Minto Apartment Real Estate Investment Trust

TSX:MI.UN

Earnings Call Transcript 2024-Q1

[Operator]

Good morning. My name is Ludy, and I will be your conference coordinator today. At this time, I would like to welcome everyone to the Minto Apartment REIT 2024 First Quarter Financial Results Conference Call. [Operator Instructions]

Before we begin, I want to remind listeners that certain statements about future events made on this conference call are forward-looking in nature. Any 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 recent news release and MD&A dated May 7, 2024, for more information.

During the call, management will also reference certain non-IFRS financial measures. Although the REIT believes these measures provide useful supplemental information about its financial performance, they are not recognized measures and do not have standardized meanings under IFRS. Please see the REIT's MD&A for additional information regarding non-IFRS financial measures, including reconciliations to the nearest IFRS measures. Thank you.

Mr. Li, you may begin your conference.

[Jonathan Li, executive]

Thank you, operator, and good morning. This is Jonathan Li, CEO of Minto Apartment REIT. Also on the call is Eddie Fu, our Chief Financial Officer; and Paul Baron, our SVP of Operations.

We're off to a great start in 2024. We delivered strong operating performance in the quarter, while taking further measures to strengthen our balance sheet and reduce exposure to variable rate debt. As a result, as you can see on the bottom left-hand chart, our normalized FFO per unit increased for the fifth consecutive quarter, culminating in growth of 27.3% compared to Q1 last year. And our normalized AFFO per unit increased by 32.8% compared to Q1 last year.

Normalized SPNOI and normalized SPNOI margin increased materially year-over-year, reflecting continued strong revenue and rent growth and lower operating expenses due in part to a mild winter. We continue to accretively strengthen our balance sheet during the quarter building on our efforts from last year. We sold 2 properties in Ottawa and received payment of the CDL for Fifth + Bank during the quarter. The proceeds from both transactions, totaling almost $100 million, were used to pay down our revolving credit facility.

As a result, interest costs in the quarter were 11% lower than last year, variable rate debt made up just 6% of total debt at quarter end, and both debt to GBV and debt to adjusted EBITDA decreased materially, which demonstrates the solid progress we have made in strengthening our balance sheet, while at the same time, growing cash flow per unit.

I'll now invite Eddie Fu to discuss our first quarter financial and operating performance in greater detail. Eddie?

[Edward Fu, executive]

Thank you, Jon. Turning to Slide 4. Same Property Portfolio revenue was $38.2 million, an increase of 6.1% from Q1 last year, reflecting higher average monthly rents for unfurnished suites, partially offset by slightly lower occupancy and lower furnished suite revenue.

Normalized Same Property Portfolio NOI increased 12.3% year-over-year to $24 million, while the normalized NOI margin rose by 350 basis points to 63%. The growth reflects higher revenue and lower operating expenses. As John noted, our normalized FFO and AFFO per unit increased by 27.3% and 32.8%, respectively. Normalized AFFO payout ratio was 62.3%, a reduction of 1,800 basis points from Q1 2023.

Turning to Slide 5. This chart highlights the REIT's steady quarter-over-quarter growth in average monthly rent and strong quarterly gain-on-lease performance. Over the last 2 years, we have captured consistently strong gain on lease even in the slower winter leasing season.

Moving to Slide 6. We signed 369 new leases in the first quarter, generating gain on lease of 12.5%. We had double-digit gain on lease in every market except Toronto, where the gain on lease was impacted by the mix of suites that turned. In Toronto, approximately 70% of the 95 new leases were executed at Niagara West in the popular King West neighborhood. This property is not subject to rent control and has sitting rents that are closer to market.

As you can see on the table, the new average monthly rent in Toronto is above $2,800 per month, which is much higher than our portfolio overall. Excluding Niagara West, our gain on lease in Toronto was 19% and 13.8% across the portfolio. The embedded gain-to-lease potential at the end of Q1 remained strong at 15.9%, representing $21.4 million of annualized incremental revenue growth.

Moving to Slide 7. The Same Property Portfolio annualized turnover was 15.9% in the first quarter. This was in line with seasonal norms and move-ins kept pace with move-outs, resulting in stable closing occupancy. Turnover in Calgary was 29% and strong demand supported high closing occupancy at 99.1%. Ottawa experienced flat turnover year-over-year and maintained occupancy of 97.7%. And turnover in Montreal was in line with seasonal norms, while occupancy increased to 96.2%.

Turnover in Toronto increased driven by tenants in non-rent-controlled suites. There was a slight drop in closing occupancy in Toronto as lease-up of one-bedroom suites has lagged during the slower leasing season. We are strategically using a small amount of promotion to increase occupancy of these suites which has shown early signs of success. We continue to expect turnover to slow in 2024 as the gap between sitting rents and market rents remain elevated.

On Slide 8, we provide an update on our commercial and furnished suite portfolios. For our commercial portfolio, we had year-over-year revenue growth of 17.3%, driven by the opening of Dollarama at Niagara West during the quarter. At Minto Yorkville, we have received strong interest in the ground floor retail space for different types of users, including high-end restaurants and luxury retail.

It is a trophy location across the street from the Four Seasons Toronto, with excellent visibility and curb appeal, and we are excited to add vibrancy to the corner. We expect to have a lease signed this year and to start receiving lease payments in 2025, factoring in the time for preparing the space for the new tenant.

For our furnished suite portfolio, revenue declined by 6.9% compared to Q1 last year due to lower occupancy. Minto Yorkville in Toronto was impacted by seasonality as well as the continued recovery from the writers' and actors' strikes. Minto One80five in Ottawa was impacted by fewer transient stays. Average monthly rent for the furnished suites increased 22% compared to Q1 last year, which partially offset the impact of lower occupancy. The furnished suite inventory has also been reduced by 11 suites compared to Q1 2023, and we continue to evaluate further reductions.

Turning to Slide 9, normalized property operating costs for the Same Property Portfolio decreased by 2.2% year-over-year in Q1 as a mild winter resulted in lower snow removal and lower repair and maintenance costs. Same Property Portfolio property taxes increased 4.7% and due to changes in assessed value in Montreal and Calgary, and increased rates in Ottawa and Toronto. Utility costs declined 11.4%, primarily due to a large drop in natural gas costs that reflected lower rates and decreased usage due to mild winter weather.

Moving to suite repositioning on Slide 10. We repositioned 7 suites in the first quarter, generating an ROI of 9.4%. Over the last 4 quarters, we've repositioned 91 suites and generated an average ROI of 9.7%. We expect to reposition 50 to 90 suites this year, that is fewer than previous years, as we strategically assess each repositioning along with lower anticipated turnover.

Turning to Slide 11, we have provided our key debt statistics. Our maturity schedule remains balanced, with no more than 9% of term debt coming due in any of the next 5 years. As of March 31, 2024, the weighted average turn to maturity on our term debt was 5.81 years, with a weighted average effective interest rate of 3.43%.

We have steadily reduced our exposure to expensive variable rate debt, which peaked in the first quarter of 2023 at 26% and ended the current quarter at 6% of total debt. We also materially improved our leverage ratio, decreasing debt to gross book value by 140 basis points to 41.4%, and decreasing debt to adjusted EBITDA by 0.85x to 10.94x. Total liquidity was approximately $188 million at quarter end.

I'll now turn it back over to Jon.

[Jonathan Li, executive]

Thanks, Eddie. Moving to Slide 12. We continue to have an attractive pipeline of growth projects. We are advancing the intensification at Richgrove and Leslie York Mills, with stabilization of both projects expected in 2026. Construction continues to progress well at the CDL properties and the next stabilization is expected in the fall of 2024.

Our previous capital allocation decisions have strengthened our financial position, so we will evaluate these upcoming purchase opportunities with discipline and careful consideration of our cost of capital, future cash flow per unit growth, pro forma leverage, market sentiment and other factors. As shown with Fifth + Bank last year, we are disciplined with our capital and will only exercise any purchase option if we are confident it is in the best interest of the REIT.

We also note that MPI has agreed to amend the terms of The Hyland CDL. The expiry date of the purchase option and the CDL maturity date have been extended. And beginning in June, the coupon payable by MPI will increase from 6% to 7.07% to match the current interest rate on our revolving credit facility, subject to a range. You can find updated photos and other details on the project in our development pipeline on Slide 13 and 14.

I'll conclude with our business outlook on Slide 15. We expect that rental housing demand in Canada will remain strong for the foreseeable future. Even with the recent initiatives from the federal government to address both supply and demand issues, we expect the fundamentals underpinning the sector will remain robust, including strong population growth relative to all other G7 countries; insufficient supply of new housing, which remains inelastic; and continued affordability pressures driving many to the rental market.

Going forward, we will continue to focus on the following: optimizing revenue and expenses, growing FFO and AFFO per unit, exploring attractive refinancing opportunities, minimizing our credit facility balance and critically assessing the growth opportunities in our pipeline. With our high-quality portfolio and strengthened balance sheet, we are well positioned to capitalize on the robust rental market fundamentals and deliver continued strong financial performance.

That concludes our prepared remarks. Operator, please open the line for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Frank Liu from BMO Capital Markets.

[Frank Liu, analyst]

Just with respect to the impact of gain on lease in Toronto portfolio from the leases executed at Niagara West, I'm just curious if this is something unique this quarter, where you happen to have higher proportion of leases executed at this property? And how should we think about this impact moving forward?

[Paul Baron, executive]

Yes. Great question. Thank you. So it is a bit unique. We've talked a little bit about it before. But in Toronto, we're seeing our vacancy predominantly in our one-bedroom suite type. We've been focused on working through this availability using tactical promotion, some rent changes and really creative marketing to lease it up. We've seen signs of this success. You see the number of leases at Niagara West in the quarter.

From a competitive standpoint, it's due to a few reasons. We're seeing some pressure from the shadow condo market that's coming online, particularly on the smaller suite types, those one-bed units. Some investors are chasing cash flow and offering slightly lower rents. At the same time, Niagara West is still facing a little bit of pressure from the lease-up [ as well ]. So that's the development just down the road that, at the end of Q1, had about 35% availability.

That said, we were able to get through a lot of those one-beds in Q1, and we continue to see strong interest in our 2s and 3s. And really broadly across the Toronto portfolio, the embedded rent in the portfolio remains strong. We're also anticipating a bit of an uptick as we enter the busy leasing season. Overall, net positive absorption according to Urbanation in the Toronto purpose-built market in Q1. So yes, we -- it's a bit unique, to answer your question.

[Frank Liu, analyst]

Yes. That's great. This is kind of leading to my second question. I'm not sure if you have a preliminary occupancy figure for Toronto in April and May that you can -- you may have handy, because I think you commented that you started using some small incentives to drive occupancy. So just curious if you have any figures handy for April or May.

[Paul Baron, executive]

What I can say is that we are seeing results from the promotions and activities that I've described in April and May.

[Frank Liu, analyst]

Got it. And then so I guess like with some pressure from condos and other newly completed rentals in Toronto, I also see the market rent estimates coming down slightly. Is this a sign -- like do you think this is a sign of like softness in the Toronto rental market? I mean we have seen results from rentals [indiscernible] that's like the average rents coming down slightly in recent losses. Just want to hear your thoughts on this.

[Paul Baron, executive]

Yes, it's certainly something we're watching closely. What we also know is the condos that are delivering through the remainder of 20 were purchased on average above $1,000 a square foot. The good news is that translates into about $5 a foot for those investors that are going to rent those out in order to cover their mortgage costs, condo fees and taxes. So the economic rent of the new competition coming online as the year continues, those are quite high versus some of the market rents for the purpose-built in the market.

[Operator]

Your next question comes from the line of Jonathan Kelcher with TD Cowen.

[Jonathan Kelcher, analyst]

First question, just a quick one on Dollarama. Was it there for the full quarter? Or did that come on stream partway through?

[Paul Baron, executive]

No, it came in partway through. So cash flow started on that one Feb 16, and they opened their doors officially first week of March.

[Jonathan Kelcher, analyst]

Okay. That's helpful. Secondly, just the furnished suites, it is more seasonal, and last year there was the writer strike. What's your sense in terms of how Q2 and Q3 are shaping up this year occupancy-wise?

[Paul Baron, executive]

Jonathan, it's a good question. I mean the business has evolved. We're seeing the transient business for the furnished suites down year-over-year. That said, we've seen an uptick in government bookings at 185, and the film business continuing to come back at Yorkville. So I would say we're trending slightly below our expectations that we shared earlier in the year for the furnished suites.

[Jonathan Kelcher, analyst]

Okay. And how much -- how far out can you see on that stuff? Like what's the booking time frame?

[Paul Baron, executive]

Yes. I mean we've got really good visibility kind of 3 months out. And depending on the booking type, we've got bookings out for the remainder of the year. But I'd say good visibility really 90 days out.

[Jonathan Kelcher, analyst]

Okay. And then you talked, Jon, a little bit about the CDLs maturing this year. What are really some of your options there? What options are you guys looking at and thinking about?

[Jonathan Li, executive]

Sure. Thanks, Jonathan. So we're looking at a whole bunch of different options. I guess just to lay them out, it'd be don't buy them. It would be buy them stand-alone. It would be buy them with a partner. It would be sell assets and use those proceeds to buy them. And it could be a combination of any of those things. It could be buying one instead of 2. So the reality is, is all options remain on the table for us. Obviously, some are financially better than others given current interest rate environment, i.e., the stand-alone acquisition of both is probably the most dilutive, and then it gets better from there with everything else that I just talked about.

And I guess the good news is, is we don't have to make a decision now. We pretty much have -- on one of them, we have until the end of the year and then the other one we have until the beginning of the next. And so hopefully, things change between now and then. I know I've been saying that to myself for the last 2 years. But it does look like there is some light at the end of the tunnel, I just don't know how long the tunnel is. And so I think time is our friend. You've got the Canadian -- the Bank of Canada likely making a decision in June and a second decision in July. We have, at least until then, to monitor what we're doing and I think that's what we're going to do.

[Jonathan Kelcher, analyst]

Okay. And then would 88 Beechwood fall into the same sort of thought process?

[Jonathan Li, executive]

Yes, it would. It's kind of like middle of -- I mean this is -- I think this is a big project in Ottawa, 227 units. Leasing just started. The building is in really good shape. I walked in a couple of weeks ago, and very exciting building. But I think the lease-up time is probably going to take a little while. And so I think we have some time there as well.

[Operator]

Your next question comes from the line of Jimmy Shan with RBC Markets.

[Khing Shan, analyst]

Just a follow up on the Toronto condo rents that are flatlining. So it sounds like the Niagara West is a bit of a situation, a bit of a unique one. Curious what you're seeing in your other Toronto assets, I'm thinking like the Yorkville, the Roehamptons. Where are sort of market rents trending in those assets?

[Paul Baron, executive]

And Jimmy, I don't want to be too pessimistic. Just going back to Niagara. In Q1, we did push through renewal increases of 3.92% on average for that property. But to your question on the other properties in Toronto, so really seeing the availability on the one-bed side. I think the good news is, as I shared, doing some pricing adjustments at those properties as well, but still capturing significant embedded gains on turnover on new leases. So we are seeing pressure across the board in Toronto on the one-beds. But with the pricing adjustments and a little bit of promotion that we put in place, we're seeing success and we're capturing those strong embedded rents that are in those rent-controlled properties.

[Jonathan Li, executive]

We're also seeing, I'd say, barbelled embedded rent opportunities. So I'd say -- you mentioned Niagara West as well as Yorkville, I'd say, those are lower embedded rents. And I'd say the other buildings in Toronto, all the other ones, including Roehampton and Richgrove and Leslie York Mills and High Park, those are all very high in terms of the embedded rents just given kind of the cost and where the competition is in terms of that high monthly rent.

[Khing Shan, analyst]

Right. Okay. And it sounds like it's the small -- as you mentioned several times, it's the small suite size. I guess, the supply, the deliveries in the small suite side that's causing a little bit of an issue in Niagara West. That's how you'd characterize it, right, as opposed to a broad-based kind of high-end market issue?

[Jonathan Li, executive]

I think that's accurate. I think we've been discussing the one-beds for a couple of quarters now, right? And even then, the framework that we've disclosed or at least talked about around our overall growth in that equation that we talked about with renewals and with turns and growth related to both of those, we've been pretty consistent, right? We're getting 3% to 3.5% growth on our renewals, and we're getting -- we've been saying low teens to mid-teens on our turns, and that's what we keep getting. And I think that framework is still relevant for the rest of this year and likely for next.

And so I think we were asked a question last quarter around are we basically sandbagging or gain to lease is going to keep growing, and we've very consistently said, no, we don't think that that's going to keep growing to the sky. And I think the framework that we've given folks for the next couple of years still apply.

[Khing Shan, analyst]

Okay. And then the CMHC upward financing of $55 million to $65 million, what are you looking to do there?

[Edward Fu, executive]

Jimmy, it's Eddie here. So in terms of upward refinancing, I think that's still a good range. Right now, we're still just waiting for our paperwork to come in or waiting for certificates of insurance. And once we have that, we can then proceed with the financing.

[Khing Shan, analyst]

Okay. And your expectation would be sometime this quarter you'd be able to get those certificates?

[Edward Fu, executive]

That's correct.

[Operator]

Your next question comes from the line of Matt Kornack from National Bank Financial.

[Matt Kornack, analyst]

Just following up on that line of questioning around kind of the supply side and delivery of condos. I mean this is a legacy issue for condos that were under construction as a result of low financing costs during the pandemic. Can you give us a sense as to what that delivery cycle looks like? Because presumably, there's a bit of a vacuum developing behind it. And then obviously, the government is trying to encourage new supply of apartments or purpose-built rental, but are you seeing kind of an indication that people are moving ahead with those type projects at this point?

[Paul Baron, executive]

Yes, it's a good question, Matt. So I would say I don't have the facts right in front of me, but just the unsold condo inventory in the city right now is amongst the highest it's been in recent years. So I think, to your point, the economics are getting more challenging. The other point that I had shared earlier was just the average cost of the condos that will be delivered into the future will be above that $1,000 a square foot mark, translating into, in our view, rents that need to be in excess of $5 a foot, which looks very different as a competitor when they come into the market.

[Jonathan Li, executive]

I think we're seeing -- the information that we've read is like there's going to be a bit of a spike in -- a small spike in supply in the early -- in the next quarter or 2. But the number of projects that are being mothballed right now is kind of like at an all-time high. So we expect that long-term supply to start moderating quite significantly on the condo side.

[Matt Kornack, analyst]

That makes sense. And then if you look at your other markets outside of Toronto. Ottawa, I think there's a little bit of purpose-built rental that was highlighted as potentially something that may temper rent growth. Calgary is obviously strong. Montreal, it does seem like your occupancy has crept up and continues to creep up, but there's very little supply in that market. Is this really a Toronto specific? And maybe if anybody had Vancouver-specific issue?

[Paul Baron, executive]

We're really seeing it as a Toronto specific issue, Matt.

[Operator]

[Operator Instructions] Your next question comes from the line of Kyle Stanley with Desjardins.

[Kyle Stanley, analyst]

You mentioned, Jon, I think just in your -- in answering the previous question, the stabilization of Beechwood maybe taking a bit longer than expected. Just curious what might be driving that? Is that maybe indicative of the market in Ottawa or a competing product? Just thoughts there.

[Jonathan Li, executive]

No, no, no. I didn't mean that it was taking longer than expected. I just think that there's a gap between when we expect that to stabilize when the other 2 Vancouver projects are stabilizing. So I think our target was always kind of middle of 2025 for that one.

[Kyle Stanley, analyst]

Okay. I think mean, Paul, you just kind of hit on this, I think, along Matt's line of questioning. But you guys have been very transparent with the softness and then maybe the one-bedroom rents, and it being kind of -- within a few specific properties, strategic incentives being offered. Is it safe to say that maybe this softness has probably fell for the next couple of quarters as we see maybe this peak delivery cycle? And then to that end, as we hit this vacuum of new deliveries, maybe early '25, you'll see that softness dissipate a bit, is that how you're thinking of things?

[Paul Baron, executive]

I think that's a fair assessment. As you know, Kyle, we're working it hard, creative marketing, promotions, really trying to increase demand, and we've seen early signs of that in the early part of this year. But I think your assessment looking forward is consistent with our view.

[Jonathan Li, executive]

And just to give you a very specific example of some of the things that we're doing. We were going through High Park Village a couple of weeks ago, and we have a number of vacant one-bedrooms and they're like 480 square feet. There's no air conditioning, there's no washer/dryer in the unit and we're asking $2,400 a month. And so we saw some really nice uptake because we did open houses when we reduced that by like $100. And so that's what we're talking about here, right? It's kind of like $100 on quite a high rent for something that -- the product offering is what I just described.

And so those are the types of things that we're doing, it's -- and I think we're seeing some success in terms of filling up some of these vacancies. But we are optimistic about the spring leasing season. And we think we'll be in a good spot, consistent with the framework that we've been describing for many quarters.

[Operator]

Your next question comes from the line of Brad Sturges with Raymond James.

[Bradley Sturges, analyst]

Just wanted to follow up on the discussion around the CDL program and just the thinking around the options that you have, that you highlighted. I guess my question would be how -- given there's -- it's tied to your cost of capital, I'm curious to know like how much of your -- how much of a decline would you kind of need in your cost of capital for the projects in terms of acquisition [ depends ] a little more? Is there a range you're looking for in terms of reduction in cost of capital before it made sense to pull the trigger on acquisition?

[Jonathan Li, executive]

Yes. The framework, Brad, is basically -- not the framework, but the current situation is cap rates are in like that high 3%, low 4% range, and our cost of financing right now is in the mid-4% range. So we love that to be closer. But all of those different scenarios that I walked through on a previous question, the math is different for all of those. So there isn't necessarily a range that we'll -- a bogey that we're going to hit and automatically do a transaction. It's definitely going to be an educated call on what does this package look like as a whole.

But I would say we understand that the market tolerance for any type of dilution in today's market is extremely low. And I would say even lower than what it was even back in January and February. So as we try to be an adaptable, nimble management team, we're adapting as we go here. The bogeys aren't set in stone, they're changing. And we're trying to be mindful about what our growth looks like over the short, medium and long term and the quality of our portfolio over that same time period. We're going to balance it all.

[Bradley Sturges, analyst]

Makes sense. And again, I guess in an ideal world, you can buy both Vancouver assets and you start adding scale there. But in a scenario that that's not feasible, do you think it does make sense to maybe execute on one versus both and not quite the scale that you're looking for? How do you think about that in terms of the strategic footprint?

[Jonathan Li, executive]

Yes, pretty similar to what we've been saying all along, which was our partner is building a very large platform there. And the pipeline in Vancouver from Minto Private is robust. So if we don't execute on 1 or 2 right now, we can do something with them later. And that's okay. I mean that's one of the advantages we have with such a well-capitalized partner that is an active developer.

[Operator]

And there are no further questions at this time. I'd like to turn it back to Mr. Jonathan Li for closing remarks.

[Jonathan Li, executive]

Thank you. And thank you, everyone, for your time. We look forward to speaking with you again in the summer. Take care.

[Operator]

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.