Q3 2022 Canadian Apartment Properties Real Estate Investment Trust Earnings Call
In your call today, all participants have been placed on mute to prevent any background noise. There will be a question and answer session at the end of the presentation. If you relate to ask a question at this time. Please press the star followed by number one on your telephone keypad.
Now like to turn the call over to your host David Miller. Please go ahead, when you're ready.
Thank you Juan and welcome everyone.
Before we begin let me remind everyone that the following discussion may include comments that constitute forward looking statements about expected future results and the financial and operating results of cap rate. Our actual results may differ materially from these forward looking statements such statements are subject to certain risks and uncertainties.
Discussions concerning these risk factors or forward looking statements and the factors and assumptions on which they are base can be found in our regulatory filings, including our annual information form and MD&A, which can be obtained at SEDAR Dot com I'll now turn things over to Mark <unk>, President and Chief Executive Officer.
Thanks, David.
Everyone and thank you for joining us.
Stephen Ko our interim Chief Financial Officer is also with me this morning.
So turning to slide four we booked another solid year in 2021.
Operating for a full year under the challenges presented by the pandemic all of our key benchmarks were up including revenue NOI and then <unk>.
And we continue to generate solid and accretive growth for unit holders.
Also important to note that we continue to experience very few rent collection issues.
To date, we've collected over 99% of our rents as we continue to get closer to our residents and understand their issues.
Turning to slide five while we were pleased with our results in the first quarter, we experienced certain increased costs compared to last year that led to a smaller increase to our quarterly <unk>.
The key challenges, where an acceleration of largely weather related and COVID-19 catch up maintenance costs.
Remember that in last year's first quarter, we were in total lockdown in Ontario, and Quebec, as well as increased gas cost and consumption due to the colder weather this year.
And higher royalty taxes.
<unk> per unit was impacted by the one 7% increase in the number of units outstanding in the quarter.
Having said that revenues were up over 8% driven by the contribution from our acquisitions increased monthly rent and continuing high occupancies, resulting in a four 4% increase in our NOI.
However, like all issuers today, we believe inflationary cost pressures will impact our results over the short term.
From an operating perspective, our ability to generate solid performance in both good times and bad it's clearly demonstrated by the results of our stabilized portfolio as you can see on slide six.
Occupancies improved again in the first quarter, while net average monthly rents continue to increase.
As mentioned our same property NOI was impacted by the increased cost we experienced in the first quarter and higher maintenance costs, the increase in natural gas cost and consumption and slightly higher royalty taxes.
We believe such inflationary cost pressures will impact our NOI over the next few quarters.
Our leasing and marketing programs continue to generate increasing occupancies as you can see on slide seven after two years operating under significant pandemic restrictions. Our occupancies remained highly stable at 98% at quarter end you can also see our bad debt as a <unk>.
Percentage of total revenues have remained low throughout the pandemic and continue to track historic low levels.
Tenant incentives also continued to decline to pre pandemic levels and we expect a majority of the amortization of lease incentives to be completed by the end of 2022.
A key factor in our ability to generate solid results is a solid increase in rents on turnover, we are achieving as shown on slide eight.
While turnovers have been impacted by the pandemic, we are now starting to see solid increases.
As we move rents closer to market at more than 10% increase on turnover in the Canadian portfolio. We believe is a solid result, and we expect to see this to continue and grow in the balance of the year.
Our churn rates are also strengthening and tracking historical trends a seasonal variations.
Renewals also started to improve in the first quarter. We noted last year, we increased rents on January one by the mandated.
The amount of one 2% in Ontario, and one 5% in D C as of quarter end.
On Ontario, and BC represent over 57% of our total NOI.
As mentioned, we experienced a solid and positive trend in rent increase on turnover each quarter since we bought them at the height of the pandemic in Q1 of last year as shown on slide nine.
Looking ahead, we are experiencing more in person and online visits we expect we will start to see more and higher mark to market rent increases in the quarters ahead, moving us toward the higher levels of increase we generated prior to when the pandemic sedan.
Turning to slide 10, we continue to increase the size and scale of our property portfolio.
Through 2021, we acquired 3744 suites insights the majority in our key GTA BC markets.
And another <unk> thousand 15 suites and sites have been acquired to date in 2022, our acquisition pipeline remains strong and robust and despite cap rate compression, we expect to generate further accretive portfolio growth in the quarters ahead.
I'll now turn things over to Steven for his financial review.
Thanks, Mark and good morning.
As you can see on slide 12, our balance sheet and financial position continue to remain strong and flexible at quarter end with a conservative debt to gross book value and continue in high liquidity.
Our $1 $3 billion and Canadian unencumbered properties, which includes $652 million of MHC properties provides additional liquidity should it be needed.
Look at our financings in the first quarter, we locked in interest rates.
Approximately two 8% on our refinancings and extended our term to maturity.
We expect to finance, a total of approximately $1 billion.
And mortgages and top ups in 2022.
Currently over 99% of our mortgage portfolio incurs, a fixed interest rate protecting us from potential future interest rate increases.
In total if we were to access all of our available sources of capital we would have liquidity of approximately $1 billion at quarter end.
As you can see on slide 13, we continue to reduce our interest costs in Canada and extending the term to maturity.
We have one of the longest terms to maturity and the lowest weighted average interest rate among our publicly traded peers.
This provides us with strong protection against renewal risk given where interest rates are as of today.
The ability to capture strong spreads and low interest costs in the Netherlands is also contributing to our lower overall interest cost and extending the term.
As mentioned over 99% of our mortgage portfolio encourage they look low fixed interest rates protecting us from expected future rate increases we continue to monitor the interest rate environment for any opportunities to prepay maturing mortgages and to hedge against rising interest rates as of two.
We have locked approximately 70% of our 2022 maturing mortgages at a threefold one interest rates.
Further to our strong and flexible financial position looking back over the last few years you can see on slide 14 that we have met our goal of maintaining a very conservative debt and coverage ratios even throughout the pandemic.
This conservative approach underpins, the stability and resiliency of our business and the sustainability of our monthly cash distributions to unit holders.
This focus on maintaining one of the strongest balance sheets in our business will continue going forward.
Our mortgage portfolio remains well balanced as shown on slide 15.
As you can see in any given year no more than 12% of our total mortgages come due thereby reducing risks and the rising interest rate environment.
Looking ahead, our current ability to top up renewing mortgages through to 2036 will provide further significant liquidity in the event that the pandemic lasts longer than we'd call.
We expect the interest rate will continue to rise further after the bank of Canada announced first policy rate increase in early March of 2022, and subsequent aggressive monetary policy tightening to fight back higher than expected inflation, we've moved up our refinancing opportunities for our 2022 matured more.
<unk> from the second half of the year to Q1 of 2022 by paying some hedge costs and prepayment penalties, we were able to achieve financing cost savings through closing our pre locking rates for the five year and 10 year mortgages.
Their rates were two 8% and three 1% respectively lower than the current five year tenure with estimated rates of approximately three 6% and 4%.
I'll turn things back to Mark to wrap up thanks Steven.
Looking ahead, we see a number of very positive value drivers that we are confident will generate strong and growing returns for our unit holders over both the short and long term.
We will continue to focus on our prove it proven asset allocation strategy as detailed on slide 17.
We primarily target value add apartment properties in the mid tier segment, and well located suburban markets in and around Canada, three largest cities Toronto, Vancouver, and Montreal, We're acquiring these properties at well under 50% of replacement cost and have proven our ability to invest in them to increase value.
Cash flows remained strong and highly stable due to their very affordable rental rates are.
Our second focus is the MHC sector revenues are highly stable with residents owning their own home capital requirements and maintenance needs are significantly reduced with homeownership cost rising across the country.
These provide a real alternative for families looking for quality residences at significantly lower cost.
Our third focus is on Europe is one of the only professionally managed operating platform in Europe the opportunities for enhanced value are significant.
Key to our growth in the upcoming months will be our ability to capitalize on a number of market trends as we return to pre pandemic conditions.
Demand for a quality properties will grow as immigration accelerates with new Canadians seeking affordable homes in our largest urban markets. The return of international students will also contribute to increased demand.
The Pan JAK pandemic generated what we call household consolidation.
Students and young people return to their homes to save cost and safety. We see these young people moving back to the rental accommodations as soon as offices reopen and in class learning fully returns.
Demographics are also on our side as the growing seniors population looks to the rental market to meet their needs. We believe our quality and well located properties offering more space on one floor at affordable rates, we'll see increased demand by seniors looking to capitalize on the significant equity.
In their homes.
We also see families looking to quality rental accommodation as highly affordable alternatives to the increasing cost of homeownership. Additionally.
Additionally, cash flows will increase as we prudently and responsibly increase rents.
Finally, our ongoing property investments as outlined on slide 19 are reducing costs through energy savings and other initiatives.
Hansen resident safety, and making our properties more attractive our technology solutions are increasing our operating efficiency.
And we are helping us to meet our ESG commitment to enhance environmental performance.
All of these investments are generating strong increases in our net asset value as Steven mentioned, we report we've recorded in over $1 billion gain in our net asset value in 2021 with another $20 million in the first quarter with increasing demand and little new supply of rental properties.
We believe the value of our asset base will only growth going forward and provide another strong driver for unitholder value over the long term.
Yeah.
In summary, we remain very excited about our future our focus on the mid tier sector sector meets an increased demand for affordable high quality homes are predominantly suburban locations outside downtown cores, and our larger sized suites or meeting the need for more space.
We are experiencing a strong pipeline of accretive acquisition opportunities and expect to see solid portfolio growth in the quarters ahead or.
Our industry, leading balance sheet leverage and liquidity position provide stability and the ability to grow going forward.
And with demographic trends and increasing immigration. We are confident we will continue to drive value for our unit holders in the years ahead.
Looking ahead, we are confident we will gradually be returning to more normal market conditions and continue our 25 year track record of growth strong operating performance and delivering enhanced value to our unit holders.
For your time this morning, and we would now be pleased to take any questions you may have.
If you would like to ask a question at this time. Please press the star followed by number one on your telephone keypad. If you would like to withdraw your question. Please press star followed by number two when propane to ask a question. Please show your phone is on mute.
Locally.
And our first question comes from the line of Jonathan Culture from DB Securities. Please Jonathan Your line is now open.
Thanks, Good morning.
Good morning.
First the <unk>.
First question just on the operating costs.
I guess as Covid related they were higher for Q4 and Q1.
What was the remainder of 2021 alike.
I think we are is it more was it more not us.
Yes.
We're definitely seeing a return to normal.
I think I.
Had even indicated on our call last time.
Sadly, we ended up with a different type of repair problem in Q1 than we had in Q4. The majority of our costs in Q1 were weather related.
<unk> had a very very cool.
Winter season across the country.
The catch up in terms of maintenance, we couldnt affect during the pandemic is in our minds essentially caught up.
Okay. So for the balance of the year, if we think of an inflation type increases for operating costs.
It sounds about right.
Yeah, Jonathan I think we should we should expect some inflationary pressures were starting to see that now.
So.
We would see some.
Cost pressures from that perspective, but overall I would say if you were using margins from last year to project out this year I would say that would be safer.
Safe assumption for Q3, Q4, but I would put a little bit more pressure on Q2, because that's when we're starting to see it is the reality of what's happening quite quickly in Q4, we still we're not seeing the effects of inflation.
To a great extent, we're now starting to see.
It's show up with wage pressures with employees.
Most certainly.
And you can see with the utilities, Fortunately, we were hedged, but things like the transportation costs and other elements of utility cost or prices have gone up.
Okay.
And then secondly, just.
Based on where your share price is right now.
The board's thinking in terms of share buybacks.
Levels.
Yes, we had announced the activation of our and CIB.
We were in blackout there.
And unable to start using in CIB, but we are committed.
To take.
Taking advantage of this incredible value.
We said it.
Before.
What's completely disconnected is the value of properties that are trading in the market.
And the value of REIT stocks, I'll say everywhere, but especially apartment REIT stocks. So it's really it's a global phenomenon.
And there's no question.
We see incredible value in our portfolio.
So it'll be a balancing act here as we go forward.
In terms of how much stock, we want to buyback and the potential disposition of assets that are premium priced you've already seen us do a few buildings I think I talked about the three one cap deals that we transacted on.
And we've got a right to more opportunities like that I can't help but see incredible value in selling selling mid one cats combined cap rate at a plus four.
Okay that is helpful. Thanks, I'll turn it back.
Thanks, Jonathan.
Thank you. Our next question comes from the line of Jim <unk> from RBC capital markets. Please <unk>. Your line is now open.
Yeah.
Thanks.
Hey, Mark just to follow up on that question.
I'm just curious what wasn't in your focus priorities.
Dirk.
Just kind of curious what the prior needs how you balance that with given that as you say there was a big public private market disconnect I'm, just kind of curious why you wouldn't be worthy before it would be more aggressive.
Yes.
Yeah I appreciate it.
We're again, we're in blackout, but we are committed.
The attention so that.
But I've been cautious on in the in the deck, although I'm, saying it now is around disposition opportunities and.
I will continue to look at this problem in a very linear way the acquisition market is still open for us.
We have the opportunity to buy newer construction assets with in place financing at favorable where we can find yield spread okay. So we're not going to be quiet and silent on acquisitions, because theres still are accretive opportunities, where you can assume low interest rate financing.
That will be opened to being part of the supply equation in Canada, it's very much near and Dear to our hearts were going to continue on that path.
And looking at assets that we're very proud of the reinvestment programs that we've changed communities. We've done the good work, where we can realize good value for unit holders.
We'll be open to disposing up now I wouldn't look at this as a wholesale change of cap rate, but we'll be opportunistic.
There is you know what extent or is there are limitations on what we can do in the NCI be anyway, but if I can match equity gains in selling selective.
Our nonstrategic assets at premium pricing and reinvested in cap REIT stock I think that investors will applaud that.
Unitholder, but very much excited to get on with this.
Okay.
Okay.
And then just on the.
Turnover spread.
Where would that sits today is it still in that.
<unk> range.
Yeah.
Yeah, it's it follow the curve, it's pretty fair to use your ruler.
The only thing thats been kind of lagging behind.
Yes, I'd like to the curve is straight up like it at the end of the day pre pandemic I think we were around 15% mark to market rents today, we're definitely in the double digits.
The reality is that traffic is great we're being tips.
Typical cap REIT fashion cautious on on maximizing revenue, but the return is there.
Would say that.
The final step of the pandemic appears to be full return to office.
And that's not taken hold completely in the country.
But as that ramps up.
You can just expect to see that directly co related.
The cap rates are.
Vacancy pressured revenue pressure really at the end of the day came exclusively from the under 30 cohorts built.
Buildings that had under 30 cohort whether they were students are young professionals that those are the people that went home and for safety would be with mom and dad and to make some money you know look at Canadian savings rates are the highest I think they've ever been in our history.
So we expect that if people return and start coming back to the cities and full force due to mandated backed work youre going to see big changes there.
But it's a very predictable.
Yeah.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from the line of Mario <unk> from Deutsche Bank. Please <unk>. Your line is now open.
Sure.
Alright, Thank you for taking the questions and good morning.
Morningstar stripped down on the back of your sub 30.
Third a huge cohort do you have any sense of what percentage of the portfolio would be represented by that cohort.
Well, we're at 90.
9% occupancy essentially.
It's more driving the demand at this point and people that are missing from the market.
And I would say when you look at cap rate, we were probably.
One of the less impacted apartment Reits.
Because we had suburban locations.
So I think it's just the final demand driver to come back that will really gave give the same oxygen to the market that we saw pre pandemic.
So essentially at this point the lost demand.
That cohort is taking the Arkansas from my viewpoint search committee by 9% or something like that that's right I'd say the peer our peer our peer recovery very much driven by exactly the same dynamic.
For what for what it's worth.
I do believe that.
Dynamic in Canada was very different in the U S. Canadian Canadian under Thirty's tend to live within an hour of mom and dad, just a cultural thing whether it be Toronto, Vancouver, Montreal, whereas in the U S. You'll see the under $30 will live by states away and again that tends to be more cultural so we were definitely.
In Canada culturally in my view culture, the more impacted by the under Thirty's going home than other places.
Okay, and then just coming back to Jamie's question on the new lease spread.
It was 10, 2%.
Right. So it sounds like it's improving.
So essentially.
Thank you.
0.2% nickel may so far might be like 11%.
Kind of.
No one returned to work and when it comes back and goes from like 11 and 12%.
15%.
It's a very good trajectory of it.
It's very steady path, but remember, we're very cautious of cap rate.
So we are renting apartments 60 days in advance and in the case of Quebec, almost six months in advance. So our pricing is following the reality of whats probably happening in the market. If we were holding our units baked into the last minute, we could be probably achieving.
Potentially higher rents, but we're renting in advance and we are managing as we always have that occupancy line at 99% I've been very very.
Inpatient with getting rid of these incentives it's not in our culture to offer incentives. So we've got great progress on incentives got great progress on our red on occupancy and we're renting into the future here. So our pricing I can assure you for the next 60 days and forward is.
Not at these current rates that we're seeing mark to market.
Got it Okay and then just on those.
The amortization in Q2 was $1 6 million, how should we think about the pace of.
Decline.
One six amortization through Q3 Q4 this year.
Yeah, I would say even bring that down to.
Yeah.
It's gonna basically wind down by the end of Q3 of this year.
So I would just say that you can model that and there will be some lingering incentives just the way the business runs, but overall, it's going to be winding down close to zero.
If you go if you go back to historical numbers recapturing essentially that's what Stephens Inc.
Okay.
Just in terms of.
Alright, well go ahead.
Okay.
Okay.
Terms of the 2023 allowable rent increase on renewals typically if it comes out in kind of June July .
Right.
Expectation today or kind of the expectation depending upon the election outcome.
No the guideline increase will happen regardless of the election outcome.
So that would follow a basket of inflationary items.
But we would not expect to see inflationary increases got cap rate now in Ontario at just over 2%.
So it's not that.
The increases to residents or completely impacted by any sort of election talk.
Right.
Terms of the timing.
In June July do you think that's a reasonable timeframe.
Yes, that's the days are supposed to do we don't typically hear that at the hotel until into summer.
Yes.
Okay. This.
This is my last question, maybe coming back to capital allocation.
So youre, saying that theres still some accretive acquisitions.
Available and it sounds like it's mostly on.
Assets are already have been in place for I think when you it wasn't too long ago that the private market was probably paying a lower cap rate for unencumbered assets.
Our multifamily garden, perhaps not.
What's changing given the three points to 4%.
The market today.
Is that what youre seeing in the market in terms of maybe pricing being more aggressive.
Employees.
Financing and then kind of secondly.
Where can you get the type of product that you want it works at cap rates that are north of 4%.
Okay.
It's a great observation on financing.
I would say, we're amongst the very few that look at the yield spread.
The way that we do so there's no question that we have valued.
In place financing.
I hope in the next quarter I'll do a more fulsome rollout of the <unk>.
New construction assets that we've actually been buying.
And Theres been quite if you look back now over the last three years, there's a predominance of new construction assets.
And part of that was new construction opportunities would be.
In place financing, so we have tended to value that.
I will tell you, though that again the market is.
Really turning out to be something very different.
No.
95% of apartment owners in this country are private.
And the predominant talk amongst brokerage is inflation and replacement cost.
So what you're really seeing in the marketplace are extremely low cap rates.
Youre going to see some reported to us in the marketplace.
Financing is now for 10 year money, 4%.
So yield spread is an hour.
A lens of value, but it's not in the lens of value of the dominant private market.
And it's the resiliency of the income it's the lack of obsolescence for housing, it's the impossibility to build with inflationary pressures.
The one thing I would probably again should have spoken more about was with these new construction assets. We believe now it could be 20% below replacement cost. So you were taking possession of vacant buildings that are in lease up that are probably 20% below replacement cost or more that's never happened in my history.
My in my experience in this business.
So that is also pushing the replacement cost.
Proposition of the value add buildings.
We say 50, you can do your own checking it's probably high thirty's at this point because of what's happening with inflation.
With all that so.
You touched on it a little bit earlier, but.
At this time from a trading discount to NAV, which partly unusual magnitude of it.
For tops.
Okay.
Does that change how you think about the acquisition pipeline going forward.
Great.
Shifting gears to perhaps becoming a best seller or neutral in terms of the acquisitions that youre looking at really been funded by asset sales as opposed to being a big buyer like you were last year.
Those change based upon the cost of capital.
I think.
We've dusted it we're in a very moving times here, but when when property valuations continue to surge we will have our eyes on a disposition program.
And with the idea of matching proceeds with buying back stock I'm not I'm not.
Comfortable leverage up the company to buy back stock in a big way because things are things are definitely moving around but I'm extremely comfortable of the natural hedge of selling buildings at low cap rate and buying back the equivalent amount in stock now there's some tax implications to all this and we're going to have to figure all this out.
But the the good business of matching high value with high discount is I think a sensible approach. So that's number one that being said, we do see opportunities in these high quality, new construction asset that will never be built at these prices per foot again.
Given inflation I don't see us retreating backwards with the cost of labor with the cost of.
Construction with the length of time to build with the cost of financing.
I keep I'm, keeping a very keen eye on new construction opportunity where cap rate can be part of the supply solution for Canada. If we can be part of that solution and find good value for unit holders will be doing the good work that we've been doing for 25 years.
I'm going off in a bit of a tangent here now but.
History of our company, we've been reinvesting in our assets and turning communities around and been very very proud of that now it's time to look at those maximized opportunities and potentially take them to market, but not in a wholesale directional way youll see us doing it opportunistically.
Got it.
Too early to provide any quantum in terms of like a disposition.
This range to think about.
Yes, it's a little bit early but I wanted I'm really excited about continuing our one one midpoint one cap rate disposition program.
I'd be happy to do that we're going to be opportunistic with it.
No it doesn't seem to be a.
Trade that's why it wasn't the highest one once Florence comps aren't sports so.
Sure.
Great. Thank you.
I think it went a little bit unnoticed like we've done three of them now and.
I keep speaking loudly about it and I think there's just such scepticism at what kind of market are we actually in right now it's hard to see that trade as being sustainable and I get it but you know cap rate, we're going to prove that out and if the current environment is such that value capturing for unit holders is this path.
Just income than I as a unit holder I'm very happy to see that happening.
Thanks, Greg.
Thanks Kara.
Thank you. Our next question comes from the line of Janney Ma from.
BMO capital markets. Please Jamie your line is open.
Thank you good morning.
Good morning, I wanted to drill in I want to drill into the other operating cost a bit more so mark based on your comments it sounds like the R&M ketchup is essentially done.
Q1 did I get that correctly.
You did get that correctly.
Okay.
Some of the weather related maintenance costs.
Do you expect any of that to show up in Q2 or is that are those confidence.
Cold induced and very much limited to Q1 or do you expect to see somewhere back in the early <unk>.
Just given I think that the spring.
No it's got a pretty good at there today.
Okay.
Okay.
So when we.
Well listen Thanks Ali let.
When we think about the same pattern why them over the next few quarters.
Felicia and I'm not sure how much of it is fully baked into Q1, but it sounds like that accelerated in Q2 and the other cost sound like they're going down and then you've got rent acceleration, but when you put that altogether, you're expecting same property NOI to flip positive.
Starting in Q2 and beyond.
Yeah, I like your beyond part like it's definitely moving through Q2 in the right direction.
And by Q3.
I can't make forward looking statements around close to but its like I said use your ruler and when can you start to figure it out but you got it exactly correct.
The confusion is sadly we had the weather related repair expense in Q1 that I think I did.
<unk>.
We did our Q4 conference call I think we were middle of in the middle of it but if we look at what's going on with Stephen has been saying is there is some inflation in both the repairs and maintenance and our wages costs and these.
Transportation cost for utilities, so of course.
To see some increased utility costs, because we can't change the cost of transportation and we can't change.
Some of the other factors that are involved in utility price acceleration, it's not just the cost of the commodity that part we've got greatly hedged out. So yes, there is a bit of affecting that but the real question is where did the rents end up travelling to to offset those those inflationary pressures and I'm highly confident on the <unk>.
Revenue story, and and we're adjusting to this.
A cost story.
Okay did I answer your question you haven't even wash it all out.
[laughter], Oh, I guess, that's our job to figure it out but no that's helpful.
According to the IMF ifr some cap rate.
And I think the timing of course, so we saw a bit of a pick up for Alberta, and then I'm sorry, you're on D. C is that really just the math.
The asset mix with some of the acquisitions or is there something else going on there.
We took a very cautious approach in terms of our fair values.
What we've seen is we've seen stabilized NOI growth.
But what we did is we basically kept the value sustainment adjusted our cap rate slightly.
We just we just see that with the rising interest rates.
We would just want to be very cautious in how we approach fair values this quarter, but if the markets continue to perform well and theres. Good trades out there we will we will make those adjustments in Q2 even work.
To build on Stephen's caution when you see 10 year money at 4%.
You would expect to see cap rates go up.
We are seeing evidence of the market has been going down, but it's not widespread its not like so many costs in each market that we can have total confidence, but this is why I go back to this opportunistic selling thing.
We can find that arbitrage will do it but we're very big long history of being very cautious on a lot of different things, but when it comes to NAV calculation I.
Echo what Steven said there completely.
Lots of spirit in discussions about this.
Okay. So that's all good.
Saying that it's a bit of caution going into the cap rate is that a reflection of the interest rate move through to March 31st or what it is.
Based on the interest rate will pick it up yes, yes, and despite the fact that we saw some trades, although not a lot with lowering cap rates. It's just very hard to do our whole portfolio with with conviction with this interest rate thing moving in the background, but but the struggle and it was a real.
Struggle was we did see evidence of declining cap rates.
I think clearly the ifr thats is that through to March 31st on interest rates or I guess, that's me too early may.
No.
Great.
I guess, what I'm getting at is that based on the moves that we've seen so far.
On September 30th I suppose.
Then I'll ask when you call them the pressure.
Operator.
We don't know like really again, if you talk to brokerage.
And you talked to.
What's happening in the market.
We're not it's not happening for reasons that are new.
And I think it has a lot to do with the private market thing.
Why wouldn't you buy apartments in an inflationary environment replacement cost is plummeting and look at the market fundamentals they take long view.
And so that's very different than the income buyers that are buying yield spreads.
Reits are geared to that communication.
But it's really back to what I've said Jenny.
The apartment REIT sector is a tiny part of the sector.
It's dominated by the private it's unlike any other real estate sector in Canada office industrial retail hospitality. These are dominated by big players in.
In the apartment space, it's dominated by private players.
How they behave as differently than how we think and what we're seeing the evidence.
It's high valuation in these uncertain times that are not based on income.
I'm going on here, a little bit but.
The one of the most peculiar things that I saw was during the pandemic high vacancy buildings, where the most valuable.
Because the private market wanted to sit on those vacancies until the market return.
That's highly on that was highly unusual event number one and we're seeing more unusual behavior, we're not unusual different behavior in the private market. They just want to walk in assets that are so incredibly cheap on a price per door.
Yeah, and Jenny just to just to make sure.
We are fully aware of these values are valued as of March 31st based on the information that we have.
We don't we don't adjust.
Possible increases in financing costs up until may.
Go up to March 31, if there is.
Change in cap rates, but now to marks point, what we've seen in the market is slightly different we just taken a very cautious approach. So if we continue to see trades below what our implied cap rates are we will adjust that in Q2, but right now I think we just want to be very cautious just because the pronounced increase in interest.
That's over a very short period of time.
Okay, Great. That's helpful. And then my last question is for Q1.
Were there any non recurring items.
Specifically related to energy.
Oh transition that you don't expect a phone system.
I think there was the I think we put in the notes I mean, there was like a <unk>.
I think it was $2 8 million and there is a celebration of some <unk> that were baked into the G&A. So you have to adjust for that to normalize it.
But I would say using the G&A of Q1 is a pretty good proxy run.
Great going forward.
Okay. Thank you very much I'll turn it back.
Okay. Thanks.
Thank you. Our next question comes from the line of Matt <unk> from National Bank Financial Please Matt the Atlanta is now open.
Hey, guys.
Just wanted to make me go back on.
The margin side.
Up until the pandemic margins had been improving from an NOI standpoint, as a result of rent growth stripping expenses, we've been kind of stable through the pandemic. When you underwrite assets going forward and then all of a secondary question because you've been buying new so.
Presumably margins are higher there, but I'm not sure if that was by design from an inflation standpoint.
But yes generally are you underwriting sort of stable margins are continual expansion as a result of rent growth outstripping expense growth.
Again, we take a really conservative approach stable.
It's really difficult to predict.
Growth in general right now despite all of the fundamentals again.
Sure.
Being extremely cautious on the acquisition front.
I remain.
Fully committed to being part of the new rental supply story in in Canada, and where theres good opportunities for investors I'm really looking to the again the value matched with income stability. So we're not we're not going to get aggressive on growth expectations in in pro forma.
Yes.
I'd like us to be able to do these be part again, if the new supply story in Canada.
Going forward, but summarize Matt we're taking a very very cautious approach on acquisitions as well.
Fair enough and then but generally speaking I guess for these newer properties your R&M.
It's lower because they are new right. So I guess that at least that's right for them that are a little bit more inflation protected.
Yes, we will have our mind again I love the <unk> sector for that reason and I love the new construction market. Another reason is cost mitigation when youre dealing with you know high.
High margin assets, where there's more pass through to the residents. Then then we have less exposure there.
And I think in an inflationary environment you have to just be real about that.
Fair enough and then on being part of.
The supply side of things.
In terms of where where youre deploying that capital on the assets that you're buying is it is it mostly suburban would you become part of the new sort of high rise downtown suppliers or the yields just too tight on that type of product.
For now we continue to get.
Yet and ready our land for our new.
New construction the opportunities, though appear to be in merchant.
Merchant builders that are looking for capital partners and form.
Forward sales of forward purchases.
So we are again cautious about procurement in this inflationary environment, but we will continue to push forward hard on the zoning of our lands with the optionality to build but the acquisitions will in all likelihood.
Come from merchant builders.
Okay and are there are their preferred partnerships on that front or is it just are you underwrite the quality of the building. That's that's been produced in and buy accordingly.
Yes.
It's the latter.
Okay.
Fair enough thanks, guys.
Thanks, Matt.
Thank you. Our next question comes from the line of brought those cargos from Raymond James Please Brad Your line is now open.
Hi, there.
Just one quick question for me.
Since the federal budget came out obviously, there is a kind of review.
Ongoing at the federal level here just wondering if.
If you could characterize how your discussions have gone to date.
Some initial thoughts are takeaways or where that might.
Where those discussions might go for the for the review.
I think I think it's an education process you know the.
Go right back to what we said earlier about.
All of the apartment Reits in Canada.
A very small percentage of the total stock.
The notion that apartment Reits are.
Hurting affordability is we have strong disagreement with that and.
How do you explain rents going up in markets that reached don't even exist in apartment REIT, suggesting you see lots of examples of this going on so that is part of the education the misunderstanding around renovation.
This is something cap rate has never done in our 25 year history.
These again are private landlord behaviors egregious rent increases okay. We are bound to guideline increases were in the private market Youll see 30%, 40% rent increases hitting the media and who do you blame the big guys.
Where we can actually do that.
People being kicked out of their homes because their homes are being sold or family members of ownership want to move in these are not behaviors that the apartment REIT to participate in.
I think that there is a real opportunity to educate.
Think that the supply narrative needs.
It needs to be understood and I think the fact that theres reached apartment reach around the world that are embraced by governments.
We are hopeful that this message will be properly received in Canada.
So the I.
I think government understands that simply cannot bill all the rental supply for this country and private partnership is important and private partnership with experience and responsibility that's important.
I won't even get into well I guess, I am ESG and corporate governance all of the good behaviors that we all follow responsible housing providers reside in the public sector and there are no they aren't <unk> behavior in the private sector other than provincial legislation.
So I think theres, a theres definitely the education.
That needs to happen were very.
Optimistic with that fact, our story is being heard.
And well carriers work.
That's great. Thanks, a lot.
Thank you. Our next question comes from Ben Wilkinson from CIBC. Please then your line is now open.
Thanks, Good morning, guys.
Good morning, Mark.
I totally agree with you on on the Mischaracterization of reached jacking up rents in the rest of that but.
But the question then becomes given the economics of new construction development fees all of the rest of that stuff.
Can you even get to a point, where you build affordable housing or like you can't replicate 1200 dollar a month rent by putting a shovel in the ground right.
Dean first of all and everybody on the call I look forward to reading in your analyst reports all of the things that I've said about how responsible apartment Reits are so thank you for highlighting that you report.
Sure.
[laughter] I'm kidding, obviously, but I'm not.
I would I would say, we all the apartment Reits have the advantage of freelance not free land, but land thats already baked into our FRS evaluations okay.
So that that opportunity to do something is is there what youre really doing is highlighting the affordability of our portfolio like when you talk about the challenges to supply what you're really saying is you guys are the affordable sector.
What would Canada due with a responsible ownership in the affordable sector. So.
So we agree with you 100% like these are going to be challenges, but really it won't be our cap rates problem with growth, it's gonna be candidates problem with growth.
How are we going to get through affordable housing if the entire country is under huge pressures with development charges land cost the cost of labor supply chain issues. These are big issues for Canada.
Cap rates going to be part of that definitely as well, but if anybody has the advantage of that.
And if anybody can do something to be part of the affordable solution its cap rate.
But could you give me worked up here a little bit, but like we are the largest a private partner of rent supplement units in this country. Okay. In terms of responsible ownership cap rate is the company that stood for in the biggest way with the government to be partnered on rent supplement that.
That is probably the most efficient way to provide affordable housing in this country.
So we welcome government engaging with us to be part of the solution.
We've been doing it.
Youre not worried you hear often right yeah.
Hum.
The other sort of tangential question to that then when I look at the amount of rent increases that you you struck on the renewals I guess for anyone who didn't turn you had an eligibility to increase those rents on January one it looks like you did in the marketing entire portfolio was that just you were waiting for rollover on some or did you hold some.
Back to do later in the year just like is it just you know.
Part of your good governance or is there something else going on in there.
Yeah.
So deane, we actually did rolled out for our portfolio, So, Ontario and BC.
So they're they're all affected I mean, I think when we say 44%.
All of our apartments. So yeah. There are other provinces that didn't have moratorium and so those processes. We were able to continue the normal course of issuing rent increases but.
The moratorium built up the ability for us to serve.
The problem is in full.
Okay. So it's all it's all caught up there there's no adjustment sort of bigger bumps coming in Q1 or two okay.
And then my last question.
Yes.
So I'm sorry go ahead.
Mhc's is yeah, I mean, it's a great business, but its land still the constraining factor for you to be able to do a little a little more around oh owning those are perhaps developing them.
You know the problem here.
And I'll give you my MHC speech and frustration now MH has been used in the U S. Three times in its history to solve the affordable housing crisis three times mhm.
Double digit percentage of U S population lives in a manufactured home families community unbelievable, Okay in Canada that compares to less than 1%.
So what's the problem.
It's not that we don't have any land, Canada is a vast quantities of land.
Problem happened 15 years ago with changes to municipal planning acts moved residential to city services. Okay.
So until we break that thinking and and municipalities wake up and realize there are a lot of homes in the country side that are on wells and septic systems every worried when you drive down the 401. That's all you can see our people on wells in septic systems. So what is the problem with building land lease communities, we have more fresh water in this country.
Then anywhere on the planet Earth. So the notion that water is the issue is frustrating.
But I do think again I'm slowly getting progress because if there's a willingness to bring affordable housing to Canada manufactured housing is a very attractive alternative for people owning a hole for under $200000 a year, where <unk> financing is available on that home nothing.
And then on the home gets people into homeownership for less than the cost of average rent.
Yeah.
When you talk about the number of Din of people that are developing manufactured home communities in Canada. It's one that we're aware of cartridge.
Moving down that track, we have a couple of little communities on the go right now, but this should be full blown focus for the country, but not something that's not getting attention.
We got the answer right next to us in the U S.
Yes.
Hopefully someone lessons.
And if you're interested in biocatalyst set at one cabinet it's for sale.
[laughter].
Alright, well thank you Eric here for me here.
Yeah Youre welcome.
[laughter].
Yes.
Thank you. We currently have no further questions. So I'll hand over back to Mr. Kenny for any final remarks.
Yeah.
Well. Thank you for that very spirit has a.
A question and answer period, we're always available.
To answer your questions. Please feel free to reach out to either Steven or myself.
Let me. Thank you again for your time and attention today.
As I said don't hesitate to give us a call we will host our virtual 2021.
Annual unit holders meeting by webcast on June 1st at four o'clock instructions on how to access the meeting can be found on our website. We hope you can join us and see you virtually thanks again and goodbye.
This concludes today's call. Thank you so much for joining you may now disconnect your lines.