How higher rates affect REITs

>> ONE OF THE BIG LONG-TERM TRENDS IN CANADA IS THE GROWING DEMAND FOR HOMES. WE OFTEN LOOK AT THAT STORY THROUGH THE LENS OF HOUSING ITSELF. BUT IN THE STOCK MARKET, THERE ARE NUMBER OF REAL ESTATE PLAYS TIED TO THE RESIDENTIAL MARKET. MINTO APARTMENT REIT IS ONE OF THEM. THE BUSINESS OPERATES MORE THAN 2 DOZEN NOTABLE RENTAL PROPERTIES ACROSS CANADA'S BIGGEST CITIES.

ITS ROOTS TIED BACK TO ONE OF THE COUNTRY'S BIGGEST REAL ESTATE PLAYERS MINTO UNTIL WE WENT PUBLIC ROUGHLY 6 YEARS AGO. JON LEE IS THE PRESIDENT CEO AND HE JOINS US HERE IN STUDIO. NICE TO SEE JON. THANKS FOR HAVING ME. A GOOD TO HAVE YOU WITH US. AND OBVIOUSLY A BIG TOPIC THAT WE'RE CONSTANTLY TALKING ABOUT, THE DEMAND FOR HOUSING IN TERMS OF YOUR BUSINESS, THOUGH, HOUSE AND STRUCTURED, HOW DOES IT OPERATE? >> SO WE OWN 27 PROPERTIES IN MAJOR CITIES IN CANADA, COMPRISING ABOUT 7700 UNITS WE ARE ONLY IN THE MAJOR CITIES OVER IN TORONTO, OTTAWA, MONTREAL, CALGARY.

WE ARE ALSO BUILDING WITH OUR PARTNER MINTO PROPERTIES IN BOTH VANCOUVER AND VICTORIA. WHAT SETS US APART FROM SOME OF OUR COMPETITORS ARE DIFFERENTIATES US IS THE FACT THAT WE ARE ONLY IN THE MAJOR CITIES. WE ARE URBAN, FOCUSED AND WERE NEWER AND WE LIKE BEING URBAN FOCUS BECAUSE IT HELPS US PROTECT LAND VALUE, LAND COSTS AND REPLACEMENT COSTS. AND WE LIKE THE NEWER BECAUSE IT MINIMIZES THE AMOUNT OF CAPITAL CAPITAL EXPENDITURES THAT WE NEED TO INVEST IN OUR, IN OUR BUILDINGS GOING FORWARD. AND I THINK WHEN WHEN PEOPLE INVESTORS TALK ABOUT INVESTING IN REITS AND ONES THAT ARE TIED TO RESIDENTIAL PROPERTIES, THEY CONSTANTLY COME BACK TO THIS LONG TERM STORY. >> OF HOUSING DEMAND. WHAT DO YOU SEE IN YOUR BUSINESS? CAN YOU JUST GIVE US A LITTLE BIT MORE HOW THINGS HAVE PLAYED OUT, WHAT THE ROBOT LOOKS LIKE JUST BASED ON DEMAND. >> WE'RE REALLY EXCITED TO OWN RENTAL APARTMENTS IN CANADA ABOUT A 3RD OF CANADIANS RENT AND THAT PERCENTAGE IS GROWING MONTH BY MONTH AND FOR FOR THE FOLLOWING REASONS.

RIGHT? WE HAVE HOUSING UNAFFORDABILITY, SO IT'S CHEAPER TO RENT THAN IT IS TO OWN A HOME. WE HAVE A LACK OF HOUSING SUPPLY IN OUR COUNTRY AND A VERY IN ELASTIC HOUSING SUPPLY. WE CAN'T BUILT FAST ENOUGH. OUR OWN FEDERAL HOUSING AGENCY CMHC SAYS WE NEED TO BUILD ANOTHER 3 AND A HALF MILLION HOMES BY 2030. IN ORDER FOR US TO SOLVE THIS, YOU KNOW, AFFORDABILITY CRISIS. TO PUT THAT INTO PERSPECTIVE, WE BUILD ABOUT 225,000 HOMES A YEAR AS A COUNTRY THERE IS A WE'RE RUNNING IT BASICALLY MAX CAPACITY BECAUSE WE HAVE A TRADE SHORTAGE AS WELL. SO OUR ABILITY TO BUILD QUICK ENOUGH IS IS, IS, IS NOT A ROBUST.

BUT WE DO HAVE A ROBUST IMMIGRATION POLICY. AND WHEN YOU PUT ALL THOSE 3 THINGS WE'RE PRETTY CONSTRUCTIVE FOR THE RENTAL HOUSING BUSINESS IN CANADA. TALKED A LITTLE BIT ABOUT YOUR DESIRE TO BE AND SOME OF THE MOST URBAN AND SOME THE COST BENEFITS THAT CAN COME FROM THAT. >> AND WHEN IT COMES TO YOUR OWN BALANCE YOU GUYS HAVE MADE SOME MOVES AS WELL.

YOU HAVE DIVESTED SOME PROPERTIES IT SEEMS LIKE MOST OF THAT WAS WAS QUITE SIMPLY TO DEAL WITH THINGS LIKE DEBT WILL WALK US THROUGH HOW YOU THINK ABOUT WHAT PROPERTIES YOU WANT TO OWN WHEN IT COMES TO ACTUALLY THE METRICS ON THE BOOKS ARE. >> SO WE'VE BEEN EXTREMELY FOCUSED ON CONVERTING OUR NET OPERATING INCOME, WHICH IS BASICALLY REVENUE MINUS EXPENSES DOWN INTO CASH FLOW PER UNIT. BECAUSE IN A MARKET LIKE THIS, WE FEEL THAT IS A REALLY IMPORTANT THING TO FOCUS ON AND HOW WE'VE BEEN DOING THAT IS EFFECTIVELY MANAGING OUR CAPITAL STRUCTURE THINGS THAT WE'VE DONE IS WE ARE ONE POINT AT THE PEAK AT ABOUT 260 MILLION DOLLARS WORTH A VARIABLE RATE DEBT IN OUR DEBT STACK AND THAT MONEY COSTS 7%. AND ALTERNATIVELY, WE CAN GET CMHC LONG-TERM MORTGAGES AND THAT CAUSES ABOUT 4 AND A HALF PERCENT. SO WE WERE REALLY FOCUSED O REDUCING THAT VARIABLE RATE DEBT. AND WHAT WE DID WAS BETWEEN UPPER REFINANCINGS AND ASSET SALES FROM ITS PEAK OF 26% OF OUR DEBT STACKED.

WE REDUCED DOWN TO ABOUT 6% OF OUR DEBT STOCK IN THE LAST QUARTER. AND WE'RE WORKING ACTIVELY WORKING ON OTHER REFINANCINGS TO HOPEFULLY GET THAT PRETTY CLOSE TO 0. AND THE OUTCOME OF THAT, IT'S VERY ACCRETIVE TO US AND OUR CASH FLOW PER UNIT. AND AS THE CHART THAT I THINK WE'RE GOING TO PUT ON THE SCREEN THAT EFFECTIVELY SHOWS OVER THE LAST 6 QUARTERS. WE WENT FROM -10 PERCENT GROWTH AND GREW IT ALL THE WAY UP TO 27% GROWTH. YEAR-OVER-YEAR FFO PER UNIT. AND THAT'S REALLY WHAT WE'RE FOCUSED ON, WERE VERY PLEASED WITH THE RESULTS. WELL, I THINK AND THEIR NUMBER, I ON BAY THERE'S A FAIRLY FAVOURABLE VIEW OF YOUR BUSINESS AND AGAINST METRICS LIKE THIS WOULD WOULD FACTOR INTO I THINK ONE OF THE COMPLICATING FACTORS IN SHORT TERM, MAYBE FOR INVESTORS JUST.

>> THE STORY ON INTEREST RATES THAT WE TALK ABOUT EVERY DAY ABOUT OUR INTEREST RATES GO INTO STAY WHERE THEY ARE, THEY'RE GOING GO DOWN. AND IT SEEMS LIKE ALL SORTS OF ASSET CLASSES, INCLUDING FIXED INCOME SORT OF WILL WILL BOUNCE AROUND JUST BASED ON FOR YOUR BUSINESS. HOW ARE YOU THINKING ABOUT WHERE INTEREST RATES ARE A YEAR FROM NOW? 2 YEARS FROM NOW. HI, HOW ARE YOU APPROACHING ALL THAT IS IMPACTING EVERY SINGLE MINUTE OF EVERY SINGLE DAY. OKAY OF OUR JOB. >> AND YOU KNOW, WE CAN REALLY ONLY CONTROL THE THINGS THAT WE CAN CONTROL THINGS LIKE BALANCE YOU THINGS LIKE OUR OPERATIONS, THINGS LIKE CAPITAL ALLOCATION, THINGS LIKE COST CONTAINMENT.

SO OUR HEADS ARE DOWN FOCUSED ON THAT. AND I THINK THAT HAS RESULTED IN SOME OF THE CASH FLOW GROWTH THAT WE'VE BEEN BUT THE REALITY IS THERE'S A MASSIVE DISLOCATION BETWEEN THE PUBLIC MARKETS AND THE PRIVATE MARKETS. AND WE THINK THAT'S AN OPPORTUNITY AT THE END OF AT THE END OF THE DAY. WE OWN SOME OF THE HIGHEST QUALITY REAL ESTATE IN THE COUNTRY. I THINK MANY OF YOUR VIEWERS ARE FROM TORONTO. MANY KNOW TORONTO TO GIVE YOU SOME SPECIFICS. WE OWN THE BIG WHITE BUILDING WITH THE MINTO SIGN ON IT, THAT YOU CAN SEE FROM THE GARDENER AT KING AND BATHURST WITH THE FARM BOY, THE DOLLARAMA AT THE BOTTOM.

WE OWN 61 YORKVILLE, WHICH IS A KEY CORNER FROM 4 SEASONS IN YORKVILLE. AND WE OWN A BEAUTIFUL NEWLY RENOVATED BUILDING CALLED THE ROW JUST NORTHEAST OF YONGE AND EGLINTON. THESE ARE TROPHY ASSETS IRREPLACEABLE ASSETS. THAT BECAUSE A DISLOCATION I TALKED ABOUT, YOU CAN ACTUALLY BUY FOR A 25% DISCOUNT TO OUR BOOK VALUE. SO WE'RE REALLY JUST FOCUS ON WHAT WE CAN FOCUS ON AS INTEREST RATES GO UP. WE GO DOWN AS AS INTEREST RATES GO DOWN, WE GO UP.

WE ARE NOT IMMUNE TO THAT. AND THAT IS THAT'S WHAT'S DRIVING A LOT OF OUR STOCK PRICE PERFORMANCE OR REALLY EXCITED ABOUT WHAT WE OWN AND WHERE WE'RE GOING VERY RESIDENTIAL FOCUSED. YOU KNOW, YOU MENTIONED THE READ TO MAKE, THERE MIGHT BE RETAIL STOREFRONTS AT THE BASE OF SOME OF THOSE PROPERTIES, BUT IT'S IT'S VERY MUCH A STORY ON ON THE RESIDENTIAL MARKET. REAL QUICKLY BEFORE WE GO. >> SINCE YOU'RE IN SO MANY URBAN CENTRES AND I THINK MOST CITIES LIKELY JUST GOING TO ST – GET BIGGER OVER TIME. WHAT ELSE CAN WE BE DOING TO MAKE OUR URBAN CENTRES REALLY SHY, YOU KNOW, THINGS LIKE INFRASTRUCTURE. WHAT DO YOU GUYS THINK ABOUT WHAT PLAYS INTO THAT, WHAT'S WHAT'S TOP OF MIND TO MAKING YOUR BUSINESS AND YOUR BUILDING SUCCESS, BUT ALSO THOSE COMMUNITIES. >> YOU KNOW THEM INTO A GROUP THAT YOU MENTIONED AT THE OUTSET.

UM, IS A 60 YEAR-OLD COMPANY THAT HE'S BEEN VERY FOCUSED REPUTATION, TRANSPARENCY, HONESTY, BUT ALSO BUILDING HIGH-QUALITY COMMUNITIES THAT ARE GREAT PLACES TO LIVE. AND AT THE END OF THE DAY, THAT'S WHAT WE'RE TRYING TO DO. WE'RE TRYING TO OPERATE. >> WELL AMENITY BUILDINGS.

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