Good morning, ladies and gentlemen. Welcome to the CAPREIT First Quarter 2019 Results Conference Call. I would now like to turn the meeting over to Mr. David Mills. Please go ahead, Mr. Mills.
Thank you, Maude. 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. Such statements are subject to certain risks and uncertainties. Discussions concerning these risk factors, the forward-looking statements, and the factors and assumptions on which they are based can be found in our regulatory filings, including our Annual Information Form and MD&A, which can be obtained at SEDAR. I'll now turn things over to Mark Kenney, President and Chief Executive Officer.
Thanks, David. Good morning, everyone, and thank you for joining us today. Joining me today is our Chief Financial Officer, Scott Cryer. As you can see on slide four, 2018 was another record year for CAPREIT, with strong increases in all of our key performance benchmarks. Our record results were driven by property acquisitions during the year, strong increases in net average monthly rents, and stable high occupancies. FFO rose a significant 15.5% for the year, driven by the growth in revenues and our continuing strong increases in stabilized NOI, generating a very conservative FFO payout ratio of 65.7%, much improved from 70.3% last year. This solid payout ratio, supported by a powerful balance sheet, drives our ability to deliver growing monthly cash distributions to our unit holders. In today's uncertain economic environment, our record of stable income is a distinct advantage.
Turning to slide five, you can see that our growth and strong performance continued through the first quarter of 2019. Revenues were up 8% compared to last year, driven by the positive contribution from our acquisitions, strong increases in monthly rents, and continuing high occupancies. NOI rose a solid 10.8% in the quarter, and FFO was up a strong 17.3%. We also maintained our track record of strong accretive growth, with FFO per unit up almost 7%, despite the almost 10% increase in the weighted average number of units outstanding. Slide six shows the key drivers of our growth as we continue to deliver real value to our unit holders. Our sustained focus on business fundamentals has resulted in more than 21 years of growth and success.
We look forward to this continuing going forward, a key driver of our continuing ability to generate increases in revenues in our diversified property portfolio. Occupancies remained high at 98.7%, up from the prior year and maintaining our track record of strong occupancies through all economic cycles. We also continue to generate increases in average monthly rents, up 3.7% from last year. A key driver of these increases were solid 14.1% increases on suite turnover in the quarter. We saw 2.4% increases on monthly rents on lease renewals, demonstrating our success in retaining residents and applying above-guideline increases. Our track record of organic growth continued in the quarter, with same property NOI up 6%, driven by strong rental increases and strengthened NOI margins. We have steadily improved NOI margins, which strengthened to 62.7% in the quarter, up from 61.2% last year.
In summary, it was a strong start to the year, and we look for this growth and solid performance to continue. As you can see on slide seven, by combining some of our Netherlands properties with the commercial assets of European Commercial REIT, we created ERES REIT, Canada's first Europe-focused multi-residential REIT. At the end of March, we once again demonstrated our ability to generate value for unitholders. Over the last few years, we have capitalized on our very positive experience in Dublin to build a strong and growing property portfolio in the Netherlands. Slide eight outlines the details of the ERES REIT transaction. We sold 41 Netherlands properties, 2,091 residential suites, for total proceeds of approximately CAD 634 million. To satisfy the purchase price, CAPREIT receives Class B LP units of ERES LP, which are exchangeable to ERES units on a one-to-one basis.
CAPREIT now owns approximately 83% of ERES, fully aligning our interests with all ERES unitholders. Going forward, we will generate a growing base of fee revenues from our asset and property management services to these Netherlands properties. We believe this transaction provides a number of benefits to our unitholders, including a more direct and diverse means to drive value in the European residential market. Also on the international front, we continue to be pleased with our performance in Ireland, as detailed on slide nine. In Q1 2019, CAPREIT saw an increase in asset and property management fees equating to an increase of 29%. This increase is largely driven by acquisitions and NAV appreciation. Our retained interest also continues to generate a solid stream of dividend income amounting to CAD 3.5 million for Q1 2019. I'll now turn things over to Scott for his financial review.
Thanks, Mark. Turning to our balance sheet on Slide 11, we continue to maintain a strong and flexible financial position with conservative leverage, strong coverage ratios, and historically low-interest costs on our mortgage portfolio. In January of 2019, CAPREIT completed a CAD 288 million bought deal equity offering, which includes the over-allotment option. This resulted in debt to GBV to further decline, reducing to just under 38% as of March 31st and putting us in a great position for future acquisitions and development. With the acquisitions complete in the quarter, we had approximately CAD 142 million available borrowing capacity on our credit facilities as at quarter end. Our mortgage portfolio remains well balanced, as shown on Slide 12. Looking ahead, our ability to top up on renewing mortgages through to 2026 will provide significant liquidity to fund our acquisitions and development pipeline.
Through the balance of 2019, we have CAD 280 million in mortgages maturing with an average interest rate of 3.3%, and we expect to refinance approximately CAD 90 million in principal repayments with these new mortgages. We expect overall mortgage renewals and refinancings for 2019 to be between CAD 365 million-CAD 415 million, excluding financings on acquisitions. Finally, you can see that we currently have approximately CAD 530 million of our properties not encumbered by mortgages at quarter end. Over the long term, we intend to maintain unencumbered investment property with an aggregate fair value in the range of CAD 450 million-CAD 500 million, mainly comprised of the MHC portfolio. This provides further flexibility to fund our growth and investment programs going forward. On the liquidity front, we remain well-positioned to continue our growth programs, as shown on Slide 13.
With a very strong 2019 pipeline of acquisitions, in January of 2019, we completed a successful bought deal offering, raising a total of CAD 288 million in funds, including the over-allotment option. In addition, on April 23rd, we completed another successful bought deal offering, raising a total of CAD 345 million in funds, including the over-allotment option as well, to complete further portfolio growth in the second quarter. This has resulted in a total equity raise to date in 2019 of CAD 633 million. We have never had a stronger balance sheet to fund our acquisitions and plan for long-term development ambitions as we do today. I'll now turn things back to Mark to wrap up.
Thanks, Scott. Looking ahead, we have defined three strategic objectives that we are confident will continue to build value for our unit holders. First, we will continue to invest in our operating platform and our people, capitalizing on our significant expertise while using new technologies to increase efficiency and lower costs. Second, we will maintain our focus on enhancing resident satisfaction by employing state-of-the-art technologies, building on our reputation as Canada's landlord of choice in our chosen markets. Third, we will continue to strengthen the value potential of our property portfolio through a number of initiatives that reduce its average age and enhance the opportunity for continued revenue increases going forward. As you can see on Slide 16, we further strengthened and modernized our portfolio during and following the first quarter. On April 15th, we announced the purchase of a brand-new 191-unit luxury apartment property in Langley, British Columbia.
Located in one of the province's fastest-growing urban markets, the property is an excellent example of how we are modernizing our portfolio with best-in-class amenities, condominium-style interiors, and numerous energy-saving initiatives. We also significantly expanded our presence in the manufactured home community market with the purchase of 1,104 sites across Canada in Q1. These acquisitions, along with the expected closing of the MHC portfolio in Q2, totaling 3,469 sites, will increase our MHC portfolio by over 45% to over 11,000 sites in 68 communities. As you know, we really like this aspect of our business. Revenues are highly stable, with residents owning their own homes, and capital requirements are significantly reduced. As you can see on Slide 17, we are continuing to focus on our development and intensification programs on land and properties that we own.
We are confident these projects will generate very accretive returns on investment for our unitholders. This is the beginning of our goal to add more than 10,000 new rental suites, primarily in the strong markets of Toronto and Vancouver, where demand remains high and monthly rents support profitable investment. For the current year, we anticipate that five to 10 applications will be submitted primarily in the GTA and in British Columbia. We will provide a quarterly update as applications are submitted. We currently have active applications in the process for two development sites in Toronto at 141 Davisville and 100 Wellesley, for a total of 266 suites. We also have an approved building permit in Montreal at 2525 Cavendish, currently in construction, with a targeted delivery date of August 2019. Upon completion, 52 suites will be added to the portfolio.
For the long term, we have adopted three goals as shown on slide 18. To become the best place to live for our residents, we will continue to engage with them on a personal level through our proven hands-on property management programs. We are enhancing their experience through new technology investments such as online leasing and a new resident portal to access CAPREIT services. To become the best place to work for our people, we have created successful employee development programs that support our culture. Going forward, we will remain focused on continuous learning as a key driver of our success. For our unitholders, driving value remains our ultimate objective in all we do. We are adopting new risk management practices and other programs to strengthen our foundation and ensure our over 20-year track record of growth and success continues.
In summary, it was another very strong quarter for CAPREIT, and we look forward to this growth and strong operating performance to continue through the balance of the year. We'd now be pleased to take any questions that you may have.
Thank you. We will now take questions from the telephone lines. If you have a question and you are using a speakerphone, please lift your handset before making your selection. If you have a question, please press star one on your telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while participants register for questions. We thank you for your patience. Our first question is from Jonathan Kelcher from TD Securities. Please go ahead.
Thanks. Good morning.
Morning.
You guys bought a lot of MHC properties this year, and I know you said in your remarks there that you really like the asset class. Is that a function of product availability, the fact you've been able to get so much this year?
Yeah. The first portfolio represented one of the largest MHC transactions in Canadian history, and the second transaction dwarfed that. It is a great business. As we've talked about in the past, the only challenge that we see is the ability to accumulate these communities. They are far and few between. What we like about these communities is A, their locations, the development potential, the vacancy potential, and the various streams of income that come off of home sales and other forms of income. We feel very excited that we were able to successfully secure both portfolios.
Okay. Are there any other portfolios sitting out there now?
Not that we're aware of.
Okay. Just secondly, as you start on development, what's the cost you expect on Cavendish, or what are you budgeting there? What sort of yield do you expect from that once it's stabilized?
Yeah. It really is a large intensification property. Because of that, they're not typical returns. From a CAPREIT perspective, it's close to a seven, with yields being much higher than that. Again, it's a unique opportunity. We took commercial space that had been unoccupied for over a decade, and we're able to refit it with apartments. Not typical returns, but very accretive returns on Cavendish.
Okay. What's the estimated cost on that?
I'd get back to you to be certain, but it's somewhere in the neighborhood of about CAD 8 million, as I recall.
Okay, thanks. I'll turn it back.
Thank you. Following question is from Neil Downey from RBC Capital Markets. Please go ahead.
Thank you. Good morning.
Morning.
Your business is doing just amazingly across the country and even outside of the country. I don't have any questions in that regard. If we could just spend a couple of minutes on admin expenses, Scott. I see they're about CAD 10 million for the quarter. I recall in the year prior, I think your disclosures had said there was a couple of million CAD of non-routine costs. On that basis, I think they may be up 25-odd% year-over-year. Can you comment on how we should think about admin or G&A maybe for 2019 as a whole?
Yeah, I think definitely we've gone through some different reorganizations. There are costs that we incurred last year in 2018. There are some costs in this year as well, not as significant. We're at a reasonable run rate right now. I understand it's a little lumpy, and I think we've articulated that in the past quarters. We've also been investing a lot in our operating platform around technology, our marketing departments, and other departments. There's a little bit of that that we're seeing in this year. I would say that the current run rate is pretty representative of go forward.
The current quarter, to be clear, is a reasonable run rate for the year. Is that right?
Yeah. It's not far off.
Yeah. Okay. I guess just equally, maybe along the same lines, the amortized component of the LTIP was about CAD 2 million for the quarter. Again, up a fair bit from, I think, CAD 1.2 million a year ago. Is that amortization now kind of stabilized, or is that above trend, or how do I think about that?
No, that's above trend. We actually accelerated about CAD 750,000 in the quarter. That made that spike in Q1.
Got it.
Yeah.
Okay. Thank you. That's great.
All right.
Thank you. Our following question is from Mario Saric from Scotiabank. Please go ahead.
Hi. Good morning.
Morning.
Morning.
Just maybe sticking to development. I noted that the budget for 2019 came down a little bit, and there was a reference to, I guess, process timing being a bit longer than originally anticipated. The Ontario government recently announced a More Homes, More Choice programming that bringing incremental supply into the market. Can you talk about whether you've seen any interim change with respect to the zoning process in Ontario, and what your thoughts are on that initiative, and whether you think it can help accelerate the development timelines that you have in place today?
Yeah. It's Mark. What we do know is that they can only help. Having the province's support on this front is going to definitely help the application side of moving things along. What we still remain cautious about is, it's our intention to go full speed ahead. I do believe the province's changes will help. We'll get our entitlements in place. We do remain cautious still on financial viability right up to the point of getting those entitlements. We have seen big spikes in development costs. Don't see that changing quite yet. We have seen some easing when we looked into the market on the build side. Again, all those factors have to come together with rent projections, which we see as unchanged as well. We're watching the market very carefully right now.
There's several new rental developments that have been brought to market, all in that 385 to 420 a foot range. We're watching uptake on those projects, and we'll remain cautious. That's not to temper our optimism, we are going to remain cautious.
Okay. All right.
A combination of both zoning and costing and rents that all have to come together.
Got it. Okay. I noted also in your disclosed kind of properties or pipeline in terms of what you want to bring to market, in terms of zoning approvals, there was a couple of properties in Alberta in that list. Is that simply just wanting to get the zoning in place when the time is ready, or are you becoming a bit more, let's say, positive on near-term Alberta fundamentals?
At this point, it would be strictly value creation. Once we get the entitlements, we do create value. The environment is such that we can get great density. We are not bullish at all on building in Alberta at this stage, we are very much motivated to get the entitlements we can on our lands, especially in the environment that's out there right now. We will do it, we will create value, we're ready to go if and when we ever think the market is primed for new rental development. If you were to ask me the question today, it would be very unlikely that we would proceed with a rental development in Alberta.
Got it. Okay. My last question, maybe shifting gears to more of a high-level theoretical question. I think it was alluded to earlier in the call. With the operations in Canada really strong. Ireland, Netherlands, you've successfully exported kind of the property asset management model to Ireland and are in the process of doing that in the Netherlands now. Have you given thought in terms of potentially using that model in Canada itself? From a CAPREIT perspective, thoughts about bringing in kind of passive third-party capital, whether it's on future growth or whether it's on existing assets today and kind of building up an asset management NOI stream in Canada as well?
We have a history of doing very selective joint ventures. We are not gearing the platform specifically around attracting third-party capital. We always remain opportunistic, there are some situations where having a JV partner where we're generating fee income can certainly help the viability of a property. There is not an active program now of soliciting that, we always consider de-risking our investments, in some cases, the size of investments in development may very well lend themselves to providing property asset management services.
How would you characterize the appetite of foreign capital in Canadian multifamily today versus six months ago, versus 12 months ago?
I would say robust and unchanged. Canada continues to present to foreigners the same interest we've had from a CAPREIT perspective, accelerated interest from Asia in investing in CAPREIT. I would say it's been robust for at least the last three to five years, and I don't see a change in that at all. Canadian multifamily is still seen as a very stable real estate investment.
Great. Thank you for the color.
Yes.
Thank you. Following question is from Dean Wilkinson from CIBC. Please go ahead.
Thanks. Morning, guys.
Morning.
Morning.
Just on the margin improvement in the quarter and given the seasonality of Q1 being the weakest, would you expect that kind of pickup to carry through through the year? Would something in the mid-60% for the year be about right?
We wouldn't want to forecast margins at this stage, if you look at the year-over-year margin enhancement, it would certainly suggest that our margins are going in the right direction. This is the toughest quarter from an energy point of view. We did well. Our investment in energy initiatives has clearly paid off. We look forward to what we're calling no real change in trend in our business going forward at this stage. Reasonable to assume that margins are heading in the right direction.
I should just note that there is a small impact from the adoption of IFRS 16, the leasing standard, for where we have land leases. It basically bumps NOI up a little bit, we've got a note in the MD&A, just that kind of articulates that.
Right.
That was a small component, but it did creep the margin up a little bit.
Yeah. Not margin enhancement through performance, but certainly margin enhancement through accounting.
Yes, Scott loves those.
Yeah.
All right. Directionally up should be better than last year. Okay. The other question is on the overall inducements, vacancy loss, and the bad debt expense, I mean, they're all materially down from last year. Is that a function more of the tightness of the market, or have you tightened up anything in your underwriting and how you approach certain new tenants into the portfolio?
We've not changed underwriting at all, we continue to invest in our platform, our data, our management analytics. I would like to believe that those all play into improved performance, which is showing itself in the quarter. We've always been robust in our processes, it's paying off. Our team has done a fantastic job, quite frankly, I would hand those results to the quality of the team.
That's great. That's it for me. I'll hand it back. Thanks, guys.
Thank you. Once again, please press star one at this time for any questions or comments. Our following question is from Sairam Srinivas from BMO Capital Markets. Please go ahead.
Good morning, guys.
Morning.
Morning.
My only question is on the rent lift on turnover, which I guess is about flat quarter-on-quarter in 14.1%. Is this a sign that the market rents did not rise from Q4, or was it related to the mix of the units coming over?
We're not seeing that.
I mean, the turnover is year-to-date across the portfolio-
14
around 14%. We've seen huge lifts in Ontario, specifically, as well as BC. Maybe we're missing something.
Yeah. In 2018, same period, we saw rents increase 9.58%, as compared to 2019, rent lifts on turnover accelerating 14.1%. If anything, we're seeing strengthening, particular in the rent increases we're getting in Alberta and Nova Scotia and Ontario and B.C.
No, specifically probably on a quarter-to-quarter basis, I guess we shouldn't be reading much into the trend then, right?
No.
Okay. That's all for me.
Thank you very much.
Thank you.
Thank you. We have no further questions registered at this time. I would now like to turn the meeting back over to Mr. Kenney.
Thank you very much. Thank you everybody for joining the call today and your ongoing support of CAPREIT. As a reminder, I would like to point everybody to our 2018 Annual Unit Holders Meeting, which we held at One King West in downtown Toronto at 4:30 P.M. on Thursday, June the 13th. We look forward to seeing you all there. Thanks again, and goodbye.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.