources quality rental we think is and the mid tier and the perfect place to be.
And the fundamentals are going to be incredibly strong how governments react to that is it's different by province.
But I can't provide any sort of meaningful insights on that right.
Okay, No that's still.
Helpful. That's it.
For me and I'll turn it back thanks.
And.
Your next question will come from Merial Zurich from.
Yeah.
Please go ahead.
Hey, good morning, guys good morning.
And then.
First question and I'm, just coming back to your acquisition pipeline.
And.
Last quarter, and Mark you kind of highlighted.
Enthusiasm over 200 basis points.
Cap rate spreads historically, they've been in the 80 to 120, let's say.
Within the market.
Some of the cap rates that you highlighted and the GTA, Montreal, and Vancouver, and a stabilized three Montreal Vancouver.
Vancouver, two three years or so Scott.
Scott talked about the tenure and being a 2.6 in terms of financing cost.
How do you how do you make that work and.
And then we go from different markets.
And it really makes those spreads work so you're.
And the the edge of the double edge sword. So.
During the pandemic, we saw rates fall tremendously and so and portfolios come available and those spreads were there and.
This financing costs have increased.
Reds are our tightened.
Where does that leave cap rate it leaves us and one of two places.
And if cap rate cap rates continue to compress.
Interest rates the way they are.
We will not be successful and growing.
But what we will be phenomenally successful and is NAV appreciation.
Because as we lose and the market reveals higher valuations per apartment buildings, our portfolio only grows in value and I.
I would suggest it would be significant.
So if we're not able to buy it just means and the enthusiasm for apartments is.
<unk> smart.
So the second thing that we.
We look at it.
But just to spread the growth prospects.
Income and particular asset so.
Always use that example.
The 150 basis points with 5% growth.
That kind of use that number is 200 basis points with 3% growth, it's kind of the same proposition and if it's 120 basis points with 9% growth. It's the same proposition. So it's all moving around that kind of idea.
And in markets that you can call it stable and growing and that's where it becomes a little more complicated, but knowing the math on spread it's quite easy when you buy it and knowing the growth or expertise comes into play.
Well I do think it's tightened Mario but I think the growth potential has increased and at a very minimum the prospects of value creation for the cap REIT asset bases has never looked better.
And and your opinion and is there enough potential.
And supply coming onto the market I'm talking about properties as opposed to construction and such.
Such that our top rates could start to reverse a little bit and starts to Carter.
No.
And unfortunately.
The and <unk>.
<unk> from government and has been increased immigration.
And we.
We all welcome not but without meaningful housing policy to accelerate.
The development of rental I think that we're going to find ourselves and this supply constrained environment, we were there before the pandemic.
And the pandemic did not accelerate the development of rental.
Population did not go down.
And we're calling for increased immigration numbers unprecedented never seen before immigration numbers going forward.
So the fundamentals are just incredible.
And where solutions need to be sought is and the acceleration of development for rental and that just isn't happening. Unfortunately at this point and in the markets that need it the most.
Right.
And you mentioned or you highlighted some of your.
Portfolio I force cap rates on one of the slides from the deck, presumably google's or per single property cap rates, whereas some of the cap rate that you are waiting.
On the private market.
And would include portfolio premiums from within those valuations.
The public market isn't subscribing significant.
Premiums from multifamily weeks today and.
And the private market, what's what's your estimation in terms of where portfolio premiums are going for larger transactions.
I think Oh theres lots.
People that would like to build platforms, and Canada and need that and so depending on the size and the portfolio.
I think.
It would range.
Merrell when you get into those portfolios that are kind of plus 500 suites I would say.
15 basis points to maybe a high of 25 basis points.
And again it depends on the players. So you know a lot of.
Buyers of apartments are not following the cap rate 35, 35 per cent leverage model. They are leveraging much higher and using shorter money where returns are far more interesting. So.
Hard for me to call.
Because people organize their capital differently and and.
Leever with different appetite so.
But I think that it's fair to say.
You know anywhere between 500 suites, and 5000 and suites UC portfolio premium.
You start going over that number you kind of you know.
Shrink the pool of those that can actually.
Cough up and kind of money that's required and so I think those premiums fall off at the over 5000 and sweet portfolio range.
It's hard to say, there's not too much evident really and the marketplace and just speculating.
Okay.
And my last question just comes back to them and.
And this quarter you admit it.
And kind of the mark to market discussion.
And kind of studying the pandemic.
The uncertainty from the last quarter, and the accumulators and about 20% or so.
And as the omission just simply because of the magnitude of third wave or is it an indication that.
Perhaps the mark to market was I'm certain last couple of quarters, and and it's correct and I think I've ever been.
Changed this.
This core.
And I was just and I'll, let I'll, let Scott try and being here, but at the end of the day, Mario and we started feeling a little bit and various cleaning that are mark to market was 20% and producing single digits. So we got the pandemic effect going on and so I think it's very difficult to say what market rent is when were evidenced as otherwise. So at this point, we felt it was misleading.
And one thing and produce and other when people ask me, what's your mark to market I'll say look at our last quarter of turnover increases and that's our mark to market and that's what we're actually achieving.
It's about what would you add to that and yet no I think that I think that bang on I mean, it's really we just felt like.
There is not enough market evidenced today to have as much confidence and that number I mean, we build that number up.
And our property level and a unit level.
And we involve marketing and.
And we felt comfortable with that number.
And in previous quarters that just given the environment Theres just not a lot to say when that will change when markets and come back and.
And so we didn't want it to be misleading.
We know we know that there's always a disconnect between what we're what we're getting on turnover like it'd be luck pre pandemic, we're getting and 13% to 15% where St and market rents at 'twenty, that's because a lot of the same units turnover.
And so the increases aren't as much and a lot of the older leases have bigger mark to market. So you know we're confident with the data before we just the uncertainty of the current environment and feel that it.
And it didn't feel appropriate to include that guidance right now.
Okay that makes sense.
Thanks for the color though.
Thanks.
And your next question will come from Mike Makinen and your line is open.
Good morning, everybody.
Alright, Mike good morning.
Just on that.
Maybe another way to ask.
<unk> question have you guys calculate and what your spreads within the last couple of quarters. If you exclude those tenants most impacted.
Yeah.
Scott do you have that.
Sorry, anything like Mark to market like the rent to lift or sales just because we're talking about the pandemic and and find the very specifics.
Just wondering.
And the last couple of.
And so would be materially different if you ex those up.
The average.
I can't say, we've done that math, yeah, I don't know Mark if you have and Matt, but I haven't done that math and forget it's a good idea.
And.
Sure.
Mike is that those properties will return to pre pandemic levels and the rest of the portfolio will return to pre pandemic levels.
The reality is that 80% of our portfolio.
Is is just moving along fine.
I just think.
It's related to the pandemic, there's nowhere and Canada, where you haven't had some degree of slowdown in traffic and interest and nowhere and Canada Yeah.
Haven't had the under Thirty's going home.
So.
Not to simplify but I think we would just go back to.
Using Q1 and 2020th a decent benchmark.
And if not and growing from there.
Okay.
I think on.
Talking about the active deal market Mark a couple of months ago. Thank you would've said and that's perfect.
Misquoting, you, but on any given day and tip.
<unk> underwriting to under $259 of acquisitions and I think in late March.
And $1 billion.
Thank you.
And if there is a pretty substantial.
And so what would what would that stat or comparative from today.
Yes.
And it would see.
Going by memory based and.
Deals that we are underwriting so.
Deals that we're currently underwriting and the marketplace I would call it a quantum of.
$600 million.
And if opportunity that's out there.
And like I said I in the core markets.
My enthusiasm around being successful is probably low.
But this brings me back to the valuation increase the cap REIT portfolio.
So all that we know is that as we lose more deal the value of the portfolio continues to surge.
Sure.
Okay and.
Last one from me.
I don't want to be accused of tripping over the Permian and not paying attention and the dollars in terms of occupancy and rents for our potential in 2023 and what your G&A.
700000 was up materially from sort of year over year and.
And to where you were running and your guidance for this being a reasonable run rate and the rest of this year.
And just help us understand your inflation.
And the reduction in travel and all that stuff.
Yeah.
Yeah, I think you know.
If we look at 2019, and our topline G&A and you know not net of the asset management fees that we have was about $46 million and and last year. It was down to 43, So I think mark and I tried to our best to communicate net that was completely unrealistic to maintain going long term those kind of savings were.
Associated with not hiring people and when.
And people left obviously a lot of the costs that you're talking about so.
We're trying to say.
We hope things will get back to normal and.
If they do and will probably be in that $54 million range. The reality is where that's kind of our budget and where.
We're well short of our budget is and as it.
Positive right now.
So that's probably on the high side and and and it assumes a return to somewhat normal.
Costs, but there are the acquisition costs and severance costs and from some new hires.
And there's also some costs associated with the IRS management contract and kind of ask I'm trying to work through that.
So and that guidance I would say is looking to be on the high side, but definitely.
We take 2019, and then add some and some inflationary plus and growth cost to that that's probably a better guidance.
Okay, Okay Gotcha and.
And it wouldn't be any.
And from classes.
Okay.
Sure.
Yeah.
No not not not really I mean, the only thing like some of our departments debt you know get capitalized to projects when we're doing big <unk> projects and stuff, that's not happening because there's not.
And a significant number of large projects happening right now, but nothing really between NOI.
And at all so the only other the only other areas to keep an eye out for and we added new disclosure on the G&A.
G&A, but we also just around and see May see premium write off for this year. It will be another big year, because we're not we're looking to be over $1 billion and financings this year and probably even closer to $1 2 billion and which is incredible from an interest rate point of view it'll be.
50 per cent of our mortgages, but that's going to come up with some some old premium write off so we've added some disclosure. They all just make sure you turn your attention to that as well.
Thanks for pointing out average can you remind me and would you typically exclude that from here and.
Termination or no.
No not not not in the current year when we did a.
We kind of day to clean up last year.
We excluded.
And included a lot of prepayment of mortgages as well because we did.
Extremely aggressive on our <unk>.
Down and mortgages to be able to lever up and get to that one 4 billion weighted last year or so.
So those were added back just because they were so large last year, but there'll be included and that's that's all this year.
Got it okay. Thanks, so much.
No problem.
Your next question comes from Matt <unk> from National Bank Financial Your line is open hi, guys and good morning.
Just a follow up on that last point the yield curve is a clearly steepened, but judging from your committed or completed mortgages.
And Youre still going with 10 year financing just wondering you do have I guess a bit of room, and 2026, and 27% to maybe do a bit shorter term mortgage refinancing and.
What are your thoughts in terms of term on mortgages at this point.
Yes, we definitely like I would say and the last five years, we almost debt.
Solely tenure, we even did some 12 and 15.
Mark and I have discussed moving to some shorter term we think.
Rates aren't going.
And you are crazy anytime soon and our portfolio by doing so much last year and a 10 year, we've given ourselves and states and those short term. So we'll do some threes fours and fives and fives.
And tens of primary just because a lot of C and we do work with a lot of the MBS lenders, which their pricing and usually also five and 10.
The majority of five and 10, I'd say, probably at least 30 per cent of our portfolio the five five year or shorter.
Uh huh.
And to that.
But we've never really.
And then leverage focused so 10 year always made a lot of sense.
However, I think.
What we are coming to realize.
Is it and the value add.
Acquisitions, you're better off with five year money simply adds so much value over that five years that theres more equity to tap into in the shorter term.
Whereas if you buy a value add property and you walk the financing and long term you have to second mortgage to get at that created <unk>.
Equity.
So.
Use of our offshore portfolio. Most recent acquisition is a great example, we feel that there'll be significant value add opportunities and that portfolio.
And therefore, you're better off with short or financing to tap into as much low cost equity as possible.
Yeah, no that absolutely makes sense and that from an underwriting standpoint, though you still would use 10 year financing is kind of governance from L. A and cap rates.
And we use cap REIT leverage and we use 10 year money than what we do.
Beyond that is it.
And is really a management decision, but for the discipline of modeling.
Model Calgary portfolio leverage and we modeled 10 year money.
And just quickly you and you noted the stabilized cap rates I know that's a bit of a.
And you may have guessed, but is that just stabilization of on occupancy I assume youre not stabilizing rents to market at this point for.
For those calix how are you.
So it's sort of stabilized cap rates.
Quote and stabilized cap rates are even on transaction activity not necessarily in terms of your area for us values.
Yes, I mean, the way the way we look at I mean, if we were looking at somewhere and disclosure obviously stabilizes.
And how that property and when the two years and you can see the relative cap rate compression.
As far as how we stabilize our income.
And <unk>.
That's a different discussion, but I'm not sure if I'm answering your question and honest.
It was more related to the acquisitions or sorry, the market and transactions that Mark and I had noted three three caps like.
For those.
Right right.
Yeah Yeah.
The word stabilized probably doesn't belong there the reality is that cap rates going in.
Depending on what income and your modeling some people use broker income some use their own everybody uses their own.
So.
Those going in cap rate. So it was just trying to give an indication of what we're seeing and the marketplace.
But they do they do range and that kind of three three cap.
Free cash.
Range right now share so that makes sense and last one from me.
And you disclosed.
Renewal percentage I think it was.
Sub 10%.
But you didn't see any increase in and vacancy so two people signing longer than 12 months leases at this point or was it a.
Pandemic related.
Issue in terms of the lower renewal percentage now its strictly the increase moratorium.
And in Ontario, and BC, and a cap and Nova Scotia at 2%.
And that's that's what's going and there's no people are not finding we're not offering longer leases and incentive.
Which hold rents were no change there.
Perfect. Thanks, guys.
<unk>.
Okay.
This spring to Sydney, and and our Q&A session for today and I'll turn the call back over to Mr. Kenny for closing remarks.
Well first of all thank you everybody for your time and your attention today and if you have any further questions. Please don't hesitate to contact us at any time.
Thanks, again and have a great day.
Thank you everyone and this will conclude today's conference call you may now disconnect.
Yes.
Right.
And.
Okay.
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Sure.
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