Good morning, ladies and gentlemen, and 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 as such statements are subject to certain risks and uncertainties. Discussions concerning these risk factors, the forward looking statements and the factors and assumptions in which they are based can be found in our regulatory filings, including our annual information form and MD and A, which can be obtained at SEDAR. I'll now turn things over to Mark Henning, 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. And as you can see on Slide 4, 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.
NFFO rose a significant 15 point 5% for the year, driven by the growth in revenues and our continuing strong increases in stabilized NOI, generating a very conservative NFFO payout ratio of 65.7%, much improved from 70.3% last year. This solid payout ratio supported by a powerful balance sheet drives our ability to deliver growing monthly Turning to Slide 5, you can see that our growth and strong performance continued through the Q1 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 NFFO was up a strong 17.3%. We also maintained our track record of strong accretive growth with NFFO per unit up almost 7% despite the almost 10% increase in the weighted average number of units outstanding.
Slide 6 shows the key drivers of our growth as we continue to deliver real value to our unitholders. Our sustained focus on business fundamentals has resulted in more than 21 years of growth and success. We look forward to this continue 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 percent 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 7, by combining some of our Netherlands properties with the commercial assets of European Commercial REIT, we created Erez REIT, Canada's 1st Europe focused multi residential REIT. At the end of March, we once again demonstrated our 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 8 outlines the details of the 2,091 residential suites for a 2,091 residential suites for a total proceeds of approximately $634,000,000 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 percent of ERES, fully aligning our interests with all ERES unit holders. 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 9.
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 $3,500,000 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, CAPRE completed a $288,000,000 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 31 and putting us in a great position for future acquisitions and development.
With the acquisitions complete in the quarter, we had approximately 142,000,000 dollars 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 $280,000,000 dollars in mortgages maturing with an average interest rate of 3.3 percent and we expect to refinance approximately $90,000,000 in principal repayments with these new mortgages. We expect overall mortgage renewals and refinancings for 2019 to be between $365,000,000 to $415,000,000 dollars excluding financings on acquisitions.
Finally, you can see that we currently have approximately $530,000,000 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 450 dollars to $500,000,000 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 $288,000,000 in funds, including the over allotment option.
In addition, on April 23, we completed another successful bought deal offering raising a total of $345,000,000 in funds, including the over allotment option as well. To complete further portfolio growth in the 2nd quarter, this has resulted in a total equity raise to date in 2019 of 633,000,000 dollars 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've defined 3 strategic objectives that we are confident will continue to build value for our unitholders. 1st, 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. 2nd, 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. And 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 portfolio during and following the Q1. On April 15, 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 1104 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
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 5 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 2 development sites in Toronto at 141 Davison and 100 Wellesley for a total of 2 66 suites. We also have permit in Montreal at 2,525 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 3 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. And 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 Our first question is from Jonathan Kelcher from TD Securities. Please go ahead.
Thanks. Good morning.
Good morning.
You guys bought a lot of MHC properties this year. I know you said in your remarks there that you really like the asset classes. Is that a function of product availability? The fact you've been able to get so much this year or?
Yes. The first portfolio represented 1 of the largest MHC transactions in Canadian history and the second transaction dwarfed that. It is a great business. And as we've talked about in the past, the only that we see is the ability to accumulate these communities. They are far and few between.
What we like about these communities is either locations, the development potential, the vacancy potential, and the various streams of income that come off of home sales and other forms of income. But we're 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. And then just secondly, as you start on development, what's the cost you expect on Cavendish? Or what are you budgeting there? And what sort of yield do you expect from that once it's stabilized?
Yes. That really is a large intensification property. And because of that, they're not typical returns. But from a cap rate perspective, it's close to a 7 percent with yields being much higher than that. Again, it's a unique opportunity.
We took commercial space that has been unoccupied for over a decade and we're able to refit it with apartments. So not typical returns, but very accretive returns on Cavendish.
Okay. And 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 $8,000,000 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.
Good morning, Neil.
Your business is doing just amazingly across the country and even outside of the country. So I don't have any questions in that regard. But if we could just spend a couple of minutes on admin expenses, Scott. I see there are about $10,000,000 for the quarter. But I recall in the year prior, there was I think your disclosures had said there was a couple of $1,000,000 of non routine costs.
So on that basis, I think there may be up 25 odd percent year over year. Can you comment on how we should think about admin or G and A maybe for 2019 as a whole?
Yes. I think definitely we've gone through some different reorganizations. So there are costs that we incurred last year in 2018. There are some costs in this year as well, not as significant. So we're kind of at a reasonable run rate right now.
I understand it's a little lumpy, I think we've kind of 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. So there's a little bit of that that we're seeing in this year. But I would say that the current run rate is pretty representative of go forward.
So the current quarter to be clear is a reasonable run rate for the year. Is that right?
Yes. It's not far off.
Yes. Okay. And then I guess just equally maybe along the same lines, the amortized component of the LTIP was about $2,000,000 for the quarter, again up a fair bit from I think $1,200,000 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 750,000 in the quarter. So that made that spike in Q1.
Got it.
Got it.
Okay. Thank you. That's great.
All
right. Thank you. Our following question is from Mario Saric from Please go ahead.
Hi, good morning. Good morning. Good morning. 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?
Yes. Ferd, it's Mark. We have not seen those changes take effect yet. But what we do know is that they can only help having the provinces 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 provinces changes will help. We'll get our entitlements in place, but 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.
But 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 are that have been brought to market, all in that $385,000,000 to $420,000,000 a foot range. And we're watching uptake on those projects and we'll remain cautious. That's not to temper our optimism, but we are going to remain cautious.
Okay.
Combination of both zoning and costing and rents that all have to come together.
Got it. Okay. And then 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 is 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, 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 and the environment is such that we can get great density. We are not bullish at all on building in Alberta at this stage, but we are very much motivated to get the entitlements we can our lands, especially in the environment that's out there right now. We will do it. We will create value.
And then we're ready to go if and when we ever think the market is primed for new rental development. But if you were to ask me the question today, it would be very unlikely that we would proceed with the rental development in Alberta.
Got it. Okay. And then 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, 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? So 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, but we always remain opportunistic. And there are still 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, but we always consider de risking our investments. And in some cases, the size of investments in development may very well lend themselves to providing property asset management services.
And how would you characterize the appetite of foreign capital in Canadian multifamily today versus 6 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 our investing in cap rate. But I would say it's been robust for at least the last 3 to 5 years and I don't see a change in that at all. Canadian multifamily we've still seen is a very stable in real estate investment.
Great. Thank you for the color. Yes.
Thank you. Following question is from Dean Wilkinson from CIBC. Please go ahead.
Thanks. Good morning, guys. Good morning.
Just on the margin improvement in the quarter and given the seasonality, Q1 being the weakest, would you expect that kind of pickup to carry through the year and would something in the mid-sixty for the year be about right?
We wouldn't want to forecast margins at this stage. But 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.
And we look forward to what we're calling no real change in trend in our business going forward at this stage. So 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 and it changed it basically it bumps NOI up a little bit and we've got a note in the financial or sort of MD and A just that kind of articulates that. So that was a small component, but it did creep the margin up a little bit.
Yes. Not margin enhancement through performance, but certainly margin enhancement through accounting. Yes, Scott loves those. Directionally
up, it should be better than last year. Okay. And just my 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, but 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 and it's paying off. Our team has done a fantastic job and 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. Our Our following question is from Sairam Srinivas from BMO Capital Markets. Please go ahead.
Good morning, guys.
Good morning. Good morning.
So 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 trends did not rise from Q4 or was it related to the mix of the units coming
over? I'm not sure we're not
seeing that. We're not seeing that.
I mean, the turnover is the year to date across the portfolio, up 14%. We've seen huge lifts in Ontario specifically, as well as BC.
In 2018 same period, we saw rents increase 9.58 percent as compared to 2019 rent list on turnover accelerating 14.1%. So, if anything, we're seeing strengthening, particular in the increases we're getting in Alberta and Nova Scotia and Ontario and BC.
So but specifically probably on a quarter to quarter basis, I guess we shouldn't be reading much into 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. Kenny.
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 Unitholders meeting, which we held at 1 King West in Downtown Toronto at 4:30 in the afternoon on Thursday, June 13. 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.