© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen. Welcome to the CAPREIT Fourth Quarter Year End Results Conference Call. I would like to turn the meeting over to Mr. David Mills. Please go ahead, Mr. Mills.
Thanks, Donna. Good morning, everybody. 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 risk factors, the forward-looking statements and the factors and assumptions on which they are based can be found in our regulatory filings, including our annual information form and MD&A, which can be obtained at sedar.com.I'll now turn this over to Mr. Mark Kenney, President and Chief Operating Officer.
Thanks, David. Good morning, everyone, and thank you for joining us today. Joining me today is our Chief Financial Officer, Scott Cryer.We continue to demonstrate the strength of our business with another quarter of exceptional performance, as shown on Slide 4. Revenues are up 8% compared to last year, driven by the positive contribution from our acquisitions, strong increases in net average monthly rents and continuing high occupancies. NOI rose a solid 11.6% in the quarter due to the higher revenues as well as lower realty taxes and utility costs as a percentage of operating revenues. NFFO rose 15.4% in the quarter, driven by our revenue growth and our continuing strong operating performance. We also maintained our track record of strong accretive growth with NFFO per unit up almost 9%, despite the 6.1% increase in the weighted average units outstanding.As you can see on Slide 5, it was another record year for CAPREIT, with strong increases in all of our key performance benchmarks. Revenues were up just under 8%, with NOI up almost 12%. Our proven track record of organic growth also continued with our same property NOI of 8% for the year. Our strong performance continues to be driven by our ability to generate strong increases in net average monthly rents and stable, high occupancies. The acquisition of 17,091 suites and sites in 2018 also contributed to our growth and will make a significant full year's contribution in 2019. Additionally, the sale of 900 older, noncore suites has further enhanced the overall quality and average age of our portfolio. The sales realized $81.9 million in cash proceeds that is being recycled into more accretive growth initiatives. NFFO, the main measure of our performance, rose a significant 15.5% for the year, driven by the growth in revenues and our continuing strong increases in stabilized NOI, generating a very conservative NFFO payout ratio of 65.7%, much improved from the 70.3% last year. This solid payout ratio, supported by what we believe is one of the strongest balance sheets in our business, supports our ability to deliver sustainable and growing monthly cash distributions to our unit holders. In today's environment of economic uncertainty and volatile capital markets, our record of steady and stable income is a distinct advantage for unit holders.Slide 6 shows the key drivers of growth and why we continue to deliver real value to our unit holders. Our rigorous focus on business fundamentals has resulted in 21 years of growth and success. We look forward to this continuing. A key driver of our continuing ability to generate increases in revenues is our diversified property portfolio. Occupancies were at near-full levels at year-end of 98.9%, up from the prior year, and maintaining our track record of strong occupancies through all economic cycles. We also continued to generate increases in monthly rents, up 5.7% in 2018 from the prior year, with increases across most of our target markets. Supporting these increased rents were very solid 11.4% increases on suite turnover in 2018 on 21.5% of the portfolio. And despite rent control legislation in 2 of our largest markets, we saw 2.2% increases in monthly rents in lease renewals, demonstrating the success of our ability to retain residents and our above-guideline increased applications. Our same property portfolio also performed well in 2018, with organic growth in NOI of 8%. A key factor in this continuing strong growth rate is our steadily improving NOI margins, which strengthened to 63.5% in 2018, up from 61.5% last year.In summary, 2018 was another very strong year for CAPREIT, and we are confident in our focus on our business and will continue to benefit unit holders for the years to come.On the international front, we continue to be pleased with our performance in Dublin, as detailed in Slide 7. Since the IRES IPO over 4 years ago, we have received a total of $24.5 million in asset and property management fees, with 2018 fees up 18% from the prior year. During the second and fourth quarter of 2018, we increased our ownership position in IRES to 18%, reflecting our confidence that performance in Dublin will remain very strong going forward. Our retained interest also continues to generate a solid stream of dividend income, amounting to $16.3 million today since the IRES IPO in 2014.Turning to Slide 8. During 2018, we significantly expanded the size and scale of our Netherlands portfolio, generating a very strong $23.8 million in NOI for the year. On December 11, we announced our intention to sell our Netherlands portfolio to European Commercial REIT, creates Canada's first REIT focused solely on the European multiresidential market. The proposed purchase will be $634 million, satisfied by cash, shares in ECREIT and the assumption of mortgages. Once completed, CAPREIT will own approximately -- a significant majority of ECREIT, and we will continue to generate a growing base of fee revenues for our asset and property management services. We expect this transaction will close sometime in the first quarter of this year.I'll now turn things over to Scott for his financial review.
Thanks, Mark. Turning to our balance sheet on Slide 10. We continue to maintain a strong and flexible financial position, with a conservative leverage, strong coverage ratios and a historically low interest cost on our mortgage portfolio. Debt to GBV was at an all-time low of under 40%, putting us in a great position for future acquisitions and development. At year-end, we had approximately $66 million available on our acquisitions and operating facility, excluding the temporary bridge facility. Subsequent to year-end, we closed on an equity raise, with gross proceeds of $287.7 million, which was used to partially pay the acquisition in the operating facility and puts us in a good position for future growth. And as Mark mentioned, the strong liquidity position is after the purchase of 1,791 suites and sites during the year for $504 million, and the sale of 900 old or noncore suites for cash proceeds of $81.9 million.Our mortgage portfolio remains well balanced, as shown on Slide 11. Looking ahead, our ability to top up on renewal through 2026 will provide significant liquidity to fund our acquisitions and development pipeline. In 2019, we have $287 million in mortgages maturing, with an average in-place interest rate of 3.46%, and we expect to refinance approximately $120 million in principal repayments with new mortgages. At year-end, 97.5% of our current Canadian mortgages are CMHC-insured, providing us with a large and diverse group of lenders willing to work with us at rates below conventional financing. It's also important to note that 100% of our mortgages are on fixed interest rate bases, shielding us from anticipated rate increases in the future. Finally, you can see that we have approximately $420 million of our properties not encumbered by mortgages at year-end, providing further flexibility to fund our growth and investment programs going forward. Over the long term, we intend to maintain these unencumbered investment properties with an aggregate fair value in the range of $180 million to $250 million, and expect to have subsequent financing on the acquisitions, which are currently unencumbered from approximately $130 million.On the liquidity front, again, we remain well positioned to continue our growth program, as shown on Slide 12. Our liquidity position on our credit facility stood at approximately $66 million at year-end, excluding this temporary bridge. And with the closing of our equity offering, this strong liquidity position provides us the resources and flexibility to fund future growth.I'll now turn things back to Mark to wrap up.
Thanks, Scott. Looking ahead, we have defined 3 strategic objectives that we are confident will continue to build our future and build value for our unit holders. We will continue to invest in our operating platform and our people, capitalizing on the significant talent and expertise at CAPREIT. We will maintain our focus on resident satisfaction, building on our reputation as Canada's landlord of choice in our chosen markets. And we will continue to strengthen the value and potential of our property portfolio through a number of initiatives that reduce its average age and enhance the stability and potential for continued revenue increases going forward.Turning to Slide 15. We believe we have one of the best operating platforms and best teams in the business. We will continue to invest in the latest technologies that allow our people to drive efficiencies and control costs. For example, our in-suite turnover tablet solution allows our site staff to maximize revenue by reducing vacancy and proactively managing repair and maintenance activities to lease a suite faster. Our new tablet-based operations manager checklist creates an efficient system for onsite inspection of common areas, consolidating a wide range of tasks, procedures, paperwork and approvals. We are also investing in new risk management solutions in a number of areas to help us better manage our future. And as a testament to the engagement of our people, we have been chosen as one of Canada's best employers for 6 years in a row.Slide 16 describes some of the initiatives we are employing to drive resident satisfaction. By strengthening our market reputation as the landlord of choice in our markets, we keep our buildings full and maximize revenue growth. New solutions are being developed to enhance our residents' experience, including an online leasing system for prospective renters to complete leases online. Current residents will also be able to reserve CAPREIT services. The portal will allow us to tailor personalized messages for residents, and data from the portal will be accessed by new analysis software that tracks leases and resident service requests through a new centralized building management system. All of these initiatives will maintain our proven hands-on approach to property management, one that has driven our growth and our success for more than 21 years.Another key objective, as detailed on Slide 17, is to modernize our property portfolio and diversify its average age. We are recently finding newer properties that are a good addition to our portfolio. Most of our Canadian acquisitions in 2018 were recently constructed, are modern and very attractive. We are selling older, noncore properties, recycling this capital into more accretive growth opportunities. And our development and intensification programs will further drive modernization as we accretively build new suites on our own properties. Over the long term, we believe we can add in excess of 10,000 new rental suites, primarily in the very strong markets of Toronto and Vancouver, where demand remains strong and average monthly rents support the profitable investment of buildings. We currently have applications in for 2 development sites in Toronto and an approved building in Montreal, which combined will add 317 suites to the portfolio when completed.In January, we held our company-wide strategic review, explaining and engaging all of our people in our long-term goals. We concluded our meeting with the messages on Slide 18 that sum up our objectives going forward, to be the best place to work for our people, to be the best place to live for our residents and to be the best place to invest for our unit holders. We have met these goals for the last 21 years, and we are confident our growth and success will continue. We continue to look forward to keeping you updated on our progress. We were also very pleased to announce a distribution increase of 3.8%, effective with the March payment. It signals our confidence in CAPREIT's future and our commitment to enhance unit holder value.We would now be pleased to answer any questions that you may have.
We will now take questions from the telephone lines. [Operator Instructions] And the first question is from Jonathan Kelcher from TD Securities. Please go ahead.
First question, just on the turnover. It's been trending down. Where do you think that goes for 2019?
If you're referring to the churn rate, I think we're at a point now where I think we're going to say the bottom. As more market rents get populated into the rent roll, you'll get a little bit more churn. But we continue to see rising rents in all of the markets, but I think we're near the bottom right now. We're in uncharted territory, to be honest, and never seen a situation where it gets much lower than this.
So 20% would be a good number?
Yes.
Okay. And then on the lift on the turnovers, based on what you're seeing in current market rents, is the -- well, I guess 2 parts. One, it's kind of accelerated into Q4 at just over 14%. But the full year 11.5%, do you think that's a sustainable number for next year -- well, for this year, 2019?
We're not signaling any change in trend at this point. There's nothing to indicate in the market that anything has changed.
Okay. And then just secondly on the ECREIT transaction. I guess longer term, are you looking to do something similar to what you have in place at IRES in terms of ownership and everything else, really?
I think we like our healthy ownership position in ECREIT. We remain very committed to the Netherlands and would like to see our ownership position stay at this level, if not grow. We're there for the long term, and we love the asset class there, and we think this is a great structure.
Okay. And then I guess the acquisitions that you have now -- that you've recently done in the Netherlands, you're just warehousing those for ECREIT for when it's up and running?
Yes, that's correct. I mean, we'll close out to $630 million, which was kind of the portfolio up to Q3 of this year. And then all of the new acquisitions, ECREIT will have the optionality to take those in at predetermined prices based on just their own growth prospects and the ability to raise capital.
[Operator Instructions] And the next question is from Matt Kornack from National Bank Financial. Please go ahead.
Just had a few questions on some of the Q4 numbers. Scott, there were some changes in particular in other revenues and in op costs that were pretty significant. I don't know if that's accounting or if you saw something specific there.
Yes, maybe we could take it offline and you can point out specifically what you're looking at. I mean, in NOI, there was definitely some noncontrolling interest. We took out our partner, Rubens, that was basically providing asset management services right out of the gate, and I think that's been coinvested in the property in the Netherlands. So we've kind of dissolved that relationship, and so a big chunk of that NOI chain was related to that noncontrolling interest.
Okay. And is there any impact on your numbers in 2019 from IFRS '16, I believe it is? I know some of your peers are changing their reports.
Yes, there will be. I wouldn't call them very significant relative to our portfolio size. It's really focused around our land leases, mostly in Calgary and one in Vancouver. There's 4 in total. From a FFO point of view, that should all be normalized, given the real path whitepaper changes, and we're just looking at what to do at the NOI impact. So we'll conclude on that, and there may be a, I'll call it, a non-GAAP version of NOI. So we're just trying to conclude on that, but that should normalize it.
Okay, fair enough. And then I guess the last accounting question here. But with regards to the Netherlands spinout, it'll be fully consolidated with the noncontrolling interests. So for your reporting standards at least in the near term, there shouldn't be too much difference because you own as much as you do?
Absolutely, yes. I mean, we can't really give a specific number of where we'll end up, because I think it's going to depend on how quick we could go to the market and how we contribute assets. But we expect to be at a very high percentage ownership under the gate and consolidate fully.
Okay. Fair value gains, there was a pretty significant write up of assets in this quarter, catching up essentially with the street NAV, so I don't think that materially is out of where we see things. But it's approximately half-half NOI growth and -- a little bit more NOI growth, and then cap rate compression. Just wondering, thoughts on further cap rate compression from here on out? I know Blackstone has been participating in the Canadian market now. Do you think that drives cap rates even lower?
Yes, I think our valuations are kind of middle of the road. There's definitely been some transactions we saw, especially in Q3 and Q4, that have pushed them quite low. And I think a tempered interest rate environment coupled with the last 8 quarters of top line growth, and seeing increases in the turnover lists has really kind of changed the dynamic. So it's hard to say what the long-term sustainable side is, but we're definitely not being aggressive in our cap rate relative to some of the transactions we're seeing.
There continues to be very limited products available in the marketplace and continues to be a lineup of people that are interested in multifamily, and again, no change, if anything, as Scott said, perhaps even more mildly compressing cap rates due to some interest rate moderating we've seen.
And I know in Canada capital gains are an issue and you can't really defer them, but do you see any incumbent owners of Canadian multifamily potentially looking to exit that would provide an opportunity for you guys to scale further, or is it just still very limited?
That was an active part of the business plan, Matt, as you know, a couple years ago. Not really, no. Family portfolio can come to market out of the blue, but it's not a trend of any sort anymore. It's more sporadic and very difficult to predict. There was a recent family portfolio that came to market in Oshawa that was, again, going to set record valuation.
Tough, good. The last minor question here, but on the mortgage side. I think you had a $50 million upfinancing on a $5 million mortgage. Was that just something that was a low LTV to begin with, or was there something else there? And how do you see upfinancing for the next year in terms of how much you'll get out of the portfolio?
Yes, I mean, I think the CMHC's getting a little bit more in line with valuations. It's always hard to predict what our total LTV will be, but we think we have significant upside on those top ups, given where fair values have gone. We've really been doing 10-year money for the last 10 years, so we're starting to come off the properties, which are pretty low LTV. I mean, I think our overall mortgage portfolio is 34% leverage, so yes, some significant upside on that. And overall, I think rates have kind of come back in after spiking a little bit there, so less of a potential headwind as it was maybe even 6 months to a year ago.
Your CMHC-insured spreads have remained pretty consistent regardless of where the underlying has moved?
Yes, they definitely popped up for a while there, but they seem to have settled back into a longer-term average of the 100 basis point, slightly below that in a lot of cases. But they moved around, especially with the banks. But we continue to find that 100 basis point or less financing with some of the other nonbank institutions.
The next question is from Mike Markidis from Desjardins. Please go ahead.
Just on IRES, can you guys remind me what the term of the management agreement is and whether or not it's been renewed, or what the plan would be there, or what the probable outcome might be?
Yes, it is coming up. Basically, I think it's under 2 years now, and we have to get into a negotiation in that obviously well in advance of the end of the contract. So that's something that we'll be discussing probably within the next 12 months to try and come to a new common ground on what that asset management agreement looks like.
IRES' board and CEO have been very vocal attributing the success of IRES to our management. It's been a very good relationship.
Okay. Moving on to a different topic here. Davisville and Wellesley appreciate that you're still going through the machinations of the approval process with the city. Presuming that you guys do get approval on those from the city within a reasonable, I don't know, 12 months' time frame, and just given where construction costs and development charges are heading, does the math work on those projects at this juncture? Or is it foregone conclusion that you'll start? Or is it still a question mark?
Well, it's one of these situations. You're right about changes to construction cost. There's a big volume of condos that are coming to market that have all of the trades tied up right now. We do have an ability to continue to push on density there, so our time would be better spent pushing on the density and waiting out the bubble of busy trades. So I think it is a slower game than we're certainly used to, but we're going to focus on the density. There's another chance there to get a little more density.
Okay. I had the privilege of attending a FRPO luncheon yesterday, and Tony Irwin sort of laid out a 4-point plan to address the supply crisis in Ontario on apartments. And one of the things he had brought up was potentially requesting the government to move to a CPI plus 2%, I guess, rent control regime for lack of better terminology. I guess, Mark, you're pretty connected with FRPO, or you have been historically. Do you get a sense that there's any real dialogue between the government and FRPO on that? And do you think the prospects of that coming through is somewhat realistic?
Mike, as a prior chair for both, I can tell you that this current government is serious about coming up with policies that will draw people into the marketplace. It's still politics, but they've made the change. They made the initial change with removing that guideline business on new construction units. There's still affordability issues here, but I would expect to see the government be cooperative with our industry as much as possible. That's definitely been the new tone out of this current government.
Okay. And just last question from me. I guess some of your peers and private investors have certainly turned to Montreal more for acquisition opportunities over the last, call it, 12 months. Just curious how you guys view the acquisition environment in Montreal these days relative to other markets in Canada that you're looking at.
It is competitive. There's also a lot of supply there, too. As one of the largest apartment owners in the province of Quebec, and as one of the largest owners of apartments in Montreal, we continue to love the market. But we're just being selective. The opportunities that we're seeing, again, are around new construction. And we're bidding and we're exercising patience, but it's a market we remain very interested in.
[Operator Instructions] And the next question is from Brad Sturges from Industrial Alliance. Please go ahead.
Just a couple quick questions from me. Just on the ECREIT transaction, I guess there's shareholder vote on their side still to do. Are there any other hurdles left at this stage to complete before the close of the transaction?
No, I mean, those are -- really, the vote is the gating item. I think we're in pretty good condition outside of that around typical tax structuring and consents and what not. So there's always a little bit of risk in those, but we seem to be pretty advanced and in pretty good shape that way.
Okay. And then in terms of asset sales, you completed a few last year. How do you see that playing out this year compared to last year?
Yes, you never say never, but we spent a lot of time really back in 2017 looking at assets that we felt were just nonstrategic, didn't have development potential, didn't have good growth prospects, didn't like the CapEx profile. And quite frankly, we dealt with those, and we waited for our price. Never say never, but I don't expect to see the same kind of velocity this year unless the right pricing comes along, but nothing currently targeted.
The next question is from Mario Saric from Scotiabank. Please go ahead.
Many of my questions have been answered, but I had a quick higher-level question. I think, Mark, you mentioned no change in trend in terms of rent bumps. On turnover, the market's really strong. Supply, if it does come, in most of the markets it will probably take a couple years to get there. When you look out today in the next 2, 3 years, what are the key risks to that rent growth, NOI growth, story that you're concentrating on today?
At these kind of rates, the risk has to become affordability at some point. That being said, our affordability proposition in the marketplace is quite attractive. I wouldn't see that revealing itself for a couple of years yet. Other than that, it's always a sudden shock to either the economy or government legislation. On the government legislation front, we're looking very good, certainly in a better place than we were from a risk point of view a year or so ago. And things are even leveling out for us in Alberta from an economy point of view. We had called the bottom before, but it's feeling quite stable up there now. And we're in a good please, really, across the portfolio. I can't think of a market that gives us any alarm.
Okay, and then I guess one side effect with higher rents generally means expectations come up a little bit. But how do you look at your platform today? You highlighted some of the initiatives on the technology side that should improve tenant experience as well operationally for CAPREIT. How do you look at the platform today in terms of staffing in relation to potentially higher expectations going forward?
Yes, it's a good question. So today, what happens, my first comment is the higher rents go in the, I'll call it the core original portfolio, the better the quality of tenant, and the expectations actually tend to fall off. When you get into new construction and a building full of all-market rents, it is a very different business. It's a very different business on the leasing front, and it's a very different business on the customer service front. And those buildings, despite these tight markets, will experience higher turnover. So they're ongoing, active businesses. So the difference is, primarily, is the old portfolio was a value add portfolio. The new construction buildings that we're buying and potentially building into the future are value adds from customer service and rent maximization. So these technology initiatives will help the core portfolio, obviously, and give people a much better experience, but it will be an expectation in the new portfolio as we buy new construction assets and build our own. That's why we're getting ready.
Understood, okay. And my last question, just more of a clarification on the IFRS methodology, perhaps for Scott. I think it was Matt mentioned earlier on, the significant gain this quarter was call it half NOI, half REIT. When you look at your NOI or your forecast NOI changes, do they factor in, for example, expected no change in trend in terms of [unintelligible] turnover, or for example, if we get into Q1 '18 and you grew over another, call it, 10%, 11% increase on rent on turnover, do those numbers then inherently move higher?
Yes, so I mean, they are forward looking in that we stabilize the income from the upcoming year. So our budgeting process utilizes actual turnover by property, and rent list by property and renewal rates by property. So it's a very granular level exercise, and it rolls it for that year. So I think what that means is with the lower turnover, as much as the rents are lifting, only so much of it is going into the stabilized NOI. So we would expect if the markets continue, our valuations will continue to increase as a result. It's tough because in 4 quarters, our AMR has gone up from 2.3% change in 2017 Q1 to 4.6% in 2018 Q4. So there's been such rapid movement, it's hard to make sure you can bill that in. But we think conservative enough in both our cap rates and our NOI assumptions that there should be further growth in the future.
All right, fair enough. And where would you, for the portfolio in totality, where would you estimate the in place versus market rent caps is today?
Obviously regionally, it will vary, and by building. But we're well in excess of 10%.
There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Kenney.
Thank you very much for attending the call today. We appreciate your ongoing interest in CAPREIT.
Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.