Q3 2024 Canadian Apartment Properties Real Estate Investment Trust Earnings Call
Good morning, and thank you for attending the Canadian apartment properties REIT third quarter 2024 results Conference call. My name is Elisa and I will be your moderator today.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end I would now like to pass the call to your host Nicole <unk> Investor Relations Nicole.
Nicole: Thank you operator, and good morning, everyone.
Nicole: Before we begin let me remind everyone that during our conference call. This morning. We may include forward looking statements about expected future events and financial and operating results of Capri, which are subject to certain risks and uncertainties. We direct your attention to slide two in our other regulatory filings for important information about these statements I will now turn the call over to Mark Kenny President and.
Oh thanks.
Mark Kenny: Nicole and good morning, everyone.
Mark Kenny: Joining me. This morning is Stephen Ko, our Chief Financial Officer, Julian Schonfeld, our Chief investment Officer.
Mark Kenny: Starting with slide four you will see for our Canadian apartment properties occupancy remained high at 98%.
Mark Kenny: Cross, which our average rent was $617 per month.
Mark Kenny: Turning to slide five strong rent growth drove five 2% increase in total portfolio operating revenues for the third quarter.
Combined with prudent cost control measures NOI was up by six 1% and our margin expanded by 60 basis points to 67, 1%. This was achieved despite higher repairs and maintenance costs, which we've intentionally incurred as we scale back on certain discretionary capital expenditures as Stephen will.
Mark Kenny: <unk>.
Mark Kenny: This healthy organic growth was partially offset by higher interest expense and our diluted <unk> per unit increased by three 3% to 65 nine turns for the current quarter end.
Mark Kenny: Okay.
Results for the nine months ended September 30 are shown on slide six.
Mark Kenny: Again strong rent growth of six 4% and high occupancy at 98, 1% positively contributed 50 basis points in margin expansion on a same property portfolio on the total portfolio. Our margin grew by 100 basis points or nine months diluted <unk> per unit.
Creased by six 5% and our payout ratio remain conservative at 57, 3% for the period.
Speaker Change: Julian will soon elaborate on our capital recycling progress, but referring to slide seven I want to take a moment to highlight again, our strategy of buying recently constructed high quality Canadian apartment properties and selling our noncore older legacy ancillary properties.
Speaker Change: We've covered a lot of ground on our repositioning objectives. So far this year.
Speaker Change: Transacted on nearly $1 billion and Canadian rental properties. In 2024, we've also completed $219 million and European property sale and have announced over $1 billion in additional dispositions of residential properties in the Netherlands, which we expect to complete by new leaders.
Speaker Change: Q1 2025.
Previously announced sale of our MHC portfolio for approximately $740 million is also set for closing in the fourth quarter of 2020 for these.
Speaker Change: These dispositions will generate significant incremental capital, which we plan to redeploy into paying down debt and lowering our leverage as well as for the purchase of more on strategy rental properties in Canada.
Speaker Change: Importantly, these strategic sales also achieve our broader objective in the simplification of the cap REIT business.
Speaker Change: We're looking forward to reallocating additional resources back into our core portfolio in Canada, where our competitive advantage are the greatest with that I'll now turn the call over to Julian.
Julian Schonfeld: Thanks, Marc on Slide nine you can see the breakdown in our buying and selling activity as it relates to the Canadian apartment portfolio, we've completed $517 million in high quality acquisitions in 2024 funded primarily through our disposition program supplemented by our revolving credit facility, which.
Julian Schonfeld: We can temporarily draw upon to act on strategically aligned opportunities that come to market.
Julian Schonfeld: In addition, so far this year, we've closed on the sale of $385 million worth of our older non core Canadian apartment properties. We're continuing to complete these dispositions at prices that are at or above their previously reported carrying values with an increasingly robust pipeline of disposition opportunity.
Julian Schonfeld: We're well on track to meet or exceed our target of $400 million in noncore Canadian apartment property sales for the current year.
Julian Schonfeld: We are selling older buildings which are no longer core to our business for a variety of strategic reasons.
Speaker Change: Thanks, Julian and good morning, everyone Slide 13 summarizes our financial strength as of the end of the third quarter with nearly $300 million and available.
Speaker Change: Full capacity on our Canadian credit facilities.
Speaker Change: Additionally, our mortgage payable in Canada carry a low weighted average effective interest rate of just over 3% and a weighted average term to maturity of five three years.
Speaker Change: Our mortgages also have a well staggered renewal profile as you can see on slide 14, with no more than 13% of our total Canadian mortgages coming due in any given year.
Speaker Change: Moving to slide 15, our total debt to gross book value ratio was 49% as of September 32024, which is down from 41, 6% as of prior year end and our coverage ratios have remained conservative moving ahead, we're continue focusing on prudent and <unk>.
Speaker Change: So active financial management to ensure that we maintain this flexible financial structure, which supports our ability to execute on our strategy.
Speaker Change: Finally, slide 16 displays the impact of our strategic Capex program.
Speaker Change: As Mark briefly mentioned, we're scaling back on certain common area in suite capital expenditures, which are capitalized to our balance sheet, where instead reallocating part of that capital into R&M work, which has been reducing our margins as compared to previous periods. However, overall, we're spending less money.
Speaker Change: Can see we have reduced our total capital spend in these two categories by 7% as compared to the nine months ended September 32023.
Speaker Change: At the same time rich achieving the same top line rental growth so by spending less we're growing our returns.
Speaker Change: In addition is worth mentioning that with our capital allocation strategy, the new build acquisitions have a significantly lower capex profile than the legacy properties, which further enhances our cash flow generation going forward on that note I will turn the call back over to Mark to wrap up thanks Stephen.
Speaker Change: As a testament to the strength of our capital management strategy, which Steven and Julian has just presented.
Mark Kenny: This past quarter, we announced a three 4% increase in our rate of distribution to $1 50 per unit on an annualized basis effective for August distribution, which was paid in September 2024.
Mark Kenny: With all of the capital recycling activity ongoing at cap rate. We were pleased to have been able to also grow our distributions to unit holders. We're currently in the midst of one of the most transformational period in cap rates history, and we've had a very busy year to date, we're excited to continue optimizing and evolving into an even.
Mark Kenny: Better place to live work and invest and.
Mark Kenny: And we're looking forward to the next chapters of Canadian apartment property real estate investment Trust.
Mark Kenny: With that thank you for your time this morning, and we would now be pleased to take your questions.
Mark Kenny: We will now begin the question and answer session.
Speaker Change: I would like to ask a question. Please press star followed by one on your telephone keypad.
If for any reason you would like to remove your question from the queue you May press star two.
If you are using a speaker phone. Please remember to pick up your handset before asking your question.
Speaker Change: Once again to queue for questions. Please press star one.
Speaker Change: The first question is from the line of Fred Blondell with Green Street. Your line is now open.
Speaker Change: Thank you and good morning, two quick questions for me, maybe the first one for Julian.
Speaker Change: Against the odds the obvious question and how the units trade at a sizable discount to be again, how do you feel in terms of capital allocation, especially in CIB.
Speaker Change: Yeah.
Speaker Change: Yeah. So.
Speaker Change: We've mentioned before typically the use of proceeds is for US has been that repayment in CIB and acquisition.
Speaker Change: We constantly evaluate the pros and cons of each of them for the NCI view one of them is really how much capital that we have or have coming in and then we and houses a discount to NAV and the implied cap rate.
Speaker Change: Relative to the others and it's certainly more attractive now than it was.
Speaker Change: Several weeks ago.
Speaker Change: We do have a decent amount of capital so I can't speak to what we will or will not do but it's definitely something that's on the table.
Speaker Change: No fair enough and.
Speaker Change: Second question, just looking at the S. P N O y across the portfolio and it looks like Ottawa and Montreal are slightly underperforming GTA is still a relatively strong obviously, but again slightly below.
Country average so I was wondering.
Mark Kenny: Mark maybe you can remind us your scenario for these three markets.
Mark Kenny: I guess for the next six to 12 months in terms of new supply and rental rate growth.
Mark Kenny: Yeah.
Mark Kenny: Yes.
Speaker Change: I think a little bit of the impact that we're seeing in NOI for those markets would show up in our repairs and maintenance expenses.
Speaker Change: And I hope to get into this more in the Q&A, Fred but it'll start off now we're really focused on cash flow now as part of the new strategy. The capex profile of the new construction buildings is dramatically different than the core legacy portfolio and the rapid and quite significant decline of our capex spend is.
Speaker Change: Really getting the entire organization focused on cash flow.
Speaker Change: So we will take the R&M hits as the happen in the pursuit of better cash flow returns.
And in terms of market dynamics.
Speaker Change: <unk> remains a very strong market and as does Montreal, we do get a little bit of <unk>.
Speaker Change: With the new construction assets as they're on boarded but are very very confident that they will properly stabilize and we will see the benefits of this strategy play out in the quarters to come.
Speaker Change: Mhm.
Speaker Change: That's great. Thank you.
Speaker Change: Thanks.
Speaker Change: Yeah.
Thank you.
Speaker Change: The next question is from the line of Dean Wilkinson with CIBC. Your line is now open.
Thanks, Good morning, guys.
Speaker Change: Mark at the risk of Politicizing, it, which I don't want to do and I, probably just did.
Mark Kenny: When you look at the business out over the next one two or three years.
How are you looking at that in the context of the Canadian population higher lower the same and tangential to that do you think that the supply of purpose built housing is going to keep up with that view.
Well I think that.
Mark Kenny: Get into population growth through that on this call.
Mark Kenny: I think that there is such a backup.
Mark Kenny: Dean of the people that are co living.
Mark Kenny: Whether they be at home or whether they be in our apartments, we have seen a rapid rapid increase in the number of people that are that are room meeting just to make ends meet whether it be in homeownership or whether it be in the rental market.
Mark Kenny: So my outlook on I'll say, the core legacy part of the portfolio remains strong.
Mark Kenny: There is high high demand and a huge runway I think cap rate of all the apartment Reits has the longest runway for mark to market rents feel good about that.
Mark Kenny: And.
Mark Kenny: The type of new construction product that we're buying generally is serving the mid market, which I think will again remains strong and with those rents being slightly higher I think again, the mid market reality of less homes to buy and less options at places to live that we may see an easing in co living but will remain.
Mark Kenny: Strong demand in that segment.
Mark Kenny: I think I've never been more optimistic about the business fundamentals of the long run for cap REIT in terms of.
What the product is that we have to offer the market. We're in the key market.
So the short term will be interesting here I think you could see.
Mark Kenny: A little bit of a.
Mark Kenny: Slowdown in rental construction in places like Toronto is we have a big condo delivery year next year.
Mark Kenny: But.
Mark Kenny: Most of the new products that are being talked about with the new development projects that people are talking rental theyre not talking condo.
Mark Kenny: So I think.
Mark Kenny: I hope that answers your question exactly Deane, but that's kind of an overview of how we see the market.
Speaker Change: Yes. It does I mean, I think the point there is maybe theres not enough focus on household formation and some other metrics that you rightly point out.
Speaker Change: Second question, maybe for Julien with the change of the capital gains inclusion rate and sort of all the stuff going around that have you seen an.
Speaker Change: An increased interest.
Speaker Change: From either individual assets or maybe portfolios, where the vendors might be looking at doing something with taking back units and tax deferral mechanisms there or is it just it hasnt.
Speaker Change: It Hasnt happened yet.
Speaker Change: When the inclusion rates.
Speaker Change: Going up we saw an increase in activity there is quite a bit of transactions that came in in June to get ahead of it and we saw some transactions where the timelines were accelerated.
Speaker Change: At the current time.
Speaker Change: Look when we're doing transactions the class B structure gets brought up a lot in consideration for deferring taxes.
Speaker Change: When it boils down to it though a lot of the times folks.
Speaker Change: Just wanted to get the cash or we can get into a discussion about what the price should be because we're not really issuers of equity below NAV.
Speaker Change: With the share price being so divergent from Nab and I find it breaks down at a little bit at that point. So it gets discussed a lot, but it hasnt been something that's been very actively I would also just build on that our strategy Dean of looking at new construction assets.
Speaker Change: The class BS really are more attractive to those with the core legacy products that have cost base issues I'm going to roll into <unk> and because we're not as focused on that part of the market.
Speaker Change: Right now the.
Speaker Change: The opportunity in new construction is less.
Speaker Change: Yeah.
Speaker Change: Time will tell.
Speaker Change: Cash is king.
Speaker Change: Thanks, guys I'll hand, it back.
Thank you.
Speaker Change: The next question is from the line of Jonathan Culture with TD Cowen. Your line is now open.
Speaker Change: Thanks.
Speaker Change: Good morning, just on me.
Speaker Change: Your capital recycling, you got roughly 20% of the dogs or left to sell and that's maybe roughly $3 billion. How should we think about I guess two questions here, how should we think about the cadence of that over over the next few years.
Speaker Change: And then once you get past that you'll be left with.
Speaker Change: Likely left with a smaller portfolio. How do you think about that in terms of driving earnings and NAV growth versus what you have now.
al: That's a great great question al.
Speaker Change: I will tell you that my full commitment has grown and growing earnings per share for unit holders. We hear this from investors loud and clear.
We will take all measures possible to grow that earnings per share and.
Speaker Change: Really.
Speaker Change: Provide a higher quality stream of income to unitholders over the long term.
Speaker Change: And protect them quite frankly from gyrations in valuation change, which the new construction product really does when you rent roll is fully market you're less.
Less inclined to have impacts on on valuation.
Speaker Change: So yeah that is our focus.
Speaker Change: Sound quality its about growing earnings per share and.
Speaker Change: Yeah, I would just maybe let Julian comment on a piece of which we could see that that older product move yet.
Reiterate everything Mark said I mean, we're really focused on increasing the cash flow in.
Julian Schonfeld: A few of the criteria on the noncore legacy that we're going to keep chipping away at it.
Julian Schonfeld: Lower growth or higher Capex and all the all the stuff that Mark has been talking about in terms of pace, we can't really guide to the future, but you'll note that we've been doing around 400 million for the last couple of years I'm not committing to doing that going forward, but that.
Julian Schonfeld: But you know there's been a bit of a trend there you know.
Julian Schonfeld: Jonathan.
Speaker Change: I'm going to put another exclamation mark on this that we've.
Speaker Change: We've seen strengthening in the market, which has allowed us to have the flexibility of pulling back on our capex spend.
Speaker Change: To pursue better cash flow, but really it's our strategy of newer construction assets that really builds in guaranteed improvements in cash flow.
Speaker Change: And we are.
Speaker Change: Absolutely committed to that and I cant sort of underestimate the importance of respiratory understate I should say the importance of our pursuit of this you know having our retained earnings fully fund our capex needs.
Speaker Change: Is a complete goal of the organization.
Speaker Change: And we're seeing progress show up in the strategy.
Speaker Change: I am very very proud of the cash flow improvements.
Speaker Change: That we've seen in the company over the last few quarters and it's lockstep with the strategy.
Speaker Change: <unk> should be a strong signal to the market of what we are actually trying to do here and we absolutely are focused on earnings per share, but cash flow is right there alongside of it and our advancements in cash flow improvements I think are quite profound.
Oh for sure for sure they are.
Speaker Change: Thanks for that and then just.
Just switching.
Speaker Change: Over to operations or for a minute here like the renewal spreads are now above.
Speaker Change: 4% they've been trending higher.
Speaker Change: How do you see that.
Speaker Change: Going forward into 2025.
Yes, so Jonathan.
Speaker Change: I mean, just to comment the first quarter, we had a majority of our renewals occur in.
Speaker Change: And Ontario.
Speaker Change: Because of the moratorium during COVID-19, so a lot of the renewals occurred on Gen <unk>.
Speaker Change: What I would say is I wouldn't take Q3 as kind of the run rate going forward I think just take the average of the year.
Speaker Change: We do know that there is a slightly lower renewal rate in BC.
Speaker Change: From three 5% in 2024, and then 2025 is going to be 3%.
Speaker Change: But I would say you can use us the full year average is a good basis and adjust for that on the PC side.
Speaker Change: I would just add Jonathan that are in the market rent side.
Speaker Change: What we're watching really closely.
Speaker Change: Is that as.
Speaker Change: We do see a moderation in the Merck in the market rents, where we're watching the increase in churn and we know that historically with churn increases.
Speaker Change: We obviously move more to the rental that's just academic but when you see these moderation of mark to market rent, you'll typically see additional churn and I think the cap rate.
Speaker Change: We'll definitely benefit from this our single biggest hurdle amongst even our peers, it's been our low turnover rate because of our ideal locations.
Speaker Change: So we're looking forward to seeing an easing there.
Speaker Change: Watching the market closely.
Okay. So if you if you put that altogether and you assume occupancy stays sort of above 90, 98%.
Speaker Change: Is it reasonable to assume that you guys can solve for sort of 5% top line revenue growth on a same property basis.
Speaker Change: Wouldn't want to point to a number but absolutely the combination of.
Speaker Change: Slow slower moderation in market rents increased churn.
Speaker Change: We're very much in our favor.
It's just math right, but if you look on historical times when the Mark to market rents were rocketing matured was grind to a halt the math can actually play out better with more fluid turnover numbers of getting back to 30%, 30% one day hopefully.
Speaker Change: With less pressure on rents that can yield a better result for the organization.
Speaker Change: Okay. Thanks, a lot I'll turn it back.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Brad Sturges with Raymond James Your line is now open.
Speaker Change: Okay.
Speaker Change: Hey, good morning.
Speaker Change: Good morning, just following up on.
Speaker Change: Jonathan's question, but maybe ask.
Speaker Change: From the buy side just in terms of the cadence of acquisitions, you've had a pretty good year and Oh see actually a couple of good years here in terms of acquisitions, but maybe less.
Speaker Change: Competition in the market as rates are rising and how do you think about the cadence now.
Speaker Change: If you're starting to see more.
Speaker Change: More buying competition going forward for new gold assets.
Brad Sturges: Yes, Thanks, Brad.
Speaker Change: We are definitely seeing a little bit more it's not anywhere I wouldn't say, it's anywhere near as hard as we would have seen in 'twenty, one or prior years, but.
Speaker Change: But we are starting to feel a little bit more competition with the with the bond yields having decreased.
Speaker Change: If you've got a couple of months ago, we start seeing capital pullback in this sector.
Speaker Change: Bond yields bounce back up a little bit, but we still continue to see our peers deploying capital in a little bit more competition, we're still able to source acquisitions at metrics that makes sense for us so.
Speaker Change: Still feel confident about being able to execute going forward, but yes, there'll be a little bit more.
Speaker Change: Little bit more competitive.
But I guess.
Speaker Change: You've already done some deals, but I assume some pretty.
Speaker Change: Reputable developers that would have confidence of being able to close I guess with with cap rate with that.
Speaker Change: Continues to be an advantage or an opportunity too.
To do more deals.
Speaker Change: Absolutely our reputation is something that really helps us are very.
Speaker Change: Strong investments in operations and legal teams as well allow us to act quickly we're very reputable party, we're very dependable.
Particularly in this market, that's something that our Counterparties remember so.
Speaker Change: We're a big fan of repeat business and I like to think that our counterparties.
Speaker Change: Enjoy the experience working with us.
So yes, we do think our reputation should help us going forward, yes, just building on that we said this on prior calls our reputation.
Speaker Change: Being a straightforward closers is key.
Speaker Change: But what that does.
Speaker Change: We've worked on this for years now is the nature of Brokerages, you only really get invited to an opportunity. When you know what the opportunity that relies on broker outreach and really because of that that's good reputation we have in the market we get visibility on almost every deal. There is in the centers that we're focused on Canada and the investment team.
Speaker Change: It's a fantastic job of Triaging those deals I think we've shown in the Investor relations in the past, we do hundreds of deals of underwriting and that is directly tied to our reputation. We have a great reputation for closing we get invited to look at opportunities and it's very important to us to maintain that reputation in the marketplace by by closing and doing.
What we say we're going to do.
Speaker Change: And I guess last question amount of moving parts in terms of transactions.
Speaker Change: Transactions right now, but how should we think about.
Speaker Change: Leverage at this point and.
Speaker Change: Assume it comes down over the next few quarters, but is there a timeline in mind in terms of where you kind of get back to.
Speaker Change: Stabilized levels.
Speaker Change: Yeah, So Brad I think.
Speaker Change: There is some.
Deleveraging occurring obviously with the MHC deal and.
Speaker Change: The <unk> transaction.
Speaker Change: So the.
Speaker Change: The number one thing that we're going to do right now is pay down debt.
Speaker Change: And also defer any mortgages that are coming up.
Speaker Change: But if there are opportunities.
Speaker Change: Such as kind of Julian has spoken on the Colorado around and CIB and acquisitions are definitely and if they meet our hurdle rate.
Speaker Change: <unk> return profile, absolutely will deploy that.
Speaker Change: I can't really speak to you know where leverage is going to go but it's definitely going down.
Speaker Change: And with those type of transactions like we will go back up we definitely will not be using leverage.
Speaker Change: To enhance returns.
Speaker Change: We are very.
Speaker Change: Sighted about hitting a new low and cap rates history of leverage.
Speaker Change: And we'd like to stay there.
Speaker Change: Until we get really.
Speaker Change: Clear view of where the interest rate markets, we're going to go.
Speaker Change: We've seen what can happen evaluations when the market has changed so I personally love.
Speaker Change: Pushing leverage down, but we'll remain opportunistic we're just not going to use leverage to move returns.
Speaker Change: Okay that makes sense I'll turn it back thank you.
Speaker Change: Thank you.
The next question is from the line of Jamie Shen with RBC capital markets. Your line is now open.
Jamie Shen: Thanks, So just on the R&M expense right.
Jamie Shen: I understand that the toggled between Capex on R&M.
Speaker Change: But it is still tracking in that.
Speaker Change: Two 9% year over year growth.
I guess I'm, just wondering should we see that that pace of growth did decelerate as we lap easier comps and how.
Speaker Change: How do we think about that pace of growth going into 'twenty five.
Speaker Change: Yes, I think youre going to definitely see that pace of growth decelerate.
Speaker Change: Even into Q4 I think there were.
Speaker Change: Some timing of R&M that occurred in Q3.
Elevated R&M.
Speaker Change: Let's say unexpected.
But otherwise if we look into 2020 with Q4 of this year and into 2025, I think youre going to see more moderate growth on that side.
Speaker Change: And Jimmy I would only add that for the organization.
Speaker Change: A dollar is a dollar and we really want business decisions being made around the best use of cash and we're seeing that play out now in our cash flow results with reduced Capex and <unk>.
Speaker Change: We are absolutely focused with the team on the value of the dollar and where it ends up in the balance sheet is really just not that many interested the operation anymore I want them focused 100% of being efficient and a dollar's a dollar.
Speaker Change: And then no I understand that I was just trying to get a sense of ultimately does drive NOI because I'm just trying to see from a modeling perspective, whether that number can be closer to mid.
Mid single digit range.
Speaker Change: It sounds like that's what you're saying yeah, yeah, yeah, that's what I'm, saying yeah. Okay.
Speaker Change: And then just it seems like a lot of their rent pressure ease at the higher end of the market.
Speaker Change: Certainly that's what the data shows that it needs whether it would be saying.
Speaker Change: Do you have a sense of what percentage of your portfolio would be kind of most exposed to where we're seeing the highest amount of rate pressure.
Speaker Change: I guess I'm thinking more of a beachhead acquisition done would they be are they are they in those markets, where you could see.
Speaker Change: Their rents actually go down.
Well I'll answer for Julie what about color here, but we underwrite very conservative rents when we're doing these.
Speaker Change: Acquisitions we.
Speaker Change: Really keep a focus on the rent roll and validating the in place rent roll to be be a number that we work around.
I. This comes up a lot now obviously, the investors and they keep moving them back to the fact that we do believe that cap rate has the largest mark to market of any peer group and a runway for that reason is quite long.
Speaker Change: So when we're seeing data in the market with condo Rins for example, moderating.
Speaker Change: We go back to the core legacy part of the portfolio and see the runway is really tremendous there and there is no sign of rents.
Speaker Change: On turnover ever falling in.
Speaker Change: Any sort of future that I can immediately see at this point.
Speaker Change: It's more of the pace of acceleration that is a blend of turnover and getting those mark to market, but it's the CT legacy portfolio, that's really going to do its job here as we go through potential changes and Julian has done a great job and the investment team has done a wonderful job on underwriting mid market deals for the most part and being cautious on the luck.
Speaker Change: <unk> deal Julian I Wonder what you would add no that's exactly it.
Speaker Change: Not uncommon for us with the acquisitions that we buy that still have a gap between in place and the market will it be the same as the value add building.
On the 19 sixties in Toronto know, but.
Speaker Change: It's not uncommon that some of the acquisitions will have a 10% gap between in place and our conservative underwriting of market and so.
As Mark mentioned, what we're buying is usually not the four seasons apartments with all sorts of services.
Speaker Change: The rooftop pools and that type of thing.
Speaker Change: Tend to be a little bit more mid market and well located well constructed.
Speaker Change: New construction properties and we think those all those old.
Speaker Change: With fan rent pressures better than better than that ultra high and high service model.
Speaker Change: Okay. Thank you.
Speaker Change: Yeah.
Okay.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Kyle Stanley with Desjardin. Your line is now open.
Kyle Stanley: Thanks, Good morning, guys just building on kind of the cost discussion.
Speaker Change: You were just having.
Speaker Change: I think we got a good sense of expectations for R&M, but when we kind of pull together the other line items that go into the same property opex.
Speaker Change: It looked like it was up about let's call. It 5% this quarter or is that probably a fair assumption as we think about the year ahead.
Okay.
Speaker Change: Yes.
Speaker Change: <unk>.
Speaker Change: I think I've spoken to you about this call in the past I mean, what we do expect is.
Some.
Elevated.
Speaker Change: Increase in Realty taxes.
And then I think just a big component of Opex is also a utility cost I mean this year, we had a very mild winter the weathers even today. It's this month has been pretty good.
So we expect a similar type of weather pattern next year.
Speaker Change: I tend to be a little more conservative reverting back to more of a average five year. So therefore, if you kind of build in insurance premiums and others I think we could probably see.
Speaker Change: Weather patterns stay pretty low it's more of a 3% to 5% maybe on the lower end, but if it.
Speaker Change: If we revert back to a more normal winter then you can see on the more of the higher end.
Speaker Change: Okay, no that makes sense. Thank you for that.
Speaker Change: Just going back to the earlier comments about seeing an uptick in room meeting over the last little while can you elaborate on how that trend maybe is different today versus a year or two ago and then.
Speaker Change: Do you look at this is almost a similar opportunity maybe rent soften a little bit.
Speaker Change: For similar household formation that we saw kind of emerging from the Covid period.
Speaker Change: Yeah.
Speaker Change: The difficult part is this is all anecdotal basis on what we're seeing in the portfolio with applications and people living in our buildings. There is not real data, we can get to see how many people are room, meaning how many people are still.
Speaker Change: Still at home waiting to enter the market.
Speaker Change: So.
Speaker Change: It is a little bit difficult to say.
Speaker Change: With the emergence of more product than there is moderation of Brent that does facilitate.
Speaker Change: The release of the remaining scenario when people really don't prefer to roommate. They wanted privacy of living on their own but it became a reality of the cost of living in Canada.
Speaker Change: And again, what we're hopeful and what we're watching is in cap rates case, it will relieve some churn.
Speaker Change: Just allow us to get at the at the market rents are more readily.
Speaker Change: So difficult to say.
Speaker Change: At this stage, we are watching it closely.
Speaker Change: But antique totally within the portfolio is extremely widespread now almost without exception every building is experiencing a degree of remaining.
Speaker Change: Okay no. Thank you that's.
Speaker Change: That's helpful. Just last one.
Speaker Change: You mentioned higher expected credit losses.
Speaker Change: Something in the quarter can you just elaborate on maybe what contributed to that.
Speaker Change: Yeah.
Speaker Change: Yes, I mean, we had.
Speaker Change: Are you referring to bad debt I mean, we have seen a little bit I mean on a normalized basis for the year. It's been pretty average I think we are at 50 basis points.
Speaker Change: So it has not nowhere, it's gone up to like the you could say the COVID-19 levels I think around 70 basis points, but we're continuing to monitoring it.
But I wouldn't say, it's anything to be concerned about at this point, what we're not seeing just for clarity, we're not seeing changes in economic circumstances, leading to greater bad debt. What we are seeing are the challenges that the tribunal by province, expediting evictions. So it has a lot to do with how efficient.
Speaker Change: The provinces are with allowing evictions to happen and less to do with the credit worthiness. So it doesn't really if the result is still the result, but the bigger driver of a reduction in bad debt would probably be changes to help tribunals are addressing.
Speaker Change: Nonpayment issues.
Okay. That's helpful context.
Speaker Change: Good for me I'll turn it back thanks, guys.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Next question is from the line of Mario Sorry, with Scotiabank. Your line is now open.
Speaker Change: Good morning, guys.
Speaker Change: Maybe just.
Speaker Change: Sticking to the to the bad.
Speaker Change: Debt.
Speaker Change: A discussion.
Speaker Change: Maybe any impact to those figures.
Speaker Change: We're likely to be gone in north of 1%.
Speaker Change: On the government.
Speaker Change: Immigration policy announcements in terms of it looks like.
Speaker Change: The government to get to the target.
Population deceleration that would require a pretty substantial exodus.
Speaker Change: Non.
Speaker Change: So on permanent residence out of the country.
Speaker Change: So how do you think about that in terms of potential bad debt expense going forward.
I don't see it having as much of a bad debt effect.
It will have.
Speaker Change:
Speaker Change: <unk> released relieving the pressure on demand.
Speaker Change: I.
I think that what we're watching obviously really closely.
Speaker Change: As we are in the market that shows up is likely to show up in our more affordable.
Portfolio in terms of.
Speaker Change: Of weakness, but at the same time in Toronto, We've got this big condo delivery year happening next year.
Speaker Change: So it's to be determined again.
Speaker Change: Really.
Speaker Change: Take comfort in is we're coming we're in the lowest apartment churn.
A period in the company's history.
Speaker Change: And a moderation of rents will follow on with an acceleration of turnover as markets become more balanced in the room meeting.
Issue out there is to be determined on how much that will prop up the market as a counter to any sort of slowdown in immigration. So.
Speaker Change: Answer your question, Gary I'm less concerned about bad debt impacts and more focused on how it will play out in demand with optimism in case of cap rate that it will it will hopefully help our churn.
Got it okay, maybe just on that point Mark.
Speaker Change: The churn pension going up your mark to market.
Speaker Change: Let me start with 19% in Q3, so still quite strong.
Speaker Change: Relative to Q2, I think it still.
Speaker Change: Still 19% also like how like how much market went to erosion.
Do you think needs to happen to see the turnover meaningfully higher than for example, like I'm just thinking about tenants.
<unk> seen a 15% uptick in rent.
Speaker Change: We think that's sufficient for the time.
Speaker Change: And until we have.
Speaker Change: Christmas.
Speaker Change: How much pressure do you need to see for that turnover.
Hi.
Speaker Change: Well. This is an answer to your question directly but obviously, if our churn was to double our market rents could fall by 50% and you ended up at the same place okay.
Speaker Change: What.
Speaker Change: Looking back at the historical churn rate of a balanced market in Canada. It was 35% and you find yourself in almost top top single digits low double digits here.
Speaker Change:
Speaker Change: It is early days like we are not seeing.
Speaker Change: Any sort of profound weakness at this stage at all what we are seeing is sort of some lease up activity in our new construction as it's happening and if anything a moderation of rents in the high end of the market.
Speaker Change: So it's early innings, yet this is again.
Speaker Change: I'm sitting back waiting here to see how profound this room meeting holdup will be to the marketplace. In our case I think it's I think it affects everybody, but it is the most confounding.
Speaker Change: So on the question.
Speaker Change: You mentioned the <unk>.
Speaker Change: A new condo in sort of the.
Speaker Change: Common deliveries in Toronto.
Speaker Change: That are taking place this year and kind of be elevated next year.
Speaker Change: Can you talk about any kind of asking about pressure that youre seeing in your core legacy portfolio and some of those in more markets.
Speaker Change: Sure.
Speaker Change: The person channel in response to the.
Speaker Change: Deliveries come online.
Speaker Change: Yeah core legacy is holding up pretty well.
Speaker Change: If anything we're seeing some where we were achieving rents higher than condo rents in core legacy we're seeing a moderation of those rents and we'll continue to see a moderation of those rents is upon delivery tapping in Toronto next year.
Speaker Change: Yeah.
Speaker Change: Okay. That's it for me thanks, guys.
Speaker Change: Thanks.
Speaker Change: Thank you.
Speaker Change: Next question is from the line of Matt <unk> with National Bank Financial Your line is now open.
Speaker Change: Okay.
Just continuing on on the train of thought around the non permanent residents.
Speaker Change: Didn't build enough housing supply to have the number that came in over the last couple of years. So.
Speaker Change: Is the thought process of it maybe.
Speaker Change: These residents depart.
You just have deconsolidation of that remaining in instead of adding three or four people.
Speaker Change: Hartmann, maybe it goes up to them.
Speaker Change: And you wouldn't necessarily see the turnover.
Speaker Change: How should we think about it because again, we didn't we didn't have a huge increase in housing supply during this period of time.
Speaker Change: Yeah I think.
You know I wish I had better better answer on this there's not a lot of data like I said.
Speaker Change: And we keep going through these different changes in the market, where we kind of never seen it before.
Speaker Change: All I can say is that in my personal experience. The remaining phenomenon has never been it's been like this before.
Speaker Change: And that's all and you are 100% right the lack of construction and the lack of build.
Speaker Change: It is we're going to see we're going to see but so far no signs of a real impact.
Speaker Change: Okay makes sense and then you mentioned kind of a little bit of more of a more yield maximization and.
Speaker Change: Holding a bit higher vacancy and it's notable that the vacancy that you're holding is in markets that have had kind of a better rent growth. So how should we think about that is at 98% occupancy the new kind of place you'd like to be or are you going to try to get that back up to call. It 99 essentially full.
Speaker Change: Okay.
I think no big change from that like I would expect our historical kind of occupancy of call. It 90 799 would be.
Where we're headed.
Speaker Change: Really is always a cap REIT monitor those market rents closely address pricing issues in specific issues in specific buildings.
Speaker Change: No profound change in thinking there.
Speaker Change: It makes sense and then just lastly on the acquisition side.
Speaker Change: Should we expect any portfolio purchases or will it be kind of one off acquisitions and then maybe along those lines Julien like what is kind of the math.
Julien: Max that you can do per quarter, just trying to get a sense as to how quickly you can redeploy the proceeds that you're going to get from MHC plus the wind down of the U S.
Speaker Change: Yeah, so given the focus on new construction properties.
Speaker Change: By and large it's been one off we haven't really seen too many portfolios and go to market. I mean part of that is I think the market or vendors recognizing that there hasn't been a portfolio premium in it.
Speaker Change: They have generally had more success with smaller transactions.
Speaker Change: I don't think we're in a market, where there's a lot of folks that look to launch large portfolios.
Speaker Change: And also just the nature of the new constructions.
Speaker Change: Vendors it tends to be a little bit more merchant vendors as well.
Speaker Change: We've also tend to sell wants to have product available.
Speaker Change: As mentioned earlier.
We've got a really strong investments team.
Speaker Change: Capable of underwriting scale in size and we do have capital. So we have the ability to do it and I have no doubt that we are the preferred partner should anyone be looking to do that but.
Speaker Change: But we also have other good opportunities as mentioned by Steven earlier debt repayment.
Speaker Change: It's something that can also be done relatively quickly and we also have the option of the CIB on the table to share prices currently are implying I believe when looking at some of the analyst numbers, implying a 5% cap rate with 3% debt on it too which is also something attractive and.
Speaker Change: Given the high liquidity of the read something that can be action relatively quickly Asia should management that you choose to do so so.
Speaker Change: We do have work ahead of us on the redeployment of that amount of capital. We're also in a fortunate spot that we've got a lot of very attractive levers to pull on.
Speaker Change: Okay. Thanks, and then what would.
Speaker Change: I mean, I don't know if you have enough that necessarily to repay you do a line of credit draws but.
Speaker Change: Would you potentially put the cash.
Speaker Change: Cash into a term deposit of some sort in the immediate short term or.
Speaker Change: Or will it all go to.
Speaker Change: Some sort of debt repayment.
Speaker Change: That's an option really again it depends on when the mortgages come up for renewal there might be a gap in between so that therefore, that's an option that we're looking at as well.
Speaker Change: Okay sounds good.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Michael Curtis with BMO capital markets. Your line is now open.
Michael Curtis: Thank you operator, and good morning, everybody.
Michael Curtis: Mark I might be reading into this a little too much but I think in your opening comments you talked about.
Speaker Change #100: The disposition of the MH, CS and sort of wind down in the U S and having a reallocation of resources into the Canadian legacy portfolio, now, where you're just talking about sort of management time and effort or is there actually an component up maybe.
Speaker Change #101: And I guess I was thinking more than the rest, but you've got a operating an asset management platform is one component of bringing some of those resources back.
In Canada at this point.
Speaker Change #101:
Speaker Change #101: The cap rate as you know has a.
Speaker Change #101: The asset management platform in Europe. It also has a property management platform in Europe.
Speaker Change #101: We're looking at the.
Speaker Change #101: Liability.
Speaker Change #101: The property management platform, given our reduced size platform.
Speaker Change #101: The asset management function finance team.
Speaker Change #101: Investment.
And really all of the head office infrastructures are based here in Canada, no changes to that whatsoever.
Speaker Change #101: And we obviously.
We are contemplating any acquisitions any reds right now so we're looking at viability of platform.
Speaker Change #101: We'll keep the market updated on that.
Speaker Change #102: Okay. That's helpful. Thanks.
Speaker Change #103: I guess, you've talked about a lot of transformation and cultural change, which has been at least evident from the outside looking in.
With respect to your.
Speaker Change #103: A dollar is a dollar.
Speaker Change #103: <unk> also added a fairly significant amount of new assets and that's something that's.
Speaker Change #104: Like better term new for cap rates, so have there been any growing pains or lessons learned on the integration and maybe just in terms of the differences in leasing.
Speaker Change #104: The recently completed property grosses.
Speaker Change #105: Got it.
Speaker Change #105: Well the good news is that the majority of the new construction assets that we've bought are in the mid market and the difference between those mid market assets and I'll see the who.
Speaker Change #106: Hi, great quarter legacy, but not that big.
Speaker Change #106: On some of the ultra high quality it is a different business.
Definitely in the leasing requirements there we are learning.
Speaker Change #106: How do we better there, but we've got a great team.
Speaker Change #106: Both at the head office on our marketing side on the pricing side and on just the general support side of the field.
Speaker Change #106: I'm pretty confident I'm pretty confident there I just can't.
It use it Mike is another opportunity to focus on cash flow, though just going back to that.
Speaker Change #106: Attribute of these new assets and the focus of the company. It's a dollar is a dollar but what we've learned in terms of learnings is that when you have a 2020 year period of evaluation ever rising and refi is easy.
Speaker Change #106: Less costly on mortgage renewal.
Speaker Change #106: We've learned that the market can change and so the focus on reducing capex and living on retained earnings and just our overall focus on cash flow.
Speaker Change #106: At any at any.
Speaker Change #106: Cash flow being Paramount. This is the focus of the company.
Speaker Change #106: And it's paying off we're seeing it showing up in the result, I'm really excited about it teams really excited about it.
Speaker Change #106: And Oh, yeah, they're not relying on top of financing is its goal of what we're trying to do here.
Speaker Change #106: Right.
Speaker Change #107: Okay, Great and then last question for me.
Speaker Change #108: I guess it was the dramatic change in in rates that caused the window of opportunity.
Speaker Change #109: I mean, maybe it wasn't a catalyst, but it created a window of opportunity and a competitive advantage for cap rate to start acquiring in the new construction market.
Speaker Change #109: The rate cycle, now, where we're kind of going in the opposite direction. So I don't know if that window is getting harder or we're getting closer to closing, but if we are going to see and I recognize you're you're focused not on the ultra high end, but on the mid market, but if we are going to see a little bit of softness in rents and maybe a little bit of a.
Speaker Change #109: Short term turbulence, notwithstanding a long term.
Speaker Change #109: Story do.
Speaker Change #109: Do you think rather than just elevated creates being an issues for developers.
Speaker Change #109: There's a little bit more concern on lease up risk and does that extend the window I guess as part a and part B is cap rate willing to buy assets, maybe on a vacant grow with very low occupancy basis and assume some release of course going forward.
Speaker Change #110: So I'll, let Julian finished the details, but I'll give you the big picture.
Speaker Change #110: A couple of things here. So number one we think that the development that's happening if there is shifting to rental okay. So while we may not be buying product at steep discounts like we saw during the distressed period, we think that there's a good pipeline of new rental for the company to look at in the years to come Okay.
Speaker Change #110: Buying it correctly will be obviously key but we've got a great team to do that.
Speaker Change #110: Secondly.
To maintain that sort of a renewal approach.
Speaker Change #110: We have development land and those development land.
Speaker Change #110: Aren't really easily tradable in the marketplace right now and we're now thinking ahead to keeping the renewal of the company going by possibly building on their own land not something that you can expect us announcing in the short to mid term, but thats. What we are readying the company for in the longer term the runway will remain a very very soon.
Drawn.
Speaker Change #110: In terms of our propensity to take lease up risk we love. It like we will do that if we're less likely to find it because most of the distressed deals would have come to market, maybe two years ago and we're now seeing.
Speaker Change #111: Uh huh.
Speaker Change #112: Properties that are more mature in nature, but let me let me just move it to Julian for a second to kind of give you the correct.
Julian Schonfeld: Market environment, and what what do you think yeah, so echo everything that mark.
Speaker Change #113: For the second part of your question with the lease up.
We've got a really experienced team we're in we're active in all the markets that we're looking to acquire in.
Speaker Change #113: So we've got a really good.
Read of the market and we're able to underwrite it.
Speaker Change #113: We're happy to take lease up on it if needed.
Speaker Change #114: With respect to development going forward Mark mentioned at the condo markets really.
Speaker Change #114: We're really suffering right now so a lot of the developers have been talking about are moving towards rental that said with the point because you mean, the optimism for developers to take that big risk on.
Speaker Change #114: It would've went up with interest rates coming down but at the same time the population growth.
Speaker Change #114: Me.
Speaker Change #114: Cause a little bit more cautiousness going forward so.
Speaker Change #114: Combined with the condo market Thats failing.
Speaker Change #114: Little bit of softness on the population growth.
Speaker Change #114: Remains yet to be seen but I wouldn't be surprised if that.
Speaker Change #114: That impacted upcoming supply as well negatively.
Speaker Change #115: Okay, and sorry, I promise last one this time, but I guess, you've talked about your asset light development strategy.
Speaker Change #115: I'm not even sure if that slide was removed from the deck I don't remember seeing it this time around but.
Speaker Change #115: It sounds like you're maybe prepping thinking about longer term trends.
Speaker Change #115: Just going back to some on balance sheet development did I pick up on that correctly or.
Speaker Change #116: Yes, I think the reality is that you know the market for land.
Speaker Change #116: This environment become challenged.
Speaker Change #116: And.
Speaker Change #116: <unk>.
Speaker Change #116: Strategy.
Speaker Change #116: Our board is highly engaged in is highest and best use of that land going forward.
Speaker Change #116: And we really just wanted to keep the high grading of the portfolio moving and the focus on cash flow being Paramount now to what we're doing so we're giving a lot of thought we've got some amazing land and.
Speaker Change #116: We don't want to be reliant on the development market to deliver us our product in the future, but the investment team is doing a great job of finding those opportunities for now and I don't see any slowdown in that in the short to mid term. So this is more of a long term vision now for the portfolio.
Speaker Change #116: Why why would we not give deep thought to what are really irreplaceable locations.
Michael Curtis: Understood exciting times. Thanks, so much for now Mike I'll, just reiterate though.
Mark was touching on this point, but like the acquisitions that we've been looking at right now it's been at a discount to replacement cost and in some cases pretty significant so.
Michael Curtis: <unk>.
Speaker Change #117: Just to layer on to marks comments.
Speaker Change #117: Maybe something for the future but for now.
Speaker Change #117: If we can buy something at 20% below the cost it takes to rebuild it without having any drag on <unk> without having any development risk in both cases without having to worry about lease up and are dealing with efficiencies immediately after.
Speaker Change #117: We view that as a.
Speaker Change #117: By far the most compelling.
Speaker Change #117: Court path for Us and the one thing we don't talk we haven't talked a lot of it we've got a very strong word with development experience.
And they're helping us think through.
Speaker Change #118: The longer term strategy, but expect no no announcements from cap rate in the near to mid term as Julian said team is doing such a great job of finding.
Speaker Change #117: Discount discount to replacement cost deals.
Speaker Change #117: In great locations that for now.
We're staying on the path we're on.
Yeah.
Speaker Change #117: Thank you.
Speaker Change #117: Thank you.
Speaker Change #117: Our last.
Speaker Change #117: Question today comes from the line of John Chris <unk>, a private Investor. Your line is now open.
Speaker Change #117: Yes.
Speaker Change #119: With all the sales that you've done to.
Speaker Change #120: Any guidance on the if there'll be a special tax this tradition, and we will be there any cash component. This year to help pay the tax for unit holders that have it and non registered accounts. Thank you.
Speaker Change #121: Yeah. So.
Speaker Change #122: You know in the past couple of years, we have made.
Speaker Change #122: So does it does.
Speaker Change #122: Dispositions and again those are older assets. So you can expect there will be a special distribution.
Speaker Change #122: As for and recognizing in Q4 and there were some transactions I think there was also on the <unk> call yesterday.
Speaker Change #122: There are some.
Speaker Change #122: Timing of transactions are uncertain around the E rate is.
Speaker Change #122: Disposition, whether it happens in Q4 Q1, so we're working through those numbers right now as for it whether there is a cash or a component.
Speaker Change #122: Component.
Speaker Change #122: We are we're still evaluating that and that's something we're giving consideration to.
Speaker Change #123: Thank you.
Speaker Change #124: Thank you. This will conclude our question and answer session for today I would now like to pass the call back to Mark for closing remarks.
Mark Kenny: Thank you operator, I'd like to thank everybody for your time today, if there's any further questions. Please do not hesitate to contact us at any time. Thank you again and have a great day.
Speaker Change #125: This concludes today's conference call. Thank you all for your participation you may now disconnect your lines.