Q3 2022 Minto Apartment Real Estate Investment Trust Earnings Call
Good morning, My name is Pam and I will be your conference coordinator today at this time I would like to welcome everyone to the Minto apartment REIT 2022 third quarter financial results Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
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Before we begin I would like 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 news release and MD&A dated November eight 2022 for more information.
During the call management will also reference certain non <unk> financial measures. Although the REIT believes these measures provide useful supplemental information about its financial performance. They are not recognized measures and do not have standardized meaning under ifr.
Please see the rights MD&A for additional information regarding non <unk> financial measures, including reconciliation to the nearest ifr's measures. Thank you. Mr. Waters, you may begin your conference.
Thank you Pam and good morning, everyone I'm, Michael Waters, Chief Executive Officer, Michel <unk> I'm joined on the call today by Julian Moran, Our Chief Financial Officer, and Jonathan Lee, Our President and Chief operating Officer, I will begin the call by providing an overview of our third quarter results as well as other corporate developments.
Julian will review our financial results in detail and Jonathan will discuss our operating performance and growth initiatives I'll conclude with our business outlook.
And then we will be pleased to take your questions.
Our business momentum continued into our seasonally robust third quarter and we delivered strong financial results like mini wheats, our third quarter was relatively quiet from a transaction perspective, and our strong performance was a direct result of our talented operations team and our best in class urban portfolio.
Our results were also supported by growing demand for urban rental housing.
Which is a result of rising interest rates, a growing housing affordability gap, increasing integration strengthening rental demand from students and a noticeable return to downtown living.
This was easily our best quarter since the onset of the pandemic.
Average monthly rent for the same property portfolio increased four 2% year over year to <unk> hundred $20 per suite average occupancy increased to 96, 2% compared to 92, 9% in Q3 last year, we achieved that increase even though we significantly reduced leasing.
<unk> due to rising demand the end of the quarter occupancy was 97, 4%.
Year over year NOI for the same property portfolio increased by 13, 3% and NOI margin for the same property portfolio improved by 200 basis points to 64, 1%.
We negotiated 574, new leases in the third quarter and achieved a gain of 14, 5% over expiring rents. This was the highest quarterly gain to lease we've generated since the onset of the pandemic and the second highest in the history of the REIT.
Market rents increased in all of our markets, we estimate that the embedded gain to lease potential in the portfolio increased to 12, 1% at the end of Q3 or approximately $16 million on an annualized basis.
That compares to six 6% or $7 3 million a year ago.
We generated <unk> growth in the quarter of 28, 2% compared to Q3 last year.
<unk> per unit increased by 15, 1% year over year or 10, 2%, excluding the impact of a one time insurance recovery received in the third quarter.
We continue to make good progress in our repositioning program in the third quarter as well, we renovated 75 suites generated an average annualized return on investment of nine 4%.
These low risk investments improve asset quality.
Reduced repair costs and drive strong growth in rental revenue.
I have a few additional updates to go over on slide four as.
As we announced in September Julian Marine will be transitioning back to the Minto group as Chief Financial Officer. Following this reporting period.
Who will take over as CFO in the REIT.
<unk> is currently the vice President of Finance and has done a terrific job in this role he has been a valuable member of the Minto team for more than eight years.
Confident that he is the right choice for CFO , Eddie along with Jonathan Lee will be full time employees at the REIT.
And yesterday, we announced some more good news as you probably saw in our news release the board of Trustees approved a three 2% increase in the REIT monthly distributions.
The annual distribution increase amounts to $1 five per unit and will be payable beginning within November distribution.
The REIT has now increased distributions in each of the four years following its formation.
This is another measure to increase it highlights our positive financial performance and our confidence in our growth strategy and business outlook. It is important to note that while regularly increasing distributions as a priority for the REIT.
We're also committed to maintaining a strong balance sheet and conservative <unk> payout ratio.
Finally in October we released the reach 2021 ESG report, which included the results from our 2022 global real estate sustainability benchmark or grasp the assessment.
We're proud of the overall results our <unk> score was $80 an increase of 10 points over the prior year score and places us in the top quartile among 16, North American peers.
In addition, <unk> received a score of 93 and a level a rank in the public disclosure of evaluation rankings first of 10 minutes comparison group. These results demonstrate our ongoing commitment to ESG initiatives.
Julia will speak more of this shortly overall, we're very pleased with the quarter and believe that we're in a strong competitive position as market conditions continue to strengthen.
In addition, we are working hard on a number of initiatives to drive value for unit holders, including achieving operational efficiencies refinancing variable rate mortgages to mitigate interest rate volatility continuing to execute on our existing development fulfilling our convertible development loan commitments and advancing repositioning projects.
We're confident that our strategy will drive continued growth in revenue NOI and <unk> per unit. Despite the current elevated interest rate environment and inflation.
Now I'd like to invite Julien, Brian to discuss our third quarter financial and operating performance in greater detail.
Julie.
Thank you Michael.
Turning to slide five we reported same property portfolio of revenue of $34 3 million and <unk>.
Q3, 2022, an increase of nine 8% compared to $31 2 million in Q3 last year. The increase was mainly due to higher occupancy higher average rents and reduced amortization of promotion.
Total portfolio revenue was $37 $8 million a year over year increase of 21, 1%, reflecting higher rents and occupancy reduced our monetization of promotions and the three property acquisitions completed subsequent to Q3 last year.
<unk> Park in Montreal, Niagara West in Toronto, and the international in Calgary.
Same property portfolio NOI in the third quarter was $22 million or 64, 1% of revenue an increase of 13, 3% from $19 4 million.
Or 62, 1% of revenue in Q3 last year.
It'll NOI was $24 2 million or 64% of revenue an increase of 24, 8% from last year. The higher NOI. This year, mainly reflected increased revenue, partially offset by higher operating expenses.
That's helpful. In Q3, 2022 increased 25, 7% year over year to $15 $7 million compared to $12 $5 million in Q3 2021, mainly due to the positive NOI theory.
<unk> increased 28, 2% to $14 million or 21, two per unit from $10 $9 million or $18.04 per unit last year.
Higher <unk>, mainly reflected the higher <unk>, partially offset by an increase in the maintenance capital expenditure reserve from the three properties acquired subsequent to Q3 2021.
And as Michael noted earlier ASF win per unit increased 10, 2% year over year after excluding the impact of a one time insurance recovery.
The <unk> payout ratio was 55, 9% compared to 61, 7% in Q3 last year.
Average monthly rent on furnished occupy suite in Q3, 2022 with $1720 for the same property portfolio and $1714 for the total portfolio representing increases of four 2% and three 8% respectively.
Last year.
Average occupancy was 96, 3% for the same property portfolio at 96, 2% for the total portfolio views represented significant improvement from 92, 9% in Q3 2021.
I'll now turn it over to Jonathan linked to review, our operating performance and growth initiatives Jonathan.
Thank you Julie I'll start with average monthly rents and gain to lease on slide six.
You can see the positive upward trend in both leasing gains in average monthly rent on the Upper chart average monthly rents surpassed $1700 in Q3, 2022 and has increased more than 20% since the formation of the REIT.
<unk> was negatively impacted by the onset of the pandemic in the spring of 2020, a realized gain to lease continues to improve as rental market dynamics continue to be favorable with realized gains of 14, 5%, marking the fourth sequential quarterly improvement, which is notable in a seasonal business.
On the lower chart, we breakout rents by geography, despite recent market rent increases our rental pricing remains a very attractive alternatives compared to renting a condo buying a new home or owning an existing home with a variable rate mortgage for example in Toronto, our rental rate per square foot is $2 62.
Which is 25% lower than renting a cargo based on market data from origination.
In addition, the carrying cost of a $500000 mortgage will be approximately $2900 per month, using a 5% interest rate and a 25 year amortization.
I'll now dig into the gain to lease performance in greater detail on slide seven beginning with the upper chart, which breaks down our realized gains in the third quarter, we signed 574, new leases in the quarter. Following suite turnover up from 555, new leases in Q3 last year.
We generated double digit gain to lease in all of our markets, including an impressive 15, 5% gain to lease in Toronto.
The average rents on new leases increased by 14, 5% from $1675 to $1918. This.
This was the second largest quarterly gain in the rich history and it resulted in an annualized incremental revenue gain of approximately $1 4 million.
Turning to the embedded rents portfolio gain to lease potential on the lower chart. We believe we can generate approximately $16 million of annualized incremental revenue by bringing rents to market levels, representing potential gain to lease of 12, 1%.
By comparison, we estimate the anchor lease potential of $6 6 million or seven 3% at the end of Q3 2021.
I would now like to review occupancy on slide eight.
As rental demand has improved over the last 12 months, our move ins have exceeded move outs contributing to higher occupancy.
We had 691 move ins during the third quarter compared to 562 move outs, a net increase of $129.
Over the last four quarters, there was an increase of net move ins of 302, despite significantly reducing the use of discounts and promotions, which were an important tool to drive occupancy during the pandemic when occupancy was lower.
Turnover in Q3 was consistent with our turnover in Q2. However, we do expect a slight slowdown in turnover going forward as the gap between existing rents and market rents widened as well as due to seasonality.
Moving to slide nine I want to review our furnace three portfolio performance reduced.
The reduced business travelers are independent severely impacted demand for the furnished suites, but as travel restrictions were removed and demand from corporate users and the film industry recovered furnished suite demand rebounded as well in the third quarter average monthly rent was $5261 an increase of more than 30% from Q3 last year.
Occupancy was 91, 9% an increase of 560 basis points from Q3 2021.
Our furniture suite count now stands at 189 suites, a reduction of 23% from Q3 last year and as close to our steady state target.
We are very pleased with the strong performance of our furnished suite offering in Q3. However, it is important to note that Q4 is seasonally a slower quarter for furnished suites.
Slide 10 breakdown, our quarterly operating expenses for both the same property portfolio and the total portfolio.
Property operating costs in the third quarter increased due to higher labor costs really staffing vacancies and higher insurance costs. We are working hard to minimize operating costs, which are rising industry wide in the current environment of high inflation.
Property taxes for the same property portfolio increased marginally compared to Q3 last year, reflecting higher assessments and rate.
The large percentage increase in utilities expenses was mainly attributable to a substantial increase in natural gas rates recognizing that typically our natural gas cost represents a smaller portion of our overall cost structure in the third quarter.
On slide 11, you'll find a summary of our repositioning activities.
We renovated and leased a total of 75 suites in the third quarter or <unk> 56 at the reach proportionate share at an average cost of approximately $55000 per suite.
The average annual rental increase following a repositioning was $5150 per suite or $370 per month, which generated a simple return on investment of nine 4%.
We have 2024 remaining switch to reposition under the current program, we expect to reposition approximately 40% to 50 in the fourth quarter subject to turnover.
Repositioned a total of 218 suites in the first nine months of the year.
On slide 12, we had eight projects in our pipeline five of which are in active development and one is stabilized.
Both of them are convertible development loan projects that include exclusive purchase options upon stabilization and three our direct investments and properties we own these.
These projects are located in our target markets and have the potential to increase the <unk> suite count by over 2300 suites or 28% from our current level.
On slides 13, and 14, you can see recent photos of each of the projects in active development and we'll talk about a few of them.
Getting with distant bank. This mixed use residential and retail property and auto was partnered lead neighborhood has stabilized. It is currently 100% leased and is not subject to rent control.
<unk> group has agreed to extend the option to purchase the property to June 32023, and extends the maturity of the convertible development alone to July 31 2023.
At this time, the REIT has not yet made a decision regarding the exercise of the purchase option and any decision will be based on market conditions and other factors at that time.
Honestly elsewhere in North Vancouver has been topped off and is nearing completion market rents in the north Vancouver nodes continue to increase with rental buildings in the area achieving rents of approximately $5 per square foot.
Pre leasing of the 113 suites is expected to begin in the first quarter of 2023.
One stabilize the REIT will have the option to purchase the project at a 5% discount to appraise values.
Utilization is expected to occur in Q4 of 2023.
Finally at our rich growth property in Toronto, we are very proud to be building 100, affordable suites as part of this 225 suite offerings with the help of our federal and municipal partners.
This is an exciting example of developing new affordable housing for the betterment of our local communities.
We anticipate stabilization in the second quarter of 2020.
Now I'll turn it over to Julie to review, our debt financing and liquidity.
Thanks, John .
Turning to slide 15, we are committed to maintaining a conservative leverage ratio and a balanced debt maturity schedule as the chart shows debt maturities are highly manageable through 2027 as of September 32022, the weighted average term to maturity on our fixed rate debt was $4 four eight years.
With a weighted average interest rate of two 9%.
Approximately 70% of our debt was fixed rate and 65% with CME agency insured lower cost debt.
I also want to note that we assumed approximately $108 million of floating rate loans on the acquisitions of <unk> West and the international in the second quarter of this year.
We're actively pursuing long term CMC ensured financing to refinance these properties with funding expected before year end closing these funds would increase.
Proportion of fixed rate debt to 88% and the amount of insured by CME C would increase to 72%.
Total liquidity was approximately $145 million at the end of September 2022, and debt to gross book value was 39, 9%.
Guarding our capital recycling initiatives the sale of our <unk> mentioned portfolio continues to progress and we hope to provide an update next quarter.
Moving to slide 16, we have now owned Niagara Western International for slightly more than six months. Both properties are performing very rounds for the REIT.
Occupancy at 90 for West in downtown Toronto increased to 98% at the end of September from 95, 6% at the end of June .
And asking rental rates have increased five 5% since the acquisition in late April .
These figures highlight the ongoing return to downtown living as the negative impact of the pandemic recede.
And it's a very similar story at the international in downtown Calgary.
Occupancy was also 98% at the end of the third quarter and asking rental rates have increased four 9% since the acquisition closed in early may.
Turning to slide 17, you will find some highlights from our ESG report, which we released last month.
Firstly, we reduced energy consumption by 11% and carbon emissions by 13% from the 2019 benchmark levels.
Secondly, 50% of individual annual bonus compensation is tied to performance against ESG objectives.
Lee we began construction on 100 affordable suites at the rich property with support from the city of Toronto.
And lastly, we completed our first inaugural diversity and inclusion survey.
Full report is available on our website and I encourage you to read it we are proud of the progress we have made on ESG initiatives to date and are committed to achieving greater performance in the months and years ahead.
Now I'll turn it back over to Michael.
Thanks, Julie I'll conclude with our business outlook on slide 18, before we take your questions. We're.
We're pleased with the steady improvement in the REIT financial performance over the course of 2022, we've capitalized on strengthening industry fundamentals. They include the rising cost of homeownership candidates expansive immigration policy and inelastic housing supply, that's just not keeping up with demand.
The affordability gap between owning and renting a home increase substantially as housing prices remained high in mortgage rates has increased sharply with regards to immigration candidates set an ambitious target to add 500000 permanent residence per year by 2025. These people will need places to live and rental housing as necessary.
Meet that demand over the last year, we've seen downtown environment come alive again as students have returned to in person learning and restaurants sporting events and cultural attractions have withdrawn big crowds.
Downtown living and renting it's once again highly attractive.
Finally, I want to note that strong commodity prices have solidified the rental market conditions in Alberta, which lagged our other markets over the last few years.
Put together, we believe the outlook for the Canadian urban rental market will remain strong for the foreseeable future.
Especially if you consider that the multifamily sector has historically performed well during recessionary periods.
Due to the short term nature of our leases.
To achieve long term success, we remain focused on these five key strategies.
Growing NOI by maximizing revenue optimizing occupancy, creating value for suite repositioning and minimizing operating expenses.
The strategic allocation of capital, which may include capital recycling opportunities accretive investments and deleveraging.
Best in class execution of our existing intensification of development pipeline in order to further upgrade our portfolio.
Third party acquisition or development opportunities, which will be market dependent.
And finally prudent balance sheet.
And liquidity management.
Regardless of short term capital markets volatility the key elements of our strategy have not changed.
We're confident that by sticking to them, we will deliver strong returns to unitholders at the fundamentals of the apartment sector remained strong.
That concludes our presentation this morning Julie.
Julie John and I would now be pleased to answer any questions you may have.
Andrew.
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 Touchtone phone, you'll hear three chunk prompt acknowledging your request on your questions will be pulled in the order. They are received should you wish to climb from pulling product SaaS. Please press star followed by <unk>.
Using a speaker phone please lift your handset before pressing any keys one moment for your first question.
Your first question comes from so Ram Srinivasan with Cormack Securities. Please go ahead.
Thank you operator good morning.
Julia Johnson, Michael Congrats on a great quarter.
Just looking at the occupancy numbers, obviously this cornerstone of a huge amount of occupancy gains coming in.
I was wondering if you guys could kind of give us some color on the breakup of these occupancy gains across markets.
There are some markets, where you saw better performance electric buses.
Hey, John Thanks for the question.
Yes, the occupancy we experienced stronger occupancy both in Toronto and Ottawa both of those are above 98%.
Calgary is in more in the mid nineties kind of 96% or so and where we see the biggest opportunity for increasing our occupancy has actually in Montreal, where we're just a tick over 93%, which which we're quite happy with.
We've been kind of bouncing along between 89% to 91% since the onset of the pandemic and so it's nice to see the hard work of our operations teams starting to bear a little bit of fruit in Montreal.
With our occupancy you kind of picked up broke through 93% last quarter.
Thanks, Mike Hello, John just told me transitioning some dead into the gain on lease prevention I think across every other market we saw a huge gain.
But TV game and that pension except from Montreal that I think that numbers come down a bit quarter on quarter from Q2.
Can you just speak about the fundamentals and the opportunities you're seeing there for perspective.
Yes, Montreal, Youre, saying sorry.
Yes, that's right.
Yes look in Montreal.
I think what we've experienced and I think you saw this when you are on our property tour.
The cost for us to turn the suites.
It has been a little bit higher than other places the time, it's taken us to turn the suites.
Little bit longer.
Market rents are increasing in Montreal, I would say the pace of which is slightly less than the others, but when there is double digit potential for gain to lease in any market I think that's quite attractive in Montreal is still there for us.
And finally, Michael and on the outlook, you mentioned capital recycling opportunities as one of the avenues.
Our value.
Just wondering if you guys have any.
The Canadian targets and that sort of any opportunity to see all that thanks.
Well.
I think youre talking about.
Ed mentioned portfolio that we've talked about is that is that we are yes.
Yes, so I mean, we're continuing to work that.
That process, we have nothing that we can announce at this point, but we're.
We're optimistic that we'll be able to share some news shortly.
Thanks, Michael I'll turn it back thanks.
Thanks.
Your next question comes from Jonathan <unk> with TD Securities. Please go ahead.
Thanks.
Just continuing on the operations side.
Period end occupancy was 97%.
4% is that holding through Q4.
We will see a seasonal dip.
I think as the market continues to tighten we are starting to see a little bit more.
Reversion back to what I would call normal seasonality for this sector.
October was relatively consistent with September we went down about one basis point in terms of occupancy.
The the weather in October was pretty warm.
Up until today up until right now actually as we kind of look at.
Our office is pretty beautiful outside and so.
We're hopeful that the leasing.
Isn't it.
Extended a little bit but.
So look there we are facing some headwinds overall.
In Q4.
In terms of our utility costs.
It's a tough comp in Q4 for us right because the rates for natural gas in particular in Q4 2021 were significantly lower because that was kind of pre Ukraine War.
So we're.
That's a tougher comp for us, whereas rates from from trough to peak or kind of two to three times. So even if there are users just saying it's going to be pretty elevated.
But in terms of occupancy, we're pretty pretty happy with our performance in October .
Okay.
That helps and then on the.
The fifth and bank loan that got extended.
Im assuming thats on the same terms as previous.
That's correct.
Okay, and then on capital recycling.
You did take.
A small little fair.
Fair value decline.
A decline this quarter was that was that the Edmonton portfolio changed at all.
So no change in Alberto whatsoever.
Just a few properties in Ottawa Toronto.
Okay, and then beyond beyond the Edmonton portfolio are there any other properties that you might be thinking of SLE.
What I'd say is this as we take a very active.
Portfolio management sort of stance and so we're constantly evaluating.
Our portfolio for opportunities.
Well when we think about our pipeline of deals that we have outside the.
Right.
You're looking for.
Just upgrade the portfolio and so I would say.
There are no sacred cows.
Look at our entire portfolio from us.
Forecasts in terms of the performance of <unk>.
Each asset and their fit with our strategy.
And so I would say that we take a very expansive view Jonathan on on sort of.
Potential candidates for capital recycling.
Particularly if we think that we can make better use of the capital in other investments just to layer on to that if we can if we can potentially reduce exposure to older rent controlled assets and take that money and invested into new non rent controlled assets.
That would be for us.
The transaction that makes sense.
Okay. That's.
That's helpful I'll turn it back thanks.
Thanks, John .
Your next question comes from Mike Makita with BMO capital markets. Please go ahead.
Good morning, everybody.
Just wondering.
The refi that you expect to do on a macro western international.
I know youre going to Youre fixing the term or you can call out any incremental capital on that transaction.
No we're not.
Okay.
And Alberta, John I think you highlighted the strong rent spreads across the portfolio, but could you see the new leasing spreads in Alberta.
Mid teen range.
Chris If you can give us some commentary in terms of what you guys are seeing on the renewal side since it is not subject to rent control.
Yes, I mean look it's broad strength across the portfolio, we're seeing particular strength in the international I think as Julie highlighted.
So it's pretty much eliminated promo from.
Most everything I think that.
There's a little bit of.
Competing products going around the quarters and the Laurier.
So.
We're keeping a very close eye on that.
But it's pretty consistent with the rest of our portfolio in terms of just broad market strength.
Rents up 5%.
Since since we acquired the international in particular.
Okay.
Just in terms of the renewals like broadly speaking for Alberta would you guys be doing something above say.
The one two or one point.
What youre getting at Ontario, just due to the limit.
Yes, I mean, we're seeing just bringing everyone up to market rents without promo.
Got it okay.
Fair enough.
And then last question for me before I turn it back.
Just on the convertible development loan program.
Is the 5% discount and the value that you capture is it a one way or.
If in the event that you pass on a project or it gets recapitalized in another manner.
Do you still capture the 5% value creation on that.
So are you asking about the instance, where the REIT with wave on its ROFO rights.
Yes.
And we haven't encountered that situation, but.
When the reach has waived on deals, particularly in the last <unk> that instance has occurred in the last 12 months, let's say when we've been more restricted.
And our ability to access the capital markets.
<unk> has pursued some deals with the.
The concurrent and approval of the independent trustees on the.
Board.
And.
And what we've undertaken.
Undertaken I would say, it's a best efforts.
Sort of approach whereby when market conditions improve.
And our cost of capital returns to where we think it should be.
That MPI will use its best efforts to.
Bring those investment opportunities back to the REIT, whether that would come in the form of a CDL investment.
Which is possible because some of those opportunities are in the pre development stage and so there would be ample opportunity.
For the REIT to participate in the development, which is obviously first prize for the REIT because the CDL structure allows the REIT to garner the vast majority of the economics from development and is ring fenced from most of the risk in terms of cost overrun scheduled risk lease up risk those risks all remain.
With MPI. So we're looking for opportunities to do that Mike if if if the capital market conditions.
Improving we see our cost of capital come back down to sort of where it should be.
Okay. That's helpful. I guess, what I was asking more specifically it was just in the event I know you got an extension on some bank.
Mid 2023, but in the event that there.
Wasn't able to exercise.
Discount purchase option.
Once the property hit stabilization.
About 5% value capture on purchase is that something that the REIT is still entitled to if the property doesn't sellers recapitalizing the different ma'am.
No I mean.
That the purchase discount is attached to it.
It's part of the CDL instrument, so if the if the.
The CDL was to mature and it was to be repaid.
That the option goes along with it Unfortunately.
Okay.
Thanks, very much I'll turn it back thanks.
Thanks, Mike.
Your next question comes from Johann Rodrigues with Industrial Alliance. Please go ahead.
Hey, everyone given that it stabilized do you have a rough sense of what the value of system bank would be.
It would be in dollar terms in the high Ninety's.
And then we would apply our our 5% purchase discount to that.
We're seeing cap rates.
Holding pretty steady we've seen five or seven transactions I would say.
Our curve and.
Multifamily.
That.
Which suggests cap rates that are.
Given the low low threes or high twos.
<unk> bin I think conservative in assuming.
Higher higher cap rate for this asset.
But that's kind of the rough order of magnitude.
And should we take it that the extension and.
The delay in deciding what other pulled the trigger.
On that is that due to availability of capital slash cost of capital or have anything to do with where.
The pro forma has landed.
Or anything like that.
The actual return on the asset.
Hello.
The assets leased up well, we've leased at rates in excess of our underwriting pro forma we're very happy with the performance of that asset.
It is.
Because it was completed after November 2018, it's not subject to the rent control provisions.
Absolutely loaded with all the latest prop tech and amenities.
And it's in a submarket, where there is probably less than 1% vacancy so.
It's a fantastic asset, it's an asset we want to put into the REIT.
We are sensitive to some of the feedback that we got.
In the spring with the timing of that.
The international 39, Niagara transactions, and obviously sensitive to where our stock is trading right. Now we are kind of 45% discount to NAV. So we.
We took a lot of feedback from investors very sensitive. The fact that this is a related party transaction and wanting to be absolutely transparent in.
Bend over backwards to ensure that the minority unit holders are treated fairly and so.
It was a very quick discussion with the MPI Board.
Get them to extend for another six months, John I don't know if you'd add anything to that.
The only thing I would add is that we're highly focused on.
Our cash flow per unit performance and our current cost of debt right now on our floating.
I think this is.
To your point earlier as you call. It the $100 billion assets, we probably only need another less than $20 million of incremental capital because of the $30 million that's already outstanding under CDL alright, So even if you finance the staying with 100% debt the cost of debt would exceed the purchase cap rate and that that math just is very difficult for us to make it work.
In the current in the current market. So we're.
We're not beholden to any specific timing.
The extension other than when its extension runs out, but we're just trying to be prudent with our with our capital Alright sure should we take it that you guys are able to sell some of the I mentioned properties that you might pull the trigger on.
It's possible I mean, I don't know if the timing is it a lineup at the end of the day, if we have excess capital we're going to look at high grading the portfolio, we're going to look at paying down debt, we're going to look at NCI B, we're going to look at everything Thats on the table I've got to make the appropriate decision at that time.
And last question you have to take down a 100% of it or can you can split it with and bring in a partner or hub.
P I retain half of it now.
The way its documents written it's 100% transaction, but it's something that we've talked about internally, whether we could.
Work with some of our existing relationships.
We have a fairly good rolodex of institutional partners.
And so that is a scenario that we've we've evaluated as well but no.
No firm.
Thoughts or plans on that at this stage.
We want this asset we want 100% of if this is a fantastic asset so to the extent, we can do that and I think we would to the extent we would lose it.
We need to consider all other alternatives, obviously, we would be open to that too.
Alright, Okay, and then just switching last question.
And keep reducing the furnished suite count in the portfolio each quarter.
No roughly where you see that stabilizing long term.
Yes.
Yes, we're pretty much there we I think we have once we left in 150 roehampton that'll be done by the end of the year and so we're going to be at that 188 somewhere between 180 688.
British suites, and it's going to be only in those two buildings 185 line as well as 61 Yorkville.
Okay.
Medium term, we couldnt add more inventory at those properties or others, but.
At this stage, we don't have any plans to do so.
Okay. Thanks, I'll turn it back good quarter.
Thank you.
Your next question comes from Kyle Stanley with Desjardin. Please go ahead.
Thanks, Good morning, everyone, just kind of looking at the Opex side of things and more specifically Nat gas I mean, youre not gas was up 70% year over year in the third quarter and while understanding and I think you highlighted that Nat gas represents a small part of the cost structure in those wins.
Summer months sorry.
I'm just wondering your thoughts on how that trend looks in the fourth quarter and first quarter I think John you made some Tom mentioned, but does that 70% kind of year over year growth number.
What do you think about that.
I think over two three years likely going to see additional consumption. So that number is likely going to be higher going into Q4.
As it relates to utilities I think from a staffing cost perspective, we're still seeing cost creep.
That site through you are likely seeing a bit of an increase there as well.
Okay. Thanks, and just one more for me and then since for Michael just could you comment on any recent discussions you've had with the federal government just regarding the review of the multifamily REIT taxation status.
Affordable housing I guess more generally.
Yeah.
We've been working.
I think as you know with.
Our closest peers killam cap rate boardwalk, and Interrent, and then more broadly with a larger list.
I will say.
Alternative housing providers in the REIT space.
And some large private.
And then broadly with the industry groups like Purple <unk>, CFA and real pack in a coordinated fashion to.
Educate policymakers and I'll say influencers in the policy space.
And.
<unk> both in the political realm folks who are cabinet level positions.
Elected members of Parliament, but also not just within the Liberal government, but also members of the opposition of the engine.
And the Conservative party as well.
I'd say those conversations have been productive.
We found that our counterparts have been open to us.
A good exchange of ideas and.
Some fruitful discussions as well as it relates to policy alternatives. So I think it's too early to comment on where the outcome of those conversations might happen.
But.
I'm optimistic.
That the parties working together, we will find some solutions to improve the housing affordability crisis that we have in this country I mean, it's notable.
That we saw in the 12 months ended at the end of June using staff, Ken figures Canada's populations searching by 700000 people.
And also notable that recently in the last week, we've seen the federal government raise our immigration targets yet higher to have 5 million people ultimately in the next three years.
In the three years. So that's those are substantial indicators.
Of housing demand in and we know as an industry.
Housing supply curve is very elastic.
And that we in the in the REIT space.
And I speak about my peers.
Big parts of that and you heard earlier today in calls with kilometer cap.
They see playing on that certainly.
Minto I think for sure in that space as well.
We can be part of the solution and what I like to see is the conversation has shifted.
At the government level to want us incentives to bringing new supply online so.
And that happened at both the provincial level.
<unk>.
With the Ontario government's recent announcements on land planning and <unk>.
Portable housing, but also at the federal level. So I think we're going to have to wait and see at the federal level. How this plays out.
Everyone in the summer was hoping maybe for some clarity in the fall economic statement I think it's taken longer for the government of this file is tremendously complex.
Have limited bandwidth theyre dealing with multiple big files, not just housing and so I expect it may not be until.
The budget time frame that we'd see a little bit more clarity, but.
Say I'm optimistic.
Okay. Thanks for that good to hear.
The level of optimism there and hopefully we do get a positive outcome and lift the overhang that's been over the sector for a little while thanks ill turn it back thanks Kyle.
Ladies and gentlemen, as a reminder, if you do you have any questions. Please press star. One. Your next question comes from Jimmy Chen with RBC capital markets. Please go ahead.
Thanks, just a couple of questions from me. So first on the turnover rate trends I know the expectation is that they will continue to go to tick down.
Where do you see that going where do you see that bought them out.
And then secondly, maybe putting your into private head on.
Can you just talk generally about kind of what you're seeing in the new condo sales development.
Market.
That impact the rental business over the next few years.
Hey, Jamie.
It's John I'll take the first one and then I'll hand, it to Mike for the second one.
Look on turnover as we said in the opening comments the actual turnover we experienced in Q3.
Very similar virtually unchanged from the turnover we experienced in Q2, we do expect turnover to increase with just seasonality as well as the strengthening and a tightening over the rental market.
I think two things.
That will moderate to turnover for us number one we have a pretty.
16% of our portfolio is as non rent control. So thats good and the second thing is there's a couple of very large buildings.
That a year ago had a lot of promotion in those rents and those leases are turning over and as those leases turnover, it's quite a large gap between what they're paying and what market rents are and so we're seeing sort of a normal natural turnover in those leases as well and.
So just to give you I guess I'm not I think our portfolio something like mid Twenty's in terms of turnover.
I think we're expecting it to be kind of low 20% turnover to just give you a little bit of that.
I may have said turnover decrease or increase by accident I might decrease.
And on the condo side.
And speaking specifically of the new condo supply so not speaking about retail.
But what we've seen I'll say broadly.
Across the country, but if we want to look at let's say.
Toronto is a specific input.
We have seen.
Significant declines in sales of new homes broadly.
Condos in particular.
You can look at Altice reports you could look at urban Asia reporting and what we're seeing are.
Volumes of new condo sales.
Dropping.
80%, 90% year over year on a monthly basis so.
That's a function of.
Higher interest rates and challenges for buyers to qualify.
And so when you've seen this reported by urban nation and others, but many of condos that were planned for launch.
This year.
I have been told by developers who are looking looking at market conditions closely looking at reception.
To their offerings and opting I think to pull deals so.
The implications for the industry is that obviously fewer condos will proceed to that pre sale point condos that are already in pre sales may not achieve their pre salt presale threshold they require for financing.
Essentially we could see projects delayed or canceled.
And go back on the shelf as developers wait for market conditions to improve.
I think the implication for the rental housing is that.
Obviously that source of new competing supply will be somewhat constricted until we see.
Market conditions improved for developers and I think thats largely going to be a function of mortgage rates and right now we're seeing.
Five year.
Fixed rates for preferred customers in the high fours low fives, and then of course customers are having to qualify with 200 200 basis point premium to that so.
It's probably.
Youre going to restrict some new supply coming online frankly.
Yes.
And Thats just unfortunately, the reality I think for for renters right. Now is that there is probably going to be fewer options for them in the near term until until we get some clarity around mortgage rates coming down.
Okay.
Are you seeing some of that supply that otherwise would've been condo.
Shifting to purpose built rental I assume no, but I wonder if there was any.
Sign of something like that.
Unfortunately.
I'm not seeing that yet on a large scale I suspect there may be individual.
<unk> that might shift that way, but.
The rental development pro forma in the condo pro forma share a lot of similarity.
So rising short term borrowing rates for construction financing.
Construction costs are soaring.
<unk>.
Slowdown in the homebuilding industry is going to.
Impacts construction pricing first on the low rise wood frame trade because those are short.
Our cycle time projects the concrete.
Construction.
The impact of lower construction volumes I suspect on pricing construction pricing is probably going to take quite a bit longer to filter through partly in.
Is that.
A lot of the competing demands on construction.
Raids and supply suppliers is not just.
Residential high rise construction, it's infrastructure, it's office industrial.
Those trades.
Other other.
Calls for there.
What they do and so.
What we're seeing is rental pro forma are under pressure in much the same way that.
Jack condo pro forma or so.
Haven't seen a big shift.
Now it will be interesting to see when Ontario.
Some of the proposals put forth forward by the Ford government.
Favre.
The construction of affordable rental our rental period, whether that might start to have an impact.
I think it's too early to say because that those proposals were just released in the last couple of weeks. So.
That's my sense anyhow.
Okay. Thanks for the color.
Thanks, Jimmy.
Your next question comes from Matt <unk> with National Bank Financial. Please go ahead.
Hey, guys. So I'll keep it quick with two quick ones here just.
With regards to the.
Niagara.
Asset.
Can you give us a sense I mean, you bought it fairly recently, but the Toronto market has been on fire from what we've heard.
Just as to where maybe mark to market potential is notwithstanding obviously, you would've done leasing market at the time that it was in lease up.
But just some thoughts there and because it's non rent control how do you how do you think about passing through that.
On lease renewals.
I mean, you hit it on the head I think right like we're able to achieve market rents with no promotion in that market.
Yes.
So so.
The Mark to market is every lease is pretty pretty much ad market.
And we've seen market rents grow 5% since April .
And where they're in the process of lease up for that with where their promotions given that would still kind of be outstanding relative to today.
Yes, yes for sure.
That's kind of what is generating some some of our goods financial performance, especially in that building is that.
I'll give you just one specific example of bitter sweet on the explore that it looks directly into a black wall.
We're exiting it for net effective two months of promotion a year in Africa for 600, and we rented it.
Last month for 2400 <unk>.
Romo.
That's just one small example, and a very attractive building in neighborhood just to give it to you there, but that's what's happening in that building.
And that just highlights I think Matt why we were so keen on that.
Acquisition and so.
Notwithstanding the timing was not being ideal.
Last March.
But so.
Focused on retaining that asset for for the REIT rather than see it settled in the market.
Because of exactly what Jonathan just pointed out its location and the fact that it's not subject to rent controls allow us to adjust quickly as demand is.
Surging.
Yes, no that makes sense.
I think everybody has surprised with how quickly things.
Things turned.
And that turned to the positive one quick just.
Housekeeping type item.
For the insurance recovery of 594000 is that in other income that is not.
And in a line item that would go into NOI as it yes.
Yes, that's correct. It's other income decline okay perfect. Thanks, guys.
Thanks, Matt.
There are no further questions at this time. Please proceed.
That's great.
Would like to before we conclude our call put in a pitch. Many of you may know that John Lee and I are sleeping on the street.
On Toronto is mean streets on the night of November 17th we're raising money.
Sure.
For Covenant House, which is of course, an organization that provides housing.
Health care and other services for youth, who are at risk a great cause we've raised I think at this point in excess of $70000 towards the $100000 goals you all could be a big part of helping us.
Hit our goal so if you've given already thank you so much if you haven't yet.
Please consider doing so a $1000.
It goes a long way it would house and feed three.
Troubled and homeless teens for eight months so.
Please please do give us some thought I would also as well like to just thank Julian Lorraine. This is that the her last.
Earnings call and I think of it she and I have been working hard on this.
For going on five years now and so.
It certainly is the case.
The end of an era with that with Julie stepping away and so I'm very thankful for all of her hard work and energy and leadership that she brought to the REIT success over the last five years. So Joey Thank you very much.
And it's been fun.
I cant believe youre, saying that.
Anyhow. Thank you everyone that concludes our call. This morning. Thank you very much for your interest in Minto apartment REIT. We look forward to speaking with you again after we report our fourth quarter and year end results next year. So have a great day. Thanks everybody.
Ladies and.
Gentlemen, This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a great day.