Welcome to the Canadian Apartment Properties REIT 4th Quarter and Year End 2020 Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference Over to David Mills.
Please go ahead, Mr. Mills.
Thank you, Denise. Before we begin, let me remind everyone that the following discussion may include comments that 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 This can be found in our regulatory filings, including our annual information form and MD and A, which can be found at sedar.com. I'll now turn things over to Mr.
Mark Kenny, President and Chief Executive Officer. Thanks, David. Good morning, everyone, and thank you for joining us. Scott Cryer, our Chief Financial and in a timely manner to the significant challenges presented by the COVID-nineteen pandemic. As we've discussed over the last few quarters, with the advent of the pandemic last March, our teams began implementing programs at warp speed Aimed at ensuring that our residents and employees remain safe and healthy, preserving capital, maintaining a Strong and flexible financial position, mitigating risk and generating the best operating results possible.
Looking back, I believe we were Successful in achieving these objectives, generating many significant achievements during this year. I'd like to touch on a few of these accomplishments this morning. The second wave of the pandemic last fall Had an impact on our 4th quarter results, as you can see on Slide 5. Nevertheless, revenues were up over 8% on the same quarter last NOI rose 9.5% with NFFO up approximately 12%, generating another very conservative payout ratio of just under 60% in the quarter. Our growth also remains accretive to unitholders With NFFO per unit up 6.2% despite the 5.4% increase in units outstanding.
Turning to Slide 6. Despite the pandemic affecting our operations for most of last year, We still achieved record financial and operating performance in 2020, a testament to the skill and dedication of our people, The stability of our asset base and the resiliency of the rental residential sector in real estate in Canada. As you can see, we generated strong increases in revenues, NOI and NFFO in 2020 compared to the prior year. These record results once again demonstrated that CAPREIT can generate strong, stable and growing returns for our unitholders through both good and bad economic times. Over the last 23 years, we have built the team, the asset base and the operating platform We believe will only accelerate this track record of performance as the pandemic eases in the future.
Once again, on behalf of the Board of Trustees and all unitholders, I want to thank our people for their exceptional contribution to our performance last year, and we look forward to significant increases in our key financial benchmarks over the long term. From an operating perspective, we maintained our track record of solid performance in our stabilized portfolio, as you can see on Slide Dominique, occupancies remained effectively at full levels, while net average monthly rent rose driven by increases on turnovers and renewals. Our track record of organic growth also continues with same property NOI up 3.9%, while maintaining a strong NOI margin of over 65%. As you can see on Slide 8, we've experienced very stable occupancies through the pandemic. It's important to note that our vacancy at year end is primarily related to a very small number of properties, Impacted the most by the pandemic, luxury properties in the downtown core locations and properties impacted by reduced Student demand and lower immigration due to foreign travel restrictions.
Not only As this is a small number of properties, it's actually less than 10 across the majority of our portfolio. The bulk of the portfolio, the remainder remains at near full levels. We also believe that our small vacancy rate It's not reflected on the overall rental market, but the challenges of renting empty suites during the pandemic. As we emerge from this challenging time, we are confident occupancies will increase quickly to our historic near full levels across the entire portfolio. Despite the constraints placed on us during the pandemic, we continue to generate increases on turnover and renewals as shown on Slide 9.
Clearly, turnovers are being impacted by the ability of residents to move or personally visit our properties. People just don't move around as normal during a pandemic. Still, almost 8% in the Canadian portfolio and over 9% in the Netherlands on turnovers are solid results. And we expect to return to our more traditionally high increases once the pandemic eases. Renewals have been affected by the rent increase freeze that we implemented in Canada on April 1 last year to help our residents Work through these challenging times.
We are now beginning to implement modest rent increases in certain markets in constant consultation with our residents. As Slide 10 shows, we significantly enhanced the size and scale of our Canadian property portfolio in 2020 with the purchase of another 2,847 suites and sites for $690,000,000 We also sold some non core properties, including an underperforming asset in Calgary. We were also pleased to have completed the buyout of 12 of our 15 operating leases In the Greater Toronto Area, as detailed on Slide 11, for a total cost of approximately $173,000,000 We have taken a highly opportunistic approach to our portfolio through the pandemic and these buyouts are an excellent example. We acted on these layouts earlier than scheduled, resulting in a 31% discount to the agreed upon price for the properties, creating long term value for our unitholders. Importantly, the transition to fee simple ownership for these properties As material new financing capacity to fund our growth going forward, meaningful net asset value accretion and unlock Potential for potential new developments in the future.
As we have discussed over the last few quarters, We successfully implemented many key initiatives last year to mitigate the impacts of the pandemic. As you can see on Slide 12, these programs allowed us to generate solid performance despite the many issues that we faced. The most important programs began in the early days of the pandemic. The strategy is to get closer to our residents, communicate with them and understand the issues that they were facing and help them stay safely in their homes, while at the same time ensuring that we collected as many of our rents as possible. Our Compassionate Care program saw an average of 3,500 to 4,000 calls to residents each month.
Despite not being able to have prospective new tenants visit our properties by moving our leasing activities online, We still generated over 2,700 new leases on average each quarter. And to facilitate more efficient rent collections, today more than 85% of our residents now pay electronically. These programs have had a lasting and positive impact on our cash flows. As of yesterday, bad debt stood
at only
0.6% of revenues, Well, over 99% of our rents have been collected. We are very proud of these achievements and remain confident that these programs will result stable collections moving forward. We have also made significant progress on our ESG program. This commitment is important, not only because it's the right thing to do, but also because it's a strong business case to be made for reducing cost, Attracting and retaining the best people, adopting strong governance policies and allowing us to provide innovative solutions to our market. A key element of this program is to focus on diversity and inclusion.
As you can see on Slide 13, We hold an equal gender split between men and women in 2020. 52% of new employees hired were women. We also celebrate over 55 language spoken amongst our employees, a reflection of the diverse makeup of the Canadian population and the residents that live in our communities. Additionally, we only have We have a highly multi generational workforce. This focus on diversity helps us to better interact with and support The communities that we serve, the communities in which we live, where people work and where people are now investing.
It enables us to deliver innovative approaches and solutions both within and outside the organization. And as detailed on Slide 14, our environmental, social and governance programs for helping us reduce costs, attract and retain the best people and ensure CAPRE maintains strong governance policies and transparency. Our commitment to reducing our environmental footprint is enhancing the resiliency of our properties. It's building healthy communities and delivering strong returns on investment. In November, we were honored With a green star designation like the 2020 Global Real Estate Sustainability Benchmark Program and a ranking of 6th amongst Our North American real estate peers.
Our employee recognition programs, courses and conferences And our career development programs continue to generate very strong engagement scores amongst our employees. While our satisfaction Surveys ensure that we meet the standards and needs of our residents. We are pleased to be recognized for the 7th consecutive year in the top I'll now turn things over to Scott.
Thanks, Mark. Turning to Slide 16. You can see that we are clearly in a strong financial position at year end with a conservative debt to gross book value and historically high liquidity. We have $750,000,000 of liquidity available through our credit facility and cash on hand. And in addition, we have $974,000,000 in Canadian unencumbered properties to provide additional liquidity if ever should be needed.
In total, if we were to access all these sources of capital, We have available liquidity of approximately $1,900,000,000 And even if we did this, our leverage ratio would still remain a very conservative 42%. Looking at our financings in 2020, we locked in a very low interest rate of 1.84% on our total refinancings and top ups, and we expect we will continue to benefit from the current low interest rate environment for some time. At year end, 99.3% of our mortgages incurred a fixed interest rate. We are also confident that debt markets and financing will remain highly available for our properties given their stability and the strong fundamentals of the rental As of December 31, 2020, 98.7% of our properties hold CMHC insured mortgages. At year end, we recorded an almost $1,300,000,000 increase in the fair value of our property portfolio, including $600,000,000 in fair market value gain, another strong indication of the stability of our business and the value of our properties that we bring to the unitholders.
Turning to our balance sheet on Slide 17. You can see that we continue to maintain a strong and flexible financial position at year end with conservative leverage of 36%, Strengthened covered ratios, such as an almost 4 times interest covered ratio. And in 2020, we continue to decrease our interest costs on our mortgage portfolio to 2.56% At a weighted average term to maturity of 5.8 years, we expect to continue this trend in 2021. Slide 18 outlines our debt strategy for 2020 2021. Starting in 2020, Management modified its debt strategy to have longer amortization terms on its CMHC insured mortgages.
By extending the amortization period to 30 or 35 years compared to the 25 years historically used. By executing on the strategy, CAPREIT has been able to increase the amount of debt we can fund at the refinancing date And the total average debt outstanding over the term of such mortgages, thereby locking in more total debt at the current attractive long term Management believes this strategy will allow CAPREIT to use the CMHC top up program in future years, which will reduce the overall CMHC costs related to premiums. In 2020, we accelerated our refinancing and acquisition financings and expect to continue to do so in 2021. CapRe completed $1,400,000,000 of total mortgages in 2020, which is approximately 30% of our total mortgage portfolio. And we expect to refinance another $850,000,000 to $900,000,000 in 20.21 in order to lock in very low interest rates for long term debt.
With the 2020 refinancing, CAPREIT repaid the credit facility and made it available for potential future investments. Again, on Slide 19, we significantly accelerated our refinancing in 2020 compared to the prior year. And this has significantly reduced our interest cost and extended the average term to maturity. We had a total top up of over $900,000,000 in 2020, far exceeding the amounts provided in 2019. We have been very proactive in capitalizing on these low interest rates and will continue to do so this year, with rates coming off Previous refinancing versus the current rate all dropping straight to the bottom line.
Our mortgage portfolio remains well balanced as shown on Slide 20. And in any given year, no more than 11 Some 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 2,035 will provide further significant liquidity in the event of major capital needs. You can also see on this graph that we have considerable opportunity to reduce our long term interest cost in today's attractive interest rate environment for years The current 5 year and 10 year estimated rates of approximately 1.5% 2.2% are well below expiring mortgage rates of between 3.1% and 3.3% over the next 3 or 4 years. Turning to Slide 21.
Our European exposure is managed by utilizing a number of different tactics with very favorable impacts, including obtaining local euro third party mortgages at variable at very favorable interest rates and entering into cross currency swaps on our local debt. Our European assets are currently 81% hedged using euro debt and cross currency swaps. Swaps are now staggered between 1 to 5 years to take advantage of the low swap rates and make sure that they continue long into the future. In total, dollars 676,000,000 of Canadian debt is currently swapped with euro debt, with all The rate between 24 basis points 80 basis points depending on the assumed mortgage term. As such, we have locked in significant interest savings while hedging European exposure.
A key reason for our prime focus on the Canadian residential sector It is the attractive spread between cap rates and interest rates. As you can see on Slide 2020 20 22. Historically, there have been very strong spreads over the last 3 to 4 years. The forecast for interest rates to remain low for the foreseeable future, we are now seeing quite high overall spreads of between 202.50 basis points. Clearly, spreads are lower in key markets like Toronto and Vancouver, but there is still good accretive deal flow available to us.
We continue to evaluate and act on the opportunity to acquire properties in our target markets. I'll now turn things over to Mark to wrap up.
Thanks, Scott. Looking back over the past few months, As I've said in the presentation, we're extremely proud of our teams and how they've responded to the COVID-nineteen pandemic. Our continuing growth and solid performance is a testament to our resiliency and ability to quickly and effectively adapt to these challenges. I can't thank our team enough for their efforts, their professionalism and their dedication. Looking ahead, I'm confident that the programs that we've put in place We'll continue to generate strong and stable performance in the coming months and will contribute to even stronger growth as the pandemic eases.
A key factor in our success has been our focused asset allocation strategy as detailed on Slide 24. On the apartment side, we continue to generate and target, I should say, value add properties in the mid tier segment. These properties are acquired at well under 50% of replacement cost. We have proven Our ability to invest in them to increase value and their stability is driven by their very affordable rental rates. We also continue to like the MHC sector, a highly stable low risk business with very strong potential to increase cash flows.
Revenues are highly stable and with residents owning their own homes, capital requirements and maintenance needs are significantly reduced. MHC Properties also provide another level of diversification within our portfolio, allowing us to enter more rural and smaller markets than a residential focus on large urban regions. Our European presence is driving significant and growing dividend and fee income. Dividends in 2020 from ERES and IRES totaled $32,900,000 while our fee income for property management Increased 5.2 percent to $22,100,000 As the only professionally managed operating platform in Europe, The opportunities for further growth and enhanced value are significant. However, we will target our exposure European markets and keep our exposure to Europe at approximately 15%.
Another key attribute of our growing property portfolio is our focus on Canada's 3 largest and most vibrant rental markets, Toronto, Montreal and Vancouver. As you can see on Slide 25, in addition to offering quality rental accommodation In these high demand markets, our rents constitute a very manageable percentage of total disposable income for our residents. Our rental rates are between $1.50 $2 per square foot, are clearly affordable are going upwards of $3 to $5 a foot. This clearly makes our product attractive to the mass mid tier market. Quality properties and more space at affordable rents, this is the CAPREIT value proposition.
Through this value proposition, our main growth focus going forward is on the mid tier segment in suburban markets It offers size and affordability. With these mid tier properties, we are providing quality suites At rates around $1.75 per square foot, far below the suburban average. Our apartment properties contain mainly 2 bedroom homes, Space that is seeing strong demand. We are also the largest owner of townhome rental properties And the 2nd largest owner of manufactured housing communities in Canada. Renters today want more space and our properties provide A range of affordable options for them.
Our recent acquisition in Halifax is a key example. These brand new properties around the downtown core contain many 2 and 3 bedroom suites with lots of living space and they rent for an average of only $1.20 per square foot. Again, value is being created by offering quality rental suites With more space at affordable rates, we continue to target these fundamentals going forward. Further to this point, you can see on Slide 27 that our residential suite portfolio is predominantly positioned in suburban markets Around Canada's 3 largest cities, our presence in downtown cores is minimal. For example, you can see in the GTA That approximately 22% of our total portfolio is located in suburban GTA markets, with only 5% of the portfolio being located downtown.
Looking ahead, we will continue to build on our presence in more suburban markets or in nearby population centers with short commutes. We believe the affordability of our suites As well as its geographical allocation, we'll continue to experience strong demand after the pandemic. In summary, looking ahead, we are very excited about our opportunities with further growth and enhanced unitholder value. Our focus on the mid tier sector, we see increased demand for affordable high quality homes. Our predominantly suburban locations outside downtown cores and our larger size suites, townhomes And MHC sites are meeting the needs for renters seeking more space.
We are experiencing a Strong pipeline of accretive acquisition opportunity and expect to see solid portfolio growth in the quarters ahead. The continuing low interest rate environment provides significant opportunities to acquire properties with strong cap rate spreads and to reduce interest costs on our refinancing initiatives. And most importantly, as our markets return to more normal conditions, We are confident we will see another year of record performance in 2021 and going forward. Thank you for your attention this morning, and we'd now be pleased to take any questions that you may have.
Your first question comes from Deane Wilkinson with CIBC. Your line is open.
Thanks. Good morning, guys. Good morning, Dean. Mark, can you just talk
a little about sort of market rents and that 20% differential, I mean, market rent is a bit of a nebulous term. Can you remind us what goes into your assessment of that 20% gap?
Yes. So in our case, when we look at our in place rents versus what we survey to be the opportunity in the market, That's clearly the gap. How we do that, Dean, is we're constantly ranking our quality of offering versus the quality of offerings of buildings in the immediate location and we price ourselves accordingly. Okay. So for the number Three quality offerings in competition for the local area because apartments are a local business.
We want to strive for being at least That rent level or higher? And constantly updated on a monthly basis.
So how should we think about I guess, COVID kind of put us all on our heads in 2020 and Your mark on turns was 8% versus the 20%, and I guess in 2019, it was more in the mid teens. What should we be thinking about for 2021? Is it going to be more of a self regulating year around bumps on turns And maybe 2022 is more back to sort of that normal year that we would have saw sort of pre pandemic?
Yes. I'll give you a very qualified answer because it's completely correlated to the vaccine rollout and the easing of the pandemic, okay? I wouldn't call anything that you see in the numbers a strong trend at this point, other than the strong results you're seeing from us. But I wouldn't read too much into rent and I'll tell you why. As we've all gone through this pandemic and I mean all the apartment communities gone through it, We really struggled to find how to find residents when there are no residents there for certain situations.
So I call it like we've been fighting on lowering rents, incentives And improvements. The reality is people just aren't moving. They're staying at home. There's been this massive household consolidation go on, okay? We don't know the numbers, Dean, but there's more kids living with their mom and dads right now than ever before in Canadian history.
And that's not a trend either, Okay. We believe that in September is a magic month, They are as we get closer to September. And the reason why is that's when the government is calling for a vaccine rollout to be substantially complete And that's when there's a return to school and that's when we believe things will start to get back to normal. I believe that That marks the beginning of what we're going to see in terms of new trend. So if everything stays the way we think it's going to stay today and it could move around, I think we Back to normal rents, probably in Q4 of this year and most likely Q1 of next.
And when I'm talking about like pre pandemic rent levels, if not higher. And the reason I say that, again, Strange effects are going on in the marketplace. We've seen home value prices surge. So the affordability for homeownership Has actually grown significantly during this pandemic as you see even further acceleration in home price valuations and a decrease in rents. So the gap is the largest gap we've ever witnessed.
And being disciplined with the gap between the, let's say, Last year being 2019 at 13% or 14% on turnover versus 20% for the portfolio. Yes. We do see that the higher The gap between market and in place rents, the less likely people are to leave. So we actually have more built up demand in older leases that are Higher mark to market. So that's kind of that bridges the gap between our turnovers and our mark to market.
Yes. No, that does totally make sense. And then my second question, and it might not be one that you can answer. I guess there has been some growing concern around just The veracity of these new variants, do you have an ability to track the incidences of positive case counts In your buildings, and have there been any sort of outbreaks or anything? Or is that something that's maybe a little too invasive to track?
No, no, no.
We have the ability to track it. We don't have the information. It's by public health, okay? So for privacy reasons, we don't know what's going on. But public health guidelines across the country are basically the same.
When declaring an outbreak in apartment building has to be more than 3 cases. And we've only had 2 of those, so that they breached 3. And very short, very short lived. People in quarantine that were fine. So we do know, but we only know through public health and the incidence of the outbreak has been virtually non existent.
Okay. Very, very well. I'm sure we had more flu cases in the past. We certainly aren't aware of any deaths. No doubt.
Okay.
That's great. I will hand it back. Thanks, guys.
Yes. Thanks, Steve.
Your next Question comes from Lorne Kalmar with TD Securities. Your line is open.
Thanks. Good morning, everyone. On vacancy, you guys are still doing pretty well, but what are your thoughts on sort of letting it drift a little bit higher over the pandemic and at what point would you start pushing occupancy?
Well, it's a little bit of science and a little bit of Because if you play the vacancy game too soon, you can really get behind and it's very, very hard to catch up, okay? And in the context of the pandemic, if the return to normal is expected to be September And that isn't quite right and you've lost your leasing season because you get low lease velocity in January. So you've really only got a 4th quarter To make up all the ground you've lost with accumulating vacancy, okay? So, my mind has changed on this Because I'm the one that's been saying don't call a trend. It's not a trend.
It's a pandemic effect, and I believe that wholeheartedly. So when it comes to holding out for value, we'll be more inclined to do that over the second and third quarter. Because our numbers aren't too bad and we don't have that many properties that need to catch up. And I really feel confident in the case Taply. If you look at the 10 buildings that we've got trouble in, the majority of those are student university focused buildings and they will fill up quickly.
So we will hold off on value offering on those for sure.
Okay. Yes, you painted a pretty compelling picture of what
you guys were expecting in
September. Maybe just switching gears to Are there any other big portfolios out there that are in your wheelhouse?
There are. We'll remain restrained on value and what we pay. We've got a very Refined sophisticated acquisition department, the team does a great job and we'll stick to our modeling. The market will determine what the market will pay always, but I'm never upset when we lose a deal. It's just validation that we're sticking to disciplined approach.
Okay. And are there any markets where you're really seeing more opportunities than others?
I would say what the pandemic has taught us and moved our mind to is space. And so probably that could result in continued focus on suburbs, as I said in the presentation, And some open mindedness to smaller markets. And by smaller markets, I Plus 200,000 population markets. We've seen how incredibly resilient Those markets have been in the pandemic. And I think that if people have more flex work options, they'll be more likely to move themselves into those markets.
Sure. And then just one last one for me.
Have you guys seen any increase in demand in the townhomes and MHC sites as
a result of the pandemic Sustained increase, I guess?
Totally sustained. Yes.
Okay, great. That's all for me. Thanks, guys. Yes.
Your next question comes from Matt Logan with RBC Capital Markets. Your line is open.
Thank you and good morning.
Good morning, Mark.
Mark, maybe just following up on Lauren's question. When you talk about Acquisition opportunities in smaller markets, can you give us a sense for which markets you might be considering? Like would those be in Ontario, Quebec or across the country?
Yes, we've been pretty open. We like the Ottawa market as an example. We can pretty much take any market across Canada that's got a population of, call it, 200,000 people, and we would just look to see what the opportunities are in those markets in terms of supply growth And demand?
And in terms of acquisition volume, would it be Fair to say you're targeting something in line with what we've seen in 2020 or perhaps a bit more?
Yes, I think that's fair. Like, we really have this like disciplined approach to valuation And David, in the market and what happens, happens. So what's been consistently revealing itself is that we're successful about 5% of the time. If we continue to be successful 5% of the time, given 300 deals of underwriting Last year, we'll probably see ourselves in the same kind of space of acquisition. It wouldn't be unreasonable to assume $400,000,000 to $800,000,000 of acquisitions?
But it's really hard to say.
Well, what you're doing certainly seems to be working. And maybe just changing gears to your letter to unitholders. You had talked about some growth opportunities in your MHC business To increase revenues,
can you give us some color on what that might entail? Well, what the pandemic has also taught us Is that the whole topic of affordable homeownership is on the minds of every government pretty much everywhere. So, we know that the MHC market offers a very affordable homeownership option for people. And so it's our intention to build on the development and The intensification, I should say, of our existing MHC sites and look to get into developing new MHC sites. It's the one area of development that I believe is under serviced and underappreciated, and it's an area that we have high expertise in.
Great color. And maybe a question for Scott in terms of the fair value marks in the quarter. Can you talk a little bit about Grow the higher normalized NOI assumptions and where you're seeing
the most cap rate compression in your portfolio?
Yes, for sure. I mean, I think realistically, we came into Q1 With some very strong cap rate compression, and we are cautious on that. And obviously, in underwriting Our evaluations in Q2 and Q3, we are again very cautious on what we were projecting from a stabilized NOI point So I think, really it's reflective in Q4 more confident having been in this for a year That maybe our underwriting on the NOI side was too conservative. And then the cap rate side, I mean, We continue to see incredible cap rate compression. I would say we think it's going to continue.
Obviously, the interest rate environment is a huge driver of that as well as the asset class just showing its resilience. Q4, the majority of it for the year was a cap rate compression, but it was a 2 thirds cap rate compression and about 1 third As far as where the compression is greatest, definitely kind of the GTA and Ontario market would probably be where we saw the strongest compression.
That's great color. And maybe one more for me and I'll turn it back. We're about 2 months into 2021. Has there been any material improvement or deterioration in the rental markets so far this year?
I'd say moderate deterioration. It's directly related to case count is all I can say, But it's not as severe as case count. So we can see that our traffic obviously slows down with case count Increases and improves when case count drops off. The second wave has been faster And probably just a far more quiet market because it was built on top of the slowest quarter of renting in the year, 1st quarter. So I'm expecting an improvement in Q2.
But all of this is in the context and backdrop of CAPREIT's incredibly strong results. Like We're still, as I said in the presentation, bad debt, at year end stood at 0.6% and vacancies are obviously strong and still exceeding
Your next question comes from Mario Klarack with sorry, Deb, please state your company name. Your line is open.
Thank you, Scotiabank. Just a Couple of follow on questions. Maybe first off, on the 20% mark to market, it's probably hard to quantify, but Within that number, what would you estimate would be the required kind of CapEx spend per suite To get that 20% or are you saying the 20% is simply the gap to market rent as
the condition of the unit stands today? I just go to traditional numbers, Maric, with the pre pandemic spend on Ensuite, I would apply those kind of assumptions As being the normalized way of getting at that mark to market. The mark to market is just a very difficult Number right now because we believe that the market isn't truly indicative of what the market is because of the pandemic. And this is why I keep saying be very careful about looking at trend. There's the difference between pandemic effect and trend.
And I think in the case of CAPREIT, you'll see a very, very fast reversal, which again, it won't reverse with the trajectory of that change forever. It's just the end of the pandemic effect will result in a very quick normalization.
Okay. And I recognize that the student population in your As well as you mentioned roughly about 10 buildings. But I do think that one of the reasons why Multifamily, yourself included, we have been feeling a little bit of pressure recently in terms of unit prices, the market uncertainty with Back to the vaccine rollout efficiency that the Prime Minister has laid out, You mentioned kind of September being the target date for the government. September is also the start Of the new school year, so just a couple of points here, a couple of questions. Number 1, within your portfolio, international students, When they do come into the country for the school year, is it typically well in advance of September or do you typically see them come in kind of No, August, start of September.
It will be August. We'll have end of July, 1st week of August, we'll know exactly where we're at With the situation.
Can you review I can't
sorry, I can't say it enough. Like, first of all, we've got 10 buildings. So in CAPREIT's case, we're talking about 6. You could argue 8 because buildings that are Just in the downtown core always have students, but the 6 that are direct. And we're talking about 700,000 foreign students returning to the country And in unlimited we don't know sorry, we can't not unlimited, we can't quantify the double cohort effect of kids that didn't go to university, Did courses online last year that are going to reenroll this year.
And then the biggest one by far Is the household consolidation one? And maybe I'm using the wrong words, just kids living at home with mom and dad That are not going to stay there. And anecdotally, I think we all have friends that have teenager 20s or early 30 kids at home right now They aren't looking to stay and they're only home for safety reasons. And that release of consolidation Of households, it's going to be profound. Even though we're not core, I very much am of the belief that you'll see a really pronounced recovery in the core across the country Once it's safe to live there, the cities have become anti lifestyle when cities have grown and urbanized because of their lifestyle offering.
So, the exact reasons why young people live in these big cities has become the exact reason you don't want to be there because of deadly pandemic effect, anti lifestyle.
Yes. I appreciate that. So when I guess the catalyst is really when the universities and colleges kind of determine when in person classes will commence. Like in your view, do you view that as the government hitting their targeted vaccination program, is that sufficient for universities to commence in person classes in September Or any thoughts on when we might get clarity on that?
Yes. Like this is unconfirmed. It can be checked. Universities are starting to announce now In class learning, and I could have this wrong, but I was told yesterday McGill Was either about to announce or had announced the return to in class in September, and that's a positive sign at this early stage. I think we'll Real good clarity at the universities in the next quarter.
Maybe shifting just one quick question on the MHC discussion. Do you have a broad Kind of sense in terms of timeline with respect to potentially kind of formulating your MHC strategy Over the next like 3 to 5 years?
Yes. So what we will be doing, what CAPREIT has been doing has been adding Somewhere in the neighborhood of 50 to 70 homes per year to our existing MHC portfolio by infill. What we are doing, hopefully, in the spring, it's all permit pending, on our existing lands is looking at Developing out intensifying the development on 4 locations, I'm hoping that gives us an additional 100 homes. And we're actively trying to understand the zoning process. That's the single biggest stumbling block To rolling out affordable ownership in Canada is finding land that we can have zoned for this use.
But politically, The people we've been engaging with, it's had a remarkably positive response. And so we're hopeful. We've got a track record of doing it. We're the 2nd largest in Canada, and there's been very little MHC development in this country for decades. And I think there's plenty of room for capacity.
Right. So would it be fair to say unlikely a 2021 event, but also It would be something that you have to wait for, 5 years
for in terms of Yes, it won't be 5 years, but we hope to give Examples and evidence of our ability to develop these communities in 2021. That's my hope to get some Actual intensification going on in our existing sites.
Okay. My last Question is just on the distribution. So in the I believe in 2019, the distribution increased with Q4 results, The pandemic obviously took over to 2020 in the past. You've announced distribution increases as part of the AGM More often than with Q4 results, I'm just curious in terms of what the Board thought process is on the distribution And whether it's simply a timing issue or whether it's kind of a latency approach in terms of how 'twenty one transpired?
Yes. We're incredibly proud of the fact that not only we're lowering guidance on our distribution range, We've now moved it from 60% to 70%. We're touching the bottom of that range, As I said in the presentation, and the Board feels very comfortable that we're moving in that direction. It's great Stability, we are going into a second wave. We are moving with caution obviously when these kind of decisions are made.
But it's clear that we have the capacity to consider that option.
Okay, great. That's it for me. Thank you. Thanks, Mario.
Your next question comes from Brad Sturges with Raymond James. Your line is open.
Hi, good morning. Good morning, Todd.
This is the follow on to Mario's question on the MHC Frank, it sounds like if you do pursue some of the infill or intensification opportunities that could be on your own, but if you're going to Maybe start a more a larger formal program, would that still be potentially with a partner?
Well, We haven't gone as far as to announce partnerships yet, but when it comes to Apartment transactions, let's just follow CAPREIT's thinking there. We've been very comfortable with buying Apartment buildings in the final stages of construction are the early stages of lease up when we can properly assess rents and we derisk The development costs and our track record at buying those apartment buildings at good cap rates is strong, okay? And we think For whatever development profit we could be saving by developing apartment buildings, our existing strategy has been a good one. And so we'd be very open to applying the same thinking when it comes to MHC development. The CAPREIT is, You've heard me say, I believe one of Canada's greatest REITs.
And we've done a fantastic job of adding value In in place income opportunities and don't proclaim to be development experts and we would always as everything proceed with caution here. So it's being mindful and planned in our approach to a development program. What we need right now is Political will. And once we feel there's political will on the rezoning process, then we will consider How to proceed with the strategy? But it's a hyper fast strategy, Brad.
Once you have zoning, it's not like building an apartment You're building land infrastructure, as you know, and then the homes are manufactured and brought in quite quickly. So the development cycle is hyper fast relative to apartments. That's everything geared around zoning.
Yes.
I guess in the past too, capital recycling has been More opportunistic than anything, could this year or going forward, could you be a little bit more active from an asset location perspective or is it still going to be very opportunistic?
I think it's the new CAPREIT to take a hard look at where we think We created, from our perspective, the most amount of value. And if somebody else sees more value in that opportunity, then that's fine. But we're extremely open minded today. And it's not really a change of thinking, it's more the size of the platform. And we're big enough That we don't need to just grow and but we have a great track record of doing that with acquisitions.
So again, our acquisition team, it's a big team, it's a great team, and they do a wonderful job at analyzing our existing properties And qualifying opportunities to look at disposal. But wouldn't call any of this Major deviations from strategy, it's just building on what's worked. So I'd say the same thing with MHC Development. We're easing into it, probably with more conviction than apartment development. And when it comes to dispositions, We're open minded and no fundamental change in strategy there.
We're open to recycling capital.
Got it. Great. Thank you.
Thanks.
Your next question comes from Mike Markidis with Desjardins, your line is open.
Hey, everyone. Just one quick technical one here and A couple of high level ones. Just on your I know, Mark, you don't want us to dwell too much on the recent spread that's seen over the past the turnover spreads over the past few quarters. But just second question, Are the impacts of the infusions included in that spread? Are you lowering it?
Or is that something inefficient too?
Scott, you can answer the question. I'm not sure I get it technically correct,
but
spreads or spreads? Yes.
The turnover numbers or Mark to market would not include any level of incentive. So, yes, that's not incorporated. We do have good disclosure on kind of the levels of incentives they have increased this year a little bit. We are starting Away from them and I think we talked about being more comfortable with vacancy, which to some degree inducement is just A level of vacancy, but yes, it's excluded.
Mike, if I can address that point, because what you're raising is actually an Important point. And this is going to sound a little bit confusing because it's not a trend environment, okay? So what we found was incentives weren't working. Like it's just not moving the needle and lowering rents really isn't moving the needle either. So what we didn't know is the duration of this pandemic And what conservative approach that CAPREIT always takes is how long is this going to go on for and we have to hold Our revenue is intact.
And so we tried to combat that with traditional tools like rental rate adjustment, incentives and quite frankly, not a And quite frankly, not effective in the long run. There's just people not moving, as I said, because of the pandemic. So Scott just alluded to it. We're taking a very hard look now that we believe that our Prime Minister is giving us good guidance on September. We have something more solid we could work towards and we will be reviewing those very, very carefully.
Despite the fact that Traffic will be probably more impaired over the next few weeks than they were than it was in the first wave of the pandemic. We won't be as open to using those tools as we were.
Okay. So if I understand you, in the short term, we're not likely to see that number increase as
Yes. There's a 12 month run rate on some of those incentives. So they have to bleed off. But yes, the rate at which you're using, you're totally right, that is unlikely to continue at the same rate.
Okay. Which leads to my next question, just a clarification. Can you remind us from a rent allowable guideline increase perspective, As long as you don't see 3 months in Ontario, you're able to it doesn't factor into your like you're able to burn those off next year, correct, We're already restricted in terms of other actual reading website.
Sorry, Mike, I couldn't quite hear you. If you could repeat that question? Yes. No, just trying to make sure I'm
clear on the maximum allowable increase being set at 0% next year in Ontario. And to the extent that you've used incentives, is it 3 months or is it like what's the rules again on that in terms of can you burn off if someone you gave someone 2, 3 months, Are you allowed
to burn that off and
that this account as an increase under the guideline?
We don't use our incentives. I know what you're But we do not use our incentives that way. There's a and Scott, you can give more color to it, but Some people use those incentives. We don't do that. So, the guideline is on the existing rent and that's it.
It's just straight line. So if your rent was $1200 you were able to get a 1.4% guideline increase, government is saying 0, it's 0 for the year. You can't offset it within any sort of other number in Ontario.
Okay. Just with respect to regulatory concern, there's been some intervention and obviously unprecedented times, unprecedented measures by governments to intervene. When we come out of the pandemic, is your thought process that that pressure will sort of abate somewhat or are you expecting to have more Regulatory concern as we emerge from the U. S. Pandemic?
Well, it's an interesting question because Traditionally, if you go into disturbed economic times, which we all thought we were going to, haven't seen real evidence of that yet, You would expect to see rents recede and political pressure fees off. But What we've had happened here is this low interest rate environment has really, as I said, accelerated the homeownership market To clearly heated levels. And so there's no political pressure to that arena. There should be, But there's not, okay? And so where the political pressure then moves is to rental.
So, I think it has a lot to do with the anxiety levels of number 1, people that are frozen out of the homeownership market That feel trapped by that and how bad the recession, if there is one, It's on people. But when you look at our collection rate, and yes, there's government assistance, it's been quite strong. So there's not that evidence Government intervention even being necessary at this point. It's I think just been highlighted because there's a lot of anxiety out there Understandably so. When there's uncertainty, these issues all escalate.
But government seems to understand the only real solution to what we're talking about here is supply. And they do seem to understand that. And I'm hopeful that anxiety is just calm.
Okay. And that's actually a great segue into my last question. Just we've talked about undersupply even now, but leading up to the pandemic and how Causing rental rate inflation or market rent inflation. But you've also talked to the fact that new supply comes on and it is in that $3 to $5 per square foot range in select markets We're not sure what the depth of what we've seen demand is for some of that product. So I guess given that, that you can only deliver at a certain Cost, what's that to give?
I mean, how do we address that going forward?
I think there needs to be Creativity, and that's why I use the manufactured home ownership as an example. I think the problem is that We've all been trying to solve the affordable housing problem by looking at how we can make concrete buildings half price, And there is no way to do that. And as a result, there's been very little progress made. You can't build something for half price. So how do you charge half price rents?
And that is the heartbeat of why CAPREIT is such a great value offering is because we're buying income, Which really creates a valuation of less than 50% of replacement cost. And that is why we're so strong. But I don't think there's a clear cut answer as to how we get out of this without high government conviction And possibly intervention to solve the zoning issue. It's all about the length of time for zoning. It's just far too long For the population ambitions that the federal government has does not align with the conviction To zone at the municipal level.
And quite frankly, so bad for the provinces, they tend to be stuck in the middle of the problem that they regulate. So it is a
bit of a
complicated issue that needs government unity. And if we're going to move through A period of growing our population, as I think we should. We need to have strong housing policy It's led at a federal level that can coordinate the thinking and activities of provincial and municipal governments. It's a dislocation between those three level of governments, which has made our portfolio so valuable. And it's a dislocation and unity of those three governments, which will help ease
Okay. Thank you. I appreciate your comments and congrats on the incredible year
Thanks,
Mike. Your next question comes from Joanne Chen with BMO Capital Markets. Your line is open.
Hi. Good morning, guys.
Good morning.
I just sorry, apologies if I missed this earlier, but you kind of quoted that $400,000,000 to $400,000,000 of acquisitions in 2021. Would it be fair to say that That would be more skewed towards Canada at the juncture in terms of where you're seeing the opportunity?
Yes. Yes. And when I quote that number, I'm quoting the Canadian acquisition. Okay. Thanks.
No, it really is a tough You've probably seen in our investor deck, we have that little pyramid that shows how many yields we underwrite and how many transactions that we do. And quite frankly, Our success rate is not so impressive. But when you look at the dollar value of that success rate, During a pandemic year, we put almost $700,000,000 of acquisitions into the portfolio. Year before, it was over $1,000,000,000 So We're incredibly disciplined. Our true strength is our ability to cover the country and underwrite so many deals with a disciplined approach.
So, I would just look at that track record in 2019 2020, and I can't see a reason why it would be different in 2021. But you don't know, A, what's going to come to the market and you don't know how much, froth is going to be out there for multifamily assets Given what's happened during the pandemic. So we'll stay disciplined, but I'm hopeful that we can continue to find value. But if we can't find value, we've got a great portfolio and I'm not driven to grow. Just for the sake
of growth. I'd just add that we are still very bullish on Europe. Okay. To support Erez in their growth, if strong opportunities happen. I mean, I think from a Capri point of view, we like European market and then you'll see from the slides our ability to hedge the FX and create Incredibly low interest rates levered up to close to 100% makes our European strategy extremely accretive.
So Definitely not afraid to grow there as well.
Yes. Would there be opportunities to, I guess, further increase your interest in
IRAs as well or?
Yes. Listen, our intentions Really, and primary focus has been in the support of Erez. And We continue to support our iRes investment and value that investment. But looking at the track record, The support in the last couple of years that's been welcomed By the Erez Board has been supporting that entity. And as Scott says, we really like the dynamics and deal flow Opportunities in the Netherlands, and we're very happy with our Irish investment.
Okay. And maybe just another way to point back to the regulatory risk question. Given The pace of vaccination that we're able to get here now in Canada seems like that recovery is being pushed back, keeps getting pushed back. Well, hopefully, we'll get a big vote
in the next month or so.
I hope so.
But what is your thinking maybe terms of, I guess, Pacific Ontario, the possibility for the expansion of that event freeze into 2022 right now at this juncture?
I think it's hard to say. The magnitude of that or the impact, I should say, of that Rent freeze in 2021 isn't great, but it's not overly material to CAPREIT. It's not something that we would openly, I guess, welcome because we have costs that are growing And residents that we need to service and employees we need to take care of, but it's not of concern to me. I think we're in the environment we're in and until it's stable, it's hard to call what's going to happen.
Your next question comes from Matt Kornack with National Bank Financial. Your line is open.
Good morning, guys.
She's been roughly popular here today, Matt. I know. I know.
I know. So, these things are better at clicking the button because then hopefully the tail end. Just a quick quick two quick questions. You're done. One of the 6 properties, are any of those we also saw the announcement from McGill University.
Are any of those your assets in close proximity to McGill?
Yes.
And I mean that One property that you have in the McGill Ghetto is about as core and central to the university as you can get. So can you talk to kind of the quantum of Vacancy in those 6 properties.
Sure. But hold on to your chair and remember that cap rate vacancy Is extremely low overall levels, but we have we've been hardest hit in Halifax, Edmonton and then Montreal, okay? Those numbers in those buildings are plus 30% to 40%. And there's really not much that can be done about that. The good news on that front is that they're going to fill up fast if September is back in place learning.
And if the vaccine is rolled out, mom and dad are comfortable letting their kids go to school. There will be no lack of students. When you're trying to catch the overall market and solve problems of that magnitude, you can't. But when you've got a returning market, it will fully return, especially with the double cohort effect That we think is out there, we don't know for sure, but we think that there's a number of kids that didn't go away to school last year that wanted to, that are going to be enrolling 1st year this year, As well as the foreign student effect. So, I think these high vacancies bode well for CAPREIT.
I've never said that before in
the history of our company.
But I think that it allows to get market rent and it allows us to improve vacancy very, very quickly.
I think that's a fair point. I know that property in particular in Montreal is going to be in high demand eventually when McGill is back and you've got some here at Concordia as well.
One of my favorite Canadian cities now.
And then quickly on mortgage, I mean, you were able to basically term out your mortgage, Just wondering, I mean bond yields have moved a bit of late. Do you have any sort of or what is the amount of mortgages that you Just repayment at this point.
Yes. I mean, look, we were super aggressive And we broke mortgages and did everything we could to create as much liquidity in 2020. I mean, definitely spreads have come out From that $180,000,000 we're looking closer to $220,000,000 today, maybe $215,000,000 So I mean just On doing that in advance, we probably saved $50,000,000 of interest versus today's rate. So we'll look at a little bit more Some short term stuff to fill in our portfolio and I think I did a pro form a of kind of where we are focused on term for next year. But We really think being aggressive right now is the right thing to do, even if that means sitting on a little bit of cash And the acquisition pipeline has been robust.
So we're not afraid to be fair, we don't have much room on our line Left to pay down, we have about $100,000,000 but we're sitting on cash, so we're kind of net neutral. So it will be utilizing cash for acquisitions, But we'll continue to be aggressive getting at those today because we don't want to miss this low rate environment.
Fair enough. And I have to echo some prior guys' very impressive quarter in the context of where we are today.
Thanks, Matt.
Thanks a lot, Matt.
There are no further questions here at this time. I'll turn the call back over to Mr. Kenning for closing remarks.
Yes. Well, that was a great Catch up of questions, probably one of the longest question sessions that I can remember. I would just use that as a reminder that Scott and I are always available to answer questions throughout the quarter. Please just reach out and let us know. We've done significant investor outreach and they're always there For people that are showing further interest in CAPREIT and a better understanding.
So I'd like to thank you again for your time and attention today. If you have any further questions, like I said, please don't hesitate to contact us at any time. Thanks again and goodbye.
This concludes today's conference call. You may now disconnect.