Q4 2022 Canadian Apartment Properties Real Estate Investment Trust Earnings Call
Good morning. Thank you for attending today's Canadian apartment properties REIT fourth quarter and year end 2022 results Conference call. My name is forum and I will be your moderator for today's call.
All lines will remain muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star one on your telephone keypad.
It is now my pleasure to pass the conference over to our host Nicole Golan Associate director of Investor Relations for Capri. Mr. <unk>. Please proceed.
Thank you operator, and good morning, before we begin let me remind everyone.
All right. We may include forward looking statements about expected future events and nothing unusual operating result of Capri, which are subject to certain risks and uncertainties, we direct your attention to.
Right right.
Great information.
Okay.
Thanks Nicole.
Joining me. This morning is Stephen Ko, our Chief Financial Officer, as well as Julie <unk>, our Chief investment Officer.
Starting with slide four you can see the 2020 Q2 was another strong year of Jefferies.
Katherine with positive increases across the board.
Revenues and NOI.
The result of higher occupancy growth in average monthly rents of nearly 5%.
Contributions from our net acquisition activity.
This drove the increase in our <unk>.
Which was more modest.
Certain inflationary and other unexpected costs.
We experienced higher repairs and maintenance costs incurred.
Including catch ups from COVID-19 related delays as well as increased energy expenses.
Hello, we've effectively implemented numerous mitigating programs and response, which will which I will expand on shortly.
It's all accumulated in the approximate 1% increase in our diluted <unk> per unit.
Despite the 5% increase in the weighted average number of units outstanding.
Our fourth quarter results are detailed on slide five shows a snapshot of our improving operational and financial returns.
Operating revenues and NOI, both up by approximately 7% compared to the fourth quarter of last year, while our diluted per unit grew nearly 3% versus Q3 2022.
Although diluted <unk> per unit did increase more moderately.
One 4% compared to the same period last year. This is this is double the increase which we realized on an annual basis. This.
This demonstrates the beginning impacts the many cost mitigating program, we put in place and prioritize this year.
For instance, we've refined our robust procurement practices and are proactively monitoring natural gas rates in order to hedge as much as possible.
The strategic modernization of our portfolio further contributes to inherently higher margins and we're accelerating our sub metering and other energy saving investments across our member vintage assets.
As of year end energy costs, approximately 65% of our Canadian portfolio are now the responsibility of our residents. In addition to lowering costs. It's also lowers consumption contributing to our ESG commitment to enhance our environmental footprint.
The increase in our same property NOI margin to 64, 3%. This past quarter evidence of the effectiveness of these initiatives, which we will continue to prioritize going forward.
Elaborating on that strong same property performance.
Six shows continuing to strengthen from an annual perspective as well.
With significant increases in demand for quality rental accommodation, we are seeing that average monthly rents right along alongside consistent near full occupancy.
Slide seven further demonstrates the effectiveness of our highly skilled and experienced leasing environment teams, who have kept occupancy high and stable even through the pandemic.
So I will continuously achieving meaningful rate increases, which were up 5% on average compared to the prior year.
A key driver strong increases in monthly rents over the past few quarters is the positive trend on turnover that we're seeing post pandemic as detailed on slide eight.
We are generating unprecedented increases on turnover.
Prior to the pandemic.
And how quickly returned to record breaking it increases our rental uplift on turnover. This past fourth quarter was 24, 3%.
Which is up substantially from the eight 6% we realized in the fourth quarter of 2021.
This not only reflects a return to our normal and increasing production sales and marketing programs, but also the worsening of the housing prices in Canada, which we expect will continue to drive the mark to market rent increases in the quarters ahead.
I'll now turn things over to Julia to outline how we are repositioning and remodeling the quality of our property portfolio.
Thanks, Marc turning to slide 10, we continue to focus on increasing the quality of our portfolio through our active asset management program throughout 2022, our strong acquisitions team successfully added 1537 high quality suites and sites to our portfolio. The majority of these acquisitions were newbuild assets and strong.
<unk> targeted geographies in line with the cap rate strategy of rejuvenating, it's asset composition and increasing our geographic diversification into desirable high growth markets in Canada Importantly, our acquisition of newly constructed purpose built rental apartment also stimulates the market for Newbuild in multifamily assets, which represents.
Just one of the ways in which cap rate is contributing to the increase of new supply in Canada.
A key component of our core asset allocation and portfolio optimization strategy includes our disposition program. Our investment strategy has evolved from a focus on portfolio growth to our focus on portfolio quality as such we are engaged in a highly strategic capital recycling.
Our recycling program, where certain older value add properties are being sold in the mid 3% cap rate range with proceeds reinvested in the 4% range through the purchase of higher quality Newbuild properties as well as our own trust units via our MPI program.
Many of these noncore assets being considered for disposition are attracting premium pricing and we are successfully divesting at above their <unk> fair values as shown on slide 11, we have been selectively executing on the strategic disposition, having disposed of almost $350 million worth in 2022, we're continuing to me.
<unk> active strides on this initiative in the new year, which we kick started with the disposition of our 50% non managing interest in three non core properties in Ottawa for growth consideration of just over $136 million with it with these being our last jointly owned buildings, we now own 100% of our entire Canadian.
Portfolio.
Not only do these strategic dispositions enhanced the quality of our overall portfolio, but they also result in disposition gains and the highly attractive source of new capital to fund our more accretive capital deployment priorities.
One of these priorities as the NCI program that I mentioned this represents a critical cornerstone of how our capital allocation strategy and slide 12 summarizes how we've been doing this by selling noncore assets at or above NAV and repurchasing units at a major discount to NAV.
We're arbitraging, the significant spread and realizing immediate value for our unit holders.
To date cap rate has invested over $245 million in our NCI V program with the purchase of five 4 million units at an attractive average price of approximately $45 per unit, which is well below our $58 in one year and net asset value per unit, we will continue to standby cap rates.
<unk> fundamentals and invest in our own portfolio of increasing quality as long as it is prudent and economic economical to do so.
Slide 13 showcases the real progress we've made on repositioning our portfolio to reduce our exposure to older value add properties, while increasing our allocation toward newbuild more modern properties and successfully upgrading our portfolio in this way we can not only improve this quality, but have also diversified our tenant base and geo.
Graphical exposure and specifically targeted underrepresented market. We additionally, improve our margins given the high growth profile as these newer assets coupled with a lower operating cost that results from enhanced energy efficiency and 73.
Lower capital expenditure needs also reduce our exposure to inflationary pressures in summary, we are strengthening our environmental and operational performance and ultimately enhancing our risk adjusted return profile.
Thank you for your time this morning, and I will now turn things over to Stephen Colbert and financial returns.
Thanks, Julian and good morning, everyone.
As you can see on slide 15, our balance sheet and financial position remains strong and flexible at year end.
With a conservative debt to gross book value and continuing high liquidity.
One $3 billion of Canadian unencumbered properties to provide additional liquidity should it be needed.
In total if we were to access all of our available sources of debt capital, we would have up to approximately $1 2 billion assessable at year end.
Looking at our financing through 2022, we lock in favorable interest rates on our refinancings and extended our term to maturity.
Based on our current property portfolio, we expect to refinance between $750 million and $800 million in mortgages and top ups in Canada in 2023.
Our disposition and capital recycling initiatives further supplement our debt program by enhancing our ability to proactively manage and reduce our reliance on debt.
Slide 16 demonstrates our success at controlling interest costs in Canada. In fact, our strategy to leverage 10 year seem agency insured mortgage debt has resulted in cash and cap rate.
One of the longest term to maturity and lowest weighted average interest rate among our publicly traded peers.
This provides us with strong protection against renewal risks, especially in the context of the current interest rate environment.
Importantly, nearly all of our debt mortgage debt carries a fixed interest rate positioning us well to continue mitigating the impact of future interest rate volatility.
Diving deeper into our mortgage portfolio, you will see on slide 17 that remains well balanced over the next decade with no more than 50% coming due in any given year.
Which again reduces risk in this volatile interest rate environment.
Looking ahead, we will continue to take an active approach to debt management and thoughtfully renewable top up our mortgage financings to optimize our overall debt and liquidity profile to that with the current five year and 10 year all indicative rates both at approximately four 3% we will.
Consider availing of relatively short terms upon renewal of our more eminent mortgage maturities with a view to minimizing our interest costs over the longer term.
Further to our healthy financial position you can see on slide 18, we have consistently met our goal of maintaining a very conservative debt and coverage ratios even through the pandemic.
This conservative approach underpins, a stability resiliency of our business and the sustainability of our monthly cash distributions to unit holders are focused on maintaining one of the strongest balance sheets in our business will continue going forward.
I'll turn things back to Mark to wrap up thanks, Steven looking ahead, we continue to see a number of very positive drivers that we are confident will generate strong and growing returns for our unit holders for the years to come.
We will continue can you continue to actually execute on our proven investment strategy, which is summarized on slide 20.
First on the apartment front, we will seek to continuously heightened the quality of our portfolio by disposing of our non strategic value add properties and reinvesting in more modern newly built properties located in high growth and diversified markets yields are attractive growth is strongest.
Cable margins are higher in Capex is modest.
Our second focus is on our CIP program as long as our unit price remains disconnected from strong pricing, we see in all the private market. We will continue to crystallize the spread and secured instant value creation for our unit holders.
The third pillar of our capital redeployment program revolves around upgrading our debt profile through de levering, we're delaying refinancings in this highly volatile interest rate environment.
Our asset light development model also plays an important role in our strategy and we are actively working to rezoning processes in order to serve and monetize our excess mad which generates additional funding for us to allocate towards cap rate core cockpit.
Our ability to capitalize on the increasing favorable fundamentals in the market.
We will further stimulate our growth.
Canada's housing supply and affordable housing prices are front and center there are simply not enough homes and the hope that we do have are just not affordable for Canadians to purchase and own.
This alone driving demand rental accommodation to historic highs.
On top of this we have posted additional factors that are further fueling the fire <unk>.
Accelerating immigration is in particular compound even crisis.
While the post pandemic return to the workplace and in class learning drive the incremental household formation and demand demographic trends are factoring in as well, including delays down the formation seniors independent living longer and overall smaller household sizes.
Meg define all of this is the fact that the cost to build is skyrocketing.
Which is significantly hindering the increase in new supply needed to address this unprecedented demand.
As you can see on slide 22. These demand drivers are resulting in rental growth across all age groups in Canada. In fact renters have increased at three times three to full ownership over the last decade <unk>.
Supply and affordability pressures demographics, and our preference to renting, especially.
The real estate market currently.
Certainty have driven this growth and.
And we will continue to do and we'll continue to do so in the years ahead.
We also continue to extend as we invest in our core portfolio generating a number of key benefits as outlined on slide 23, our energy saving initiatives and technology upgrades reduce our costs and improve the operating efficiency and environmental performance of these properties.
That in turn contributes to our ESG commitments are focused on enhancing the safety of our residents further increases the attractiveness of our properties and the satisfaction of our tests.
Finally, as I mentioned earlier candidates experiencing the worst crisis of housing supply and affordability in a generation and is one of the largest publicly listed providers quality housing.
<unk> is a key part of the solution to Canada's housing crisis and has taken a leading role in that discussion.
Along with our peers. The other large publicly traded Canadian residential REIT cap raises led the launch of the Canadian rental housing providers for affordable housing.
This coalition is advanced numerous proposals to address issues around additional housing supply and affordability.
In Canada.
Some of which are outlined on slide 24, one of our objectives is to educate policymakers and the public and do a bit of a myth busting in order to ensure workable solutions are informed by facts and evidence for example.
The fact that a publicly traded residential REIT represents the rights represent less than 3% of Canada's rental market or the fact that over half of our suites are rented at rates that meet the government's definition of affordable.
Or even the fact that <unk> has never done a renovation in its 25 year history.
With our experienced senior Vice President of tax and government relations cafes have been working hard on many fronts to affect meaningful change and we are engaged in productive dialogues with a variety of variety of government officials. Most recently, we enthusiastically welcome BC Premier Edf's announcement of a 500 million.
<unk>.
Rental protection plan.
Having been strongly advocating for a government led acquisition program as one of the most cost effective way to preserve existing affordability in housing.
From our vantage point, we are both hopeful and optimistic that we will see constructive policy announcements in the near term.
This top timber we celebrated 25 years of strong performance and value creation.
Since inception, <unk> has grown from owning only 2900 apartment suites in Ontario to closing out 2022 with interest and almost 67000 suite Townhomes and manufactured home community sites.
Which are well diversified across all major Canadian market and internationally.
Our total investment property portfolio now exceeds $17 billion.
From the beginning our goal of the cap.
Quite safe and pleasant rental housing experience.
Second to none in our chosen markets and we believe that we are meeting this objective.
Building, a modern high quality portfolio investing in our property and leveraging the significant experience and commitment of our team. We are confident the next 25 years, we will see further value generation for all of our stakeholders.
In closing we remain very excited about our future moving forward, we will seek to actively upgrade our property portfolio on a perpetual basis, one by targeting the acquisition of Newbuild properties again strongest markets and to buy strategically disposing of solar.
Noncore value add assets.
Our divestiture program will also remain focused on unlocking and monetize development value from excess density we will additionally use net proceeds from this capital.
Refresh strategy to proactively manage our debt profile, where prudent we will also invest in our NTIC to convert that growing portfolio quality each immediate returns for our unit holders.
This thoughtful monthly rent increases and consistent near term full occupancies will further contribute to higher revenues as will increasingly strong fundamentals in the Canadian market. We are confident this will all result in calories continued ability to generate strong and growing returns for the foreseeable future.
Thank you for your time this morning, and we would now be pleased to take any questions that you may have.
Certainly thank you I'd like to ask a question. Please press star followed by one on your telephone keypad.
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Our first question comes from the line of Mark Ross, How mechanically Mark Your line is now open.
Thanks, Good morning.
Maybe just talking about the capital recycling and looking at how you are trading out of maybe some older properties into buying newer.
Does this analysis to also go into geographical decisions or is it really just based on the types of properties that for example, certain markets in Canada, having stronger population growth than others. Maybe job growth are you looking at that way and maybe you can just expand on that and how you look at different markets.
I'm going to let Julian touch on this but I would say.
Because of our reputation all.
Placement in the market coast to coast, we look at all of yields in the markets. We're interested in the best Newbuild opportunities for US are properties that are nearing construction completion or recently finished so that really does limit the pool.
So calling it a specific market.
We'd be hard to say focusing on the markets that we're familiar with we get the yields that we're seeking.
It's definitely is Jeff Julien what would you add to that.
Yeah, No. When you said market is exactly right we do.
We.
We're limited in what we can and what we can buy and what's out there to bid on but certainly there's markets that we have greater appetite for and we will target a little bit more if we can.
Things that do drive our views on that are waiting in that market are we underwriter we overweight.
Forecasted strong population growth forecast and strong economic growth.
Is there a lot of supply are there, whereas the supply demand imbalance most most acute and we factor all of that in our bidding process.
And maybe just to clarify that but what I'm trying to get at it besides for buying new.
When you look at markets like with the Halifax or Alberta.
Fundamentals might be changing a little different than Ontario would you buy older properties. There if you see better rent growth and if you could just talk about how you look at the Alberta market now.
No we're pretty much exclusively focused on the newbuild assets right now.
Our appetite is significantly stronger for those but certainly within those markets that you described.
Where we do see very strong fundamental you'll see us have a bit stronger appetite than in others.
Okay, Great. Thank you told me at one one.
One thing just to be clear, we have come across situations, where there's a brand new building that's attached to a value add property.
You may see unique situations, where we deviate.
From the strategy, but not in a conviction to value add just where it makes absolute sense, when we own Sunday to optimize something together so it wouldn't be sort of exclusively a moratorium on topline valor glass.
Really a focus on new construction.
I got it makes sense. Thank you.
Okay.
Our next question comes from the line of Dean Wilkinson with CIBC.
Your line is now open.
Thanks morning, guys.
Actually like to continue on that same vein of the new construction.
Mark do you think that the.
Fan ban on foreign investment.
Causes new construction in particular, maybe your desire to construct new to become a bit of an unintended consequence, there and.
What do you think the outcome of that ends up being.
I think theres going to be a shift I think because you have to get shaken out of government. The intention was not to stop rental development, we've had conversations with government.
I suspect.
The implications will be better understood in the short term I'm optimistic on that front.
I think what it does.
For cap rate it could create an opportunity with near completion rental products that are tracking less capital that can make financing and value.
A little more compelling.
So in the short term I think this is a blip and it's one that we will take advantage of if we see opportunities in the marketplace.
The one thing I've heard theoretically and we'll see if it pans out is if there's less demand for.
Folks have a development site for residential that decision do we do for purpose built rental or condo and to the extent that theoretically lowers demand for condo.
There is a possibility that would add more to purpose built rental, but we'll see if that actually picked up.
I can't help but throw this on the table. We all are very aware they didn't have a large Canadian cities. The primary supplier of rental has come into more of condominiums and foreign buyers funding the purchase of those funded media now if that softens the demand.
Really the rental sector as we knew it over the last decade that will further exacerbate the problem in the marketplace that quite yet.
Most of the rent at the Toronto to new condos that were bought by foreign investors.
And it's up and sticks at that level.
Even more rough waters with respect to getting supply from market. So these are these are the unintended consequences, but I think not to be.
Thought through carefully by policymakers.
Yes, I guess, it's a bit of a moving target.
Shooting at.
And then the other question I had was just on the big lift on the suite turns do you have a sense of what the duration of those tenants that debt.
Turning to switch back to you was during the quarter and is that sort of a number that we can think about sort of.
As a new baseline.
Well historically, we know that our prior rents generate higher turnover rates people don't older leases that it goes away.
We are not seeing any evidence of this with at all in the churn. If you look at the early innings here, but the churn is basically unchanged. So even with these higher rates, we're not seeing an increase.
In churn or churn rate.
So we'll see.
C.
Okay, great. Thanks, guys.
Yes.
Yeah.
Our next question comes from the line of Jonathan Culture with TD Securities. Jonathan Your line is now open.
Thanks, Good morning, just to follow along Dean's question. There. So do you think for 2023 you can continue.
Continue to get sort of north of 20% uplifts on turnover.
Well I caught myself sterling at the end of that says a lot of your question, but that's what I was going to say is that we're bumping up against the ceiling of affordability.
Wouldn't expect to see the chart continued to accelerate this pace.
Jonathan if you look at the.
Slide 18 that shows the trend in the sector and the pandemic.
It's exactly what we were telling the market in terms of the hassle consolidation impacts the lock.
Or is it due to all these doctors redo.
Resulting in a massive massive reduction embark in market rents in the 3% range.
So when you draw the volume pre pandemic to where we are right. Now is just a steady increase that shows a supply problem.
It's happening it's not a market that it's exactly what was going to happen in the market Hasnt panned out as an asset.
We lost three years in the supply conversation because it appears on paper rents for falling in vacancies were abundant, but because everybody was in a consolidated households, and we stopped the pools are forced to do that so.
Getting back to a normalized chart here that you you can probably use a ruler to you know example, you're probably just predict.
On a stable basis now where this line is going it will moderate.
Okay.
Got a lot of catch up right.
The cash Mark to market your Mark to market has got to be.
2025%.
I think the evidence of the actual rents are saying, 20%, 25% that's for sure.
I don't believe it is mark to market rent business. The American market range of what we posted last month in terms of what we actually achieved.
I think our beads.
Occupancy levels, where they have a very hard time getting yep.
But the demand is astonishing.
Okay, and then if we flip to expenses what are you guys thinking for expense growth for 2023.
Yes. So in Q3 are kind of set that we're expecting for 2023 around 4% to 5% I mean looking at it.
The weathers.
It's been occurring in January and February .
Moderate weather I think we.
Probably at the lower end of the range.
So yeah, I think that's that's kind of where we're still guiding to 4% to 5%.
On a consolidated Opex area.
Maybe on the lower end.
I think we've been talking obviously, a great deal of the jokes with experience with repairs and maintenance of a whole variety of factors that conspire against us from one quarter to the next.
The team feels very confident that the worst is now behind us and inflation is baked into the actual expense lines. We wouldn't expect to see inflationary Joel we don't expect to see catch up Joel we don't expect to see a number of the doctors that we saw.
We encountered during the last few quarters.
Okay sounds good I'll turn it back thanks.
Our next question comes from the line of Mario <unk> with Scotiabank.
Your line is now open.
Hi, good morning, guys.
Just sticking.
Speaking to the sticking to the Opex I appreciate.
The color on maybe the cost coming in at the lower into the 4% to 5% range.
Primarily due to the weather.
But when it comes were made back in Q3.
Where they may.
Inclusive of the notion that you're reviewing the cost structure going forward. That's what I'm just curious whether like the 45% is still quite conservative in your view.
And whether there is the possibility to kind of surprise to the upside on that.
Based on recently implemented.
Yes, I mean, that's kind of on a stable basis, I think where we have.
Mark alluded to in his script.
There is some procurement initiatives that we're undertaking within opex.
Theres also.
Some of the you could say image type of maintenance cost that we incurred in 2022 that we hope to have resolution on in 2023, so that may help as well.
So four to five is kind of stable state without any type of.
Okay.
<unk> sees that we were going to build it.
So.
To your point it could get lower if we can initiate on those and execute on those.
Got it okay.
More of a bigger picture question, just sticking to operations like the topline revenue growth is getting stronger.
So you're making a bit of progress on the expense issues that your document too. So it's really driving much better same store NOI growth for this quarter than what we saw for most of 'twenty two.
That said the recurring SSO was kind of flattish up 1% year over year.
So the question really pertains to your thoughts internally on your ability to convert.
It appears to be.
Strong improving same store rate growth into improved <unk> growth per unit in 'twenty three relative to what you just in 'twenty two.
Yeah.
The track record that was disturbed by some quarters of.
Unfortunate one time events and in the 25 year history Youre going to hit these patches and we saw that hit it but we're very positive that we are back to normal state and cap rates has proven itself over the decades.
Decades now to be highly effective.
Cost control and highly effective revenue yield managers.
And there's just incredible incredible excitement around around not just.
The expense growth, but you know a more normalized capex that as Julian and continues on the path to purchase the newer high quality assets they have.
Attribute of lower Capex.
Golf and lower.
So the system, especially in a world where.
Our interest rate carrying costs of those capex investments are what vertical what they were two years ago.
Our strategy fits perfectly into that as well so that we're in.
Really quite exceptional.
Stay here it out it's been a very difficult three years.
<unk>.
We managed to occupancy exceptionally well, we did not know how long the pandemic was going to last night I stick to our strategy of minimizing our vacancy effects.
Our strategy is working exactly as planned we're coming out of the pandemic, it's exactly what we call the terms of the demands and.
With tasteful consolidations and the team is fired up.
And get ready for more savings in Calgary.
Got it okay, two more quick ones on my end.
I don't know if youll have this number but the the 24% new lease spread.
It's much stronger than the 14% in Q3.
Do you have a sense of what the average cost.
Her suite to turn was this quarter versus last quarter.
No change.
If anything we're seeing slightly lower cost to renovate.
You can see.
Our marketing is just there.
With regard to renovation.
Okay that makes sense and then lastly, just for me Steve.
Pertaining to your comment on maybe going to shorter term on the debt on.
On refinancings.
Kind of term are you thinking and where would the costs.
For that term b today in relation to the four 3% for five and 10 year money that you referenced.
Yeah, I mean, five to 10 year money is pretty much at ballpark, 30% towards seamless cheap financing.
Depends I mean constant conversation with Julia.
Where he has physical proceeds and where a lot of credit sitting at maybe like five 6%. That's a pretty good use of proceeds and paying down the line.
So it's really you know.
What Walter.
Moving targets in some ways are moving strategy and how we did.
Those proceeds so if we don't need to maturity is coming up on the mortgage I may add.
Actually just not.
Renew or we just pay down debt. So it's all it's all dependent on what Julian can do so it was really a more active debt management strategy and.
The opportunity to highlight.
The investment team work here.
We are we are absolutely focused on delivering strategy and if we can continue to generate.
So with the three cap range.
You don't have to be a mathematician to down 6% on a revolver.
Have a good use of that 3% use of proceeds so we got a lot of innocent ways to deploy capital between our CIP program are delivering exercise in the acquisition market.
Sitting on unbelievable instant use of proceeds.
Got it okay, but just for clarity like outside of the recycling just in your normal course kind of debt refinancing when you talked about going shorter term were you referring to the five year.
Or are you, referring to something shorter than that.
No I'm, referring to five years or I can use the revolver, but just like what you have to meet the five year.
Got it okay.
Great. Thank you guys.
Thanks.
Our next question comes from the line of Brad Sturges with Raymond James Brad. Your line is now open.
Hi, good morning.
Just on the disposition program, obviously, you've been quickbooks on the value add assets and things like that so I'm. Just curious does that program or analysis expand into looking at smaller markets, where maybe the returns arent as favorable or the you know the regulatory environment changed.
Where it may not.
Allow for a couple of pieces in that market I'm. Just curious if it will continue to keep more of the kind of urban.
Value add items being sold or you know are your analysis.
Unity is to sell out of other smaller markets.
Brad it's rich.
We're really open to selling anything thats, not performing well or where we don't see.
Good future returns and so there are some markets that have been.
Yes subject towards the worst regulatory regimes that have less population growth going forward or that have more more supply than other markets and so.
We are really coming through the entire portfolio looking at the risk adjusted returns of all of our assets and where we see strong mark at least decent demand in.
That's how we're kind of filtering through what we're going to dispose of it just to Bill Brod.
We built in the investment and development groups.
A fine group of talent, which is really now focused on asset management.
Analysis.
Really kick into high gear.
I say almost six months ago, and as Julian said, we're agnostic to market, it's all about performance.
At this stage.
Conversations now about future.
Performance and really just being completely agnostic to the real estate and we're focused on yield.
Okay.
It sounds like you're still seeing that cap rate spread between what you can sell and what you can buy it so you know.
At least 100 basis points between the two.
It's such a deal like that I'll, let you guys chime in here, but I can't help myself when youre talking three jobs.
Stephen got fix on the revolver Julian got Florida have jobs in new construction and we got an NCIC programs. It can also.
Juice returns. So it's it's it's an incredible situation. We used proceeds are not our problem.
Yeah, Brad that wont necessarily preclude us from selling stuff better higher cap rates. If there is no growth or heavy capex burdens are really owners.
Regulatory.
Regime in the areas, where you feel you'll see some of those as well like we are really focused on total returns not just just the cap rate, but factoring in the capex.
The growth in other considerations, but generally speaking that is.
That is what we're seeing on the disposition front or tighter efforts and what we're buying.
And with the Ottawa sales executed I assume though.
So initially used to repay the line, but assuming that eventually gets redeployed into newbuild acquisitions.
Yep.
Okay.
And then the opportunity set that you were getting on the on the disposition side that still call. It around 600 million Mark in terms of.
Potential assets that could be under consideration.
Yeah for the year.
If I could do 500 million I mean, it's all market dependent and.
We're in negotiations on a bunch of different things and.
We're working through it but.
I can get.
Another 500 million or 500 million for the year it would be.
We would view that as positive we've also.
Absolutely led the charge as we said in the presentation.
And acquisition find opportunities so we're in.
Active dialogue with the province of British Columbia and.
Very much.
Offering up ways to help with the federal government. So should there be announcements on that front that could that could accelerate.
Great opportunity on the disposition front, but we're not factoring that in with Julian talking about.
That range, we're hopeful.
The private market will will deliver that I got to a point out though.
<unk> worked very very hard and the dynamic selling in this market to the private market. It's a different profile of a buyer we're talking about.
Private ownership so yields are really never deals until closing one minute after closing date so.
That's the environment that we're in but it's worth it's worth the effort and the team's doing a great job and we're very as I said extremely excited about the exercise we're going through.
If you were to contribute to the beauty initiatives or would that be a tied to I guess, a third party appraisal and then.
Would you Ah.
It doesn't sound like you're based on your discussions or do you think there's appetite either other prevention.
[noise] promises or at the federal level to do it.
Similar type of initiative.
There's been this analysis in Toronto on it for a very very small scale of paying out $60 million or something but this.
This idea is taking hold.
In provinces and municipalities and at the federal level.
Our commitment is of course as always to our unit holders and value in that regard, but we think we can strike that balance between.
Protecting unit holder value in doing some good for Canada and as leaders. That's that's our responsibility. So that's why there's so little on on this front is.
The notion of being able to viability.
40% of replacement cost.
Something government, each and understand we're trying to help them understand that.
Okay, great. Thanks, I'll turn it back.
Our next question comes from the line of Kyle Stanley with data.
Your line is now open.
Thanks, Good morning, guys.
Just looking at your turnover spreads again I'm just wondering the the level that you achieved in the quarter would you say that was more reflective of just underlying market fundamentals or you know would you say there has been a strategic shift or a focus on kind of pushing pushing rate a little bit more within within the organization.
Yeah.
Yeah, no it's definitely market dynamics. It certainly we're always focused on maximizing value for our unit holders but.
This wouldn't be unique to cap rate I mean, the whole market has really been experiencing pressure in it.
As we've alluded to it.
You know a very large population growth matched with the.
The shortage of new supply being added.
Okay.
This is also in a small number of units as well probably get caught up in the headlines, but when you look at the total.
Rent increase passed onto cap rate customers.
In place customers, we're talking to sub 2%. So this is what's helping offset the market with Julian makes it a very important point that I touched on in the slide presentation.
Presentation is that all the rights and Canada combined.
I think it's like we're sitting at about two 6% of the market with our dispose. So we're.
We're very very very small sample of the Canadian market, but reflective of what's happening in the markets that we're in.
Right. Okay. Thank you for that.
Just digging into performance just for in some key geographies.
Would you be able to comment maybe on the Opex improvements you saw in Montreal, Halifax in Vancouver, It seemed like the strong same property NOI growth, obviously, accompanied by strong rent growth, but you don't really seem to be opex, driven so I'm just wondering maybe what drove some of that.
We had it in a more remote geography, but I think we said it throughout the pandemic Montreal that was really hit quite hard during the pandemic, we had definitely staffing challenges there and.
We've got a new leadership that really rebuilding the team there in Quebec, and it's having great results. So I think we had some operational challenges.
From a margin point of view the expenses show up because rents are lower.
But we're feeling very very good about where we're at with the team in both the east and David.
Yes.
Okay, Great and then just one last one from me just on.
The aseptic issues within the MH portfolio I'm, just wondering if you could comment on you know it could provide an update I guess on where we stand currently.
So it sounds like perhaps you are what we're trying to do but the reality is.
You know I think we have to own the problems that we've learned through older communities is subject systems, where the fifth year reach it all has to do with falling costs behind us.
Just another tragic.
Tragic coincidence of three sites at the same time, but why don't I pass it over to Julian.
Oh sure what we're doing on that front, yes.
So we've been looking we've been working with the Ministry and with some of our vendors to mitigate or lower the hauling costs as much as possible and on my end to the extent that I can do it effectively.
Look to dispose it.
Appropriate values.
Some of the worst offenders.
Certainly tough assets to get liquidity on but.
It's something we're exploring and making sure that we do a prudent price levels. I mean, I would also just add on that front that the high grading of the cap REIT portfolios moving into our MH sector as well, we'd love this sector, but we're keeping with the help of our asset management.
Team a much closer look at returns if we loved the tradition is to love the sector now we're looking to love the return so more refinement.
Total return will help drive the high grading of our portfolio as well.
Okay, great. Thanks for the color I'll turn it back.
Our next question comes from the line of Jimmy Sean with RBC capital markets Jamie.
Jamie Your line is now open.
Thank you so Mark I think you mentioned that the market rent, whereas chief this quarter on turn starting to hit the affordability ceiling jealous.
Do you have a sense of what.
What the rent to income ratio would be on your tenant base on those terms.
Yeah, that's a great. It's a great question.
And a lot of this is going to depend on the profile of the asset that we own. So if you look back you can get into the slide deck, but we had a deck that might be in our investor relations pack still there.
It shows that the ink.
Income to rent ratio in our portfolio was around 25%. This is incredibly incredibly affordable and this is the point that we continue to make on how affordable the portfolio really is when you've got homeownership ratio is at 70% to 80% in the big cities Calgary portfolio with major markets was 25 or.
So that 25 moving up into the low 30, but it's still exceptionally affordable.
So in the assets. So this is a bit of a thread the needle and understand the difference between the new portfolio is at all.
If you were to find those value add assets, you're targeting certain income bracket those will bump up against affordability ceiling much more quickly in the brand new high quality luxury assets, where family incomes are probably in the plus $200000 household range. So it's really it's not just the sector. It's a tale of two different.
Sub submarkets within rental universe.
Okay, so, but but based on your comments that a given given the turns that you've seen this quarter and especially the value I assume a lot of that 24% would be on the value add type of assets.
That that youre hitting that ceiling and that your expectation that's right for them Mark ranked market rent on those particular assets.
They don't have that much more room to grow that that'd be fair.
Well, 24% is a lot of growth, but yes. It was 24 I'm going to turn into 30, probably not if you look at the slide deck, where I think Julian just talking to.
The percentage of the portfolio.
Doug I think we were at 86% go by memory value add 9%, new construction, we're going to keep tilting that but 88, 6%.
There's still value, but this is what 100% driving.
The big Mark to market gains.
If I got yesterday he said he.
But then the offset to that Jimmy.
You heard us talk about the margins in the in the newer buildings are much higher.
So you don't have the inflationary exposure in the new construction assets that you have and the value add that you have higher mark to market and you don't have the Capex and the list goes on and that we've allocated as to the rationale for this strategy.
Right.
Okay.
And then just.
On the natural gas hedging I think you said, 70% ish and hedged.
How would that compare the rate compare with the average of 2022.
Okay.
Uh huh.
Yeah.
Maybe I'll have to look into that Jimmy and maybe I'll pick out along with you.
Okay.
Okay.
That's it for me thank you.
Our final question comes from the line of Matt corner with National Bank Financial Matt. Your line is now open.
Good morning, guys.
It would be hard to believe that it would exist, but are there any pockets of weakness still within the portfolio at this point or is everything kind of.
Running on full steam.
<unk>.
Okay.
Yeah no it is.
Oh, it's all markets are covered the area of focus for cap reading throughout select lease up assets newer construction lease up assets in Montreal.
But they're completely on target.
That that is is for sure. So we don't see any trouble in the actual.
Hum market itself I'll share a challenge though.
That we're now <unk>.
Much aware of as.
As we high grade the portfolio you don't have to again be a mathematician to know if youre selling value I built my brand new construction.
Without using the N C before the idea here or paying down debt portfolios are getting smaller and.
And so we're going to have to manage G&A as we go forward here and we've got I believe one of the most to ocular readily teams in.
North America.
And we've got to preserve that team.
As the portfolio gets smaller and so that'll be that'll be a headwind and maybe two to three quarters from now if all goes to plan on the digital front.
We have to manage that so well.
Or these are things that we're working through but we're aware of and we've adjusted to most of the cost increases in G&A at this point with salary adjustments those are now behind us.
And our analysis managing managing the AR the team for a smaller portfolio or any types of G&A.
Fair enough.
This quarter was pretty heavy on the Capex front.
It was in line with your budget for the year, but.
You thought to or provided any guidance on 2023 capex expectations.
No I think we were conscious that.
And putting around like a capex budget, what we did for all of it was I think.
More of our estimate in terms of the non discretionary capex.
As Mark has kind of alluded to you know in Sweden improvement given the very very strong rental market, we may be able to scale back on some of that capex spend but area that we will focus on that we will put a lot more money into as the energy and conservation area.
That way, we can you know.
Reduced some of the utility cost or even reached some of our ESG.
In terms of energy so.
Okay fair enough and I think I mean, this quarter was I think the lowest turnover you've ever had.
At least post financial crisis as far as our data goes back so presumably the opportunity set in on sweet renovations might be.
Little lower as well is that a fair comment.
That's it absolutely correct on that.
Okay.
Just a quick ones Stephen on on the interest on bank indebtedness sequentially is there is there anything in that I would've thought it would've gone up but it was down.
Down.
And I know, there's some consolidation stuff with <unk>, So I'm not sure exactly how it works on the financial statements but.
Any comment there.
Yeah, Matt maybe I'll look into that and we'll take that offline.
Sounds good and then a last one for me.
Starts were fairly elevated I'm not sure for purpose built rental during the pandemic one financing costs were exceptionally low but it seems like they're falling off a cliff and I don't know a few purpose built rental entities in the public markets.
<unk> did not think the numbers make it a lot of sense to start projects right. Now. So can you give us a sense as to how you think that ultimately impacts the <unk>.
<unk> rental market, but also the opportunity set to buy.
Some of these newer assets I presume youll have deliveries elevated deliveries through this year, but they may falloff thereafter.
That's okay.
Acutely aware of that problem like there may be short term distress as long as youre seeing in the market ripped out that might represent an opportunity for cap rates to take on some of these projects.
We've got underneath it as Julian can talk about it a bit more but we're making tremendous strides on the entitlement front and hopefully though.
Those entitlements will be.
In place at the perfect time call. It three years from now it's a cafe again I'll, let you wanted to talk with her development program, what we're doing though yes.
So we're working through combing through the portfolio and identifying excess land in there there is a significant amount of it and going through the entitlement process and really trying to.
Maximize the value of Atlanta, It doesn't really show up in our eye for S value and cash.
Cash and redeploy it and.
Into our core competency of acquiring and operating apartments.
To touch a little bit on your on what you were you were saying earlier there.
It is something.
We do see as being.
A problem for the for the supply of purpose built rental going forward.
The economics of developing apartment is becoming more and more and more challenging.
Given the higher cost of development and frankly, that's still a problematic entitlement process and so while.
While we are still seeing new supply there.
Very real possibility that that starts to drop off as projects now become more and more challenging to launch.
While that could potentially present, a problem in acquiring more assets on the flip side. It also will make the constrained supply even more constrained and drive a.
Higher rental growth so.
It's a double edged sword.
I guess, taking that one step further let's say, we get to 2025 interest rates are a bit lower and we have a significant need for new rental and then people can start again would you be inclined to build on your book at that point or sell the excess density so that someone else can build.
Hard to say, what we'll do three or two or three years out from now but.
And we are in the business of acquiring and operating apartment buildings, its not to preclude us from doing anything in the future but.
We'd really evaluate it.
The context of what.
What we can where we can deploy our capital how much capital is available to us.
What we're our risk appetite is at the time, but for now.
The strategy for the foreseeable future the strategy is what it is.
<unk>.
There we saw the merchant rental builders entered the market really starting to five seven years ago with each of the projects that we're now seeing available in the marketplace that we've been acquiring at.
And it.
It is an incredibly unfortunate situation that we are where we are right now because its really whats happened to know what's going to determine what happened four or five years from now.
But I can't help it goes back to what Julien said looking two or three years that it was all email and all we know here is that cap rate has an apartment portfolio.
That is bigger than all of our peers combined them at a time that we have unbelievable use of proceeds. So we are so I'm anxious to monetize the value of some of our lower tier assets. Because we have this use of proceeds whether it be in CIB.
Delevering or buying some of these luxury new builds that we're seeing in the marketplace.
All in all we can say is right here and now it's it's never been better in terms of the capital recycling opportunity. So that we're very very focused on.
We're also very very focused on unlocking finally, the value of some of the land and the team is making some great strides in that area and that would be the repositioning that will set us up for I think incredible.
Opportunity three years edge, whether it be selling that land developing that land, maybe it's developing and for Florida, It's hard to say right now it all depends on the environment at the time, but we're definitely setting ourself up for success in the next three to five.
That absolutely makes sense to me thanks, guys appreciate it.
Thanks, Matt.
This concludes our question and answer session for today's call I will now pass back to Mark Kenny for any closing remarks. Thank you.
I'd like to thank everybody for their time today do you have any further questions. Please don't hesitate to contact us at any time, thanks again have a great day.
This concludes today's Canadian apartment property three fourths.
At year end 2022 results conference call. Thank you for your participation you may now disconnect your lines.