Minto Apartment REIT is refinancing hundreds of millions of dollars’ worth of mortgages as rising interest rates jack up the costs of servicing its debt and eat into its cash flow, the company says.
The Ottawa-based firm said in financial documents filed this week it replaced a variable-rate mortgage on its Niagara West property in downtown Toronto with a fixed-rate mortgage and is in the process of refinancing its variable-rate mortgage at The International, a building in downtown Calgary, with a new fixed-rate mortgage.
In addition, the REIT said it has submitted applications to the Canada Mortgage and Housing Corp. to refinance nearly $137 million of maturing variable-rate mortgages at other properties with fixed-rate mortgages. The company said it expects the switch to result in “incremental proceeds” of between $60 million and $70 million, which it plans to use to repay a portion of its revolving credit facility.
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In a statement, new Minto Apartment REIT chief executive Jonathan Li said he expects the refinancing bid to bring “immediate upside” to the firm’s funds from operations, a key measure of cash flow that has taken a hit over the past year as mortgage rates have steadily risen.
Minto owns a 28.35 per cent stake in Niagara West, which it acquired last year for $114.5 million. The 501-suite property now carries a 10-year, $61.2-million mortgage at a fixed annual interest rate of 3.87 per cent, compared with the previous variable-rate mortgage, which still had $46.1 million remaining at a rate of 7.7 per cent as of March 31.
Minto said it expects the new mortgage for the 252-unit International, which Minto purchased last year for $86.5 million, will have an annual interest rate of about four per cent, down from 7.44 per cent under its current mortgage.
“We will continue to evaluate other initiatives to maintain or reduce the REIT’s overall leverage and further reduce its variable rate interest exposure over time,” said Li, who took over as CEO from Michael Waters last month.
The company said its funds from operations declined from $12 million in the first quarter of 2022 to $11.6 million in the first three months of this year. Minto said the drop was due mainly to the effects of rising interest rates on its revolving credit facility and higher interest costs on variable-rate mortgages.
Still, Li said Minto had a “very strong start” to 2023.
The occupancy rate in Minto’s unfurnished suites rose to 97.2 per cent in the first quarter, up three percentage points from the previous year.
Meanwhile, the REIT’s average gain of 16.9 per cent on new leases matched its highest-ever quarterly increase. Average monthly rents rose 6.9 per cent year-over-year to $1,769.
Those gains helped boost the REIT’s net operating income at its same properties 13 per cent year-over-year to $21.1 million. Minto’s overall revenue from investment properties totalled $38.4 million, an 18 per cent increase from the same period last year.
“Given the significant affordability gap between renting and owning a home, insufficient supply of new housing and significant immigration-driven population growth, long-term sector fundamentals remain constructive for our business,” Li said.
Minto reported a net loss and comprehensive loss of $24.2 million, compared with net income and comprehensive income of $34.6 million a year ago.
The company attributed the reversal to non-cash, fair value losses on investment properties and Class B LP Units of $13.5 million and $18.3 million, respectively, in the first quarter of 2023 compared with non-cash gains of $14.4 million and $9.6 million, respectively, last year.
Minto REIT’s portfolio currently includes 31 properties with a total of 8,227 suites in Ottawa, Toronto, Montreal, Calgary and Edmonton. The company is constructing an additional 1,100 units at three sites in Toronto at an estimated cost of $833 million.
Minto’s unit price rose 16 cents to $13.96 Wednesday on the Toronto Stock Exchange.