Canadian Apartment Properties Real Estate Investment Trust

TSX:CAR.UN

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to the CAPREIT Q1 2020 Results Conference Call. I would now like to turn the meeting over to Mr. David Mills. Please go ahead, Mr. Mills.

[David George Mills]

Thank you, Mellie, and good morning. Before we begin, let me remind everyone that the following discussion may include comments that constitute forward-looking statements about expected future events and the financial and operating results of CAPREIT. Our actual results may differ materially from these forward-looking statements as such statements are subject to certain risks and uncertainties. Discussions concerning these risks, the forward-looking statements and the facts and assumptions on which they are based, can be found in CAPREIT's regulatory filings, including our annual information form and MD&A, which can be obtained at sedar.com. I'll now turn things over to Mark Kenney, President and Chief Executive Officer.

[Mark Kenney, CEO, President & Director]

Thanks, David. Good morning, everyone, and thank you for joining us. Scott Cryer, our Chief Financial Officer, is also with me this morning. Clearly, we are operating in challenging times. This morning, I'd like to quickly review our results for the first quarter of 2020, which included one month of operating under the coronavirus pandemic and spend the bulk of our time discussing the initiatives that we are taking to preserve capital, maintain a strong and flexible financial position, mitigate risk and generate the best operating results possible in this new environment. Turning to Slide 4. Our growth and record performance in 2019 was proved positive that we can generate strong and growing returns for our unitholders. For more than 22 years, we have built the team, the asset base and the operating platform that can, will and continue this track record of performance as the pandemic eases in the future. We look to return to our traditional year-over-year growth as conditions improve. As slide 5 shows, we significantly enhanced the size and scale of our property portfolio in 2019, acquiring 9,241 residential suites and MHC sites for approximately $1.4 billion. In the first quarter of 2020, we continue to grow with the purchase of another 1,724 suites for $467 million, including a large 1,503 suite portfolio in Halifax, transforming CAPREIT into one of the largest owners of residential properties in this resilient real estate sector. These acquisitions strengthen our market presence and drive economies of scale and operating synergies through our experienced and proven property management teams. At this time, we've essentially curtailed our acquisition activity as due diligence is all but impossible. However, we remain highly opportunistic as we see real estate opportunities arise. Our growth over the last 12 months had a positive impact on our first quarter 2020 results, as you can see on Slide 6. Revenues were up almost 19% over the same quarter last year, driven by the positive contribution of our acquisitions, increased monthly rents and continuing high occupancies. NOI rose over 21% with NFFO up 24%. We also generated another quarter of strong organic growth with same-property NOI of 5.7%. However, as we all know, the COVID-19 pandemic essentially began in early March, accelerating quickly to levels that will affect our business in the second quarter and going forward until the situation is resolved and we can all return to normal life and work. From an operating perspective, the first quarter showed that we maintained our track record of solid performance in our stabilized portfolio, as you can see on Slide 7. Occupancies remain at effectively full levels in the residential portfolio of our business, while net average weekly rent rose, driven by increases on turnover and renewals. Our track record of organic growth also continues with same-property NOI up 5.7%, with good growth in our NOI margin. But that was then and this is now. A primary observation of this pandemic outbreak is that our business thesis does hold strong. Apartment investment is resilient. I want to spend the rest of our time together, discussing what we have been doing to adapt to this new operating environment. Our main goal is to ensure the safety and wellbeing of our staff, of our residents and of our properties. Residential living is an essential service, and our frontline staff have also been essential workers, keeping our residents safe. And I want to say that our residents have been extraordinarily supportive throughout this time. Our business objectives are: to preserve capital and maintain a strong and flexible position; to mitigate risk; and generate the best operating results possible in this challenging environment. Slide 9 outlines some of the operating initiatives that we are taking to keep the business moving in these challenging times. We are maintaining a solid presence in each of our properties to build on close relationships we have developed with our residents. We have initiated what we call our Compassionate Care Program, reaching out to all of our residents, checking in on them and consulting on any rent payment issues that they may have. We encouraging -- we are encouraging our automatic, preauthorized and online payment options and advising them of government assistance programs, should they need to help. We have also placed a temporary moratorium on rent increases effective April 1. We have always had a rent deferral program in place for those suffering economic hardship. This is nothing new to CAPREIT, and to date those residents approved rent deferrals are currently running at less than 0.5% of our residents. Slide 10 outlines some other key initiatives which we have been implementing at CAPREIT. To help with our resident communications program, we have accelerated the rollout of our new resident portals, enabling our residents to more easily communicate and transact with us. Getting this system up and running was a real accomplishment. What we had expected to take 6 months was completed in only 6 weeks, and we are seeing a strong sign up for this initiative with 81% of our residents being invited and 55% having already signed up. We look to increase this percentage going forward. Our innovative technology platform is also helping us to maintain our properties with our customary high occupancy. As an example, potential new residents are able to see available apartments online through our virtual property and suite tours. Once interested, they can apply remotely through our online lease system. These systems have been up and running for some time and are very helpful during the pandemic. Moving to Slide 11. In summary, during these challenging times, our business has essentially returned back to basics, engaging with our residents through our communication programs to ensure that we understand their ability to pay situation. We're filling vacancy through our new and innovative technologies, such as online tours and online lease applications. And finally, investigating all areas where we might find operating efficiencies. It is by a return to basics that we will work through these challenging times and emerge stronger than ever before. Our main focus is on rental payment communication, and all of our teams are totally focused on this activity, and we are very pleased with the results so far. I understand that it is not the end of the month and that we can't fully see rent collection patterns until the month completes. There are always checks that come into us that need to be received and cleared, residents that rely on social benefit payments during the month to meet their rent obligations. Other people sometimes pay a little bit late, but will eventually pay throughout the month. We have collection procedures against rent defaults and other factors that don't give us a full and clear picture until the end of the month. Having said that, we are cautiously optimistic to see that 98% of our April rents were collected, and our occupancy continues to remain strong. As you can see on Slide 12, we have not seen any material decline in our occupancies since the quarter end. As I've said before, it is very early to call trends on any one performance metric, and occupancy levels are no exception. Renting in this COVID environment is somewhat challenging. And while our technology solutions will help us navigate through this time, we remain cautious and will adapt as the situation evolves. As you can see on Slide 13, the strength in our business is also driven by the continuing affordability of rental accommodation across the country. The resilience of the CAPREIT portfolio is clearly laid out in this slide, as our strategy of targeting the mid-price market has worked exceptionally well. You'll notice that each -- in each of our gateway cities, the affordability proposition remains intact. Additionally, it is this income earning market that's being targeted by government assistance programs during the pandemic. The annualized average monthly rents in our key cities of Toronto, Montréal and Vancouver remain well below average income and represent a much smaller percentage of income than owning a home. In these challenging times, the affordability of apartments remains a distinct advantage as to why so many Canadians are affected by the COVID pandemic. As I said before, apartments have traditionally been countercyclical in nature in terms of their performance. Affordability has helped CAPREIT perform in both good times and in bad. Resilience is the foundation strategy of our company. I'll now turn things over to Scott to outline what's one of our most important advantages in these challenging times, our strong balance sheet and liquidity position.

[Scott Cryer, Chief Financial Officer]

Thanks, Mark. Turning to Slide 14. You can see that we are clearly in a very strong financial position at the end of the first quarter, with a conservative debt to gross book value of 36% and total liquidity of approximately $280 million. We also have $800 million in Canadian unencumbered properties available to generate funds should we need it with approximately $328 million in our apartment portfolio and $472 million of that being our MHC portfolio. For the remainder of 2020, we have approximately $540 million to $590 million in renewals and refinancing in a favorable interest rate environment with 5 and 10 year money being offered at low interest rates between 1.6% and 2%. As an example, subsequent to the quarter end, we locked a total portfolio of mortgages of $165 million on refinancing at an average rate of 1.89%. We expect we will continue to benefit from the current low interest rate environment through the balance of the year. Although the debt markets have had some changes in recent, we are confident that the debt marketing and financing in our industry will remain highly available for our properties, given their stability and the strong fundamentals of the rental residential business. Turning to our balance sheet on Slide 15. You can see, we continue to maintain a strong and flexible financial position at quarter end with conservative leverage, strengthening coverage ratios and historically low interest cost on our mortgage portfolio. Based on stress testing performed by management on financial debt covenants, we concluded that there is significant room on each of our covenants when compared to their set thresholds. And again, debt to GBV was a solid 36% at quarter end, providing financial resources and flexibility to help us work through these challenging times. Our mortgage portfolio remains well balanced, as shown on Slide 16. Looking ahead, our current top-up renewal mortgages through 2034 will provide further significant liquidity, in the event that this pandemic gets deeper or last longer than we hope. As of March 31, as said, we expect to raise between $540 million and $590 million in total mortgage renewals and refinancings, including operating leases purchased to date. You can also see on this graph that we have considerable opportunity to reduce our long-term interest cost in today's attractive interest rate environment. The current 10-year estimated rates, averaging about 1.8, are well below expiring mortgage rates of between 2.7% and 3.4% over the next 3 or 4 years. An example of some very attractive financing recently locked in was a $45 million mortgage that we closed at 1.59% for a 10-year term, which included a top-up of $39 million and is expected to close shortly. Overall on liquidity funds, Slide 17 demonstrates that we will remain well positioned to work our way through these challenging times. As at March 31, as noted, we had approximately $282 million in available liquidity, including $99 million borrowing capacity on our line of credit and $182 million of cash and cash equivalents. Our total equity raise of $1.1 billion in 2019 positioned us strongly as we entered 2020. With our strong balance sheet and liquidity positions, we are confident we have the financial resources to weather these storms. And in addition, we remain highly opportunistic in our growth programs, and our balance sheet strength allows us the potential to capitalize on accretive acquisition opportunities should they appear. I'll now turn things back to Mark to wrap up.

[Mark Kenney, CEO, President & Director]

Thanks, Scott. Looking ahead, we are confident that our long-term focus of making CAPREIT the best place to live, work and invest will take us through this challenging time. We are working diligently to communicate with our residents, and we remain committed to providing them with a safe and affordable place to live. I thank our residents for their support over the last few months. Our team is capitalizing on the efficient and well-tuned operating platform that we've built over the last 22 years to deliver the best possible results. I especially want to thank everybody at CAPREIT for their hard work and commitment. I want to especially thank our brave front line who've worked throughout this pandemic, equipped with PPE, we thank you for your commitment. It is the experience of our team that will get us through these difficult times. And from an investment perspective, the apartment industry remains a very defensive sector, one that has proven its ability to generate solid returns in both good times and in bad. At CAPREIT, we remain very optimistic about our future. We have a highly conservative balance sheet with low leverage, strong liquidity and numerous sources of capital, and the current attractive financing environment provides us with a real opportunity to generate significant interest savings for the long term. In summary, to manage this difficult period, we have returned our business to its basics: resident outreach to help through the payment cycle, filling our property vacancies and finding operational efficiencies. It is this focus that will help us manage through this time and emerge stronger than ever before. Thank you for your attention this morning, and we would now be pleased to take any questions that you may have.

[Operator]

[Operator Instructions] The first question is from Jonathan Kelcher of TD Securities.

[Jonathan Kelcher, Analyst]

First, just -- well, I guess when we get to the point, when you're no longer doing the deferrals on increases in renewal rents, how will the process work in terms of reinstating those?

[Mark Kenney, CEO, President & Director]

It's different by province and how we reinstated will be different by province. For example, in the province of Québec, we may end up serving the increases and then just deferring them because we don't want to lose the opportunity for the year. In the province of Ontario, you're simply moving the anniversary date of the apartment. So you're essentially just losing the rent increase for however many months we decided to continue this, which just accelerates the early collection of revenue for the year after. So it does vary. In simple terms, Jonathan, it varies province by province.

[Jonathan Kelcher, Analyst]

Okay. And will you -- will it be sort of a national, you'll decide, say, July 1, that you're reinstating the rent increases or August, whatever month it is?

[Mark Kenney, CEO, President & Director]

Yes. We won't pick a month to do it across the board. As I said, we may reactivate the process in different provinces at different stages. It has a lot to do with the legislation. I'm happy to walk you through that offline. But for now, the message that we're giving to CAPREIT residents is that we're deferring rent increases, whether it be by not serving the rent increases or by just not charging them.

[Jonathan Kelcher, Analyst]

Okay. And then just switching gears. How has turnover been in April and May versus last year, for instance?

[Mark Kenney, CEO, President & Director]

It is very difficult to call a trend of any sort because what we did see in turnover, again, very dependent on where you are. But in the city, we did see some people go home. When you had a younger -- where you have younger population of service workers, we saw people go home. So we saw a slight uptick in turnover. I would call that the settling month in terms of the pandemic. I wouldn't expect to see that as a continued trend, but I think, in general, it would be fair to say that we would see a mild uptick in turnover going forward. I'm very cautious when I call that because, again, we have really 2 months of data. But if there's challenging economic signs, it tends historically to generate higher turnover rates.

[Jonathan Kelcher, Analyst]

Okay. So for 2020, overall, you think turnover will be a little bit higher than it was in 2019?

[Mark Kenney, CEO, President & Director]

Going by history, in challenged economic times, you do tend to see more apartments turnover because life circumstances tend to change more during an economic shock. So yes.

[Operator]

[Operator Instructions] The following question is from Brad Sturges of Industrial Alliance.

[Bradley Sturges, Equity Research Analyst]

Maybe just sticking with the comments there about your same-property NOI and just maybe looking at market rents, have you seen much of a change in the market rents you're seeing across the portfolio? And just remind me, what you think the gap between in-place rents and market rents would be?

[Mark Kenney, CEO, President & Director]

You could look at the gap as being just the revenue increases you're seeing on turnover from the past. I think we've got -- if you look at those numbers combined, I'd turn to Scott for the actual portfolio number, it's in the neighborhood of around 15%. I think that -- Scott, could you help me with that number?

[Scott Cryer, Chief Financial Officer]

Yes. We're around 13, I think, just slightly below. And we continue to see realization of those increases at not the identical levels but fairly strong levels. So -- and similar to previous calls, I think we continue to see them across all markets nationally. Some growth in everywhere from Halifax to Québec, Ontario, et cetera. Those are markets that are kind of driving those increases still.

[Mark Kenney, CEO, President & Director]

The number to be mindful of, and we just don't have the confidence to see a trend to look forward to is that a decline in mark-to-market rents that are offset by an increase in turnover can actually yield more bottom line revenue. It's just very, very early to call that. CAPREIT typically does not like the incentive gain because we think that it hides the true nature of income. So we will typically price adjust to attract. But during a pandemic we don't know if anything is based on price because market is not functioning normally. So adjusting price up or down can sometimes have an absolute 0 effect because there's is just nobody moving in the marketplace. So I'd just say that what we need to be mindful of here going forward is the combination of increased turnover and a substantial change in market rents, if it happens.

[Bradley Sturges, Equity Research Analyst]

Okay. From a margin perspective, do you -- what would you expect the change to be year-over-year for the portfolio right now, given there might be more, I guess, cleaning cost? Would you expect a little bit of an impact on margin?

[Mark Kenney, CEO, President & Director]

No. I think that every portfolio functions a little bit differently. I -- it again is way too early to call any sort of change. But generally, we're seeing cost slowdown at this stage, which isn't indicative of profitability at all. It could be deferring expenses for a quarter down the road, but we're not seeing anything material at all on the cost front. If anything, we're seeing expense relief at the current time.

[Bradley Sturges, Equity Research Analyst]

And still, I guess, early days, but how does pandemic change your thought process when it comes to proceeding with development entitlements? Or does this -- on the acquisition side, does this kind of reinforce the focus on the newer build properties rather than value add?

[Mark Kenney, CEO, President & Director]

Well, I think what you're going to see is, if affordability becomes the topic in challenged economic time, you will see a return to value-add focus for a lot of apartment investors. The question will be, can certain locations see an offset in development cost to make up for potential downward push on rents and that's to be seen. We've seen real uncertain data coming out of new construction. New construction has done exceptionally well in some areas and is weak in others. So I think when it comes to the $5 a foot per month rental market, I would think you would see pressure on that in difficult economic times. The question is, does the pro forma look better with potentially reduced construction cost. We're not seeing any evidence of that right now. So we're going to continue on the path of entitlement and getting the properties ready for permitting. And I think that will just benefit CAPREIT tremendously being ready to pull the trigger on building permit-ready sites. So we will not slow down our entitlement position, but it's too early to call what it really does to our program. Again, we're always quite cautious until we get to the point of entitlement.

[Operator]

The following question is from Michael Markidis of Desjardins.

[Michael Markidis, Real Estate Analyst]

So I guess just to start on the Brad's question on the entitlement and development, maybe you could just give us an update on where you would stand with Wellesley and Davisville?

[Mark Kenney, CEO, President & Director]

Yes. We -- you'll remember Wellesley 128 units. It's been delayed. The prehearing was delayed for a month to August, and the same thing for Davisville. We've seen another 1-month delay in terms of the settlement hearing. So right now, we're getting these delays. We don't know if that's definitive or they'll keep pushing out the delays for the hearings, but it's not a profound effect. It's just -- both have been pushed out about a month.

[Michael Markidis, Real Estate Analyst]

Okay. And then just circling back to the topic of rent collection. Obviously, you did a great job and had a great experience in April in terms of collecting 98%. And I realize it's early, but do you have any sense on where you're tracking in May versus where you've been tracking in April as of this date?

[Mark Kenney, CEO, President & Director]

There is no change in trend. I've always been very cautious about quoting numbers until the end of the month, but I would say that you can look forward to seeing no change in trend. If anything, government programs, people were getting settled into them in the month of April, and clearly, those government programs are fully in place for the month of May. And the mid-market nature of the CAPREIT portfolio is definitely revealing itself to be well suited to the income earning level of our residents and the programs that are out there.

[Michael Markidis, Real Estate Analyst]

Okay. So just paraphrasing, no reason at this juncture to expect it would be any worse than April.

[Mark Kenney, CEO, President & Director]

That's very safe to say.

[Operator]

The following question is from Mario Saric of Scotiabank.

[Mario Saric, Analyst]

I just wanted to stick to the market rent discussion and realizing that it is still very early days. There was an article that came on, I think, it was last week, highlighting maybe a bit of pressure in condo rents month-over-month, so -- like May versus April, April versus March in some of the bigger markets in Canada, there is a huge gap between condo rents and your rents in the portfolio. Can you maybe just talk about how insulated the market rents might be for multifamily, if we continue to see condo rents come down?

[Mark Kenney, CEO, President & Director]

Yes. We're really seeing the divergence of multifamily value-add and multifamily new construction. I put the condos in the category of multifamily new construction. So the pressures there are obvious. Higher income earners aren't -- that have been displaced due to COVID are not getting government assistance programs to match their previous income. That goes without saying. The second factor is, we're unsure of the full effect of Airbnb units that are being converted into long-term rental. A lot -- and I say that because we're not entirely sure of the size of the Airbnb market in places like Toronto, Vancouver, Montréal, but we think it's pretty big, and we know that those people are under tremendous pressure to keep revenues alive. So the combination of those 2 factors, I'm not sure which one is impacting more, but it has something to do with both, and that's definitely got pressures in the condo end of the market. I don't see that affecting us for 2 primary reasons. I think what you might find is the people that are choosing a lifestyle in Toronto may choose our value-add portfolio, I'm going to say, over being in a condo due to affordability. They want to stay in the city. And I think that you'll see an effect of that. And then I think you'll just see the general affordability proposition holding true. We have a lot of mark-to-market runway in our portfolio that is not lost on people. There will be a phase where people readjust because they've had an economic shock to their income, and they've had to move on for different reasons. But I feel highly, highly confident that, that mark-to-market embedded value in the CAPREIT portfolio is going to ensure us through these times.

[Mario Saric, Analyst]

Got it. Okay. And then just on immigration, clearly it's a big driver of rental demand nationally. Clearly, there is a freeze in terms of international immigration right now. How do you see that playing out and any implications for your portfolio depending on, I guess, the length of the freeze over time?

[Mark Kenney, CEO, President & Director]

Yes. I think it -- immigration is one of several factors that had huge pressure on the housing situations in Toronto, Vancouver, Montréal. We've got -- we've talked about the urbanization, natural population growth, aging seniors, the student populations. There are still -- and of course, the ever-increasing pressures on getting supply to market. So I do think that we are well protected from all of those factors. And I do think, again, the affordability of the CAPREIT apartment really ensures us better than anyone else from changes in demand factors. People still have very good value with their CAPREIT leases, and that, I think it will get us through.

[Mario Saric, Analyst]

Got it. Do you have a sense of like what percentage of demand last year would have been from international immigration for the portfolio? And then maybe what percentage of the existing tenant base would be students today?

[Mark Kenney, CEO, President & Director]

Well, I really -- and not that we don't know our numbers, but I really don't know the overall effect on the overall market. And I think it's the overall market that has effect in every sector from the condo buying sector, home buying sector to rental high-end rental mid-tier. So it is difficult to say. There will be an effect also with foreign students, but how long that will go on for is to be determined. I think that when schools return to a bigger state of normal, you'll see a very quick return in that demand segment as well. So very -- and I'm not trying to evade the question, Mario, it's just so early to say. It really is early to say.

[Mario Saric, Analyst]

Right. But in terms of the CAPREIT-specific portfolio, do you have a sense of like what percentage of the portfolio would be rented out to students?

[Mark Kenney, CEO, President & Director]

Quite a small percentage. We have to look at where the universities or secondary education institutions are situated. But if you want to talk about like direct correlation buildings, we would have less than a dozen properties that are specifically serving post secondary.

[Mario Saric, Analyst]

Got it. Okay. And in the past, you've kind of highlighted -- and this comes back to the value-add assertion, you've highlighted fairly large waiting list for tenants in your bigger markets like Toronto, can you give us a sense of where waiting list stand today? And how they've been impacted, if at all, by the crisis?

[Mark Kenney, CEO, President & Director]

Yes. I think that the demand is difficult to read because people in the last 4 weeks have been in some state of lockdown. So it's a very unusual time unless you absolutely have to, to be looking to move. I don't think that, that indicates anything. I think that during the period of lockdown, you can obviously expect different behavior. As things ease up, I would say, the month of -- particularly the month of June will tell us a little bit more clarity on where the market's at. That's traditionally a high rental month, June, July, and we'll see how many people are returning to the marketplace. There are people still renting, but really, it's people that must move that we're seeing more than anything.

[Operator]

Thank you. There are no further questions registered at this time. Management has asked that only analysts who follow CAPREIT ask questions on the call. Anticipating a lot of questions, this step has been taken to ensure there is sufficient time. Please call management at your convenience after the call has concluded. I will now turn the call back over to Mr. Kenney.

[Mark Kenney, CEO, President & Director]

I'd like to, first of all, thank everybody for their time and attention today. And if you have any further questions, please don't hesitate to contact us at any time. Thank you so much, stay safe and goodbye.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.