Minto diversified away from Ottawa to reduce risk. Then the pandemic hit
Despite a nearly four per cent gain Wednesday, Minto's share price is about one-third below its early March peak.
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It’s been a dispiriting year so far for real estate investment trusts, especially the ones that happen to own lots of shopping centres (RioCan) or office buildings (Allied Properties). These trusts have seen share values slump 42 per cent and 33 per cent respectively since their pre-pandemic peaks.
But if your main business is managing a string of more than 7,200 apartment suites across three provinces — as is the case with Ottawa-based Minto REIT — you really haven’t done a whole lot better. Despite a nearly four per cent gain Wednesday, Minto’s share price is about one-third below its early March peak.
Which is something of a surprise given Minto’s ability to navigate the pandemic’s shoals.
The company on Tuesday published detailed financial results for the third quarter showing a nearly 13 per cent rise in revenues year over year to $31.2 million, paced by a nine per cent jump in average rents to $1,613 per month. Ninety-seven per cent of the company’s apartment suites were occupied in the quarter, down a relatively modest amount from 98.6 per cent a year earlier.
The relatively strong revenues, of course, reflect Minto’s activities on several fronts — most notably its acquisition of additional properties in Montreal, Toronto and Alberta.
To get a better idea of why COVID-19 has tripped up Minto’s market value, we need to examine the nearly 4,600 suites common to the company both this year and last.
These units generated third quarter revenues of $22.5 million — down 3.5 per cent year over year — while average rents were up a relatively modest 3.8 per cent to $1,514 per month. Most of the weakness was caused by a 39 per cent drop in revenues associated with furnished apartments, which accounted for 13 per cent of Minto’s property portfolio in the third quarter of 2019.
Minto said the demand for furnished apartments has slipped considerably thanks in part to the sharp drop in business travel.
The pandemic has hurt in other ways as well. Turnover of tenants slowed, though the rate is gradually returning to normal. This is an important metric financially because when tenants leave, Minto is able to negotiate new leases at higher monthly rates.
For the 403 new leases signed in the third quarter, average rents jumped 9.4 per cent to $1,630 per month. Nearly half the conversions involved apartments in Ottawa, where new tenants paid an average $1,651 per month — 13.4 per cent more than the previous tenants.
But the big majority of tenants stayed put. Not only that, Minto suspended provincially regulated rent increases scheduled to come into effect between April and the end of July. These were resumed in August, which helped to explain the general improvement in the third quarter. However, Minto warned Wednesday that new Ontario legislation will freeze residential rents for existing tenants in 2021.
Minto listed other factors that helped to produce weaker revenues on a like-to-like basis. These included: increased cleaning costs; a small jump in bad debt expenses; higher utility costs to accommodate work-at-home tenants; and a small decline in the number of students and immigrants, as well as increased competition from the conversion of Airbnb rentals into apartments.
Since it first issued trust units on the TSX little more than two years ago, Minto has been diversifying rapidly away from its roots in Ottawa, which now accounts for 50 per cent of the REIT’s apartment units compared to nearly three quarters in mid-2018. Toronto and Montreal each now account for roughly one-fifth, while units in Edmonton and Calgary make up the remainder.
Ironically, the diversification increased the risks for Minto during the pandemic, particularly in Alberta where average rents actually dropped thanks to the twin economic hits of the pandemic and a collapse in energy prices.
Minto’s saving graces: it has focused on urban locations that attract salaried workers and professionals. This has been a particular boon in Ottawa which is “much more insulated from economic swings,” Minto concluded in its filing this week.
The diversification may well pay off down the road. Just not now.
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