Canadian Apartment Properties Real Estate Investment's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar. 3.14 | About: Canadian Apt (CDPYF)

Canadian Apartment Properties Real Estate Investment Trust (OTC:CDPYF) Q4 2013 Earnings Conference Call March 3, 2014 10:00 AM ET

Executives

David Williams – Independent Trustee

Thomas Schwartz – President and Chief Executive Officer

Scott Cryer – Chief Financial Officer

Analysts

Frederic Blondeau – Dundee Securities Corp.

Jonathan Kelcher – TD Securities

Alex D. Avery – CIBC World Markets, Inc.

Mario Saric – Scotia Capital Markets

Heather C. Kirk – BMO Capital Markets

Jimmy Khing Shan – GMP Securities LP

Matt Kornack – National Bank Financial Brokers

Neil Downey – RBC Dominion Securities, Inc.

Operator

Good morning ladies and gentlemen. Welcome to the CAPREIT Fourth Quarter and Year End Conference Call. Please be advised that this call is being recorded.

I would now like to turn the meeting over to Mr. David Mills. Please go ahead Mr. Mills.

David M. Williams

Thanks Melanie. 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 on which they are based can be found in CAPREIT’s regulatory filings, including our Annual Information Form and MD&A, which can be obtained at sedar.com.

I’ll now turn things over to Tom Schwartz, President and CEO.

Thomas Schwartz

Thanks David. Good morning everybody and I want to thank everybody for joining us today. With me this morning is Scott Cryer our Chief Financial Officer. We are very proud to discuss with you another record year for CAPREIT in 2013.

As you can see on Slide 3, our portfolio growth over the last two years combined with the continuing success of our property management programs are generating increases in all of our key performance benchmarks. Revenues were up 15.7% in 2013, generating 15.1% increase in NOI. Same property NOI was up 3% for the year while our NOI margin remained very strong at 57.4%.

Normalized funds from operations rose 20.2% for the year and was highly accretive as NFFO per unit was up 5.1% in 2013 to $1.56 per unit, despite the 14% increase in units outstanding. With this strong performance, our NFFO payout ratio also improved to 74.8% from 76.4% last year.

We also continued to growth and diversify our portfolio as you can see on Slide 4. In 2013, we purchased 4,931 apartment suites and MHC sites once again exceeding our annual growth target for total cost of $456.5 million. Importantly, we entered three new geographic markets further strengthening the diversification of our property portfolio and enhancing our overall risk profile.

We also significantly strengthened our highly stable MHC portfolio which now represents just under 15% of our total. While immediately accretive our cash flow, looking ahead, we expect for contribution from these new properties were increased as they benefit from our proven property management programs.

Slide 5 shows we are continuing to capitalize on strong rental markets. Average monthly rents have risen across all segments of our apartment portfolio, resulting in an overall 2.9% increase for the year. Rents in our MHC portfolio were impacted by acquisitions made in lower rent markets during the fourth quarter.

Occupancies remained strong at 98% in the residential suite portfolio, up from 97.8% last year. Looking ahead, demand remained strong in all of our markets. We see occupancies remaining stable at these nearly full levels and we believe average monthly rents will continue to increase overtime.

Slide 6 details how our average rents are performing on suite turnover and lease renewals. As you can see, we continue to generate solid growth in average monthly rents although at a slightly lower pace than last year due to the lower 2013 rent guidelines, Ontario and British Columbia.

One of the key reasons for our rental rate growth is our ongoing successful application for above guideline increases to properties, where we have invested capital in capital improvements. As of December 31, 2013, we have filed AGI applications where 12,368 suites, which we have settled on 73 applications for average increases of 3.44% expected to be applied over 1.7 years with another eight applications pending for average increases of 3.99% expected to be applied over 1.8 years.

Stabilized same property performance also continues to demonstrate the success of our property management programs as detailed in Slide 7. As you can see, despite the modest increase in operating expenses in 2013 compared to last year, same property NOI was up at solid 3% in 2013.

Fourth quarter same property NOI declined by 2.6% due to higher operating costs including accelerating repairs and maintenance costs as well as increase in utilities, but we expect to return to positive growth in the near future. We continue to maximize all opportunities to generate increased revenues at our core properties in 2013.

As Slide 8 shows, our ancillary revenues which include resident and commercial parking, laundry revenues, cable and Internet charges and rooftop antenna contracts, increased 5.8% in 2013 on the stabilized portfolio, another year of significant growth.

Since 2009, we have generated a very solid 5.2% compound annual growth rate in our ancillary revenues and we expect those to continue going forward. In addition to adding value, most of these programs enhance lives of our residents, further increasing our retention rates and building brand loyalty for CAPREIT.

One of the key reasons for our success over the last 17 years is the experience and dedication of our team. At CAPREIT, we have worked hard to build and engaged and happy group of employees and in 2013, we were very proud to be named one of Canada’s top 50 employers by AON Hewitt. Also CAPREIT was named in the top 20 employers in the province of Québec by AON Hewitt. This award was achieved with a number of unique and focused programs introduced over the years and enhancing the CAPREIT work place.

Training and education programs are aimed at developing for our people and ensuring we can promote from within. We recognized achievements and have implemented other initiatives to build and fasten our group premier culture at CAPREIT where everyone acts as a team.

We believe our approach is working and we are very proud to receive this award. At CAPREIT, we also work hard to make sure we are a good corporate citizen in the markets where we operate.

As you can see on Slide 10, we contribute to a number of charities and are partnered with Toronto Foundation for Student Success to fund the provision of free nutritional breakfast for children at a local elementary school. This is an addition to our student breakfast program at certain properties where we provide free breakfast to underprivileged children.

Over the next few months, we will be launching a new social media platform to keep you up-to-date on all of our initiatives and the positive impact they are having in our communities. We hope you will tune in to run more about how CAPREIT is contributing to our neighborhoods and improving lives of our residents.

I will now turn things over to Scott to review our financial results to-date.

Scott Cryer

Thanks Tom. As Tom mentioned at the outset, our performance remained strong through the year, driven by our portfolio growth and our successful operating initiatives. As you can see on Slide 12, operating revenues were up 10.6% in the fourth quarter, primarily due to the contribution from our acquisitions and improved operating performance. With this revenue growth, our NOI increased 5.4% in the quarter with NOI margin remains solid at 53.2%.

The decline in NOI margin compared to last year’s fourth quarter was due to higher operating expenses, typically from higher R&M and utility cost. NFFO in the quarter was up 8.3% primarily due the 14% increase in the weighted average number of units outstanding in the period, the NFFO pre unit was $33.08, down from $35.06 last year.

Slide 13 details the record results for the year with the operating revenues up 15.7% NOI increasing in 15.1% and the strong NOI margin of 57.4% and despite an approximately 14% increase in the weighted average number of units outstanding, NFFO per unit was up 5.1% with our NFFO payout ratio also improving to 74.8% from 76.4% last year.

Turning to our balance sheet on Slide 14, you can see we continue to maintain a strong and flexible financial position. Coverage ratios remained very strong with interest coverage continuing to exceed 2.5 times and the improved debt service ratio well within our guideline. It is also important to note that we have approximately $271 million of our properties that are not encumbered by mortgages used only to secure acquisition and operating facility.

Our weighted average interest rate declined further at year-end and we’ve continued to focus on extending our debt maturities using 10-year term mortgages debt while more recently attempting to balance our maturity profile with the use of various duration mortgages.

Looking ahead, we expect a rate between $600 million and $650 million in total mortgage renewals and refinancing in 2014, translating to over $200 million in top up financing.

As you can see on Slide 15, our mortgage maturity profile remained very conservative and balanced as we continue to focus on extending our debt maturities in the historically low rate environment. With significant maturities and top up potential for 2014, we should have the opportunity to take advantage of what we see as continuing low interest rate environment where are the low level mortgage maturities from 2015 to 2020 should mitigate risk of rising interest rates in the medium term. In addition, with almost 94% of our mortgages being CMHC insured, we have a large and diverse group of lenders willing to work with us at rates below conventional financing.

On the liquidity front, as detailed on Slide 16, we remained very well positioned to continue our growth program. Strong top up potential estimated at over $200 million for 2014 will easily allow us to fund our CapEx program and should create incremental liquidity throughout the year. With the completion of our $150 million equity offering in October, our liquidity position now stands at approximately $86.4 million at year-end, providing continuing long-term liquidity and the resources for future acquisitions of approximately $285 million while still maintaining our conservative debt ratios.

And as I mentioned earlier, we saw how $271 million in unencumbered properties that maybe up for future growth initiatives at the appropriate time. We currently expect the finance unencumbered investment properties with a fair value of over $130 million during the first months of 2014, bringing down our total unencumbered pool for approximately $140 million.

Thanks for your time and I will now turn back to Tom to wrap it up.

Thomas Schwartz

Thanks, Scott. Looking ahead, we are confident 2014 will be another great year for CAPREIT. First, a record portfolio growth over the last two years is having a very positive impact on our performance. Property revenues will also continue to benefit from our near full occupancy levels and consistent increases in our average month rents. Our ancillary revenues continue to grow as we introduce new and innovative programs in our properties.

Our NOI margin will remain strong particularly as we realize benefits for our state-of-the-art purchasing and energy management programs at our new properties. And as Scott detailed, we have the flexibility and the resources to continue growing and diversifying our property portfolio.

In summary, we believe CAPREIT faces a very exciting future. We have proven our ability to capitalize on continuing strong fundamentals in the Canadian Apartment business through all economic cycles. We believe we have one in the strongest balance sheet in the business and fiscal prudence will remain a key priority at CAPREIT. We are very confident in our team and we‘ve the right people and the right positions to manage our growth for years to come.

Finally, we have demonstrated that our business strategy is working and we will continue to build on the solid performance generated over the last 15 years. The main message today is that we are still very confident in our future and we look forward to sharing our results with you in the coming quarters.

Thanks again and we will now be please to answer any of your questions.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. (Operator Instructions) Your first question is from Frederic Blondeau from Dundee Capital Markets. Please go ahead.

Frederic Blondeau – Dundee Securities Corp.

Thank you. Just a quick question here, I was just wondering what would be your target of debt to gross book value here?

Scott Cryer

I would say, generally we are very comfortable with our debt to GBV is right now.

Frederic Blondeau – Dundee Securities Corp.

Okay.

Scott Cryer

Though we are not necessarily looking to move that upwards or downwards at a time.

Frederic Blondeau – Dundee Securities Corp.

Okay, thanks. And lastly what would be your target market at this point? In terms of new acquisitions?

Thomas Schwartz

We look at all the major cities in Canada. We are opportunistic. It depends what comes up. So we’ve bought in all the major cities coast-to-coast other than Winterpeg and we still save, the right deal came up with Winterpeg, we would buy.

Frederic Blondeau – Dundee Securities Corp.

All right. Thank you.

Thomas Schwartz

Thank you.

Operator

Thank you. The next question is from Jonathan Kelcher from TD Securities. Please go ahead.

Jonathan Kelcher – TD Securities

Thanks. Good morning.

Thomas Schwartz

Good morning, Jonathan.

Jonathan Kelcher – TD Securities

Could you really give us a little bit more color on the Q4 same property expense, like you talked a little bit about accelerated R&M costs and maybe where, how much?

Thomas Schwartz

I will tell you where in terms of details, talk to Scott offline, a lot of things happened in the fourth quarter. You certainly know about the ice storms and the weather and that created a lot of costs with plumbers and electricians, burst pipes, buzzing people, the warming centers I don’t want to tell you how many trees fell down on our properties. So that was a major issue.

It happens, at the same time we accelerated the number of one-time expenses. We did a significant amount of drain work, which again will benefit us this winter, we accelerated a window rehab program we’ve been working on, and again from an energy point of view, where our timing was pretty good with that. And we also chose to do a bunch of appliance replacements which again will be one-time. So what I can assure is there was a spike in that fourth quarter, these are not recurring items.

Jonathan Kelcher – TD Securities

Okay, so for – well you obviously can’t predict well, but for Q4 next year, you should be back closer to margins that you generated in Q4 2012?

Thomas Schwartz

Q4, again we can’t look at that Q1, you know what the weather is, I mean you saw it today, going across Canada. So we are burning more natural gas and we are incurring some extra-ordinary expenses but not at a level you saw in Q4.

Jonathan Kelcher – TD Securities

Okay, and then just secondly on Ireland, portfolio looks like it’s doing really well there. Is that the market, or is that specific to your assets?

Thomas Schwartz

It’s the market, remember, there is really no professional land or nobody really knows where rent levels are so. We are probably the first ones to come in and try to understand where rent levels are and take advantage of that. So we’ve gotten tremendous rent increases. We are very small there, but we are still getting a little bit of efficiency in the way we operate compared to others. So yes, we are very positive with those results and that will certainly continue.

Jonathan Kelcher – TD Securities

Okay and then in terms of your size there, maybe a little update on the acquisition market there, are there a lot of properties trading or you close to acquiring some of it?

Thomas Schwartz

We are certainly looking at other properties. Most of what happens there of any scale is done in the auction process as the properties that we bought. So we are certainly looking at other auctions and if the right opportunity comes up we’ll take advantage of it.

Jonathan Kelcher – TD Securities

Okay, have you bet on other assets and not gotten them or …

Thomas Schwartz

We’ve not bid on anything else since the first acquisition.

Jonathan Kelcher – TD Securities

Okay, thanks I’ll turn it back.

Thomas Schwartz

Thanks Jonathan.

Operator

Thank you. The next question is from Alex Avery from CIBC. Please go ahead.

Alex D. Avery – CIBC World Markets, Inc.

Thank you. I guess I wanted to take a bit into Nova Scotia, you had pretty good performance in Q4 in the province. And one of your peers had a little more of a challenging time. Were utilities not an issue for CAPREIT during Q4?

Thomas Schwartz

Scott?

Scott Cryer

I mean utilities definitely did play a part in Q4 for us. I think some of our forward purchasing of natural gas probably helped us well with our energy initiative. But it did have an impact but I think just not to the extent of maybe some of our peers.

Alex D. Avery – CIBC World Markets, Inc.

Okay. And then just was hoping, I guess we’re not through the – I guess the magnitude of or I guess how far you’ve gotten through the sub-metering of the Ontario portfolio and perhaps give us an estimate of what kind of I guess expense minimization impact that would have had in Q4, I guess said another way, what the impact or what the incremental impact would have been had you not gone through that?

Scott Cryer

Yes, so I mean I think we’re about 40% done. Again we turned a third of our units over every year, but we are seeing a trend that it does end up being a lot of the same unit. So, we would expect a fairly consistent pace of turning those on. I think when you look at our electricity costs, it was despite some rise in rates. In a tougher winter we’ve been able to maintain those flat. So I think it is having solid impact to our bottom line ultimately on the electricity front.

Alex D. Avery – CIBC World Markets, Inc.

Okay. And then just I guess looking at Q4 and Q1, you noted that during Q4 you would have had the ice storm and some unusual tree expenses and water issues and thinks like that. How much of the negative impact in Q4 would have been simply sort of normal utilities and maintenance expense versus how much of that would’ve been sort of I guess ice storm specific?

Scott Cryer

Yes, I’ll probably take this off-line, but definitely $0.02 worth of expenses we wouldn’t see in our regular run rate.

Alex D. Avery – CIBC World Markets, Inc.

Okay, so you probably won’t expect to see those in Q1?

Thomas Schwartz

I mean the energy costs and some of the ice storm impacts we will see in Q1, but not to the same extent. The drain programs here at the window rehab that was completed before fourth quarter.

Alex D. Avery – CIBC World Markets, Inc.

Okay. That’s great. Thanks guys.

Thomas Schwartz

Thanks, Alex.

Operator

Thank you. The next question is from Mario Saric from Scotiabank. Please go ahead.

Mario Saric – Scotia Capital Markets

Hi. Good morning.

Thomas Schwartz

Good morning Mario.

Mario Saric – Scotia Capital Markets

Just maybe come back to Ireland, there was an article in the Sunday post in Ireland a couple of weeks back on highlighting CapEx desire to get to maybe 5,000 to 7,000 suites in Ireland, which is a bit above kind of the greater or less than 5% of the total portfolio that had we’ve discussed in the past.

I’m just wondering if you kind of comment on whether your growth plans in Ireland accelerated in the last three months or whether that type of target means to imply your desire to restructure your investment in Ireland sooner as opposed to later?

Thomas Schwartz

It’s the latter Mario. If we have the opportunity to go to that scale and we hope we do, we would certainly spin this off the CAPREIT books to make sure we do it in saturated benefits CAPREIT shareholders and we’re currently looking at the best way to do that.

Mario Saric – Scotia Capital Markets

And presumably that would happen once you achieve critical mass – in your view what would critical mass comprise in terms of asset value in Ireland?

Thomas Schwartz

That article said 5,000 to 7,000 units. I mean that’s $1 billion worth of assets. So pretty close to it. We would be restructuring long before we got that. I said earlier this will never be on the CAPREIT books at 5% or more. So I think you can assume we would do it earlier rather than later.

Mario Saric – Scotia Capital Markets

Okay and any, it’s probably hard to say but, how quickly do you think you can get to those 5,000 to 7,000 suites in terms of the overall market environment today?

Thomas Schwartz

There are some large auctions coming up. As you know all of these suites are in the hands of either banks which are being driven by some government pressure or the government itself, which established an agency called NAAM. Our sources tell us NAAM will be having a residential auction at the beginning of the second quarter in the range of 1,000 units.

We owe another 400 units to 500 units in the hands of one of the English banks that will be auctioned again in the next one or two quarters and other things as well as. So I think there will be a fair volume coming up. The question is whether we’ll be successful in audits. I’m sure you’ve read it’s extremely competitive over there. There’s all kinds of bidders now on properties.

Mario Saric – Scotia Capital Markets

Yes and I know, you did very well at the first acquisition and you haven’t bid on anything else subsequent to that, but any sense as to what pricing or how pricing has changed since early August?

Thomas Schwartz

I mean, it’s been publicly reported that on the commercial auctions, the bidders have been Lone Star, Apollo, Blackstone. So all the regular names you would expect over there. CAPREITs are still profitable. It’s not like here where they have been driven down to very, very thin margins. There is still room to make a profit in Ireland.

Mario Saric – Scotia Capital Markets

Okay, and then maybe lastly in terms of the sub-metering, Scott I think you mentioned that about 40% or 42% of your portfolio has that [ph] paying for hydro and I’m sure in Alberta. On average, that’s increased about 300 basis points to 400 basis points quarter-over-quarter. Going back to last couple of years, would it be fair to assume that type of trend going forward or should we probably see an acceleration in that number given the strength in your markets?

Scott Cryer

Honestly, it’s very hard to call just because you don’t know what units are going to turn over. So I think that’s probably a reasonable run rate that you described, but I don’t know that we can specifically say we are going to get better attraction in that. It’s really a function of which units turn over because we have made the discussion not to do that on renewal and only do it on turnover. So I think your initial assumption is probably the safest.

Mario Saric – Scotia Capital Markets

Okay, and generally what are your competitors doing in your various markets. Are they following your lead or are they deciding to stay gross for now?

Scott Cryer

Sorry, from which perspective Mario?

Mario Saric – Scotia Capital Markets

Your competitors, are they following your lead in terms of flicking on the switch and sub-metering and were not – and their bidding was lower.

Scott Cryer

All the responsible landlords are pretty much doing what we are in, they are sub-metering and they are passing it on turnovers and not on existing tenants.

Mario Saric – Scotia Capital Markets

Okay, so you don’t have any …

Scott Cryer

That’s why there hasn’t been a political outcry and this has been done responsibly this time.

Mario Saric – Scotia Capital Markets

Okay, so but you are not having any issues kind of competing with buildings or deciding not to do it and it’s putting a bit of pressure on you to…

Scott Cryer

We haven’t seen that measure, our occupancies are very strong in our rents, we have cases where we are passing the meter on still getting the rent increase.

Mario Saric – Scotia Capital Markets

Okay, thank you.

Scott Cryer

Thanks Mario.

Operator

Thank you. The next question is from Heather Kirk from BMO Capital Markets. Please go ahead.

Heather C. Kirk – BMO Capital Markets

Good morning.

Thomas Schwartz

Hi Heather.

Heather C. Kirk – BMO Capital Markets

In some your comments, in your outlook section in the disclosure. You mentioned potential increases in vacancy and tenant incentives and bad debt. I’m just wondering if you could elaborate on exactly what your thoughts are there and whether that in specific geographies?

Thomas Schwartz

I think it was probably more reflective of some of what we thought this year. I think we kind of noticed in past conference calls where we have had some spikes in Halifax, London and some other areas.

So it was probably more reflective of what we’ve seen in that and that always continues to be a risk. I wouldn’t take that as guidance. We don’t get guidance. So I think going back to a general theme, I think we still see strong NOI margins overall and that’s not really been anything extraordinary for 2014 that we’re planning.

Heather C. Kirk – BMO Capital Markets

Okay. Capital recycling certainly been a theme, I would say probably across the REIT space and I am just wondering what your thoughts are, if there is any sort of further opportunities for capital recycling and asset sales?

Thomas Schwartz

We’re always working at our portfolio Heather and at this point we’re pretty comfortable we have go the right portfolio and a right balance, but as we have done over the years, things become non-strategic or we can refine we have buildings that have maxed out. We will certainly recycle them. We have done very well in the past with trades and we’re always looking at trading with other landlords to diversify our geography and our demographics as well.

Heather C. Kirk – BMO Capital Markets

And you also had spoken in the past about potential for development. I am just wondering if there is any update on where you’re at and your thinking on that?

Thomas Schwartz

Looking at it very closely and certainly the numbers work better today than they have ever worked before and we looking at from two perspective, we’re looking it at from some of the excess land in our portfolio and we’re certainly looking at joint ventures with others that have land and their buzzword this year seems to be mixed-use and we’re certainly looking to participate in some mixed-use developments where we could supply the rental housing component.

Heather C. Kirk – BMO Capital Markets

Okay, thanks very much.

Thomas Schwartz

Thanks Heather.

Operator

Thank you. The next question is from Jimmy Shan from GMP Securities. Please go ahead.

Jimmy Khing Shan – GMP Securities LP

Thanks, good morning.

Thomas Schwartz

Good morning, Jimmy.

Jimmy Khing Shan – GMP Securities LP

I just wanted to follow-up on that margin question again, so 270 points margin drop in Q4, which is say roughly that half of that is due to the ice storm impact and the accelerated program, what will be the other half that rough, how we should think about it?

Thomas Schwartz

I think that’s a reasonable assumption. Obviously there is always variability, but looking year-over-year that the spike and where we send the money, it definitely seems like it’s not going to be a reoccurring theme at this point, so I think that’s a fair assumption.

Jimmy Khing Shan – GMP Securities LP

Okay and then the drain work and then we have the window rehab program, was there a particular why it was done on the fourth quarter or was there any and should we expect in the next few quarters that a lot of other expenses that could have been done in the summer, you’ll see in other words improve margin in the summer, because these programs already have been done.

Thomas Schwartz

All right I think that’s possible I mean with us, the lot has to do with availability of trades and timing and again cash on hand and this was just for all of REIT and good time to do it.

Jimmy Khing Shan – GMP Securities LP

Okay. I think in later shareholders or somewhere in the Annual Report, there was talk about establishing a committee for a success and planning, wondered if we should expect any sort of announcement on that front this year?

Thomas Schwartz

No, I don’t really see any announcement. I don’t know where you read that. Our Board is always looking at success and planning. I just came from a Board meeting and that certainly is one of topics and as a responsible readers and important ongoing topic.

Jimmy Khing Shan – GMP Securities LP

Okay, so nothing to read there. And then lastly on Dublin, so 6.4 cap I think is where you guys are valuing the assets for IFRS purposes, is that where you see the pricing range for the options that you’re talking about earlier?

Scott Cryer

I think cap rates will go down a little bit from there, but not much.

Jimmy Khing Shan – GMP Securities LP

Okay, perfect thanks.

Scott Cryer

Thanks Jim.

Operator

Thank you. The next question is from Matt Kornack from National Bank Financial. Please go ahead.

Matt Kornack – National Bank Financial Brokers

Good morning guys.

Thomas Schwartz

Good morning.

Matt Kornack – National Bank Financial Brokers

Quickly on the balance sheet side of things; you’ve got a fairly sizeable amount of mortgages coming due, are those weighted towards the beginning or the end of the year or are they sort of spread out throughout the course of the year?

Scott Cryer

I would say, we did more towards the beginning. Our strategy right now as we are accelerating them as quick as possible that too a point with our lenders that we are able to commit and lock in rates without moving into a whole derivative structure.

Matt Kornack – National Bank Financial Brokers

All right.

Scott Cryer

Obviously, wanted to take advantage of the current rate environment, it may provide an opportunity to bring some mortgages forward to pay the break fee and I think when I look above the hedge costs to do that very reasonable compared to even what we can do from a derivative point of view. So our current plan is definitely to accelerate them and I would say they are heavily weighted toward the first two quarters anyway.

Matt Kornack – National Bank Financial Brokers

Okay, great. And then in terms of the $200 million of up financing that’s going to cover your maintenance and CapEx schedule, but was it also to be used finance acquisitions?

Scott Cryer

I mean, ultimately becomes the part of the pool, right. So we see up financing well in excess of our CapEx budget, so yes, definitely good for liquidity with that where we deploy that, but ultimately comes back to what Tom was saying around or hasn’t seen around opportunities in the current pricing.

Matt Kornack – National Bank Financial Brokers

Okay and then just finally in terms of the affordable segment, growth rates have been a bit slower on the rental side for that segment, is that sort of where we should consider it’d be around the 1% versus 3% for the other two segments?

Scott Cryer

It moves around. We’ve certainly done our budgets for the year and the budget should show good growth on the top-line. So some times one building offsets another.

Matt Kornack – National Bank Financial Brokers

Okay, thanks guys.

Scott Cryer

Okay.

Operator

Thank you (Operator Instructions) the next question is from Paul Merritt, a private investor. Please go ahead.

Unidentified Analyst

Hi, good morning.

Thomas Schwartz

Good morning.

Unidentified Analyst

I’m calling you from Florida.

Thomas Schwartz

Okay.

Unidentified Analyst

And I notice that, but I’m a Canadian and I’m a small investor, so I’m trying to get bigger.

Thomas Schwartz

Okay.

Unidentified Analyst

I noted the property category, called MHC in the background, guessing those are mobile home communities?

Thomas Schwartz

Yes, we call them Manufactured Home Communities.

Unidentified Analyst

Okay good. Big factor of the market down here.

Thomas Schwartz

Yes.

Unidentified Analyst

I wouldn’t see that as a traditional part of the rental accommodation business and I was wondering if this section which is growing section obviously in your revenue side, is that part of the strategic future for the company?

Thomas Schwartz

It certainly is part. Let me tell you a little bit of the business up here. It’s a big different than it is in the U.S, it’s extremely stable in Canada. We operated very, very high occupancies, there is less variable costs and we have apartments, there is no light, heat, and power and from a security point of view, we have somebody’s home on our lands.

So bad debts are almost an impossibility, it’s an extremely stable sector in Canada, it’s not as big as it is in the U.S., they aren’t just many of them, but we see it a very consistent with CAPREIT’s commission, which is to delivered to our shareholders a steady growing stream of income and that’s exactly what these MHC perks do, the residential, they are also in Canada operate under the same legislation as Apartment.

So they operate very well on our platform. So we see it as a great compliment. It’s never going to be a large portion of our portfolio and although it’s 15% of the – in number of units I think in terms of bottom line is probably 5% or 6% because again it’s just land rent.

Unidentified Analyst

Right exactly, yes. Are the solely, the properties have now are all in Canada?

Thomas Schwartz

All in Canada.

Unidentified Analyst

You are not looking in the future in Ontario.

Thomas Schwartz

No, we’ve actually said publicly we are not going into the U.S., neither MHCs or apartments.

Unidentified Analyst

Okay. Well, thank you very much.

Thomas Schwartz

Thank you for your call.

Operator

Thank you. The next question is from Neil Downey from RBC Capital Markets. Please go ahead.

Neil Downey – RBC Dominion Securities, Inc.

Hi, good morning.

Thomas Schwartz

Good morning Neil.

Neil Downey – RBC Dominion Securities, Inc.

Tom, back in the fall you invested, I believe it was about $37 million to buy some assets in PEI.

Thomas Schwartz

Yes.

Neil Downey – RBC Dominion Securities, Inc.

And, we are just getting the initial disclosures there and obviously there is some seasonality effect, but the margins appear very low on the MHCs around 29% and I think their maybe mid 30s on the apartments. So is that purely a function of seasonality? Is that inefficiency in the operation whereby those margins can be substantially improved or how do we think about this?

Thomas Schwartz

I think it's a couple of things. First thing is the start-up operation. We went there. We had to set an office up. We had to bring people in, we had to train people. So we had start-up costs. The other thing we’re seeing is we have two luxury properties and they have higher vacancy than normal. We think it’s seasonal. We’re highly confident that, certainly by the summer we’re going to have them for – but that’s impacting as well. So I’d say a combination of start-up costs and higher vacancy.

Neil Downey – RBC Dominion Securities, Inc.

Okay. With that imply that you’d be keen to add some more suites on the Ireland to get operating efficiencies in your platform?

Thomas Schwartz

Yes, that’s right. It’s a very good assumption.

Neil Downey – RBC Dominion Securities, Inc.

Okay, and in the subsequent event note, and I believe this was press released, CAPREIT has effectively terminated its management contract over a pool of U.S. assets.

Thomas Schwartz

Yes.

Neil Downey – RBC Dominion Securities, Inc.

Was that a possible contract in 2013? I guess it was basically a yearlong contract. Was there an EBITDA contribution that you can reference us too or…

Thomas Schwartz

What I can tell you is we ended up being profitable. I and Scott assume we are going to see that next year.

Scott Cryer

That’s right. Yes, I would consider fairly on the materiality of view, I consider fairly flat for 2013 obviously. You will see the increase in the G&A side but there is an offset in the other income.

Neil Downey – RBC Dominion Securities, Inc.

Yes.

Scott Cryer

But, yes, in 2014 Neil, you will see some profit coming out of that.

Thomas Schwartz

That portfolio was sold Neil, so we came out very gracefully and we came out with a bit of a profit that you will see in the first quarter.

Neil Downey – RBC Dominion Securities, Inc.

I see and that will simply just be an other income line item or something like that one.

Thomas Schwartz

Yes.

Neil Downey – RBC Dominion Securities, Inc.

Yes. Okay, thank you.

Thomas Schwartz

Thank you.

Operator

Thank you. There are no further questions registered at this time.

Thomas Schwartz

Okay. I want to thank everybody for your interest in CAPREIT as always. If you have any additional questions, please give Scott or I a call. Thank you very much.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!