Minto Apartment Real Estate Investment Trust Q1 2023 Earnings Call
Good morning, My name is Joe out and I will be your conference coordinator today at this time I would like to welcome everyone to the Minto apartment REIT.
2023 first quarter financial results conference call.
All lines have been placed on mute to prevent any background noise. After the speaker's remark there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If he would like to withdraw your question. Please press Star then the number two.
Before we begin I want to remind listeners that certain statements about future events made on this conference call are forward looking in nature and as such information is subject to risks uncertainties and assumptions that could cause actual results to differ materially.
Please refer to the cautionary statements on forward looking information in the news release and M. D. N. A dated may nine 2023 for more information during the call management will also reference certain non-GAAP financial measures. Although the REIT believes these measures provide useful supplemental.
Rental information about this.
Financial performance they are not recognized measures and do not have standardized meanings under GAAP. Please see the REIT MD&A for additional information regarding non-GAAP financial measures, including reconciliations to the nearest GAAP measures. Thank you. Mr. Lee you may begin your conference.
Thank you operator, and good morning, everyone I'm, Jonathan Lee Chief Executive Officer of Minto apartment REIT I'm joined by April our Chief Financial Officer.
I will begin the call by providing an overview of our first quarter financial performance as well as other corporate development.
Andy will review, our financial results and liquidity in detail and I will discuss our property development pipeline.
No.
Then we will be pleased to take your questions.
The first quarter represented a strong operational start to the year as robust demand in urban rental markets drove high growth in rental rates and continued strong occupancy across our portfolio.
We generated double digit growth in both the same property portfolio revenue and NOI compared to Q1 last year.
Average monthly rent for the same property portfolio reached $1755 at the end of the quarter our year over year increase of five 7%.
Average occupancy in the quarter increased to 97, 2% compared to 94, 2% in Q1, 2022 and 97, 1% in Q4 2022.
We signed 343, new leases in the quarter, achieving a strong gain to lease of 16, 9% over expiring rents.
Market rents continue to increase in all of our markets, increasing our estimated embedded gain to lease potential to 15, 3%.
Same property portfolio NOI increased by 13, 3% compared to Q1 last year, while same property NOI margin grew by 150 basis points to 59, 2%.
Same property portfolio annualized suite turnover in the quarter was 13, 9% compared to 25% in Q1 2022.
The lower turnover can be explained by a seasonal slowdown typical for Q1 and because of the very tight rental market conditions, resulting in more tenants choosing to stay in place.
<unk> in a difficult per unit were both lower compared to Q1 2022 due to the impact of high interest rates on variable rate debt, which offset the growth in NOI.
We're actively pursuing initiatives to reduce variable rate debt, which we will discuss shortly.
Moving to slide four we repositioned 32 suites across our portfolio in Q1 generating an average annualized return of 10, 3%.
On March 7th we completed the sale of high level place a property that had been for a sale price of $9 9 million.
And net cash proceeds of $2 9 million.
This was the first property to be sold under our capital recycling strategy.
Finally on March 23, we announced amendments to the loan agreement for the <unk> properties, which provide us with greater flexibility. The amendment extend our exclusive purchase option to December 31, 2023, and adjusted coupon to be equal to the all in interest rate of the <unk> credit facility beginning July one.
Moving to slide five as I noted, we are working to reduce our variable rate debt exposure and increased our <unk> and <unk> per unit and have made progress in this regard.
In March we committed to refinance a $136 $9 million of mortgages.
Maturing in the next year with all in interest rates ranging from 387% to 395%.
We estimate the upward refinance potential abuse maturing mortgages to be between 60 and $70 million, which.
Which we intend to use to repay a portion of the revolving credit facility once funded.
Okay.
In addition, subsequent to Q1, we made progress on the refinancing of the variable rate mortgages on our two most recently acquired properties Niagara West and the international.
For Niagara West, we refinanced a seven 7% variable rate mortgage with a new $61 $2 million 10 year CN makes the insured mortgage with an annual interest rate of 387%.
And we will imminently refinance.
744% variable rate mortgage at the international with a new 10 year CMA the insured mortgage at an annual interest rate that we anticipate will be approximately 4%.
The chart on this slide shows the variable rate debt made up of about 26% of total debt at the end of the first quarter with much higher rates than our fixed rate debt.
After the refinancing of the two variable rate mortgages. This percentage will drop to approximately 16% of total debt.
I'll now invite <unk> to discuss our first quarter financial and operating performance in greater detail.
Eddie.
Thank you John .
Turning to slide six.
Same property portfolio revenue increased by 10, 5% year over year, reflecting higher occupancy and higher average rates.
Same property portfolio NOI increased 13, 3% from Q1 last year with a margin of 59, 2%.
The increase reflected revenue growth.
Outpaced higher operating expenses generating margin expansion.
<unk> per unit was $17 seven.
A reduction of 7% and <unk> per unit declined eight 1% to $15 one.
Reflecting higher interest costs due to the impact of higher interest rates on variable rate mortgages.
Increased usage and costs on the <unk> credit facility as well as higher general and administrative.
Partially offset by higher NOI.
The <unk> payout ratio was 81% compared to 72, 1% in Q1 last year.
Turning to slide 10.
The chart shows the strong positive trends in our gain on lease and average monthly rent over the last several quarters as rental market position have consistently strength.
Moving to slide eight as John noted, we generated double digit gain on.
The average rate on new.
Leases increased 16, 9% to $2118 per suite with gains realized across all markets.
The embedded gain to lease potential at quarter end increased to 15, 3%.
On slide nine.
You can see that strong rental demand is driving higher occupancy for the rigs.
<unk> turnover was relatively low in the quarter and is likely to remain below the historical average due to a tight rental market and the lack of affordable housing alternatives.
Moving to slide 10.
Operating expenses for the same property portfolio increased six 7% compared to Q1 last year.
Property operating costs increased due to higher salaries and wages from a tight labor market as well as one time severance costs as we continue to pursue efficiency.
Natural gas costs were up due to 24% increase in overall average rates.
However, natural gas rates have fallen materially from their peak in the fall of last year.
Water expenses increased over last year due to higher consumption from higher occupancy and rate increases across the portfolio.
On slide 11, we repositioned a total of 32 suites in the first quarter generating an ROI of 10, 3% on our proportionate share.
We expect to reposition 80 to 120 suite. This year a reduction from 259 last year due to lower anticipated turnover.
I will now turn it back over to Jonathan.
Thanks Eddie.
Moving to slide 12, I will review our development pipeline.
Three of the projects involve intensification of properties, we currently own while the other five are convertible development loan or CDL with exclusive purchase options upon stabilization.
All of our developments are progressing very well with key updates provided on slides 13 and 14.
Our cdls represents an excellent opportunity to add brand new assets in our target growth markets.
Having said that we will continue to be disciplined and evaluate each opportunity in the context of prevailing market condition access to capital and cost of capital.
Now I will turn it back over to Eddie to review, our debt financing and liquidity.
Turning to slide 15, we show a snapshot of our key debt metrics.
The implementation of certain debt refinancing initiatives discussed earlier by John .
We'll reduce our variable rate debt exposure, while improving our term to maturity and our debt maturity ladder going forward.
We will repay $108 4 million or <unk>.
Variable rate mortgages and <unk>.
<unk> from the refinancing of the mortgages at <unk> West and the international.
On completion of these refinancings the fixed rate portion of our total debt will increase to 84% and the CMC insured portion will rise to 71%.
In addition, we are working to further mitigate our exposure to variable rate debt from our credit facility by using proceeds from upward mortgage refinancing and other deleveraging strategies.
Finally.
I want to note that total liquidity was approximately $92 million at the end of March 2023, and debt to gross book value was 41, 2%.
I'll now turn it back over to John .
I'll conclude with our business outlook on slide 16, before we take your questions.
Canadian urban rental market conditions are currently very robust as demonstrated by our strong gain on lease at our high occupancy in the first quarter. We expect to continue generating strong operating performance at the key fundamentals driving our sector are expected to persist.
Housing affordability has been a growing prices in Canada for decades.
We expect it to remain challenging given persistent high interest rate rising levels of integration and the inability of new construction to keep pace with demand.
Renting a home as an affordable alternative to ownership and in this environment. We are not surprised that the increasing numbers of Canadian opting for it and driving higher demand in our sector.
We are confident that the REIT is well positioned for long term success with our best in class portfolio.
We will strive for strong growth in <unk> and <unk> per unit by executing on the following.
One growing NOI.
Two reducing exposure to variable rate debt.
Three generating capital by selling assets to fund our growth.
For continued execution of our intensification and development pipeline, and finally prudent balance sheet and liquidity management.
We expect that executing on each element of this strategy will deliver strong returns for unitholders amid these volatile capital markets.
That concludes our presentation. This morning.
And I would now be pleased to answer any questions. You may have operator, please open the line for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone, you'll hear three Tom profit acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by the Q.
If you are using a speaker phone please lift the handset before pressing any keys one moment. Please for your first question.
First question comes from Jonathan <unk> with TD Cowen. Please go ahead.
Thanks, Good morning.
Okay.
First just on the.
I guess on the two the two loans youre doing for $108 million, how would how would what are you getting in terms of loan to value on that and how would that compare to the acquisition price a year ago.
Good morning, John This is Eddie here.
Alright, thanks for the question.
Alright in terms of loan to value.
They're around.
The range around that 55% to 60%.
With regards to <expletive> West.
As we announced we had secured to $61 two.
Mortgage.
Which replaces the previous $46 two.
There is a little bit of up obviously upside there on the rates on the spread between the $3 7 million, we gotten worse.
Seven seven exit.
On the international the.
Property was coming out of the renovations and carrying higher leverage.
We're going to refinance somewhat imminently.
The if we're going to look at somebody that was a bundle we are terming out of $108 million and.
And in terms of the upper refinancing, it's actually pretty thin just getting tick over that the real upside is the difference in the spread on the rates.
Our combined say seven five for the two mortgages compared to just obviously, 4% if we looked at <unk> west as well as international.
As shown we are estimating around 4% that's based on CMV whereabouts.
Okay.
Okay.
Fair enough and then <unk>.
Secondly, you are also going to.
I guess two related questions here, what do you have a target.
Where you wanted to get your variable rate debt to I guess it goes to 16%. Once you once you get the international fund it at that.
After that and then the related part is that Youre going to do obviously some of that with the $60 million to $70 million you expect to up finance.
What's kind of the timing on that up financing does that sort of Q2 or does it take most of the year for you to get that money.
Well I'll, let Andy answer the second question first and then I'll handle the first question Jonathan.
Yes.
We announced that we are committed to refinance 137.
Mortgages.
Ranging from <unk> 87 to $3 95, those are currently under review with CAH C and.
And we'd be looking to fund those I would say towards the end of Q2.
Okay. So you think youll get somewhere between $60 million to $70 million and up financing.
And by the end of Q2.
That's correct.
Okay and then on your question about that.
We target variable rate debt.
I think our targeted.
As low as possible.
Our peers are anywhere from zero percent I didn't kill him just paid it down to 6%.
For us the low hanging fruit on the refinancings.
But we've got them done them already and they are really the only other lever that we can reasonably pulled our asset sales in order to pay down our AR.
Variable rate debt, there is still a pretty big chunk of variable rate debt that we can pay down kind of call it $150 million to $180 million.
So there's a lot of room to go still and depending on our success on selling assets I think youll see.
Actually all of those proceeds go to pay down that variable rate debt.
We don't want it to be an overhang on our on our numbers. We don't wanted to consume some of the strong NOI growth that we expect over the near term and therefore it is.
Pretty much our top priority.
Pay down our variable rate debt when we get all the way down to zero probably not.
Because as you know we have a lot of developments in the ground and we have some CDL commitments. Then we have also committed to so we will run a little bit on our revolver, but anytime we can pay it down materially even from where it is after the financings that we've talked about I think thats our hope.
Okay. So when you are when you.
Looking at asset sales.
<unk>.
Do you have a like.
What do you have in terms of unencumbered assets and would you be targeting those first so that you could it could be a little bit more effective on on paying down the line.
Yes.
When we look at all of our assets we looked at all.
Bunch of different strategic reason in order to identify the ones that we wanted to sell.
<unk> capital structure was one of the things that we considered and so on.
The properties that we have identified for sale there is a range of capital structure at all no.
There are some that are higher leverage and some that are lower leverage.
Yes.
The liquidity in the market is going to be the number one determining factor on whether or not we'll be successful to sell.
Obviously, selling our lower Levered, one would be would be great. So we can get something equity proceeds and pay down our line but.
It's going to be somewhat.
Not fully in our control.
Okay. Thanks ill turn it back.
Thanks, Jonathan I should mentioned that Paul Burton well is here.
As well as John loss, our general counsel.
Your next question comes from Karl Stanley with this please.
Please go ahead.
Thanks, Good morning, guys.
Just looking at.
Talking about turnover slowing I'm just curious on the proportion of the units that are turning.
How many of those require material capex to hit the leasing spread that you've been achieving or I guess another way are you having to spend a ton to hit the leasing spreads or.
How is that looking.
Hey, Kyle Thanks for your question no. We don't have to spend a lot of money to hit our leasing spreads I mean are these are market rents for us.
In terms of being able to lease it up and how we measure it.
Now through the pandemic to now that we have renovated a bunch of suites that we're making now are are renting so that that lifted in some of our gain on lease numbers that youre seeing.
I. Thank her for her for the rest of them, it's a mix of non renovated and renovated suites.
But we're able to get close to market on all of them.
Okay Perfect and then you did mentioned the impact of higher water expenses I mean, it's not a huge line item at the moment, but I'm. Just wondering what are you doing or could you be doing to help mitigate some of that cost inflation over time.
Okay.
I mean all of these are.
Operationally, we spend a lot of his time in trying to be more efficient from a utilities perspective, and so I'll, let him talk to US a couple of things we're doing on water, yes. So Kyle a number of projects that are underway as well as a few pilot projects. So one example that comes to mind is the installation of shower heads with service static shutoff valves.
De minimize the energy and water consumption, while the shower starts up.
We also have a few pilot projects that are underway.
<unk> to more easily identify toilets, better running continuously things of that nature, So really using technology to try to minimize that cost in the long term.
And for US it's super important from a water perspective in particular because a.
We're more fall and B, we're finding that people are working from home one two or three days a week and so the consumption of water throughout the day is a lot higher than our overall in our portfolio than it otherwise would be and we ought to know more even a hybrid environment.
Right. Okay understood there and then just the last one so I mean it was good to see the purchase option on system Bank extended and I know Youre working through I think I believe it's four other projects within the CDL program, just curious into your knowledge as MPI looking at any new projects that you might look to partner on as part of kind of the CDL program at this point.
Yeah, I mean, good question Kyle.
Private company has access to capital.
Our very active.
Developments, either condo or rental the math for them.
Skewing much more towards rental on a lot of their projects now.
A number of extremely exciting developments.
In Vancouver, and the Camby corridor as well as get till I know theres three separate developments that theyre looking at it very early stages of land assemblage with partners and are going through the zoning process. We have waived all knows as the REIT.
Jason we don't have the capital to lend to them today.
Having said that they are a really good partner of ours that I think theyre going to look for ways to get those to us overtime showing should our access to capital.
Change from what it internally from what it looks like today, but super exciting stuff you're working on in Vancouver, They've got a couple of really really large ones in Toronto as well.
So again, we're super excited about the partnership we think it works obviously in today's market window doesn't really work very well.
Where are that we're being very disciplined and I think youre going to see us continue to be disciplined.
At least and so long as the market kind of chugs, along if I can just like it's running now.
Okay, great. Thanks for the color guys I will turn it back.
Thanks, Joe.
Your next question comes from Jimmy Chen with RBC. Please go ahead.
Okay.
I just wanted to clarify the $60 million to $70 million of upward refinancing. So should we expect that the full amount will be used to pay down the credit facility. Once you see.
At the end of the quarter.
Good morning, Jimmy if any here, yes, that's the plan our intention is to use the upward refinancing to repaint.
Part of the credit facility.
One Sunday, Okay alright.
And then I just wanted to touch on the development yield on which group in.
Mills that looks like it stayed about the same or even went up a tad bit.
Is that really just the development charges going down that's making a big difference or that or that the rents have moved up quite a bit and you've kind of trended the market rents higher I'm just kind of curious about the economics on these on the development yields today.
Sure.
The rent.
Relative to the pro forma Theres no doubt about that.
That has offset virtually all I'd say almost all of the schedule increases and the cost increases any interest rate increases.
Not quite fully offset but very close and what has taken us over the line in terms of that yield or the development charge.
<unk> from.
From the new Bill in Ontario, So.
That was a nice favorable move for us and.
And it has kept our yield.
Constant consistent with the pro forma, but even even improve them a little bit.
How much should have the development charges decline.
40% to 50%.
Okay.
Perfect. Thank you.
Welcome.
Your next question comes from Matt Cormac with National Bank Financial. Please go ahead.
Yes.
Just with regards to occupancy.
Toronto, Ottawa, Alberta, you're above or at 98%.
Montreal is moving in the right direction, but still a little bit.
Low 94% on a same property side would you expect that thats, an opportunity going through the spring leasing market or how should we think about that at this point.
Hey, Matt Thanks for your question.
Yes, we do think that there is some occupancy upside in Montreal pretty consistent with what we've been telling the market and expecting.
There have been.
There are more expensive building as well as some of our more expensive.
<unk>.
Have been the ones that are a little bit vague and so.
Our team is now working really hard our leasing momentum.
In April and the beginning of this month has been quite strong in that market. So we're cautiously optimistic about further upside.
Montreal in terms of occupancy coming into the spring and summer leasing season.
Okay. That's helpful and then with regards to turnover and kind of the propensity to turn at this point is it fair to say that.
It's shifted to some extent from.
Shorter duration leases to people staying in place longer than that.
Suites that are coming up now are those with more rent upside or any color to that effect across the portfolio would be interesting.
Yes.
I actually think it's probably working the other way is there any if you just think about our turnover broadly historically and kind of fluctuate in it's quite seasonal by quarter. As you know so I won't fluctuate between the high teens to the high 20% range on an annualized basis.
Thank for us going forward Youre going to see both the loans and the high come down.
So we're expecting our turnover to range between where kind of where it is today. So about 13, 9% likely is near the low and then it will go up to maybe a low twenty's. So on average you can see our turnover probably be in the sort of high teens on average for the <unk>.
Year.
We are still experiencing a mix of the leases that are turning.
Starting to skew towards the folks who have recently moved in.
The people who have been there for 34567 years.
Are the ones that have the largest gap to market and therefore, it is very expensive for them to move.
We're not seeing a sea change, but we are seeing kind of it is the ones who have been in place for a year or 18 months. Those are the ones who are available if it's another like four or 500 Bucks a month and.
They want to move and they can still make that math work.
That's kind of what we're seeing.
Okay.
That's fair commentary and then with regards to the financing opportunity in <unk>.
2024, and 2025 I understand leggett.
The smaller amount of maturities, but would you expect that you would continue to kind of grind away at a variable rate debt with those maturities as well as getting some financing there.
Maybe I didn't get into some of the details, but I would say.
The more low hanging fruit.
From an economic perspective.
To sell some assets and pay down the variable rate debt before getting into the rest of the 2024 maturities in 2025.
If you bring those and you havent yet breakage costs.
It's not as ideal.
One of the loans.
And of the five that we lock and actually in early 2020 for maturity. So we already are creeping into 2020, Florida to try to bring in the ones that make sense.
So absolutely we will start looking at future maturity, obviously, though for US again, I think the biggest bang for Buck will lead.
To sell some assets and pay downs on variable rate debt.
I should clarify I, just I just meant as they come to maturity in those years. So in the Fi Asher.
And just maybe if you could get a sense as to.
I mean, I understand that underwriting standards are a bit different from CMA sea, but presumably.
You've got a fair bit of potential upside to potentially up financing in the future as maturities come due.
Okay.
Yes, there would be.
We will look at the maturities at the time, we will look at the underlying assets.
I would think that there would be upside potential.
Typically quantifying what that would be.
Okay Fair enough. Thanks, guys I appreciate it.
Thanks Pat.
Your next question comes from Brad Sturges with Raymond James. Please go ahead Sir.
Hi, there.
Just a follow up on Bob's question, there just on the I guess the existing mortgage mortgages, you're refinancing end up financing.
Particularly at the rates that some of the loans youre pulling forward or are there are you expecting some prepayment penalties with that or are you within a window where that would be fairly minimal.
I would say that we wouldn't be in that window, where it's fairly minimal yes, there'll be some potentially three months of interest, but it's pretty nominal.
As we disclosed.
But we have that are rate locked.
We've been looking to fund that by the end of Q2.
So to answer your question.
Okay.
And then.
If you go back onto the variable rate.
Exposure between the refinancing activities that the mortgages and asset sales.
It's fair to say that by the end of the year, you think you'd be at the very least back in line with your peers at this point and.
Based on what you are looking at potentially selling could that gets you to a point, where youre getting closer to zero than let's say, 6%.
Yes.
Yes, I'd say that's not that.
Operational like that would be we would love to be in that position because if you think about our our approach to capital structure in a market like this.
Okay, <unk> being very lowly levered, even way below our target.
When the cost of debt is so high.
You guys. It gives us optionality going forward, if we want to lever up later or if we want to use the money to buy something and it just gives us that flexibility and we can always put more debt on the portfolio at a time when the cost of that debt is a lot cheaper than it is today. So.
But what our variable rate loans are costing a six 5%. It is the most accretive thing for us to do to pay that down as quickly as possible.
Youre going to see us trying to be laser focused on translating.
Pretty nice NOI growth into <unk> and <unk> per unit growth.
<unk>.
Martin hopefully hopefully be able to execute in terms of paying down some of that variable rate debt.
Okay.
Moscow St.
As you are.
<unk> are sort.
Re explore some of the asset sales and.
Maybe potentially put.
On the market for sale are there any green shoots you're seeing in the transaction market now that gives you comfort that.
Youre going to have some success in achieving fair values or just give us some context in terms of.
Where youre potentially selling assets and the activity levels, you're seeing today.
Yes.
I think even if even comparing today's private transaction market to what it was even like three months ago. I think we're starting to see green shoots we're seeing a little bit of activity for some of our REIT peers.
<unk> do a very nice deal with Chris' point in Revpar.
The cap rate and doing some selected acquisitions, we saw boardwalk by something inventory suddenly so.
Some of the buyers that have been completely on the sidelines are coming back and access to capital and access to damage. The financing is still quite robust even though it's slow.
So private buyers the last good access to capital and so we're seeing more activity.
In the for the asset sales that we've launched.
We are seeing.
A pretty good amount of the typical buyers who are at least looking right like we don't know if a lot of tire kickers.
If it comes to fruition, but the activity level and the folks looking or I.
I think we're pleased with the process the progress to date.
Okay. Thanks, I'll turn it back.
Yeah.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by the one.
Okay.
Yes.
There are no further questions at this time. Please proceed.
Well. Thank you very much operator, and I appreciate everyone's time, and we're glad we can be really efficient and keep.
Keep this to 36 minutes, which I think everyone will be happy for going forward.
Take care.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
Yeah.
[music].
Okay.