Northview Apartment REIT's (NPRUF) CEO Todd Cook on Q3 2016 Results - Earnings Call Transcript

| About: NORTHVIEW APT (NPRUF)

NORTHVIEW APT REAL ESTATE INVT TR (OTC:NPRUF) Q3 2016 Earnings Conference Call November 10, 2016 12:00 PM ET

Executives

Todd Cook - President and Chief Executive Officer

Louise Elsey - Corporate Secretary

Leslie Veiner - Chief Operating Officer

Travis Beatty - Chief Financial Officer

Analysts

Mario Saric - Scotiabank

Jenny Ma - Canaccord Genuity

Jonathan Kelcher - TD Securities

Jimmy Shan - GMP Securities

Operator

Good morning, ladies and gentlemen. I would like to welcome everyone to the Northview Apartment REIT Third Quarter Conference Call. [Operator Instructions]

Mr. Todd Cook, President and CEO of Northview Apartment REIT, you may now begin your conference.

Todd Cook

Thank you, Anthony. Good afternoon ladies and gentlemen, and thank you for joining us for the third quarter conference call. Joining me today is Leslie Veiner, our Chief Operating Officer; Travis Beatty, our Chief Financial Officer; and Louise Elsey, our Corporate Secretary. We'll begin the conference call after Louise reads our brief cautionary statement. Louise?

Louise Elsey

Thank you. Today's conference call may contain forward-looking statements with respect to Northview Apartment REIT and its operations, strategy, financial performance and condition. The actual results and performance of Northview discussed could differ materially from those expressed or implied by such statements. Important factors that could cause actual results to differ materially from expectations include, among other things, general economic and market factors, competition, changes in government regulation and the factors described in securities regulatory filings. All forward-looking statements speak only as of today, November 10, 2016. And the parties have no obligations to update such statements. Thank you.

Todd Cook

Thank you, Louise. Yesterday, we released the third quarter financial results for 2016. Diluted FFO per unit was $0.64 for the quarter and $1.72 for the nine months. Excluding nonrecurring items, diluted FFO per unit was $0.60 for the quarter and $1.66 year to date. The trend that we saw through the first half of the year continued into the third quarter, and we expect it to roll through the rest of 2016.

The majority of our portfolio was performing as expected. Northern Eastern Canada, with the exception of some weakness in Newfoundland Labrador, and Central Canada are performing well and delivering organic growth. Western Canada, principally Alberta and Northeastern BC, not surprisingly remain the soft spot in the portfolio. Les will provide more detail across the portfolio in a couple of minutes.

Our focus remains on executing our 2016 strategic initiatives, as outlined in our financial documents. Les and Travis will talk separately to the value creation initiatives and the debt component. The non-core asset disposition program is more or less progressing as expected. We have seen some slippage in closing dates, but all in all we are on track. We have completed $45 million in asset sales, and have another $44 million or so under contract to date.

Dispositions are coming in at or around our IFRS values. The $75 million equity offering completed in October accelerated our overall leverage reduction by close to 250 basis points. Combined with the reduction in leverage from asset sales, we expect our debt to gross book value to decrease to close to 57% by year end. I’ll now turn the call over to Leslie to talk specifically to our operations.

Leslie Veiner

Thank you, Todd. I’ll now provide an update on how we’re performing in our residential, hotels and commercial portfolios. Starting with the transaction that was completed a year ago, overall we are pleased with the progress of the five value creation initiatives that were identified at the time of the transaction.

After two quarters of reported results, the almost 7,600 units in Ontario that we internalized April 1 continue to generate savings ahead of our estimated $1.2 million of savings for 2016. And we expect to finish the year with about $1.5 million in NOI savings from the internalization of the Ontario properties.

The high-end renovation program is progressing well, with 209 units completed so far in 2016, and the return on investment is consistent with our expectations. Other value creation initiatives, including sub-metering, below market rents, and above guideline increases are also on target for the year.

Moving on to residential operating performance, in the third quarter our performance was in line with expectations in most regions throughout the country. The continued stability in Ontario, Northern Canada, Nova Scotia and New Brunswick, and Southern DC markets, together with our continued focus on managing control over the expenses has helped offset the impact resulting from continued poor economic conditions in our resource dependent markets.

I will now provide some color in our markets, starting in the West. Occupancy in Western Canada improved almost a full percent to 82.1% in the third quarter. With the exception of Fort McMurray, we have not seen any material improvement in our Alberta resource dependent markets.

Following the forest fires at Fort McMurray in the second quarter, our occupancy has increased almost 6% since the reopening of our buildings in July. Vacancy in Fort McMurray at the end of the quarter was 17.5%. We don't expect to see the same pace of occupancy improvement in the fourth quarter of 2016, but are expecting occupancy to further improve in 2017, once the main rebuild gains traction and the local workforce increases to facilitate the rebuilding activities. Lloydminster and Fort St. John appear to be the only two regions in Western Canada that do not appear to have bottomed out in the current economy.

Ontario regions saw a slight increase in occupancy for the quarter to 96%. Occupancy continues to be impacted by the high-end renovation program, which requires a unit to be vacant for 30 days, while renovations are being completed. We expect that the Ontario market will continue to be a stable performer. And expect that the impact of the high-end renovation program will result in improved operating metrics over time.

In Atlantic Canada, occupancy decreased slightly in the quarter to 93%. This is largely attributable to some recent softening in the St. John's market, due to local economic weakness and the recent opening of new purpose-built student housing accommodations. Management expects this weakness to continue through the first quarter of 2017. The performance of the Nova Scotia and New Brunswick portfolio’s acquired in the transaction has provided increased stability in the Atlantic Canada region.

In our Northern Canada markets, our overall occupancy declined slightly in the quarter to just under 95%. The small decline is mainly due to a slight decrease in occupancy in Yellowknife, which was as a result of some corporate and construction leases not being renewed, and some increased supply in the market. Iqaluit at just under 97% continued its strong performance in the third quarter.

Finally our Quebec market occupancy of slightly under 91% remained flat in the third quarter compared to the second quarter. The bulk of our vacancy in Quebec is concentrated in two properties, while the rest of the province is performing at or near market occupancy. We expect occupancy in the region to remain fair flat over the next two quarters.

NOI margins for the nine months ended September 30, 2016, were 56%, compared to 60% for the same period of 2015. The decrease in margins is mainly due to some transaction portfolios operating at lower margins as a result of higher operating costs and lower average market rents.

Moving onto hotels and commercial, our executive suite and hotel operations had a strong performance in the third quarter. Same-store NOI increased by 22% and average occupancy increased by 800 basis points compared to the same period of 2015. The occupancy improvement stemmed from our Northern located properties, while the higher revenue generated from our renovated suites contributed to the improved NOI performance.

NOI from our commercial operations was down 2% from the same period in 2015. Commercial vacancy at September 30 of 4.3% was lower than a 6% in September 2015. The lower NOI is as a result of lower operating cost recoveries, due to the higher number of gross leases compared to the prior period.

I will now turn the call to Travis to discuss the financial results.

Travis Beatty

Thank you, Les. As Todd mentioned, we reported diluted FFO of $0.64 per unit, or $0.60 excluding nonrecurring items, compared to $0.68 for the same period in 2015. Nonrecurring items include $2 million of insurance proceeds received in Q3 relating to the Fort McMurray wildfires and other property insurance claims, of which $1.6 million related to Fort McMurray.

We expect to recover the majority of the $3.2 million of incremental costs less our $1 million deductible. Contributing to the decrease in FFO per unit from the prior year was higher interest expense and lower operating performance in natural resource based markets. However, we did see improved occupancy in Q3 by 80 basis points in Western Canada from the prior quarter.

Our distributions remain at $1.63 per unit on an annualized basis, which are sustainable long term. For Q3 the FFO payout ratio, excluding nonrecurring items was 68%. During the third quarter, we had a fair value increase of $16 million in Ontario, primarily due to cap rate compression. This was offset by a fair value decrease of $8 million in Western Canada, primarily based on rent decreases. Lastly, the recently completed Airdrie development of $26 had a $2.2 million fair value increase, which is approximately $16,000 per unit.

Reducing our leverage remains a key initiative for Northview. On October 31, 2016, we completed the $75 million equity offering of Trust units that included a full exercise of the overallotment option. This allowed us to repay credit facilities that were used to fund developments in Calgary and Airdrie.

The net proceeds of $71 million will accelerate our leverage reduction and improve debt to gross book value by over 200 basis points, and provides flexibility for development and acquisition opportunities. Our debt to gross book value decreased by 40 basis points during the third quarter to 59.8%. Leverage reduction will be further reduced by asset sales under contract in the fourth quarter.

We continue to have success in this low interest rate environment. We were able to complete $60 million of mortgage financing during the quarter with an average interest rate of 2.27% with a term of 10 years. We continue to evaluate our capital structure to take advantage of these low interest rates. We are well positioned financially as we head into 2017, with the recent equity offering and the asset sales under contract.

I will now turn the call back to Todd.

Todd Cook

Thanks, Travis. On to developments. In Calgary we are on budget and ahead of schedule with our 261 development in the northeast part of the city. The first two buildings are now open. And we have seen reasonable demand, with over 25 units leased and committed today. Our rents and timing of lease-up are generally in line with our pro forma expectations.

I believe this high quality rental accommodation, along with our recently completed development in Airdrie, will provide long-term value for our unit-holders. We started construction late in the second quarter on our 36-unit development in Cambridge Bay. Construction is well underway, as we expected to have the buildings enclosed and the heat turned on in the next 30 days or so, allowing us to focus on the interior work during the long, dark, cold days of winter in the Arctic. 20 of the 36 units are preleased and expect to be occupied in mid-2017.

In conclusion, similar to last quarter with the exception of Alberta, we are pleased with the performance of our diversified portfolio. The diversification achieved and the transaction completed last year continues to serve our unitholders well by adding quality, strong performing assets to the portfolio, and reducing the relative impact of Alberta.

Our steady markets are performing well, and continue to provide organic growth opportunities for unitholders. Our strategic priorities, outlined in the financial documents, continue to progress as expected.

The value creation initiatives are on track with our projections and contributing to organic growth. I still believe there's lots of recovery left before the oil companies start ramping up CapEx spending, exploration and production required to get people moving back into these areas of the country, and in order for you to benefit. As Travis said, we are well positioned today. And with our experienced, dedicated team across the country, ready to move forward to continue delivering value to our unitholders.

Thank you for your time. And we’ll turn the call back to Anthony for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Mario Saric of Scotiabank. Please go ahead.

Todd Cook

Good morning, Mario.

Operator

Mr. Saric, your line is now open. Please proceed with your question. Your line is open.

Mario Saric

Good morning. Sorry. A couple of quick questions. One on Alberta and then a couple of more specific questions on G&A and then the commercial portfolio, but just on Alberta, the revenue was down 22% year-over-year, which was modestly worse than a 21% year-over-year decline in Q2 despite improved occupancy. Does that apply incentives are moving higher? Or if you could just maybe add some color in terms of the discrepancy that’s there?

Leslie Veiner

It's Leslie, Mario. A lot of that is due to incentives. There are still a fair number of incentives being offered in a number of the markets in Alberta. And that would explain sort of why you are seeing that trend.

Mario Saric

Okay. Are you able to provide even a quantum in terms of - you don't have to give us a number, if incentives were $100 a year ago, are they $125 today, in terms of the trend?

Leslie Veiner

I can get back to you after the call with more specific information on that.

Mario Saric

Okay. And then with respect to those incentives in the market overall, it seems like your occupancy within Fort Mac is getting better. Do you have any visibility in terms of when you think those may come down and what the catalyst could be?

Leslie Veiner

You're talking about incentives in Fort McMurray?

Mario Saric

Outside of Fort Mac.

Leslie Veiner

At the moment, we watch it closely. We obviously are very aware of what’s happening in the marketplace. And incentives are still very much a part of the market and our leasing activities in a number of these regions in Alberta. So for the foreseeable future, just given where our vacancy is now, just given what the competition is doing, the incentives are needed to keep some sort of momentum and leasing activity going. So sitting here today it's very hard to predict when they will start to back off. But at the moment we've - they've been fairly consistent over the last 2 or 3 quarters. And I would expect them to remain in place, unless we start to see some significant improvement in some of these economies and markets.

Mario Saric

Okay. It’s obviously really early days post-election, but a Trump Presidency, one of the potential side benefits been noted for the Canadian market has been Keystone being back on the table. In terms of Keystone potentially looking forward at some point, how should we think about the positive impact to your portfolio today?

Todd Cook

It’s a hard question because I'm not sure what the President-elect will do. If Keystone moves ahead, I think [indiscernible] will be positive. The question will be timing because you are going to have to go through the approvals and the planning. So, I can't say it's going to be positive in the next six months. I think that's a wait-and-see what comes out, because we have been optimistic before with positive news. And it takes forever, or it does not happen. So, I can't say when something will happen.

Mario Saric

I can appreciate that. But in terms of, like you substantially reduced your relative exposure to Alberta, but it is still in absolute terms it's a driver. In terms of the percentage of your portfolio that would be directly impacted by the potential pipeline at some point down the road, what percentage would you place that at?

Todd Cook

Well, I mean, so Alberta is just under 20% of NOI. I guess, I'd be guessing there. You're going to see activity through Northeastern BC a little bit. You'll see it through - maybe half of that.

Mario Saric

Okay. Okay. And then maybe shifting gears to the commercial portfolio. It looks like the net rent per square foot was down about 2% quarter-over-quarter, was there anything in particular that drove that?

Leslie Veiner

No. It's just, it was some renewals in Yellowknife at lower rates, just given there's been more vacancy in that market. It's just indicative of market conditions in markets where we've had lease renewals.

Todd Cook

Okay. And then maybe last question from you before I turn it over, but on the G&A side, it came down pretty meaningfully quarter-over-quarter in Q3. What would be a good run rate for us to use going forward?

Travis Beatty

We did have some adjustments to our long-term compensation that went through in the third quarter. So it's a little bit lower. I think if you looked at the year-to-date number that would be a reasonable run rate going forward.

Mario Saric

Great, okay. Thanks, guys

Todd Cook

Thanks, Mario.

Operator

Thank you. The next question is from Jenny Ma of Canaccord Genuity. Please go ahead.

Jenny Ma

Thanks. Wanted to ask about the new portfolio that was acquired, I think the mark-to-market that was cited embedded in there was about $32 when the portfolio was picked up last year. So, now that we're a year out, can you comment on what that mark-to-market spread is? Because it sounds like you picked up some rent growth in the Ontario portfolio.

Leslie Veiner

I think, we’ve picked up about $18 year to date, but obviously that mark-to-market was steady, too, back then. It is a moving number. But we've grown a more $18 on the acquired portfolio.

Jenny Ma

Okay. And have you been able to get some good AGIs based on the CapEx spent in Ontario?

Leslie Veiner

Yes, I think we disclosed that as well. I think we are averaging 4% for the AGIs that we've applied for on the CapEx that was incurred on the Ontario portfolio over the last couple of years.

Jenny Ma

Okay. And then new questions for Travis. In terms of the insurance proceeds, it sounds like there's not much left over, is that correct? You said $3.2 million less the $1 million deductible. And you received $1.6 million this quarter, and I think a few hundred thousand dollars last quarter. Could you confirm that?

Travis Beatty

Yes, that's correct. We have about $600,000 left to collect on the Fort Mac claim.

Jenny Ma

And that’s net of the deductible, correct?

Travis Beatty

Correct.

Jenny Ma

And do you expect to see that in Q4?

Travis Beatty

It's possible it'll be Q4, or Q1 maybe.

Jenny Ma

Okay. And then my last question is with regards to some of the dispositions. It looks like you sold a couple of properties back to Starlight for about $15.5 million. Could you give us some color on maybe which properties those were and what the rationale was? And then if you could comment on pricing versus where you bought it at?

Todd Cook

Sure. I mean, they were - I think it's disclosed in the prospectus. It's a property in Woodstock and Trenton. They were part of the True North portfolio. When we listed them for sale, they became interested parties and were part of the bid process. There's not much more to say other than that, they were the successful bidders.

Jenny Ma

Okay. Any other - any of the properties that are under contract with Starlight?

Todd Cook

No.

Jenny Ma

Okay, great. Thanks. I’ll turn it back.

Todd Cook

Thank you, Jenny.

Operator

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

Jonathan Kelcher

Thanks. Good morning. First, your Ontario properties, I guess you guys, you've quantified the benefit you’ve gotten from internalizing the property management, but do you see upside there in terms of running it yourselves, in terms of driving the margin? It looks like you guys are going to be around 52% or so this year in terms of operating margins, depending on where you come in, in Q4. And that compares to your other public peers in Ontario that are high 50s, or even low 60s.

Leslie Veiner

I think - so there are a couple of things. I think when you are making a sort of comparison amongst the peers, I think one of the important metrics that you need to look at is the average rents, because if some of the peers have got a higher concentration of their properties sort of low core GTA, they're going to have higher rents, which does lead to higher margins than we would be showing. Going back to your first question, yes, we would expect those to see some improvement in those margins. A combination of internalizing the property management and running them ourselves. And also as the high-end renovation program gains more traction and you start to get the benefit of that, the increased rents through that program also help - would also help to lift the margins.

Jonathan Kelcher

Okay. And then secondly, just on the two Montreal properties that seem to be pulling back your vacancy there. Can you maybe give us a little bit more color on that? Is that something - are those properties maybe not worthwhile holding onto over the long term, or is it just something near term that you think you will fix?

Leslie Veiner

It is the large - the two properties are large - it’s a large complex. It is approximately 1,500 units. The vacancy today is better than it was 12 months ago. I think we just - sort of in the high single digits in terms of vacancy at those properties. We spend a lot of time stabilizing it. We've now had stable management there for most of this year. So, I’m not expecting that you will see any significant improvement in vacancy over the next two quarters, but as we start to move back into sort of the more prime leasing season in the second quarter of 2017, we do hope to start to see the vacancy improve there.

Jonathan Kelcher

Okay. Are they the majority of your properties in Montreal? Because I think your portfolio overall for Q3 was 9% vacant, and then in the MD&A you guys talk about just the two of them sort of driving the vacancy.

Leslie Veiner

We've got a portfolio in [indiscernible] which is close to zero vacancy. And then we have some other properties, about 600 units I think it is, in other areas of Montreal where the vacancies is more typical of market.

Jonathan Kelcher

And what would that be, what would market vacancy be?

Leslie Veiner

That's at 3% to 4%.

Jonathan Kelcher

Okay. And just on the development, the Calgary development. So are you guys using any incentives there?

Todd Cook

Yes. The incentives work out to be about $75 a month, I think, is where we are. There are some of the new product that is competing. So the face rents are there. But I'll get back to you on the exact number, but I think it’s in that $75 to $100 range.

Jonathan Kelcher

Okay. Thanks. I'll turn it back.

Todd Cook

Thanks.

Operator

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

Jimmy Shan

Thanks. So just on the dispositions, it looks like most of them are in Ontario. And I know you mentioned it’s consistent with IFRS value. What cap rates are you realizing on those assets?

Todd Cook

The cap rates in Ontario are, give or take, 5.4% or 5.5% is the range we're in. They bounce around a little bit, but on average you are looking at about 5.5%.

Jimmy Shan

And then the - can you comment on just if you've seen any meaningful transaction happening in some of the Western Canadian markets, whether your existing markets are open markets you're looking at potentially? And any sort of comment on pricing trends, to the extent that they are transactions?

Todd Cook

Haven't seen any meaningful transactions in our markets. I know Boardwalk did their - the Southeast Calgary acquisition in Q2. But if you go into sort of the Alberta BC stuff, I'm not seeing a lot that's moving.

Jimmy Shan

No. But are there anything at all moving?

Todd Cook

There is some, but it's very, very small volume. So, I wouldn't say they're indicative of anything.

Jimmy Shan

Yes. Okay. Okay, thank you

Todd Cook

Thanks.

Operator

Thank you. The next question is a follow-up from Mario Saric of Scotiabank. Please go ahead.

Mario Saric

Hi. Sorry. Two more quick ones from me. More of a broader question on the portfolio as you look at the 2017. Outside of Alberta, are there any specific markets where you feel pretty optimistic in terms of pushing occupancy on a year-over-year basis?

Leslie Veiner

Yes. I think our focus is more - I mean, if you look at the markets outside there, I think we were - if you look at Ontario, there might be slight upside in vacancy. I think the focus is more going to be on making sure we continue to successfully execute on the strategic initiatives and grow the operating margins. On the East Coast, New Brunswick, Nova Scotia they operating close to a market occupancy now. The Quebec, potentially we are hoping to see some improvement there, as I described a couple of minutes ago. And then in our Southern BC markets are very strong. So this, again the upside is going to have to come from sort of operating efficiencies because we are operating with very little vacancy in those markets. I think to see the meaningful improvement in occupancy we're going to need to see a turnaround in the Western Canada markets. The northern markets, again, operating with low vacancy. So difficult to sort of get any sort of material upside unless getting revenue growth. But not from improved vacancy, because the vacancies are relatively low or in line with market.

Mario Saric

Got it, understood. Okay. And then just more of a technical question. In terms of your same-property NOI stats, when can we expect them to include the True North and institutional portfolio?

Leslie Veiner

It would be from the first quarter, would be the first full quarter. So Q1 of 2017 would be the first time we'd report same-store.

Mario Saric

Okay. Do you have a sense in terms of what those two portfolios would have done same property this quarter?

Leslie Veiner

It’s a little difficult, just given that the portfolios came from two different sources. One was publicly traded, the other was private. So, we know we're seeing improvement, just given - and I think we've been executing on the strategic initiatives. But to give you an absolute number, it's hard to track given that a lot of the information was not available, or publicly disclosed at the time.

Mario Saric

Okay. Thank you.

Todd Cook

Thanks, Mario.

Operator

Thank you. There are no further questions registered at this time. I’d like to turn back over to Mr. Cook.

Todd Cook

Thank you everyone for attending. And look forward to talking to you in New Year when we do our fourth quarter call. Have a good day.

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