Q1 2022 Minto Apartment Real Estate Investment Trust Earnings Call
Good morning.
And.
Vince.
Yes.
At this time.
Okay.
First quarter 2022.
Sure.
<unk> conference call.
<unk>.
Yeah.
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Before we begin I want to remind listeners that certain statements about future events made on this conference call are forward looking and make sure.
Any such information is subject to risks uncertainties and assumptions that could cause actual results to differ materially.
Please refer to cautionary statements on forward looking information on the news release and MD&A dated may 3rd 2022 for more information.
During the call the.
Call management will also reference certain non iff's RF financial measures.
Although deep beliefs.
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Please see the rights M DNA.
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Reconciliations.
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Mr Waters, you may not be getting your conference.
Thank you Miranda and good morning, everyone I'm, Michael Waters', Chief Executive Officer, Michel apartment, REIT and I'm joined on the call. This morning by Julie <unk>, Our Chief Financial Officer.
Also like to welcome Jonathan Lee, our President and Chief operating Officer to his first quarterly conference call welcome Jonathan.
I'll begin the call by discussing highlights from the first quarter as well as other corporate development. Julie will then review our financial and operating results in detail and I'll conclude with our business outlook. After that we'll be pleased to take your questions.
Canadian urban rental market conditions continued to improve during the first quarter and we generated solid financial and operating performance, we entered into 401 new leases.
On which we realized an average gain of 10, 8% over expiring rents. This was our single largest quarterly realized gain to lease of two years since the outbreak of the pandemic.
We continue to reduce the use of promotions and discounts in the quarter, reflecting the strengthening market condition and we achieved these leasing results. Despite the challenges in the quarter from the trucker occupation of downtown Ottawa, which severely impacted our 600 suites in the core and the rise of the omicron bearing in general.
Average monthly rent for the same property portfolio increased two 9% year over year to $60 $177 in the quarter.
And average occupancy improved to 94, 2% compared to 91, 1% in Q1 last year. These figures underscore the fact that market dynamics are steadily improving.
We also continue to pursue important internal and external growth initiatives during the quarter.
We completed the repositioning of 60 suites during Q1 generating an average annualized return on investment of eight 4%.
These renovations improve asset quality, they produce future repair costs and they drive strong growth in rental revenue.
In March we agreed to advance a convertible development loan to Minto properties, Inc. To fund its share of the redevelopment of the University high shopping mall in the greater Victoria here. The redevelopment will create 593, new residential suite than more than 113000 square feet of grocery anchored retail space the REIT will.
Earn at 7% interest rate on the loan during the development period, and we will have an option to purchase Minto properties, 45% stake upon stabilization Juliet.
Julie will provide more details on this transaction later in the call.
This is the fifth convertible development loan that we've done with the major group, which provides the right access to attractive development opportunities at favorable pricing and new and existing markets.
Finally subsequent.
Sequential quarter end in April we announced the acquisition of a 23, 5% managing interest in Niagara Westin downtown Toronto, and 100% interest in the international property.
In downtown Calgary for total purchase price of $201 million. These are premium downtown rental properties that will increase the REIT growth suite count by a combined 753 suites.
Overall were pleased with improving fundamentals the combination of normalizing rental markets and positive outlook for population growth.
Support our top line expansion, although we are facing rising cost pressures on labor and other operating costs.
<unk> on managing our controllable operating expenses.
I'll now invite Julie to discuss our first quarter financial and operating performance in greater detail Julie.
Thank you Michael.
Turning to slide four I'll begin with an overview of the Q1 operating results.
Higher average rents and occupancy drove rental revenue growth in Q1 average monthly rent for the same property portfolio increased by two 9% and occupancy was 94, 3% compared to 91, 1% a year ago.
Same property revenue increased five 6% compared to last year and total portfolio revenue, including acquisitions was up eight 4%.
Despite higher operating cost, which I'll discuss in more detail on the next slide the same property NOI increased by two 6% compared to last year.
AOI for the total portfolio was up by 5%.
<unk> and <unk> were up 10% and 11% respectively.
Per unit was up four 3% compared to last year.
<unk> payout ratio was 72, 1% compared to 72% in Q1 2021.
Turning to slide five I mentioned that has higher operating expenses impacted NOI. This table lays out the cost increases.
Higher labor cost the staffing up of certain job vacancies higher insurance costs and higher repairs and maintenance costs all contributed to the increase in operating expenses in the quarter.
Youll notice the large year over year increase in natural gas costs. This was due to both higher natural gas prices with unit rates, increasing 34% year over year and cold winter weather, which resulted in a 13% increase in total heating degree days compared to Q1 last year.
Cost containment is one of our key priorities and we will continue to focus carefully on costs to maximize net operating margin.
On slide six we have an overview of occupancy Michael and I. Both mentioned that average occupancy in Q1 2022 increased significantly compared to Q1 last year, reflecting the stronger market conditions.
Occupancy declined slightly compared to the fourth quarter of 2021 as move outs narrowly exceeded Louisville show in Q1. This is consistent with normal normal seasonality in leasing and occupancy patterns and reflects the Ottawa trucker occupations negative impact on two downtown Ottawa properties, representing 600.
Sweet.
Slide seven has our revenue analysis as of the end of March 2022.
Richard breaks down our realized gain to lease performance in the first quarter, while the lower chart shows our updated estimate of the gain to lease potential embedded in the portfolio.
Beginning with the Upper chart as Michael noted, we signed 401, new leases in the quarter. Following suite turnover, we realized solid gains police in all markets with double digit growth in every market except Alberta.
The average rent on new leases increased by 10, 8% from $1620 to $1794. This resulted in an annualized incremental revenue gain of approximately $726000.
We continue to reduce the use of discounts and promotions during the quarter, which positively impacted <unk>.
Turning to the gain to lease potential on the lower chart. We believe we can generate approximately $12 5 million of annualized incremental revenue growth quite bring <unk> 6950 suites to market level, realizing gain to lease of 10, 7% this exceeds our.
Estimated gains lease potential of six 8% at the end of December 2021.
Turning to slide eight the upper chart tracks, our gain to lease an average monthly rent on a quarterly basis gain to lease in Q1 2022 was the highest we have generated since the start of the pandemic in the first quarter of 2020.
And we have generated steady growth in average monthly rent despite the negative impact of COVID-19 on urban rental market.
On slide nine Youll find a summary of our repositioning activities, we renovated and leased a total of 60 suites in the first quarter or <unk> 45, but the Reits proportionate ownership share. The average annual rental increase following repositioning was $4468 per suite, which generated a simple return.
An investment of eight 4% in line with our target.
We have 2255 remaining suites to reposition under the current program, we expect to reposition approximately 180 to 250 suites over the rest of the year subject to turnover.
On Slide 10, you can see our repositioning results for the trailing four quarters repositioning investment is our best use of capital.
Generates our highest risk adjusted return this chart clearly demonstrates that the average unlevered return for the four quarters was eight 8% and remained in a narrow band of eight four to nine 4% per quarter. We renovated a total of 381 suite over the 12 month period.
Now I'll review, our intensification and development initiatives beginning on slide 11, with the addition of the University Heights or your development pipeline. Now consists of a projects seven of which are in active development. These project comprised 2271 suite.
During the first quarter, we provided the first advance on the University Heights convertible development loan and construction continued on fifth third bank.
Lonsdale Square Rich grow Leslie York Mills, Beechwood and 8% in Q3.
I would like to highlight some of that work now.
Let's start with our most recent development loan on slide 12, which is for University Heights, and the greater Victorian market.
The plan is to redevelop a shopping center in order to construct five six storey wood frame buildings with 593, new residential rental suite and 113485 square feet of grocery anchored retail space.
We expect construction commenced in late 2022 early 2023 with completion and stabilization in 2026.
We have agreed to provide a $51 $7 million convertible development loans Minto property to finance at 45% interest in the project.
The financing bears interest at 7%, which will accrue and be payable in full upon maturity.
As with our other convertible development loans, we have an option to purchase mentals interest upon stabilization at a 5% discount.
Value.
Slide 13, pinpoints the location of <unk> hate it isn't Michele Burns Valley neighborhood of San It's near the University of Victoria, and kind of with some college with good access to public transit in hospitals and attractive amenities, including perks beaches and a library.
The walk score is 77% in the bike or is TBD.
There is significant demand for student housing in this area two of the five buildings in the planned redevelopment will specifically target as Jim with smaller furnished suites since June focused amendments.
Moving to <unk> Bank on Slide 14 construction of this building and auto asleep neighborhood is nearly complete.
As you can see from the photo on the upper right more than three quarters of the 163 suites have been leased in nearly 100 are already occupy.
We'll have the ability to exercise our purchase option later this year.
Turning to long sterile square in North Vancouver, and Slide 15 excavation on this project is complete and form work is well underway with concrete poured at the <unk> basement level with.
Continue to expect construction completion in the second quarter of 2023 with stabilization in Q4 of that year.
Progress was also made on two other convertible development loan projects in Q1 2022 demolition at 810-Kingsway in Vancouver continued and the Beechwood project in Ottawa officially broke ground.
On slide 16, Youll find a recent photo of the risk growth site in Toronto, where construction is underway on a new rental tower with 225 suites, including 100 affordable.
Stabilization is expected in the first quarter of 2020.
Previously noted despite as attractive in part because it has decided the future Martin growth LRT station, which should be operational in 2030 or 2031.
Construction is also moving ahead with Leslie York, Milton Toronto, which you can find on slide 17, we are transforming this site with 192, new rental terrorists suites, and the new 9000 square foot amenity pavilion, serving the entire community.
Construction got underway late last year and stabilization is expected in late 2025.
Now I'd like to review the newest addition to our portfolio in Niagara West in Toronto and be international in Calgary.
Note that the closing of the purchase of the International is expected later this week, let's review and iron ore West first on slide 18.
On April 20, <unk>, we completed the acquisition of a 28, 35% matching interest in this premium and newly built downtown property.
Total purchase price was $114 5 million.
We have placed on a very rare opportunity to acquire newly constructed residential rental building in downtown Toronto.
Returns on the property are also enhanced by asset and property management fees earned from managing our institutional partners interest in the property.
Property was completed in 2020 and consists of 501 rental suites and 52600 square feet of retail at grade anchored by firms or grocery store.
The East facing Suisse also provide a lovely view of the downtown core as UPC.
Turning to slide 19, I want to note that this building prioritizes sustainability. It is equipped with electric vehicle charging station secured bicycle parking and a brief roofs that absorbs and capture storm water for on site irrigation.
The design of the water and electrical system is also highly efficient which results in 45% energy savings compared to the national coal standard for this building category.
The building is currently undergoing certification under the Canada Green building Council lead program and is expected to earn LEED silver certification.
This highlights.
Highly sustainable and efficient design.
More photos of Niagara West are on slide 20, it features quality condo quality suites, and amenities, including a rooftop pool and urban garden with barbecue facilities, a full service fitness center any rooftop half leased area for dogs.
Walk score for this property is 94 also has a bike or a <unk> 73 in a transit score at 100.
Turning now to the international on Slide 21. This downtown Calgary building consists of 252 suites with 2700 square feet of commercial space.
Purchase prices $86 5 million.
The international is located in Calgary Central business District, and offers direct access to the plus 15, skywalk and 18 kilometer weather protected above ground walkways. This very unique for us for residential building and connects residents directly to offices restaurants retail and entertainment without <unk>.
Having to go outside.
The property was originally constructed in 1970 and was operated as the hotel before being acquired in 2015, the property underwent a $30 million conversion into quality condo condo quality residential rental property. It has retained high quality hotel inspired common areas and amenities.
Moving to slide 22, these photos provide a snapshot of the rooms and amenities are multiyear renovation program of all suites common areas and amenities with recently completed and significant upgrades have also been made to the heating and building automation system. The international has a walk score of 97.
A bike score of $79 in a transit score of 85, which highlights the attractive downtown location.
Turning to slide 23, I'll conclude with a review of our debt financing and liquidity since the recent inception, we have maintain a conservative leverage ratio and balance in our debt maturity schedule.
On this slide shows debt maturities are highly manageable through 2027 as of March 31, 2022, the weighted average term to maturity on our fixed rate debt was $4 77 years with a weighted average interest rate of 281% approximately 93, 6% of our debt is fixed rate and 70 <unk>.
Percenters image ensured lower cost debt.
Total liquidity was approximately $144 million at the end of March 2022, and debt to gross book value was 36, 8%.
Subsequent to the end of the first quarter, we obtained a commitment from our lenders to increase the limit on the <unk> revolving credit facility from $200 million to $300 million.
This provides us with additional financial flexibility as we pursue growth opportunities.
<unk> of the amended credit facility is expected this month.
I'll now turn it back over to Michael.
Thanks, Julien I'll wrap up with our business outlook on slide 24, before we take your questions.
We believe the outlook for Minto apartment REIT is highly positive for the Canadian urban multi residential rental market is steadily improving.
Strong fundamentals.
Driven long term growth in this market remain in place.
And that includes Canada is expansive immigration policy and elastic housing supply and the increasing gap between the cost of renting and owning a home.
These factors were driving the market prior to the pandemic and we believe that they will continue to do so for the foreseeable future.
We're confident that we have the right assets and strategy to succeed as the market conditions continued to strengthen our strategy is made up of five key pillars, firstly capitalizing on organic growth through gain to lease.
Creating value from suite repositioning.
Focusing on cost containment.
Exploring attractive acquisitions and development opportunities and lastly, capitalizing on our relationship with the Minto group, which continues to provide us with proprietary and highly attractive investment opportunities.
Our strategy has served us well since the inception of the REIT.
<unk> will continue to do so in the post pandemic world sticking.
Sticking with it we believe we're well positioned to generate strong returns for unitholders in both the short and long term.
That concludes our presentation. This morning, Julien I would now be pleased to answer any questions you may have.
Miranda Please open the line for questions.
Thank you, ladies and gentlemen, we will now.
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There appears to be no questions.
Okay, Miranda well I guess that concludes our call. This morning, then thank you very much for joining us and.
Michelle hang on sorry, we've just got a note Miranda this seems to be a problem with the with the call in.
Not sure quite what that is.
Maybe what we'll do is.
Just take 60 seconds here to see if we can resolve the issue.
Brian do you mind, taking a quick look at that.
Okay.
Sure.
Okay.
Okay. It does seem like there are a couple of people here now in Q.
The first one would be Brad.
Doug <unk> from Raymond James Please go ahead.
Hi, good morning.
Hey, Brad how are you.
Yes.
Wanted to get your thoughts on I mean, we've seen a pretty slight.
Sizeable movement in the underlying bond yields.
Net financing costs.
How do you think that translates into acquisition pricing and revaluation.
Given that move it you see much of an impact on.
On valuation metrics or do you expect given the inflationary environment for revaluation of holding right now.
No.
I think the.
<unk>.
We need to consider.
Funding sources for some of the bidders.
In addition to long term debt.
A component of the bidding I'll say.
Market would be publicly traded REIT.
At current conditions.
Ourselves and our peers are all trading at substantial discounts to NAV and so.
That Mike at.
At least in the near term take some of those bidders out of the market, but when you turn to the other.
Players the other segments I guess of demand for investment in multi res.
Looking at private equity and private buyers.
They of course will be looking to fund acquisitions with term debt and in many cases.
And I think.
The sort of initial conclusion might be to say rising rates might translate.
<unk>.
Valuation.
Of course, as you pointed out there would be an offsetting.
Yes.
Offsetting impact from from NOI growth.
And it's hard to say that there would be a one to one sort of linkage I think.
You need a little bit of time here to see exactly how the market plays out.
The expectation I think we have seen rising bond rates for.
Several months, we've been seeing the bond rate move.
It Hasnt had to this point and immediate and obvious impact and what we're seeing in the private market.
For multi read that that.
Sort of monitoring several auction.
And seem fairly deep bidding pools and fairly aggressive.
Now I think if we.
Watch the Central Bank.
<unk> to ratchet rates.
We progressed into Q2.
I think I think that might change a little bit so I think from our perspective.
And I think most builders are probably underwriting not on a cap rate basis, but probably on a five or 10 year DCF basis.
And so they are looking at.
NOI growth of course, they are layering in value add capital.
Our suite repositioning possibly intensification.
And so I think that it is not.
Necessarily follow that there'd be a one to one.
Relationship between rising rates and cap rates I think there's more factors at play and I think we we need to see sort of how the market dynamic plays out on that.
Great and from mental perspective, the rates respectively.
I guess beyond eventual lending the fifth third bank.
I guess in terms of incremental capital being deployed I guess thats use of proceeds for now would be still on the renovation program.
And would there be more opportunities for further development loan.
Being deployed.
So.
Obviously, and we've said this.
At length in the past the highest and best use of capital for us on a risk adjusted basis is the is the repositioning program.
Partly because we have tremendous visibility into what renovated suites are fetching in the buildings that we're renovating because were.
We're leasing them more or less on a continuous basis.
Have really good visibility on the renovation costs because we're on it.
More or less continuous renovation program in the buildings that we highlighted for repositioning.
But also that we're we're metering out capital in very discrete amounts and so we can tailor the program.
Two what market demand is showing us and so.
The only negative.
Is that we're really gated.
The amount of capital we can deploy in value add repositioning by the turnover of on renovated suite. So.
It's a very attractive use of capital for us but.
It's relatively limited in how much we can deploy in any given year. So.
Turning to other uses of capital.
Certainly we are looking for.
Accretive investments.
CDL loans are they're all accretive the coupons.
Yes.
<unk> are accretive from an <unk> perspective.
And they do give the preferential access at a discount to fair value to buy new assets.
When those buildings are stabilized different banking is an example, as Julie highlighted we have five CDL programs out there.
Right now we are looking at others questioning comes to where is the capital coming from certainly our liquidity position right now with very healthy.
It is possible that.
On a go forward basis, we might look to you.
Certainly not certainly not looking to raise capital.
At a significant discount to NAV or any discount to NAV right now the stock is trading at a very substantial discount to <unk>.
Book value NAV.
So it's possible that we could look for capital in other ways recycling some capital.
Which would allow us to upgrade the portfolio.
Is one such option, but we'll be we'll be managing it very carefully.
Okay, Great I'll turn it back thanks.
Thanks, Brad.
Your next question is coming from Jonathan.
<unk> with TD. Please go ahead.
Good morning.
Just following up on that last one when you are talking about recycling capital Michael would that be.
Sales of partial interest in properties or would you look to sell 100% interest in some.
Good morning, John I think.
It might vary, but there are assets, where potentially we have.
Generated cigna.
Significant value and perhaps the future potential.
That might be possible from selected assets.
Might be attenuating.
And so in certain cases, it could be a potential.
Potentially the sale of a 100%.
And certain assets, that's a process that we are.
Yes.
<unk> on a more or less regular basis.
We.
We're looking for assets.
Think about acquiring Stephan and essentially by deciding to hold something we're making a decision effectively to buy it.
And our acquisition criteria include repositioning potential intensification potential or significant gain to lease and so when there is assets in our portfolio where.
Yes.
The gain to leases or potential is limited either because we're at or near market rents or turnover is limited or where there is limited potential for intensification, just because of the site characteristics.
Or.
Our renovation is limited.
Those might be assets that we would highlight for for sale and then redeploying the capital into opportunities that are not only accretive but raise the overall quality level of the portfolio.
Okay.
That's helpful.
Sean.
Debt refinancing.
You've got the current five year. So you may see right in your presentation deck would that be a fair.
Sure.
The assumption to use that youre going to be doing mostly five year run.
<unk>.
New mortgages.
We always look to ladder, our maturities. So I think it will really depend on what's coming to maturity and where we have gaps.
But to your point with rising interest rates right now.
This would be to shorter term.
Okay.
And your your.
The stock looks like you've got it.
This room in 2026 2027.
Yes, Okay, and then lastly, just for me.
What's the expected development spend for the for the remainder of.
This year.
Yes.
Okay.
And Youre looking at the development, Yes, Highbridge Grove, and Leslie York Bells.
So we've begun drawing on the construction loan for rich growth, so as far as equity outlay.
It would be mid.
Minimal or nothing I think we made the first strong Q1.
And we think Julia I don't know if you have that handy Jonathan. Unfortunately, I just don't have that information at my fingertips, but no.
Those two on balance sheet deals.
Our.
I think roughly $10 million I'd say for for Leslie York Mills, and as I say if rigs go overall redrawing on the construction loan.
Okay.
Helpful I'll turn it back thanks.
Okay.
Your next question coming from Kyle Stanley with D var.
Please go ahead.
Thanks, and good morning, everyone.
Sure.
I was just looking for a bit of an update on the carlile.
Your plan there you mentioned potentially.
Renovating the commercial space I'm, just wondering what would the impact be to NOI. If you were to do you lease the remaining 35000 square feet and then.
Just generally what are your thoughts on development potential investment and return to be generated I understand it's probably early days, but just an update there.
Yes, so we immediately prior to Covid had engaged.
Consultants.
To evaluate the feasibility.
Converting either non revenue or commercial.
Faith in that building to revenue space in and immediately pre Covid, we actually gave converts.
Non revenue space to.
Two residential suite.
As part of that work, we developed a number of concepts.
For the podium itself.
And are now taking that to the next level of design development drawings.
The property is zoned.
To allow for that use.
Thank you.
Based on our concepts.
And sort of yield and now our preliminary yield analysis generate something like 40 to 50 suites. The space. There is about 43000 square feet.
And so.
As we go.
I'll go through that design development stage, and we cost it out.
We'll be developing a pro forma so it's I think it's preliminary right now which is.
Which is why we've left that asset in the same property.
I would expect that at some point in Q2.
Danced our feasibility analysis on that I would expect.
Kyle that it would take.
12 months or more.
Yes.
Plan in permitting and then.
Perhaps 12 to 18 months to it.
The renovation work and bring those.
Online but.
We did make the preliminary steps.
As well as it relates to the tenants that we have in there to convert them to on demand they are cash flowing.
Despite the difficult.
For commercial users for the office users from the downtown core.
So we've taken all the preliminary steps to to take the podium.
From a repositioning.
We'll make a substantial impact.
<unk> on the performance of the asset, but I think it's premature right now to say nicely.
What that might look like.
We do note.
Obviously.
We end the quarter with having converted those to month to month it.
It did have an impact on SP NOI performance.
About 60% to AEP.
And I think from a.
Obviously, we've been using it to cash flow. This basically complete with just nine months ago.
I don't know if that helps.
Yes, no definitely not.
Very helpful and good to understand what Youre thinking there.
Just maybe a last one.
And then just turning to the FERC business I know, it's a small component now.
Rental rates within that part of the business improved pretty nicely on a sequential and year over year basis, especially given the truck your occupation in Ottawa.
Just wondering.
With the economy reopening business travel ramping a bit.
What's what are your thoughts on where we see the rental rate a furnace side going do we hit pre pandemic levels.
In the near term.
We've steadily drawn down the inventory, which may yield management on those.
I believe Jeremy as you pointed out the rate your average monthly rate has climbed.
In excess of 4200.
We had lower occupancy in Q1, it's kind of a seasonal lower occupancy quarter for furnished suites.
And of course, it was impact as you pointed out by by the trucker occupation and some of the omicron.
<unk> down.
I think when we're looking at April we've already seen the occupancy improve well in excess of 70%.
I expect that will continue to improve and with that I think rate I'm not sure we'll see that rate.
Move to pre Covid levels in Q2, but but obviously it will continue to strengthen I think if we get to the latter part of the year.
Okay, great. Thanks for that that's it for me I'll turn it back.
Thanks Scott.
Your next question will be coming from Jenny mall with BMO capital markets. Please.
Please go ahead.
Thank you good morning.
Hey, Jenny.
Turning to the op costs.
Yes.
As it relates to energy prices and natural gas.
The differential amongst the different market or rates going up at the same clip.
Michael.
I mean, we sort of look at it kind of.
I mean is it.
With the global commodity we've seen I mean, theres, probably small differentials for delivery costs, but the.
The actual unit cost of the energy is.
As relatively relatively uniform market to market.
Okay great.
Can you remind me if you guys do any hedging or do you have any of that in place right now.
Don.
And we've evaluated at length in the past Jenny.
Vince has been that.
Over the long term our hedging program.
Obviously, we will we will.
Yes.
Dampen volatility or or eliminate volatility, but it does come at a cost.
Being the cost of those hedging contracts so.
We opted for better for worse too.
Forgo a hedging program.
And with the expectation that over the long term.
Performance was good.
Be better because we would.
Avoided the cost of the insurance if you will.
When you implement the hedging program.
Okay, Great that's helpful.
Two the development loan.
When you look at the yield that we get.
Sure.
Pipeline looking for future loan.
And more specifically how is that yield calculated I just want I'm getting at is as rates go up is there any provision for that yield to go up for future development mode.
Obviously future loans would would be negotiated based on market conditions at the time we.
We do have a pipeline of opportunities that we're looking at.
We haven't committed to anything obviously.
And so I think as we look forward and project.
Over the latter part of the year, we'll be evaluating credit market conditions.
At that time in setting setting right, obviously I'm looking for obviously a reasonable spread over the underlying.
From the REIT perspective, though it's important to note that the.
Bulk of the return from the CDL program actually comes from the exercise of the option. Because these options are established at a 5% discount to appraise value and appraisals often lag through fair value, but even if you just look at it on the appraised value basis.
About 60% to 70%.
Of the return to the REIT from the CDL program is coming from.
The exercise of the option and as we've talked about.
With NOI growth and particularly rental growth.
We might see that.
That gap widened even further.
Terms of the discount to fair value.
Okay, Great. That's helpful. And then lastly for me with the Ontario provincial election less than a month away. Just wondering if you could share any feedback or tidbits from good discussion with government and of course, we can't predict the outcome, but if we end up with a government that is going to be more friendly to <unk>.
Building on supply how do you see the Reits participating in that with you sort of continue with what Youre doing now or is there any chance you could ramp up.
Instruction and helping with the policy.
Well I mean, I think at the provincial level. The two big levers. The provincial government has is rent control on one side.
And then planning policy.
Which really goes to.
The growth side so.
I think the expectation is that a conservative government would be relatively more constructive shall we say than the alternatives on a rent control perspective, we also view.
That the conservative government. If it was returned to a majority might also be more constructive.
On on planning policy.
Moves such as.
Increasing density around transit nodes for example, and streamlining.
Planning processes those will all help.
Of course, the reality is is that municipalities play a very significant role in planning approval.
Yes.
They can.
I, both help and hurt.
FERC in the form of delays in processing planning application.
And restrictions in terms of bringing more density online, but they can also help we've seen.
Great policy for example implemented by the city of Toronto for Affordable housing in fact, we're leveraging that program at our rich growth.
Project, a new tower that we're building there is being built in partnership with the city of Toronto to their open door program.
<unk>, where theyre granting waivers of deferrals on things like property taxes and development charges. So.
I think that there's rightly a lot of emphasis on what's happening at the provincial level and on June 2nd.
But we also need to keep in mind as well that the planning environment is complicated.
By municipal the impact of municipal government.
I guess, that's our sort of look at it.
Okay, Great that's great color. Thank you very much thanks.
Thanks Jenny.
Your next question comes from Max <unk>.
Matt Mccormack with National Bank. Please go ahead.
Hi, guys.
Quickly just wanted to get your sense as to its early days, but.
How things are trending in the spring market.
You highlighted that there's going to be a bit of an opportunity in Q2 and Q3 of this year, but is that materializing in what youre seeing on the demand side.
From bolt on occupancy and rent trajectory standpoint.
Yes, I think number one just in Q1, we saw that realized gain to lease of 10, 8% versus what we had forecast at the end of Q4 was so it was materially higher part of that is a function of the suites that actually did turn versus.
Versus what our forecasted benzo was stronger than what we had expected. We ended the quarter Q3 with an expectation of 10, 7% gain to lease in the early indication is what we've actually achieved in April are entirely consistent with that estimate so we're re.
<unk> in April at levels consistent with the forecast from the end of March April is tracking very well not just on gain to lease but demand.
Our focus is on downtown Ottawa filling some of that white space that we suffered from the shutdown.
The city.
City streets.
Many cases remain shot we did have.
Another protest ripple through last.
Last weekend, so hoping that we can get through some of these disturbances in sort of return to some sense of normalcy in downtown Ottawa.
In terms of street closures and disruption.
There are other areas of focus for us rockhill in.
In Montreal in Edmonton.
But generally speaking, yes, I mean, thats whats really buoying, our optimism is what we're seeing in the leasing offices from a demand perspective, and the early indications as well for move ins versus move out is also strongly positive in April so.
April is a strong leasing months.
Perhaps our second best leasing months traditionally in the year after September .
And certainly the early indications are good.
The Q2 from a leasing perspective.
And from an occupancy standpoint was the sequential pullback mostly related to the issues in Ottawa or was there anything else there.
Obviously seasonally slow but.
No.
Responsible for the pullback in occupancy.
I mean, we have two properties there that are right across the street from each other 185 in the Carlile.
They literally straddled the security cordon.
And so.
For tenants are folks looking to move in.
It was incredibly difficult to access those buildings.
The smell of diesel hung in the air rate constant blaring of horns.
And we did see.
Fairly significant sequential decreases in vacancy at 185 in the Carlisle from from the end of Q4 to where we ended up in.
In Q1 and that was in.
Entirely due to that and so when you think about those 600 suites. They did have an impact in the sequential overall portfolio occupancy. The good news is is that we've got renovated suites available we're starting to see some movement.
And we are seeing improvement on an occupancy button.
Certainly.
The occupation did.
Did not help us in Q1 and that was not anticipated in our.
In our thinking about how.
Late last year, how we were looking at the Ottawa market Okay.
Okay Fair enough and then on the incentives front it sounds like youre, not giving incentives in Ottawa and Toronto anymore Cal.
Calgary, obviously, it's part of the market and funneling through but.
Are you still giving select incentives in Montreal or is that a market that youre seeing.
Get back to normal as well.
I'd say were very tactical across markets I mean in some buildings in some sweet plan, where there is availability, we're applying it but I would say.
Q1, 2021, with a carpet bomb approach to discounts across the portfolio given how weak market conditions, where now it's kind of a sniper approach.
Looking and building.
Rent rolls in.
And stacking plan for certain views certain plans, where there is availability, we're applying discounts sort of judiciously.
And I think it also varies based on where you are in the year.
In many ways, it's preferable to carry a little bit of vacancy as you head into April versus.
Heading into November let's say so.
You wouldn't want to carry our you'd want to minimize the vacancy you're carrying in November but as you head into the bathroom or second best leasing month of the year and in April .
You probably want to have a little bit.
Availability. So we are pushing rents Conversely, and plans, where there is very low availability of properties, where there's very little available. So we're seeing pricing power return as the white space on the rental shrinks or disappears.
Makes sense and last one for me just on on the cost side. It sounds like Youre focused on that but are there opportunities I guess to streamline things are or where do you see the ability to kind of rein in your controllable costs or should we just expect limited growth from this point.
Okay.
Well.
One thing, it's sort of hard to look at our full year based on Q1 Q1 is.
Lee your lowest profitability quarter, just because you're hitting your use of heating is the highest.
And we did have this confounding impact not only of a colder winter than the year before so using relatively more gas, but just the surge in gas prices.
Did have that very significant impact.
I mean, where we are looking at really is everywhere in the controllable cost category. We're also looking at new capital programs on the energy side.
Investments in energy, reducing technology or investments.
With higher gas prices those that were marginal ROI projects suddenly become.
Yes, I think.
Yes.
Very very yes.
Good projects. So we're looking at that we're also looking at other areas leveraging relationships.
To mitigate some of the contract increases in things like waste and other areas.
G&A is another area from from prospective consultants and other things. So so we're looking really across the board at managing it.
Challenging in an inflationary environment of course.
But.
We're pulling out all the stock.
Okay sounds good thanks for the update.
Thanks, Matt.
Your next question will come from Jimmy <unk> with RBC capital markets. Please go ahead.
Thanks, Yeah, just two questions for me if I could go back to <unk>.
Grow west.
Yes.
How did you underwrite the asset in terms of growth potential.
Maybe maybe more to the point that what made it compelling for you to.
Go ahead with this deal despite what looks to be reasonably skinny economics, especially in a higher interest rate.
Yeah, So firstly, maybe I'll just tackle the timing issue.
<unk> and the international were both held in a private equity.
Equity fund that had reached.
The extent of its investment period, if you will.
Both asset.
Im.
Had stabilized in the last quarter of <unk>.
'twenty one we completed construction at 39, Agra and really over the 18 months following.
Work through the lease up of the international conversion work completed around the same timeframe and again the lease up there in that building.
We reached 99% occupancy I guess in Q4, so we had fairly limited potential to extend.
The disposition of the assets from from those private equity funds.
We could have.
Pushed them out farther we absolutely would.
Looking for.
Higher unit prices to produce.
Due to the impact of the dilution, but notwithstanding all of that we went into it.
With our eyes wide open.
Because we think both of these assets have higher much higher than average NOI growth profile. Firstly, neither one of them is subject to rent control obviously the international Alberta, There is no rent control regime 39, Niagara being one of the.
Buildings delivered our occupied closed in November 2018 is not subject to rent control and those are very rare beast. Indeed.
<unk> defined.
We.
When you look at the at the valuation of the repaid for that asset.
The red cap rate would have been in the low threes the commercial component of course in the mid fours.
That was based on two appraisals.
I think that if it was actually exposed to the market the valuation would have been.
Fair fair higher possibly in the high high twos, 275% cap rate on the on the residential component for example.
So we I mean, both of those assets just from a location perspective.
They are not subject to rent control.
<unk> investments made in the international obviously.
39, <unk> loaded with.
Prop tech and from an operating perspective, the operating margin on 39 narrow would be would be very high we'd start with a 7%. So as you do see revenue growth there because we are able to reprice renewals to market.
I think from an operating leverage perspective will be very substantial so.
On balance we looked at all of those factors and said.
Two assets.
<unk> not in the near term, but in the in the near to medium term will be very significant.
<unk>.
Attribute for REIT unit holders in terms of their NOI growth profile. So.
From our perspective in the medium to long term needs will be jewels in the crown uplift of the REIT portfolio and Thats why.
That is how we underwrote them.
Okay.
Thank you.
And then the other question I had was.
I see Andrew.
Underwriting standards changed at all with the rate increase in holiday.
Loan to value cap rate.
Good assets.
I think at this stage, it's too early to say, we haven't seen any indication of that traditionally CMA. The valuations have been quite a bit lower than market or appraised values there.
Their cap rates typically have traditionally been quite a bit higher.
And.
They look at things like.
Debt service coverage ratio is actually usually the gating factor so that could be impacted.
The loan to value I think it's more debt service coverage ratio.
Okay.
Okay. Thank you.
Thanks.
Your next question will come from Mario <unk> with Scotiabank. Please go ahead.
Hi, good morning, and thank you for taking the question.
I wanted to start off on the operational side.
Can you provide us with the total incentive amortization recorded during the quarter and.
Kind of a pace.
It will trend lower over time, we'll work through two quarters in 'twenty two.
Thanks, Thanks, Mario So you said the total promotion.
I missed your next word sorry, yes, sorry, the deduction against the revenue this quarter in terms of the amortization of previously provided incentives.
Yes, so we.
We don't typically break that out but this quarter it would have been.
Between 7% and 800000.
So thats, representing the amortization of.
Incentives granted over the previous four quarters.
And just for reference the amortization expense for promotions would've peaked in Q3.
Of last year, and we're forecasting they will we'll continue to fall because of them.
Really the peak application of incentives and promotions with Q1 Q2 of <unk>.
Last year, particularly Q1 of last year.
Got it Okay. That's helpful. And then in terms of occupancy was still your expectation to hit 90, 697% and 22 and we got more of a.
However, Q3 Q2 event or do you think you can hold at that level by the end of the year.
I mean Q2 is a key leasing quarter, obviously and as I mentioned to the earlier question about April's results.
And Andy the net move ins and move outs, so leasing obviously as a leading indicator of move in.
And we had.
<unk> move ins in the quarter.
That were in line with our internal forecast and the leasing activity was which was strong.
So our expectation as I've said.
At the end of the Q4, when we did our Q4 earnings call was that we would return to <unk>.
Like full occupancy from our perspective in the 97% by Q3 so.
I expect we'll see strong improvement in Q2 with the spring leasing season sort of get into that 97 plus range.
In Q3, and possibly see it climb further.
In Q4.
Perfect Okay.
No significant change.
<unk>.
I wanted to also touch on your estimated market rate, which was up pretty significantly for 9% quarter to quarter.
It goes towards inquiries during the pandemic, including 6% in Toronto.
Can you provide a bit more color on kind of the internal estimation process, there and as with the four 5%.
It essentially a bit of a catch up from prior quarters or do you feel confident in what you saw on the ground rents are moving up you didn't give us confident.
In terms of disclosing those or is the four 5% generally what's happened in the last three months in terms of where you think.
Well.
So two things first I'll speak to methodology.
When we measure our develop our estimate at the end of each quarter based on a plan by plan announced bidding Ren.
Versus the market rent for that specific plan.
So we would go through the stacking plan of every single building.
And and the estimate of the market rent is based on the.
The last actual ramp that we achieved for that suite. So as I pointed out in the past Mario it's highly seasonal as you go into Q1. So at the end of December typically is is youre heading into January not a high leasing months.
So typically our estimates of what we are we're looking at.
From a market rent potential tends to be a little bit lower and then if you go into into the spring leasing season and demand rises in conversion rates improve.
We.
We would tend to see that number right. So there would be a bit of a sine wave type function.
Holding acquisitions and everything else.
Constant.
For your estimate of market rents right, obviously low in Q1 rising in Q2 Q3, dropping again in Q4, what made it difficult at the end of Q4 to estimate and come up with that six 8% as we were already in omicron, because those shutdowns really began in the middle of December .
And we had some difficulty.
Coming up with <unk>.
Truly an estimate of market rents because of the shutdown.
There was some uncertainty.
And then obviously as we got through the end of January .
We saw the actual conversion rate, what we actually realized 10, 8%.
With stronger than we had maybe we've been a little too conservative in our estimates at the end of Q4, what we saw in April as I mentioned, the realized gain to lease was exactly in line with our estimates at the end of Q1. So the early signs at least are that Q2 is playing out.
Consistent with our with our expectations at the end of March So that's the hope and that's the expectation now based on the data that.
That we have.
When your window shopping with competitors.
Part of part of your process.
Are you seeing your competitor buildings.
Inching up asking rents as well.
Yes so.
We do it is on a building by building basis, we look at the competitive set which.
Usually it's purpose built rental but in some cases would include.
Condo rentals and what we are seeing is.
Generally yes, we are seeing rent edging up there are specific considerations in each market of course.
And so we <unk>.
Look at that but but generally speaking as a broad statement, yes, we're seeing those market rents go up and Thats, what part of what's contributing to our sense of optimism around the.
The growth in the market.
Okay, maybe shifting gears just to capital allocation.
Touched on a bit.
During the call but.
We're not we're not interested in the REIT sector. So.
A couple of weeks.
How does that change your capital allocation priorities.
If at all.
When you look into the next six nine months.
Alright.
Does it make you think more about buybacks, even though your intention is to grow them over time.
All responses by the management team or the company argues Tvs.
In the shorter term fluctuations in the cost of capital in terms of Windows.
Capital allocation questions over a couple of years.
Yes, so I mean, we obviously are tracking the unit price for ourselves and our peers.
And watching.
Sure.
Capital markets activity from an equity raise perspective, and certainly there's been a couple of data points not a lot but.
A couple of data points on that front.
Obviously for us trading at a 20% 25% discount to NAV.
As unusual.
We're not expecting it to <unk>, but certainly for the time being.
Our focus from a capital allocation perspective.
We remain as I said earlier on the on the value add capital that we can deploy in the portfolio with our single highest and best use from a risk adjusted basis. The limitations, we can only deploy a limited amount because we're gated by the turnover upon renovated suites. So.
And then we look at other opportunities obviously the development pipeline.
The York Mills, and rich growth committed on those were under construction.
But they are largely self funding at this stage certainly rich growth. It began its first drawn on a cost to complete funding basis, it's not requiring a lot of more.
<unk> capital at this stage in construction.
<unk> now funding that Leslie York Mills, as we indicated probably roughly $10 million of capital to get to that equity requirement that we have in the construction facility there.
The CDL programs as we've talked about that we've committed.
Some of them are fully drawn and bank for example is fully drawn our expectation.
Assuming the REIT.
They will exercise the option to acquire the asset would be minimal equity outlay to acquire that that building.
And so those would be the big the big sort of ones that are committed today and over which we have visibility and we based on our liquidity situation right now.
And the.
Our outlook is that we have more than sufficient liquidity to.
Two.
Handle all of those commitments, we do get questions.
About.
How would we fund fund growth we did talk.
As I mentioned with the with <unk>.
An earlier caller about.
Possibly recycling capital of course in the past, we've also leveraged joint ventures with institutional investors.
If there were opportunities that made sense.
If we do get the question.
Regularly about NCI and share buybacks.
And certainly.
For us it.
It's a bit of stock and below because.
We also get questions about one of the biggest.
We have with some investors is the small size of our float and so obviously in CIB.
Would work against that.
And the impact of courses.
But our volume is relatively minimal impact.
And of course, it will be quick.
Negatively impact our leverage as well so.
At a high level I guess, that's kind of sort of how we're looking at it globally the commitments that we have.
Future sources of capital beyond a bought deal, which the window seems to be shot right now.
And then this notion of share buybacks.
Okay.
I guess im asking the question in relation to.
Bank.
Terms of that's a good point.
The equity is kind of already in the assets. So it's not a big capital outlay.
Jamie's question there.
Could you could cap rate spread is pretty skinny.
Presumably it could be a bit better.
At the bank because the cap rates in teller grew a bit higher than they are in downtown Toronto.
I'm curious in terms of how you think about acquiring assets.
Tighter acquisition cap rate spreads versus buying back units at a 25% discount.
The spread would be higher.
The puts and takes involved.
Yes.
Activity.
I mean I guess.
We look at things like our CDL program, where the yield on those is 6% to 7% through the development stage.
The option is exercised on those the effective.
IRR for the region.
Mid mid teens, which is.
Which is a really good result from our perspective.
That I guess sort of looking at that I mean.
As we talked about with 39, Agra and international the timing was really not fully within our control.
We do think that.
In the medium to long term those assets.
Growth will really reflect an above average NOI growth profile simply because of our.
The flexibility we have in terms of moving rents as the market continues to strengthen.
You.
<unk> fifth and bank.
We're buying that asset.
When we exercise the option and a 5% discount to to appraise value.
<unk> values there.
We will probably lag true market value I mean, they are just.
Arent great.
Comps there is nothing really that is selling brand new apartment buildings in Ottawa in a neighborhood like the greed.
Just arent there so we look at it more than just cap rate too, though Mario we do look at a multiyear.
DCF.
And we layer on NOI growth fifth and bank again, like 39, Niagara would not be subject to rent control. So the profile on that would be we'd be very strong and because of the new buildings.
The NOI margin there would be would be quite high it would be in the 70% and so as you are moving that topline.
Can move more quickly than a rent control building.
It would be disproportionately accretive to two.
The REIT.
Ernie So I don't know if that may be addresses your question a little better.
Okay.
Great. Thanks, Michael.
Thanks Mario.
Your next question comes from Brad.
Sugars from Raymond James Please go ahead.
Alright.
Yes.
A quick question on tunnels proposal for increasing development charges.
Just wanted to understand.
Based on what you understand to date would that be fully phased in at once or do you think thats over a period of time.
And then secondly with that.
Increased potentially be retroactive to current projects under construction.
That I don't know it would be atypical to make them retroactive typically you pay the DC when you pull the permit so.
I'd be shocked if folks had paid it pulled the permit paid the Dcs and then the city somehow had the power to go back retroactively and increase the BC Levy that would seem.
I would be shocked if that was the case, but to be fair I have not read the.
The language in the bylaws.
I would need to go back and look suffice it to say development charges have been growing at a rate substantially higher than inflation over several cycles typically.
<unk> on a five year cycle and so.
They have been long term running running much higher than inflation.
Just to give you a sense I mean, how when we're underwriting a new development deal.
We are.
Using in our in our in our pro forma we are using what we're forecasting either in the in the bylaws or what we're forecasting for.
For the bylaw that will be in effect when we pulled the permit in many cases, we've been able to accelerate.
The payment of the DC to lock in that lower rate in fact, we did that on one of the two projects that we've got active in Toronto right now.
It was one example, where we moved quickly to two to pay the DC to make sure that we were protected from from increases under the under the BDC and UDC biologics coming into effect.
Well then it increases implemented.
For example in Toronto.
On a five year cycle does that.
Yes.
Then there over that five year period or would it be.
Basically be a full increase.
Once it is reviewed.
I mean I'd have to go back and take a look.
I think that it's phased in or not facing I think it kind of hits your all in one throat.
Now there may be some.
Transitory relief, but I don't believe so Brad I think you can kind of pay the new higher rate and that's what causes the panic to make sure that everyone's pulling their permit and locking in the DC right before the new one comes in.
Got it that's helpful. Thanks.
Yes, Thanks, Brad.
Your last question comes from Dean Wilkinson with CIBC. Please go ahead.
Thanks morning, Michael.
Almost along the lines of Brad's question, there with the rapid increase in Dcs levies municipal charges permitting all the rest of that great stuff.
Is it possible.
Possible to actually build affordable housing at these levels I mean, when you look at the <unk> thousand so units, you've got sort of shoveling the ground.
You are probably pushing 700 grand a door on the build out there can you build stuff that would be economic in terms of you've got $600.
Call it $800 market rents like it just seems someone's got a given that that equation now.
Well I can break your question into two kind of what's in the works now versus a prospective view, let's say.
I'll just say when we.
Before the REIT commits to construction and that would be true on any of the CDL loans and it would be true on the on balance sheet deals.
Think about.
Leslie York Mills, and rich globally.
Would not commit to construction until we had tendered.
75% or more.
The the construction cost and so.
We have a high degree of visibility on probably the single biggest chunk of the of the cost side of the equation.
We also as I indicated.
Further to.
<unk> the <unk>.
<unk> from Brad.
We would be looking to lock in things like Dcs and permit charges and things of that nature.
I think for the projects that we have underway.
We have <unk>.
Hi, visibility and comfort level on those pro forma.
So your question maybe on a prospective basis, what does the impact of.
Rising levies development charges permitting feed the new community benefits charge in Toronto Park land.
They are changing and how the parkland dedication mechanisms.
And then add on to that.
Inflation on cost of construction.
Is that.
They are conspiring to raise the cost of building new rental.
To a level that is I think.
It's going to make some pro forma differ.
Difficult to pencil.
So I think if you do have assets already you are probably finding that the fair value probably lags replacement cost buyer.
Fairly wide margin that was true.
That's been true for quite a while but I think it may even be getting.
<unk>.
You can see coming even more extreme now now.
Now what we are finding and I mentioned earlier there is policy positive policy that is happening I mentioned that the city of Toronto Open doors program that we're leveraging.
Together with the CMA HDR CSI program for the rich growth project.
<unk>.
Project, probably would not have proceeded without the combination of those two programs that really have made the math work.
Okay.
Our levered IRR into a kind of a high teens territory.
Without those things that it would not a pencil.
I'll also site for example city of Vancouver.
<unk> density bonus for rental and so that kind of programs like that are very helpful. I'm, just offering noted as a counter to.
On a constant steady drumbeat of DC increases, which which runs counter to bringing new housing supply online and I think that was kind of highlighted.
By the Ontario, Affordable housing task force amongst other measures they cited those things as well alright.
Alright, I guess, but from a renters perspective that which already exists becomes that much more coveted because if I can get into something that's 600 Bucks a month, that's a lot better than 3200 or so.
Yes.
Absolutely, but I mean theres also material.
Differences in the quality of those assets right. If youre also shared 1968 apartment building.
May not have AC and if you do maybe it's that.
A window unit you may not have in three laundry you may not have a balcony.
You may have older windows older kitchen older Bath.
And so I.
I mean, there is a place for that product because of the affordability issue, but we also think there is a <unk>.
As well for.
Newer.
Product that.
As more.
Amenities.
More condo alike.
Quality at the end of the day, it's great to own rental because it.
We think that the fundamentals with population growth.
The surge in returned to levels, we saw in 2019 or perhaps higher based on the new higher integration target.
The Greeley and elastic housing supply curve, which is exacerbated by some of the points you've cited here in terms of cost pressures from construction.
I think if you own rental year youre in a pretty good spot notwithstanding kind of where the market's view of apartment leases right now.
That's a sidebar comment.
No that's great. Thanks, Thanks for that and I'll try not to take the 1968 vintages being being old and derelict on a personal level because.
Sure straight out there.
Thanks, guys I'll hand, it back.
Thanks Deane appreciate the question.
Yes.
Mr. <unk> there are no more questions at this time. Please proceed.
Okay, well. Thank you everybody that concludes our call. This morning, thanks very much for joining us and appreciate your interest in <unk> apartment REIT. We look forward to speaking with you again after we report our Q2 results in the summer. Thanks, so much.
Ladies and gentlemen, this concludes your conference call for today.
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