Q1 2021 Minto Apartment Real Estate Investment Trust Earnings Call
[music].
Good morning, My name is Sylvie and I will be your conference operator today at this time I would like to welcome everyone to the Minto apartment REIT first quarter 2021 results conference call no debt all participant lines have been placed on mute to prevent any background noise.
The speaker's remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad and if you would like to withdraw your question. Please press star followed by two before.
Before we begin I want to remind listeners that certain statements about future events made on this conference call are forward looking in nature and as such information is subject to risks uncertainties and assumptions that could cause actual results to differ materially. Please.
Please refer to the cautionary statements on forward looking information in the REIT news will be leased and M. D. N. A dated may six 2029 at 21, sorry for more information.
During the call management will also reference certain non ifr as financial measures. Although the REIT believes these measures provide useful supplemental information about its financial performance. They are not recognized measures and do not have standardized meanings under ifr S.
Please see the REIT MD&A for additional information regarding non ifr S financial measures, including reconciliations to the nearest ifr's measures. Thank you. Mr. Waters, you may begin.
Great. Thank you Sylvia and good morning, everyone on Michael Waters', Chief Executive Officer of Minto apartment, REIT and I'm joined this morning by my colleagues, Julie <unk>, our Chief Financial Officer.
I'll begin the call by discussing highlights from the first quarter, Julie will review, our financial and operating results in more detail and then I'll discuss our business outlook. After that we'll be pleased to answer any of your questions.
On our last conference call in March I discussed how the pandemic is impacting demand for urban rental housing in the short term.
On a period of extended Lockdowns and with shops restaurants museums and libraries are closed to visitors.
And work and education are mostly being conducted remotely the benefits of urban living are temporarily on hold and.
And that will change soon we're starting to see COVID-19, vaccines and vaccination. So a ramp up rapidly across Canada as cases come down and the economy gradually returns to normal during the second half of 2021, we're confident that demand for urban apartments will rebound but.
But in the short term the challenging and unusual market conditions are impacting our financial performance. We saw in the fourth quarter of 2020 and as foreshadowed during our March earnings call again in the first quarter of 2021 with demand lower than normal we have made the decision to hold firm on asking rental rates in order to protect long term.
Average monthly rent NOI growth potential and growth in net asset value. We believe this strategy is important to maximizing the REIT long term <unk> on NAV.
Over on the short run, it's resulting in lower than normal occupancy and NOI average occupancy over the reporting period declined to 91, 1% in the first quarter compared to 96, 6% in Q1 of last year, but.
But the strategy is showing some results I am pleased to say that we generated generated a gain to lease of seven 6% in the first quarter, while completing an unusually large volume of leasing that was significantly stronger than the 2.1% gain to lease we recorded in the fourth quarter of 2020, we also generated gains.
On sweet turnover in all of our markets, including Alberta, where we've not achieved gain to lease since 2019 average monthly rent reached a new high of $630 at the end of March compared to $50 $199 a year ago.
<unk> declined in the quarter as expected, reflecting the lower average occupancy how REIT note that more than half of the decline is attributable to just three properties located in core urban centers.
It contained the majority of our furnished suites 185 line winter Yorkville and $1 50 row Hampton.
Furnish suite demand continues to be impacted by Lockdowns and stay at home orders, but as Julie will discuss shortly we're adjusting our pricing and furnished suite inventory to adapt to current market conditions.
Meanwhile, we continue to execute on our other organic growth initiatives. During the first quarter. We completed the repositioning of 46 weeks, improving asset quality, reducing future repair costs driving strong.
Growth in rental revenue. We also continued to advance our development of intensification projects that are expected to materially grow our suite count.
Importantly, we did all this while maintaining a very strong balance sheet. We ended the first quarter with total liquidity of approximately $159 million.
Representing a liquidity liquidity ratio of 19%, we're well positioned to pursue further growth opportunities, while maintaining financial flexibility throughout this period of economic uncertainty.
Finally, I want to mention an exciting transaction, we just announced last week, we agreed to advance on investment loan of up to $51 $4 million to a subsidiary at Minto properties for the development of our mixed use <unk>.
Multi residential property on Beechwood Avenue in Ottawa with an expected 229 rental sweep the terms of the loan make it accretive to <unk> during the development period, and we have the option to purchase the property at a 5% discount to appraise value upon stabilization.
Transactions attractive and highlight the ongoing benefits of our strategic alliance with the Minto group.
My key message today is that we're in a very strong competitive position, we're responding effectively and appropriately to the short term challenges brought on by the pandemic.
Generating solid gains to leaf capitalizing on growth opportunities and maintaining a strong balance sheet and our portfolio is well positioned for growth in occupancy and rental rate as the pandemic subsides on.
I'll now invite Julie to discuss our first quarter financial and operating performance in greater detail Julie.
Thank you Michael turning to slide four I'll start with an overview of the operating results note that we do not have the same.
Separate same property results to report this quarter as we owned all of our properties throughout the comparable periods in 2020 in 2021. So all of these Q1 results are for the total portfolio.
We reported revenue excluding furnished suites of $28 $5 million in Q1, 2021 compared to $29 $4 million last year, a decline of three 3%.
The decline was mainly due to lower occupancy as Michael mentioned, partially offset by higher rents.
<unk> revenue, including furnished suites was $30 million in the quarter a decline of four eight per cent from $31 $5 million in Q1 2020.
This reflected lower occupancy and rents for furnished suites. In addition to the factors I just mentioned.
NOI, excluding furnished suites with $17 3 million or 68% of revenue in the first quarter a decline of six 1% from $18 $4 million or 62 six per cent of revenue in Q1 2022.
Total NOI, including furnished suites declined eight 2% year over year to $17 9 million or 59, 6% of revenue from $19 5 million or 61 eight per cent of revenue in Q1 last year.
Lower NOI in Q1, 2021 reflected the reduction in revenue as well as higher property taxes.
<unk> was $10 $9 million in Q1, 2021 compared to $12 1 million in Q1 last year a decline of 10, 1%. This mainly reflected the negative NOI experienced in higher G&A.
<unk> declined 11, 7% year over year to $9 3 million from $10 6 million in Q1 2020.
This result reflected the lower <unk> adjusted for the on monetization of Mark to market adjustments.
<unk> per unit was $15 eight compared to $17 nine in Q1, a year ago.
We declared cash distributions in the first quarter $11 38 per unit, resulting in an <unk> payout ratio of 72%.
Cash distributions were <unk> 11 per unit in Q1 last year, resulting in an <unk> payout ratio of 61, 5%.
As a reminder, and for comparative purposes, we increased our cash distributions by three 4% during 2020.
The increase took effect beginning in August with the August distribution.
As at March 31, 2020.
2021, our portfolio consisted of 7277 suites with an average monthly rent of $1630 per occupied unfinished suite.
Average monthly rent increased by $31 or one 9% compared to $1599 at the end of Q1 last year the average.
Occupancy over the reporting period in Q1, 2021 was 91, 1% compared to 96, 6% in Q1 2020.
On slide five we have provided our updated revenue analysis, we breakdown gain to lease activity for Q1 2021 in the Upper chart and our estimate of the gain to lease potential of the portfolio in the lower one.
Beginning with the Upper chart leasing activity was very high for the second quarter in a row and we signed 470 new leases in the first quarter.
Typically we see stronger leasing during the warmer weather in the second and third quarters and slower activity in the first and fourth quarters.
However, the impact of COVID-19 has disrupted typical turnover pattern.
Our leasing team performed extremely well by completing a high volume of leases, while generating a solid realized gain on new leases.
The average rent on new leases increased by seven 6% from $1618 to $1741. We were pleased to realize two.
Two realized gains in all of our markets, we had double digit rent growth in Ottawa, and Montreal, and we generated positive games lease in Alberta for the first time since 2019.
As we previously stated the Alberta rental market has been very challenging due to the combination of the pandemic and its struggling energy sector. We were pleased to see some recovery during Q1.
The lower chart shows the gain to lease potential that we estimate in our portfolio as at March 31, 2021, we believe we can generate approximately $8 $7 million of annualized incremental revenue growth by bringing rents from 6511 suites to market levels.
While the embedded potential revenue opportunity was down from $14 7 million as at March 31 of last year. It increased from $8 million at the end of 2020, we expect the total gains lease potential will increase from the second half of 2021 as the Canadian economy emerges from the pandemic and market rents gain.
We also expect to realize a significant portion of this potential over the next three to five years.
Turning to slide six the upper chart highlights our long term leasing gains and growth in average monthly rent you can see that quarterly gain to lease has been lower since the second quarter of 2020, which reflects the negative impact of COVID-19.
The trend of realizing gain to lease each quarter has remained highly positive and average monthly rent has continued to reach new highs every quarter as we have held firm on rental rates the rate growth has slowed since the start of dependent.
Turning to slide seven I'd like to provide an update on our furnished suites, we are continuing to reduce our inventory of furnished suites and lease the Swedes owed on an unfinished basis.
During the first quarter, we reduced our finished suite count by 16 suites, we will continuing to adjusted to meet demand and changing market conditions.
On the lower chart, you can see average rent and occupancy for a furnished suites over time. The first quarter is generally a slower quarter for furnished suites in occupancy in Q1, 2021 was 62, 5% down from 64, 2% in Q1 2020.
Average monthly rent was $3540 per suite, reflecting the decline in demand from corporate users due to tightened COVID-19 restrictions.
As a result, we have increased our mix of government and other short term users. We believe the furnished suite performance will recover as COVID-19 restrictions are lifted and normal economic activity in Brazil.
Moving to slide eight we have provided a summary of our repositioning activities. We renovated a total of 46 suites in Q1, 2021 or 34 at the REIT proportionate ownership share.
The average cost per renovation was approximately $52000 per suite C.
Average annual rental increase following repositioning was $4531 per suite generating an average annual unlevered return of eight 7%, which is in line with our targets for repositioning.
In total we have over 2400 remaining suites to reposition.
That includes 148 suites at the Roehampton property, where we identified an opportunity to accelerate repositioning by converting furnished suites to unfinished and leasing them out on that basis.
Overall, we expect to reposition approximately 250 to 300 suites in 2021 or 200 to 250 other REIT proportionate share. This is in line with the guidance we provided last quarter.
Turning to slide nine I would now like to review our investment financing from the property development on Beechwood Avenue in Ottawa that we announced last week and talk a little bit more about the proposed building as Michael noted we agreed to advance an investment loan of up to $51 4 million to subsidiary.
<unk> properties to fund development of this mixed use building.
The loan includes $43 $7 million of direct advances and a $7 7 million interest reserve.
The development is expected to comprise 229 rental sweep over nine stories and approximately 6000 square feet of retail at grade subject to final zoning approval.
The rendering images demonstrate that this will be a very attractive rental property.
On April 29th we provided an initial advance of $9 $1 million under the credit facility. The remainder will be advanced as construction progresses.
We expect construction to begin in early 2022 with stabilization in late 2024.
The financing we are providing bears interest at 6%, which will accrue and be payable in full upon maturity. In December 2025, we will have an option to purchase this property at a 5% discount to its appraised value upon stabilization.
Okay.
On slide 10, we have provided an overview of the location. The property is located in the highly attractive new Edinburg neighborhood. It is within close walking distance of the Rideau River and numerous shops perks and amenities.
The location is well served by transit and is located only three kilometers from Parliament Hill, and Ottawa Central business District.
Turning to slide 11, I'd like to review, our other intensification and development initiatives construction of the fifth on Bank redevelopment project in auto is cleaved neighborhood remains on schedule with project completion expected in early 2022.
Form work is complete and as you can see on the lower photo on the left work is moving ahead on the building envelope.
At long sales square on North Vancouver, we expect construction to begin in the current quarter with regards to intensification. We are working towards final development approvals for new construction at rich growth and Leslie York Mills, while rezoning is in process for two new proposed towers at high Park village.
We expect construction at risk growth and lets see arc mills to begin in the third quarter of this year with high Park village following in 2023.
Overall these projects could add more than 500 suites to the REIT portfolio.
For more information on the anticipated timing of these projects. Please view our Q1 MD&A.
Finally, I'd like to review our debt financing and liquidity on slide 12, we continue to have a conservative leverage ratio on a highly balanced maturity schedule as of March 31, 2021, the weighted average term to maturity on our fixed rate debt was $5 67 years with a weighted average interest rate of two 9%.
Approximately 95% of our debt is fixed rate and 76% is image the insured.
Our total liquidity was $158 9 million at quarter end and debt to gross book value was 38, 7% on.
Now I'll turn it back over to Michael.
Thanks Julie.
I'd like to conclude with our business outlook on slide 13 the.
The first two points on this slide are extremely important.
Historically high quality multi residential housing and desirable urban areas has generated superior risk adjusted returns.
This has been driven by strong underlying fundamentals, including population growth in elastic supply and the high cost of homeownership. The COVID-19 pandemic has impacted demand in the short term, but the long term demand picture has not changed we fully expect our portfolio will outperform in the years ahead.
We're still in during the economic impact of the pandemic now, but better times arent far away. The pace of vaccinations are expected to continue to gain momentum in the weeks ahead and life will start to get back to normal before long, we expect that border restrictions will be loosened population growth will resume at more typical levels and increased immigration or more permanent.
Vince will enter Canada driving demand for rental housing based on the federal government's targets as well as natural growth. We expect net population growth of more than half a million people per year for the next three years.
Meanwhile, we expect that workers will begin to return to their office, albeit possibly on a part time basis. Initially and students will begin to return to campuses per in purpose learning this fall restaurants, and retail stores will welcome customers inside again and in short the many appeals of urban living will reassert themselves, we're confident that many people.
Who temporarily left downtown neighborhoods during the pandemic will be keen to move back and then there is the issue of affordability, Canada had a very significant affordability gap between renting and owning.
Prior to the pandemic that GAAP got much much wider in most cities over the past year as housing prices have soared higher renting is now an increasingly attractive option for millions of Canadians, we expect the recovery in rental market demand to build steadily throughout the year as the vaccine rollout proceeds and restrictions are loosened as it does.
Are well positioned to generate growth in rents and occupancies.
We're confident that Minto apartment REIT has the right assets and strategy for long term success, we're actively capitalizing on organic growth through gain to lease we're creating value from suite repositioning, we're maintaining a strong liquidity position, enabling us to explore attractive external growth opportunities and we continue to capitalize on our relationship with them.
<unk> group, most recently with the exciting Beechwood Avenue development opportunity in Ottawa.
As we execute on our strategy, we expect to deliver further value for unit holders through growth in NOI NAV and cash distributions.
That concludes our formal presentation. This morning, Julien I would now be pleased to answer any questions you may have.
So think leaves open the line for questions.
Ladies and gentlemen, if you do have any questions. At this time. Please press star followed by one on your Touchtone phone you will then hear a three tone prompt acknowledging your request and should you decide to withdraw. Your question you will need to press star followed by two and if you're using a speaker phone. We do ask that you. Please lift the handset before pressing.
Any keys. Please go ahead and Bristow on now if you do have any questions and.
And your first question will be from Jonathan culture at TD Securities. Please go ahead.
Thanks, Good morning.
Jonathan.
First question just the.
I guess you had a strong.
Leasing quarter in Q1.
It looks like it was more back in back end.
Weighted.
Did that include the.
Three urban property sort of cause so much either.
Same property NOI issues.
Yeah, It did Jonathan and Youre right the trend through the quarter strengthened February was stronger than January March was stronger than February and.
And so we did see.
Decent leases our leasing activity in our Toronto assets High Park 61 Yorkville.
They all.
Shared in that strong leasing activity.
Okay, and then I guess assuming.
The vaccine Rollouts continue and we'd get back to a more.
Hopefully normal environment.
The fall.
How long do you think it'll take you to get your occupancy back to true that 90, 590 697 per cent page.
So.
So let's go back I mean, this quarter was the first quarter Q1, where leases outstripped move outs for the first time that has happened since.
Q1 of last year.
And so.
Which was pre pre pandemic. So subsequent to the the declaration of the pandemic in March of 2020, we saw.
Basically three quarters, where we had move outs.
Lastly out strip.
Leases and so while we.
Q1, certainly was.
Favorable in that leases were stronger than move outs for the first time in that in that one year GAAP, but we got to basically make up for that vacancy loss and leases.
Don't generate revenue until they actually move in and so the strong leasing that we had in March will not materialize in our revenues until till Q2, but even with that Jonathan we're going to need several quarters.
Two of strong leasing to continue to build occupancy we expect occupancy to continue to build through the year, but.
I'll, just reiterate and I know you know this.
We are not in.
Our philosophy is not about filling the buildings.
It is not an occupancy driven yield management strategy. Our strategy is all about NAV growth and for US what that means is really protecting rate and gain to lease and so that will mean that we will be judicious in our use of discounts.
And promotions and incentives.
Because we want to build for the long term, we're all about growing NAV for the long term and so the beauty of of multi res of course is there is very short lease negotiation process.
There is no fixed during on part of the tenant we could fill the buildings next quarter. If we wanted.
Quickly by just adjusting range and we would generate fantastic SP NOI.
For that one quarter, but of course, we've got our eyes looking at much longer time horizon. So I would say looking at the.
The balance of 2021, I think we'll start to see that occupancy edged back two awards the mid Ninety's, but.
I suspect that it.
It's really going to be the pace.
Which we can retain sort of 96% will really be dependent in some to some great extent on the pace by which the vaccine rollout proceeds and we begin to see some of those other drivers.
Which are immigration, which we talked about and certainly the data that we saw.
That was released by the government for January and February of this year was very encouraging in that the number of permanent resident arrivals.
This January this February we're quite a bit higher than what we saw on the last nine months of 2020 and really we're at levels that were comparable with.
On a pre pandemic levels in early 2020, so so that's encouraging sign number one.
We are starting we think to see.
Some universities Mcgillen UBC foremost talk about on campus instruction in the fall term, so that will be critical and of course return too.
The workplace for workers, who are working remotely that is the the second factor and we think all of those are driven by.
By the pace at vaccine Rollouts and the loosening of restrictions as case count start to come down so.
It's a long way of basically answering the trend line is up on occupancy when we look at our April leasing results. They were very encouraging with continuing the trends that we saw in March but we need to the timing of this is a little bit imprecise, because we were waiting to see how how.
Quickly the vaccine rollout will impact these drivers certainly it seems that the news that we get almost on a daily basis from the federal government and provincial health authorities on vaccine supply vaccine rollout is very good. So it's I would say.
We are really thinking 2022, before we start to see numbers that bring us back to kind of pre pandemic levels.
And doing it on our terms that is to say.
Preserving rate driving NAV, we could do it.
Much sooner if we were prepared to mortgage our future.
Okay. That's.
That's very helpful. Thanks.
Ill turn it back thanks, Jonathan.
Next question will be from Mike Mark Yudof Theres All day. Please go ahead.
Thanks, Good morning.
Wanted to move out.
Operator, I think we've lost Mike.
I'm here with anyone can you hear me yes.
Yes, sorry.
The second part of your question sorry, we heard okay no problem no problem.
Okay, so back to the Moon.
Moving just you mentioned that the pace of move interest remained strong leasing activity actually so far in Q2, which was positive.
What about the move outs is that remained above.
What would be typical per a second quarter or is it pretty normalized at this juncture.
Well so the first quarter certainly remain quite high if you think about 2019, we would've been low three hundreds kind of move outs.
And Q1 of 2021, we were kind of low four hundreds so so.
It remains elevated we saw that in Q4 of last year, we saw a very elevated move outs after.
Q2, Q3, where turnover was muted so.
I think the pattern that we saw in Q4 continued into Q1 from a move out perspective.
Like <unk>.
Q4, we saw strong leasing in fact leasing debt was even stronger in Q1 than what we saw on Q4 and that was really the difference when that that the lines between leases new leases and move outs crossed for the first time in 2000 in Q1. The first time since we've seen net since Q1 of 2020.
Okay and then just.
So far the early indication I guess for April has been move outs slowed down or have they remained above average I guess, just due to that pent up the Clos.
So what we saw in terms of.
Move out activity was with.
It was roughly consistent with what we've seen the same month of the year before so April of 2020.
Now this was immediately after the outbreak of the pandemic and in fact, we didn't see huge numbers of move out in April of 2020, and what we're what we saw on April of 'twenty, one was actually very consistent with that Mike. So so that is to say.
It seems like move outs have come down and so in.
Interpreting through the data and I don't want to overreach, because one months as it is.
Is encouraging but it's.
I think we need to see more data before we can confirm a trend but it is possible that we saw the bottom and are on furnished.
Move outs and leasing trend in February.
And obviously look to see see that trend continue through the rest of Q2, but the impact of the stay at home order.
It really needs to be understood as well and I think we are right now in Ontario, where the bulk of our portfolio is that going to run to end of our last last week of May may 20th I believe so I think we're all waiting to see if that is extended another couple of weeks or how that will play out, but but certainly.
The early signs are very encouraging.
Okay.
No I think if we just look at Toronto and Ottawa. Your estimates of market rent has come down by five 7% in those two markets pre pandemic.
Did you expect.
We will continue to build or the markets will continue to build higher.
Gradually as you bring on more occupancy is there something that might just be a day.
Yes.
Until you get occupancy back up to that stabilized level.
So we moved up our estimates from the end of last quarter. So there is certainly an element of seasonality.
In that and there is an element as well Mike just of.
What is in our.
Inventory.
What's been leased so we have to we look at it on a suite by suite building by building basis, but our expectation is we'll continue to see.
Growth in <unk>.
The estimate of average monthly rent so that margin.
Of of potential percentage gain to lease we would expect to see it it widened a little bit further.
Okay.
And last one.
Technical thing on on the.
Your spreads that you realized during the quarter when it shows the new rent versus expiring on them on a suite by suite.
For the the new leases versus the move.
And therefore, it could be impacted by different.
Yes.
Here with move it's been true.
Your question got a little garbled, but I think what you're asking is are the gains to lease that we reported realized in Q1 was that calculated on a suite by suite basis from the answer is yes.
We look at every single suite and compare the expiring rent to the new rent and Thats, how we calculate that gain to lease and Thats why there is a little bit of volatility in those numbers quarter to quarter simply because.
You're really measuring on the new leases and so it's very much dependent on.
<unk> suite.
<unk> was at the one in the southwest corner on the third floor or was it the same one bedroom one floor below and what was the rent that was expiring.
So there is so it's done on a suite by suite basis.
But that seven 6% is <unk>.
Obviously, the weighted average debt.
Debt, we realized in the quarter.
Right right Okay.
That's it from me thanks very much flow.
Thanks, Mike.
Thank you next question will be from Brad <unk> at Raymond James. Please go ahead.
Hi, good morning.
Net.
I guess just from the first suite.
Portfolio.
Curious to get your thoughts on on what you would guide towards in terms of seasonality.
That business and then.
In relation to the commentary for the.
On a recovery on the <unk> suites portfolio, how would that compare to what your expectations would be from a recovery on the first REIT side.
So I mean furnished suites and on furnished react very differently and what we saw after the outbreak of the pandemic.
Does that the furnished suites adjusted.
Very much more quickly one there theyre shorter tendencies theyre short stays as short as 30 days, but obviously trending.
Several months longer than that so what we saw was as the border closures impacted as business travel halted the furnish suite.
Business really bottomed very quickly we saw that hit that bottom in June of 2020, and then what we saw in Q to.
Q3, and Q4 is sort of a strengthening both in occupancy and rate.
As that as that market sort of settled into that kind of new equilibrium, which was.
Much lower.
Corporate business mix and a much higher mix of government transient so we expect that debt.
The furnished suite business is.
Much more highly sensitive to changes in demand and will it will both adjusted are correct.
First and it will.
Recover more quickly.
As we see business travel in particular, which is the least price sensitive segment in that in that furnished sweet mix.
On furnished in contrast is much much slower to adjust and so after the declaration of the pandemic in March.
We didn't see our occupancy really adjust.
Through Q2, and Q3 in any meaningful way it wasn't until Q4 that we saw that really unseasonably high flood of move outs.
Where we began to see material.
Degradation in net occupancy now, obviously offsetting that with leasing.
Q1 was was was with a little more muted in terms of move outs is still unseasonably high.
And as we talked about.
One of it with Jonathan's question is it will recover but it will just the sheer volume of it and it ended the behavior of.
Of unfinished tenants is such that that recovery will take a little bit more time to gather steam and momentum under our yield management philosophy. So.
It will it's slower to adjust or correct down and it's a little slower to recover but it but it will follow it sort of a similar pattern just not is not is not as quick.
Okay, that's great in terms of the renovation program.
The suites are your renovated so far youre still generating.
Returns on investment at the lower end of the target range.
Do you see that return profile, improving as the market strengthens and could you get back into the mix with the higher.
End of the range or turns if you if youre getting better rent growth.
Yeah for sure I mean that target is 8% to 15 and it is very it's somewhat volatile quarter by quarter based on what suites were repositioned suite sizes and what properties. They are at.
And obviously as the as the rent rental market for renovated suite continues to gather steam I would expect to see some expansion now countering that.
Is.
Pricing pressures that we could see for renovation costs, it's not the same as as new construction.
There is a much lower element of commodities like lumber OSB steel and concrete in your typical renovation.
But you are competing for labor and in some components like millwork.
But but there is a little bit of inflationary.
Larry pressure on the cost side, so, but I would say on balance the.
We would start to see stronger growth.
As that rental market.
Recovers and that will start to see rois climbing as opposed to staying flat.
Great. My last question would be on the.
Acquisition market.
Accounts, there's plenty of product for sale today, I guess, what comment can you make in terms of the opportunities youre seeing from the REIT in terms of what could fit in.
From an investment criteria perspective.
Well I think overall deal flow.
I don't think we've seen it stronger since the REIT had gone public in June of 2000 2018. So.
It is a.
A very high deal flow now of course, it's only a subset of those deals that would sort of fall within our kind of I'll say.
Okay.
Matching criteria.
We continue to see.
Very strong demand I mean, the private market demand for private.
Transactions remains.
Very high.
And we've seen some really large portfolio some of which have been.
We talked about in the press, but others that have not hit the press.
And so we know there is both enhanced deal flow, but also very strong demand I would say that from our perspective.
Areas like the greater Vancouver area. The GTA on Montreal. There is there is certainly lots of deal flow.
Lots of in particular development opportunities.
And with and the we were compared to last May.
It's last made was essentially debt for the year over year comparisons arent, great, but even if you went back to say 2019.
I'd say theres relatively more opportunities substantially more than we saw pre pre COVID-19.
In terms of the REIT, perhaps executing on third party acquisition do you put a higher probability on that at this point.
We will continue to be very cautious as we always have on acquisitions and really thoughtful.
We are at any point in time.
The deal pipeline.
Acquisition opportunities that we're tracking and underwriting.
That would.
Would be.
You know many many opportunities at any given time, we would underwrite.
10 deals and we might bid on three.
Of those three we want to be competitive.
And obviously, we're looking for.
A particular subset of deals we're looking for assets, where there is the potential to deploy value add capital or intensify the site and we are seeing those opportunities.
And those are ones where.
Particularly in core markets, where we have that development skill set.
And we've got existing market knowledge I would say our chances are very solid where we're not going to overpay just to get a deal done we want to make sure that we're doing the right deal. So.
So I'd say our chances are good I.
I think youre trying to say, what's your acquisition target for this year, we don't have a formal target Brad where I don't get bonus on doing deals, we don't get paid on acquisition fee or anything of that nature.
I'm hopeful and optimistic that that will see more deals in the balance of 2021.
But it's hard to say and predict with accuracy because there is just a lot of competition.
<unk>.
Four.
Investment grade.
Multi res right now.
Okay, Great I'll turn it back thanks.
Thanks, Brad.
You next question will be from Matt Logan at RBC capital markets. Please go ahead.
Thank you and good morning.
Net.
When we put them into your fill 185 in Roehampton aside for a minute can you talk about where you're seeing the weakness in the portfolio in Q1 in terms of your move outs and maybe just some color on that aspect of your portfolio.
Well I think that.
Certainly those those urban markets would be very impactful on.
In terms of.
<unk>.
Vacancy loss, but the other ones that we would highlight.
Would be two other properties that do have a.
Meaningful or relatively meaningful student element.
And or would be more impacted by by immigration volumes. So theres, two one and one in Ottawa and it will too in Ottawa at or very close to Algonquin College debt have some element of students.
On to it so those those two would would obviously contribute to it as well.
And if we turn to your leasing spreads for the portfolio can you talk a little bit about the respective markets. It looks like theres, some good strength in Ottawa and Montreal, but.
Still relatively tepid demand in Toronto at Alberta based on spreads in Q1.
Yes, again, I would focus probably more on the potential.
The bottom table on on slide five Matt simply because it's okay. What happens in a quarter from a realized perspective is very much skewed by which suites.
Our re leased and so because that measure is is done on a matched pair basis, so vacating suite.
Expiring rent compared to the.
Net new rent on the exact same suite and so what could skew that would be changes in the length of stay so as length of stay average length of stay in our property drops you would tend to see that that gap narrow I think the better measure of potential is that second table at the bottom which really.
Sort of says as at the end of the quarter for the debt.
Suites that are.
In that portfolio, we would look at it market by market and you can see that we're kind of in Toronto, saying seven eight almost 8% is our guesstimate and we've been pretty good about benchmarking.
Our potential too.
What we achieve and so on.
On aggregate quarter by quarter.
What we relieved a REIT realized seven six in Q1 was debt on what we had estimated the potential to be at the end of 2020. So you can see that we were pretty darn close to net the lines are highly correlated so I think debt I would focus on the second point, which was.
Really that percentage gain to lease which is closer to 8% in Toronto.
And certainly.
Looking looking at these.
For the first time, we're seeing Alberta, we saw positive gain to lease realized and so some some little signs of encouragement there of course, the Edmonton and Calgary tiny tiny proportion of the portfolio. So I don't want to over rotate on that I mean, the focus should be on on the other markets, where the bulk of the portfolio sales.
Good color and maybe just one last one from me in terms of your Beechwood financing.
Give us a little bit of color on the underlying sub market and what youre seeing in terms of vacancy and rent growth potential there.
Yes, so of course.
Buildings delivered after 2018, our November 2018 to be precise in Ontario or are not subject to the rent the rent control regime 2021 excluded of course. So this property we would expect when it is stabilized would have.
More potential for growth than a comparable.
Pre pre 2019 building.
But that market and we've been very choosy about the new purpose built projects that we're doing in terms of location on <unk>.
While overall very strong market, but.
Looking at Submarket to Submarket on.
On that particular location very much like fifth third bank in many ways.
There's very little competition.
And and it.
We have a high degree of sort.
Familiarity, having built a condo almost right across the street.
And in that building, what we're seeing in other buildings nearby very strong rent.
In the secondary rental market and there is very little competition in the purpose built so we look at that and given its size 229 suites is what we expect to achieve through the rezoning. It's a very manageable number much like fifth and bank from a lease up perspective, which gives us a lot more pricing power in a <unk>.
<unk> revenue management sort of approach so I think that.
It's a highly.
On an urban location as Julie pointed out it's just minutes from downtown Parliament Hill the canal.
Many many amenities that that Beechwood strip is is a.
Very.
A very.
Practice sort of some sort of node so we think that.
On this one positions us really well.
And we're super excited about about the potential of this Beechwood project.
Well, thanks, Mike I appreciate the commentary I'll turn the call back.
Thanks, Matt.
A reminder to please press star one if you do have any questions.
And next will be Mccormack from National Bank financial.
Hi, guys.
Matt with regards to move outs the elevated levels would you characterize the people moving out as are the price shoppers moving to homeownership.
Assume we're a bit late for people to be moving in with their parents, but you never know.
Any sense as to what the driver is of those move outs.
Well, we look at the demographic mix of leases to move outs.
And sort of roughly half of the move outs and lease leases are.
What we'd say professionals work from home types.
They are actually fairly balanced which would lead us to think that it's not people moving out to move to the suburbs or buy them I'm certain that happens, but I think what people are doing is theyre moving out staying in the same neighborhood, but theyre, just moving and going to.
Ah competing building, where they are able to get a free months Ranch for example, so that that's our our suspicion I mean.
Obviously housing affordability, even with low interest rates historically low rates, so they popped up a bit since since the lows of 2020, but they are still very low and but housing prices, whether it's retail or new home and most of these markets have just they've scaled new heights I think.
They are probably putting putting on.
Home purchase out of the reach for for many people. So our sense is.
Is it mainly people moving within a sub market just to scoop a deal in a in a competing competing building, where maybe they're getting a free month rent okay.
On that makes sense.
On the lending program in terms of outlay of funds will that I think of the <unk>.
Sorry, I can't remember the number off the top my head, but will it be put out immediately or is it going to be put out overtime.
So it's going to be put out over time.
So we made an advance of about $9 million at the end of April we probably expect another 11 million or so in the rest of 2021 with the balance being advanced in 2022.
Perfect and then on the same token rich growth Q.
Q3, 2021 start how should we think of the dip.
<unk> <unk> capital I mean, you provide the total amount you expect to be spent but its over a number of years is it.
Front end weighted.
Terms of the construction or backend weighted or sort of equal throughout the quarters.
So I would say its probably more back ended and so rich growth. We've got the the first round of permits for the enabling works.
On that site.
Which are basically.
Beginning the process of demolishing some of the the low structures and and.
<unk>.
Building temporary access and parking and other and other works that will start.
Imminently.
So it will gradually ramp up but I would expect that the <unk>.
Really going to be fairly low.
For the balance of.
2021, it really will gather steam when we begin the below grade works.
Late this year early next.
And that what's happening there Matt.
Average growth, we've got a demolish a portion of the existing parking structure and begin to replace that so that's when we'll start to spend money.
In a meaningful way now we do have a financing commitment.
With CMA Z for construction financing so I think the actual equity outlay overall is going to be quite low on that one because.
The terms of that <unk> financing.
It's under their <unk> program are so favorable.
Leslie York Mills is is similar but its probably lagging by a quarter or two same issue.
There are some existing parking.
Structures access and temporary parking some tree removal some of that kind of enabling works that need to happen first before below grade works, which include the demolition of some portion of the existing parking structures and then replacing that can really began and.
<unk>.
We are still working and we're on the final stages of getting the site plan agreement in place with the city of Toronto, but even before that to get the what's called the no notice of approval conditions, which would basically free us up to begin getting those permits rolling and so I'd say, we're probably lagging by a quarter.
<unk> from from rich growth on that one so.
Those would be the two most imminent ones. Okay. That's very helpful.
Last one from me.
Montreal is.
Is the outperformance there at least in terms of the forward looking rent spreads is that due to the demographics of the properties you've acquired in the locations that are in or is that a general sort of.
Citywide performance.
On the Montreal market.
I think we've seen strong performance in Montreal overall, I would say the repositioning program that we're doing remember all three of those assets had significant repositioning potential and what we've seen certainly in Q1 was.
The Haddon Hall, and lift 4300 programs.
Really begin to gather steam so.
I think that not just the en suite, but also some of the investment in some of the common areas and amenities.
And I would say something like rock Hill, where the gym and outdoor spaces that we inherited.
When we acquired the asset.
Significantly below kind of the standard.
For that market and so that work is continuing to progress and I think even while some of those amenities are restricted.
Due to COVID-19 I think that tenants.
Tenants coming in and see those amenities, especially in the outdoor amenities are obviously less restrictions. So I think those I wouldn't want to discount the value of some of those common area and outdoor amenities that some of the investment we're making on that as well. So I would say again remember when we bought rock Hill thousands.
<unk> ish.
Less than 10% had been Repositions on 900 suites, we're there and we're just really getting going on that one and Haddon Hall on La <unk> 4300, both had significant.
Repositioning potential I mean, we had something like.
Kind of 450 suites, two to reposition there and I think there given the demographics for those two buildings I think some of the common area stuff has even bigger bang for the Buck potential and certainly what we're seeing in the early days of those repositioning programs is very encouraging so all of those factors.
I think in addition to sort of Montreal strength.
Overall is probably what's fueling some of that.
Estimated potential there.
Thanks for the distinctions.
Yes, Thanks, Matt.
Next question will be from Joanne Chen of BMO capital markets. Please go ahead.
Hi, good morning.
A quick one from me just with respect to that.
The gain to lease potential.
The market could you comment on me it seems like there was a pretty big jump.
So is it your expectations for Toronto.
As well on for Alberta could you maybe just comment on what.
Give me the confidence with respect to those two markets.
Let's say good morning, Joanne So again those those estimates are somewhat volatile quarter to quarter because we are.
We evaluated almost on a suite by suite basis building by building.
So it's really a function of whats available too.
At least there.
When we looked at those markets.
Certainly Alberta.
A little bit of strength, there as we'd mentioned we realized in the quarter.
For the first time.
And some time since 2019 in fact, we saw positive realization, we'd seen some stronger job growth in Calgary for example.
Some of those things.
I will say just anecdotally on the private side Minto has seen.
On the for sale new home side.
And resale as well that.
The market there was surprisingly strong in Q1 so.
I think some of those things are.
Assets like the laureate, we saw really solid gain to lease something almost 8%, there, so which was something which was which was nice to see.
So I guess income.
Encouraging signs.
Joanne I mean again I just want to highlight that Alberta is a tiny part of the portfolio, it's something like 9%. So.
I wouldn't want to.
You don't get too excited about Alberta, because it's just not a big part Montreal as I've mentioned.
Obviously very strong now you'd ask specifically about Toronto, I think youre, comparing our estimate of the gain to lease at the end of quarter with what we realized in the quarter is that yes.
Yes, yes, that's correct, yes, okay. So as I mentioned I think it.
Spend more time, focusing on the bottom chart, which is the estimate because what's realized in the quarter is.
Quite volatile and can be very much skewed based on the actual suites that turn so because we go if a matched pair so we take.
Like let's take we'd say Minto yorkville, a one bedroom suite that had a eight year length of stay.
When vacant and we released it and we realized a 10% gain to leave the exact same suite on the floor that had a two year length of stay the gain to lease could be tiny so it really depends on what what turned in that in that quarter. So.
I mean, obviously, we're pleased to see seven 6% and actually it was dead on with our estimate at the end of Q4 for what we thought the potential would be so I think that speaks to the validity of our estimation process, but when youre looking forward I would key on the eight 2%.
Seven eight specifically for <unk> in the bottom chart.
Okay.
Good color on maybe just one lastly on on the furnished suites.
Yes.
Appreciate that you guys have a lot of flexibility with respect to converting on furnish and whatnot on life will eventually get back to normal.
But just wondering in terms of.
For this year, where would you like to see the number of furnished suites kind of gets to you guys on target in line or is it really depending on I guess everything is right now with the vaccine.
Yeah, Great question I think back in Q3, we had talked about bringing that number down into the 180 to 193 range obviously on <unk>.
Peanuts continue to bring that down it is somewhat opportunistic it very much driven by what we're seeing from a market demand perspective.
And to some extent, what we're seeing there.
As well is the pace of the repositioning program at Roehampton, which if you recall with sort of.
Fortyish suites that were furnished in that building that we were going to take through a renovation program and if we had taken all 40 offline to renovate at once at the beginning of Q1, we would've come down to roughly 180, 190 suite furnished suites inventory as it turned out we saw some continuing.
Furnished suite demand in there so we're not going to take those offline.
Prematurely, if we still got if they are still cash flowing with furnished suites, if we've got vacant on renovated.
On furnished suites that we can renovate.
Simultaneously.
Did out there very quick for us to adjust those.
Furnished on furnished or or the other way if market demand dictates now the plan right now is for those.
Renovated what are currently furnished suites to come back online as on renovated so.
The thought being we would get to something like potentially 180 190.
Barring some change in furnished suite demand. So if we see business travel ramp up if we see that movie business in Toronto ramp up.
It's possible that we could go back and you add incrementally to that furnished suite inventory if.
If it made sense, if there was demand drivers for it.
This is such an effective tool in a stable or rising market from a yield management perspective, because the leases are so short, which means you can reset to market very very quickly and the increment over the on furnished rental even with higher vacancy typically a good quarter for furnished suites, you might be at 80%, 85% would be.
Really strong quarter.
And Thats typically only see that Q2 Q3 kind of things so.
But still that increment over on furnished rent is so high that we want to be judicious, but but there's a potential that we could be opportunistic about bringing some of that back so.
Sure.
To have that flexibility.
Most of my other questions have been answered so I'll turn it back thanks very much. Thanks Joanne.
Thank you next question will be from Brendon Abrams of Canaccord Genuity. Please go ahead.
Hi, Good morning, everyone, Hey, Brandon.
Maybe just to follow up on the gain to lease.
If you could characterize incentive used during the quarter a correct me if im wrong I don't think the seven 6% includes.
Incentives that could be wrong on that but if you were to factor those in with the number look materially different or would it be.
Pretty close to what.
What the slide shows.
Yes, so that top slide the realized I think is the slide you're you're the table youre referencing net right.
Yes.
Yes, so Alberta, we've shown on a net basis simply because.
That's been more of a long term trend in Alberta is incentives just the way that market dynamic works.
Incentives are sort of I'll say endemic if I'm going to use the pandemic theme. There endemic in every other market, we think that and just to follow up on my part and I apologize if its in bad taste. Its pandemic, we don't think its a long term trend and so we continue to show those on a growth basis now growth of incentives.
And promotions, but not growth of discounts, so where we have discounted.
Those are reflected in the gain on new leases so.
We have used incentives and promotions and targeted marketing very strategically and thats, what youre seeing in that that high number of leases in the conversion rate, which has been very high with I think lead volume set in Q1, we're sort of 30% off of what we would've seen in Q1 of two.
<unk> thousand 20, so so the team has been effective but the incentives and promotions have varied substantially we don't offer them at every property. We don't offer them for every suite type it even within a suite type it varies by the view.
For sure so I think debt.
Certainly they would have some impact.
In those utilized figures.
Would not be unusual to see where we offer an incentive a month free rent for example that that would be but again, it's not it's not across the board Brendan.
Right, Okay, no that makes sense and that's helpful. Maybe just on the development.
On advances.
Beachwood, which I guess would be the third.
Such a loan for the for the REIT just wondering there's clearly significant benefit in terms of access to.
New product that's located.
At a discount.
On the purchase price.
How should we think about the flip side in terms of risks.
The REIT or rather how do you think about.
Risks to the REIT through these loan advancements.
Can you give any color in terms of.
Where I guess, the REIT would rank on the capital structure or typical let's say loan to cost.
Debt you would be.
Road funding.
Yeah. So.
First off these were structured those three deals Lonsdale fifth and bank Beechwood all following essentially the same structure.
We're structured in a way to insulate the REIT entirely from.
Schedule.
Construction cost overruns lease up risk all of those risks.
Our to the account of the developer.
So the REIT doesn't have any of those risks it's risk is.
Solely as a as a mezzanine lender so it would rank below.
<unk>.
Below the senior ranking construction lender.
But above the developer equity and so it would not I would say just very generically for these three deals. If you were to look at it somewhere between 65% to 70% of the capital stack and kind of 90% to 95% if that makes sense. So that's.
A typical kind of mezzanine kind of our positioning within the capital stack.
The coupons are between 6% and 7% what's unusual of course is the value of the discount on the exercise of the option, which if you add that in and and calculate on an effective interest rate basis would bring the REIT return from it.
I'll call it mezzanine finance to something in the 12% to 14% kind of return if that makes sense.
Now all of these loans are guaranteed by MPI. So.
That may be another difference that from a typical mezzanine loan which might only be secured by the property.
Yes.
An important differentiator.
And then I know, we're kind of long in the tooth here on the call, but just last question from me on the regulatory front.
I guess, two things that would impact Ontario.
Where the majority of <unk> portfolio is.
One I think the provincial government recently.
As the federal government to suspend because the entry of international students in September for September.
I'm wondering if you have a comment or an expectation around that and how that may impact things and then the second I know we're only in may here.
<unk>.
But it's a question that I think is topical for a lot of multifamily investors.
Clearly there was a rent freeze in the province for 2021, given your kind of industry contacts and association is there.
Any expectation for 2022, yet or is that still pretty far away.
Yes, so maybe I'll tackle the first question, which is really.
On the province of Ontario has called on the federal government for many things, including I think at one point in time to shut Pearson Airport.
And other thing.
The federal government has responded.
There.
To the negative or.
Making some sort of big.
And loosely.
Supportive comments.
In response, I really don't know if.
Those calls from foreign government to the.
The provincial or federal government will will lead to a change in immigration policy I would be.
A little bit surprised if they did in fact, what you've seen is the federal government is earlier this quarter like early in 2021 actually made some changes to.
Continuing on what they did in the fall of 2020 to loosen immigration policy in this case trying to convert what were non permanent to permanent.
Permits so.
I don't know many of those are folks who probably already in Canada. So I don't know if.
If that would be.
Exactly on point, but I think we'd have to wait to see what the federal government does and what they have been loath to do whether its flights from India or other things they've typically been fairly reluctant to close the borders and so I mean, obviously the border restrictions within with the U S have been there in.
Certainly a name for since last year, but of course, we do see significant movement across the board because I think the federal government is very mindful of the economic impact of of some of these things and the knock on effect. So.
I mean, I don't have specific insights into the mind of where the federal government is going on immigration policy other than.
They published on what you read.
Read the same design, but that's my view.
Take that for what it's worth your second question.
About.
Rent regulation, and Ontario, specifically and whether I think youre asking is will they extend the freeze on renewals.
For our second year into 2022, and certainly what we saw in 2021 was unprecedented when that was announced in the fall I guess September of 2020 was the first time.
Since the onset of rent control in the mid 70 in Ontario debt, we'd ever seen a zero rated guideline increase.
In good times and that what we have always seen in Ontario was that the guideline increase now its flexed up and down with the rate of inflation, but it was always a non zero guideline increase so 2021 was really unprecedented and this from a government debt I would say broadly speaking had been very constructive towards <unk>.
<unk>, the housing industry, and adding more supply whether that was planning decisions whether it was.
Other other elements of growth policy.
So my my instinct is to say.
Particularly I think if we see strong vaccine rollout, we see a reopening of the economy, we start to see improvements in.
Employment growth and I, obviously, a stay at home order is not helpful. I think we're going to see April job numbers that are probably not good.
And obviously a lot of that will be service sector jobs impacted by the stay at home order in Ontario, but.
Follow our hypothesis of vaccine rollout accelerating.
Lifting of the stay at home order gradual relaxation of some of the restrictions on economic activity, we think that job growth would follow economic growth would follow.
And so my suspicion would be that the <unk>.
<unk> government would have the air cover then to sort of revert to their traditional kind of policy and really.
The policy of governments of every political strikes since $19 75, which would be to have a non zero.
<unk> increase in 2022, so now we won't know that of course.
We won't get the first inklings of this until August or.
Possibly September when the Ministry begins to do that work last year I think it was fair to say it was a political decision responding I think.
Sensitive to the plight of voluntary into who are in the service sector, who could not work from home where were impacted.
I think we will have to look to see are those conditions.
Ameliorated in July August of 2021, and I for one am optimistic so.
That's my view.
I think inflation has typically been the driver of guideline increases and I think there are signs across the economy, certainly asset inflation, but in other aspects of inflation, particularly inputs for construction and fuel and other things.
I suspect that I'll, just say as an operator, we've seen huge increases in some aspects.
Insurance property taxes other things so I think that Ford government will recognize that rental housing providers are subject too just because they declared a zero or a freeze on guideline increases for renewals doesn't mean that rental housing providers werent seeing.
An increase in pressure for wages insurance in particular and other costs to repair the maintenance that they.
They will put pressure on housing providers to keep.
Communities rental communities at a high standard of maintenance security and other things so.
I'm hopeful.
I don't know Brandon, but I don't have special insights into the the Premier's office or the Minister's office, but.
Im looking at those factors and thinking on balance.
I do not believe they will extend it.
Into 2022, but I mean again.
Again, that's my opinion for what it's worth.
Right, Yeah, and obviously no one has a crystal ball, but yeah. That's very helpful. Thank you I'll turn it over.
Thanks Brendan.
Thank you.
And at this time, Sir we have no further questions registered please proceed.
Well that's great. Thank you everyone. We appreciate your interest in Minto apartment, REIT and look forward to chatting with you all.
Next quarter and.
And we will talk to you all soon cheers.
Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask such a please disconnect your lines.
Okay.
[music].
Yeah.