Q3 2021 Minto Apartment Real Estate Investment Trust Earnings Call
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Good morning, My name is Britney and I'll be your conference operator today at this time I would like to welcome everyone to the mental rights.
Third quarter 2021 results conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad. If he would like to withdraw your question. Please press star followed by the two.
Before we begin I want to remind listeners that certain statements about future events made on this conference call are forward looking in nature.
Any such information is subject to risks uncertainties and assumptions that could cause actual results to differ materially. Please refer to the cautionary statements on forward looking information and the routes news release and MD&A dated November 19, 2021 for more information during the call management.
We'll also reference certain non I F. R. S 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 meaning under I F. R. S. Please see the REIT and DNA.
For additional information regarding non and I F. R S financial measures, including reconciliations to the nearest I asked our AST measures. Thank you. Mr. Waters, you may begin your conference.
Alright, Thank you Brittany and good morning, everyone I'm, Michael Waters', Chief Executive Officer, and rental apartment REIT, Julie Moran, Our Chief Financial Officer is also with me on the call.
We end the call by discussing highlights from the third quarter as well as recent developments Julian will review, our financial and operating results in detail and then I'll wrap up with our business outlook.
After that we're pleased we'll be pleased to take any of your questions.
The urban rental market conditions continued to gradually improve in the third quarter. This was reflected in our increased occupancy and continued strong leasing activity. There's still a ways to go before the market returns to pre pandemic normalcy, how can we continue to successfully execute on our strategy during the quarter, while positioning <unk> for success in the law.
Long term, we entered into an all time record 555, new leases John Q3 exceeding the previous high of 534 leases that reset in the second quarter of the year the.
555 leases, representing a 38% increase compared to the 403, new leases, we signed in the same quarter a year ago. So we're seeing demand for urban rental improve.
We realized a gain to lease of four 4% on new leases signed that's a slightly lower than the second quarter, but still be driving significant and sustained revenue growth.
Average monthly rent in the quarter reached $651 per unfinished suite.
Average occupancy increased to 92, 9% in Q3 up from 91 and a half in the second quarter. Our point in time occupancy. However at the end of the quarter was 94, 8% and so while average occupancy was lower compared to 94% from Q3 last year. This is the second.
Second quarter on which Occupancies increase move ins are now outpacing move outs by substantial amount, which is highly encouraging Julie will cover this in more detail shortly.
<unk> made progress on other organic initiatives in the quarter, we completed the repositioning of 120 suites, a quarterly record for the REIT repositioning improved asset quality and reduces future repair costs and also drive strong growth in rental revenue.
We made progress in our intensification development projects, where we're achieving important financing and permitting milestones.
Construction at our rich growth project the gun and we have secured a construction financing commitment from CMA Sea.
While Leslie York Mills is poised to get underway during the fourth quarter as well.
We recorded a fair value gain of $34 7 million on our investment properties. During the third quarter based primarily on strong valuations for multi thread rental properties recall that we also recorded a fair value gain on investment properties of $55 million in the second quarter of 2021, that's a.
Actual increase and a six month period.
Subsequent to the end of the third quarter, we agreed to acquire the Hill Park, a high quality 260, <unk> property in Montreal, that's an ideal fit to our portfolio.
After the closing of the transaction next month, we will have four properties and almost 1800 suite in Montreal, which is highly <unk>.
Highly attractive rental market, we had no properties in that geography at the time of our IPO in 2018.
On October 29, we completed an $87 million bought deal equity offering, including the exercise of the full exercise of the over allotment. The deal was fully subscribed, reflecting strong demand from the investment community. The proceeds will be used to fund acquisition development opportunities, including.
<unk> Park, while increasing our financial flexibility.
Finally, I'll conclude with the best news of all for our unit holders as you probably saw yesterday. Our board has approved a four 4% increase to the REIT monthly cash distributions beginning with the November distribution, which is payable in December the increase reflects the board's high level of confidence in our business outlook, including our ability to execute on our.
Strategy that reached now increased distributions in each of the three years since it went public in two of those were during the pandemic.
I'd also note that while we're committed to raising distributions over the long term. We also plan to maintain a strong balance sheet and conservative payout ratio that allows us to continue to reinvest capital to fund future growth.
To sum up we're pleased with the positive momentum we're seeing in our business and the fact that we continue to capitalize on attractive growth opportunities. We expect to reach financial performance to continue to improve as the pandemic dissipates and herbal urban market conditions gradually returned to normal.
Ask Julie to discuss our third quarter financial and operating performance in a little bit more detail Julian thank.
Thank you Michael let's start on slide four where I'll begin by reviewing our Q3 operating results.
We reported revenue excluding purchased suites of $29 million in Q3, 2021 compared to $29 $3 million last year.
Slight decline of one 2% the decrease was mainly due to lower occupancy and promotions, partially offset by higher rent.
The majority of the decline continues to be focused on several core properties in urban centers, where the negative impact of COVID-19 has been coming down.
Total revenue, including furnished suites was $31 $2 million, an increase of 3% compared to Q3 last year, reflecting higher occupancy and rental rates for furniture suite.
NOI, excluding furnished suites in the third quarter was $18 1 million or 62, 4% of revenue a decline of 6% compared to $19 $2 million or 65, 6% of revenue last year.
Total NOI, including furnished suites with $19 4 million or 62, 1% of revenue a decline of three 7% compared to $20 2 million or 64, 7% of revenue in Q3 last year.
Lower NOI in Q3, 2021 reflected the lower revenue from increased suites as well as increased property operating costs property taxes and utilities expense.
Yes.
<unk> was $12 5 million in Q3, 2021 compared to $13 $2 million last year, a decline of five 5%.
This mainly reflected the negative NOI, they're young.
<unk> declined six 3% year over year to $10 9 million from $11 $6 million in Q3, 2020, mainly due to lower <unk>.
<unk> per unit was approximately $18.04 compared to $19 seven last year.
The REIT declared cash distribution in the third quarter of $11 38.
Resulting in a payout.
Payout ratio of 61, 7% cash.
Cash distributions were $11 25 per unit in Q3.
Last year, resulting in a full payout.
Payout ratio of 57, 2%.
As of September 32021, our portfolio consisted of 7277 fleets with an average monthly rent of $1651 per occupied.
<unk>.
Average monthly rent increased by $38 or two 4%.
<unk> to $1613 at the end of Q3 last year.
The average occupancy rate in Q3 was 92, 9% compared to 94% last year.
Turning to slide five as Michael noted in his introduction our quarterly movements have now outpaced move outs for two consecutive quarters.
This is a very positive trend that is driving growth in occupancy and highlights the steady recovery of urban rental markets in Canada.
We have 615 move ins during Q3 2012.
One versus 578.
The positive differential.
That compares to 36 net new business during the second quarter of 2021, and 65 net wells during the first quarter of the year.
Occupancy has steadily increased from 91, 1% in the first quarter to 91, 5% in the second and 92, 9% in the third quarter.
On slide six we've provided a revenue analysis as of the end of September we break down gain to lease activity for Q3 2021 in the Upper chart and our estimate of the game's potential of the portfolio with the whole online.
Beginning with the Upper chart as Michael noted, we signed 555, new leases in the quarter.
Fleet turnover.
<unk> activity was strong and we were pleased to generate positive gains lease in all of our markets.
The average rent on new leases increased by four 4% from $1630 to $1701.
This resulted in an annualized incremental revenue gain of approximately $392000.
The strongest performance came in Montreal, where we've generated a gain on new leases of eight 2%.
Turning to the gain to lease potential on the lower churn. We believe we can generate approximately $7 $3 million of annualized incremental revenue growth by bringing 6664 suites to market levels.
Expect to realize a significant portion of the potential over the next three to five years.
We should also note that this figure does not include the landfill.
Property in Montreal, and which average sitting rents are well below market.
Got to complete the acquisition of wildcard for next one.
Turning to slide seven the upper chart track for gain to lease an average monthly rent growth on a quarterly basis.
<unk> has been negatively impacted by the pandemic.
You can see since remains highly positive script count.
Average monthly rent continues to hit new highs every quarter. Despite the impact of COVID-19 on urban rental market.
Moving to slide eight.
I want to provide you with an update on purpose.
Lower chart shows that we are generating significantly stronger performance from our furnished suites and we haven't any.
And more than a year.
Average monthly rents are furnished suites of nearly $4000 at the end of the third quarter and average occupancy for the quarter was 86, 3%. These figures represent a dramatic improvement from the levels. We saw in early 2021.
We expect a recovery in demand for the furnished suites in the coming quarter as restrictions are lifted and economic growth continues to improve.
On slide nine you'll find a summary of our repositioning activity.
We renovated a record total of 126 120 suites in the third quarter or <unk> 91 of the Reits proportionate ownership share.
The average cost per renovation was approximately $48400 per suites. The average annual rental increase following repositioning with $4298 per suite, which generated a healthy return on investment of eight 9%.
In total we have approximately 3000 remaining suites to repositioning our portfolio again, not including the potential repositioning off Catholic health parts, we expect to reposition another 100 to 110 suites in the fourth quarter for a total of approximately 350 suites for the year.
This is above our prior guidance of approximately 250 to 300 reposition suites in 2021.
On slide 10, we highlight the strong predictable returns on invested capital that we generate from repositioning over the last four quarters. Our average annual Unlevered return has remained in a narrow window of between eight 4% and 9% quarter with an overall average return of eight 7%.
Mm 310 renovated suites.
The average renovation cost per suite was approximately $48100 and the average annual rental increase per suite.
$4185.
We've mentioned lessor parked a few times already on this call. So let's take a closer look at it on slide 11.
We're paying $80 1 million for the property, which comprises 20 stories and 261 suite.
Part of the reason that is so appealing is that it provides significant organic growth potential both from gain to lease and repositioning we estimate that sitting rents are approximately 20% below current market rent and only 72 261 suite have undergone repositioning program, which provides additional patel.
Playing in rents of approximately 20% to 25% upon completion of renovation.
We expect the acquisition to close on or around December 7th the purchase price will be satisfied in part by proceeds from the bond deal. We completed last month and a new mortgage loan of approximately $41 million.
This is our fourth acquisition in Montreal and brings our suite count in the city to 1793.
Roughly a quarter of our total.
The map on slide 12 shows the location of where it's located in close proximity in close proximity to our three other properties the Montreal Rockhill in the 4300 FTE. This creates the potential for operating synergies.
The property is also located close to the <unk> Metro station and the planned new station that is one market, which is part of <unk>. So it has to be comforting thing or are young are.
A massive expansion of the city's existing metro networks.
In addition, please hill part is near the University of Montreal, Mcgill University, three major hospital, seven one and Mark Royal Kirk.
Now I'd like to review, our intensification development initiatives on slide 13.
We currently have investments in six projects in various stages of development. Each of these is advancing at a steady rate.
Provide highlights on a few properties over that in a few slides and you can find more detail about the current status of each project and our Q3 MD&A.
One important recent development is that we have obtained construction financing commitment from CA H C for the rich growth project under their rental construction financing initiative that will provide construction financing on attractive terms.
And construction has commenced.
Construction is Leslie York Mill is also expected to begin later this quarter.
Combined these six projects could expand the reef portfolio by 1570 suite by 2029.
That represents an increase of approximately 21% from the current level inclusive of Russell Park.
I'll now provide an update on a few of the individual development projects, beginning with the fifth and bank redevelopment and Aldo on Slide 14, you can see from the photo on the upper right that construction is very near completion.
Pete.
Yes.
We have been leased already with first occupancy beginning this month the projected bonds scheduled to be stabilized in mid 2022 at which point. The REIT will have an exclusive option to purchase a 5% discount just unapproved fair market value.
Turning to Lonsdale square North Vancouver on Slide 15, our first development project in Greater Vancouver is making good progress site excavation is complete as you can see on the upper right.
And some work has commenced.
Protect is comprised of 113 suites.
And approximately 7800 square feet of retail space construction completion is expected in the first quarter of 2023 with the stabilization of the fourth quarter of that year.
Have a purchase option at that point with the same terms as fifth third bank.
These offerings really highlight the benefits of the reach unique relationships with them.
Moving on to the risk of project on Slide 16, we are taking advantage of excess plan on despite adding new rental tower with 225 suites, including 100 affordable housing.
And 213 parking stall construction is underway and stabilization is expected in early 2026.
One additional benefit to this property is that it is adjacent to the future status and Martin growth, our T station, which should be completed around 2030 or 23 one.
Finally, I'd like to review, our debt financing and liquidity on slide seven.
A central part of our strategies, maintaining maintaining a conservative leverage ratio and balance in our debt maturity schedule.
This demonstrates that maturities between 2022 and 2026 are highly manageable as it is.
September 32021, the weighted average term to maturity on our fixed rate debt with 517 years with a weighted average interest rate of two 9%.
Proximately, 91% of our debt is fixed rate and 73% and seeming to ensuring that.
Our total liquidity was approximately $126 million at quarter end and debt to gross book value was 67, 9%.
I'll now turn it back over to Michael.
Thanks, Julie I'll wrap up with our business outlook on slide 18, before we take your questions.
When the pandemic struck in March of 2020 of course, the impact on urban multi residential real estate in Canada was significant with the border shop in shops, and restaurants closed immigration delayed in post secondary institutions operating largely remotely the benefits of urban living were temporarily disrupted but that's changing rapidly.
Pandemic restrictions are being eased on a regular basis as COVID-19.
Vaccination, increasing and Keith.
Keith Count.
Continue to improve borders are reopened including the land border with the U S restaurants, and sports venues are welcoming customers without capacity limits Postsecondary education has returned largely in person learning immigration is rapidly picking up again with the federal government increasing its targets for new permanent residents over the next three.
Years to catch up on the immigration that was delayed by border closures. Although we must remain vigilant COVID-19 case counts have not been nearly as high. This fall as summit featured these are all really highly positive developments for the rate, we're seeing market demand and occupancy increases the benefits of urban living Gratulate reassert themselves.
Take some time to get back to normal, but we're confident that our focus on high quality multi rents housing in desirable areas will outperform over the long term as it has done historically the increase to our distributions that we just announced sort of underscores this confidence.
Our positive outlook is supported by strong fundamentals in Canada, putting expansive immigration policy and elastic supply and the growing affordability gap between owning and renting a home with population growth continues to increase in 2021 and beyond rental housing demand is expected to strengthen we expect to see further increases in occupancy.
Seeing stronger growth in rent rates driving improved financial performance. However, we still do anticipate lower than normal occupancy for the remainder of this year to sum up we continue to believe that Minto apartment REIT has the right assets and strategy for long term success will continue to focus on four key areas to grow the REIT.
Namely capitalizing on organic growth through gain to lease creating value from suite repositioning exploring attractive acquisitions and capitalizing on our relationship with the Minto group. These have been the key elements of our strategy. Since the data was created and we're confident by sticking to these principles will generate strong returns for our unit holders.
The impact of the pandemic subsides.
That concludes the formal portion of our presentation. This morning, Julien I would now be pleased to answer any questions you might have Brittany.
Britney Please open the line for questions.
Thank you ladies and gentlemen, we will now begin the question answer session should you have a question. Please press the star followed by the one on your Touchtone phone, you'll hear three cone prompt acknowledging your request and your questions will be pulled in the order that they're received should you wish to decline from the claim process. Please press the star.
<unk> followed by the two if you're using a speaker phone please with the handset before pressing any keys.
One moment for your first question.
Your first question is coming from Jonathan culture from TD. Please go ahead.
Thanks, Good morning.
Hey, Jonathan.
Yeah.
First question just on on the leasing.
If you just look at where September ended versus the averages. It's August September was a very strong quarter on the leasing front for you guys is that continued into October.
Yes.
October thoughts do more than 200 leases.
With continued strength basically.
Continued where we were in in September and that was true.
And almost all of our markets.
Toronto has been perhaps the slowest to really recover.
But we signed more than 90 leases in October in Toronto, which has been fantastic. It continues to still be the largest consumer of incentives I'll say, if we look at our different markets Jonathan.
But when.
When I look at Ottawa, well that market has been steady and strong.
For a while we're seeing that high housing price growth, both new home resale has really pushed many buyers into rental and so we've done more than 60 leases.
In <unk> in October and we're seeing promotion there be really peeled off quite rapidly Montreal has been has been resilient has been supported by pretty strong job market there.
We signed 22 leases in October would have done more but we had many suites offline for the repositioning programs, particularly at Haddon Hall, and look 4300 <unk>.
Alberta, I would say Edmonton remains a soft market, but Calgary has been surprisingly strong actually we have very little availability in our Calgary portfolio in and out and we could see continued strength there just economically with job growth.
In Alberta, so I.
I think what we saw was really strong momentum through the quarter and that continued through October.
The objective of caution that seasoning of course.
Leasing demand tend to taper towards the end of Q4 and the first part of Q1.
Okay.
Enough.
Helpful. And then just I guess switching gears a little bit.
As you are in the ground at rich grow or expect to be Leslie York Mills. This quarter, what what are the yields youre targeting on the development there and how much of your cost would be.
So.
We're typically with targeting.
Turn on investment of somewhere between four and four 5%.
And if you compare that to kind of market cap rates.
The new multi red in the city, they would be sort of three to three 5% so fairly significant margin.
Kind of a 100 plus or minus basis points.
Which is which translates to an we tend to think of it in terms of Levered IRR, but levered IRR that would be in that in the high teens.
Any decent in some cases higher.
Yes.
Okay.
Do you have a lot of cost fix on that or.
Yes, so we of course before we put a shovel in the ground we would tender.
The vast vast majority of the bill of materials. So our internal rule as we won a tender more than 70% 75%.
I think it at <unk>.
<unk>.
90% of corporate tenured and on those the tenders that we've done and starting to award contracts, we are at or favorable to our pro forma so tracking quite well on that one Leslie.
Leslie York Mills, it's not quite as far advance, but the tendering processes is moving along nicely there as well.
Okay, and then I guess just last question when you are.
In the past when you've done sort of infill things like youre doing with rich growth.
As a construction.
Yes process does that does that impact the performance of the existing assets at all.
Well in the short term of course, there is some noise and dust and disruption for existing tenants, particularly on access in and out of the site.
So it does have a very short term impact.
We have a fairly detailed construction management plan that we put.
Forward for each of those communities.
<unk>.
Multi pronged it would include communication with our residents that are resident engagement strategy.
And really try and give tenants a lot of visibility on what we're doing.
Including communicating the benefit like whats explore those existing tenants in terms of improvements to amenity improve.
Improvements the landscaping and if you think of less New York Mills for example were completely.
Really the entire suite of amenities.
Generating very significant improvement.
To that so from a selling proposition.
Often we're able to.
Lessen the staying if you will of the construction inconvenient.
Obviously long term the impact of having these these new suites refreshed our brand new amenities expanded amenities.
And the landscape.
It rises.
Rises.
Potential of the entire the entire property so.
Yeah, there is a near term impact I think we.
We work as hard as we can to manage and mitigate that but but it's something that you are right.
To note that we work very hard on that.
Okay.
That's helpful I'll turn it back thanks, Greg.
Great. Thanks, Jonathan.
Your next question comes from Mike <unk> from DJ Dan. Please go ahead.
Hi, there.
Okay.
The chart on.
But the furniture segment can you kind of got it going back I guess four quarters.
But what would be helpful. Maybe it's just thinking about.
Hi.
Look pre pandemic and how much runway you think we'd have to go book from a occupancy average perspective and maybe potentially.
Not suggesting you get here in the next two quarters, but just in terms of thinking about the normalization going forward.
Yeah. So.
Do you think about furnished suites going back pre COVID-19. So.
If we went back to sort of.
Late late.
Late 2019, let's say if you if you were to look at the fall of that year October November December.
Then of course, our suite count was higher we were sort of in the two.
<unk>.
Almost $2 50 range or a little bit over.
And we were seeing average daily rates that were in the $140 range and occupancy that quarter.
Started the quarter very strong.
October we were in that in the low nineties, which was absurdly high we don't typically see that kind of level of occupancy so producing revpar that were like 136 Bucks.
Which is which is really really high.
The balance of that quarter, we saw occupancy dropped him, which is more typical we were dropping into the <unk>.
The low eighty's in November and sort of getting into the high Sixty's by December and so I think thats.
Illustrates a couple of things I mean, one the furnished suites segment is is highly seasonal.
Depending on the property.
Youll see youll see seasonal trends for example in Toronto often tied to.
The movie business and other things.
And secondly, it is obviously a little bit more volatile than the on furnished you typically are generating much much higher rate, but at the expense of a little bit more vacancy and some some more volatility there again at not ever intended to be a huge part of our business right. Now we are kind of low to.
<unk> hundred suite count probably getting into the high 100 <unk> at least at this stage as we complete the renovation repositioning program at Roehampton, where we had 48 furnished suites at the at the beginning of the renovation program.
But it is a fantastic yield management tool, particularly in.
In steady or rising markets, because they are very short tenancies, which allows us to reset.
To market rent.
And so from that perspective, it's a fantastic yield management tool again right now we really have furnished suites of only a handful of properties one in pipeline in Ottawa.
Our yorkville property.
In Toronto, Roehampton still has surprisingly strong.
2000, and suites, there there are 79%.
80% occupied.
At this stage and and and so we're waiting for those contracts to burn off obviously and we talked just a handful.
For example property Calgary.
I think what you would expect to see that we maintain a meaningful.
Inventory at 185 in Yorkville, but that Roehampton inventory will disappear in the laurier as well.
It's possible that we could bring more suite count back online at some point in the future.
If market conditions.
Merited, but.
At this stage right now we're sort of focused on the plan, we communicated way back in the queue for reporting.
Back in March.
Okay. Thank you and then just last question.
Yes in terms of the.
Are you seeing more leasing done but in terms of the amount and intensity of incentives may be offered.
On a per seat basis would it be fair to say that that.
The decline through <unk> and declining <unk> would be the first part and secondly, I think you mentioned Toronto coming back slower than expected.
On that front, so maybe just a little bit more color on how about some holding on the incentive side.
Throw in a market in particular.
Yeah, So as we talked about in our Q2 reporting back in August we really saw the the.
The market bottom in April and it just hits us strengthen sort of month over month sequentially. Since then and our use of promotions.
Certainly.
Peaked in Q2 early part of Q2 or very late part of Q1.
And.
We have really dropped very very significantly subsequent to that.
And.
As I mentioned in my my response to Jonathan's Quest.
Question earlier.
You think about.
Our belief or sorry promotions defined as a.
Number of months rent per lease signed.
We have brought that number way down that the area, where we're seeing still the highest has been trying to which has been the slowest to recover though it is recovering slumped strongly so it's been the area. The last one where we've been peeling them off it.
We pulled them off in Ottawa and Montreal much sooner.
Now I think with the strength that we're seeing I mean 94 leases signed in October in Toronto, I think it is a P.
Pretty strong sign so.
We think that the amortization impact.
Of promotions will will that peaked in Q3, so the P&L impact.
Of course lags right, you're the granting of the promotions probably peaked back in March the amortization impact in the P&L of peak in Q3, and we will start to see a tail off it will still be meaningful as we get into Q1 and Q2, but by Q3 next year, we anticipate that that.
Promotion.
<unk>, which is really the amortization of promotions range from the prior year will largely have tailed off.
Okay. So so in Q4.
Workspace effect.
So this year just to be clear right.
It will welcome down in Q4 of this year.
Yes, yes.
Okay No that's good.
And then obviously next year yet.
Late 2022.
Discussing incentives anymore I appreciate that thanks, very much I'll turn it back.
Yes, Thanks, Mike.
Your next question comes from Matt Logan from RBC. Please go ahead.
Thank you and good morning.
Yeah.
Michael if we roll up some of your commentary on the positive post quarter leasing demands.
Where do you think occupancy can trend over the next two or three quarters.
Well, we if we finished the quarter September 30 that number was $94 eight.
You look at the continued but we had very strong leasing as we talked about in Q.
Q3 leasing is a leading indicator of move ins not all of those leases would have moved in the quarter.
We were plus 98 net move ins in Q3, we expect that that momentum of move ins.
Just to continue into Q4, so we're looking to see.
Occupancy by the.
In Q4 would be likely in that in the 95 ish range, Andy you might anticipate that the ending.
Occupancy so that's the that's the average 95 ish.
By the end of the year, it would be probably a little bit higher now.
Now of course, we get into that slower Q4, particularly the latter part of Q4 Q1 is.
Typically a slower leasing demand quarter, but we anticipate that going into.
Q2, and Q3 next year that we'd be in the 96% 97, plus kind of range, which is sort of what we would consider to be more full occupancy.
Pursuant to our kind of yoga.
Yield management.
Yes.
And then in terms of the realized gains on the leases that youre signing at least the new leases.
Would it be fair to think about that 4% print in Q3 as a function of perhaps low single digit.
Spreads in the early part of the quarter three or four months ago.
Strengthening perhaps somewhere in the mid single digit range today.
Definitely yes, because we mark this on a lease by lease basis and.
And just when you look at the volume of leasing.
Which was fairly balanced through the quarter, but certainly the trend in terms of what we were achieving continued.
Month over month sequentially during the quarter July through September so.
I would expect that the gain.
To lease would be.
I think more representative of the future I think we will see our estimate at the end of the quarter was $6 six.
Potential I think that that number will continue to climb if we look out into 2022, hopefully getting back to the range, we were pre COVID-19 seeing double digits.
That's good color and maybe just following up on the.
Mikes.
Question on the furnace suite business.
What would be a fair kind of annual target for occupancy and.
The rent for that business.
That is a good question.
Give me a second I'll come back to that a little later in the call. If that's okay I just I need to yes. It does.
No rush, if you don't have that handy.
Wanted to think could we see some of that pricing moderates seasonally similarly with occupancy.
But not a big part of the business overall.
Maybe just.
One other housekeeping question for me I didn't see it in the press release, but are you able to provide a cap rate for Lasalle Park.
It would be roughly 3%.
We sort of we underwrite not on a cap rate basis, we look at a couple of metrics, the levered IRR, which would be.
Right around 7% over a 10 year basis.
<unk>.
What we see there is I mean.
If you were to look out two and three years.
The cap rate would be rising EBITDA to mid threes like 3436.
And a lot of that is where our going in as is always a little bit lower with our renovation program and this one has a very substantial renovation program like it really had about 70 suites renovated leaving something like 190 suite.
And it's a fantastic program I think we build off what the vendor did there.
Our sense of what they've done their execution was quite strong and so we look at that and think.
We could do quite well not the only gating factor for US there is the pace of turnover.
Because of course, you can only renovating and renovated suite as it turns so we're hoping over the next five years to get.
Well into the more than 120 of those suites renovated.
But that will drive to some extent the.
The return from that from the investment but.
As I say, even on a on renovated market basis, we're seeing very significant.
GAAP to market more than 20% so.
Just back to your furnace suite question, if we were to think about that.
The year ahead 2022.
Typically we would look for something like an occupancy that would be kind of 80% ish 81 like low eighty's.
And then that average daily rate for the two big properties 185 line. It would be something like 120, and Yorkville would be substantially higher something like 170. So an average of about 140 between the two of them I'm doing this rough math here, but that's kind of what that would look like.
That's great and maybe just one last question for me before I turn it back if we kind of take a bit of a 30000 foot view. The next 12 months, what do you see as the biggest opportunity to capitalize on.
So we see.
Opportunity.
On development for sure.
I think that obviously, starting L y M enriched drove our big steps, we've been talking about those projects since the time of the IPO.
I think as well some some of the opportunities through the convertible development loan program that we've been doing if you think about lonsdale or fifth in bank or Beechwood.
I think fifth in bank.
Stabilizes sometime roughly Q2.
We will be the first of those projects to roll off the Assembly line and I think that they really demonstrate the value of the Minto pipeline and not only the pipeline of deals, but also the strategic relationship with Minto group.
In terms of development and construction expertise and.
That I think will be a fantastic project of 163 suites and as we said earlier, it's almost 50% pre lease we haven't even started to occupy the building yet so.
I think that one will be fantastic, it's obviously not subject to Ontario's rent control provisions and I think there are more opportunities like that I think as well.
Broadly speaking the Minto pipeline is something that.
We think also has substantial potential for for the rate as we saw in the past with with Leslie York Meals and high Park were.
Acquisitions off.
Minto properties, Inc investments in stabilized assets and the Minto portfolio outside the REIT to have some some attractive candidates I think that would fit very nicely into the REIT portfolio. So we're going to continue to work those deals and see if theres an opportunity to bring those forward.
And then of course as we talked about earlier the repositioning program that we've done has been so strong I mean this has been our strongest quarter in terms of just sheer number of repositioning for 120.
Suites in the quarter, bringing us to $2 54 year to date and if we if we do add another 90 to 110 in Q4.
Jeeze, we'd be almost $3 50 in the guidance. We gave gave everybody was $2 50 to 300 generating very strong ROI to them north of 8%.
Dumped simple ROI like that.
It's a pretty nice program. So with the addition of the Hill Park and some of the other deals that we're looking at in the portfolio completing the feasibility I think if we can add to.
The potential and the repositioning side, that's certainly an area of focus is our best use of capital on a risk adjusted basis. The only limiting factor is we can only do so much of it and it's really gated by the.
The turnover among renovated suite.
Well, thanks for the color Michael I appreciate it I'll turn the call back.
Thanks, Matt.
Your next question comes from Joann Chen from BMO. Please go ahead.
Hey, good morning.
Joanne.
Sorry, if I missed this earlier, but just on the furnished suites.
I would like to see the turnaround this quarter for sure, but what are you guys thinking with respect to the overall percentage of furnished suites in your portfolio kind of going forward or does it continue.
Continues to be quite flexible here.
Well at the time of the IPO that number would have been about 6% of the portfolio.
Today, the furnished suite count is something like.
Yes.
Less than 3% so we brought it down.
Down as a proportion of the total portfolio, but also in absolute terms quite substantially.
And as I've said in the past Joann.
The beauty of furnished suites is there short tendencies.
So you can reset the market, it's very easy for us to.
Brain on furnished suites online, it's furnished and yet to go the other way. We can we can take them offline very very quickly, it's really purely about demand and what are the.
What are the demand lead indicators that we're seeing advanced bookings and things of that nature. So we don't want to make furnished suites.
Big part of our business that we see it as a yield management tool when the.
The unpunished rental market is stable or growing it is a fantastic tool for us and so we'll continue to use it opportunistically, but not meant to be.
A big part of the portfolio and so if you think about where we're at now just a little bit less than 3%.
It could grow a little bit in terms of suite.
But but probably not materially as a percentage of the portfolio and it's really only effective at a handful of properties. If you can't do furnished suites in every property so.
And so that's the other limiting factor.
Great.
That makes sense, that's helpful and I guess just on or reposition.
Our repositioning efforts.
Has the current placement route.
Environment impacted your thinking kind of on the pace and the magnitude or has that not made a substantial difference.
As far.
Are you talking about inflation on construction cost and.
And labor.
Yeah, well I mean speaking about the repositioning program.
We.
There is that.
It's typically.
Typically a different trade base not not entirely but it is a bit of a different trade base from new construction.
But some of it is certainly caught up in some of the same supply chain disruption like if you think of cabinets for example.
Those are those are issues, but we are able to leverage the relationship with Minto group in a strong buying power that we get through that because of the.
That substantial number.
New home and development stuff that were doing outside the REIT. So we're we're not shy about leveraging those relationships.
To sort of get some volume.
Pricing.
Incentives and things I would say generically about inflation more broadly obviously, we saw in the quarter.
Insurance property taxes, certainly salaries is an area, where we're seeing some.
Some price pressure for sure.
We struggled.
To.
Phil some of the vacancies we.
We saw higher turnover and some of that was coming out and higher salary expense. So so inflation certainly something that we're seeing in the business and something we're conservatively sort of working that into our planning hopefully hopefully be the net result will be better than what we were sort of.
Providing for but it's something that we're definitely mindful on the new construction side as I said earlier in the call. Our safeguard there is that we would we would tend to.
Tender the vast vast majority of our cost categories before we put a shovel in the ground and so we're locking in pricing for that so.
And so that's I think from that perspective, but we've seen typically that inflation does pass through rents. If you were to look at Ontario's rent control regime and you go back to 1975 and you look at the the guideline increases that will promulgated each year. They they tend to track inflation pretty closely so.
Certainly that would not that would be our expectation going forward.
That's good to hear and I.
Just one more.
How should we be thinking kind of the acquisition pipeline.
Kind of for the remainder of ear and into early 2022.
Obviously.
It is very competitive right now.
Are you still seeing kind of a healthy pipeline.
Sure.
Yeah look we are very active Joanna always looking at deals we're pretty choosy about.
What we pursue.
We are looking for investments if we're buying.
Stabilized assets, we're looking for for properties that one hit the location cast that we set.
Number two we're looking for assets, where there is significant embedded rent.
And where there is repositioning potential and or intensification potential and those are if you said are pretty hotly contested right now.
And it's not just the usual suspects are peers in the publicly traded REIT space, but also pension fund and institutional investors and then private investors are bidding.
Bidding aggressively so I think we're spending as much or more time on.
Development I think that's one of our differentiators because of our.
<unk> relationship with Minto group, we're able to.
Underwrite and pursue development deals and some of them.
Many of them, we've been using doing through the convertible development loan structure, such as fifth third bank, which I think from our perspective yields huge advantages to the unit holders because.
The unit holders.
An accretive return to <unk> through the development period from the coupon on the instrument and then with the discount on the stabilized future value often we're seeing those those levered returns are unlevered returns on those investments sort of in the mid teens, so they're fantastic.
Buying at a stabilized new asset at a 5% discount to fair value is.
A huge advantage there.
They're there, they're obviously NAV accretive almost right away. So so we like that and we will we'll just continue to main our discipline.
Remain maintain our discipline on the on the acquisition front end and.
We're not growing for growth's sake, so its not chasing every deal it and they come in.
They come in bunches.
We went nine or nine months or 12 months really without anything and we did very each with deal and that was pretty much it and then suddenly.
We've seen a flurry of opportunities so yes.
Yes, I was just kind of the way the way it works sometimes.
Oh for sure Okay.
Very helpful. That's it for me I will turn it back thanks.
Thanks Joann.
Ladies and gentlemen, as a reminder, should you have a question. Please press the star followed by the one.
Okay.
Your next question comes from Brad sugars from Raymond James. Please go ahead.
Hi, there.
So good color on the.
The trends Youre seeing from B.
Leasing activity in move ins.
I'm just curious there.
Last year, our turnover move outs was elevated if youre seeing maybe a little bit more normalization.
Move outs heading into the end of this year.
So.
So move outs.
Thinking about like 2020, with what's kind of bonkers in terms of <unk>.
Total totally turned upside down kind of a normal seasonal pattern. If you recall we saw massive.
Move outs in Q4, which was unseasonable in Q1 had a.
Very high number of move outs, which is sort of unusual I think what we're looking for is is to see.
Move outs return to kind of normal patterns looking ahead to Q4.
We have fantastic visibility because of the way the notices work.
That we're seeing in Q4 look sort of more like normal.
Fourth quarters in terms of the number of move outs.
If you think of turnover, which we define as.
New leases.
To bind.
Divided by total suites.
Q3 had because we had such strong leasing we had a huge turnover number.
Approaching kind of 30% overall, you can see that by through the tables that we put in the telecom.
On a trailing trailing.
Trailing 12 months or four quarters that would be like I say, 30% to 30% which is pretty high.
Which is fantastic if youre if youre seeing.
Growth in.
Growth in market rates, because you are able to realize on some of that.
Embedded rent there. So so what we've seen in the lead up to Covid was with turnover was.
Dropping down substantially.
Substantially and so what we saw now at least the most recent couple of three quarters. This is a strong leasing activity generating higher turnover.
Right.
I guess I guess it depends on what type of unit turns.
But it seems like the renovation program spin.
<unk>.
It seems I guess higher levels of suites reposition than I think what you were forecasting I guess, how do you see do you see that is repeatable in 2022 or will it be the.
The expectation I guess for.
The amount of suites, you might be able to get to next year.
Yeah. So I mean, we use the crisis I would say starting in Q4, but really picking up steam in Q1.
Of this year too.
Weaker softer demand for unfinished suites meant that rather than.
Curiously discounting those suites just to fill them, we took them offline and.
And renovated them and then we built up a substantial inventory.
<unk> of renovated suite and as we got into Q2 and Q3 with a strong leasing season.
That really reflects the the numbers that you saw a 120 in the quarter to 54 year to date.
Which is which is substantially higher than the guidance, we give it 250 to 300 earlier in the year were maybe a little bit conservative on that.
I think looking ahead into 2022, the gating factor.
We talk about is.
The turnover on renovated suites, and so of course.
Unless you're adding new buildings.
The program.
There'll be a natural.
Natural tailing off of the program, but adding the Hill park to the program.
Completing the feasibility on a couple other buildings as well means that we can we can.
Hopefully keep the program going I don't know if were going to get to 350 again next year, that's probably wishful thinking.
Probably looking at something more like $2 50, which is kind of where we started 2021, so but we're always exploring opportunities.
Always looking for the potential to deploy some value add capital in and sometimes as we've seen in the past with Parkwood Hills. They enhanced tern program with very small amounts of capital, but we were generating.
Very nice.
Roy kind of kind of in that that.
<unk>.
Well in excess of our target so and.
And some of those were kind of 10-K, a suite or less even in generating 8% ROI. So so we're always pretty.
Pretty opportunistic if we see those opportunities and we'll keep doing that our asset management team is always on the hunt for ideas like that.
Okay, that's great I'll turn it back thanks a lot.
Thanks, Brett.
Your next question comes from Matt Cormack from National Bank Financial. Please go ahead.
Phil.
Just a quick one on operating costs. This quarter was there anything specific to this quarter or maybe to the prior year quarter.
So the growth there.
Yeah. So I would say when you when you drive a huge volume of leases. It does tend to be associated with higher marketing costs and higher repairs and maintenance.
So lots and lots of turns in the quarter as I mentioned.
If you look at the new leases.
On it on a quarterly basis. It was 8%. So it was a pretty strong number you annualize that over the last four quarters, that's kind of 30 so.
So that that certainly that amount of of.
New leases new move ins.
Certainly has had an impact on that.
The other ones, we talked about in prior quarters insurance.
Certainly were seeing insurance really moving.
We don't have a lot of control over insurance the other I'll say uncontrollable categories, our property taxes.
We highlighted in the past, Calgary, certainly, but but Montreal as well where we're seeing.
Property taxes, moving utilities in certain cases for sure impacting us not not all utilities, because a lot of our suites are sub metered, but.
That's an area that we're keeping an eye on watching gas prices and other things pretty closely.
And I would say the last one which we touched on earlier, Matt with staffing.
Particularly our frontline staff more modestly paid.
Strong job market in many cases.
And we did have a lot of vacancies going into the quarter.
I think quite.
Quite successful in getting a lot of fantastic new.
<unk>.
Members on the team and so that partly is playing out as well in the in the Opex numbers is that we did have a little bit more.
Salary expense there too so I don't know if that color helps.
That's very helpful. So I guess in terms of trajectory going forward. It sounds like Q4, you're still going to see some elevated leasing activity Q1, maybe slows down a bit although who knows these days and then.
The balance of the year I guess some of the additional sort of marketing and other costs may fall away as that is that fair.
They will.
Again continue to highlight those some of those non controllable categories that we can't manage and.
What what I think we're looking at for 2022 is that <unk>.
Revenues will outstrip the cost growth on the Opex side.
But it's certainly something we're very conscious of okay.
Okay that makes sense and then last one for me.
Can you just give a little bit of color around obviously, we've seen pretty substantial uptick in occupancy, but so.
Sort of what's happening with high Park village Roehampton.
<unk>.
Maybe you can fill in the context of what's going on around those assets as well or are you sort of in line with what the markets are trailing or add any color you can give there would be helpful.
Yes, good question.
Certainly in the quarter.
What we had seen.
With that.
Yes.
Good.
Performance High Park, we signed something like 64 leases roll.
<unk> Hampton 31 leases, so roehampton had significant vacancy owing for the renovation program there.
That really got momentum in the quarter, and we did quite well on that.
Minto and Yorkville 19 leases.
One of our problem children earlier in the crisis, but now I think if you look at Yorkville I'm looking at the stats from the beginning of November we had no availability in that building. So so those are very very encouraging signs for us.
Now as I said in the past math like leases signed as a leading indicator of move ins, which is a leading indicator of revenue. So there is that lag effect and I just want to caution people from over exuberance about Q4.
We will see that impact, but it will continue to.
Follow I guess, the move ins, which follow the leases, but but yes. So I think we look at those ones.
I feel feel real positive about it as I said earlier I think Toronto.
What's probably.
The slowest markets to really come back and so.
But it is coming back and it's looking good I think roehampton, particularly as those renovation program.
<unk> continues to steam along we're going to see even more leasing in Q4 than we saw in Q3 for example, so so.
I am very very optimistic on that front.
Okay perfect I appreciate that color was very helpful.
Thanks, Matt.
Mr. Water there are no further questions at this time. Please proceed.
Well that's great. Thank you everyone that concludes our call. This morning, thanks for joining us and for your interest in the REIT and its results. We look forward to speaking with you again. After we report our Q4 2021 results early next year. So thank you so much and we'll talk to you all again real soon.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.