Good morning, and welcome to today's Canadian Apartment Properties Conference Call. My name is Bailey, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to our host, David Mills. David, please go ahead.
Thank you, operator. Hardly the host, but 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 CAPREIT's regulatory filings, including our annual information form at MD&A, which can be obtained at sedar.com. I'll turn things over to Mr. Mark Kenney, President and CEO.
Thanks, David. Good morning, everyone, and thank you for joining us. Scott Cryer, our Chief Financial Officer, is also with me this morning. While we are pleased with our performance in the fourth quarter, we did experience certain increased costs that led to a smaller than expected increase to our quarterly NFFO. The key change was an acceleration of repair and maintenance costs in the quarter as we started to play catch up after two years of reduced spending due to COVID-related restrictions on our property activities. Increasing expense, interest expense on the acceleration of CMHC mortgage amortization. NFFO per unit was impacted by the 1.8% increase in the number of units outstanding in the quarter. The unexpected increase in Omicron caseloads across the country also led to increased uncertainty in some of our markets.
However, we believe we are now working our way through this situation. Having said this, revenues were up almost 7%, driven by the contribution from our acquisitions, increased monthly rents and continuing high occupancies, driving a 3% increase in our NOI. Turning to slide 5, we booked another solid year in 2021. All of our key benchmarks were up, including revenues, NOI, and NFFO, and we continued to generate solid and accretive growth for our unitholders. It is also important to note that we have experienced very few collection issues through the pandemic. To date, we have collected over 99% of our rents as we work with our residents to understand their issues and ensure we collect on a timely basis. Our payout ratio remained stable despite the significant 5% increase in monthly cash distributions last September.
Our strong performance through the pandemic allowed us to increase our distributions while maintaining a very conservative payout ratio. Looking ahead, we expect to see further increases in occupancies, accelerated growth, and much improved operating performance as we work our way out of the Omicron pandemic and gradually return to more normal markets and operations. From an operating perspective, our ability to generate solid performance in both good and bad times is clearly demonstrated by the results from our stabilized portfolio as you can see on slide six. Occupancies improved again in the fourth quarter, while net average monthly rents continued to increase. Our leasing and marketing programs continue to generate increasing occupancies, as you can see on slide seven. After two years of operating under significant pandemic restrictions, our occupancy has remained highly stable, rising to over 98% at year-end.
You can also see that our bad debts as a percentage of total revenues have remained low throughout the pandemic. While we did experience some issues with our commercial portfolio last year due to the pandemic, the residential portfolio continues to track its historic low level of bad debt. A key factor in our ability to generate solid returns during the pandemic is the solid increase in rents on turnover we are achieving, as shown on slide eight. Clearly, turnovers continue to be impacted by the ability of residents to move or personally visit our properties. However, an almost 6% increase on turnover in the Canadian portfolio is a solid result, with rent increases moving higher sequentially through each quarter in 2021.
It is also important to note that our churn is increasing up to 22% from 19% last year, a good sign that we should see more mark-to-market rent increases in the quarters ahead. Our increasing churn rate, up significantly from pre-pandemic periods, speaks well for our ability to achieve higher mark-to-market rent increases going forward. Renewals continue to be affected by the rent increase freezes legislated in Ontario, British Columbia, and other regions. Looking ahead, we are pleased to see Ontario's 2022 guideline increase of 1.2% and 1.5% in British Columbia. CAPREIT has served notice to over 45% of Canadian tenants. The weighted average rental increase was 1.3% effective January 1, 2022, capturing a full year of increased income. As of year-end, Ontario and BC represented approximately 56% of our total NOI.
Nova Scotia has capped rent increases at 2% for apartments and 1% for MHCs in 2022, and we will be monitoring how we can implement these increases through 2022. As mentioned, we experienced a solid and positive trend in rent increases on turnover each quarter since we bottomed out at the height of the pandemic in Q1 last year, as shown on slide 9. With churn also rising beyond pre-pandemic levels, the lower turnover numbers in Q4 is normal. As you can see in the past, few families want to relocate during the holiday season. Looking ahead, we are experiencing more in-person and online visits, and expect we will start to see more higher mark-to-market increases in the quarters ahead, moving us towards the higher levels of increase we generated prior to when the pandemic set in.
Through most of the last two years, our ability to invest in our properties was also significantly curtailed by the pandemic and our focus on conserving cash. Through the latter months of 2021, we ramped up our efforts to further enhance the value and income-producing potential of our property portfolio. As you can see on slide 10, we targeted in-suite and common area improvements last year, ensuring our properties remain the most attractive in our markets and provide residents with safe and comfortable homes. Our investment in energy-saving initiatives is also reducing costs and helping us improve our environmental footprint, a key goal of our ESG program. All of these key investments serve to increase NOI more quickly compared to other investment categories. Turning to slide 11, we continue to increase the size and scale of our property portfolio.
Through 2021, we acquired 3,744 suites and sites, the majority in our key GTA and BC markets. Our acquisition pipeline remains strong and robust. Despite cap rate compression, we expect to generate further accretive growth portfolio in the quarters ahead. We also sold 593 non-core suites for CAD 143 million, the majority in the GTA. We are achieving very strong returns selling to experienced property developers wanting to develop downtown locations. We continue to evaluate our total portfolio to assess whether recycling certain capital will contribute to more accretive growth. I'll now turn things over to Scott for his financial review.
Thanks, Mark, and good morning. As you can see on slide 13, our balance sheet and financial position remained strong and flexible at year-end, with a conservative debt to gross book value and continuing high liquidity. Our CAD 1.2 billion in Canadian unencumbered properties, which includes CAD 615 million of MHC property, provide additional liquidity should it be needed to grow. In addition, we had CAD 458 million available in cash and on our credit facility at year-end. Looking at our financings last year, we locked in a very low interest rate of under 2.2% on our refinancing and top-ups in 2021, and extended our term to maturity. We expect to finance a total of CAD 1.1 billion in mortgages and top-ups in 2022.
Importantly, at year-end, over 99% of our mortgage portfolio incurs a fixed interest rate, protecting us from potential future interest rate increases. In total, if we were to access all these sources of capital, we have available liquidity of approximately CAD 1.2 billion at year-end, and even if utilized, our leverage ratio would still remain a very conservative 40%. We were also pleased to see another significant increase in the fair value of our property portfolio, increasing by just over CAD 1 billion in 2021, following a CAD 596 million increase in 2020. As you can see on slide 14, we have capitalized on the low interest rate environment over the last few years, reducing interest costs in Canada and extending the term to maturity.
The ability to capture strong spreads and low interest costs in the Netherlands is also contributing to our overall lower interest costs and extending the term. As I mentioned, over 99% of our mortgage portfolio incurs a fixed interest rate. We continue to monitor the interest rate environment for any opportunities to prepay mortgages and to hedge against rising interest rates. As of today, we have locked approximately 35% of our 2022 maturing mortgages at a 2.9% interest rate, mitigating against the expected rise in interest rates throughout the year.
By April of this year, we will have locked close to 60% of our total mortgage portfolio over the last 2.25 years at an average rate of 2.34% and a 9-year term. Further to our strong and flexible financial position, looking back over the last few years, you can see our, on slide 15 that we have met our goal of maintaining very conservative debt and coverage ratios, even through the pandemic. This conservative approach underpins the stability and resiliency of our business and the stability of our monthly cash distributions to unitholders. This focus on maintaining one of the strongest balance sheets in our business will continue going forward. Our mortgage portfolio remains well balanced, as shown on slide 16.
As you can see, in any year, no more than 15% of the total mortgages come due, thereby reducing risk in a rising interest rate environment. Looking ahead, our current ability to top up renewing mortgages through 2036 will provide further significant liquidity in the event this pandemic lasts longer than we hope. You can also see that we have many opportunities to reduce our long-term interest costs. The current five- and 10-year estimated rates of approximately 2.6%-3.1% are below expiring mortgage rates of between 2.6% and 3.4% over the next three or four years. We also believe we're in a strong position despite forecasts for interest rate increases this year and going forward. I'll turn things back to Mark to wrap up.
Thanks, Scott. At CAPREIT, we are committed to a fully integrated strategy to enhance our environmental, social, and governance performance. These initiatives contribute to our mission to be the best place to work, live, and invest. Our ESG objectives, as outlined on slide 18, reflect our understanding that the evolving global market has introduced new risk factors and opportunities for value creation. Our integrated ESG strategy helps us proactively address these risks. Our investments extend beyond managing our buildings to include the people we employ, the residents we house, and the suppliers we engage, and the communities in which we operate. Through these strategic alignments, we believe we will generate enhanced returns for our unitholders while making a meaningful contribution to our communities and the environment.
Our ESG objectives continue to evolve and undergo constant review and assessment, all integrated with our operating plans, assuring we achieve the highest levels of ESG benchmarks over time. A key initiative is our comprehensive ESG checklist that we use to evaluate potential acquisitions, as detailed on slide 19. All opportunities are evaluated on current and potential risk factors related to environmental performance, including energy consumption and our ability to implement suite metering, energy-efficient lighting, water usage, waste, recycling programs, among other factors. We also examine ways we can enhance resident engagement and resident safety systems. In addition, we look at working conditions within the property in line with our goal to attract and retain the best people in our business. All of these criteria are aimed at linking our ESG goals to creating increased value for our unitholders.
In 2021, we achieved a number of key accomplishments, as outlined on slide 20, a testament to our commitment to our ESG strategies. Once again, for the eighth year running, we were ranked in the top tier of the best employers in Canada with a very strong score on diversity and employee engagement. Late in the year, we received a BOMA Award for innovation, reflecting our goal to enhance the value of our asset base. We received the award for Habitat, our state-of-the-art property-wide building automation systems that result in enhanced comfort for our residents while conserving energy, lowering operating costs, and driving sustainability. We are also proud. The diverse nature of our employee base, including by gender and ethnic background, reflects our markets and the overall Canadian population.
This commitment to diversity helps us understand and address issues and concerns among our communities and our resident base. We are excited to issue our next ESG report in May, outlining all of our successes over last year. Looking ahead, we see a number of very positive value drivers that we are confident will generate strong and growing returns for our unitholders over both the short and the long term. We will continue to focus on our proven asset allocation strategy, as detailed on slide 22. We primarily target value-add apartment properties in the mid-tier segment in well-located suburban markets in and around Canada's three largest cities, Toronto, Vancouver, and Montreal. We are acquiring these properties at under 50% of replacement costs and have proven our ability to invest in them to increase value.
Cash flows remain strong and highly stable due to the very affordable rent levels. Our second focus is the Canadian MHC sector. Revenues are highly stable, and with residents owning their own homes, capital requirements and maintenance needs are significantly reduced. With home ownership costs rising across the country, MHCs provide a real alternative as prices have not appreciated to the same extent. Our third focus is on Europe. As one of the only professionally managed operating platforms in Europe, the opportunities for enhanced value are significant. As you know, our investment management agreement with IRES terminated on January the thirty-first. While we are losing the fees from IRES, it frees up management and operations time and resources to focus more on our European platform, where we believe we have a much larger opportunity to grow.
Key to our growth in the coming months will be our ability to capitalize on a number of market trends as we return to pre-pandemic conditions. Demand for our quality properties will grow as immigration accelerates, with new Canadians seeking affordable homes in our largest urban markets. The return of international students will also contribute. The pandemic generated what we call student costs and to stay safe. We see these young people moving back to rental accommodations as offices reopen. On our side, as the growing seniors population looks to the rental market to meet their needs. We believe our catered properties offering more space on one floor at affordable rents. Looking to capitalize on the significant equity they have in their homes. We also see families looking to quality rental accommodations due to the increasing cost of homeownership.
Additionally, cash flows will increase as we prudently increase rents. Finally, our ongoing property investments, as outlined on slide 24, are reducing costs through energy saving and other initiatives, enhancing resident safety, and making our properties more attractive and are increasing our operating efficiency, helping us to meet our ESG commitment to enhance environmental performance. All of this in our net asset value. As Scott mentioned, we recorded an over CAD 1 billion gain in our net asset value, following a CAD 596 million gain in the year prior. With increasing demand and little new supply of rental properties, we believe the value of our asset base will only grow going forward and provide another strong driver for unitholder value over the long term. I'm very excited about our future. Our focus on the mid-tier sector meets increased demand for affordable, high-quality homes.
Our predominantly suburban locations outside of downtown cores and our larger size suites are meeting the need for more space. We are experiencing a strong pipeline of accretive acquisition opportunities and expect to see solid portfolio growth in the quarters ahead. Our leverage and liquidity to grow going forward. With demographic trends and increasing immigration, we are confident we will see to drive value for our unit holders in the years ahead. In closing, I want to once again thank your hard work and dedication over the last two years. These have been very, very difficult two-year period, but our experienced, engaged, and dedicated team has risen to the challenge. I also want to thank our residents for their patience during these challenging times.
Looking ahead, we are confident we will gradually return to more normal market conditions and continue our 25-year track record of growth, strong operating performance, and delivering enhanced value to our unit holders. Thank you for your time this morning, and we would now be pleased to take any questions that you may have.
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, then please press star followed by two. Again, to ask a question, that is star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Our first question today comes from Jonathan Kelcher from TD Securities. Jonathan, please go ahead. Your line is open.
Thank you. Good morning.
Morning, Jonathan.
Morning.
First question just on the operating costs. Mark, I guess you said that there was some deferred R&M in there. Have you largely caught up with the Q4 catch-up, or is there more of that that we'll see in 2022?
I would say really was what we would describe as the return to normal quarter. You know, looking back, Omicron really started showing up for all of us. In the months leading up to that, residents were getting a lot more comfortable with inviting us into their apartments to do work. Safety concerns were, you know, fading. We forget all this now because we're back in it again. I think the short answer to that, Jonathan, is yes, we did significant catch up in Q4, but every time we go through a shutdown period, we're seeing this effect of people being concerned about us going into their homes and then letting us back in again. The propensity to put a work order in the portal goes down when there's fears of the virus out there.
That's helpful. The one chart did show that you are starting to see increases on turnover. Do you think that gets back to 2019 levels over the course of 2022?
I think the fundamentals are stronger. You know, we've had record immigration. We've had record house price valuation increases, and we've got increased churn. With all of those things working in our favor, it's like we're on the momentum now. The reality is, timing wise for Omicron to show up in the middle of December was good. It's not a big churn quarter for us, the new year January one. Those rentals had already been done anyway, and February had essentially been done. We've not seen really an impact on revenue at all to be a strong one. I think it's restricted here. We'll just see what we see each time, like another wave of demand.
Okay. Just last one for me. I see that you showed bad debt jumped a little bit in Q4 after sort of trending down. Maybe you might have addressed this with commercial properties. Could maybe give us a little bit of color on that.
Yeah. The jump itself was really related to commercial, a commercial tenant specifically. So, you know, we're not seeing any major trend negatively that way. I think it's pretty much in line for the quarter.
Okay, thanks. I'll turn it back.
Thanks.
Thank you, Jonathan. The next question today comes from Matt Kornack, from National Bank Financial. Matt, please go ahead. Your line is now open.
Hi, guys.
Morning.
On the margin front, R&M to come down in Q1 and then maybe see a bit of a catch up again. This is inflation. You seem to be doing pretty well on property taxes and utilities. All NOI margins going forward.
Well, Q1, the effect of the weather I'm gonna say, has been difficult. We've had record snow across the country. We're clear in our direction on inflation and cost lifts. Like we talked about the catch-up effect for repairs and maintenance. We've now got a difficult weather quarter, no doubt it effects of snow removal, and we've seen some other effects of just weather-related expense. That's not a trend, it's an unfortunate back-to-back event. I think on the inflation front, we're okay. Wages, we've got a lot of frontline worker staff, and we've tried to address their needs.
On the margin expansion front overall, though, Matt, you know, without stating the obvious, as our revenue story improves and the story is getting better and better each quarter, and incentive initiation falls off, which is, as you know, we track our incentives or book them is amortized over a one-year period after initiation. The real question is, incentive initiation is on the decline. Occupancy is strengthening even though we're at almost record levels. Mark-to-market rents are following that path back to double digits very quickly. All of those revenue lines will naturally assist margins. It's I'm not trying to be coy, I'm trying to navigate the effect of the pandemic as in March, then I would expect on Q2. If there's a delayed effect of the virus, it puts a little bit more risk in the system.
I don't know if that does it for you or not, but basically the revenue story is opening up again and the expense story is not inflationary driven for us.
Fair enough. Mitigated to some extent. With this weird kind of end to the moratorium on rent increases, are you now gonna have 40% of your portfolio maturing in January, at least for the near term? Or how does that work in terms of rent increases?
Well, yeah, I think we've got the effect. We've got that old Quebec province effect for Ontario and B.C. now. Like, it'll stick with us for years and years. You know, assuming you don't have vacancy periods to reset renewal dates, we've got a new renewal date of January one.
Yeah.
Which makes modeling a little more easy and predictable, I guess. Yeah, the only thing that moves an anniversary date now is vacancy that is prolonged and where a new tenant initiates a lease outside of January. Otherwise, I predict it'll be with us for a decade, at least.
It's an odd time. Anyway, last one for me on the accounting side for IRES. Outside of the management fee side of things, is there any change in the way just the recognition of maybe FFO versus dividends or how we should think of that from an operating standpoint in the income statement?
You know, we're finalizing our assessment on this, but with the loss of a management contract, we will likely move to a point where we just, you know, it's fair value as opposed to equity-based accounting. There will be a change in that basis.
Okay. It shouldn't be hugely material at the end of the day to FFO figures?
No, it shouldn't. They have a high payout ratio of their income, et cetera, so
Okay
It should be fairly in line.
Makes sense. Makes sense.
Thank you, Matt. Question today comes from Joanne Chen from BMO Capital Markets. Joanne, please go ahead. Your line is now open.
Okay. Good morning, guys.
Morning.
Maybe just following up on the kind of turnover activity. How do you think it's gonna trend through 2022? I know you did talk about, you know, the mark-to-market opportunities, but could you perhaps provide some color on. I think you did mention there could be double digits, but could you maybe comment by market within your portfolio where you're seeing the most strength?
Yeah. I mean, kinda trending through Q4, we saw actually the strongest in December was in the Halifax market. I believe it was 13% or 14%, so that was the strongest overall, followed by Ontario, and then BC. Montreal, we still have some work to really get those up, and I think July will be kind of a kickoff with rental increases in general and some new leasing. Those are kind of by market. You know, we're looking at double digits definitely, nationally kinda coming through today effectively. You know, that's the general trend. It's been pretty strong. The graph in our conference call kinda shows it go upwards right now.
Mark said we think that'll only continue with some of the, you know, returning students, foreign students returning in the household. We think there's just a ton of upside to that market rental growth rate.
Okay.
If I could just add.
Maybe just
Go ahead.
Sorry. Oh, yeah.
Yeah. I was gonna add to what Scott said. On the household consolidation, this is a real Canadian, made-in-Canada effect that they have not seen in the U.S. You know, we hold the belief that culturally under-30s live within an hour of mom and dad relating to that under-30 cohort going home during the pandemic. If they were renting, they just went home. With restrictions in the city, there wasn't much of a city lifestyle. With workplaces shut down, work from home was possible. We all feel very strongly. You know, different than the U.S. where if you're, you know, you're from Houston, you work in Seattle, and it's very, very different cultural situation with where people live and follow their careers.
We feel extremely strongly that when workplaces start to get comfortable with back to work, this is gonna have a big effect. There is still a big cohort of under thirties that are at home. Like we said throughout the pandemic, like, I don't believe it's a permanent effect. I don't believe under thirties are gonna, you know, live out their retirement with mom and dad. We do know anecdotally it's in Toronto, Vancouver, Montreal, these are the places where it happened. We see that effect as back to work starts to change.
Right. No, that's for sure. Maybe just, I guess, you commented on each of your markets. I guess it seems like this quarter there was a little bit more. You know, Atlantic Canada continues to hold up quite well, but there would seem to be a little bit of softness in Quebec and B.C. Could you comment on whether it's just kind of more because of on the expense side of things, or are you seeing any other trends in Quebec that's different than the other markets?
Like our portfolio, not to generalize Quebec, but our downtown core portfolio is highly reliant on foreign students. You know, you've got this multitude. You got the Université de Montréal, you've got McGill, you've got Concordia, you've got the college. You've got all of this happening in the core. You know, these are world-known schools and attract a tremendous number of foreign students. Our Montreal experience in the core was really affected by the foreign student market. Every market's a little bit nuanced. In the aftermath, everywhere was really focused on the under thirties going home or foreign students not being here. If you just call it one cohort of effect, if you have mobility and you were in rental, you had the optionality of giving notice and going home.
That's the household consolidation point that Scott was talking about.
Yeah. Quebec got hit, you know, by a couple things. That was probably one of our higher areas of incentive throughout the year, and it continues to be through Q4 as far as granting of incentives. You know, and then similar to some of the other regions, you know, R&M utility costs, et cetera, and a little bit higher vacancy. It was just a culmination of a bunch of factors specific to Quebec.
You know, Scott talks about incentives. Like we're very proud of how we managed the pandemic. Our incentives are something that's not in CAPREIT's history at all. When you look at the total effect of incentive granting, it really equates, as Scott had said, in today's environment, we think of that as vacancy loss. Like we mitigated vacancy loss through incentive use. It's not something we believe in, but under the circumstances, we had to embrace because others were also embracing incentive use. It is important to highlight that burn off effect is really about incentive initiation. We've done a very good job in my mind of managing that prudently.
On the defensive incentive front, December was the lowest month for incentive granting for the year. We do see that burning off throughout 2022. By the time we hit Q4, it should be, you know, much more insignificant. It takes. It's a lagging effect on revenue as opposed to vacancy offset, which comes back more immediately.
It's been building, it's the problem. Like, when we were using incentives, it was a slow build, and now it's a slow burn. I think we've crested the top initiation curve. Well, we have crested the top of it.
Right. Got it. Well, that's helpful. I guess maybe just one more on, I guess, the expense side of things. I know obviously Q4, there was a lot of catch-ups that you guys did. How should we think about the run rate, I guess, in 2022, given, you know, the current inflationary environment?
You know, we never do this. We're not as impacted by inflation as our numbers may suggest. Again, we are looking at a difficult January with weather-related expense across the country, b ut it's not inflationary driven. It's unfortunate that it backs on to that catch-up quarter, but it's not inflationary pressure. We have inflationary pressure on the wage front. Dollar-wise, it's our frontline workers that we've had to address. From a quantum of dollars, it's not significant. From a percentage of increase, it is. From a dollar effect, that's where it is, but we don't view that as material. We view the revenue catch-up and overachievement due to higher churn to be-
Like, on the natural gas front, we've hedged 85% of our 2022 consumption. We see a lot of electricity costs are passed on through our sub-metering process. It's more around consumption than rate, we believe, from where we are today. Insurance, we're getting indications that those should be a more positive story for 2022, we renew in March, than the larger increase we saw kind of this year. There's some hopefully good news on that front.
Got it. Okay, maybe just one last quick one for me. I guess on the acquisition side, you guys obviously been keeping busy, but, I guess could you maybe comment on which markets are you seeing the most attractive opportunities for you guys right now?
It's been a slow quarter for new product launch for the type of assets that we identify as opportunities. We've got a couple of things in the scope right now, but it's also clear that the market still has an incredible appetite for apartments. You know, we continue to evaluate disposition opportunities as well, where we see value creation, significant value creation. There's a lot of assets CAPREIT's held for many, many years that really are trading at unbelievably attractive valuations. We've got that whole, you know, diversification, modernization strategy in mind. We'll be looking at that as well. I would not call it material change, but definitely something we're excited about.
Okay. No, that's very helpful. Thank you very much. I will turn it back.
Thank you, Joanne. The next question today comes from Mario Saric from Scotiabank. Mario, please go ahead. Your line is now open.
Hi. Thank you. Good morning, guys.
Morning.
Good.
I wanted to touch on the operating costs and then the large fair value being recorded during the quarter. J ust on the operating costs, you know, you're saying property value came down 2% this quarter. It would've been up 1%, if it wasn't for the other expenses category, which was up 13% year-over-year to CAD 40 million marked to net spend. You know, can you provide us with a bit more granularity on the breakdown of that CAD 40 million of other expenses this quarter, like between RM and insurance and anything else? That would be helpful.
Yeah, I'll let Tim.
Yeah. I mean, the majority of that would be R&M. I think, you know, through the year, I think we had about a 20% increase in insurance, b ut you know, either direct wages or wages through subcontracted personnel, it was largely driven by the increase in R&M and a little bit of inflation in the wage side. Yeah.
Of the CAD 40 million-
That was the real key driver, yeah.
Of the CAD 40 million, say like 70% or 80% plus would be R&M expense or more?
Yeah. Yeah. That's a reasonable estimate.
Got it. Okay. The commentary on kind of the catch up, if it was CAD 40 million in Q4, it was up 13% year-over-year. Is it fair to say that in Q4 of 2022, that CAD 40 million is 10% lower than it was this year kind of thing. Mm-hmm. Does that sound reasonable?
That choppy run rate's going on with the pandemic. Like, I'd hate to put 10% on it, but that seems reasonable on the surface, Mario. It's the catch-up. Like, if we have a stabilized go forward from here in terms of, you know, apartment entry, then yeah, I think that would be more than conservative. If we have another surge, obviously, in Q2 and Q3, then you could see a drop-off followed by another increase. Yeah, that's a reasonable assumption. It's all pandemic related, sadly. It's not just the normal operating business. There's clearly a start-stop effect with the pandemic.
Okay. That makes sense. Just shifting focus to the large fair value gain. I think the one thing that struck me with the quarter is the same property NOI declined during the quarter, which you've explained, and then the increase in the fair value gain that was taken. Most of that was due to higher NOI, not cap rate, which was particularly interesting.
Yeah.
I figured a two-part question. What happened in Q4 that drove kind of the cumulative fair value gain year to date from higher NOI up to CAD 417 million versus just CAD 27 million year to date in Q3?
Yeah. I mean, first of all, we obviously do our full valuation process with our third-party appraiser in Q4. Historically, if you look at the bulk of our increases come in that final stage. We're obviously cautious through the quarters to bump too fast, and then you have the pandemic effect through different quarters as well. That's the reason it generally comes in Q4, and there were a lot of transactions also to support those gains. The NOI side, really, obviously, 2020, the assumptions with 0% increases in BC and Ontario, and, you know, really lower mark-to-market rents, you know, were apparent in our valuations in 2020 and, like, through the first half of the year.
With you know the announcement of the BC and Ontario renewal rates you know which come into effect January 1, 2021 had a very large impact on our stabilized 2022 NOI. You know again as we saw through October November December we saw a real ramp-up in the mark-to-market of rents. We have budgeted increases in R&M so there is some inflationary pressure built into our valuations because we use our budget numbers to a large degree,b ut really it's really that top-line change a combination of vacancy drop off of bad debt. You know TIs don't come into play as much from a valuation point of view. I t really a top-line story with the momentum in Q4.
If you look at the trend through 2021, we hit, you know, a cumulative low of vacancy or higher vacancy, and bad debt and et cetera, in June. As we've come into the December months, all of those figures have really improved and built out a very strong stabilized NOI for 2022 from a valuation point of view.
Mario, I think it's appropriate if I could add something on the valuation front that we don't talk about a lot. You know, all of the apartment REITs in Canada who value income make up an incredibly small percentage of the ownership pool. You know, we calculate it less than 5% of the ownership pool for rental. The apartment sector in the public domain owns the smallest slice of the pie, okay, compared to office, compared to industrial, compared to. What we're seeing in the market. In fact, the counterintuitive thing happened during the pandemic. Apartments with large vacancy rates, the market sees it as a revenue opportunity and doesn't really run its business quarter to quarter like a lot of the REITs do.
Well, we don't run it that way, but they just take a different view. The other factor that has nothing to do with income is this replacement cost thing we keep talking about. The private market says, "My goodness, income at less than 50% of replacement costs, there's value in that." I think on the valuation front, it's something that we don't talk about a lot. We are a very, very different sector of real estate to our other sector peers. The valuation is really got, over the last five years I've seen it, so much less to do with actual income and so much more to do with NAV.
Mark, just maybe one follow-up on that. It's an interesting point that you're making. We're seeing in the industrial space where, you know, whether a building is occupied or vacant, it's the same valuation because of the conviction in being able to lease up the space at a very good rent. Are you finding in the private market just highly sought after, notwithstanding, let's say, some of the regulatory clarity uncertainty that exists for residential today? Are people buying vacancy today aggressively?
Again, oddly not as much today as a year ago, not a lot of product available today. You had this movement in the private sector saying it was peaking a year ago, and vacancy and income had nothing to do with it, nothing to do with valuation at all. Well, I shouldn't say nothing, but there was a surprising reaction in the acquisition market, as I said, where vacancy was seen as a positive. Whereas we run around and we're afraid of incentive use, the private sector kind of like they really value the inherent asset. I'm saying the same thing over and over again, but the conversation in the private market is more about price per unit than it is about, you know, what's your income effect next quarter.
Yeah. Probably from the fair value gain. You may not have the information handy, but like what would you say is the ballpark gap in the valuation that you're using between the stabilized NOI that is embedded in the fair value and then like your NOI that would have been in place on an LTM or NTM basis?
I mean, we might need to just take that offline, but are you kind of talking about what we're budgeted from a stabilized versus-
Yeah. Because one of the challenges with the
Breaking it all a little bit.
Oh, sorry. One of the challenges with the fair value mechanism is that it's generally based off some stabilized NOI, which in some cases could be 2-3 years down the road as opposed to today. I'm just trying to understand kind of what the gap between those two numbers may be.
No, realistically, I mean, we run a 2022 value, stabilized, for our valuations. We run rent rolls based on what we're seeing in the markets, based on renewal rates that we know are in place. That's what I'm saying was a huge driver of the valuation increase through NOI for year-end, was the fact that we do model one year forward stabilized. So it's not. We're not two and three years out. Like I know some other companies do that. We're basically a year forward. We're quite conservative from that point of view. Given where our occupancy is at, where we're seeing rental rates and renewal rates at, we think the top line is pretty predictable from that point of view.
Yeah. Like our through the year process is based on income changes, but it's not forward-looking, as Scott said. It's like in-place income calculation. The cap rate, the market probably looks ahead, and that's what we were just talking about, the private market valuing vacancy loss. When we do these year-end cap rate adjustments, that's when there's the catch-up effect. The typical, we believe that cap rate has probably one of the most conservative valuation models out there. We use multiple third parties. We vet it internally, and we typically lag what NOI by a small margin. We keep that robust system in place so that we're never overstating really.
Okay.
What's exciting though, and part of what some of our dispositions have revealed is this significant gap in cap rate use depending on the attribute of the disposition.
Mario, I'll just add, we do especially during the pandemic, we use DCF models just to look at the short-term impact of bad debt and vacancy, which doesn't have real large valuation impact. Obviously, if you're not getting market rents and if you're getting low renewal rates, that has more of a lasting effect. We do DCF as well as a kind of check our heads against a direct cap method on a one-year forward stabilized basis. You know, when we look at per door, and we look at a whole bunch of other things. We do look forward, but that's not our primary basis for valuation.
Yeah. No, it all sounds pretty comprehensive. Okay. Thanks, guys.
Yeah.
Thank you, Mario. The next question today comes from Mike Markidis from Desjardins. Mike, please go ahead. Your line is now open.
Thank you. Good morning, everybody. A couple quick ones just to begin. Scott, you said that 85% of your natural gas consumption was hedged. Can you remind us where the price level is, where you were for 2021?
I think the metric I could give you. My recollection is Natural gas prices were kind of almost 30%-50% higher. I think the mark-to-market on our one year of natural gas was somewhere in the CAD 2 million range, and for the three-four years, like CAD 6.5 million. That was the last time I looked at it. I haven't been following natural gas prices during the last two months, given how busy we are. It was substantially higher by, I would say, close to 50% at one point.
Sorry. To make sure I understand you correctly. The mark-to-market, I get that's a favorable event just from having the hedge in place. In terms of the actual price level where you're fixed, is that the 30%-50% higher that you spoke of, or is that-
Oh, sorry.
Yeah. Sorry.
The fixed price is almost bang on the same, like, for the next three years. I thought we were talking about, compared to spot market or forward market, which is, you know, I think it was between 30% and 50%.
That's in summary saying there's not a significant 2022 effect over 2021. I think that's what you're getting at, right?
Right. Exactly.
Yep. That's exactly it. Got it. Okay, thanks for clarifying that.
Okay.
Just on a significant presence there, New Brunswick is seeing some hyperinflation. Are there any other regions where you're kind of concerned about, or are you generally feeling good about property taxes over the next, I don't know, 12-24 months?
Yeah. You know, we work with advisors and whatnot. It doesn't seem to have any major pressure points. We saw a change in Alberta that's already hit us through 2021. We're not getting any indication of any major spikes. O f course, we'll continue to go back and fight any major increases like we have for the last 15 years.
Okay. Thanks. Last one from me before I turn it back. Just Mark, you made some comments in your opening statements just with regards to reallocating the resources you have, people from IRES to focus on other opportunities in Europe. Should we take that as an indication that you're not planning on repatriating any capital from Europe back to Canada?
No. In the resources, or it's our Toronto head office resources that we had dedicated on the corporate side. We have the ERES platform. We're very excited about what's happening with ERES and, you know, our efforts can be fully dedicated to the success of that platform.
Repatriating capital, there's no plans to bring any money back from Europe at this juncture?
No.
Okay. Excellent. Thanks very much.
Thank you.
Thank you. The next question today comes from Jimmy Shan from RBC Capital Markets. Jimmy, please go ahead. Your line is now open.
Thanks. Hey, guys. Just on the turnover spread, what is that tracking so far in the year? Did you say it was double digit?
Yeah. Like, nationally all in, I'm not getting too far ahead of myself. We kinda hit that 10%. Again, I think, you know, the numbers are strongest in the Halifax market then the GTA and Ontario and followed by BC.
You know, I'm like a broken record on this, Jimmy, and I'm not telling you anything you don't know, but it's the revenue story is what's so strong. You know, increased churn alone, even with lower mark-to-market rents, can generate a better bottom line. Better mark-to-market rent is clearly the path that we're on quarter-over-quarter. There's no reason to suspect that if the under thirties that are at home come back to mandated work and immigration numbers continue the way they are, we should be seeing stronger than pre-pandemic mark-to-market rents. Our occupancy gains are already the first part to recover in our revenue story. That's the way we run the biz. Incentive generation has crested, and initiation of incentives is dropping. Bad debts have stayed stable. It's all of it. The revenue story is quite strong.
You know, the trajectory of that story has been, as we said, gradual but predictable in an upward direction. As Scott said in June of last year, and the results in June weren't that bad, but there's always a bit of a lag effect. We've got this, you know, building momentum now on the beating of the Q4 by some operating expenses, hopefully not too weather-related in Q1, we'll see. The story is very, very strong.
Yep. Yep. On the under-30 cohort, what percentage do they make up of your tenant base, roughly?
They make up about 95% of our vacancy. I'm not kidding. It was all the under-30 cohort. There was no exception. The suburbs, Scott, was unaffected, and there's not a building in Canada that I'm aware of that was impacted that didn't have the under cohort. You can call them foreign students if you want. You can call them workforce city dwellers if you want. The reality is, I picked 30, maybe it's 32, but that's the entire effect of the pandemic. That's why I was making this point, it's a cultural Canadian effect, okay? In the U.S., if you're 30 years old, it's not unusual to be working in Houston and mom and dad are in Seattle. In Canada, for whatever, we live within an hour especially in the big cities.
If you're from the east side of Toronto, I'm gonna guess that your family is on the east side of Toronto. It's that specific. When it comes to Canadian vacancy effect, cultural phenomenon. It's age cohort related 100% to the pandemic. It's that cohort. That's why the downtown cores were affected. Where are the universities? Big city downtown cores.
Yeah, that all makes sense. Just quickly, in terms of your engagement on that front and advocating for the industry, I noticed you're also pretty active on social media now. Any updates, if you're hearing
Thank you for the mention.
I'm one of the followers.
Okay. Thank you, Jimmy.
Any update on that front, federal?
No. Listen, I'm doing my best. Anyway, that's another story. I'm doing my best to actually tell the affordable housing story. I'm not even telling the rental story. I'm telling the affordable because it does not serve our industry well to have these runaway home prices, owners of their property doubling in value in the last three years. You know, I really do feel strongly about the fact, well, of course, we embrace immigration. We're all immigrants. However, you can sit here and wonder why prices are runaway and yes, there's, you know, a flooding of capital in the market that has driven prices. Reality is that for people to have affordable homes, there's never been an example in the history of the world ever where supply didn't help that problem.
We're way behind on this. We've got the municipal level fighting development. We've got the federal demand into the system, and we have the poor provinces trying to solve the problem, and they have the least impact. At the end of the day, the rental sector is demonized even though our rents are actually not doing anything compared to the larger housing market. You know, there's my speech. Like I said, I'm not sure too many people are interested in following Mark Kenney on Twitter, but that's the story we're trying to get out there.
Okay. Yeah, but are you hearing it on the phone anything that come out recently or discussions underway, that you might be hearing or otherwise?
Not really. I think that there's, you know, as of this morning, a preoccupation with other issues, but not really. You know, between the truckers and the-
Okay.
What's happened in Europe over there, that seems to be the attraction. We're doing our best to get the message out on the need for more housing and the need for government to address the affordability issue, especially in the context of immigration.
Okay. Thank you.
Thank you, Jimmy. There are currently no further questions registered, so I'd now like to hand back to Mr. Kenney for closing remarks. Please go ahead.
I'd like to thank everybody. If you have any questions, please feel free to reach out to Scott or myself. Wishing you all a nice day.
That concludes.