Welcome, everyone. Thank you for joining InterRent REIT's Q4 2021 earnings call, and Happy International Women's Day. You can find the presentation to accompany today's call on the investor relations section of our website under events and presentations. We're pleased today to have Mike McGahan, CEO; Brad Cutsey, President; Curt Millar, CFO; and Dave Nevins, COO, on the line today. As usual, the team will present some prepared remarks, and then we'll open it up to questions. Before we begin, I wanna remind listeners that certain statements about future events made on this conference call are forward-looking in nature. Any such information is subject to risks, uncertainties and assumptions that could cause actual results to differ materially. Please refer to the cautionary statements on forward-looking information in the REIT's news release and MD&A dated March 8th, 2022 for more information.
During the call, management will also refer to certain non-IFRS measures. Although the REIT believes these measures provide useful supplemental information about its financial performance, they are not recognized measures and do not have standardized meanings under IFRS. Please see the REIT's MD&A for additional information regarding non-IFRS measures, including reconciliations to the nearest IFRS measures. Mike, over to you.
Thank you, Sandy. First off, wanna say thank you to everybody for joining us and taking the time here today. Hope everybody's doing well, and I think I'm gonna speak for myself and a lot of the people that of our team and hopefully all of our team, and we're starting to see a lot. Things are looking a lot better and a lot brighter for all of us, a lot more bluer skies, and I hope you're all feeling the same way, and I look forward to seeing many of you very soon. Also wanted to, before we get into results, just to, we've got a new format of our annual report. We had Arunia, Ralph Yow, Khaled, Sandy and Chris that did and I know a bunch of other people did great work on it.
If you have a chance really, I wish you'd take a look at it. You'll see the, I guess, what we've been doing not only last year but the last few years on the technology side. We've really pushed hard into the technology side, but some of the creativity of our company and some great personal stories for everybody. If you have a few moments, that would be great. Lastly, I just wanna say before we hit the results, I'd like to say, like I'm so proud of our team. They've just done great work and really worked hard and under unbelievably challenging times and very proud of them. Anyways, you'll see some. They've obviously produced some, I think some pretty good results.
We'll go to slide seven for everybody right now if you're going through the deck. I just wanna kinda talk about, you know, things we've kind of held fast on. We really held fast on keeping our rents, not worrying about occupancy. We actually utilized that time to upgrade more of the units. We just felt like that in the long run that was the better move. Felt a lot of pain for a couple of years over it. I feel very confident it's the right move, and I think we're all gonna see some really good things coming forward for the company. Happy we're almost at pre-pandemic vacancy right now.
Also, as you can see, we're seeing some good movement on our growth. We've had growth through our FFO, AFFO, and I think we're, you know, getting back to a more normalized spot, so I'm very encouraged by that to say the least. Also wanna highlight, last year we had a record year in acquisitions. We bought 1,829 units. We pushed into a new market, being Vancouver. I think we're really super happy with that market. That market was just great timing. Very happy, really happy to get our platform down there. It's so hard to get any type of scale in that market.
Once you have it, I mean, it just seems you can just keep bolting on as you go. You know, we're one of the few players that do have a platform there, and I think it's gonna work out incredibly well. We're really extremely happy about it. I guess, you know, we did transactions pretty well everywhere in our normalized footprint, and everything is working out fairly well. We still have some vacancy in our core markets, or sorry, in our markets, being in Montreal. Montreal's been the hardest. We've had our hardest time, but I truly believe once immigration and international students come back, that'll come back too.
We've seen it in Ottawa and also in Toronto in the core. I have to tell you, I'm surprised Ottawa's held up as well as it has, especially with really, you know, we're not seeing the amount of people that we'd like to see in our downtown core, save and except a few people that came for three to four weeks. On a normalized basis, we're really hoping the Federal government is gonna get back into their offices, and I hope there's a big push on that. I think all in all, I think you're gonna see our numbers.
I'm pretty pleased and what I'm most pleased about is that I think we just kind of stuck to our knitting, and I'm really pleased about what we're gonna see going forward. As I look at the financial health, and I'll really let Curt spend the balance of his time on it, you can see our. We do have a number of, you're gonna notice that we do have a number of mortgages coming due. We are doing a lot more in CMHC now. We're through a bunch of them now. You're gonna see, you know, over the near term, we're gonna be up around 80% CMHC.
Just the way we go about it, we obviously go in and do some work, and then after we've done, you know, done the work, then we usually slap on the CMHC mortgage. That's usually the way we always work. We'll never be at 98%, but you'll see that we'll, that's gonna tilt up a lot. We've kept our debt to gross book value, you know, down into that, you know, 36 and change range. Anyways, I'm very, very happy with where we're going. I think that we're really heading in the right spots.
Maybe I should also point out one of the things that's not on this slide, and I'll just say it too, is that we've also during this time has really increased our bench strength, really kind of pulled forward a lot of you know positional hires that maybe we would have held off than traditionally before. We're really looking in this in the long term and thinking we wanna bring people in, wanna get them you know thinking about the way we do things, doing that whole education and training, and also having some of these senior people.
This, I'm filling a lot of, you know, roles all the way through the company, but a lot of senior roles, which we would have usually held off on and waited to grow into those roles. We've kind of pulled some of that, some of those positions, I guess, forward. I think it's just so important as we look forward as the company that I just see like, again, great things coming, really good bench strength. Just really very happy with where we're going. Obviously, never super happy with our numbers, but really excited about what we're doing as a company. We're just getting better and better as a company, and yeah, very pleased so far. Anyways, I'll pass it over to Dave now. Thank you.
Thanks, Mike. During our last call, we said we're expecting to finish the year close to a 95%-96% occupancy level, and it's great to see that we're there. Overall, portfolio occupancy is sitting at 95.6% at year-end, and we saw improvements come through all of our regions in the repositioned portfolio. Our GTHA repositioned portfolio improved 320 basis points during the quarter and is sitting at 98% full in December. We're also happy to report that our Montreal repositioned portfolio closed 250 basis points of vacancy in Q4 and is back around the 95% mark, which positions us well for the return of international students in the market. As you know, we like the vacancy on our non-repositioned portfolio so that we can work through our CapEx program.
We highlighted Vancouver last quarter with a big occupancy improvement, and we chewed through another 390 basis points this quarter to close the year at 3.7% vacancy. As a reminder, that portfolio had nearly 16% vacancy when we acquired it in Q1. To echo Mike's comments, really happy with how things are progressing in Vancouver and proud of the team on the ground. Looking at slide 10, in December, we posted 5% annual growth in average monthly rent, which is coming through both our repositioned and non-repositioned portfolios. These results are a continuation of what we saw in Q3 and highlights the consistency in our strategy over time, even during the challenges of the last two years.
Now looking at slide 11, at the regional level, we continue to see steady year-over-year growth in average monthly rent across all regions in December. The slight quarter-over-quarter dip in Montreal is from the inclusion of our recent acquisitions at 14 Claremont and 3655 Papineau. Excluding those two properties, we saw sequential average monthly rent growth in Montreal. We currently see a gap to market in excess of 20% across our portfolio, and we expect fundamentals to strengthen further when international students and true immigration returns. I'll turn things over to Brad to walk through our capital spend.
Thanks, Dave, and good morning, everyone. Turning to slide 13. On the left side of the slide, you can see that our maintenance CapEx has remained consistent on a per suite level for the past few years, around that CAD 950-CAD 1,000 mark. In 2021, the big change over 2020 was our value- add CapEx program. We increased the spend on a non-reposition portfolio and for value- enhancing initiatives in our reposition portfolio for a combined total of CAD 71 million. That puts us back in line with the 2019 spend at CAD 70 million after seeing a dip in 2020 to CAD 45 million due to the initial slowdown when the pandemic first hit. I highlight those figures because about a third of our portfolio is at various stages in our repositioning program, and we see great value creation potential in the years ahead.
These properties will undergo work in the coming years, with individual suite upgrades following the cadence of natural resident turnover. As you know, our approach is to apply reposition expertise to create beautiful, safe and quality communities for residents to call home while simultaneously extending the useful life of existing housing supply and creating value for all stakeholders. We're excited to be fully back on track with our reposition program, and we truly believe it's a win-win strategy for all of our stakeholders. Turning to slide 14. 2021 was a record acquisition year for us with more than 1,800 suites across Canada, which is a great milestone for us as a company. We've been saying all year it's competitive out there, and there's lots of capital chasing the asset class. We want to be clear that we aren't willing to get caught up in the frenzy at any price.
We have not relaxed our underwriting requirements or our internal return hurdles, and we'll continue to only pursue deals that make sense and will create value over the long term. Turning to slide 15. We entered Vancouver in Q1, but you can see from the slide that we're able to add scale across all core regions during the year. That clustering is key for our growth plan because we're positioned for scale. We added to our team in 2021 at all levels of the organization to prepare us for the future. Mike mentioned innovation and moving the business forward in his opening remarks, and that momentum is palpable across our business. We're ready, and we're operating as one team. Turning to slide 16. On the development side, we're progressing nicely on our office to residential conversion in Ottawa at 473 Albert.
Demolition has been completed and construction is underway and on schedule, with partial occupancy anticipated to start towards the end of Q3. We want to highlight as well that long- lead construction items have all been tendered and awarded, and the project is approximately 80% contracted from a hard cost standpoint. Turning to slide 17. We continue to make progress behind the scenes on three greenfield development projects. As many of you have heard us say, Canada needs more housing supply to accommodate the influx of new immigration expected in the coming years. These three projects will create nearly 4,000 new residential suites in Ontario, and we're excited to play an active role in the supply solution with these prime location developments. I'll pass it over to Curt. Over to you, Curt.
Thanks, Brad. In Q4, we recorded a CAD 85 million fair- market value gain, bringing our full year total to CAD 327 million. The increase in fair value comes from continued strong operational performance as well as a 7 basis point compression in cap rate. We have been talking about the wall of capital interest in our sector all year, and the private market appetite continues to be strong. We currently sit at a weighted- average portfolio cap rate of 3.86%. Moving on to slide 20. The REIT continues to be in a very healthy financial position. Our debt to GBV on December 31 has increased slightly to 36.7% from 34.4% at the end of Q3. This is as a result of the significant acquisition activity in the quarter.
At the end of December, the REIT had mortgages of CAD 1.4 billion at an average term to maturity of 3.6 years and a weighted average interest rate of 2.38%. As you can see from the chart, we have approximately CAD 450 million in mortgages renewing in 2022, with much of this loaded in the first half of the year. We have been actively working on this book for some time, and we expect to see our share of CMHC insured mortgages climb back to historical norms somewhere in the 80% range, while increasing our average term to maturity to roughly six years by the end of 2022. The current market rates we're seeing for CMHC insured mortgages for a 10-year term are in the 2.95%-3.05% range.
We expect to see our refinancings move our overall weighted average interest rate up somewhere between 15 and 20 basis points. Of course, this will depend on rate movements between now and the time of being able to lock rates. Although we see pressure on rates from a long-term viewpoint, we should continue to benefit from a low overall cost of debt in a historical context. Moving on to slide 22. You've heard us say before that we believe our responsibility extends beyond the four walls of our properties. In Q4, we had a small window before Omicron hit where things had started to open back up, and we were able to gather with our stakeholders once again. We seized the opportunity and worked with our partners to organize our annual Mike McCann Charity Golf Tournament in Ottawa in just four short weeks.
We had 280 fully vaccinated golfers with on-site health screening and temperature checks at registration and a revamped format to ensure social distancing. With the help of our incredible business partners, we showed up for our community by raising a record amount of over CAD 1 million, which has been donated back to the community. With eased border restrictions, we also welcomed several groups of investors from Europe and the U.S. to see our communities in the GTHA and Montreal firsthand this fall. We hope to see more of you in person in 2022. Finally, we have to salute our incredible team. We organized a volunteer campaign in November and asked our employees to take time out of a hectic year-end to help our community partners across the country.
They showed up in a huge way, as they always do, donating more than 300 volunteer hours, spending their own money to create personal care packages with The Shoebox Project, and contributing armloads of food to the donation boxes in our community lobbies. When we talk about moving our communities forward, our team is the heart and soul behind that momentum. Mike, would you like to say a few closing words?
Thanks, Curt. Overall, again, pretty solid results. Looks really good, forming a really good position as we go into 2022, 2023. You know, I am excited of where we're looking. I think that one of the things I touched on before is I'm also really happy about the bench strength that we've added. You know, and, to be quite candid, it hurts the results in the short term, but we're not a short-term results company. We're building this for the long run and some extremely talented people that we've added and
That's just fantastic. Very, very pleased about it. There's also, as we go forward, you know, you can see that we're continually innovating and doing all the right things. We've done a lot of this, to be quite frankly, naturally along the way. Probably just didn't really go back and, you know, check the scorecard as we should have done, you know, in the past. There's other items that, you know, clearly we needed to get better on. We are working on getting better on all things as we all try to do every day. You know, I'm really happy about where we're going there.
I'm gonna give kudos to Sandy on just developing our whole sustainability piece and making sure that we're you know getting credit for the things that we've done and making sure that we're working on things that we've missed. I guess also as I'm looking forward, I see there's, we've got a great future in a lot of different ways. We've got, you know, I think almost 4,000 units in various stages right now being completed. Nobody, unless you've been around, done a tour with us, realize the intensification opportunities that we have. We really truly believe that you know part of what we're responsible for and to our actually our 17,000 shareholders, and I think that kind of blows people away when you think about it.
I know we were talking about it. We are actually the ultimate ma and pa real estate play. Like, how many people are relying on us to make sure that we do all the right things? I have to say, like, and it's not just us, all of our peers, they've been great. Even going through this whole pandemic, we've shared so much information, and they've all been extremely responsible and in how they've handled everything, and we've shared all best practices. You know, and they're all cranking up their supply too. We truly know that we need this as we go forward in Canada. We are gonna have record immigration numbers coming in here.
They're gonna be huge, and they've just announced even further increases, I think 5% and 6% more in 2022 and 2023. We have that whole international student that will be hopefully arriving back here as we get more normalized, which is fantastic. You know, supply is gonna be a big part of the equation. We wanna be part of that answer. I know with my peers, we've spent a lot of time, you know, trying to figure out how we can be helpful part of that answer. I am looking forward to it. I look forward to the opportunities for the whole team here. Again, looking forward to the future here for the REITs.
I wanted to say thank you to our team. Our team, they've done a great job in the last couple of years. Now I'll open the floor to questions.
Thank you. If you'd like to ask a question, please press star then one on your telephone keypad. Our first question is from Mark Rothschild with Canaccord. Your line is open.
Thanks, and good morning, everyone. In regard to the improvement that you guys have had, clearly pretty strong in some markets like Montreal. Mike, you mentioned that it should get a lot better as immigration picks up. Are you expecting a notable improvement this year, or is this something that you think might take, you know, a couple of years as immigration accelerates, for that Montreal vacancy to come down even further?
I'm very hopeful, Mark. First off, nice talking to you. Hope you're having a good day so far. Very hopeful for the second half of the year we'll be in a much better position. That's what we're hoping for. Like, these last couple of years have been just crazy, so it's pretty hard to predict. Obviously the volatility on a geopolitical level. There's a lot of, you know, things out there. I'm very, very hopeful that we'll start seeing that. I mean, things look, you know, relatively good right now. Even just what the Canadian government is trying to, they're stating for their immigration numbers are gonna be record numbers here this year, so.
Okay, great. Then you mentioned. Yeah, no, that's helpful to understand your thoughts on that. Then maybe, you know, you mentioned geopolitical in regards to that as well as just general inflation. Obviously the revenue growth helps, but do you expect to see any pressure on your margins, on the cost side or the energy side, this year?
There's obviously nobody can predict 100%. We think, you know, we're in pretty good shape in a lot of the different areas. There will be a little bit. I'm just kind of speaking out loud here, my usual unscripted self. I think, you know, on utilities, obviously on the gas, that could be a bit of an issue. Still a bit we're hopefully that the taxes have been kind of property taxes kind of held firm so far. I think we've dealt with a lot of the wage piece, which was a big part of the issue. There will be a little bit of obviously some items like, you know, we'll see some inflation on.
I do believe we'll see some, you know, some good growth in the rents to offset it though.
Yeah. Just to add to that, Mark, it's Brad here. I think we're gonna continue to see margin expansion given that we still have room in the top line for growth. I just don't think it's gonna be at the same pace that we've seen before on margin expansion, given the fact that there will be some probably a little bit of pressure on the utilities. I think we've done a good job trying to capture that in our own internal budgets going forward for 2022.
Okay, great. Thanks so much.
Our next question is from Joanne Chen with BMO Capital Markets. Your line is open.
Hi. Good morning, guys. Just a quick one for me. You did mention that your mark-to-market rental gap is around 20% right now. Could you maybe comment on what you're seeing, I guess, in each of your markets and where you're seeing the largest spread?
Well, right now, the lowest spread is in Montreal. I mean, Montreal has been the market that we've had the most trouble with. The strongest market, probably Vancouver, to be quite frankly. We were so lucky to get into Vancouver when we did. Very, very ecstatic about it, very ecstatic at that platform. We continue to see, you know, different opportunities in Vancouver, and it's pretty-
Mm-hmm
Easy to bolt on those acquisitions. We're, you know, really happy about it. That would be the, I guess, the two different spectrums, I would say. I don't know if anybody have a-
No, nothing to add to that. I agree with Mike's comments. Montreal is being probably the lowest and Vancouver the highest. Southwestern Ontario is performing quite well as well. It really is gonna come back down to as the young professionals continue to leave their parents' basement, which we have seen a lot of. I think there's still some pent-up demand for the rental. When you put on top of that, the newcomers to Canada, especially international students, who most of our universities are in the urban core, you should start to see material pressure on rates when we start to see that. Anecdotally, we are starting to see a little bit of return of interest from international students.
Yeah. We feel pretty like, across the board, we're gonna see some good uptick, to be quite frankly. Brad was right to hit on the Southw estern Ontario. It's done incredibly well and been very resilient all the way through.
Right. No, that's helpful. I—you know, I guess it's super good to see that, you know, the improvement on the occupancy front as well. Would you say the main driver of that is what you just said about people leaving their parents' basement and then, I guess, the return of the students?
Yeah. I think to be honest, Joanne, we started it last year with such high vacancy numbers, and it was unnerving for our senior management team, to say the very least. I think we're pretty happy that we did bite the bullet and we kept rents stable.
Mm-hmm.
When we did that, we believe that the decrease in the rental demand was temporary, and it was. We did throughout the year see a lot of the return of the young professionals. What we didn't see to the same degree was the return of international students. I think we're set up pretty well to see that. Now, that said, we've caveated it with saying we'll have a better idea second half, because really it's gonna be September is the true big lease up for the international-
Right.
students. We're hopeful that maybe some of that will come in for the summer.
Yeah. To say, Joanne.
Got it.
I've got a bit of a laboratory at home. I have four kids, three of the four have left. They all came home and one is telling me he's going too. That is my litmus test of what's going on.
There you go.
Because-
Well, that makes sense.
Okay.
All right. That's really helpful. I guess maybe just switching gears for me on, I guess, obviously, 2021 was a really active year on the acquisition side. I guess kind of what you're seeing right now in the current market and kind of your, you know, target for 2022 and, you know, the markets where you're seeing the most interesting opportunities right now. Is it still gonna be Vancouver?
Well, we love Vancouver. There's no question.
Yep.
We really love it. You know, again, we like all our markets. All our markets are very strong. We're happy about everywhere we're at. I would say last year, I wouldn't want anybody to perform out the same amount of volume as last year. You know, we're seeing a lot of flow of deals, but we're gonna be very prudent. Some of it will get really bid.
Mm-hmm.
We are working really, really hard. We do have some advantages in certain markets, and we're hoping that we'll utilize those to our, I guess to get the best results as far as purchasing in that. I wouldn't want you to model on, you know, the same exact amount, and that may be an outlier.
I guess on that front, you're seeing quite a bit of, I'm guessing, you know, on the cap rates compress just given the strong demand for rentals. Could you maybe comment on some of the, what kind of, color that you're seeing around, you know, on the cap rate side of things?
It's staying down. I think people are looking at multi-res as a real safe haven and probably a good hedge on inflation that, you know, everybody's seeing that's coming. You know, we're lucky that we have those shorter term leases, some of them anyways. There is that ability to, you know, to kind of keep pace with inflation, where some of the other asset classes may not have that ability. It is a really strong market and a lot of players in it. You know, a lot of people that we hadn't seen before are arriving on the scene. It's
Right.
You gotta be on your feet trying to find deals, as I'm saying.
Yeah. You guys can always leverage your relationship, I guess, with the partners with Crestpoint as well, right?
Yes. We'll look at probably more JVs, you know, with Crestpoint. We've got other, you know, partners too that, we'll be looking at too. We're gonna try to do the best we can to make sure we make the right transactions that are, you know, accretive and good for our shareholders.
I think the one key is, t he industry is getting institutionalized, which I think is a good thing.
Mm-hmm
I think there'll be lots of opportunities for ourselves and for our peers and other professional managed provider homes, Joanne. There is a reflection point where it's getting more onerous to operate at this level. I think the professionally managed and organized organizations are in a better position to be able to provide the service levels that you need in today's world to compete.
Great.
Yeah. That's one thing I don't think enough people have realized, Joanne, and sorry, I'm gonna go off track here, is I don't think people understand the value of a platform. That is huge. You know, we have a lot more people that come to us and approach us because of the platform, right? It's easier to buy, but then you gotta operate it.
Right. Oh, yeah.
This is not an easy asset class. It's very, very intense, very people intensive.
No, for sure. I guess still things kind of keeping active on the acquisition side, maybe as a good reminder, what would your target leverage be? Kinda can it maintain it around the current levels? Or, just given that, you know, I guess the pipeline will continue to be somewhat busy.
You know what? Like, we don't mind going into the, you know, low 40s in that range. Especially if, you know, we think we can add value and kind of organically take it back down over time. We feel very good about it. If we see something really compelling, I guess we'd have that, you know, that conversation. I don't think you'll ever see us have really elevated levels, you know, in the high 40s or 50. I don't think that's ever in our DNA. That ship sailed about eight years ago or nine years ago. That'll never happen. So we'll always be very mindful in that.
I think we try to build ourself for the kind of shocks that we've unfortunately all been through here in the last couple years, and I'm very hopeful that we will not see more of it.
Mm-hmm
Yeah.
Okay. That's very helpful. Thank you very much. I will turn it back.
Oh, thank you.
Our next question is from Jonathan Kelcher with TD Securities. Your line is open.
Thanks. Good morning. First one, just on occupancy. Were you guys able to roughly hold occupancy in Q1 with Omicron, or did you see a little dip down?
Okay. Do you wanna go? Curt? Go ahead, Curt. It's all yours.
It's in line, Jonathan. I mean, typically Q1, it does come up a little bit. If you look back even pre, you know, everything we've been through in the last couple of years, Q1, vacancy goes up, occupancy comes down a little bit. You know, at this point in the Q, it looks like it's sort of following that trend, but it's very close to where we were for Q4.
Yeah. I'm nodding at Curt right now. Obviously, you can't see me, but yeah. It looks like it's getting back more in line with historical.
Normal seasonality.
Omicron didn't have the impact that one might have thought it could.
Okay.
Jonathan, do you want to talk about the Leafs?
Yeah, we could talk about goalies. I guess, Curt, just sticking with you. I see that post the quarter, you guys did lock in CAD 283 million or so of mortgages. What rates was that at, and what sort of term?
It was all longer-term money, so we're looking at mostly 10 years right now. There may be a little variation on that to smooth out our mortgage ladder as we go forward, but mostly 10-year term. The rates on those average down to about a 2.9%-ish, you know, around there. It was all CMHC insured.
Okay.
Right now with what's going on in Ukraine, we're seeing, you know, rates actually pull back marginally, which is nice. It's anywhere, depending on the day, 10-20 basis points from where they were, sort of going into the latest events. So we're doing our best to lock more right now. It's hard to predict right now because the market on the bond side is up and down daily.
Yeah. It's kinda like your kind of window would say 2.80%-3% in that, you know, but it's very volatile right now.
It's very volatile. I wouldn't model the 2.80%s.
Yeah.
If we take them, it's a bonus. If we get them, it's a bonus. I'd be modeling more that 2.90%, 2.95%-3.05%.
Okay. The spread like the bond yield is moving, but have spreads basically stayed the same?
Yeah. Spreads haven't blown out. They had blown out at the beginning of COVID, but they sort of over the course of the last year, they've come back in line to where they were pre-COVID, and we're sort of been holding in there so far.
Okay. Just last one for me. Your CapEx got back to sort of 2019 levels last year. What do you expect for 2022, given all the acquisitions you did last year?
I would say a little, it's maybe a little bit larger just because of the nature of the beast of having like a record year.
Yep.
It might be a little bit higher.
Okay.
Just as we work the properties.
Yeah.
Okay. That's it for me. Thanks.
Thank you, Jonathan.
Our next question is from Mario Saric with Scotiabank. Your line is open.
Hi. Yeah, thank you. I wanted to just touch on the potential for same-store revenue growth next year. Q4 was really strong at 7.8%. With occupancy presumably kind of a tailwind for you in terms of year-over-year growth, assuming the occupancy holds, do you think that we can achieve that type of high- single- digit same-store revenue growth in 2022 similar to what you did in Q4?
Yeah. There's no question it was high coming off a low base. We're happy with it. I think in Mike's opening remarks, he thought that I think we are set up for what could be a very robust industry. We've always kind of said in between that 4%-8%, as near as possible. Obviously, we're at the high end of that range. I think it's quite possible, especially if the foreign students come back. I think I'd rather the model be a little more conservative and kind of look somewhere in that mid-range. There's definitely a scenario that could play out where we could maintain that.
A big part of it, and maybe this will be your next question. I'm sure Curt is gonna shoot me, but it's really the promotional discount is slowly gonna burn off, and that's where the key is to the revenue growth.
Okay.
On top of movement in the market rent.
Okay. Just in terms of the rent growth, I did notice, like if we just look at Q4 versus Q3 on a same- property basis, the uptick was at about 1%. If we looked at Q3 versus Q2 of this year, the uptick was about 2%. It was running about half of what we saw in Q3. Montreal and Ottawa were kind of lagging a little bit versus other parts of Ontario. Is there anything in particular from a strategic standpoint that you did in Q4 that would kind of decelerate that pace of growth a little bit?
Well, I think, and I'm looking at Curt
versus go back to higher?
I'm looking at Curt, but I think some of it makes sense that it'd be lower just sequential as you lease up, right? If we started the year at an elevated vacancy, and then as you go in on the leased up, each sequential quarter is gonna have the impact of that lease up, right, Mario? I'm assuming that's a big part of it. I can't speak to anything fundamentally that would be different.
Sorry. Were you saying, Mario? Were you saying I was having problems hearing some of that? Were you saying the Q4 over the Q3?
Yeah. If we just look at your same-store rent as of Q4 and compare that to your same-store rent as of Q3, that increase was 1%. That same increase in Q3 was 2%. I wasn't sure-
Yeah.
If it related at all to your increased occupancy quarter to quarter, Q4 versus Q3, whether it was kind of some fundamental shift?
It will definitely have something to do with that and something to do with traffic. I mean, typically what you'll do if you go back and I think look at previous years, your highest peak demand is in Q3. More demand, more units turning over to market, more rental growth. I think typically, if you go back over the years, you'll actually see that Q3 is the higher.
Yeah.
In the quarter that has the highest growth, and then it sort of comes in off of that.
Yeah. Q3 and then Q2 would be number two, Mario.
Got it. Okay. Roughly following the seasonal pattern, that's all.
Yeah. It's very seasonal. That's a good way to put it.
Maybe just two more on my end. You know, the comment on going up to 80% CMHC financing in the short term, you still have about a third of your portfolio that's not repositioned. Would that imply that we should expect kind of an acceleration in the repositioning of the non-reposition portfolio, or are you changing how you think about financing of the non-reposition portfolio relative to historical?
Yeah. No, that's a good question, Mario. Typically when we look at our CMHC insured, it's, you know, our repositioned portfolio is like 98%-99%, and it's our non-reposition that really accounts for most of the non-CMHC insured. It's a great question. I think what we're doing is just trying to balance out the value creation in the portfolio and what we get when we roll it into CMHC versus the risk of interest rates going up. We're maybe pulling them forward, I know, a year versus where we might have let it go another year before. We're starting to pull some of those forward a little bit.
We're just, you know, trying to be cognizant of if rates do take off, especially what we're seeing in inflation and everything else. We just wanna make sure we try and walk that balancing tightrope, if you will, on that one.
Okay.
Just trying to be more conservative.
Okay. My last one, just maybe sticking with Curt. Do you have a rough breakdown of the fair value gain this quarter? You mentioned some of it was because of higher expected NOI and some of it because of the lower cap rate. Do you have a rough breakdown of the CAD 86 million fair value gain between the two?
Yeah. It's pretty close to 50/50. It's just slightly more weighted to the cap rate. I think it's about 55/45. It's pretty close to the 50/50 range between cap rate compression and NOI improvements.
Okay. Thanks, everyone.
Our next question is from Brad Sturges with Raymond James. Your line is open.
Hi, guys. Within the opening comments there, Mike, you talked about you know, adding more talent or bench strength to the organization. I was curious to know if that was targeting a specific area or is that more broadly across the organization?
It's pretty broad, to be frank with you. But on the, we've added in all the different process, just besides Sandy, they're part of our bench strength, right? So we've got, you know, part of the sustainability side. We've added on our back office side operationally, like just all the way through, I guess the company. Part of it, we're just trying to make sure that we can get ready for the next leg of the growth of the company.
We think it's really pretty important that we get everybody in even a little earlier than you usually would and just make sure that everybody, you know, goes through you know proper education, training, coaching, all those good things to, you know, really to make sure that, you know, we try to always achieve to be the best in our asset class. We wanna make sure we're doing that.
Okay. As that translates to overhead or G&A costs, I guess there was a little bit of an uptick quarter-over-quarter, as a result of some of that investment. You know, how should we think about G&A as a percentage of, let's say, revenue for 2022? Would 2021 still be a good kind of runway on an annual-
I think you're gonna see a little bit of an uptick, and I think you saw that as it kinda came through here this quarter. It'll be, you know, a little bit of an uptick on the again. The good thing is that I think as we thought it was important to do this in the short run because we are building the company for the long run. We think you'll see as we hopefully scale over the next few years, that you will see a lot of that incremental revenue will drop to the bottom line, and we won't be in a, I guess, going through the kind of like a panic mode to be trying to educate, training, and coach people.
It'll be a short term, a little bit of a short- term hit, but we think it's the right move.
Right. Switching to your comment on intensification potential within the portfolio. Obviously, you've been highlighting that for a while. You know, if we continue to see the strengthening on the demand side, particularly with foreign immigration, you know, is there the potential to maybe add a couple intensification projects into the near-term development pipeline if the economics make sense? Or are you pretty comfortable with where you are from a development exposure perspective right now?
Well, we're obviously very mindful of what we're doing, but we are planning out more long term too. We do feel that there is a lot of intensification. We've looked at it across the board. We've got a lot in mind here over the next few years. We really do believe, like, again, going back to, we need supply. Like, the country needs supply. We're gonna have these record amount of immigrants and international students all arrive here and, you know, there is no recourse for these people for housing. We wanna be good stewards. We wanna do the right thing, so we wanna be part of that answer. We definitely wanna be, you know, bringing in supply.
We're gonna be mindful because we can only afford to do so much and at a time. We definitely, we've got a really good pipeline that's built into what we have, so.
Okay.
Hopefully that answers your question.
Yeah. Thanks a lot. I'll turn it back.
Our next question is from Michael Markidis with Desjardins. Your line is open.
Hi, everybody. Good morning. First question for me is just on, I know there's maybe a few isolated weak spots within the portfolio, but are you guys still using incentives in your leasing program right now?
Sorry, still using what?
Incentives.
Incentives. Oh, okay. Sorry, I apologize. I look forward to hearing that.
Yeah. It's funny when the deaf guy wears two hearing aids.
On the incentives, yeah, it's down a lot. I mean, we still have some in isolated spots in Montreal, a little bit here and there, but really it's burning off all across the board. That looks like that ship will have sailed. I mean, I think we've all went through the tough parts in the last couple of years where we, you know, we decided that we thought it was the right thing to do to you know keep our rents where we were, and we used some incentives along the way. Again, it's turning off.
Okay.
Sorry, just to be clear on that, though, the incentives, as we've discussed before, just to make sure for I know your modeling purposes, we see those peak out in Q4, which I think is what we communicated. We expect Q1 and Q4 to be very similar, like Q1 of next year 2022 because of these, you know, advertising and the life of the lease. Then that will sort of start to drop off in Q2 and come down hard in Q3 and Q4.
Yeah. I'm talking more new incentives.
Yeah. No, there's definitely an interplay there, and thanks for the clarification, Curt. That's ultimately I was trying to get to. Then I guess, as you're rolling off, now you're starting to address those leases where you used incentives and are you getting any pushback from tenants as you try and get rid of those or not so much?
It really depends. Like sometimes, I mean, you know, you're gonna get a little bit here and there. Look, we're really believing very strongly there's gonna be really good velocity in the leasing cycle, so it'll all work its way through, right?
Okay.
We're feeling confident where we're at.
Okay. I guess I know you guys holding the line on your end is certainly the strategy, and we've gotten through a period where you've rebuilt your occupancy. The mark-to-market gap has come down to 20 from 25. Directionally now, are there regions in your portfolio areas where market rents are growing again or is it still stable on that front?
Yeah, there is for sure. No, there is definitely some regions that are growing, and I'm kind of surprised in some cases how they're growing with, again, not having the, you know, the new immigrants and the international students and just, I guess, deploying the kids out of their bedrooms and, you know, whether they be university or young professionals. I mean, that's definitely what's happened. Also, you gotta remember too, what's happened with houses, the housing prices. There's a whole cohort of people that would usually be, you know, moving out to buy houses. It's out of their range, unfortunately. Like I'm telling you, like, supply is key right now. We need supply.
We need to make sure that we're doing all the things to speed up the process to get more supply. It's the right thing for, you know what I mean? Obviously, for we wanna see for Canada, we need supply across the board.
Okay. All good points. I guess, with respect to the mark-to-market gap, would you expect through 2022 that you'd get back to that, in excess of 25%, barring the unforeseen, is that a safe assessment?
I think there's a scenario where it either plays out where you can get to that, Michael, and even maybe much higher. We don't wanna be presumptuous, right? It really does come back to when do immigration come back in earnest, meaning that they're not just being given permanent residency, but where they're actually coming back into the country and the foreign students. I think with the way the world is headed, and especially with the geopolitical risk, I think Canada looks like a pretty attractive place, prior to the pandemic and prior to, unfortunately, the recent crisis in Eastern Europe. I think Canada even looks that much more desirable.
I think we're gonna see strong rental demand, but it will go back to what Mike has been advocating and the rest of us and other industry participants. We've got to be able to deliver new supply in the speediest way in order to meet some of this rental demand. To answer. A long answer, but really at the end of the day, I think our 20% is conservative. You can. You're the smart guys. You guys can kind of figure out where your sensitivity is from there.
Okay, great. That's it for me. Thanks for that. Congrats on a strong turnaround last year.
Thank you. Thanks for the congrats to the team. They all worked really hard.
Again, if you'd like to ask a question, that's star one on your telephone keypad. Our next question is from Matt Kornack with National Bank Financial. Your line is open.
Hey, guys. Just one quick one from me. On Montreal, you've notwithstanding the comment that it's been a bit weaker, you've actually seen some occupancy gains there. Have you been, in any cases, kind of replacing some of your student population with longer-term tenants, or is the remaining vacancy kind of exclusively student-related at this point?
It's mostly student and young professionals, again, kind of leaving their family homes to come and come back. You know what I mean? Again, we expect it to be much stronger, Montreal. Like, we're a big believer in Montreal over the medium- to- long term. It just seems like it's got hit a little bit more in the core than Toronto has too, to be frank, you know, but I think you've seen it in all the core market, like all the cores of the urban, these, you know, in the cities, they've all been hit. Montreal, we've just had a little bit more troubles just because we've got a lot of buildings are very close to universities.
Just to clarify Mike's comments with the young professionals and students, domestic students. We saw a pretty good uptake in leasing earlier on last year in Montreal, and it kind of petered out. I think a lot of that was a pent-up demand of people, 'cause Montreal, on the first before Omicron, looked like they were coming out and a little more back to normal versus Ontario. We saw that in the leasing traffic really pick up, and we saw a lot of the domestic Ontario student kids this time come and lease up. What we didn't see, Matt, was on the margin those international students, which you know is quite a big number for the island. Anecdotally, we're starting to hear of interest picking up again from the international student community.
Okay, perfect.
Now, we won't have full proof until as we get further on into the leasing season, and that will probably be July, August. We'll have better visibility of what that looks like.
Okay. But at the end of the day, the tenant composition hasn't changed because, I mean, it is nice to have students. They leave every three years.
Yeah. I think where you're getting at is I think the younger cohort versus the older cohort, and it's not empty nesters.
Sorry, Matt, if we kind of went around that. If we hadn't done that one, we could have made it pretty clear. Pretty clear.
Okay. Perfect. Thanks, guys.
We have no further questions at this time. I'll turn the call back to the presenters for any closing remarks.
Well, first off, I want to say thank you, everybody, for joining us. Really appreciate it. Hope everybody is doing very well. Looking forward to seeing many of you over the next few weeks and months. Thank you again. Appreciate everybody following us. Have a fantastic day.
We'll see you all at Q1, which is right around the corner.
Thank you, everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.