Watch the Apartment REIT – Fund President Q3 2023 Update
Transcript
Ray Punn: [00:00:25]
I am pleased to provide you with Skyline Apartment REIT‘s update for Q3 2023. Joining me here today is Matt Organ, President of Skyline Apartment REIT. Matt, thanks for joining.
Matthew Organ: [00:00:35]
Thanks for having me, Ray.
Ray Punn: [00:00:36]
So Matt, let’s just jump right into it. There’s a lot of hot topics on immigration, on housing supply. What does all of that mean to the Apartment REIT?
Matthew Organ: [00:00:43]
Yeah, there’s a ton of hot topics right now in the news. You see it just about daily, right? We’re still talking about a supply shortage in not only Ontario, but also right across the country. We’re talking about rising rental rates, obviously low vacancy rates, leading to supply problems. So, I think there’s a variety of things there.
From an immigration standpoint, obviously the federal government’s just recently announced their immigration plans for the next number of years. And I forget the exact numbers, but I think we’re 500,000, or maybe 600,000 de-escalating to 500,000 going forward. But the reality is, it’s obviously still feeding into the rental demand.
There was recently a study done by the University of Ottawa, I believe, that was talking about the demand that we have currently, and the demand that we have coming within the next eight years. And the best-case scenario is they feel that, with the current mandates out there, and the incentives by the government to developers to get further things built, we’re still likely only going to meet 50% of that target, right? So, the bottom line is obviously the rental demand is going to remain high.
We are in the right communities and well poised to, I don’t want to say take advantage of, but certainly be the beneficiaries of, that high demand in rental. And across the Apartment REIT portfolio, we’ve seen vacancy rates fall quite a bit over the last several months again, right? So, we’re really getting to the point where. . . they’re getting as tight to the point where you’re simply just turning over a unit, getting it ready, having the next tenant come in. And that’s obviously where we want to be. And it’s finding the sweet spot between where you need rental rates to get things rented on time, and to have that back-to-back turnover occurring. And that’s where we get the the most benefit for our unitholders.
Ray Punn: [00:02:41]
So, with the rise of rental rates, with the higher demand and sort of lower supply, what does that mean to the NOI for the Apartment REIT?
Matthew Organ: [00:02:49]
Yeah, again, going back to that, the ultimate thing for the NOI is to have sort of rental rates where they are. We’re price-sensitive to every market we’re in, where all our competitors are. And just trying to find where that proper ground is to set our rates. And we’re constantly adjusting them every month.
But it’s really about optimizing your units. You want to drive as much revenue as you can out of the units. In order to do that, you need to keep them full, right? So, it’s about having our operational teams work as efficiently as possible and being able to turn those units, like I say, back to back. So, if you have a tenant move out, the faster you can get that unit ready, and the faster you can get a new tenant back into that unit, is your minimum downtime, your minimum amount of vacancy bleed. And that’s really what contributes to better NOI growth.
Ray Punn: [00:03:41]
So, Matt, one of the other ideas we talk about is interest rates. And interest rates have, of course, spiked. But I also know that the Apartment REIT can benefit from CMHC debt. Can you maybe walk us through what that looks like for the Apartment REIT?
Matthew Organ: [00:03:53]
So, obviously, again mentioned before, hot topic – interest rates. We’re probably now around the 18-month mark of increase in that cycle. 10 hikes by the Bank of Canada in that timeframe. And obviously there are pros and cons to all of it.
On the con side, obviously most of the financing that we’re doing at this point is higher than obviously what we were doing sort of a year ago, two years ago. And in some cases, it’s higher than what the outgoing rate of a mortgage was, if we had to refinance it today. We’re still getting reasonably favourable rates, though, in the big picture. As of today, we’re still sort of in a 4.6/4.7 rate, if we’re talking about a five-year CMHC mortgage.
Strategically, we’ve taken on some shorter-term debt, thinking that rates will be going down, which is sort of the common consensus across the board both in Canada and the US right now. So, it’s sort of about – it’s a little bit of a finger in the wind. But we’ve taken on, like I said, some shorter-term debt, which might be conventional debt. We might be taking on some mortgage rates at 6% on a one-year term, with the long-term view that sometime within the next year when that comes due, we can then amortize them out on a new 25-year or 35-year on a five-year term at CMHC insurable rates, which may be back down around the 4% point. You know, at that mark.
Ray Punn: [00:05:29]
Okay.
Matthew Organ: [00:05:30]
So, in addition to my first comment on interest rates, which really are the primary effect of our financing on the Apartment REIT side, the other side of the coin is that right now, obviously, with interest rates being what they are for residential homeowners, for them to pass a stress test, obviously, and qualify for a mortgage, it becomes much harder.
So, the other day, I was actually fooling around on a Bank of Montreal mortgage calculator for fun. The average home price in Canada in September that was sold was $741,000. So, if you take a $741,000 home, and you look at what it takes to qualify for a mortgage on a $741,000 home right now for somebody entering the market. So, if you looked at it from a standpoint of: they’re putting 10% down, what would their household income be in order to qualify for that loan? And the answer is almost $190,000. And that would be $190,000 with a household income to qualify for the average sale of a home price in Canada with a 10% down payment.
So, obviously, those numbers are staggering. It makes home ownership very tough for people just coming into the market in the first place. So, I think the flip side of that for us in the Apartment REIT is it bodes very well for rentals, right? Interest rates on the residential side are going to stick around for a little while. Most of our financing is done off bond rates, which will turn much quicker than what interest rates are, even when interest rates or the Bank of Canada starts to lower rates.
So, I think we’ve got a long runway of the barriers to home ownership probably staying in place for a while, which just fuels the demand, coupled with the housing shortage already driving people into rental accommodations.
Ray Punn: [00:07:24]
So, Matt, you’ve hit some hot topics there. One of the topics that we speak to our investors about is loss of lease and mark to market. So, as we conclude the video, can you just give us sort of an update on that loss of lease, mark to market? What does that mean to investors in the fund? Where are we at? And any final remarks that you have for investors?
Matthew Organ: [00:07:46]
Yeah, certainly. So, obviously loss to lease, as we’ve explained in the past, is simply the dollar gap between what all our in-place rents are, and what the market rent on those suites would be if the old tenant moved out and a new tenant moved in.
So, right now, our our current mark to market gap as of October was $424 a door. So, in theory, if every tenant moved out and every new tenant moved in, and we captured that $424 per suite on average, essentially what it does, if you take that out at 20 times earnings, which would be a five cap, it would add about $27 worth of value to our already $27.75 unit price. So, you’re effectively doubling the unit value over time, as those suites turn.
We’re still maintaining slightly above a 20% turnover rate in the suites. So, in theory, you could turn over every suite in five years. Obviously, in practicality it doesn’t work that way. Some tenants stay longer, etcetera. But as an investor myself and for all of our investors, there’s a lot of upside there for the future. We just have to keep doing our job and just turning over the units.
Ray Punn: [00:09:02]
Matt, that’s a great update. Thanks for joining us today.
Matthew Organ: [00:09:05]
Yeah, it’s great to be here, Ray.
Ray Punn: [00:09:06]
Skyline Apartment REIT is currently open for new investment. If you have any questions, connect with your Skyline Wealth Management representative or simply email us at Invest@SkylineWealth.ca. Thanks for watching.