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Good afternoon, ladies and gentlemen, and welcome to the Fourth Quarter for the Year Ended December 31, 2022 Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. This call is being recorded on Thursday, February 16, 2023.
I'd now like to turn the conference over to Paul Miatello. Please go ahead.
Thank you very much, and good afternoon, everybody. And thanks for joining us on our Q4 results conference call. I'll just do a quick introduction on role call for everybody. This is Paul Miatello, SVP of the REIT speaking. With me, I have Angela Sahi, SVP in Canada; John Talano, SVP of our U.S. Operations; Beverley Flynn, SVP General Counsel; and I also have Chris Newman, our CFO.
So as usual, I'll turn it over to Chris. Chris is chomping at the bit to give you a queue for update. It was another good and very strong quarter for the REIT. So just with that quick introduction, I'll turn it over to Chris.
Okay. Thank you, Paul. As is customary, I'll provide some comments on the REIT's financial position and performance. In terms of our financial position, the REIT completed the fourth quarter of 2022 with total assets amounting to $3.9 billion higher compared to $3.5 billion at December 31, 2021, resulting from a fair value increase on the REIT's income-producing properties, $208 million and a higher foreign exchange translation.
The fair value increase is a result of an increase in underwritten NOI at both the U.S. and Canadian properties, supported by strong rent growth, partially offset by a cap rate increase on the Canadian portfolio. As well to note, during the fourth quarter, the REIT posted a fair value loss of $203 million, which partly offset the year-to-date fair value gain, and it was due entirely to cap rate increase at most of the Canadian and U.S. properties.
During the fourth quarter, the REIT completed the following transactions on October 6. The REIT sold its property located in Coconut Creek Florida, comprising 340 suites for net proceeds of $70.6 million after closing costs and the repayment of mortgage payable secured by the property.
And subsequent to year-end, the REIT acquired for Morguard Corporation, the remaining 50% interest in Finastra at Rockville Town Square, comprising 492 residential suites for a gross purchase price of $71.5 million, excluding closing costs and the REIT assumed at the mortgages payable of $34 million.
The REIT disposition of three assets this year supports management's strategy to dispose of assets where values are benefiting from strong market demand and to focus on opportunities to acquire properties located in urban centers and major suburban markets in Canada and the United States.
To add, the REIT utilized the tax deferred strategy under Internal Revenue Code Section 1031 in connection with its first two U.S. property dispositions and is pursuing a 1031 exchange on the recent disposition completed during the fourth quarter. Under 1031 exchange, subject to certain conditions, REIT will be able to defer tax payable upon the acquisition of a replacement property.
The REIT finished the fourth quarter with $14.6 million of cash on hand, $62 million from net proceeds received from the sale of Blue Isle during the fourth quarter that is classified as restricted cash on the balance sheet, while the REIT pursues the replacement property, and has also $80.7 million advance to more of our corporation under its $100 million revolving credit facility, providing the REIT with $180.7 million available under the facility.
The REIT completed the fourth quarter with $1.2 billion of long-term debt obligations. On December 30, 2022, the REIT completed the refinancing of a property located in Cooper City, Florida at a floating interest rate for a term of five years, providing additional net proceeds of $0.7 million.
And as at December 31, 2022, the REIT's overall weighted average term to maturity was 4.9 years, decreased from five years at December 31, 2021. And the weighted average interest rate increased to 3.5% from 3.31% at December 31, 2021. The REIT's debt to gross book value ratio improved to 38% at December 31, 2022, down compared to 40.2% since December 31, 2021.
Turning to the statement of income. Net income was $239.6 million for the year ended December 31, 2022 compared to $245 million in 2021. The $5.4 million decrease in net income was primarily due to a lower fair value gain on real estate properties of $80.4 million relative to the gain recorded during 2021, and was partly offset by a higher fair value gain on Class B LP units of $56.3 million, reflecting a decrease in the REIT unit price during the year, and was also offset by an increase in NOI plus $21.7 million.
IFRS net operating income was $151.2 million for the year ended December 31, 2022, an increase of $21.7 million or 16.8% compared to 2021. The change in foreign exchange rate increased NOI by $6.7 million of the overall $21.7 million variance to last year.
On a same-property proportionate basis, NOI in the U.S. increased by $11.1 million or 19.4% as an increase in revenue from AMR growth and ancillary revenue was partly offset by higher vacancy and an increase in operating expenses.
NOI in Canada increased by $3.4 million or 6.7%, mainly due to AMR growth and lower vacancies, partly offset by an increase in operating expenses. And the change in foreign exchange increased NOI by $6.2 million.
Interest expense decreased by $2 million for the year ended December 31, 2022, compared to 2021, primarily due to a loss on the tax liability on the redemption of Class C LP units of $3.8 million recorded in 2021 as well as a higher non-cash fair value gain on the convertible debentures conversion option of $2.4 million, partly offset by an increase in interest on mortgages of $3.9 million, mainly resulting from additional net mortgage proceeds on the completion of the refinancings during 2022 and during the fourth quarter of 2021 as well as a net increase from the impact of acquisitions and dispositions throughout the year.
The REIT's 2022 performance translated into basic FFO of $82.8 million, an increase of $18 million or 27.8% when compared to 2021. And on a per unit basis, FFO was a record high at $1.47 per unit for the year ended December 31, 2022, an increase of $0.32 compared to $1.15 per unit in 2021.
The increase in FFO per unit was due to the following: on a same-property proportionate basis in local currency, an increase in NOI from AMR from higher AMR and lower vacancy, partly offset by higher operating costs, an increase in interest expense and trust expenses had a $0.15 per unit positive impact, of which a successful property tax appeals net of consulting fees contributed $0.025 of that increase.
In addition, a change in the foreign exchange rate had a $0.09 per unit positive impact. Also an increase from the contribution of the REIT's development property, which reached stabilization in October 2021 at a $0.03 per unit positive impact. The net impact of acquisitions and dispositions had a $0.01 per unit negative impact, primarily due to the timing of redeploying sales proceeds towards acquisitions. And an increase in other income mainly from an increase in interest income on the Morguard facility and interest income earned on restricted cash held as part of a 1031 exchange from disposition proceeds, had a $0.06 per unit positive impact.
The REIT's FFO payout ratio continued to decline to 47.8% for the year ended December 31, 2022, a very conservative level, which allows for significant cash retention. In addition, as previously announced, commencing in November 2022, the REIT increased its annual cash distribution by $0.02 to $0.72 per unit, an increase of 2.86%.
Operationally, the REIT's average monthly rent in Canada increased to $1,588 at December 31, 2022, a 3.5% increase compared to 2021, reflecting our -- the quality of our Canadian portfolio. And during the year, the Canadian portfolio turned over 19% of total suites and achieved 13.7% AMR growth on suite turnover. While in the U.S., same-property AMR increased by 13.1% compared to 2021, having an average monthly rent of $1,737 at the end of December 2022, as the REIT continued its strong performance, benefiting from strong market fundamentals across many regions.
The REIT's occupancy in Canada finished the fourth quarter of 2022 at 98.6% compared to 93.6% at December 31, 2021. Overall, occupancy has increased across the portfolio as leasing activity increased to pre-pandemic levels as economic conditions improved and as people return to their normal routine. Same-property occupancy in the U.S. of 95.3% at December 31, 2022, was slightly lower compared to 96.2% at December 31, 2021, as U.S. occupancy is still maintaining optimum levels.
During the year 2022, the REIT's total CapEx amounted to $40.8 million. That included revenue-enhancing in-suite improvements, common area and exterior building projects as we continue to ensure that we maintain the structural and overall safety at our properties. And the REIT collections of rental income during the year continue to be materially in line with historical collection rates.
At this time, I'd like to turn the call back over to the moderator for any questions.
Thank you. Ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from the line of Jonathan Kelcher from TD Securities. Please go ahead.
Thanks. Good afternoon. First question, just on the your U.S. markets. You see a lot of media talk on market rent growth slowing in many of the markets. Maybe give us some color on what you're seeing in your markets. And what you expect for market rent growth in 2023?
No problem. John Talano, do you mind responding to that question?
Sure. Well, I would first say that the market rent growth are slowing, but that's because it's been so aggressive in all throughout 2022. So for us, we are seeing some seasonality growth reductions in places like Chicago and Washington, D.C., where it's cold, lots of folks will continue to move if there are job ends or something like that in those regions, but there aren't as many folks to backfill at that point. So we generally have always seen a slowing at that time.
In our Southern markets, it's definitely stronger. But I would say we're returning to more normal levels of growth, but it's certainly not negative. Our projection -- we didn't expect to be where we were -- where we are now today based on our projections from last year. So we're doing very well.
Okay. And then for this year, like inflation-type growth a little bit below, a little bit above, how are you thinking of that?
Yes, we're in inflation this year. That's -- I can't predict that stuff, obviously, but I would say our growth is still good, and we're certainly keeping up with inflation.
Okay. And then just secondly, on the 1031 funds that you need to invest. What markets are you looking at? And what sort of cap rate should we think about there?
Jon, it's Paul. We're largely sticking to the existing footprint. So not going too far afield outside of that. So pretty -- probably a pretty safe assumption, we would end up doing something in the existing submarkets. In terms of cap rate, it varies, obviously, depending on the market, but could be 4.25 to 4.75 maybe 5, but sort of somewhere in that range. But again, depending on where we picked.
Okay. Are you seeing -- are there like a lot of opportunities? Or it's every stuff I'm hearing, reading is that the market has slowed down quite a bit in sort of Q4, Q1?
Yes, it's definitely slowed down, but there's still deal flow there for sure, still listing. So that's the great thing about the U.S., right? There's always some deal flow there. So yes, it's curtailed. But yes, we're not having a hard time finding opportunities to look at.
Okay, thanks. I'll turn it back.
Thank you. And your next question comes from the line of David Ramsay from Calrossie Investment Management. Please go ahead.
Hi, your dividend rate increase was relatively small, I thought, given the low payout ratio, the strong NOI growth, the general inflation rate, can you talk a bit about your philosophy on raising the dividend?
Yes. I mean, generally, our history is that it's been pretty conservative. So I mean based on that history, you probably shouldn't be too surprised that we kept it relatively conservative. So we will, as an organization, we'll continue to sort of err on that side of conservatism. And to John's point, he made a few minutes ago about rent growth. Each year, look distribution increases are looked at separately.
Obviously, it was a very strong year in 2022, suffice it to say. And we -- and certainly, as John said, we're expecting rent growth again, but certainly not likely not at the level that we saw in '22. So obviously, there's room to increase the distribution further and still maintain a pretty conservative payout ratio. But overall, the thesis of the organization is to keep it conservative.
Okay, thank you.
Thank you. [Operator Instructions] And your next question comes from the line of Jimmy Shan from RBC Capital Markets. Please go ahead.
Thanks. Just a couple of quick ones. So one is on the convertible debenture. I was wondering where -- how you're planning to deal with that one? And then second, I just wondered if you could just make some general comments on your GTA assets. Termed looks like it's pretty strong. So just any interesting observation you make with that portfolio would be great.
Okay. So I'll do the converts question and then I'll turn it over to Angela for the GTA asset question. But on the converts, Yes, I mean, obviously, we're analyzing our options right now. There's a fair bit of cash in the entity now. And you'd see from our disclosures, we've got a couple of refinancings coming up in the next like four to six months or even soon or two to three months to as far as six months out, that will yield some financing proceeds to the REIT.
So yes, we're looking at the options. Obviously, if we were to do a new convert in this interest rate environment, it'd be at a high coupon than what's maturing. So that we're obviously playing off the availability of cash against what kind of coupon we want to lock into. So everything is being assessed as we go. Jimmy, obviously, that convert matures on March 31. So we're looking at it real time right now, but that's about as much as I can say right now.
Sorry, do you mind repeating the GTA question?
No, I just wondered if you could just comment on what you're seeing in the GTA because it looks like the lease turnover spreads in the quarter was pretty strong. And so any color you could add be appreciated.
The turnover uplift, you mean or just yes.
Yes. The turnover uplift. Yes.
Yes, exactly, yes. So we are seeing definitely a very positive rent growth on turnover. We had about 20 -- just under 20% for the quarter for last year, and we're actually at about 22.7% for January. So to just give you an idea, Mississauga is at 23% rent growth and 41% in the Thorncliffe Park area. So it's pretty significant. Obviously, given the housing shortage, the increase in immigration. So turnover rate is still low. It's lower than last year, but definitely seeing momentum on the rent growth and turnover. I haven't seen numbers like this actually. And this is also we're at -- the smaller units at $3.40 a square foot for some of the units, $3.26 definitely, we're seeing a lot of -- north of $3, which is surprising and Thorncliffe Park as well $2.50 even. So just to give you some idea.
Okay. And sorry, did you say -- which one was the 40% lift, a 40%?
Thorncliffe Park.
Thorncliffe Park, okay. All right. And then the 22.7% in January, that was for the entire?
The portfolio, that's for the portfolio.
And Jimmy, sorry, the Thorncliffe is high, but the number of turnovers are very low. So it gets all weighted down on that average.
Yes.
Great, okay. Okay, great. Thank you.
Thank you. And your next question comes from the line of David Ramsay from Calrossie Investment Management. Please go ahead.
Well, thanks. Just a follow-up. I was noting in a TD report, I read today that your discount to net asset value is at the large end of the historical range. Do you have any thoughts on why that is the case? And do you have any thoughts on how you might shrink that discount, for instance, share buybacks or further to my previous question, a higher payout ratio. Anyways, over to you.
Yes. On the share buyback, we have been utilizing the NCIB into 2023. So we purchased 50 -- a little over 56,000 units, about $1 million worth. So we are kind of recognizing a little bit of value gap there. So we're doing -- we've started that program. Paul, anything you want to add on, like the traditional structure of the REIT and the -- overall, it's -- I don't know, it's -- sorry, Paul, do you want to add anything?
Yes, there's a historical discount to NAV is larger than our peers has. It's been there consistently, right? I'm sure you understand that and appreciate that. And some of that has to do with a smaller trading quote and some of that has to do with the existence of a major shareholder or a major unitholder in this case. And yes, so I think we're largely for those reasons, they're somewhat structural.
And yes, so using the NCIB and -- yes, overall, I think we're unduly punished in capital markets. We should be trading better than we are. And the results for the -- for 2022 and especially the last couple of quarters sort of underscore that.
And further, we unlocked some of the value in our assets with the dispositions as well. So more so proofing out the balance sheet itself.
Great, okay. Thank you.
Thank you. There are no further questions at this time. Please proceed.
Okay. Thank you again, everybody, for joining us and we look forward to speaking to you on our next conference call. Thank you.
Thank you. That does conclude our conference for today. Thank you all for participating. You may now disconnect.