Minto Apartment Real Estate Investment Trust (MI-UN.TO) Earnings Call Transcript & Summary

Good morning. My name is Regina, and I will be your conference coordinator today. At this time, I would like to welcome everyone to the Minto Apartment REIT 2025 Second Quarter Financial Results Conference Call. [Operator Instructions] Before we begin, I want to remind listeners that certain statements about future events made on this conference call are forward-looking in nature. Any such information is subject to risks, uncertainties and assumptions that could cause actual results to differ materially. Please refer to the cautionary statements on forward-looking information in the REIT's news release and MD&A dated August 13, 2025, for more information. During the call, management will also reference certain non-IFRS financial measures. Although the REIT believes these measures provide useful supplemental information about its financial performance, they're not recognized measures and do not have standardized meanings under IFRS. Please see the REIT's MD&A for additional information regarding non-IFRS financial measures, including reconciliations to the nearest IFRS measures. Thank you. Mr. Li, you may begin your conference.

Thank you, operator, and good morning. With me today are Eddie Fu, Chief Financial Officer; and Michelle Calloway, Senior Vice President of Property Operations. We had solid operating performance in the second quarter. Starting on Slide 3. On a same-property basis, we generated stable year-over-year revenue growth of 3.3% from our unfurnished suite portfolio, driven by a 5.2% increase in average market rent, partially offset by lower occupancy. Decreased furnished suite and commercial revenue resulted in total same-property revenue growth of 2.3%. Same-property NOI increased 1.6% compared to Q2 of last year as the growth in revenue exceeded the increase in operating expenses. Normalized FFO and AFFO per unit decreased by 2.5% and 3.2%, respectively, stemming from the loss of NOI from the Castleview disposition, coupled with decreased capitalized interest from a lower average outstanding balance on the revolving credit facility and lower interest income following the repayments of 2 outstanding convertible development loans. These decreases were partially offset by accretive unit buybacks and same-property NOI growth. During the quarter, we were able to execute on a number of important leasing objectives. As I highlighted on our last call, we executed a 25-year lease for the entire 10,000 square foot vacant commercial space at Minto Yorkville in Toronto, with the lease commencing in January 2026. We also executed a lease agreement for the vacant commercial space at Kaleidoscope in Calgary with lease payments scheduled to commence in November of this year. And in June, a new tenant took occupancy at The Carlisle in Ottawa with rent payments beginning in September of this year. In total, gross annual rent from these new commercial leases is expected to exceed $1 million, representing over $0.015 per unit on an annualized basis. We have remained very active with our NCIB program. And in Q2 2025, we purchased $20.5 million of units at a weighted average price of $13.17 per unit. To date, we have purchased approximately 3.2 million units and deployed over $43 million towards the NCIB program. Finally, we extended the CDL maturity and purchase option for 88 Beechwood in Ottawa. And in return, the coupon was amended from a fixed rate to a floating rate structure and the coupon was increased by approximately 200 basis points from 6% to 8% based on current interest rates. I'll now turn it over to Eddie to review our second quarter financial and operating performance in greater detail. Eddie?

Thank you, Jon. Slide 4 provides some key details about our operating performance. Same-property revenue was $38.5 million, reflecting a 2.3% increase compared to Q2 of last year. This growth was primarily driven by a 3.3% rise in unfurnished suite revenue, supported by a 5.2% increase in average monthly rent for the same-property occupied unfurnished suite portfolio, which reached $2,048. However, this was partially offset by lower average occupancy, reduced revenue from furnished suites and decreased commercial revenue due to the temporary retail vacancy at Minto Yorkville. Same-property NOI was $24.4 million in Q2 2025, an increase of 1.6% compared to Q2 2024. The increase reflects the same-property revenue growth, partially offset by a 3.5% increase in operating expenses, which reflected higher repairs and maintenance expenses and elevated marketing costs incurred to support leasing activity. Normalized FFO and AFFO per unit decreased by 2.5% and 3.2%, respectively, compared to Q2 of last year. Normalized AFFO payout ratio was 60.9%, an increase of 370 basis points from Q2 last year. I'll move now to Slide 5. This chart highlights the REIT's consistent quarter-over-quarter growth in average monthly rent. Our realized gain on lease of 4.7% in Q2 was down slightly from Q1 as market rents have flattened and turnover remains lower for suites with tenants whose sitting rents are substantially below current market rents, reducing their inclination to move out. Moving to Slide 6. We signed 469 new leases in the second quarter, generating realized gain on lease of 4.7%, down from 5.4% in the previous quarter. We generated increases of 8.3% in Ottawa, 4.7% in Toronto and 4.2% in Montreal, but Calgary and Vancouver continue to experience competitive pressure from new supply. As indicated in the lower table, the embedded gain-to-lease potential at the end of the second quarter remained solid at 10.4% or $14.5 million. Moving to Slide 7. The same-property annualized turnover was 24% in the second quarter, up from 20% last year. Overall, same-property closing occupancy remained consistent with the first quarter at 96% as we leveraged a combination of tactical promotion, marketing campaigns and a targeted renewal program across the portfolio. Calgary experienced higher annualized turnover compared to Q2 2024 as the continued delivery of new supply created alternative living options. As a result, closing occupancy declined from Q1 2025 by 40 basis points to 95.2%. Ottawa also experienced higher annualized turnover compared to Q2 2024, reflecting competitive pressures from newly completed rental apartments. As a result, closing occupancy declined by 60 basis points from Q1 2025 to 95.8%. Toronto also experienced an increase in annualized turnover compared to Q2 2024, driven by the continued delivery of new supply in the market. However, the REIT's leasing team successfully leveraged targeted promotions and marketing campaigns to support leasing activity, resulting in closing occupancy of 95.6%, an increase of 60 basis points from Q1 2025. In Montreal, turnover was consistent at 19% and demand remains strong, resulting in stable closing occupancy of 97.1%. On Slide 8, we provide an update on our commercial and furnished suite portfolios. Revenue from commercial leases decreased by 12.1% from Q2 last year, driven by the temporary vacancy at Minto Yorkville. As mentioned, we have leased vacant commercial space in the portfolio, representing estimated combined gross annual rent of approximately $1 million. This will bring our remaining vacant commercial space to less than 2,500 square feet, representing approximately 2% of the commercial portfolio. With respect to the furnished suite portfolio, revenue decreased by 19.1% from Q2 last year due to a lower average number of occupied suites, coupled with a decrease in average monthly rent. Since Q2 2024, we have converted 31 furnished suites to the unfurnished portfolio, including 20 at Minto 185. We expect to continue winding down the furnished suites business over time by converting furnished suites to unfurnished suites. However, the pace of conversions in each building will be subject to local market leasing conditions in order to optimize yield and cash flow. Turning to the operating expense breakdown on Slide 9. Same-property operating expenses increased 3.5% due to the higher property operating costs that were primarily the result of increased repairs and maintenance expenses and marketing costs. Same property taxes decreased due to lower assessed values and rates in Calgary, partially offset by increased rates in Montreal, Toronto and Ottawa. Same-property utility costs decreased compared to Q2 2024 primarily due to lower electricity expense resulting from a reduction in consumption, partially offset by rate increases in Ontario and Montreal, while the cancellation of the carbon tax contributed to the decrease in gas costs. Moving to suite repositioning on Slide 10. We repositioned 18 suites in the second quarter, generating an ROI of 8.1%. We experienced elevated costs this quarter due to the renovation of 2 penthouse suites in Minto Yorkville, which required higher capital investment due to the larger relative size and premium finishes. Over the past 4 quarters, we repositioned 58 suites and generated an average ROI of 8.7%. We expect to reposition a total of 50 to 70 suites this year. Slide 11 highlights our key debt statistics on a proportionate share basis. Our maturity schedule remains well balanced. As of June 30, 2025, the weighted average term to maturity on our term debt was approximately 5.3 years with a weighted average effective interest rate of 3.6%. As of the end of Q2, 98% of our total debt was fixed rate. Total liquidity at quarter end was approximately $137 million. I'll now turn it back over to Jon.

Thanks, Eddie. On Slide 12, we provide the current status of our development pipeline. As we indicated last quarter, we allowed the purchase option on The Hyland in Vancouver to lapse. And in April, we received repayments of $19.4 million for its related CDL. The intensifications at Richgrove and Leslie York Mills continue to progress with stabilization of the projects expected in Q4 2026 and Q4 2027, respectively. First occupancy at both developments is anticipated to occur later this year. As I highlighted earlier, in Q2, we agreed to amend the CDL associated with 88 Beechwood to extend the maturity date and the purchase option to December 31, 2026. Effective January 1, 2026, the coupon will be amended from a fixed rate to a floating rate structure and the coupon will increase from 6% to approximately 8%, calculated as a 500 basis point fixed spread over the base variable rate of our revolving credit facility, resulting in additional FFO on a per unit basis. I'll conclude with our business outlook on Slide 13. Despite the near-term uncertainty facing our industry, such as elevated supply in certain markets, immigration policy changes and affordability pressures, the long-term fundamentals supporting Canadian rental housing demand remain intact, driven by an acute housing shortage and the relative affordability of rental housing. However, due to the high-quality and urban locations of some of our assets, we do compete with new supply that is currently offering a variety of incentives and promotion. Our team has been actively managing the portfolio on a building-by-building basis to increase occupancy and optimize rents, and we are pleased with the progress so far in our fiscal Q3. The majority of expected supply in Toronto and Calgary is expected to be delivered throughout 2026 with fewer new starts to follow. As these new suites continue to be absorbed, we expect to see a more balanced supply and demand dynamic in both markets. In addition, we have made significant progress in leasing up the commercial portfolio, which will provide some tailwinds in 2026. At the same time, we continue the measured wind down of our furnished suite portfolio, subject to local market leasing conditions and cash flow optimization. Lastly, we expect to continue returning capital to unitholders through unit purchases as it remains an attractive use of capital at current trading levels. We have undertaken many initiatives over the past 2 years to strengthen the REIT, including improving the balance sheet, effectively allocating capital and high grading the portfolio. As near-term headwinds abate over the coming quarters, we believe the REIT is well positioned to generate strong returns for unitholders. That concludes our prepared remarks. Operator, please open the line for questions.

Our first question will come from the line of Jonathan Kelcher with TD Cowen.

First question, just on the occupancy, it held flat versus Q1. Do you think the sort of 95%, 96% level is one that you can hold over, I guess, over the balance of the next 18 months while the new supply kind of works its way through?

Good morning, Jonathan and thanks for the question. Yes, we have been extremely, extremely active managing the portfolio in an attempt to increase occupancy. Turnover is higher and the tenants who are turning do tend to be those who have a shorter length of stay. We have invested in many marketing and leasing strategies to try to backfill that higher turnover. And as I said in those remarks, we are pleased with how it's going so far in Q3. And I think, unfortunately, like flat is kind of the new up in this market, at least that's kind of how we're approaching it. And we are optimistic that we can maintain current occupancy levels through Q3 and what we're seeing in July and August to date kind of supports that.

Okay. That's helpful. And I guess along the same lines, if a lot of the turnover is from tenants that have been there the shortest, how do you -- how should we think about the uplifts going forward on turnover, like the sort of 5% to - -4% to 5% range?

I mean, look, I think the numbers that you're seeing in our gain-to-lease charts, they are on a gross basis. On a net basis, i.e., including promotion and incentive, it's a little lower than that. So I think in terms of driving the model and your numbers, anywhere between 0% and 5% gain-to-lease is probably reasonable. We're seeing that kind of actual gain-to-lease in all of our markets, and that's kind of what we're forecasting in our internal models as well. And so when you add that to the renewals, which is 80% of our portfolio or so, those are still growing at 3% and 3.5%. And so you can kind of take the weighted average of those 2 and get your growth for the rest of the year.

Okay. So if you did -- I forget the exact number, 4.7% or something this quarter, what would that have been on a net basis? Do you have that number?

It's about flat.

Okay. And what would that translate into in terms of average incentive, like a month, 3 or 1.5 months? Like how should we think about that?

Yes, it's somewhere between a month and 1.5 months on average, right? It's 0 somewhere, it's 2 months other places. And so on average, it's a month, 1.5 months.

Our next question comes from the line of Sairam Srinivas with Cormark Securities.

My questions have been answered. I'll turn it back.

[Operator Instructions] Our next question comes from the line of Matt Kornack with National Bank Financial.

Just with regards to the incentives question, are you providing incentives on renewals as well? Or should we think about the renewal spreads as being a cleaner number?

Renewals tend to be a cleaner number. And generally, though, we're aiming to be flat on renewals in many markets, up a little bit, obviously, when there's some embedded rent in there. And so it varies. But on the renewal side, our strategy really is to just get really far ahead of those renewals with the tenants and have our teams have one-on-one discussions with them. And look, we're finding that the tenants are very sophisticated and open to discussion and so are we. And so that's -- it's bearing a little bit of fruit, but there is a lot of backfilling as we mentioned before. So we're working hard.

Okay. Fair enough. And then like how should we think of how far we are into this process in terms of timing? I mean, you had a bit higher turnover this quarter. But like are we going to work through it, call it, in the next 12 months? Or is this a multiple year issue in terms of the higher leases coming to maturity?

I mean it's a good question and something that we try to analyze a lot. I think based on some of the questions we're getting and based on some of the information that we show our Board and we analyze, we do have a decent view on what the supply is coming up in each of our markets, and that's relative to historical averages as well. So I think we're going to consider kind of putting these supply slides into our investor presentations, and so people can just see the same data that we're looking at. And you can kind of see that in like Toronto, Calgary, Ottawa, Vancouver, in 2024 and 2025, the deliveries are significantly higher than what the 10-year averages have been, and that's what we're dealing with. But you can see in some of these charts where the additional supply is forecasted to be based on current estimates, and this can obviously change. And I suspect if it changes, it will actually decrease relative to these numbers as some condos and purpose-built rentals just don't get finished. But I think we're going to put some of these graphs up on in our materials and folks can just take a look and come to their own conclusions.

Fair enough. And then maybe last one for me. How is the transition on the furnished suites to kind of long-term rentals going? And then also, did I read correctly is the incremental contribution from the commercial portfolio as a result of leasing is about $250,000 a quarter? Or I'm just interested in how we should model that going forward as well.

Well, I'll start with the commercial, it's easier one. So starting in effectively 2026 -- I mean the lion's share of the incremental commercial is Minto Yorkville [ and ] the stock lease. And that's, call it, $800,000, and that's going to start Jan 1, 2026. The other 2, the Carlisle and Kaleidoscope, basically take that remaining $200,000 or so and half of it will start at the Carlisle paying in September 2025 and half of it will start in March 2026.

Okay. That's helpful.