Q4 2022 Killam Apartment REIT Earnings Call
[music].
Good morning, ladies and gentlemen, welcome to the Killam apartment real estate investment Trust Q.
For 2022 year end financial results conference call at this time all lines are in a listen only mode.
Following the presentation, we will conduct a question and answer session if.
If at any time during this call you require assistance. Please press star zero for the operator. This call is being recorded on Friday February 17th 2023, I would now like to turn the conference over to Mr. Philip Frazier President and CEO . Please go ahead.
Thank you good morning, and thank you for joining killing apartment rates Q4, 2022 year end financial results Conference call I'm here today with Robert Richardson Executive Vice President Steel Noseworthy, Chief Financial Officer, and Aaron Cleveland Senior Vice President of Finance.
To accompany today's call are available on the Investor Relations section of our website under events and presentations.
I will now ask Karen to read our cautionary statement. Thank you Paulo.
This presentation may contain forward looking statements with respect to kill them apartment REIT and its operations strategy financial performance conditions or otherwise the actual results and performance of Killen discussed here today could differ materially from those expressed or implied by such statements such statements involve numerous inherent risks and uncertainties and although killen.
Management believes that the expectations reflected in the forward looking statements are reasonable there can be no assurance that future results levels of activity performance or achievements will occur as anticipated.
For further information about the inherent risks and uncertainties in respect of forward looking statements. Please refer to <unk>. Most recent annual information form and other securities regulatory filings found online on SEDAR.
All forward looking statements made today speak only as of the date, which this presentation refers and kill and does not intend to update or revise any such statements unless otherwise required by applicable securities laws. Thank you Eric.
We have delivered strong financial and operating results for the fourth quarter and for the year ending December 31 2022.
However, the past year came with new uncertainties and headwinds. Nevertheless, we remain focused on our three core growth strategies we.
We achieved four 7% same property NOI growth across the portfolio.
Which included four 5% same property NOI growth.
Our apartment portfolio.
6% same property NOI growth and our manufactured home community portfolio and $7 nine same property NOI growth for our commercial properties. Despite pressure in the capital markets in 2022.
Multifamily fundamentals in Canada were the strongest we have seen in our 20 year history Killam ended the year at 98, 3% same property apartment occupancy.
Also the highest in our 20 year history.
We are optimistic of the opportunities ahead, and we will remain focused on growing our portfolio, our cash flow and the underlying value of our assets that will take us through our financial results, followed by Robert who will discuss our MHC and commercial portfolio results.
And an operational update I will conclude with an update on our current and recent developments and our capital allocation strategy I will now hand, it over to Bill. Thanks, Bill Slide five highlights financial performance <unk> earned net income of $122 7 million in 2022 and <unk> per unit.
$1 11.
Up three 7% from last year.
<unk> per unit of <unk> 93.
About three 3% from 2021.
Same property NOI, <unk>, <unk> and <unk> growth in Q4 and for the year are summarized on slide six.
The growth in <unk> in <unk> was attributable to increased NOI from our same property portfolio and incremental contributions from acquisition, which totaled over 500 million since the beginning of 2021.
This growth was partially offset by an increase in the weighted average number of trust units outstanding and the impact of rising interest rates.
Strong top line growth continued to drive positive results in Q4.
Same property revenue growth of 5% was driven by higher rental rate across all three business segments coupled.
Coupled with a 130 basis points increase and apartment occupancy ending the year with Callum highest occupancy level in its history.
The weighted average rental increase chart on the top of slide seven captures the increase in rents based on the leases that came into effect. During each period. This chart shows that in Q4, we achieved a weighted average increase of four 3% for new and renewing leases that started in October to December well above our three seven year over year.
This four 3% increase is made up of two 1% rent growth on lease renewals and an average increase of 12% on unit turn from new tenants moving in during the quarter.
Slide eight illustrates our total same property operating expenses up five 4% in 2022, the most significant increase within property utility in fuel expenses, driven primarily by higher natural gas prices.
Same property general operating expenses were managed below inflation, increasing by three 6% while property tax expenses increased by two 2%.
Kill them the debt maturity profile, which can be seen on slide nine includes average apartment mortgage rates by year versus prevailing five years CME C insured mortgage rate based on today's bond yields current bare borrowing rates are above <unk> annual weighted average interest rates.
In 2022, Killen refinanced $152 million of maturing mortgages with approximately $213 million of.
Of new debt at a weighted average interest rate of three 7% 90 basis points higher than the average rate on the maturing debt refinancing at higher rates is expected to lead to increased interest expenses. However, this increase is expected to be gradual due to the staggered nature of kill them that ladder.
We remain focused on reducing our debt levels and ended the year with debt to normalized EBITDA of 11, two time and debt as a percentage of total assets of 45, 3% just above our target of 45%.
The increase in this ratio is attributable to higher balance <unk> credit facilities from acquisitions during the year and the recognition of fair value losses related to investment properties due to a moderate expansion of cap rates in the second half of the year.
So on that metrics are included on slide 10.
I will now turn the call over to Robert who will discuss our operating results in more detail. Thanks.
Thank you Dale and good morning, everyone. We continue to see positive results across all kilns business segments, our MHC and commercial portfolios had strong fourth quarter 2022 results and are expected to continue to add meaningful contributions to <unk> future growth.
The MSC sector also delivered an impressive performance for the year as a compelling affordable housing solution.
As well, Kevin seasonal resorts outperformed previous years as Canadians enjoyed these well located affordable vacation destinations during the summer and fall of 'twenty two.
As noted on slide 11 come with MSC portfolio realized and same property revenue growth of five 8%.
And NOI growth of 6%. This growth is mainly attributable to increased seasonal revenues achieved through annual rent increases plus more short term rentals all compared to 2021 comes MSC business segment generated six 1% of <unk> overall net operating income for 2022.
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Slide 12 highlights Killen same property commercial portfolio, which also performed very well in 2022 with revenues up five 9% and a seven 9% increase in net operating income.
These improvements are primarily due to a 240 basis point increase in occupancy to 93% for the year.
Kevin leased 50000 square feet of net new commercial space and renewed a further 100000 square feet throughout the portfolio during the year combined new and renewal leasing generated a weighted average net rental rate increase of 11, 4% <unk> commercial portfolio is proven to be very complementary to our <unk>.
<unk> portfolio.
On the apartment side, we continue to strategically invest capital in our portfolio with capital upgrades energy efficiencies and unit repositioning kill.
<unk> is well positioned to deliver quality housing solutions to our residents and communities are suite renovation program is an important initiative that meet the market's demand for modernized suites.
Potential first time homebuyers are turning to the rental market has an increasingly affordable option given today's surging single family home prices I'd kill them, we're cognizant of our responsibility and candidates competitive apartment market. For example, killam upgrades only those suites that come vacant when tenants do not renew as we do not engage.
And programs to influence returns through aggressive rent hikes or incentive offerings.
As shown on slide 13 kill them reposition 617 suites exceeding our 2022 target of 600 suites. This represents approximately 15% of the suites turned and 3% of our total portfolio.
Over the years Jo mill fine tune its upgrade processes and has the ability to reposition most suites within 28 days and provide our residents with the best finishes based on appeal functionality and durability.
Slides 14, and 15 profile a number of kilns upgrade projects in 2022.
Where we invested capital to improve the attractiveness and curb appeal of all of our properties.
Adding two new amenity rooms at Copel towers in Halifax, a fully equipped 2000 square foot gym, along with a 2000 square foot residents' lounge further we installed a dedicated elevator to ensure our mobility challenged residents.
Can also access and enjoy these facilities.
Brentwood apartments also in Halifax, and above are in Charlottetown kill them installed new exterior cladding of windows.
Capital investments improve the durability of properties given climate changes related to weather and increased installation for improved energy efficiency and resident comfort.
Our energy efficiency investments totaled $8 5 million in 2022 exceeding our annual target. This included projects such as solar photovoltaic installations electric vehicle charging stations geothermal heating and cooling systems boiler and heat pump replacements and electricity and water Conservation project.
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These advanced Green initiatives will reduce <unk> impact on the environment and helped mitigate our exposure to volatile energy costs.
As the chart on Slide 16 highlights continued population growth in Canada, and specifically in the Halifax region. Our largest market is also expected to drive demand for our properties.
Our collection growth in Halifax has continued to remain at record levels.
The city is attracting people from across Canada and around the world.
According to statistics, Canada, Halifax was the second fastest growing region in the country behind Mountains, Canada, leading an impressive five 4% population growth not only our Atlantic Canadian cities growing at a record rate. The average age of the population in the region is also trending younger.
Demand for housing is unprecedented we recognize that housing supply and affordability is a challenge in Canada and as noted earlier kill them is committed to contributing to our solution.
In 2022, we increased our long term commitment to affordable housing through CMA six innovative MLR select mortgage loan insurance product.
We ended the year with over 1000 apartments suite, having a long term affordable commitment an 18% increase from 2021.
At year end for the 42% of our portfolio remains affordable as defined by CMA sees 30% a median household income metric.
Our environmental social and governance priorities are core to our business and in 2022, we continue to focus on inclusive and sustainable growth. Our annual third Party management resident residential survey is an essential way we measure our progress in 2022, we continue to score well on these metrics compare to <unk>.
History benchmarks with ADP, 86% of our residents saving and that they are happy to rent from Cowen.
We certified an additional 10 properties this year under the certified rental building program.
And we are well on our way to reaching our portfolio goal of 20% certified by 2025. These certifications insurer that we have the best operating and healthier living standards for our residents.
I will now hand, you back to sort of provide an update on our developments acquisitions and capital allocation strategy.
Thank you Robert.
We completed $119 million in acquisitions in the first half of 2022.
Expanding our portfolio in Halifax, Waterloo growth and on Vancouver Island, we reduced our acquisition activity during the second half of the year because of rising interest rates and focus on maintaining capital flexibility.
Future acquisitions will continue to be an important component with kilns growth. However, we believe now is not the time to be aggressive.
During the last two to three months Killen has been focused on identifying assets to sell and reallocating this capital to pay down our variable rate debt.
After repayment of debt, we will use the capital for new developments.
Sure.
Our NCI program.
Film has received many inbound inquiries for off market sales from private capital and we expect to close on several small transactions in the coming months.
<unk> is one of the markets.
Where we've had many inquiries and we will look to reduce our ownership exposure through 2023 2024.
<unk> focus on dispositions is driven by a desire to recycle capital increased geographical diversification and reduce leverage.
Developing high quality properties in our core markets is an important component of <unk> capital allocation strategy as we grow our portfolio and contribute to new housing supply that is so badly needed in Canada today.
This past year has been <unk> largest year for development since our program started in 2010 with $243 million and completed developments.
This component of <unk> growth strategy is one that distinguishes us from our peers and allows us to add assets to our portfolio in strong markets.
As seen on slide 19 in 2022, we completed three developments.
The Ontario region the K.
Property Mississauga.
And Luna in Ottawa and these developments are exceptional additions to <unk> portfolio and are expected to contribute positively to our NOI and <unk> growth in the coming year.
We finished the year with three developments underway, which will add an additional 320 high quality suites to cone's portfolio over the next 24 months.
They are profiled on slides 20 to 25 and include the Governor in Halifax, and <unk> 66 in Kitchener.
Eric in Waterloo, which broke ground last fall is.
As expected to be completed by the end of 2024.
To conclude.
<unk> has a strong balance sheet has a proven business model and an experienced management team.
We recognize that Canadians rely on us more than ever and kill me will be there for our residents in our communities as a responsible corporate citizen.
We are committed to being an ESG leader developing a culture of diversity inclusion.
Building meaningful purpose built built rentals.
And investing in initiatives to improve operating efficiencies.
I would like to thank our <unk> team across the country for their hard work and dedication.
Our residents for choosing kilometers or home and our unit holders for their continued support.
We are optimistic of the year ahead, and we will continue to execute on our priorities and create value for unitholders during 2023.
Thank you.
I will now open up the call for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone.
You will hear with Frito prompt acknowledging your request should you wish to decline from the polling process. Please press the star followed by the Q.
If youre using a speaker phone please lift the handset before pressing any keith.
One moment. Please for your first question.
Okay.
The first question comes from Mike <unk> of BMO capital markets. Please go ahead.
Thank you operator, good morning, everyone.
Good morning, Phil.
Just on the.
Just wanted to get a little bit of additional clarity clarity on the dispositions.
Is that a gross figure or is it not and I guess, what I'm getting at is are you contemplating doing any acquisitions at all this year.
That is right now our growth is minimal.
So it could go higher than that it depends on.
Basically.
The deal and that's going to be deal by deal. These are all smaller properties that we're looking at.
And it doesn't really exclude.
These issues.
But again from our point of view on the growth side.
Right now we don't see a lot of.
Value and opportunities on the older stock to looking at it.
If there is opportunities out west on maybe newer product in the second half of the year, we will look at that.
But the focus on growth for us this year will be on their development side of the business.
Okay, so not ruling out acquisitions, but not especially explicitly putting a target out.
Right.
Got it okay just on the on the guidance for same property.
NOI of 3% to 5% for this year.
You guys could give us a little bit more color in terms of what youre expecting from the top and top line versus the the opex inflation side that would be great.
I'll take that one so on the top line I mean, where we are seeing acceleration in terms of rent growth as you would have seen in the result, though.
First to starting off 23 that continuing though.
We're pretty bullish in terms of being able to get 4% to 5% on top line. Again reminder, occupancy is pretty high in most of our markets. So it's all going to be about rent growth. Although we do have some occupancy gains to be made.
And 23, so and then on the expense side, we've talked a lot about Nat gas exposure and we're going to have a lot more information after Q1.
So heading into 'twenty three I think that was our biggest cost pressure that we were seeing especially some of that pricing.
We're we're high in Atlantic Canada, what we have seen is that pricing is coming in a bit lower than we had originally expected. So on the expense side I think similar to probably what we are we will at the end of this this year when we look across the board. The mild weather is certainly helping us on that on that side when we look at other.
Expenses property taxes will probably 3% to 4% we got some some provinces theyre going to be a lot less some is going to be more.
We are having inflationary pressures on a lot of our repairs and.
Maintenance and contract related costs.
Those are being offset by some other efficiencies we've got internally so overall.
So that should get us to the range that we talked about.
Okay.
Just I mean, you didn't state explicitly Darren I think you guys are likely being conservative for variety of reasons, probably lower turnover in the opex side.
Would it be fair to say that youre expecting lower turnover from a topline perspective, you're expecting lower turnover, but that that 12% and really are.
Your new leasing spreads are starting to inch up over the last couple of quarters will be offset and that will continue to go higher and then on the opex side like with some conservative conservatism. There we just got to get through the Q1 bogey and then.
Is that fair.
I think that's fair. The turnover is one you would have seen it really came down a fair bit in this past year and that trend. We are expecting that continue to continue so that that's the big question when we look out.
How much lower turnover or are we going to have.
That's great. Thanks, I'll turn it back thank you.
Sure.
Thank you. The next question comes from Mark Rothschild of Canaccord. Please go ahead.
Thanks, and good morning, everyone.
Philip and your comments about <unk>.
Not being aggressive in acquisitions this year.
I assume that was referring to just the returns you can get and you also mentioned that youre getting inbound calls to sell properties.
What do you think changes.
Over the next little while do you think that prices need to come down or if the market just need a stabilize as far as interest rates go up because obviously over the long term you do want to be active in buying properties.
I understand your point that the numbers don't seem to work right now.
Well I think of the two comments are the two reasons. The one that's more concerning to US is just to understand.
Where the interest rates are going to be and again, it's been a constant sort of increase through last year. The beginning of this year. They started to come down and now they've moved back up in the last three or four weeks again and all we want is a little bit of certainty we want to know that.
Bank of Canada has signaled this is the end of their rate increases because I think that once that happens for sure. We will start to see the bond yields and the cost of our debt on a five or 10 year to come down a little bit and even if it doesn't that's not the end of the world. What is what is really heard too.
Sort of.
Work with if you look at the property and its going to be a 60 to 90 day sort of tie up you don't even know what it is going to be when you close and we just want a little bit of certainty and up in.
For the last 10 years, it was always quite simple.
Going to be relatively stable or less.
And that's the part and again, we're looking at typically the acquisitions are all going to be $50 million plus and so you don't really want to make a mistake. If you can sort of postpone that sort of an.
Uncertainty for a few months.
Understood Okay, Great and then maybe on the development side or you've been successful lender and remain active the cost to develop whether its development charges or just general costs have gone up quite a bit.
Are you seeing further pressure on returns or is the rent growth.
Horizon rental rates enough to offset that and get to comparable returns.
I think it's.
To answer your question again, we see that there is the ability to move those rents.
And so therefore when you even if you look at it and say, it's a four five development yield today in.
Even if there is cost pressure over the next 30 months as you build it.
We truly believe we can move the ramp in.
And again.
If you look at it what this country needs as new supply and so from a pure.
Real estate company the growth side should be on the new supply and so you can do your own development.
And sort of maybe partner up with other developers and have joint ventures on the new construction.
So I think that that's really what we're going to concentrate on because that's the biggest opportunity and need for the country.
Okay, great. Thank you so much.
Okay.
Thank you.
Question comes from Jonathan <unk> of TD Securities. Please go ahead.
Thanks, Good morning, just going back to the same.
Same property NOI guidance, you said, 3% to 4% expected increases on the property tax and utilities are obviously always going to be a wildcard at least through Q1, but what are your expectations for your your R&M or your general operating expenses.
They're more qualified.
4% to 5%.
Okay and then on the.
Bill you talked about.
In your remarks about selling.
So as to reduce leverage, but if your sort of outlook or targets for the year.
Our leverage basically flat.
What where do you think you want to take leverage over I guess, a two to three year period.
Well again, the trend has always been to try to move it down right now we're at 45, 3% and when I say we are.
Do see the debt it is our sort of our line of credit.
That we would've typically for the last number of years.
Ben.
Partially into the line, which is variable.
And then basically we've been over the last three or four years fortunate enough to be able to raise money on the market through the markets pay down that line and then go out and look for acquisitions and use outline in terms of quickly and being able to close.
We know where everybody stock price, we've last year, we're not prepared to raise equity at this time. So therefore, one of the ways to pay down that line is to sell assets I mean, there's such huge demand the pricing looks incredible.
Use that to pay down the line.
And it will reduce our leverage.
To a certain extent and then we have the flexibility in the capital flexibility to look at opportunities.
Or to put it back into their development program.
As I said are in CIB program.
Okay.
So that makes a lot of sense and you mentioned specifically PEGI is that is that basically due to the regulatory environment. There you just can't get enough.
Well as you can in the rest of your Mark.
And.
As we sort of thought about if we're going to get asked that question today.
We are looking at opportunities to sell assets in Ontario, New Brunswick, Nova Scotia and Pgi.
Cei is basically we've been there almost for 20 years, it's been very good to us, but the last couple of years have been.
The rent control side of it has been less than what we hoped for and expected and it comes to the point, where we know that our capital can find a better home and if we can sell down some of those assets then we're prepared to do that.
Okay and then just last for me on on rent control is there anything.
To suggest that it doesn't go away at the end of 2023 and Nova Scotia.
Well Theres talk one way or the other we don't know anything for sure.
But again my comment on rent control the sporting I guess is if you look at it.
With <unk>.
Basically <unk>.
See it too.
Ontario, with two and a half so lets go through with two so these are the provinces that affect us the most.
My comment is is that.
As we've experienced the inflationary pressures for the last two to three years.
Been a lot higher than that.
With two five range. So I think that is.
Land, Lord and even sort of talking to these provincial governments are just even being involved.
And the industry, we need a little bit more of an increase on these rent control markets.
Okay.
That's helpful I'll turn it back thanks.
Thank you. The next question comes from Brad Sturges of Raymond James. Please go ahead.
Yeah.
Hi, there.
Just to continue on the line of questions on the asset sales.
It sounds like.
Several small transactions is it fair to say, then you're targeting or contemplating I guess.
Some smaller assets, maybe a little bit.
Perhaps older assets, where there are other attributes.
The announced sale attractive at this point.
I would say that that is that's a big chunk of the.
Opportunities in front of us are older and smaller assets for sure.
Okay.
Sorry, just one more comment it's almost because that's the biggest pool of potential buyers are in the smaller range of these assets.
Because of mainly private buyers.
Better approaches.
Yes.
Yes.
Can you comment on.
Where are those conversations going in terms of pricing relative to Europe first of all are you expecting to basically achieve your.
Your current book value, if you are to sell assets.
That would be fair to say for sure.
Okay, I'll turn it back.
Thank you. The next question comes from Kyle Stanley of D. Jordan. Please go ahead.
Thanks, Good morning, everyone.
Just going back to the earlier comments on <unk> I'm, just wondering as you do look to sell some of the assets in the province do you are you seeing reduced investor interest or any impact on potential pricing just given the recent regulatory shift.
No no not at all.
Okay good to know.
Yeah.
You did disclose that kind of 10% to 20% mark to market upside across your portfolio I'm. Just wondering could you talk about how that may differ across your geographies.
Sure Yeah, I mean, I think that yes.
It's a moving target.
Every month looking at it it is a hard one to peg down I'd say, we've seen acceleration in the west where we wouldn't have had I would say in the last two quarters much on that mark to market, but that's really starting to broaden and especially when we look at net effective rents after incentives in that market I think that 10% plus.
In Alberta that we haven't seen.
<unk> is one that <unk> got a lot of headlines on MHC kept that came out.
That's another one that it's moving up quickly the mark to market and this market is probably 15 to 20, but it gets higher when we do some repositioning.
Ontario is very healthy I would say in new Brunswick still strong, but maybe just a little bit under 10.
Newfoundland is probably yeah.
Three to eight yeah. So the vacancy is gone down materially in St. John's, Yes, we're seeing good gains there in southwestern Ontario across the board has been very strong very strong yeah, probably lead us.
So really like that 10 to 20, it's probably closer to the to the 'twenty and it.
Great.
Keeping an eye on what we're capturing a lot of it's a function of the decrease in turnovers.
So with.
The jurisdictions, having brand control.
People are choosing not to move so therefore fewer units come up and.
Those are when they do come up there's a requirement to maximize revenue.
And Thats an average number two just a reminder, too so we're seeing some far above that and some lower.
Okay perfect.
That's exactly where I guess why I asked the question just thinking that maybe the number ends up maybe a little closer to the 20% so great to hear and then just one more for me.
On your capital budget for 2023 and capital spending was up.
Decent amount I think about 30% in 2022 I do believe some of that was catch up and I mean, you highlighted the fact that maybe you do fewer repositioning this year, but I'm, just wondering where your capital spending maybe trend in 'twenty three versus versus last year.
It will be relatively comparable there'll be.
Call It 85 to 90.
<unk>.
So it will be very similar to this year.
Okay. Thank you very much I'll turn it back.
Thank you. The next question comes from Mario <unk> of Scotiabank. Please go ahead.
Hi, good morning.
I don't want to come back to the turnover as well.
<unk> 22 was 23%.
<unk>.
Sounds like you mentioned or you did mentioned that you expected to come down this.
This year can you give a sense of what is baked into the guidance in terms, how much more can come down.
And the reason I ask it.
It was essentially a structural turnover that takes place that irrespective of the market cable moves.
What do you think thats structural churn rate is for your portfolio.
We're expecting for this year kind of probably in the range of 18% to 20%.
And that structural number I think.
Are we there.
I can hear you bill.
Alright, well had some technical problems can you hear me.
Yes.
Yes.
No I think probably 10% is probably that.
When we look at it.
Probably about technical number.
Got it.
Okay and then.
In terms of.
So we'll come back to the turnover.
Chad track that turnover by lease duration was 22.
3% for the overall portfolio, but how would that Barry.
For leases that have been existent for 10 years plus five two.
Is there a wide variation in that.
We don't have bye bye tenure.
We haven't dug into that detail.
Ill turn it over.
Okay.
Yeah Yeah.
But obviously the named driving factor of the.
A reduction in turnover.
It's simply the increased population right across the country.
And our ability not to keep up with the supply side.
Great.
Okay.
And then just.
My second question in terms of cap rates in your Q3 disclosure I think you talked about the expectation of cap rates moving higher.
We saw evidence and drive gross valuation this quarter.
That disclosure will be missing the scores I'm not sure if that was intentional or not but based on what I guess bill's commentary regarding strong market pricing is it fair to say that.
Current rate environment do you think about the upward pressure on cap rates, so that's pretty much done.
We think so.
It's a balance between the rent growth.
<unk>.
I mean, we feel good where where cap rates settled for that quarter, and where especially with the transactions that we're looking at as Phil already talked about in terms of sales there's lots of support for the values that we have though at this point.
Right.
We're not expecting those continue to move in any material way.
Based on current information.
I mean, the other comment I'll make is it's interesting that.
As expected.
The other.
Kill them and all the other publicly traded.
Current rates, we own 3% of the market.
But.
Just by default, we don't dictate.
Where volumes are going.
And even if we stopped buying.
There is a larger market as they're behind us that basic basically see a lot of value.
And that's just being reinforced to us almost every day with a number of inquiries were getting.
So.
Yes.
Okay, and then I guess I don't know if you answered this question, but with the buyers.
Like what are they seeing in so far as.
Cap rates still seem to be a bit below where financing costs are today.
Yes.
Let me, let me say what are they saying.
What they're really saying is is that they look at it they probably and in almost every case they already are landlords.
Obviously at a smaller scale, we're seeing the incredible pressure on rents, we're seeing basically know that rents are going to go up.
What they are buying depending on the market a lot of it would be under rent control and then.
Look at it and say I don't have to report. It every 90 days. So therefore I take the long view in these assets are going to appreciate it in value and all at a size, where I can see real wealth creation.
By being.
Smaller mid sized landlord because I like the business.
So it is a hard asset and inflationary pressure.
Going to as we see the cost to replace its significantly higher.
Accelerating so taking those assets and in time, they will pay back.
Okay. Thanks al.
And then maybe just the last one where would kind of five and 10 year.
Financing cost today.
It would be in the range kind of a 410.
<unk> 30, depending on the day and again, two or three weeks ago. It was about 30% to 40 basis points less.
And depending on sort of.
The way that the bank again reacts in the rest of the year I mean, we kind of expect that it will go back up and down a bit of a roller coaster.
Okay, great that's good color.
Thank you.
Thank you. The next question comes from Matt <unk> of National Bank Financial. Please go ahead.
Good morning, guys.
Just wanted to quickly go back to the the Capex guide being similar to 2022 is the composition changing there in terms of where you are spending the capital in suite versus on buildings and then in terms of the building improvements.
What's kind of the target in terms of how you go about that Capex spend.
So it's a very detailed budget.
Allocated accordingly.
Certainly for US one of the main thrust of that program and as our repositioning program. So we're looking at 450 turns this year on the repositioning side. So we'll invest there returns being 13% cash.
Cross the board.
Building envelope swing when we're doing that we're improving the value of the building. So we're saving money operationally. So there's no payback on that.
And.
But in terms of the breakdown it will be very similar to other key initiatives. We have it's just our green program, where we're using more photovoltaic installations are working for us on new construction geothermal.
To go unless you.
Only reason you can't do it.
That's exceptional payback.
Across the board, we're modernizing our properties and working to make them more.
Weather resistance, given theres, a fair bit of variability these days and frequency of storms.
Okay. That's perfect I appreciate that color and then just the last one from me with regards to your development pipeline.
Can you give us a sense as to what the impediment would be to build at this point are preventing you from building further the access to capital returns or ton a process driven zoning items.
And then is the development pipeline or expanding it.
It all dependent on the disposition program.
Right now I think it's independently.
One of the biggest focuses will be doing for the rest of this year and looking at all our development all the opportunities in front of us.
And moving ahead from the entitlement process on a number of file.
Straight up.
So if there is a theme is that on.
On this call or what we see in terms of the big opportunity in front of US is to be involved in the supply side. So it takes a lot of time every single project to from a concept to entitlement to the beginning of construction. So we've got three developments.
Currently two finishing up one.
Just starting there'll be another 24 months, we're involved in another one in smaller percentage ownership in <unk>.
In Calgary.
And we truly want to get the next one or two at least one started this year. So.
High probability of that happening.
We are looking at that one to kind of do a little bit of value engineering to see what we can bring down the cost one more time, because we still haven't received the permitting up until the last few weeks and that's not going to be the issue and then really the next one we've got a number of files that we just really have to push.
To be able to to look at these opportunities and bring them up to the next level is a big chunk of work that we're prepared to do at this time one of the more exciting ones will be west Mt.
That's the one where we have the carrier underway.
<unk> phase would be as of right potentially up to 244 units and then the master plan and behind that which.
We will be quite aggressive on trying to get the number up.
In terms of building a real community there overtime.
Okay, no that makes sense and given your expertise on the building front.
Your.
Contribution to new supply would be through development more so than buying of new assets is that a fair characterization.
Well again, I think the big as it.
Hopefully trying to reinforce it we see stabilization of interest rates in the second half of the year. Then we know what kind of return we're going to get looking at opportunities on the new side of the above.
Of acquisition I think right now the <unk>.
Idea of buying something relatively old and doing the added value with a low turnover, it's just going to take that much more time.
So basically turn these buildings around and see huge improvements in cash flow I mean, that's better served.
For the private investor because they don't have the time horizon that we do.
That makes sense thanks, guys.
Thank you. The next question comes from Jamie Shen of RBC. Please go ahead.
Thanks, just a quick follow up on the turnover rent spreads.
So when I look at D C MHC rental report.
Reporting spreads and market that Halifax Kitchener Waterloo.
25% to 30% and even in new Brunswick.
No team.
And that was October data, so I'm, just trying to square that with reported <unk> 12 for the for.
For the quarter is that I don't know if thats just law of averages, but just any thoughts as to why there is.
The big difference.
Yes, we've been having the same question. So when we look at it I will just highlight that you might see how they gather the data.
Do note that Halifax actually at that level D, which is.
Poor poor data supporting that so im not sure how they pull it certainly when we look at that repossession.
Numbers makes sense, but regular churn safety them high. So for example, our relentless largest landlord here and we were not included in those conversation. So I think it is probably what Pierre what group they pulled to get that data.
<unk>.
Yes, it is different than what we're seeing but I think that the trend with those market rents increasing its absolutely true.
I am expecting that their sample pool was quite small and if you look at our more depending on some of our older assets those numbers do you make sense.
That's a.
They don't fully aligned with what we're seeing.
Jimmy did you did you pick that up in terms of the data that they are saying that the.
The quality of it was a D New Brunswick PFC.
So really you're talking about a very small sample prep.
<unk> six.
6000 units I mean, statistically we'd be 10% and they never.
They never called Us.
Okay.
Okay, alright that makes sense.
Yeah.
<unk>.
Okay.
Turning to the debt maturity.
For 2023.
So I think half of the maturities on the apartment side I'm not saying it is insured.
If you can remind me like what was the rationale to not have seen it seen truth being away then.
With respect the plan is to refinance the debt with <unk> financing.
Yes, I mean, most of those would have been either assumption.
Okay.
When we acquired those assets or debt that we.
Put in place immediately upon an acquisition all of those would likely go see it each day this year.
Okay.
Recent acquisitions <unk>.
It did not have any money on it we assume the debt when we bought it in the last couple of years and they are relatively short term like three year term.
Two to three years.
Yes, Amit.
On the development, we weren't necessarily putting CME theme, Sir just because the timing and.
Whereas in new development today aren't doing it and we're able to get the MLR for the last 10 years, the energy efficiencies and that really positive for us on the new development.
Some of the changes that you may see.
Made has that.
We're fans avid.
On the new development financing.
Yes.
Alright.
Thanks, guys.
Thanks.
Thank you.
Next question comes from Gaurav mature IAA capital. Please go ahead.
Thank you so much and good morning, everyone. Firstly, thank you for the guidance its really helpful.
Let me I'm thinking of capital recycling and 0.3 and given the output the recent upward movement in cap rates.
Are there any market, which look more favorable from an acquisition viewpoint and the others.
Financing rates stabilize.
So sorry, if I.
Your question is.
What where do we see the most attractive market.
A core acquisition not disposition of that yes exactly.
Yes.
I would say from a from a cap rate it will be the west Alberta.
Okay. Okay.
Okay. Thank you and just on the disposition front could you provide some more color on how deep the buyer pool is and if that's.
That's changed materially from the last 12 months.
Well I think well the lift of different it's quite deep.
When we're looking at.
The opportunities in front of us like I had mentioned earlier these are off market inbound inquiry.
And basically it is the one person coming out and saying that I want to buy and this is what I'm willing to pay.
Okay.
Because of the pricing we're more than happy.
To entertain that negotiate with them.
The starting point.
Okay. Thank you for the color I'll turn it back to the operator.
Yeah.
Thank you. The next question comes from David Crystal of Echelon. Please go ahead.
Thanks, Good morning, guys.
Just really quickly on the disposition proceeds do you have a target for that debt.
Debt reduction and below that level, what would you kind of focus on the CIB or how would you balance the.
The kind of.
Proceeds of dispositions.
Well I mean are very our lineup.
Our acquisition line is now currently six plus percent.
So therefore, I mean, the goal is to pay that down.
And then we will look at it the capital to look at the development side or the IV program.
So this was the first.
Clarify refinancings will help pay down that line as well.
Okay, but the goal really is.
Get that lined down as close to zero through dispositions and refinancings.
Yes.
Okay, and then just maybe a quick housekeeping one for the developments you delivered in 2022.
Can you provide the total NOI contribution from these assets in Q4, just relative to the $6 million annualized run rate.
Okay.
Hmm mm.
Well I'd like to.
So what you have another 300, yes.
Here with a boat.
About 1.2 is probably about 300 300000 any contribution in the fourth quarter.
Okay.
Okay.
Fully leased up and contributing very positively.
Well I'm, sorry that was <unk>.
I think the question you're answering my answer was yes, so from an NOI perspective would be a fair bit higher so.
Now looking out to 'twenty three.
Aaron do you want to comment on those.
Yes.
For FY2023 we had in the MD&A that there was about $6 million in an NOI yeah.
That's on a stabilized basis that would be between 'twenty, three and 'twenty four.
Yes, I'm, just trying to get a sense of the incremental like how much was the NOI in Q4, and how much incremental upside is there from stabilization.
There is still lease up happening on both Luna and latitude the K and Q4 would've been relatively stabilize.
He probably has.
A couple of hundred Grand from from occupancy gains.
Over a year and youll see a bit of a.
The reduction in interest expense from an ethical perspective.
Well at that debt is fixed.
Okay. Okay. That's helpful. Thanks, I'll turn it back.
I will kind of I mean overall when we look at our development that we finished last year, we would expect from an ethical perspective year over year contribution.
Around $1 2 billion.
That's helpful.
Okay.
Yes, that's great. Thank you.
Thank you once again, ladies and gentlemen, if you do have a question. Please press star one at this time.
Our next question comes from Dean Wilkinson with CIBC. Please go ahead.
Thanks, Good morning, Dale on the debt.
I think we talk about rates stabilizing and I think thats. We can all agree that's a euphemism for being lower than they are today.
If that stabilization doesn't come until say into 2024 would you be willing to look at trading off term for rate with a view that you might be able to do something better or would you rather just ladder out the debt maturity right now and sort of take the rates as they are.
I think we've generally overall, we're looking long term in terms of lottery.
No one off opportunity.
That's a different discussion, but overall, we want to make sure that we are allocating that risk.
On overloading any one year, so I'd say that we will continue to manage our debt.
Responsible way look at it I think I don't have in front of me, but this year, it's about 200.
From 200 to 250 million EBIT next year, maybe around 300.
While our year is relative to the $2 billion.
I mean, what we're talking both in terms of thinking.
On the lines and just a question here.
What are we doing on the new development is it a 510, because where rates are today.
Good.
Sure.
You've never been able to be.
The market relative to what is going to do.
The easiest thing in the most conservative thing.
We'll go and see if it actually makes sense, so and always in the last 20 or 30 years the cheaper oil.
Part of the curve has been fiber to the network.
But we've just come off a total year declining interest rate environment, and so now it's a little bit more complicated but at the same time.
Our existing debt will just naturally roll because we'll be looking for that same five and 10 year sort of matter on the new development. It will take a little bit more decision making.
Our approach to decide whether it's cyber June .
No that's great I guess, we all lose sight of the fact fill that over our lifetimes four 2% is still actually pretty cheap debt.
Keith.
Yes.
My back tells me that I'm, probably too old to be playing great games.
Thanks, guys I'll hand, it back.
Do you think.
Thank you.
There are no further questions at this time, please continue with closing remarks I would.
Just like to say, thank you very much for everybody participating today, and we look forward to Q1 'twenty.
2023 first to me thank you.
Ladies and gentlemen, this does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
Yeah.