News & Press

— Rising rental demand and occupancy continue to drive strong operating performance —

OTTAWA, ON, March 8, 2023 /CNW/ - Minto Apartment Real Estate Investment Trust (the "REIT") (TSX: MI.UN) today announced its financial results for the fourth quarter and year ended December 31, 2022 ("Q4 2022" and "FY 2022", respectively). The Audited Consolidated Financial Statements and Management's Discussion and Analysis ("MD&A") for Q4 2022 and FY 2022 are available on the REIT's website at www.mintoapartments.com and at www.sedarplus.ca.¹

"Overall, we are pleased with our performance in 2022. Same Property Portfolio revenue and NOI grew by 8.3% and 7.5%, respectively, year over year. This led to FFO per unit growth of 2.8% and AFFO per unit growth of 3.4%, despite significant increases in our interest costs over the same period. In addition, we announced that the REIT's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") will be full-time employees of the REIT, which represents an important step in the REIT's evolution." said Michael Waters, CEO of the REIT.

"Q4 2022 was another strong operating quarter, despite it being a seasonally weaker period." he added. "Our end of quarter occupancy rose to 97.6% and our quarterly gain-to-lease of 16.6% was close to the highest in the REIT's history. This resulted in continued strong growth in Same Property Portfolio revenue and NOI of 7.6% and 7.2%, respectively. However, FFO and AFFO were impacted by high short-term interest rates.

Looking ahead, we believe the outlook for our rental markets remains highly positive due to factors including continued growth in immigration and the high interest rate environment, which has widened the affordability gap between owning and renting a home. We will continue to focus on operational efficiencies, cost reductions and reducing our variable-rate debt exposure, while making prudent capital allocation decisions in order to maximize FFO and AFFO per unit.

We recently announced the appointment of Jonathan Li as President and CEO, effective April 3, 2023. Jon has become an integral part of our team since joining us last year, and I am confident that he is the right person to lead the REIT into its next stage of growth. Once the appointment is effective, the REIT will have a management structure similar to large sponsored retail and grocery real estate investment trusts at the time of their IPOs.

FY 2022 Highlights

• Same Property Portfolio² Net Operating Income ("NOI") was $81,793, an increase of 7.5% compared to the year ended December 31, 2021 ("FY 2021"), driven by strong rental demand increasing average monthly rent and total revenue, which grew by 8.3% to $133,547 compared to $123,314 for FY 2021;
• Same Property Portfolio NOI margin of 61.2% represented a moderate decline of 50 bps over FY 2021, driven by significant increases in operating expenses and natural gas expense;
• Adjusted Funds from Operations ("AFFO") were $47,443, or $0.7315 per unit, an increase of 12.3% and 3.4%, respectively, compared to FY 2021;
• Annualized distributions per Unit were $0.4775, an increase of 4.2% compared to FY 2021 and representing an AFFO payout ratio of 65.4%;
• The REIT acquired ownership interests in two high quality properties: Niagara West in Toronto and The International in Calgary, increasing the gross suite count by 753 suites;
• Announced the CFO succession plan, with Edward Fu, formerly the REIT's Vice President, Finance, succeeding Julie Morin as CFO of the REIT, effective January 9, 2023;
• The Board of Trustees approved an annual distribution increase of $0.015 per Unit or 3.2%, effective for the November 2022 cash distribution; and
• The REIT released its 2021 Environmental, Social and Governance Report ("ESG Report") including the results from its 2022 Global Real Estate Sustainability Benchmark ("GRESB") assessment. The REIT earned a GRESB score of 80, a 3-Star GRESB Rating, and Green Star Designation. This score is a ten-point improvement over 2021 and places the REIT fourth out of 16 in our peer comparison group of North American residential firms. The REIT's ESG Report can be found by visiting its website at http://www.mintoapartmentreit.com/2021ESGreport.

Q4 2022 Highlights

• Average monthly rent was $1,732, an increase of 5.5% compared to the fourth quarter ended December 31, 2021 ("Q4 2021"). Average monthly rent for the Same Property Portfolio was $1,738, an increase of 4.6% compared to Q4 2021;
• Average occupancy of unfurnished suites increased to 97.1%, compared to 95.0% in Q4 2021 and 96.2% in the third quarter of 2022 ("Q3 2022"). End of period occupancy for Q4 2022 was 97.6%, compared to 95.5% at the end of Q4 2021;
• The REIT executed 423 new leases, achieving an average rental rate that was 16.6% higher than the expiring rents, representing the second highest quarterly gain-to-lease in the REIT's history. As rental markets have continued to strengthen, the gain-to-lease potential on sitting rents increased sequentially to 13.6% from 12.1% at the end of Q3 2022;
• Total revenue was $37.9 million, an increase of 16.9% compared to Q4 2021; total revenue for the Same Property Portfolio was $34.7 million, an increase of 7.6% compared to Q4 2021;
• NOI was $22.9 million, an increase of 15.1% compared to Q4 2021; NOI for the Same Property Portfolio was $21.2 million, an increase of 7.2% compared to Q4 2021;
• NOI margin was 60.5%, compared to 61.5% in Q4 2021; NOI margin for the Same Property Portfolio was 61.2%, compared to 61.5% in Q4 2021;
• Funds from Operations ("FFO") were $12.9 million, or $0.1960 per unit, compared to $13.2 million, or $0.2147 per unit, in Q4 2021;
• AFFO was $11.2 million, or $0.1700 per unit, compared to $11.7 million, or $0.1890 per unit, in Q4 2021;
• The REIT repositioned 41 suites across its portfolio in Q4 2022, generating an average annual unlevered return of 11.3%;

Subsequent to Quarter End

• As referenced above, the REIT announced that Jonathan Li will assume the role of President and CEO effective April 3, 2023, an important step in its internalization process. Michael Waters will continue to serve as a Trustee of the REIT and focus on his role as CEO of The Minto Group.
• The REIT was added to the S&P/TSX Canadian Dividends Aristocrats Index effective February 1, 2023, due to its consistent distribution increases. The REIT has increased monthly distributions to unitholders in each of the five years following its formation, while maintaining a solid balance sheet and conservative AFFO payout ratio.
• On March 7, 2023, the REIT completed its disposition of Hi-Level Place in Edmonton for a sale price of $9,920, generating net proceeds of $2,832.

Financial Summary

Q4 2022 Operating Results

Revenue in Q4 2022 totalled $37.9 million, an increase of 16.9% from $32.4 million in Q4 2021. The increased revenue in Q4 2022 reflected improved occupancy, higher average monthly rents, reduced amortization of promotions, and property acquisitions completed during and subsequent to Q4 2021 (Le Hill-Park in Montreal, Niagara West in Toronto and The International in Calgary). Same Property Portfolio revenue was $34.7 million, an increase of 7.6% from Q4 2021, reflecting the improved occupancy, higher average monthly rent and reduced amortization of promotions.

Average monthly rent at the end of Q4 2022 was $1,732, an increase of 5.5% compared to $1,641 as at the end of Q4 2021. Average monthly rent for the Same Property Portfolio was $1,738 at the end of Q4 2022, an increase of 4.6% compared to the end of Q4 2021.

Average occupancy was 97.1% in Q4 2022, compared to 95.0% in Q4 2021 and 96.2% in Q3 2022.

The increases in average monthly rent and occupancy reflected steady improvement in urban rental market conditions in the REIT's major markets.

Operating expenses were 19.9% higher (8.4% for the Same Property Portfolio) in Q4 2022 compared to Q4 2021, reflecting inflationary pressures on expenses such as wages and natural gas, and acquisitions completed during and subsequent to Q4 2021. Inflationary pressures showed signs of slowing by the end of 2022 and Management continues to evaluate opportunities for cost reductions and efficiencies.

NOI for Q4 2022 totalled $22.9 million, representing 60.5% of revenue, an increase of 15.1% compared to $19.9 million, or 61.5% of revenue, in Q4 2021. Same Property Portfolio NOI for Q4 2022 was $21.2 million, representing 61.2% of revenue, an increase of 7.2% compared to $19.8 million, or 61.5% of revenue, in Q4 2021. The increases in NOI and Same Property Portfolio NOI in Q4 2022 reflected higher revenue, partially offset by higher operating expenses as noted above. The decreases in NOI margin and Same Property Portfolio NOI margin for Q4 2022 were driven largely by higher utility costs and salaries.

FFO in Q4 2022 was $12.9 million, or $0.1960 per unit, compared to $13.2 million, or $0.2147 per unit, in Q4 2021. AFFO was $11.2 million, or $0.1700 per unit, compared to $11.7 million, or $0.1890 per unit, in Q4 2021. The declines in FFO and FFO per unit in Q4 2022 were attributable to a 49.9% increase in finance costs spurred by the impact of rising interest rates on variable rate mortgages and increased draws and interest rate on the REIT's variable rate credit facility, partially offset by higher NOI. The declines in AFFO and AFFO per unit reflected the lower FFO and FFO per unit, and the increase in the maintenance capital expenditure reserve from the addition of the three properties acquired during and subsequent to Q4 2021.

The REIT reported a net and comprehensive loss of $32.4 million in Q4 2022, compared to net and comprehensive income of $24.9 million in Q4 2021. The variance was primarily attributable to non-cash, fair value losses on investment properties and Class B LP Units of $12.2 million and $29.6 million, respectively, in Q4 2022 compared to non-cash gains of $3.1 million and $10.7 million, respectively, in Q4 2021. The fair value loss on investment properties in Q4 2022 reflected a slight expansion of capitalization rates and increases in the capital expenditure reserve for upcoming projects and sustainability initiatives, partially offset by strong growth in forecast NOI for the portfolio. The fair value loss in Class B LP Units reflected the increase in the REIT's unit price during Q4 2022.

The REIT paid cash distributions of $0.1212 per unit for Q4 2022, an increase of 3.5% compared to Q4 2021 and representing an AFFO payout ratio of 71.3%. As previously noted, the REIT's Board of Trustees approved a 3.2% increase to the REIT's monthly distributions during Q4 2022, effective for the November 2022 cash distribution. Cash distributions of $0.1171 per unit were paid in Q4 2021, representing an AFFO payout ratio of 63.1%.

Gain-to-Lease and Repositioning

The REIT signed 423 new leases in Q4 2022, realizing an average gain-to-lease of 16.6%, the second highest quarterly gain in the REIT's history. This resulted in an annualized incremental revenue gain of approximately $1.2 million. By comparison, the REIT realized gains on new leases of 7.2% in Q4 2021 and 14.5% in Q3 2022. Significant gains were realized in all markets during Q4 2022. The Canadian urban rental market maintained its strong performance during the quarter, supported by increased immigration, the growing affordability gap between rentals and home ownership, increasing acceptance of renting versus owning, the return to in-person learning at downtown post-secondary schools, and a broad return to downtown living. As a result of increased demand for rentals, the REIT has increased rental rates and reduced the use of promotions to drive occupancy.

Management estimates that the REIT holds embedded gain-to-lease potential in its unfurnished suite portfolio of 13.6% as at December 31, 2022, representing future annualized embedded potential revenue of approximately $18.1 million, the largest such dollar amount in the REIT's history. That compares to embedded gain-to-lease potential of 6.8% and an estimated annualized revenue growth opportunity of $7.9 million as at December 31, 2021, and 12.1% or $16.0 million as at September 30, 2022. The embedded gain-to-lease potential is increasing as Canadian urban market rents continue to strengthen.

Management believes that the strength in the Canadian rental market will be sustained and that suite turnover will moderate in the months ahead as existing tenants will be more likely to stay in place since affordable housing alternatives will be less available. However, management expects that the REIT will be able to realize a portion of the gain-to-lease potential over the next few years. Notably, management does not anticipate materially reduced turnover in non-rent controlled markets like Calgary, or in certain properties in Ontario that were built after November 2018.

The REIT repositioned a total of 41 suites across its portfolio in Q4 2022. The annualized revenue gains realized on the repositioned suites generated an average annual unlevered return on investment of 11.3%. The REIT has a total of 1,983 suites remaining to be repositioned under its current program. Due to the anticipated lower suite turnover in the Canadian rental market, as well as low vacancy rates, management currently expects to reposition 80 to 120 suites in 2023, a