Q4 2021 Canadian Apartment Properties Real Estate Investment Trust Earnings Call
Good morning, and welcome to today's Canadian apartment properties Conference call. My name is Bailey and I'll be your moderator for today's call.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star followed by one on your telephone keypad I would now like to pass the conference over to our host David Mills, David. Please go ahead.
Thank you operator hardly the host but before we begin let me remind everyone that the following discussion may include comments that constitute forward looking statements about expected future events and the financial and operating results of cap rate and our actual results may differ materially from these forward looking statements.
Such statements are subject to certain risks and uncertainties discussions concerning these risk factors forward looking statements factors and assumptions on which they are base can be found in cap rates regulatory filings, including our annual and for mortgage issued annual information.
Formation, Harman MD&A, which can be obtained at SEDAR dot com and now I'll turn things over to Mr. Mark Kenny President and CEO .
Thanks, David Good morning, everyone and thank you for joining us.
Scott Pryor, our Chief Financial Officer is also with me this morning.
While we are pleased.
Pleased with our performance in the fourth quarter, we did experience certain increased costs that led to a smaller than expected increase to our quarterly NSF.
The key change was an acceleration of repair and maintenance costs in the quarter as we started to play catch up after two years of reduced spending due to COVID-19 related restrictions on our property activities.
An increasing expense interest expense on the acceleration of <unk> mortgage amortization.
<unk> per unit was impacted by the one 8% increase in the number of units outstanding in the quarter.
The unexpected increase in omni Kron case loads across the country also led to increased uncertainty in some of our markets.
However, we believe we are now working our way through this situation.
Having said that revenues were up almost 7% driven by the contribution from our acquisitions increased monthly rent and continuing high occupancies driving a 3% increase in our NOI.
Turning to slide spot, we booked another solid year in 2021.
All of our key benchmarks were up including revenue NOI and <unk> and we continue to generate solid and accretive growth for our unit holders.
It is also important to note that we have experienced very few collection issues through the pandemic.
To date, we have collected over 99% of our rents as we work with our residents to understand their issues and ensure we collect on a timely basis.
Our payout ratio remained stable despite the significant 5% increase in monthly cash distributions last September .
Our strong performance through the pandemic allowed us to increase our distributions, while maintaining a very conservative payout ratio.
Looking ahead, we expect to see further increases in Occupancies accelerated growth and much improved operating performance as we work our way out of the <unk> pandemic and gradually return to more normal markets and operations.
Yes.
From an operating perspective, our ability to generate solid performance in both good and bad time is clearly demonstrated by the results from our stabilized portfolio.
As you can see on slide six.
Occupancies improved again in the fourth quarter, while net average monthly rents continue to increase.
Our leasing and marketing programs continue to generate increasing occupancies as you can see on slide seven.
After two years of operating under significant pandemic restrictions. Our occupancy has remained highly stable rising to over 98% at year end. You can also see that our bad debt as a percentage of total revenues have remained low throughout the pandemic.
While we did experience some issues with our commercial portfolio last year due to the pandemic. The residential portfolio continues to track it as historic low level of bad debt.
A key factor in our ability to generate solid returns during the pandemic is the solid increase in rent on turnover, we are achieving as shown on slide eight.
Clearly turnover continued to be impacted by the ability of residents to move or personally visit our properties.
However, and almost 6% increase on turnover and the Canadian portfolio is a solid result, with rent increases moving slightly moving higher sequentially through each quarter in 2021.
It is also important to note that our churn is increasing up to 22% from 19% last year a good sign that we should see more mark to market rent increases in the quarters ahead.
Our increasing churn rate up significantly from pre pandemic period speaks well for our ability to achieve higher mark to market rent increases going forward.
Renewals continue to be affected by the rent increase freezes legislated in Ontario, British Columbia and other regions.
But looking ahead, we are pleased to see on here is 2022 guideline increase of one 2% and one 5% in British Columbia.
Copies of the <unk>.
Notice to over 45% of Canadian tenants across the weighted average rental increase was one 3% effective January one 2022.
Capturing a full year of increased income.
As of year end, Ontario, and BC represented approximately 56% of our total NOI.
Nova Scotia has cap rent increases at 2% for apartments, and 1% for MH seeds in 2022 and.
And we will be monitoring how we can implement these increases through 2022.
Yes.
As mentioned, we experienced a solid and positive trend and rent increases on turnover each quarter since we bottomed out at the height of the pandemic in Q1.
Last year as shown on slide nine.
With churn also rising beyond pre pandemic level, the lower turnover numbers in Q4 is normal as you can see in the past few families want to relocate during the holiday season.
Looking ahead, we are experiencing more in person and online visits and expect we will start to see more higher mark to market increases in the quarters ahead, moving us toward the higher levels of increase we generated prior to when the pandemic set in.
Through most of the last two years, our ability to invest in our properties was also significantly curtailed by the pandemic and our focus on conserving cash.
Through the latter months of 2021, we ramped up our efforts to further enhance the value and income producing potential of our property portfolio.
As you can see on slide 10, we targeted in sweet and common area improvements last year, ensuring our properties remain the most attractive in our markets and provide residents with safe and comfortable homes.
Our investments in energy saving initiatives, it's also reducing cost and helping us improve our environmental footprint a key goal of our ESG program.
All of these key investments serve to increase NOI more quickly compared to other investment categories.
Turning to slide 11, we continue to increase the size and scale of our property portfolio.
Through 2021, we acquired three <unk>.
744 suites and sites.
The majority in our key GTA NBC markets.
Our acquisition pipeline remains strong and robust and despite cap rate compression, we expect to generate further accretive growth portfolio in the quarters ahead.
We also sold 593 noncore suites for 143 million. The majority of the GTA. We are where we are achieving very strong returns selling two experienced property developers wanting to develop downtown locations.
We continue to evaluate our total portfolio to assess whether recycling certain capital will contribute to more accretive growth.
I will now turn things over to Scott for his financial review.
Thanks, Mark and good morning.
As you can see on slide 13, our balance sheet and financial position remains strong and flexible at year end with a conservative debt to gross book value and continuing high liquidity.
Our $1 2 billion in Canadian unencumbered properties, which includes $615 million of MHC property provide additional liquidity should it be needed to grow.
In addition, we had 458 million available in cash and on our credit facility at year end.
Looking at our financing last year, we locked in a very low interest rate of under two 2% on a refinancing and top ups in 2021 and extended our term to maturity.
We expect to finance, a total of $1 1 billion in mortgages and top ups in 2022.
Importantly at year end over 99% of our mortgage portfolio incurred the fixed interest rate protecting us from potential future interest rate increases.
In total the weird to access all of these sources of capital we have available liquidity of approximately $1 2 billion at year end and even if he utilized our leverage ratio would still remain a very conservative 40%.
We were also pleased to see another significant increase in the fair value of our property portfolio.
Increasing by just over $1 billion in 2021, following a $596 million increase in 2020.
Yes.
As you can see on slide 14, we have capitalized on the low interest rate environment over the last few years, reducing interest costs in Canada, and extending the term to maturity.
The ability to capture strong spreads and low interest cost in the Netherlands is also contributing to our overall lower interest cost and extending the term.
And as I mentioned over 99% of our mortgage portfolio and create a fixed interest rate.
We continue to monitor the interest rate environment for any opportunities to prepay mortgages and a hedge against rising interest rates.
As of today, we have locked approximately 35% of our 2022 maturing mortgages at a two 9% interest rate.
Mitigating against the expected rise in interest rates throughout the year by.
By April of this year, we will have lost close to 60% of our total mortgage portfolio over the last two and a quarter years.
At an average rate of 234% and a nine year term.
Further to our strong and flexible financial position looking back over the last few years, you can see on slide 15 as well.
We have met our goal of maintaining very conservative debt and coverage ratios even through the pandemic.
This conservative approach underpinned the stability and resiliency of our business and the stability of our monthly cash distributions to unit holders.
This focus on maintaining one of the strongest balance sheets in our business will continue going forward.
Our mortgage portfolio remained well balanced as shown on slide 16.
As you can see in any year no more than 15% of the total mortgages come due thereby reducing risk in a rising interest rate environment.
Looking ahead, our current ability to top up renewing mortgages through 2036 will provide further significant liquidity in the event. This pandemic lasts longer than we hoped.
You can also see that we have many.
Opportunity to reduce our long term interest costs.
Current five and 10 year estimates rate of approximately two six to $3, one or below expiring mortgage rates are between two 6% and three for over the next three or four years.
We also believe we are in a strong position despite forecast for interest rate increases this year and going forward.
Turning things back to Mark to wrap up.
Thanks Scott.
Cap rate you are committed to fully integrated strategy enhanced our environmental social and governance performance.
These initiatives contribute to our mission to be the best place to work with and does that.
Our ESG objectives as outlined on slide 18 reflect our understanding.
The evolving global market has introduced new risk factors and opportunities for value creation.
Our integrated ESG strategy helps us proactively address these risks.
Our investments extend beyond managing our buildings to include the people we employ the residents we house and the suppliers, we engage in the communities in which we operate.
Through these strategic alignment, we believe we will generate enhanced returns for our unitholders, while making meaningful contribution to our communities and the environment.
Our ESG objectives continue to evolve and undergo constant review and assessment all integrated with our operating plans assuring we achieved the highest levels of ESG benchmarks over time.
A key initiative is our comprehensive ESG checklist that we use to evaluate potential acquisition as detailed on slide 19.
All opportunities are evaluated on current and potential risk factors related to environmental performance.
<unk> energy consumption and our ability to implement suite metering energy efficient light water usage waste recycling programs among other factors.
We also examined ways, we can enhance resident engagement and resident safety systems. In addition.
We look at working conditions within the property in line with our goal to attract and retain the best people in our business.
All of these criteria are aimed at linking our ESG goals, creating increased value for our unit holders.
In 2021, we achieved a number of key accomplishments as outlined on slide 20, a testament to our commitment to our ESG strategies.
Once again for the eighth year running we were ranked in the top tier of the best employers in Canada with a very strong score on diversity and employee engagement.
Late in the year, we received a BOMA award for innovation, reflecting our goal to enhance the value of our asset base. We've received we received the award for habitat our state of the art property wide building automation systems that results in enhanced comfort for our residents, while conserving energy lowering operating cost.
Cost and driving sustainability.
We are also proud of the drivers the my apologies the diverse nature of our employee base, including by gender and ethnic background reflects our markets and the overall Canadian population.
This commitment to diversity helps us understand and address issues and concerns among our communities and our resident base.
We're excited to issue our next ESG report in May outlining all of our successes over last year.
Yes.
Looking ahead, we see a number of very positive value drivers that we are confident will generate strong and growing returns for our unit holders.
For both the short and the long term.
We will continue to focus on our prove it out proven asset allocation strategy as detailed on slide 22.
We primarily target value add apartment properties in the mid tier segment, and well located suburban markets in and around candidates three largest cities Toronto Vancouver, and Montreal, We're acquiring these properties properties at under 50% of replacement cost and have <unk>.
Proven our ability to invest in them to increase value.
Flows remained strong and highly stable due to the very affordable rent levels.
Our second focus is the Canadian MHC sector revenues are highly stable and with resident owning their own homes capital requirements and maintenance needs are significantly reduced.
With homeownership cost rising across the country Mhc's provide a real alternative as prices have not appreciated to the same extent.
Our third focus is on Europe as one of the only professionally managed operating platforms in Europe the opportunities for enhanced value are significant.
As you know our investment management agreement with Iris terminated on January 31.
While we are losing the fees from my read it frees up management and operations time and resources to focus more on our European platform, where we believe we have a much larger opportunity to grow.
Key to our growth in the coming months will be our ability to capitalize on a number of market trends as we return to pre pandemic conditions.
Demand for our quality properties will grow as immigration accelerate with new Canadians seeking affordable homes in our largest urban markets. The return of international students will also contribute to increased demand.
The pandemic generated what we call household consolidation as students and young people return home to save cost and to stay safe. We see these young people moving back to rental accommodation as offices reopen and in class learning returns.
Demographics are also on our side is the growing seniors population looks to the rental market to meet their needs. We believe our quality well located properties offering more space on one floor at affordable rates, we will see increased demand by seniors looking to capitalize on the significant.
Equity they have found in their homes.
We also see families looking to quality rental accommodations as highly affordable alternative to the increasing cost of homeownership. Additionally.
Additionally, cash flows will increase as we prudently and responsibly increase rents.
Finally, our ongoing property investments as outlined on slide 24, our reducing cost through energy savings and other initiatives enhancing resident safety and making our properties more attractive our technology solutions are increasing our operating efficiency.
Helping us to meet our ESG commitment to enhance environmental performance.
All of these investments are generating strong increases in our net asset value.
As Scott mentioned, we recorded an over $1 billion gain in our net asset value following a $596 million gain in the year prior.
With increasing demand and little new supply of rental properties. We believe the value of our asset base will only growth or going forward and provide another strong driver for unit holder value over the long term.
In summary, we remain very excited about our future our focus on the mid tier sector meet increased demand for affordable high quality homes.
Our predominantly suburban locations outside of downtown core and our larger sized suites or meeting the need for more space.
We are experiencing a strong pipeline of accretive acquisition opportunities and expect to see solid portfolio growth in the quarters ahead.
Our industry, leading balance sheet leverage and liquidity position provide stability and the ability to grow going forward.
With demographic trends and increasing immigration we are confident we will see.
To drive value for our unit holders in the years ahead.
In closing I want to once again, thank everyone at cap rate for their hard work and dedication over the last two years. These have been very very difficult two year period, but our experienced engaged and dedicated team has risen to the challenge I also want to thank our residents for their patients during these challenging.
Time.
Looking ahead, we are confident we will gradually return to more normal market conditions and continue our 25 year track record of growth strong operating performance and delivering enhanced value to our unit holders.
Thank you for your time this morning, and we would now be pleased to take any questions that you may have.
Thank you.
I'd like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you may like to remove that question and please press star followed by two again to ask a question that is star one.
Remind me if you all using a speaker phone. Please remember to pick up your handset before asking your question.
Our first question today comes from Jonathan <unk> from TD Securities. Jonathan. Please go ahead. Your line is open.
Thank you good morning.
Morning, gentlemen, good morning.
First question just on the operating cost Mark I guess, you said that there was some deferred.
Deferred R&M and there have you guys have you largely caught up.
Q4 catch up or is there more more of that that we'll see in 2022.
I would say, we have largely caught up like the <unk>.
Q4 really was what we would describe as the return to normal quarter.
Looking back on the call I'm really started showing up for all of us and around the 15th of December as I remember.
In the months, leading up to that residents were getting a lot more comfortable with inviting us into their apartments to do work.
Safety concerns were.
Fading, we forget all this now we're back into the yen, but.
The short answer to that Jonathan is yes, we did significant catch up in Q4, but every time, we go through a shutdown period. We're seeing this effect of people being concerned about us going into their homes, and then letting them back in it yet so the propensity to.
Put a work order in the portal goes down when there's fears of.
Of the buyers out there.
Okay.
That's helpful.
And you're the one the one chart that show that.
We are starting to see increases on turnover do you think that gets back to 2019 levels over the over the course of 2022.
I think the fundamentals are stronger.
Todd.
Record immigration.
We've had record price has.
Valuation increases and we got increased churn.
So with all of those things.
Working in our favor.
It's just a matter of catching a momentum like we're on the momentum now the reality is.
Timing wise for Omnicom to show up in the Middle of December was good it.
It's not a big churn quarter for us in Q1 people aren't generally moving into a new apartment January one.
Those rentals had already been done anyway in February when we had essentially been done so we've not seen really any impact on revenue at all of the revenue story continues to be a strong one.
And I think as restrictions get lifted here.
We'll just see what we see in each time like another wave of demand.
Okay, and then just last one for me.
But you showed bad debt jumped a little bit in Q4 after sort of trending down I mean, maybe I think you might have addressed this with commercial.
Properties could maybe give us a little bit of color on that.
Yes.
The jump itself was really related to commercial.
Tenants specifically.
Well we are.
We're not we're not seeing any major trend negatively that way.
I think.
It's pretty much in line after the quarter.
Okay. Thanks, I'll turn it back.
Thanks.
Thank you Jonathan and the next question today comes from Matt <unk> from National Bank financial.
Please go ahead. Your line is now open.
Hi, guys.
On the margin front.
No.
Given your commentary should we expect I guess, then R&M to come down in Q1, and then maybe see a bit of a catch up again.
In Q2, and then maybe more broadly on expenses and inflation you seem to be doing pretty well on property taxes and utilities.
But how should we think of kind of overall.
<unk> margins going forward.
Well.
Q1.
The.
Effective the.
The weather and I'm going to say it has been difficult we've had record snow across the country.
It will be.
Got it.
Clear in our direction on the difference between inflation and tossed with like we talked a bit of a catch up effect for repairs and maintenance.
We've now got a difficult weather quarter no David in front of US, we're just into it but we've already seen the effects of snow removal and we've seen some other effects of.
Weather related expense, that's not a trend it's an unfortunate back to back.
Event I think on the inflation front, we're okay.
<unk> is where we've got to be mindful, we've got a lot of frontline workers stopped and we've tried to address.
Their needs.
On the margin expansion front overall, though Matt without.
Stating the obvious.
As our revenue story improves and that story is getting better and better each quarter and incentive initiation falls off which is the way.
We track our incentives are booked them amortized over one year period after initiation.
So the real question is incentive initiation is on the decline occupancy is strengthening even though we're almost record levels mark to market rents are following that path back to double digits very quickly and all of those revenue lines will naturally.
Assist margins.
No.
I'm not trying to be coy or trying to navigate the effect of the pandemic.
As we come out of it if we really are back to normal.
In March then I would expect to see a very strong Q2, if theres a delayed effect of the virus it puts a little bit more risk in the system.
I don't know if that does it for you or not but basically the revenue story is opening up again in the expense.
Story is.
Yes.
Not inflationary driven for us.
Fair enough mitigated to some extent.
And then on.
With this weird kind of enter the moratorium on.
Rent increases are you now going to have 40% of your portfolio.
And maturing in January at least for the near term or how does that work in terms of rent increases.
We've got.
We've got that all will that.
Province effects material <unk> don't think.
It will stick with us for years and years.
Assuming you don't have vacancy periods to reset renewal dates we've got a new renewal date of January one, which makes modeling a little more easy and predictable I guess, but.
Yes, the only thing that moves an anniversary date now is.
Vacancy that is prolonged and we are a new a new tenant initiate the lease upside the January that otherwise I predict it will be with us for a decade.
At least.
It's an odd time.
Anyway.
Okay fair enough.
And then last one for me on the accounting side for IRS outside of the management fee side of things is there any change in the way.
Just the recognition of maybe <unk> versus dividends or how we should think of that from an operating standpoint in the income statement.
Yes, I mean ultimately.
Were finalizing our assessment on that but with the loss of a management contract, we will likely move to a point, where we just.
Its fair value as opposed to equity based.
Accounting so.
There will be yet.
A change in.
And that in that basis.
Okay, but it shouldnt be a hugely material at the end of the day.
Figures should inherently missing something there.
No it shouldn't they have a high high payout ratio on their income et cetera. So.
It should be there.
Makes sense thanks, guys.
Thank you Matt.
The next question today comes from John Chen from BMO Capital markets. Joanne. Please go ahead. Your line is now open.
Okay.
Hi, guys.
Good morning, maybe just following up.
The turnover activity, how do you think it's going to trend through 2022.
You did talk.
About mark to.
Okay opportunity.
Can you perhaps provide some color on.
Hum.
You mentioned double digits, but could you maybe comment by market.
In your portfolio.
Great.
Yes so.
Kind of trending through Q4.
We saw actually the strongest.
In December was in the Halifax market.
And I believe it was 13 or 14% so that was the strongest overall.
Followed by Ontario.
And then D C. Montreal, we still have some work to really get those opt in I think July will be kind of a kickoff left.
With rental increases of general.
And some some new leasing.
So those are kind of by market, we're looking at double digits definitely.
Nationally kind of coming through to today effectively.
So.
That's the general trend that's been it's been pretty.
The graph in our in our conference call kind of.
So is it pretty clearly it's almost a straight.
Errol afterwards, right now and as Mark said, we think that will only.
Only continue with some of that with the housing crisis and immigration.
Returning students.
Foreign students returning in the deconsolidation household. So we think there's just a ton of firepower behind that that market rental growth rate.
Okay.
Oh, yeah yeah.
Yes.
What Scott said is on the household consolidation this is a real.
Canadian made in Canada.
They have not seen in the U S.
We hold the belief that culturally under <unk> with Liberum.
Within an hour of mom and dad and that lent itself to two that under 30 cohort going home during the pandemic. If they were renting they just went home with restrictions in the city there wasn't much of a city lifestyle with workplaces shut down work from home as possible. So I really we all feel.
Very strongly no different than the U S, where if youre from Houston, you work in Seattle, and it's very very different cultural situation with where people live and followed their careers, but we feel extremely strongly that when workplaces.
Start to get comfortable with the back to work. This this is going to have a big effect. There is still a big cohort of under 30 days that are at home and like you said throughout the pandemic like I don't believe its a permanent effect I don't believe under 30 is going to liberate the retirement with mom and dad, but we do know anecdotally.
Its prevalent in Toronto Vancouver, Montreal. These are the places where it happened.
So we see that effect.
Is back to work.
Thoughts start to change.
Right, Yes for sure.
Maybe just I guess on you commented that each of your markets I guess.
It seems like this quarter, there was a little bit more.
Atlantic Canada continues to hold up quite well, but it would seem to be a little bit of softness in Quebec.
Could you comment on whether there is kind of like a puzzle.
Sort of thing.
Are you seeing any other trends.
And in Quebec.
All right.
Our portfolio not to generalize that.
Our portfolio, our Montreal downtown core portfolio is highly relying on foreign students you've got this.
Multiple we got the University of Montreal, Mcgill you've got concordance you've got.
Polytechnic.
Call that you've got all of this happening.
In the core.
And.
These are world known schools and attract a tremendous number of foreign students.
Our much our luxury all experience.
In the core.
Really affected by the foreign student market.
And every market is a little bit nuanced in BC, it's probably more of that under 30 at home.
<unk> phenomenon.
But weakness everywhere.
<unk> was really focused on the under 30 going home or foreign students not being here. If you just call one cohort of that if you have mobility and you were in rental you have the optionality of giving notice and going home.
And Thats the host Reconsolidation points that Scott was talking about.
Yes.
Yet.
By a couple of things that was probably one of our higher areas of incentive.
So at the year and it continues to be.
And through Q4 as far as granting of incentives.
And then similar to some of the other regions.
R&M utility costs et cetera.
And a little bit higher vacancy. So it was just it was a combination of a bunch of factors.
Specific to Tibet.
Scott Scott talks about incentives, but we're very very proud.
Of how we manage the pandemic and our incentives or something thats not in cap rates history at all but when you look at the total effect of incentive grants and it really equates to Scott said on a number of occasions to about 1% of revenue.
So really in today's environment, we think of that as vacancy loss like we.
We mitigated vacancy loss through incentives and it's not something we believe is that under the circumstances, we had to embrace because others. We're also embracing incentive use.
But it's important to highlight that that burn off.
The fact is really the incentive initiation.
And we've done a very very good job in my mind of managing that prudently.
And on the incentive front December was the lowest month for incentive granting.
For the year, so we do see that burning off throughout 2022. So by the time, we hit Q4, it should be should be much more significant but it takes it's a lagging effect on our revenue as opposed to new vacancy Alex aware, which comes back and what I mean, it's been building the problem like when we were using incentives.
It was a slow build analysis slow burn.
So I think we've crested at the top of the incentive initiation curve.
While we have pressed.
Sure.
Got it.
Paul.
I guess, maybe just one more on.
One side of things and obviously Q4, there's a lot of catch up.
Uh huh.
How should we think about the run rate I guess.
In 2022.
The current inflationary environment.
We never do this were not as impacted by inflation as is.
Yes.
Our numbers needs may suggest again, we are.
Looking at a difficult January with weather related expense across the country.
But it's not it's not inflationary driven it will be very it's unfortunate that it backs onto that catch up quarter, but it's.
It's not inflationary pressure we have.
Yes.
Inflationary pressure on the wage front.
And but dollar wise, it's our frontline workers that we've had to address so from a quantum of dollars its not significant from a percentage of.
Increase it is but from a dollar effect, that's where it is but we don't view that as material we view the revenue catch up.
And over achievement due to a higher churn.
To be what gets us through those those inflationary pressures.
And like on the natural gas front, we have hedged 85% of our 2020 to consumption.
See a lot of electricity costs are passed on to our sub metering process. So it's more around consumption and rate. We believe from where we are today insurance, we're getting indications that those that should be a more positive story for.
For 2022, and we renew in March.
And then the larger increase we saw kind of this year. So there is some.
Hopefully some good news on that front.
Got it.
Okay, maybe just one last quick one from me I guess on the acquisition.
And keeping busy but I.
I guess could you maybe comment on which markets are you seeing attractive.
Attack with opportunities for you guys right now.
It's been a slow quarter.
For new product launch for the type of assets that were we identify as opportunities. We've got a couple of things in the scope right now.
But.
It's also clear that the market.
It still has an incredible appetite for apartments.
And.
We continue to evaluate disposition opportunities as well where we see.
Value creation significant value creation, and a lot of assets cap rates held for many many years.
That.
Really are trading it unbelievably attractive valuations.
And.
We've got that pool.
Diversification modernization strategy in mind.
So we'll be looking at that as well I.
I would not call it material change, but definitely something we're excited about.
Okay.
Very helpful. Thank you very much I will turn it back.
Thank you Joanne.
The next question today comes from Mario <unk> from Scotia Bank. Please.
Please go ahead. Your line is now open.
Alright. Thank you good morning, guys.
Good morning.
I also wanted to come back to you.
<unk>, calling from that I wanted to touch on the <unk>.
<unk> fair value gain recorded in third quarter.
Just on the operating cost.
There are some property in Washington about 2% this quarter would've been up 1%.
Sure.
The other category.
The percentage of your reporting.
Mark you mentioned kind of a recovery in our numbers.
Hum.
With a bit more granularity on the breakdown about $40 million a month or.
Quarter like between R&M insurance and everything else.
That'll be helpful.
Yes, I'll, let Scott I mean, the majority of that would be R&M I think.
Through the year I think we had about a 20% increase in insurance.
But.
Either direct wages or or wages through subcontracted programs, where.
It was it was largely driven by by the increase in R&D and a little bit of inflation in the wind side.
Yes.
Okay.
$40 million and the real key driver yet.
So the 40 million call it 70% to 80% plus would be army.
Furthermore, yes, yes, and Thats a reasonable estimate.
Okay. So then the commentary on.
Kind of a catch up if it was $40 million in Q4, it was up 13% year over year with 36.
Q4 'twenty two.
$40 million.
We're still lower but it was this year.
Right.
I think yes.
Got choppy run rates going on with the pandemic like so.
I'd hate to put 10% on it but that seems reasonable on the surface merial.
The catch up like if we Havent stabilized go forward from here in terms of apartment entry then, yes, I think that would be more than conservative if we have another surge obviously in Q2.
In Q3, then then you can see a drop off all load by another another increase.
So.
Yes, it's that's a reasonable assumption at all pandemic related sadly, it's not just our normal operating business Theres clearly a start stop effect with the pandemic.
Okay.
Okay wonderful.
So just stripping focused community.
First of all in the game I think the one thing that struck me.
With the quarter.
Same property NOI declined during the quarter, which which you explained MMA increasingly a fair value gain that was taken most about.
Due to higher in a line.
Cap rate, which was particularly interesting.
Two part question.
What happened in Q4.
<unk> kind of accumulated period of volume gain year to date from higher NOI up to $417 million versus just $27 million.
Great.
Yes.
First of all we we obviously do our full evaluation process with a third party appraiser in.
Q4, historically, if you look at the last five years most of our increases coming that final stage, we're obviously cautious through the quarters to bump to too fast.
And then you have the pandemic effect through different quarters as well. So that's the reason that generally comes in Q4 and there were a lot of transactions also support those gains.
The NOI side.
Really obviously 2020, the assumptions with zero percent increases and in BC and Ontario.
And really the lower mark to market rents.
Were apparent in our valuations in 2020 and like through the first half of the year with the announcement.
The BC, and Ontario renewal rates, which come into effect Jan one had a very large impact on our stabilized 2022.
NOI.
And then.
Again as we've as we sort through October November December we saw a real ramp up in the mark to market of rents.
We have budgeted increases in R&M. So there is some inflationary pressure built in to our valuations because we use our budget numbers to a large degree.
But really it's really that top line change.
A combination of vacancy drop off of that debt.
<unk>.
Ti don't come into play as much from a valuation point of view. So it was really a top top line story.
With the momentum in Q4.
If you look at the trend through 2021.
We hit.
Our cumulative level of <unk>.
They can see our higher vacancy so.
And and bad debt and et cetera.
In June and so as we've come into the December months, all of those figures have really improved and built out a very strong.
Stabilized NOI for 2022 from a valuation point of view.
Yes.
It's appropriate if I could add something on the valuation front.
We don't talk about it a lot.
All of the apartment REIT in Canada, who value income makeup an incredibly small percentage of the ownership pool, we calculated at less than 5% of the ownership tool rental.
So when you look at all sectors of real estate.
The apartment sector in the public domain.
One of the smallest slice of the pie, okay compared to office compared to industrial compared to let's go by whatever.
And so what we're seeing in the market or valuation that are not based on income in.
In fact, the counter intuitive.
Thing happened during the pandemic apartments with large vacancy rates were commanding the highest valuation.
Because the private market sees it as a as a revenue opportunity and is it doesn't really run it business quarter to quarter like a lot of the Reits do.
Well, we don't run it that way, but they just take a different view.
And the other factor that has nothing to do with income is this replacement cost thing we keep talking about so the private market says my goodness I can buy stable income at less.
Less than 50% of replacement cost.
There's value in that.
So I think on the valuation front, that's something that we don't talk about a lot.
We're a very very different sector of real estate to our other sector peers.
And the valuation is really got.
Over the last five years I've seen it so much less to do with actual income and so much more to do with Nab.
Markets, maybe one follow up on that.
At some point that you're making were seeing in the industrial space, where no other buildings occupied the vision and.
Valuation because of the conviction can we start.
So at a.
A very good rents are you finding in the private market.
They continue to highly sought out for notwithstanding let's say some of the regulatory.
The uncertainty that exists for residential.
There are people buying very aggressively.
Again, oddly not as much today as a year ago.
However, it's also probably just not a lot of product available today. So you had this.
Movement of private sector sales that really with peaking a year ago and vacancy in income had nothing to do with nothing to do with valuation at all well I shouldn't say nothing but there was a surprising reaction in the acquisition market as I said, we're vacancy was seen as a positive.
We run a red we're afraid of incentive use the private sector kind of doesn't even understand what we're talking about it so they they really value the inherent asset so the Congress I'm, saying the same thing over and over again, but the conversation.
In the private market is more of a price per unit than it is about what's your income effect next quarter.
Okay, Okay, and then Jim just.
Last question from me.
Okay fair value gains.
And you may not have the information.
But what would you say the ballpark.
And then in the valuation, which we use in between the stabilized in Hawaii.
Zero value.
Sure NOI, there would have been in place on an LTM or.
Basis.
Okay.
So I'm trying to yes.
Yeah, I mean, we might have needed to take that offline.
Are you kind of talking about what were budgeted from a stabilized versus what we've seen in the last last 12 months.
Yes, because one of the taking on what would be.
So what are the challenges of fair value mechanism certainly based on some stabilized NOI, which in some cases it could be two three years down the road as opposed to Pittsburgh.
To understand.
What would.
What's the gap between those two numbers maybe.
Now realistically I mean, we run at 2022 value stabilized.
For our valuations, we we run rent roles based on what we're seeing in the markets based on renewal rates that we know are in place.
That's what I'm, saying.
Was a huge driver of the valuation increase through NOI for year end was the fact that we do model one year forward stabilized. So it's not we're not two and three years out.
I know some other companies do that.
We're basically a year four we're quite conservative from that point of view.
Given where our occupancy that where we're seeing rental rates and renewal rates.
We think the top line is pretty predictable.
From that point of view.
Throughout the year processes based on income changes, but it is not forward looking but Scott said its like in place income.
Calculation.
But the cap rate.
The market probably looks ahead and that's what we were just talking about the private market valuing vacancy loss. So when we do the year end.
Cap rate adjustments that that's when there's the catch up effect.
But the typical we believe the cap rate has probably one of the most conservative valuation models, they're with multiple.
Third parties, we vetted internally and we typically lag.
What consensus NAV would be by.
A small margin, but we keep that robust system in place so that we're never overstating really.
What's exciting, though and part of what some of our dispositions have revealed is is this significant.
GAAP and cap rate.
Yes.
Depending on the attribute of the disposition.
Maybe I'll just add we do.
Actually during the pandemic, we use DCF models just to look at the short term impact of bad debt and vacancy which doesn't have a long term real large.
Large valuation impact obviously.
If youre, if youre not getting the market rents and if youre getting low renewal rates that are more of a lasting effect, though we do DCF as well.
Check our heads against that.
A direct cabinet.
One year for stabilized basis so.
When you look at <unk>, when we look at a whole bunch of other things but.
But we do we do we do look forward, but that's not our primary basis for valuation.
All sounds pretty comprehensive okay. Thanks, guys.
Yes.
The next question today comes from Mike <unk> from Vishal, It's Mike.
Mike. Please go ahead. Your line is now open.
Thank you good morning, everybody.
Couple of quick ones just to begin Scott you said, 85% of your natural gas consumption was hedged can you remind us where the.
This level is versus.
Where you were for 2021 .
I think the.
Probably the I think.
I think the metric I can give you my recollection is gas prices or maybe natural gas prices were kind of almost 30% to 50% higher I think the mark to market on our.
On our one year.
Natural gas.
Somewhere in that $2 million range any.
For the three to four years like six 5 million that was the last time I looked at it I have been following that natural gas prices during the last two months.
How busy we are but.
That was it was substantially higher.
Sure.
But I would say close to 50% at one point.
Sorry, so just to make sure I understand you correctly, so the mark to market I get that.
Favorable event, just from having the hedge in place, but in terms of the actual price level, where your fixed how does that compare in 2020 Q2 last year.
50% higher that you spoke of words, Oh, sorry prices almost bang on the same like for the next three years.
I thought we were talking about compared to spot market or forward market.
Which is I think it was between 30% and 50% higher than what we've hedged out Scott I guess in summary, you're saying there is not as significant in 2022 effect over 2021 I think that's it.
Yes, that's exactly it got it okay. Thanks for clarifying.
Claire.
Just on the on the property taxes, I mean, I know you guys don't have a secondary.
So you can have a presence there.
New Brunswick is being some hyper inflation are there any other regions, where you're concerned about or are you generally.
Feeling good about property taxes over the next 12 to 24 months.
Yeah.
We work with advisors and whatnot it doesn't seem to have any major pressure points. We saw a change in legislation in Alberta, that's already hit us.
Through 2021.
We're not getting any indication of any major spikes.
Of course, we will continue to.
Go back and buy at any major increases like we have for that.
15 years.
Okay. Thanks, a lot.
Last one for me before I turn.
Turn it back just Mark you made some comments in your.
Opening statements just with regards to reallocate the resources.
In terms of people.
<unk> two.
Focus on other opportunities in Europe , so should we take that as well.
When we came from that.
We're not planning on repatriating any capital.
Uh huh.
Yeah.
No in the resources or Toronto of head office resources that we had that dedicated on the corporate side.
We have the <unk> platform.
We're very excited about what's happening with <unk> and.
Our efforts can be fully dedicated to the success of that platform.
Got it.
In terms of repatriating capital Theres, no claims to bringing the money back.
Okay.
Okay.
Excellent thanks very much.
Thank you.
Thank you.
Our next question today comes from Jamie Shen from RBC capital markets. Jimmy. Please go ahead. Your line is now open.
Thanks, Hey, guys.
Just on the turnover spread.
What is that tracking so far in the year did you say it was double digits.
Yes look nationally all in.
I'm not getting too far ahead of myself, we kind of hit that 10%.
So and again I think the numbers are strongest in the <unk>.
Halifax market them in the GTA in Ontario.
Followed by LTC.
Yeah.
I'm like a broken record on this Jimmy I am not telling anything you don't know, but its the revenue story is what's so strong.
Increased churn alone, even with lower mark to market rents can generate a better bottom line better mark to market rents is clearly the path that we're on a quarter over quarter.
There is no reason to suspect that if.
Under <unk> that are at home come back mandated work in immigration numbers continue the way they are we should be seeing stronger.
Mark to market rents our occupancy gains are already in the first part to recover and our revenue story Thats. The way, we run the business and incentive generation has crested and initiation of incentives is dropping.
That stays stable that it's all of the revenue story is quite strong.
And the trajectory of that story has been as we said gradual but predictable in an upward direction. It was the worst as Scott said in June .
<unk> of last year.
And the results in June weren't that bad, but if theres always a bit of a lag effects that we've got this building momentum now on the revenue front, which has been.
Punch likely into Q4 by some operating expenses hopefully not too weather related in Q1, we will see and but the story is very very strong.
Yep Yep.
On the under 30 cohort.
What percentage they make up of your tenant base.
Okay.
They make up about 95% of our vacancy.
I'm not kidding.
The vacancy with all the under 30 cohort there was no exception.
The suburbs Scott Scott.
Effective.
And there is not a building in Canada that I'm aware of that was impacted that didn't have the under 30 cohort you called them foreign students. If you want you can call them.
Students, if you want or you can call them.
New workforce city dwellers, if you want the reality is and I think <unk>, maybe it's 32.
But that's that's the entire effect of the pandemic and that's what.
I was making this point, it's a cultural Canadian effect, okay in the U S. If you're 30 years old.