If you make a living renting apartments in downtown Canada, like Minto Apartment REIT does, you were in the wrong business when the pandemic hit two years ago.
Two of your most important customers—students and immigrants—stayed home. Town centers lost their cachet overnight. And your ability to raise rents was severely limited by the Ontario government’s decision last year to freeze most rents last year. This year, increases are capped at 1.2%.
Still, the message from Wednesday’s conference call hosted by Minto CEO Michael Waters was that the worst was over — that business could be close to pre-pandemic levels by the middle of the year.
A key metric tells the story. Just over 95% of the company’s more than 7,500 rental apartments were occupied in the fourth quarter of 2021, marking the third consecutive quarterly increase since the low of 91%. Waters said he expects to continue to fill his apartments, thanks in part to the federal government’s strong immigration targets of more than 400,000 a year and a return to more normal downtown lifestyles. In 2019, 98% of apartments in Minto were fully occupied, so there is still some distance to go.
Nevertheless, Waters believes it is only a matter of time. Another thing in his favor, he pointed out, was the wide gap between rent increases and housing affordability. For example, last year the average rent for the company’s approximately 3,100 apartments in Ottawa was $1,542 per month, up just 7% from 2019. Over the same period, the value Ottawa home resale jumped 45% to $782,000.
For those who can no longer afford a home, renting or condominiums seem relatively more attractive.
And, despite government-controlled rents for existing tenants, Minto has several ways to increase revenue. For example, the company may raise prices for new leases and suites that have been renovated. Minto renovated 367 suites last year at a cost of nearly $50,000 each. The gain was the ability to charge an additional $4,465 per year each.
The company also builds new apartment and retail complexes for which it can charge market rates. A $91 million redevelopment on Fifth Avenue and Bank Street will add 163 suites and outlets by the end of the next quarter. Minto is also investing in a $123 million project adding 227 apartments along Beechwood Avenue and Barrette Street in Ottawa’s east end by 2024.
Since 2018, when $200 million was raised in an initial public offering, Waters has purchased thousands of new apartments and expanded Minto far beyond its Ottawa roots. At the time of the IPO, 71% of the company’s 4,279 apartments were located in Ottawa. By the end of 2021, the ratio had slipped to 41%, thanks to the addition of almost 1,800 apartments in Montreal and more than 1,150 in Toronto.
Minto recorded $123.5 million in revenue from its various properties last year — a slight drop from 2020, but a substantial increase from $104.4 million in 2019 before the pandemic. This is the influence of conversions and acquisitions of apartments. It also generates plenty of cash to pay distributions to investors.
Those lucky enough to acquire shares at the IPO price of $14.50 have done well. Based on Wednesday’s closing price of $21.02, they would have posted compound average gains of over 10% per year, excluding an annual dividend currently just below 2.3%.
Of course, it all depends on your point of view. During the first week of March 2020, days before governments began to lock down the economy in response to the then unknown COVID-19 virus, Minto was trading at $28. He will have to gain 33% to get back to where he was.
All Waters can do is keep an eye on the multiple sides of the business. If the pandemic is really late game, the price of these Minto units will go along with the ride.
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