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Minto Apartment REIT reports 'Best quarter' since pandemic

Michael Waters, CEO of Minto Apartment REIT. (Courtesy Minto)
Michael Waters, CEO of Minto Apartment REIT. (Courtesy Minto)

For Minto Apartment Real Estate Investment Trust, the third quarter of 2022 was "easily our best quarter since the onset of the pandemic,” according to its CEO.

Michael Waters made the comment during the REIT's call with analysts and investors on Nov. 9.

Minto Apartment REIT recorded year-over-year improvements in same-property net operating income (NOI), average monthly rent and average occupancy during the quarter.

Same-property NOI improved by 13.3 per cent to $21.98 million, the average monthly rent increased 4.2 per cent to $1,720 (excluding 189 furnished suites, 160 vacant suites and 59 suites offline for repositioning) and average occupancy rose from 92.9 per cent to 96.2 per cent from the same quarter a year earlier.

Minto Apartment REIT (MI-UN-T) owned and operated 8,291 units in 32 rental apartments in Toronto, Montreal, Ottawa, Calgary and Edmonton at the end of the quarter, up from 7,277 a year earlier.

“Like many REITs, our third quarter was relatively quiet from a transaction perspective and our strong performance was a direct result of our talented operations team and our best-in-class urban portfolio,” Waters said during the call. 

“Our results were also supported by growing demand for urban rental housing, which is a result of rising interest rates, a growing housing affordability gap, increasing immigration, strengthening rental demand from students and a noticeable return to downtown living."

New leases with rent increases

Minto Apartment REIT negotiated 574 new leases in the quarter and achieved a gain of 14.5 per cent over expiring rent, from $1,675 to $1,918. That was the second-highest quarterly gain in the history of the REIT. 

“Despite recent market rent increases, our rental pricing remains a very attractive alternative compared to renting a condo, buying a new home or owning an existing home with a variable rate mortgage,” president and chief operating officer Jonathan Li said during the call. 

“For example, in Toronto, our rental rate per square foot is $2.62, which is 25 per cent lower than renting a condo based on market data from Urbanation.

"In addition, the carrying cost of a $500,000 mortgage would be approximately $2,900 per month using a five per cent interest rate and a 25-year amortization.”

Seventy-five units were renovated during the quarter, at an average cost of approximately $55,000 each, generating an average annualized return on investment of 9.4 per cent. 

There are 2,024 remaining units to reposition under the current program. Minto Apartment REIT expects to reposition 40 to 50 in the fourth quarter, subject to turnover. It repositioned 218 in the first nine months of the year.

Smaller number of furnished suites

Minto Apartment REIT’s furnished suite count stands at 189, down 23 from Q3 2021 and close to the trust’s target. Average monthly rent was $5,261, an increase of more than 30 per cent from a year earlier, and occupancy rose by 560 basis points to 91.9 per cent.

“Reduced business travel during the pandemic severely impacted demand for the furnished suites, but as travel restrictions were removed and demand from corporate users and the film industry recovered, furnished suite demand rebounded as well,” said Li. 

All but one of the furnished suites are in apartments at 185 Lyon St. N. in Ottawa and 61 Yorkville Ave. in Toronto.

Development pipeline

There are eight projects in Minto Apartment REIT’s pipeline, five of which are in active development and one that’s stabilized.

Five are convertible development loan projects that include exclusive purchase options upon stabilization and three involve the intensification of properties owned by the trust.

The projects have the potential to increase the REIT’s unit count by 2,301 by 2029.

Fifth + Bank is a fully leased, 163-unit mixed-use residential and retail property in Ottawa’s Glebe neighbourhood. Minto Group extended the REIT’s option to purchase the property, which Waters estimates to be worth close to $100 million, to June 30, 2023. 

“It’s absolutely loaded with all the latest proptech and amenities and it’s in a submarket where there’s probably less than one per cent vacancy,” said Waters. “It’s an asset we want to put in the REIT. 

“We are sensitive to some of the feedback that we got in the spring with the timing of The International and 39 Niagara transactions and obviously sensitive to where our stock’s trading. Right now we’re at kind of 45 per cent discount to NAV. 

“So we took a lot of feedback from investors, very sensitive to the fact that this is a related-party transaction and wanting to be absolutely transparent and bend over backwards to ensure that the minority unitholders are treated fairly.”

Lonsdale Square in North Vancouver has been topped off and is nearing completion. Market rents in the area continued to increase, with rental buildings achieving rents of approximately five dollars per square foot. 

Pre-leasing of Lonsdale Square’s 113 suites is expected to begin in Q1 2023. Once stabilized, the REIT will have the option to purchase the project at a five per cent discount to appraised value. 

Minto Apartment REIT is including 100 affordable units at its property at 7 and 21 Richgrove Dr. in Etobicoke, with the help of federal and municipal government partners, as part of a 225-unit development. It anticipates stabilization in the second quarter of 2026.

Changing of CFOs

Chief financial officer Julie Morin took part in her final earnings call for Minto Apartment REIT, as she’ll be transitioning back to Minto Group as its CFO. Edward Fu, the trust’s vice-president of finance, will take over as CFO of the REIT.  

Morin said the sale of the trust’s three-property Edmonton portfolio continues to progress and it’s hoped an update can be provided after this quarter.

“If we can potentially reduce exposure to older rent-controlled assets and take that money and invest it into new non-rent-controlled assets, that would be a transaction that makes sense,” Li said in response to a question about other potential property sales.

Focus on five key strategies

Waters said Minto Apartment REIT has capitalized on the rising cost of home ownership, Canada’s expansive immigration policy and housing supply that's lagging demand. 

“We believe the outlook for the Canadian urban rental market will remain strong for the foreseeable future, especially if you consider that the multifamily sector has historically performed well during recessionary periods due to the short-term nature of our leases,” said Waters.

Minto Apartment REIT is focused on five strategies: 

    •    growing NOI by maximizing revenue, optimizing occupancy, creating value from suite repositioning and minimizing operating expenses; 
    •    strategically allocating capital, which may include recycling opportunities, accretive investments and deleveraging; 
    •    executing on its existing intensification and development pipeline to further upgrade its portfolio; 
    •    third-party acquisition or development opportunities, which will be market dependent; 
    •    and prudent balance sheet and liquidity management.  

Debt, liquidity, stock price and distributions

The trust had outstanding debt of $1.08 billion and total liquidity of $145.1 million at the end of Q3.

Minto Apartment REIT’s stock closed at $14.50 on Nov. 14, when it had a market cap of $578.37 million. Its 52-week high and low were $23.41 and $12.41 respectively.

“Regardless of the short-term capital markets' volatility, the key elements of our strategy have not changed,” said Waters.

“We’re confident that by sticking to them we will deliver strong returns to unitholders as the fundamentals of the apartment sector remain strong.” 

Minto Apartment REIT has increased distributions in each of the four years since its formation. 

“This is another measured increase that highlights our positive financial performance and our confidence in our growth strategy and business outlook,” said Waters.

“It’s important to note that while regularly increasing distributions is a priority for the REIT, we’re also committed to maintaining a strong balance sheet and conservative AFFO payout ratio.”

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