Canadian Apt Pptys' (CDPYF) CEO Thomas Schwartz on Q2 2016 Results - Earnings Call Transcript

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Canadian Apt Pptys (OTC:CDPYF) Q2 2016 Earnings Conference Call August 10, 2016 10:00 AM ET

Executives

David Mills - Investor Relations

Thomas Schwartz - President and Chief Executive Officer

Scott Cryer - Chief Financial Officer

Analysts

Jonathan Kelcher - TD Securities

Mario Saric - Scotiabank

Matt Kornack - National Bank Financial

Jimmy Shan - GMP Securities

Dean Wilkinson - CIBC World Markets

Mark Rothschild - Canaccord Genuity Capital Markets

Operator

All participants please standby, your conference is ready to begin. Good morning, ladies and gentlemen. Welcome to the CAPREIT’s Second Quarter 2016 Results Conference Call.

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

David Mills

Thank you, Catherine. Before we begin, let me remind everyone that the following discussions 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 of forward-looking statements and the factors and assumptions on which they are based can be found in CAPREIT’s regulatory filings, including its Annual Information Form and MD&A, which can be obtained at SEDAR.com.

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

Thomas Schwartz

Thanks, David. Following another record year in 2015, our growth and strong operating performance continues in 2016. As you can see on Slide 4, all of our key performance benchmarks are up, once again demonstrating the positive benefit generated by our portfolio growth and our proven property management programs.

NFFO was up a very solid 16.1% through the first six months of 2016, and our growth continues to be very accretive, as NFFO per unit was up 3.3% despite a 12% increase in the weighted average number of units outstanding. Our NFFO payout ratio also remains strong and conservative at 72%.

Our strong track record of organic growth, as you can see on Slide 5, is the result of our property management programs aimed at keeping our buildings full with stable and steady increases in average rents combined with a relentless focus on operating efficiency and reduced costs.

As of June 30, 2016, 85% of our portfolio consisted of stabilized properties, generating a strong 1.8% same property NOI increase through the first six months of 2016. Looking ahead, we believe our proven track record of organic growth will continue.

As you can see on Slide 6, our organic growth is being driven by very strong performance in our stabilized portfolio with increased average monthly rents and very strong occupancies across all demographic sectors and asset types. Looking ahead, demand remains strong in the majority of our markets. We see occupancies remaining stable at these nearly full levels and we believe average monthly rents will continue to increase over time.

A key factor in our strong performance is our track record of portfolio growth, since inception, as you can see on Slide 7. So far this year, we have acquired a total of 1,823 suites and sites for a total acquisition cost of $276.9 million. All of these accretive purchases will make a strong and growing contribution to our results going forward.

Since our IPO in 1997, our growth has been successfully focused on expanding into new geographic regions, diversifying our portfolio to reduce risk, and strengthening our presence in all of Canada’s strongest rental markets. We have also repositioned the portfolio with an increased emphasis on the higher margin luxury and mid-tier demographic segments of the business, while also maintaining a strong presence in the profitable, affordable sector.

In addition, we have expanded into new asset classes, building a growing portfolio of manufactured housing communities that deliver strong and growing cash flows with a reduced risk profile. All of these growth initiatives have transformed CAPREIT into Canada’s largest publicly traded residential landlord, with a high-quality in growing portfolio and a management team located in key centers from coast to coast. We will continue to build on this dominant market presence in the years ahead.

We are also very proud of generating a strong track record of accretive growth for our unitholders through both good times and bad, a testament to the strength of the apartment business and our proven property management programs.

As you can see on Slide 8, CAPREIT has delivered on its main goal to deliver solid, sustainable, and growing earnings and distributions to its unitholders, with at the same time very conservative payout ratios. We look forward to this growth going forward.

I’m now going to turn things over to Scott to review our results in more detail.

Scott Cryer

Thanks, Tom. As Tom said, our track record of growth continued in the second quarter of 2015, as shown on Slide 10. Once again, we are benefiting from the increase in size and sale of our property portfolio, as well as our continuing strong organic growth.

Revenues were up just under 13% compared to last year’s second quarter. And as a result of our proven operating program, NOI increased by 12.1%. Operating expenses as a percentage of revenue remains stable at 37.9% consistent with last year’s second quarter. NFFO rose 13%, primarily due to contributions from acquisitions and strong operating performance. We also generated solid accretive growth in the quarter, as NFFO per unit was up 3.2% despite the 10% increase in weighted average number of units outstanding.

As we all recognize, the Alberta and Saskatchewan rental markets have been negatively impacted by the soft economy being experienced in these provinces. You will have seen in our press release and MD&A that for the total portfolio average monthly rents on turnovers fell slightly through the first six months of the year compared to last year. The small decline was due to our decision to reduce rents in these provinces to keep our buildings fully occupied and reduce turnovers.

However, as you can see on Slide 11, excluding these two regions, we are doing very well in all of our other markets, with solid increases in rents on both renewal and turnovers, particularly in Ontario and British Columbia. Although Alberta and Saskatchewan represent only 7.1% of our total NOI, the impact of these two markets have had an amplified effect year-to-date, as a result of turnovers being almost double that of the same period last year. Although, we continue to believe in the long-term prospects of these market. However, the benefits of our portfolio diversification continue to prove to be the right strategy.

Turning to our balance sheet, we continue to maintain a strong and flexible financial position as shown on Slide 12, with conservative leverage and proved coverage ratio compared to last year. As of today, our current debt-to-gross book value stands at approximately 45% post-equity offering. It is also important to note that we have approximately 266 million of our properties not encumbered by mortgages as of June 30, 2016.

Our goal continues to be to maintain our unencumbered assets in the range of $150 million to $180 million over the long-term. Our weighted average interest rate continued to decline at the end of the quarter, as we further extended the term to maturity of our debt at 6.5 five years.

Looking ahead, you can see that our mortgage portfolio remains well balanced for the future as shown on Slide 13, as we continue to focus on extending our debt maturities in this low-rate environment. With maturities through the end of 2018 representing a smaller portion of the portfolio in the few years – 10 years, we believe we have a good balance between top-up liquidity, reduced sensitivity to rising interest rate, as well as the opportunity to finance at rates well below the maturing rate.

On the liquidity front, we remain well-positioned to continue our growth programs, as shown on Slide 14. With the completion of our $165 million bought deal equity offering, earlier this month, our liquidity position now stands at approximately $285 million, providing the resources for future acquisitions of approximately $960 million all while maintaining our conservative debt ratio.

Strong top-up potential, including funding on new acquisitions is estimated at $70 million for 2016. And we will continue to provide this and we will continue to provide sufficient liquidity and allow us to fund our future CapEx program.

And as I mentioned earlier, we plan to finance a portion of our unencumbered properties while maintaining this pool in the range of $150 million to $180 million available for future growth.

Most importantly, our growth and performance continues to generate strong free cash flow at CAPREIT. As you can see on Slide 15, over the last five years, our NFFO has more than covered the increasing monthly cash distributions we have delivered to our unitholders. NFFO over distributions declared coupled with our mortgage top-up, we had excess cash of $247 million after paying for capital expenditures.

In addition, with the cash retained through our DRIP program of $148 million, we were able to make acquisitions, while reducing our leverage during those five years. In total, you can see that cash – free cash flow available for our portfolio growth over the last five years has been significant and we see this track record continuing in the years ahead.

I’ll now turn things back to Tom to wrap up.

Thomas Schwartz

Thanks, Scott. Looking ahead, we believe the future is extremely bright at CAPREIT. We have proven our ability to capitalize on continuing strong fundamentals in the Canadian Apartment business through all economic cycles. We have one of the strongest balance sheets in the business and fiscal prudence will remain a key priority at CAPREIT.

We are very proud of our team. We have the right people in the right positions to manage our growth for years to come. Finally, we have demonstrated that our business strategy is succeeding and prospering. And we will continue to build on the solid performance generated over the last 19 years.

Turning to our growth prospects, Slide 18, details our new and innovative growth initiative, the development of new apartment assets. We own a number of properties, where there is sufficient excess land on, which we can develop new apartment buildings. After a full review of our portfolio, we believe we can add approximately 1,600 suites over the next three years, with another 2,100 suites in the following three years. Once these are done, we have the opportunity a further 5,600 suites in the future. Developing these new properties will generate very strong and accretive returns for our unitholders as there are no land costs associated with this growth.

We are also looking at partnering with other real estate companies to bring our expertise to joint development opportunities such as our partnership with First Capital and King High Line. These are exciting and very accretive opportunities for CAPREIT and we look forward to keeping you apprised of our progress in the coming quarters.

The CAPREIT IRES transaction is another example of our innovative approach to growth, as you can see on Slide 19. So far this year, our asset and property management fees from IRES totaled $2.5 million, up from $1.4 million last year. This steady and stable stream of recurring income should continue to grow going forward as IRES built its presence in the bright vibrant Dublin market.

We also believe our 15.7% retained interest in IRES will generate long-term capital appreciation for our unitholders over the long-term. IRES is focused on growing it’s common share dividends and to-date we have already received close to $3.5 million in dividends from IRES.

Looking at our progress over the last five years as we can see on Slide 20, you can see there’s significant growth has occurred where we have generated results and significant benefits for our unitholders while at the same time maintaining a very strong and conservative financial position.

Compared to the end of 2010 our debt ratio was strengthened considerably and we have taken advantage of the low interest rate environment to extend our term to maturity and reduce our interest costs. We have also attracted a large pool of unencumbered assets adding to the resources and flexibility we can draw on for our growth initiatives, and all of this has been accomplished with strong accretive growth for our NFFO per unit a much more conservative payout ratio and solid growth in our monthly cash distributions.

Finally as you can see on Slide 21, this growth and superior performance continues to generate strong returns for our unitholders. Unitholders who invested in our IPO in November 1997, have received a total return of 1,193% to August 5, 2016, and this compares to only a 663% for the CAP Real Estate Index, and 261% for the overall TSX index.

We are very proud of everything we have accomplished for our unitholders and truly believe this growth and success will continue going forward. The main takeaway today is that we are all excited and confident about our future, and we look forward to sharing our results with you in the coming quarters.

Thanks, again, and Scott and I will now be pleased to answer any questions.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. [Operator Instructions] Our first question is from Jonathan Kelcher of TD Securities. Please go ahead.

Jonathan Kelcher

Thanks, good morning.

Thomas Schwartz

Good morning, Jonathan.

Scott Cryer

Good morning, Jonathan.

Jonathan Kelcher

First question just on the operations, your BC portfolio was very strong this quarter. I was hoping to get a little bit more color on that?

Thomas Schwartz

I mean we made a very good buying BC towards the end of last year. As we’ve always said we add value with the CAPREIT Management system, the minute we takeover portfolio and we do that in the usual ways. We always get a little bit of a revenue increase. We managed the expenses. We put our master contracts in place.

It grows more money at the bottom line, BC happen to be a situation where we had a very good infrastructure and we have capacity, so frankly we didn’t have to hire very many new people to bring these properties on Board, so put all that together and that gives you stronger bottom line. And I think…

Jonathan Kelcher

Okay. The same property – those assets wouldn’t be in the same property yet, would they?

Thomas Schwartz

No, they won’t be in same property yet. But overall I mean if you look at our turnover in BC, we are looking at about 8% change in rent. So that coupled with the strong guideline increase again in both 2.9% on renewals, so the combination of that is really driving incremental growth.

Jonathan Kelcher

And the expenses were down about 4% I think year-over-year?

Thomas Schwartz

I believe that’s right.

Jonathan Kelcher

Okay, now would you expect that to continue over the balance of the year?

Thomas Schwartz

Certainly BC is one of our two strongest markets in Canada and I can tell it’s going to be exactly that percentage, but it will certainly grow.

Jonathan Kelcher

Okay, and then just on acquisitions dispositions, I guess at 1,800 units acquired year-to-date your kind of the top end of the 1,500 to 2,000 you put out each year. Do you think you will exceed that this year or has it quite…?

Thomas Schwartz

I think it’s possible that deal flow is pretty good, I say over your 1,500 to 2,000 as you said we’ve almost hit our target at this point. So I would say it’s likely we’ll exceed it this year.

Jonathan Kelcher

Okay, and then on the disposition side, you’ve got the two you announced in Montreal…?

Thomas Schwartz

Yes, and there – again we said that we’re repositioning Montreal because of the big acquisition last year. So there’s still one more potential disposal in Montreal.

Jonathan Kelcher

Okay. Thanks I’ll turn it back.

Thomas Schwartz

Okay. Thank you.

Operator

Our next question is from Mario Saric of Scotia Capital. Please go ahead.

Mario Saric

Hi, good morning.

Thomas Schwartz

Hi, Mario.

Scott Cryer

Hi Mario.

Mario Saric

Just maybe coming back to the operations and specifically focusing on the margin. So it’s kind of leveled off a little bit this year, and if I go back to 2011, I think your margin was something like 57%. I don’t know if you would have placed a wager back in 2011 on the margins going up north of 60% to 61% within three to four years, what that wager would have been. But can you talk about further potential margin expansion from this point forward or do you see margins stabilizing in and around these levels?

Scott Cryer

We have addressed we would get about 60, so we’re pretty proud of what we’ve accomplished. I can assure you the equalized property taxes where we’ve got the best margin in the business. We always think it can get a little bit better so that’s what we strive for that is we’re right up there.

Mario Saric

Yes, okay and then in those – on the sub-metering front, in the past you kind of highlighted a 300 basis point quarter-over-quarter increase in terms of the percentages to each that are sub-metered. It’s kind of come in a little bit below that recently. Is that still the range in the long-term or should we think about something a bit lower going forward?

Scott Cryer

Yes I mean I think we definitely have noticed a trend of the same units turning over where we have some units combination of just what the tenant themselves and then people knowing that they might sub-metered unit on living. So it’s definitely been a little more challenging in those same units turning. So how to predict the future, but that has been a bit of a trend.

Thomas Schwartz

It’s really a timing issue. The potential is still there we just don’t know exactly when we’ll get at it.

Mario Saric

And then maybe coming back to Vancouver any incremental thoughts on the foreign property tax that was announced in BC and the implications if any for your capital allocation in the front?

Thomas Schwartz

No implication on capital, I mean our capital plans are pretty firm and they move forward. Again that tax if any could probably help us and keep people in apartments.

Scott Cryer

I don’t know from an acquisition point of view very aggressive cap rate prior to the announcement of that. It’s really hard to say what’s going to happen?

Thomas Schwartz

There was something in the paper yesterday or two days ago about apartment acquisitions in Vancouver – but we haven’t seen anything yet.

Mario Saric

Okay, I was just wondering whether there could be potential Vancouver expense tough market to buy…

Thomas Schwartz

The cap rates are extremely low, again well, let’s make the differences. It’s too early to tell at the next quarter we may have better visibility on that.

Mario Saric

Okay. And then maybe my last question, just in terms of capital allocation. Cap rates in Canada continue to come down, especially in market like Vancouver, Toronto as well. Due to the in place cap rate today kind of further incentivize maybe look globally in combination with the extreme success that you had in Ireland. Does it kind of set the stage for potentially looking for opportunities outside of Canada in the near-term?

Thomas Schwartz

I guess the answer is we look both in terms of Canada we’re still a Canadian REIT were 48,000 units. We’re obviously very proud of what we’ve done here and we still see opportunities. We look at in Canada, there is no question, cap rates are going down. But remember, we only buy things or we can add value.

We’re in an environment where interest rates are starting – historically low and I think last more of it is Scott give 2.5%, so that drives a lot of accretiveness and we still look at replacement cost. We still have to buy our assets, significantly grow replacement costs and we feel we can do that.

In terms of international expansion, yes, we’re in that traffic and then the IRES success brings us other oppourtunies and if we see the right opportunity for cap rate and we think we’re taking advantage event, we will do it.

Mario Saric

Okay. And then in Canada, when you referenced, buying at below replacement costs, what would you estimate that discount to be more recent acquisitions?

Thomas Schwartz

I used to say we’re buying it at less than 50% of replacement cost, but I wouldn’t say that I think we’re still certainly less than 65% replacement cost virtually ever than we’ve thought.

Mario Saric

Great. Okay, thank you.

Thomas Schwartz

Thanks, Mario.

Operator

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

Matt Kornack

Hi, guys. You hinted at – with your comments with regards to BC, can you speak to how some of the integration as gone sort of Quebec and other markets with regards to what you’ve acquired this year and over the last couple of years?

Thomas Schwartz

Sure, Quebec is doing extremely well. We’re repositioning in Quebec. The assets we bought there and last year better quality assets in the gain. As I said with regard to BC, we’ve got a very strong team on the ground. We have capacity so that’s going very well. A biggest challenge is one building in Halifax, you certainly see that when you look at MD&A and look the results. We have one 400 suite building that continues to be a challenge.

We’ve re-staff recently and we are optimistic that we’re going in the right direction with it. Halifax is always a side market. In September we will bring us lots of occupancy as the students come back and that’s build into our numbers. I think those are the only – really the only highlights, everything else is going exactly has planned.

Matt Kornack

Sure, good. And with regards to the Alberta portfolio at this point that the – just to manage through the current situation and see how it develops over the long-term, or do you think you’ll be proactive in terms of asset allocation there?

Thomas Schwartz

Let’s talk about operations first. I mean that’s the only price over drop in rents and giving incentives. And there are – that’s the nature of the Alberta market as I’m sure the unemployment is high and I think the number announce the other at $8.6 million or something. So people are losing jobs in Alberta.

We’re doing our best to stabilize the operations. It does have a negative impact on our results, but the good news is it’s not a very large portfolio – part of our portfolio. In terms of acquisitions, we’ve seen nothing out there that we could even put an offer on.

I think you have to realize Alberta has gone through a major boom. They have apartment buildings are in extremely strong hands and we don’t see any desperation and frankly if we did underwrite something in Alberta, one of the challenges we have is we don’t – still don’t know where the bottom is.

Matt Kornack

Fair enough. Some of competitors are looking at condo product that may not have sold, would you ever entertain doing something along those lines or…?

Thomas Schwartz

We looked at a little bit of that. We’re not comfortable to even put an offer yet, but we’re looking at everything. I mean long-term, we believe in Alberta, I think Alberta is going to be – it comes back and it comes back very resilient. So if we can see the right deal, there we would buy it, we just haven’t seen it.

Matt Kornack

Great. Thanks, guys.

Operator

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

Jimmy Shan

Thanks. So on the international traffic that you refer to what geographies would be considering?

Thomas Schwartz

I mean we’ve kind of got a foothold in Western Europe. Brexit is obviously creating changes of over their, so that’s a logical one. So we’ve certainly looked at opportunities in other countries, in Western Europe. We’re not going very far. We’re not looking at Asia. We’re not looking at Africa. We’re not looking at anything like that. I’m not high on the U.S., but I’ve said that the absolute right opportunity came in the U.S. we would look at it. But again primary focus is still Canada.

Jimmy Shan

Right and so facility international strategy is more of I guess more of a distress strategy.

Scott Cryer

No it’s an opportunistic strategy. When Ireland came and we knew that was the right opportunity. We are certainly seeing others and if we see something that we think it’s a macro great opportunity, and the cap rate is capable of adding value and take advantage of that, and we’re going to do it.

Jimmy Shan

Okay. And then I wanted to just get a sense of where cap rates are today, so specifically when I look at the Montreal sale and the Ottawa acquisition in the quarter. What’s the rough range of cap rates?

Scott Cryer

There is a rough range that hard to find – it’s had to find to buy that we can find that we certainly created, but it’s not there. Most markets have in front of them except when you go to BC. We heard of a deal recently that was done in $2.7 million cap. I mean I find that incomprehensible, but if anything happen out there. We haven’t bought much in BC this year, because when we do the analysis it works out to $3.5 million.

Jimmy Shan

Great. So Montreal and Ottawa went specifically those would be…?

Scott Cryer

They would be – I would call high four and low five – these numbers we’re using.

Jimmy Shan

Okay.

Thomas Schwartz

Yes, Jimmy I mean it certainly interesting what’s in place, what we look at is what is going to look like 12 to 24 months out after we apply our strategies to it.

Jimmy Shan

Great.

Thomas Schwartz

Theoretically, I would buy a two cap, if I knew in a year, I could certainly turn it into a six or seven because rates were 25% below market, and we don’t see things like that any more, but it’s something like that came in the initial cap rate wouldn’t be as relevant as at the value we could had.

Jimmy Shan

So it sounds like there are low four going in and then more or like five year end?

Thomas Schwartz

Yes, for us going in, and we can turn into five and eventually six.

Jimmy Shan

Okay. Lastly just looking at the quarter, seems to NOI for Ottawa and Halifax, it looks like this to markets saw a declines in most of the expense driven. Just Wondering if there is any story behind us to?

Thomas Schwartz

As I said, we had one challenge building out there. It’s been up and down challenge for a couple years and we’re working on it and it’s certainly getting better, but it’s taking time. Ottawa, I don’t – Scott – there is nothing unique on Ottawa watch next quarter it will probably fix itself.

Jimmy Shan

Okay. Okay, thank you.

Thomas Schwartz

Thanks.

Operator

Thank you. Our next question is from Dean Wilkinson of CIBC World Markets. Please go ahead.

Dean Wilkinson

Thanks. Good morning everyone.

Thomas Schwartz

Good morning.

Scott Cryer

Good morning.

Dean Wilkinson

Just a follow on question to Matt’s question about the Alberta properties, Tom, you said you don’t know where the bottom is, but in terms of the incentive and the dropping of the rents, is that accelerating still or is it sort of flattening out or where are we sort of in the curve there?

Thomas Schwartz

I think it’s flattened out. It’s actually popped up a little bit, but you’re not seen it in the results yet. You’ll see it next quarter.

Scott Cryer

It seems that peak kind of March, April to be honest as far as incentives and rent reductions on turnover like we seen in more positive trend going into June, but we don’t know obviously what that look like going forward.

Thomas Schwartz

And I think the bottom for us was a rent drop of $150 a month and a months free rent to move in, so when you do the numbers on that that’s probably 15%, 16% to 17%.

Dean Wilkinson

Right.

Thomas Schwartz

Where we were, that’s getting better from that, but not much yet.

Scott Cryer

And also dealing with obviously the occupancy side occupancy side where we’ve at least been able to bring it up to 98% where we are more aggressive in Q1, Q2 and hopefully that stabilizes as well.

Dean Wilkinson

It does seem that the occupancy across the market is stabilizing with about a 15% property rent, so?

Scott Cryer

Yes.

Thomas Schwartz

You’re right.

Dean Wilkinson

Okay, that’s really consistent. And then I may have missed this, sorry. On the sort of that theoretical acquisition capacity of call it shy of $1 billion, what leverage does that imply?

Thomas Schwartz

I mean really when we’re looking at obviously our capacity of 300, where you’re looking at 55%. And when we’re looking at acquisitions, we’ve been getting very low leverage, like if we’re talking in reality. We’ve been getting much lower leverage on some of the deals a year ago. Our Ottawa deal we were able to get actually quite good leverage.

So, it can range between 55% and 75%, the total leverage you can get on a deal. So it’s – the reality of what we can do with that $300 million, there is a wide range depending on where CMHC comes back with kind of total loan-to-value. They seem to be coming a little bit closer to market versus where they were, 12 months ago, but we have to kind of wait and see on other markets. It’s very market dependent on how they treat cap rates and sticker price per unit. So it’s going to vary based on that.

Dean Wilkinson

But – so if we were to think sort of 65%, that would be…?

Scott Cryer

I think that’s probably the right number to use, yes.

Dean Wilkinson

Okay, perfect. That’s all I have. Turn it back, guys. Thanks.

Thomas Schwartz

Thank you.

Operator

Thank you. [Operator Instructions] Our next question is from Mark Rothschild of Canaccord. Please go ahead.

Mark Rothschild

Thanks. Good morning.

Thomas Schwartz

Good morning, Mark.

Scott Cryer

Good morning, Mark.

Mark Rothschild

In regards to the cap rate that you’ve quoted, obviously we’re seeing some really low cap rates, especially in some markets which is Toronto. When you talk about a forecast, is that including a significant CapEx reserve that you’re seeing others paying or maybe some of the properties you’re bidding on? And then I’m also just trying to understand the context of your CapEx budget, because clearly you’ve always been stating that there’s a large CapEx amount that you model into your acquisitions. I’m just trying to understand that?

Thomas Schwartz

Yes. So let me address the first part and Scott can address the second part. When we talk about forecast, I mean, this is what a broker presents to us. We model it based on our numbers. So certainly CapEx is a very important number to us. We do an engineering study. We do an environmental report. We look at what those numbers are and we build that into the capital cost then we create an NOI based on what we can do with the property over the next 12 months, and that’s our cap rate.

That’s not necessarily the brokers cap rate, sometimes that will come up higher than the broker, sometimes lower, and that determines what we offer to the property. But the CapEx is always built in. And I’ve been saying that from the day we created this REIT, and it’s a critical part of our business. I mean, we’re buying assets that has not been particularly well maintained by the previous owners. We’re finding that we can use CapEx to actually add value and generate revenue.

So we look at that as well. And the most important part is that, we estimate it at the time we buy a building. And as I used to say, years ago, the reason we don’t buy a lot of the buildings that come to us is, we therefore divide the building into the CapEx and make it accretive. But ones we do buy, the CapEx is assumed. So that’s consistent.

Scott Cryer

Yes, I mean, as far as the cap rate we use obviously in our financial statements is going to be a really a blend. Our portfolio is in good condition. We have invested a significant amount of property. So those cap rates will be fairly clean up CapEx type of rate for quoting from an IFRS point of view. On a go-forward basis, we try to describe the same store properties we’ve owned prior to 2012, that CapEx is really declining. You’ll see that over 50% of our CapEx budget kind of going forward relates to acquisitions we’ve done in the three years.

So, we would expect, if we did stop growing, we would expect our CapEx on the same store to continue to decline over time. But the reality is a lot of the opportunities come from buildings with significant CapEx requirements.

So, back to Tom’s point, it’s about seeing an upfront, knowing what your CapEx requirement and making it accretive – making sure it’s accretive, including that CapEx, and that’s how we do it from a due diligence point of view.

Mark Rothschild

Okay, great. That’s very interesting. But just to clarify one point, Scott, that you made, so would it be fair to say that about 50% of the CapEx budget for the year approximately would be properties owned more than three years?

Scott Cryer

Correct.

Mark Rothschild

Okay. And then just finally the question, the property on Halifax that challenged, I forget, would this be the building downtown that you bought maybe about five years ago as far as the larger portfolio that was incredibly challenged when you first bought it?

Thomas Schwartz

It was and we saw there’s an opportunity and we within – about 18 months, we took it from, I think, 40% vacancy and 98% full, and then the problems came back and we’re dealing with them again, so that’s exactly is the building.

Mark Rothschild

Okay, understood.

Thomas Schwartz

But we know when to fix it, because we fixed it once.

Mark Rothschild

Okay, I got it. Thank you.

Thomas Schwartz

Okay.

Operator

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

Mario Saric

Hi, thank you. Sorry, one quick follow-up for Scott, just on your comments on CMHC underwriting, just so that I’m clear on it. So is the way to think about it is that CMHC is now using cap rates that are closer to reality in the market, but they’re also gravitating down on the LTV. So, for example, if you have a $100 building in CMHC will underwrite it at $50 leverage today, and that’s the same as it was before, but just the cap rates come down and the LTVs come down?

Scott Cryer

So, I guess, first of all, we definitely, I would say from a trend point of view, we used to get fairly close to 75%. We do a 75% of their fair value is what we finance that of whatever fair value they give, we find that’s kind of the sweet spot from a premium versus getting capital out of the building. That 75% level loan-to-value on a CMHC underwritten turned out to be in many cases anywhere between 55% and 65% of what we would say is our fair value.

We’ve seen them on the biggest recent transaction, I mean, Ottawa come in at a much closer to our fair value basis, and give us the full 75%. So that’s a trend. It’s been a discussion point that we’ve had with CMHC a lot. And it appears to be translating based on our recent transactions. But I don’t want to alarm. Ottawa is a different market than BC and Toronto, where they’re sometimes not as comfortable with the dollar per door we’re paying on prime assets.

So it is very market dependent and we haven’t had enough transactions as of recent to be able to say that, they’re moving to a market-based fair value in all markets, but definitely we saw on the Ottawa deal.

Mario Saric

Understood. So you were able to get more debt on the Ottawa deal today than you would have two years ago?

Scott Cryer

Today than we would have, yes. And we would have got more on Ottawa than we would on a property in Vancouver or whatnot so or Toronto.

Mario Saric

Okay, that’s great.

Scott Cryer

There they seem to be stickier in some of those extremely low cap rate environment, because the dollar per door starts to put them up against just not a level of comfort.

Mario Saric

Okay, great. Thank you.

Thomas Schwartz

Thanks, Mario.

Operator

Thank you. We have no further questions registered at this time. I would now like to return the meeting over to Mr. Schwartz.

Thomas Schwartz

Okay, thank you. I want to thank everybody for joining us today. We’re very excited about our future and we look forward to keeping you apprised of our progress going forward. As always if anybody has any future questions, please give Scott and myself a call at anytime. Thank you very much and have a good day.

Operator

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

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