Q2 2022 Minto Apartment Real Estate Investment Trust Earnings Call
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If you would like to withdraw your question, please press star, then the number 2.
Before we begin, I want to remind listeners that certain statements about future events made on this conference call are forward-looking in nature. Any such information is subject to risks, uncertainties, and assumptions that could cause actual results to differ materially. Please refer to the cautionary statements on forward-looking information in the REITs news release and MDNA dated August 9, 2022 for more information. And the call management will also reference certain non-GAAP financial measures.
Although the REIT believes these measures provide useful supplemental information about its financial performance, they are not recognized measures and do not have standardized meanings under GAAP. Please see the REIT's MD&A for additional information regarding non-GAAP financial measures, including reconciliation to the nearest GAAP measure.
Thank you, Mr. Waters. You may begin your conference.
Thank you, Joanna, and good morning, everyone. I'm Michael Waters, Chief Executive Officer of Mental Apartment REIT, and I'm joined on the call this morning by Julie Morin, our Chief Financial Officer, and Jonathan Lee, our President and Chief Operating Officer.
I'll begin the call first by discussing highlights from the second quarter as well as other corporate developments. Julie will review our financial results in detail and then Jonathan will provide an overview of our operating performance and growth initiatives. I'll conclude with our business outlook and then would be pleased to take your questions.
Our financial performance continued to significantly improve in the second quarter as we capitalized on stronger urban rental market conditions. Market dynamics have substantially returned to pre-pandemic levels and we delivered strong growth in our key financial metrics despite inflationary pressures.
We signed 667 new leases in the quarter, achieving an average gain to lease of 12.1%. It was our single largest quarterly gain since Q1 of 2020, with solid gains across all of our markets. Average monthly rent for the same property portfolio increased 3.4% year over year to $1,695 at the end of Q2 2022. And average occupancy rose to 94.7%.
compared to 91.5% in Q2 of 2021, even as we continue to reduce the use of promotions.
Again, these results reflect strengthening urban rental market conditions underpinned by net immigration, a widening housing affordability gap, and a return to school, to name just a few.
We also continue to advance our organic growth initiatives during the quarter.
We completed the repositioning of 83 suites, generating an average annualized return on investment of 8.6%. These renovations improve asset quality, reduce future repair costs, and reduce the cost of
drive strong growth in rental revenue.
We also closed the acquisitions of two premium downtown rental properties, Niagara West in Toronto and The International in Calgary, which combined increased the REIT's gross suite count by 753 suites.
At the end of the quarter, we increased the total commitment of our revolving credit facility from $200 million.
to $300 million, providing us with enhanced financial flexibility as we continue to pursue opportunities to drive NAV growth during a period of reduced accessibility to equity capital markets.
We had strong liquidity at quarter end of $193 million, representing a liquidity ratio of approximately 18%.
You're also likely aware that on July 19th, subsequent to the end of the quarter, we announced our intention to initiate a normal course issuer bid. The NCIB will be active until July 20, 2023, and enables us to acquire and cancel up to 10% of the week public float.
The purchase of units at price is below the REIT's net asset value and attractive use of funds.
However, we're constantly evaluating various capital allocation opportunities and there's no guarantee that we will purchase and cancel any units under the NCIB. The guarantee will depend on market conditions, the prevailing unit price, and other factors.
Overall, we're very pleased with our current competitive positioning. We're capitalizing on improving market conditions to deliver strong financial performance while maintaining a very strong balance sheet.
The outlook for our business remains highly positive and while capital market conditions are currently challenging for the Canadian multi-residential sector, we're evaluating alternatives to efficiently raise capital in order to fund the attractive investment opportunities in front of us. I'll speak more about this later in the call. For now, I'd like to invite Julie to discuss our second quarter financial performance in greater detail.
Thank you, Michael. Turning to slide 4, I'll begin with an overview of the key Q2 financial results. We reported same property portfolio revenue of $32.9 million in Q2 2022, an increase of 10.1% compared to $29.9 million in Q2 last year.
The increase was mainly due to higher occupancy and higher average rents.
The total portfolio revenue was $35.5 million, a year-over-year increase of 18.8%, reflecting higher rents and occupancy as well as the acquisitions of La Hill Park, Niagara West and The International.
The same property portfolio NOI in the second quarter was $20.2 million or 61.5% of revenue, an increase of 6.4% from $19 million or 63.6% of revenue in Q2 last year.
Total NOI was $21.8 million or 61.5% of revenue, an increase of 14.8% from Q2 last year. Higher NOI in Q2 2022 mainly reflected increased revenue partially offset by higher operating expenses. I will discuss the expenses in more detail shortly.
In addition, I want to note that same property NOI would have increased by 9.9% in Q2 2022 and Q2 2021 NOI margin would have been 61.6% if a one-time property tax refund received in Q2 2021 is excluded from the calculation.
The AFFO payout ratio was 65.2% compared to 64.8% in Q2 last year.
The average monthly rent per unfurnished occupied suite in Q2 2022 was $1,695 for the same property portfolio and $1,690 for the total portfolio representing increases of 3.4% and 3% respectively from Q2 last year.
Average occupancy was 94.8% for the same property portfolio and 94.7% for the total portfolio. These represented significant improvements from 91.5% in 2.2.20.21.
Turning to slide 5, as I mentioned, higher operating expenses impacted NOI growth. You can see the increases in this chart. Like our sector peers, we are facing inflationary pressures and we are working hard to manage controllable costs and improve operational efficiencies. Property operating costs in the quarter were impacted by higher labour costs, filling staffing vacancies, higher insurance costs and higher repairs and maintenance costs.
The year-over-year increase in property taxes is mainly due to the one-time refund of approximately $600,000 received in Q2 last year that I previously mentioned.
Excluding the refund, property taxes would have been flat year over year and total operating expense growth would have been approximately 11% instead of 16.7%.
Higher utilities costs were due largely to significant increase in natural gas costs.
This was due to both higher natural gas prices and cool spring weather which resulted in greater usage during the quarter with a 9% increase in total heating degrees.
I'll now turn it over to Jonathan to review our operating performance and growth initiatives. Jonathan?
Thank you Julie. I'd like to start by reviewing occupancy on slide 6.
Average occupancy increased both sequentially in Q2 2022 and compared to the same period last year. This reflects the fact that as market conditions have improved, our move-ins have significantly outpaced move-outs.
We had 585 move-ins during the second quarter compared to 492 move-outs, a net increase of 93.
Over the last four quarters we've had 2,024 move-ins compared to 1,753 move-outs, a net increase of 271.
Move-ins have now exceeded move-outs in four of the last five quarters.
Slide 7 shows our revenue analysis for Q2.
The upper chart breaks down our realized gain-to-lease in the second quarter, while the lower one outlines our estimate of the gain-to-lease potential embedded in the portfolio at June 30.
Beginning with the upper chart, we signed 667 new leases in the quarter, an increase of 25% compared to 534 new leases in Q2 last year.
We continue to realize very solid gain to lease in all markets with double digit growth in every market except Alberta where we had high single digit growth.
The average rent on new leases increased by 12.1% from $1,645 to $1,844.
This resulted in an annualized incremental revenue gain of approximately 1.3 million dollars.
During the quarter, as market conditions strengthened further, we continued to drive occupancy while simultaneously reducing the targeted use of discounts and promotions.
We expect to reduce these even further in the months ahead as market conditions continue to improve.
Turning to the embedded rent potential on the lower chart, we believe we can generate approximately $14 million of annualized incremental revenue by bringing rents in 7,753 suites to market levels.
Turning to slide 8, the upper chart tracks our gain to lease and average monthly rent growth on a quarterly basis.
You can see how the quarterly gains release has improved over the last four quarters.
The 12.1% quarterly gain in Q2 2022 was the strongest that we have achieved in more than two years and was roughly in line with pre-pandemic levels.
We have also generated steady growth in average monthly rent despite the particularly negative impact of COVID-19 on urban rental markets, which we believe is now reversing.
On the chart we break out rents by geography. Our rental pricing continues to compare favorably to condos on a size and rental rate basis making for a very attractive offering to renters.
Now I'd like to review our furnished suite performance on slide 9.
As we have previously discussed, the pandemic has had an outsized negative impact on our furnished suites due primarily to the curtailment of business travel.
However, rental rates and occupancy have trended steadily upward as market conditions have improved and business travel has recovered.
average monthly rent in the second quarter for furnished suites.
was $4,476 compared to $3,572 in Q2 last year, while average occupancy was 86.2% compared to 74.4% last year.
We are continuing to trim the furnished suite inventory by converting furnished suites to unfurnished in our Roehampton property in Toronto. And once this is done, the furnished suite count will reach our steady state target of approximately 185 suites.
On slide 10, you'll find a summary of our repositioning activities.
We renovated and leased a total of 83 suites in the second quarter, or 61 at the REITs proportionate ownership share.
The average monthly rental increase following repositioning was $370 per suite, which generated a simple return on investment of 8.6% in line with our target.
We have 2,172 remaining suites to reposition under our current program. We expect to reposition approximately 100 to 170 suites over the second half of the year subject to turnover.
We repositioned a total of 143 suites in the first half.
Now I will review our intensification and development initiatives beginning on slide 11.
We currently have eight projects in our pipeline, six of which are in active development.
These projects have the potential to increase the suite count by 2,271 suites or 1,443 at our proportional ownership share, a 27% increase. Of note, over 82% of our growth pipeline by suite count is located in Vancouver, Victoria and Toronto.
You can see the current status of several of our properties.
several of the properties in our development pipeline on the next two slides, beginning with Fifth and Bank on slide 12.
This mixed-use residential and retail property in Ottawa's Glebe neighborhood stabilized during Q2 2022.
All of the 163 suites have been leased and are now occupied.
Solid construction progress is being made at Lonsdale Square in North Vancouver. You can see in the updated photo that framing is well underway and construction has reached the fifth story. We continue to expect the property to stabilize at the end of 2023.
Demolition is complete at 8 10-K ingsway in Vancouver and excavation commenced in June .
This will be a six-storey mixed-use building comprising 108 suites and approximately 11,500 square feet of at-grade retail space, and we anticipate stabilization by the end of 2024.
Turning to Beechwood in Ottawa on slide 13, demolition of the previous buildings on the site is complete and excavation is well underway. We are anticipating stabilization by the end of 2024.
At Leslie York Mills in Toronto, site work continues and the existing parking structure has been demolished. We are transforming this site with 192 new townhomes, several new amenities and a new two-level underground parking garage. Construction began late last year and stabilization is expected in late 2025.
At our Rich Grove project also in Toronto, shoring and excavation is well underway. We are building a new rental tower with 225 suites including 100 affordable suites.
We currently expect stabilization in the second quarter of 2026.
Moving to slide 14.
As you know, we completed the acquisitions of Niagara West in downtown Toronto and the International in downtown Calgary during the second quarter. I am pleased to say that occupancy has remained strong at both properties and there has been significant market rent growth since they were purchased by the REIT.
In addition, we are executing on exciting initiatives to drive rent growth and maximize value at each party. For example, at Niagara West, we are working with a prospective investment grade tenant to fill all of the remaining retail space, which amounts to about 12,000 square feet.
I'll now turn it back to Julie to discuss our debt financing and liquidity. Thank you, Jonathan.
Turning to slide 15, since the REITs inception, one of our key priorities has been to maintain a conservative leverage ratio and imbalanced debt maturity schedule. As you can see on this chart, maturities are highly manageable through 2027.
As of June 30, 2022, the weighted average term to maturity on our fixed rate debt was 4.74 years with a weighted average interest rate of 2.9%. Approximately 80% of our debt was fixed rate and 63% was CMHC insured.
I want to note that we assumed approximately $108 million of floating rate loans during the second quarter on the acquisitions of Niagara West and the International. We are actively pursuing long-term fixed-rate CMHC-insured financing to refinance these properties.
Total liquidity was approximately $193 million at the end of June 2022 and debt to Grossbook value was 39.5%.
As Michael mentioned earlier, we increased our revolving credit facility at the end of the second quarter from $200 million to $300 million, and this provides us with significantly enhanced financial flexibility.
I'll now turn it back over to Michael to wrap up.
Thanks, Julie. I'll wrap up with our business outlook on slide 16 before we take your questions.
We're obviously very pleased with our strong financial performance in the second quarter and we're confident that all of the fundamentals that have driven the market over the long term remain in place.
These include our country's expansive immigration policies, the increasing housing affordability gap between owning and renting a home, and the inelastic housing supply curve in Canada. These factors have gradually reasserted themselves after the Canadian rental market was severely disrupted by the pandemic.
We also believe that we'll benefit from additional rental demand as the population continues to return to urban centers that went temporarily quiet due to COVID.
The positive fundamentals driving our market aren't new, but we believe that they're becoming more pronounced. For example, I'd note that rising interest rates have significantly increased the cost of home ownership in recent months, which has further widened the affordability gap between owning and renting.
We're confident that we're well positioned for long-term success.
long-term success and to achieve it will be focused on five key strategies.
Firstly, growing NOI by maximizing revenue, optimizing occupancy, creating value from sweep repositioning, and minimizing objects.
strategic allocation of capital which may include capital recycling opportunities, accretive investments, deleveraging, and unit buybacks.
Third, best in class execution of our existing intensification development pipeline through our relationship with mental property.
Third party acquisition or development opportunities, although these may be challenging in the short term given our current cost of capital.
Lastly, prudent balance sheet and liquidity management.
I want to spend a bit of time focusing on capital allocation before I wrap up as I suspect many of you may have questions about that.
The current capital market environment is challenging for the Canadian multi-rent sector. Accordingly, in order to strengthen our portfolio and capitalize on attractive growth opportunities, we've initiated a capital recycling program. Under this program, we're exploring the potential sale of certain mature, stabilized properties in our portfolio.
The proceeds would be deployed to fund higher growth or value-add initiatives.
which could include property developments, property purchase options, convertible development loans, suite repositioning, and potential opportunities under the NCIB program.
The capital recycling program could also enable us to adjust our geographic diversification and reduce the average age of our portfolio.
There's no guarantee that we'll sell any properties under this program, but we believe it's an appropriate strategy to seek to efficiently redeploy capital into better risk-adjusted and accretive investment opportunity.
In addition, given our current cost of capital, pursuing third-party acquisitions and development opportunities is currently challenging. We're putting less of a priority on these initiatives in the short term. Fortunately, we already have a very strong pipeline of growth opportunities through our property intensification and CDL programs.
We're confident that by continuing to execute on our strategy,
will deliver strong financial performance and strong returns to unit holders.
This concludes our presentation this morning. Finally, Jonathan and I would now be pleased to answer any questions you may have.
Operator, please open the line for questions.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by one on your touch tone phone. You will hear a three tone prompt acknowledging your request.
And if you would like to withdraw your question, please press star followed by 2.
This question comes from Saram Swinivas at Cormac Securities. Please go ahead.
Okay, everybody. Michael, Julie, Jonathan, congratulations on a great quarter.
My first question is probably just on the elephant in the room and that's capital recycling. Michael, can you give us a little more color in terms of are there any specific tasks you're looking at or have you identified markets where you probably want to lighten your load and probably reinvest it? That's a good question.
Well, we...
As we mentioned, we listed some properties in Edmonton earlier in the summer. Many of you are probably aware of that. We're very early stages on that one in terms of...
you know, working with prospective interested parties. There's no guarantee anything will happen. You know, we'll continue to work on that. We'll share an update on the next quarterly call. We are, every year, constantly, you know, for each asset, and we'll continue to work on that.
conducting a very rigorous asset management review. And, you know, from time to time we do look at assets where, as we indicated earlier, maybe they're fully stabilized, the value creation curve is flattening and there may be an opportunity to harvest some value and redeploy it. John , I don't know if you'd add any color to that.
No, I think you covered it well, Michael.
Just probably shifting gears to occupancy and thank you for the disclosure on the vacancy break up this quarter. Just looking at that, I guess you guys have probably close to 2% of the suites available right now for renting at some stage or the other.
Do you see a lot of, I mean considering where the markets are and considering on-demand other slowing projects as well, do you see a lot of scope for red growth?
So maybe, John , do you want to take a stab at that one?
Sure, so I mean look absolutely we see an opportunity for rent growth especially in our markets you know even even through through July we've continued to see some nice rent growth in market rents in all of our key markets. In terms of the occupancy yeah we added that disclosure we thought it was helpful because look we are repositioning a very large number of our suites over over time and that will help with our gain to lease obviously but it's also
It also creates what I'll call some structural vacancy in our portfolio. So occupancy continues to tick up nicely. Don't forget that part of the in place occupancy as well that you see, we know some of those people are moving out as well. So some of those people move out. We know when they're going to move out. And we're highly focused on turning suites extremely, extremely efficiently so that we can kind of minimize any downtime and maximize.
folks in the suites and maximize our monthly rents.
That's great John . Thanks for the call. And my last question is on broader policy and government initiatives. I know affordability has been a big topic off-grid as well. And there was some noise around vacancy, decontrol as well especially in Toronto. Is that something you guys are hearing or are there any policy level discussions you've been having?
Yeah, so I mean obviously this is a big topic of late, particularly with housing affordability, both for purchase and for rent.
eroding and it's obviously been a politically charged topic.
you know, even going back to the federal election campaign last fall. And so, you know, looking at governments at multiple levels, federal, provincial, and municipal, who are all under pressure by their constituencies to tackle this issue. And so we've been active both through groups like Real PAC, FERPO, really, really, really, really getting our vision up and running, because we've lost but we have no idea how we're going to fix it anymore. How do we actually, really, be able to define3 what we're going to do with both what we want to do with what we don't? And when I look in the cont Basic online classes that have last been associated
and others at that level, but also working very closely with our peers in the industry, both publicly traded.
REITs and other rental housing providers.
to develop, we think, policy alternatives that we think could really move the dial. And I think there's a growing consciousness.
at the policy maker level, that supply is the issue. And I think there's been many forecasts produced indicating that both current states, the relative under supply of housing, are also looking at the policy maker level.
in Canada, but further with our heightened population growth, how that deficit in housing supplies is likely to worsen.
materially over the next decade or more, and just given the cycle to redevelop.
urban sites in particular, but even in greenfield sites, cycle time to bring new rental housing online is measured in years, five, six, seven, eight years in many cases. So we need to start that work now. I think that our challenge will be to continue to work with policymakers to educate, to provide...
our perspective, obviously, you know, we've been in business for, you know, seven decades and we've built, you know, over 100,000 homes. So we've got a lot of experience in this area and certainly our peers have much of that same experience. And so we do see policy alternatives that we think can help. And we also see areas where, you know, policies maybe have not been as effective and certainly...
eliminating vacancy decontrol or extra taxation would be areas that we would sort of gently guide policymakers away and look at policy options like we've seen in some cities, Vancouver for example, where we've seen density bonuses.
The City of Toronto has programs in place to help with the development of affordable rental housing. We're leveraging that right now at our Ridge Grove property. And we've also seen policies that, you know, through agencies like CMHC, their RCFI program, their MLI select program, where we think we can introduce incentives to bring private capital to deliver.
much of the gap that we need to fill in terms of housing supply. So I think, you know, it's a complex issue. We could talk about it at length. But suffice it to say we're working very closely with other players, trade groups and policymakers.
to see if we can make a difference.
That's it, Michael. Thank you for that. I'll turn it back.
Great, thank you.
Thank you. Next question comes from Jonathan Kelcher at TB Securities. Please go ahead.
Thanks, good morning. Just going back to the occupancy, it looks like you're around 97% if you include the suites out for repositioning. Is that sort of your sweet spot in terms of where you're pushing rents versus keeping suites full?
Yeah, good morning John . Maybe I'll start off and then maybe John Lee can jump in. But as we've talked about in the past, our yield management philosophy has never been one of sort of full occupancy, but more, I'll say, revenue optimization. And that is partly investing in repositioning programs, but also a bit of a price discovery exercise with tenants and...
and trying to drive rents. And so, we typically would run a little bit more vacancy as we seek to drive that top line, and obviously that goes to nav growth. So, John , do you want to fill in the blanks on that?
Sure Michael. Hey good morning Jonathan.
Given where we are now and what we've experienced over the last couple of months, we are already in a position where we can push rents and increase occupancy simultaneously. And I'd say that's across all of our geographies. I would say, though, also in Montreal, we actually think that's a really good opportunity because currently our occupancy is kind of in like the low 90s. And we, you know, given all of the sweet turns that we anticipate are going to come down the pipe.
especially in two of our properties in Rock Hill and both Lihill Park. You know, we're seeing, those are very well positioned in order for us to do both of what you just said in terms of pushing rents and pushing occupancy higher.
Okay, and then just that sort of I guess leads into my next question. The mark to mark in the market rents that you guys put out, that's a June 30 snapshot, correct?
Correct.
So how has Q3 been shaping up?
That's far.
From a cap rate perspective, John ? No, not from a cap rate, from a demand and the ability to push rents. Would you expect to see similar growth in market rents that we saw in Q2 and in Q2?
I guess similar mark-to-market gains on new leasing. Like I know if I look back at just at your slide deck, Q319 was very, very strong.
Yes, so seasonally, of course, Q2 and Q3 are the two strongest.
quarters from a leasing perspective in terms of demand and I think that would certainly be our expectation that our Q3 numbers from a leasing and revenue perspective would be quite strong. I mean, John , do you want to provide a little bit of color on that? Sure. So, John , I'd say the trend has continued.
at least what we've sort of witnessed in the early parts of Q3, you know, quite nicely. I'd say, you know, in Montreal in particular, if you talk about gain to lease, I think that you can see that that was actually our strongest gain to lease market. And that goes to what I said before about just there's a large percentage of these suites that we're turning, and we expect that to continue. So we see Montreal, you know, we're cautiously optimistic.
about Montreal in terms of what we can do with our portfolio to improve the performance and increase occupancy and optimize revenue. Obviously, the return of the student, I think, is going to help for us on the margin. It just lifts all boats in terms of the rental market and we're experiencing that in all of our markets.
to you know with our portfolio to improve the performance and increase occupancy and optimize revenue. Obviously you know the return of the student I think is is going to help for us on the margin as it just it lifts all boats in terms of the rental market and we're experiencing that in all of our markets.
I don't know if that answers your question Jonathan. Yeah, that is helpful. That's it for me. I'll turn it back. Thanks. Thanks, John .
Thank you. Next question comes from Brad Sturgess at Raymond James. Please go ahead.
Hi, good morning.
Just to go back to the capital recycling discussion there, at this stage besides the Edmonton properties, is there anything else you've got your mark to market for sale at the moment? I'm sticking to just that little group of assets.
You know, nothing specific at this point. We continue to evaluate all properties across the entire portfolio more or less on a regular basis, Brad.
and look for, you know, we look ahead for every asset, you know, in our asset management planning and look at the trajectory of value creation potential in every asset. And, you know, and look for opportunities where we can, you know, are we optimizing the returns on the capital that we've got deployed in those assets on a risk-adjusted basis and if there's an opportunity to connect.
to harvest some value and redeploy it into something else, we would look at that. So, our Asset Management team is very rigorous in that and on an almost continuous basis. So, you know, and obviously you have to pick your moments. Your market conditions ebb and flow and looking for opportunity like that, you have to be nimble, but at this point, I think it's a fairly broad effort.
value and redeployed into something else, we would look at that. So, you know, our asset management team is very rigorous in that and in an almost continuous basis. So, you know, and obviously you have to pick your moments. You know, market conditions ebb and flow and looking for opportunity like that. You have to be nimble, but at this point, you know, I think it's a fairly broad effort.
analysis and believe that the time is still enough, is that ideally through selling the entire ownership interest or would you consider partial?
interest sales and maintain an interest in an asset with the idea of managing for a third party.
Well, you know, obviously we've got very strong relationships with institutional capital that invest directly in real estate, entities like CPPIB and...
and HOOP and IG and others and obviously they're partners of long-standing and obviously present today in the REITs operations. And so where those make sense, obviously we'll continue to leverage those relationships, particularly where it allows the REIT maybe to defray what otherwise would be large checks and allow us to get managing interest in good assets.
over time. Certainly you've seen that, the recent investment in Victoria on the redevelopment of University Heights.
The shopping centre is being done in conjunction with a leading Canadian pension fund. So that very much is a tool in the toolkit, Brad, that we would use and have used and are always looking at where those fit. They don't work in every case, obviously, and in some cases it might be in the best interest.
for unit holders for us to, you know, dispose of an interest entirely. And so we look at each circumstance.
based on the facts.
at hand and make the judgment based on that. So where we think that there's long-term value creation potential, you know, using third-party capital with a trusted partner, you know, is a good option in other cases. Maybe we see that the future growth trajectories...
potential list is more limited and so those are cases where maybe an outright disposition might make more sense.
Last question, just on the bank, it's stabilized now. I guess you have some time.
to make a decision on whether to excise your option, but just could you walk through, you know, the factors that would go into that decision-making process, whether the REIT would acquire the assets, and then I'm assuming it wouldn't be much of a capital outlay just given the outstanding loan and probably the ability to fund with long-term debt.
Yeah, so you're right, it's not a significant outlay because of the existing loan advance that the REIT has made to the redevelopment. There are a number of factors at play. I mean, John , do you want to provide a little color here on this one?
Sure.
So look, no decision has been made at this time. It is full, but Minto, the private company, is working on a couple of housekeeping items before it can offer it to the REIT. The purchase option expires at the end of November and the CDL expires at the end of December .
and look the REIT is going to evaluate the purchase relative to other
capital allocation alternatives that we have at that time and we're going to make a very balanced decision around
You know
taking into account access to capital, pro-forma leverage, our liquidity position at the time. It's an extremely attractive asset. We want to get it in the portfolio. But we're going to make smart decisions around where we're going to spend our incremental dollars that we have at our disposal.
Okay, I'll turn it back. Thanks a lot. Okay, I'll turn it back.
Thanks Brad.
Thank you. Next question comes from Johan Rodriguez at Industrial Alliance. Please go ahead.
Hi everyone. I just wanted to first ask about cap rates. I noticed you guys took up your cap rates. The midpoint of Ottawa was up five, six basic points and then Montreal was up fivefold and it went down just fine.
you know close to 20. I was just curious to know what the rationale was behind that, you know what your appraisers were telling you, especially given you know a couple of your peers that that have
know, put poison in those markets didn't take them up by that degree.
Maybe Julie, do you want to talk a little bit about the process we go through and sort of some of the thinking around this?
Yeah, for sure. So, to your point, we only moved cap rates on a couple of our buildings, so the two downtown properties in Ottawa as well as our Montreal portfolio. And to be honest, it wasn't based on transactions per se that were happening in the market. It was more industry trends or sentiment that were pushing us in that direction. You know.
hindsight or you may think that's a little bit conservative and certainly would agree with that, but the other thing I think we look at or think about is cap rates are just one of the elements when we value our portfolio. And as you can see from our numbers this quarter, the NOI more than offset that cap rate expansion in those cities. So overall still a good result.
I was just curious if you guys were being conservative or if you thought you might see another rise in cap rates next quarter.
And then just on the developments, obviously we know that the cost inflation labor shortages have changed the math on developments and you guys have a pretty large development pipeline compared to the apartment peers. I know you probably fixed the pricing or structure of the contracts and some of your developments so that the moving input costs or labor haven't really changed the yields, but I'm just curious to know on some of the developments, you talk about them as a group or you know, we can single out 15 banks since it's the...
you know, the closest to stabilization. You know, if you were to underwrite or price out the cost of those developments today versus back when you underwrote it, you know, what would the swing in the yield on cost be?
Did you give a sense of that? Yeah, so it's an interesting one.
Inflation has been...
significant and it's picked up, I'd say particularly...
since Q4 last year on the construction cost side.
And it's been
labor and materials both and...
and particularly let's say in Toronto and Vancouver where trade union negotiations yielded settlements that were materially higher.
And
I think so, you know, holding the revenue side constant.
I think that the inflation on construction costs would be...
very material to yield. I mean, you know, in some cases you might even push returns to well below threshold levels of where you'd want to invest.
That said, what we're seeing is that the revenue inflation, the inflation in rent is galloping ahead as well. And so in many cases what we're seeing, well construction costs deteriorate. We're seeing the revenue line and sort of the stabilized value estimate moving along as fast or in some cases even faster. So what we're seeing is that margin.
is not deteriorating to the extent that you might otherwise believe just by looking at construction costs. So that inflation is a double-edged sword on one hand, it cuts you on the construction costs, but then it saves you a little bit on the revenue side, and we're seeing that in multiple markets.
So it's a challenging environment. I would just reiterate the point that you made early, which is that we don't commit to construction until we've tendered the vast majority of the bill of materials for a project. So we want to get assurance through tenders and contracts with our trades and suppliers before we commit to putting a shovel in the ground. And so the projects that you saw on slide 11 were sort of all...
a snapshot of the point in time when we committed, they all penciled quite nicely. You know, if we were to undertake a new project now, a brand new project, we'd have to look through it at the lens today with construction costs. And it's an issue. I mean, it's a problem that's really affecting our housing supply. It's one of the main reasons our housing supply curve is so inelastic, it's not just commodity prices, it's...
It's the relative lack of availability of skilled trades.
to do the work and obviously we're competing not just with other residential developments but also infrastructure and other projects are consuming scarce resources. So it contributes to that supply demand imbalance in housing in Canada.
and obviously we're competing not just with other residential developments, but also infrastructure and other projects are consuming, you know, scarce resources. So it contributes to that supply-demand imbalance in housing in Canada.
Okay, but like if we take fifth and ninth, for example, you think that
You think that rent growth from the time you underwrote it to today, you think that was enough to fully offset the change in inputs and labor? Or you think this spread still would have shrunk?
If we were to start Smith and Banks today, construction costs would be materially higher than what we committed to way back in 2019. But revenues will have moved materially as well.
You know the leasing that we conducted for this building was was higher than our underwritten pro forma That would be the new basis For that that building if we were to underwrite Redevelopment today we'd forecast out three years from today You know our expectation is that rent growth would would be quite significant over the next three years Remember as well this building delivered post November 2018 Is not subject to to rent control so we have a little bit more
flexibility in our ability to capture market rent increases on an asset like that.
OK, thanks. I'll turn it back. Great, thanks, Johan.
Thank you. Next question comes from Kornak at National Bank. Please go ahead. Hey guys, I don't know if you'll be able to provide or if you want to provide this information, but with regards to Fissend Bank, can you give us a sense as to what the yield on cost would have been? And I know it's subject to be purchased, I think, on an average of an appraisal, but have you gone through the process of getting an appraisal yet on the building?
So we're not at a stage yet where we can.
exercise the option as John had indicated.
MPI is doing a little bit of housekeeping to complete some of the open diligence items that the REIT would need before it would be in a position to exercise the option. Certainly our view on value right now, I think we're like many looking for concrete indications of value. We're really looking for transactions contracted post.
rate tightening, you know, in March, let's say, and there haven't been a tremendous number of those. And so I think as we near that date when we are in a position to exercise the option, Matt we would commission an appraisal or appraisals at that point in time to try and get a cent. Certainly an asset like this, brand new, not subject to rent control restrictions in a sub-market with sub-1% vacancy.
loaded with all of the modern conveniences and PropTech, very high operating margin asset as well because of the features that are around energy efficiency building envelope, we expect would attract a premium valuation if exposed to the market. Of course, the REIT has a right of first offer at a 5% discount to appraise value. So.
You know, whatever way that looks, the REIT is going to do, I think, quite well out of this.
transaction when and if it should exercise the option.
No, that absolutely makes sense. On the financing side, for I guess any new asset purchase, there's a mechanism to get the equivalent of some CMHC even if you don't have the operating track record. That's correct, right? But LTBVs may be a little lower, or can you get essentially something equivalent to what you could get with CMHC?
Maybe I'll let Julie tackle that one. Yes, so there is definitely a process to get CMHC even on an unstabilized property and you know I'm going to say MPI and the REIT will look to do that before the asset gets transferred if the REIT exercises its option.
On the general capital outlay between your development projects and your capital outlay,
the loan commitments that you have, can you provide a sense as to what the outlay would be for the remainder of the year as well as maybe into 2023 if that's possible?
Julie, do we have that at your fingertips there?
I don't. I know for CBLs for example we would have probably close to 35 million for the rest of the year.
and then on the rest of our capital, it's a fairly even run rate, so I think what we've seen in 2.1 and 2.2 could be used as a go-forward comparison.
And Matt, if you just look at slide 11 there, you can see at least at the end of Q2, the CDL commitment and the CDL advance for the CDL.
deals of which there are five. The other three, Leslie York Mills, Richgrove and High Park Village, the ones that are on balance sheet. Richgrove has already reached the stage where we're drawing on the construction loan on that one. So there's not any more equity outlay at this stage. Leslie York Mills, as John mentioned, well advanced in the preparation for excavation and stuff now beginning.
And so High Park is in the pre-development stage, and not anticipated to start in the next very near term. We're still perfecting the entitlements on that one. So it's more pre-development spanned in the nature.
of consultants types cost and stuff like that. So that might be a useful guide for you as you think about capital outlay. That's perfect, very helpful. And then lastly, from my perspective, G&A was a little high in the quarter. I don't know if there was anything one time in nature or if you can provide a sense as to what a run rate should be for that going forward for the next two quarters.
Julie, do you want to grab that one as well? Yeah, for sure. So the run rate you're seeing for GNA is probably what you're going to see on a go-forward basis, and most of that is related to Jonathan joining us in April . I guess I could do one time. High-priced talent, but you're right. We won't back into what that is. Thanks, guys.
Thanks Matt.
Thank you. Next question comes from Mario Saric at Scotiabank. Please go ahead.
Thank you and good morning. I just want to come back to the capital recycling program. Given you have completed a rigorous asset management review, can you give us any more color on the potential quantum of dispositions whether it's dollar value or percentage of sweeps? I'm not necessarily asking how much you think you can do but more so after the review how much would you like to do if everything went according to plan.
Look, I would say the ones that obviously are public, the three Edmonton high-rise assets, and certainly we're looking to achieve.
values in excess of our carrying value, you know, mark-to-mark at the end of Q2, and certainly the early indications are that there's good appetite, but you know, we're going to have to evaluate conditions over the fall as that process develops.
You know, we look at the rest of the portfolio, you know, and there are certainly areas where we think there may be opportunities, but it's partly a function of where we think market appetite might be and obviously wanting to maximize.
You know, return for our unit holders on some of those. In some cases there's maybe a little bit of unfinished business we need to complete before we'd be in a position. In other cases we continue to look at assets and say that, you know, they're keepers just because of their value creation potential. So we don't have a specific target Mario that we're looking at. As I say, we're looking at asset by asset where that value creation curve starts to taper or we forecast that it will taper in the near term.
That's where we were looking at specific assets, but at this point no targets other than the one that is public, Edmonton, that we're looking at. But again, wanting to see bids and terms that make sense for unit holders and we're not committed to doing anything unless we see what we want. In terms of that market appetite, where are you seeing relatively the strongest?
that's where we were looking at specific assets but at this point no targets other than the one that is public Edmonton that we're looking at but again wanting to see bids and terms that make sense for unit holders and we're not committed to doing anything unless we see what we want. In terms of that market appetite where are you seeing relatively the strongest institutional IPP today?
You know, I think what we have said is, we've said this repeatedly, you know, the most liquid assets in our view are assets that are typically urban oriented. Concrete still is a premium from an institutional investor perspective. And thankfully that's where the bulk of our portfolio fits in those categories. Definitely hate investing in some risk Fuller signs into getting the other. An event like this could put some white seed people at risk for my core and I was really extremely One everyone who isn't really thinking about it, but you know,.'I don't know about this group of people, who even couldows with their own lives.
You know, other REITs are not actively in the market today, at least the public REITs, not active with unit prices trading where they are. But certainly there is a substantial number of...
private
investors and private equity and others that are very interested in making investments in the multi-red space in those areas. And so, you know, I think everyone's going to be looking for a couple big transactions coming out this fall. There's a number of portfolios that I think are well known that are in the market. We expect that certainly the intelligence that we're getting.
is that the valuations on those will be very comparable to what we saw pre-March. Investors are underwriting not on a cap rate basis. They're typically doing a five to ten year DCF and they're liking what they see in many cases on a lot of these assets. So, you know, I think that there's a little bit of...
I'll say chop right now because people are waiting to see where the capital markets are playing out, but we've already seen bond rates begin to come back in and so I think, you know, we're expecting that, I mean there's a number of players in the market active now, but I suspect that that volume of activity will pick up as we get into the fall.
Okay, and then just maybe coming to your comment on buyers not necessarily focused on going in yield when making their investment decisions you've outweighed.
a plethora of potential uses of capital, highly attractive returning uses of capital if you were to sell us some assets.
REITs, implied cap rates are probably pretty close to five, give or take. How do you assess putting capital into the units at a 5% implied cap rate, give or take, versus... How do you assess putting capital into the units at a 5% implied cap rate, give or take, versus...
financing loans versus redevelopment at a high single digit unneeded return, how important is that initial kind of going in yield when you're deciding to allocate capital versus other qualitative factors such as the desire to go to the portfolio or just improve the overall quality of the portfolio and so on? Well I think, you know, look at a 35% discount to semi- chanting
To nab our unit trading price is a pretty attractive alternative.
So, you know, share buybacks certainly are part of the discussion, Mario.
But of course we are looking long term as well beyond the current...
you know, current volatility in the market and where multi-res sits today. We obviously made some commitments on CDL loans. We're going to continue with those. We think we are looking forward to the betterment of the portfolio and so investments in projects like Beechwood and Lonsdale Square and North Vancouver and others only improve the overall cash flow generation potential of our portfolio.
it's not, I would say, exclusively in sort of one specific area. We would look at the NCIB program for sure as a very, you know, clear opportunity for us right now. But certainly we think there are other opportunities as well that, you know, and we probably have more frankly than we have capital right now, which frankly has been the case since we went public. So lots of potential there. Okay. And then if you were to, so your
disclosure which I echo previous statements. I think that's really helpful. You noted the 180 suites that were leased for future occupancy. Do you have a similar number in terms of known use books at this stage?
John , do you want to tackle that one?
Yeah, look, we do have that. Poor
trying to evaluate whether or not we're going to share that with the market Mario so let us do a little bit of thinking internally and then we can we can
I won't get back to you, but it sends a direction. I mean, it's a pretty similar number to...
to what you see as the move-ins.
And Mario, how we've sort of tackled that in some markets, it's obviously province by province.
in many cases renewal notices We can we can issue those You know a little earlier Quebec for example we can accelerate that and so we've done
We've done that and that gives us a lot more visibility on when...
Suites are going to turn and allows us to gear up if it's an unrenovated suite and it's a building that's in a
repositioning program that we can, you know, tackle that and turn those suites as quickly as possible. But it's getting getting visibility is a little different, province by province just because of the way the legislation works. Okay, last one for me. Can you give us a sense of what the incentive amortization was this quarter? How about compared to let's say Q1 and then secondly, what percentage of the portfolio are you still offering any type of incentive on either new?
that we can, you know, tackle that and turn those suites as quickly as possible. But it's getting visibility a little different, you know, province by province just because of the way the legislation works. Okay, last one for me. Can you give us a sense of what the incentive amortization was this quarter? How about compared to, let's say, Q1? And then secondly, what percentage of the portfolio are you still offering any type of incentive on either new or renewal leasing? combustible world webinars
John , do you want to talk about how we're using incentives and promotions now? Yeah. So, it's extremely targeted right now. Effectively, you know, it's mostly, at the end of June , it was mostly actually in two buildings, which was the international and then 185 line. I would say the trending has continued to be reduced.
And we are using very few promotions kind of across the portfolio kind of as we're sitting here today in July .
And just in terms of amortization, it continues to burn off from the peak that we talked about in Q3 2021. It continues to step down as you'd expect quarter by quarter and certainly Q2 was another increment down from where we were earlier in the year in late 2021.
Did you happen to have the queue to remember, Andy? I can't recall if we've disclosed that. So let us give some thought to whether we're putting that out. Julie I don't know if we put that out in our materials.
So we haven't. So let us take that away.
Okay, that's it for me. Thanks everyone. Thanks Mario.
Thank you. Next question comes from Jenny Ma at BMO. Please go ahead.
Thanks, good morning. I just have a few quick questions. First one is in terms of operating costs, have you seen any change in the pace of inflationary pressure on off-costs? 2122 obviously a big year-over-year step up and we probably should expect that for the rest of the year but in terms of the costs changing has that slowed down at all?
John , do you want to grab that one?
Sure, maybe a combination of Julie and I can handle this one.
Look, we are seeing a little bit of stabilization in terms of, you know, the big one, Jenny, has been gas, right? And so both usage and pricing has gone up exponentially over the last number of quarters. You know, obviously in this queue, usage is down a little bit. We expect it to be down a little bit again for Q3. And it seems like the rates are stabilizing somewhat. But I can't predict where it's going.
We are experiencing some more like efficiencies what I'll say and with new contractors and sustainability initiatives that we have in place with our boilers for example at the property level.
So, you know, I don't want to use the words cautiously optimistic, but I guess we are seeing something. I'm not going to use the words cautiously optimistic, but I guess we are seeing something
you know, reduction in acceleration.
in acceleration in inflation.
Okay, that's what I was trying to get at. So hopefully that might mean an easier comp starting in 2023. As far as the fair value adjustments, I saw that the NOI markup was a bigger piece to do that and offset some of the cap rate changes.
Is that change in the NOI a result of just different assumptions for rent and or occupancy? Julie, do you want to speak to that one? Yeah, I'd say it's a combination of all of that. When we do our models internally, we do a full update. So we'll look at rent growth, we'll look at our expenses, we'll look at basically everything. Obviously the big driver was definitely a combination of both.
CMHC all in, we can probably get 3.7 or somewhere around there. And interestingly enough, you can get that for five or ten years. The ten was actually a little bit cheaper than the five recently. So, you know, we're looking at that and as we get closer for 39, sorry Niagara West and the international will have a better sense in terms of where they are. The rates have been coming down a little bit as well, so we'll see.
But if they come in a little bit more and we can get the same for the five and 10, we will probably go along. Okay, perfect. Great. That's all from me. Thank you. Thanks, Jenny.
Thank you. If there are no further questions, you may proceed.
Well that's great. I think with that we can conclude our call today. Thank you very much for joining us and for your interest in the REIT. We look forward to speaking with you again after we report our Q3 results in November . We hope you all enjoy the rest of the summer. Thanks so much.
Ladies and gentlemen, this concludes our conference call for today. We thank you for participating and we ask that you please disconnect your lines.
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