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Edited Transcript of CAR.UN.TO earnings conference call or presentation 28-Feb-18 3:00pm GMT

Q4 2017 Canadian Apartment Properties Real Estate Investment Trust Earnings Call

TORONTO Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Canadian Apartment Properties Real Estate Investment Trust earnings conference call or presentation Wednesday, February 28, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Ehrlich

Canadian Apartment Properties Real Estate Investment Trust - Former Trustee

* Mark Kenney

Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director

* Scott Cryer

Canadian Apartment Properties Real Estate Investment Trust - CFO

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Conference Call Participants

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* Frederic Blondeau

Echelon Wealth Partners Inc., Research Division - MD & Head of Real Estate Research

* Heather C. Kirk

BMO Capital Markets Equity Research - Former MD of Equity Research & Analyst

* Matt Kornack

National Bank Financial, Inc., Research Division - Analyst

* David George Mills

Mills Investor Relations - President

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the CAPREIT Fourth Quarter and Year-end 2017 Results Conference Call.

I'd like to turn the meeting over to Mr. David Mills. Please go ahead, sir.

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David George Mills, Mills Investor Relations - President [2]

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Thanks very much, and before we begin, let me remind everyone that the following discussion may include comments that constitute forward-looking statements about expected future events and the financial and operating results of CAPREIT. Our actual results may differ materially from these forward-looking statements.

As such, statements are subject to certain risks and uncertainties. Discussions concerning these risk factors, the forward-looking statements and the factors and assumptions on which they are based can be found in CAPREIT's regulatory filings, including our annual information form and MD&A, which can be obtained at sedar.com.

I'll now turn things over to David Ehrlich, President and Chief Executive Officer.

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David Ehrlich, Canadian Apartment Properties Real Estate Investment Trust - Former Trustee [3]

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Thanks, David, and good morning, everyone, and thank you for joining us today. I have with me our Chief Operating Officer, Mark Kenney; and our Chief Financial Officer, Scott Cryer.

If you turn to Slide 4, you can see that 2017 was another record year for CAPREIT. All of our key performance benchmarks were up over last year, with continuing strong organic growth. NFFO increased just over 8%, driven once again by solid portfolio growth and strong same-property NOI. Importantly, our growth continues to be accretive as NFFO per unit rose 4% despite relatively low leverage and the 4% increase in the weighted average number of units outstanding. Our NFFO payout ratio also remained conservative at 70.3%, strengthening once again from the prior year.

Now I'd like to turn things over to Mark to review our strong operational performance in more detail.

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [4]

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Thanks, David. Good morning, everyone, and thanks again for joining us today.

Turning to Slide 6. You can see that we continued to perform very well from an operational perspective. Occupancies remained strong and stable, with our average monthly rents rising in both the apartment and MHC segments of our business. Our ancillary revenues continued to grow in 2017, up 5.1% to $33 million for the year. Our NOI margin also remained strong at 61.6%, consistent with the prior year.

Slide 7 shows that 2017 was another year where our organic growth continued to be driven by increased average monthly rents and higher occupancies across all of our demographic sectors and asset types. Looking ahead, demand remains robust in the majority of our markets. We see occupancies remaining stable at these nearly full levels, and we believe average monthly rents will continue to increase over time.

Our turnover and renewal rates are doing very well in the majority of our markets, as shown on Slide 8 with solid rent increases. Looking ahead, rent guidelines have been increased in Ontario and British Columbia for 2018: 1.8% in Ontario this year, up from 1.5% in 2017; and 4% in BC, up from 3.7% last year. These guideline increases bode well for continued organic growth through 2017.

For the last 20 years, we have demonstrated a consistent ability to generate what we believe is industry-leading organic growth, driven by increasing revenues, managing our costs and with enhanced operating efficiencies resulting from our size and scale. As you can see on Slide 9, our organic growth continued in 2017 with same-property NOI rising 2.9%. We are confident we can continue to deliver stable and steady growth in same-property NOI going forward.

We continue to be pleased with our performance in Dublin, as detailed on Slide 10. In 2017, our asset and property management fees from IRES totaled $6.2 million, up from $5.2 million in 2016. We expect this steady and stable stream of reoccurring income to continue to grow as IRES builds its presence in the vibrant Dublin market. Our 15.7% retained interest in IRES also continues to generate a solid stream of dividend income amounting to $7.1 million in 2017.

We also expanded our presence in The Netherlands in 2017, as shown on Slide 11. Our Netherlands portfolio has grown to 2,088 suites, and we continue to evaluate further expansion opportunities in the country. Similar to Dublin, we are exporting our proven property management and marketing programs to these new properties. And in 2017, we generated $9.3 million in NOI from this portfolio. Late in the year, we opened our property management office in this country, which we are confident will lead to operating efficiencies in this very strong market.

I will now turn things over to Scott for his financial review.

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Scott Cryer, Canadian Apartment Properties Real Estate Investment Trust - CFO [5]

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Thanks, Mark. The fourth quarter of 2017 was another period of strong performance for CAPREIT, as shown on Slide 13. Revenues were up 7.7% compared to last year's fourth quarter due to the positive contributions of acquisitions and continued increase in average monthly rents and stable high occupancies.

NOI rose a solid 5.3% on the higher revenues, lower realty taxes and reduced utility costs as a percentage of revenue but largely offset by higher R&M costs. NFFO rose 5.2% in the quarter, driven by the growth in revenues and a 1% increase in stabilized property NOI growth. The quarter also demonstrated accretive growth as NFFO per unit was up 3.4% despite the 1.7% increase in units outstanding.

Turning to our balance sheet. We continue to maintain a strong and flexible financial position as shown on Slide 14, with conservative leverage, strong coverage ratios and a further reduction in our interest costs. At December 31, 2017, we had approximately $86 million available borrowing capacity on our various Canadian, U.S. and euro credit facilities.

It's also important to note that we have approximately $300 million of our properties not encumbered by mortgages as of December 31, 2017, providing further flexibility to fund our growth and investment programs going forward. Our goal continues to be to maintain our unencumbered assets in the range of $150 million to $180 million over the long term.

Our mortgage portfolio remains well balanced, as shown on Slide 15, as maturities through the end of 2019 represent a smaller portion of the portfolio in the next 10 years. In 2018, we have approximately $118 million in mortgages maturing, with an average interest rate of 3.08%, and expect to refinance approximately $115 million in principal repayments with new mortgages. As of December 31, 2017, 97% of our current mortgages are CMHC insured, providing us with a large and diverse group of lenders willing to work with us at rates below conventional financing.

On the liquidity front, we remain well positioned to continue our growth programs, as shown on Slide 16. With the completion of our $150 million bought-deal equity offering in March, our liquidity position will stand at approximately $200 million, providing the resources for future acquisitions, all while maintaining our conservative debt ratios.

I'll now turn things back to Dave to wrap it up.

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David Ehrlich, Canadian Apartment Properties Real Estate Investment Trust - Former Trustee [6]

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Thanks, Scott. As you know, in 2017, we proudly celebrated our 20th year as a publicly traded REIT. It's worth a moment to look back at our accomplishments as the same strategies that have generated 2 decades of success will continue to build value for our unitholders going forward.

Through a series of accretive acquisitions, as shown on Slide 18, we have built a strong and diversified property portfolio, becoming one of Canada's largest owners and operators of residential rental programs -- or properties.

Slide 19 details how we have diversified our portfolio to ensure that we are not overly exposed to any one market. From 100% of our portfolio located in Ontario in 1997, our properties now span Canada from coast-to-coast, with a presence in 2 international markets, Ireland and The Netherlands.

As -- if you turn to Slide 20, we've also increased our presence in the higher-return luxury and mid-tier demographic segments while building a strong presence in the stable and growing manufactured housing community market. This focused transition has contributed to our growing cash flows over the last 20 years.

And as we increase our size and scale, we are also focused on ensuring we met the needs of our residents, ensuring that they have a safe and comfortable place to live. This focus has resulted in consistently high occupancies with growing average monthly rents across our entire portfolio. As a result, as shown on Slide 21, this track record of steady and stable performance has generated strong and consistent organic growth.

If you look at Slide 22, you can see that our growth and proven operating programs have resulted in a 20-year track record of strong cash flows with conservative payout ratios through all economic cycles. Most importantly, Slide 23 shows that our 20-year track record of success has built real value for our unitholders. We have increased monthly cash distributions 14x since our inception and we remain focused on generating stable, sustainable and growing cash distributions going forward.

Looking ahead, we remain extremely confident in our future. We've proven our ability to capitalize on continuing strong fundamentals in the apartment business through all economic cycles. We continue to maintain a strong financial position, with the flexibility and resources to continue our growth and sustain our monthly distributions over the long term.

Finally, for the last 20 years, we have demonstrated that our business strategy is succeeding and prospering, and we will continue to build on this solid performance going forward. I want to thank you all for your time this morning.

And we'll now be pleased to answer any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Fred Blondeau from Echelon Wealth Partners.

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Frederic Blondeau, Echelon Wealth Partners Inc., Research Division - MD & Head of Real Estate Research [2]

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I only have one question, a quick question for Scott. I was wondering if you could give us a bit more color on the 8% increase in same-store expense for the quarter, and if we should anticipate any significant increase in the repairs and maintenance cost per suite this year and next compared to what we've seen over the last 3 years.

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [3]

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Fred, it's Mark. I think what you'll see if you look at Q4 2016 over Q4 2017, is we reduced our en suite and common area capital spend by over $10 million in the quarter. That did result in some higher operating costs in Q4 2017. But that being said, we are highly confident that we'll return -- that we are on track to normalize our run rate of expenditure. It's really due to the strong market in both Vancouver and Toronto, where we did not have to invest in en suite improvements to get the higher rents that we're seeing.

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Operator [4]

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(Operator Instructions) Then a question from Heather Kirk of BMO Capital Markets.

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Heather C. Kirk, BMO Capital Markets Equity Research - Former MD of Equity Research & Analyst [5]

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In the MD&A, you referenced some onetime $2 million item in Q4, but it doesn't seem to appear in the NFFO. Just wondering if you can give us some color on what that was. It appears to be related to employees.

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Scott Cryer, Canadian Apartment Properties Real Estate Investment Trust - CFO [6]

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Yes, we had -- in the quarter, we had over $1 million in severances due to a restructuring that had an impact on FFO as well as some more significant consulting costs that were onetime in nature and around about $1.5 million that we won't expect a run rate going forward. So we are elevated, for the year, about $2.5 million on onetime items [alone in] trust expense.

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Heather C. Kirk, BMO Capital Markets Equity Research - Former MD of Equity Research & Analyst [7]

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So was that $2.5 million entirely in the quarter, or that would be...

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Scott Cryer, Canadian Apartment Properties Real Estate Investment Trust - CFO [8]

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No, about $2 million of that would have been in the quarter. Yes.

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Heather C. Kirk, BMO Capital Markets Equity Research - Former MD of Equity Research & Analyst [9]

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Okay. And in terms of the additional line item on the interest expense line, on the minority interest, can you just walk me through exactly what that is? I'm not -- it's the first time that's appeared, I'm not fully clear on what that represents.

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Scott Cryer, Canadian Apartment Properties Real Estate Investment Trust - CFO [10]

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Yes. So we have -- that's related to our Netherlands investment. We have a partner there that has a carried interest. We had extremely high fair value gains, driven primarily off of our initial portfolio but across the whole portfolio. So that represents, actually, just a revaluation of their interest. And to get technical, from an accounting point of view, it has to do with their ability to exit in a certain number of years, and so it became a liability and is therefore treated as interest expense.

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Heather C. Kirk, BMO Capital Markets Equity Research - Former MD of Equity Research & Analyst [11]

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Okay, great, that's really helpful. Just operationally, it looks like the suite turnover rate is coming down. I'm just wondering if you can give us a little bit of color on the market and whether you think that, that's a temporary situation or with how tight some of the markets are, that we should expect less turnover activity going forward.

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [12]

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Yes. Both the markets in, again, Vancouver and the Greater Toronto Area remain very, very tight, and we're seeing significant decreases in turnover rates. That being said, I think the market hasn't changed that much in the last 6 months in that regard, so we would expect to see those lower levels to stay stable.

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Heather C. Kirk, BMO Capital Markets Equity Research - Former MD of Equity Research & Analyst [13]

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Okay. And just finally, one last one, turning to the balance sheet. I'm just wondering what your thoughts are, given you took a really big fair value gain this quarter. Clearly, the apartment market demand is very robust, cap rates are very low. Can you just give us a sense of what your thoughts are on leverage and, potentially, dispositions in a frothy market?

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [14]

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We are looking currently at some potential dispositions in markets that we think are overheated and properties that we think have reached the maximum potential. And we are taking a very keen eye to development opportunities within the portfolio and building on our owned lands for more accretive acquisitions. But there's no question that across the country, we're seeing cap rate compression everywhere, and we're going to look carefully at where we can take advantage of that.

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Heather C. Kirk, BMO Capital Markets Equity Research - Former MD of Equity Research & Analyst [15]

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Can you give us a sense of what kind of scale that looks like, like how big of a disposition program would you be considering?

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [16]

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Yes, it wouldn't be overly material. We have one portfolio that we're eyeing in Quebec that's less than 700 suites. We're looking again at another little portfolio of a couple of hundred units, but we wouldn't expect to see anything of any sort of significant scale. It's more looking at the opportunity of where cap rates could become quite low and where we think the horizon of investment doesn't look as positive.

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Operator [17]

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The next question is from Matt Kornack of National Bank Financial.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [18]

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Just wanted to quickly drill down a little bit deeper into Fred's comment on the margins, particularly in Q4. Utilities margins improved a fair bit year-over-year. But as was mentioned, the operating expense numbers went up. Do you expect utilities -- I mean, is that a general downward trend? It looks like it has been for the last couple of years from a margin standpoint there. And then the R&M, I mean, should we just take an average of the last 3 years in terms of what you'd expect to be that margin going forward?

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Scott Cryer, Canadian Apartment Properties Real Estate Investment Trust - CFO [19]

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Yes, on the utilities front, we continue to invest in our energy management programs. And as we invest in those throughout the year, there's possibly a full year run rate effect in the following year. That gets slightly offset by increases in rates and we never [know] consumption. But yes, we believe the trend is positive with respect to utilities. With respect to repairs and maintenance, we fully expect to be in line with our budget of about $925 per unit for 2018.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [20]

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Okay, perfect. And then on turnover, is there a floor in your view as to how low that number can go? I mean, do you know the nature of the turnover at the end of the day? Sub-25%, I think, for the year is fairly low. But have you at least gone back historically and got a sense as to where that can go? I know, obviously, if the market rents are significantly above in place rents, people will stay, but there are other factors leading to where people choose to live.

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [21]

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We would find it difficult. We've not seen a circumstance where -- because we're major cities, despite how tight the markets are, 20% is very close to a bottom because natural attrition of people turning over. But we do have normalized turnover in the rest of the portfolio. It's really just the greater Vancouver, Greater Toronto Area.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [22]

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And by the same token, with the 9% turnover spreads that you've got, is that disproportionately impacted by Toronto and Vancouver as well, or you're seeing positive turnover spreads in a lot of markets?

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [23]

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We're -- we see that trend continuing in Toronto and Vancouver, but we also see positive signs with the rest of the portfolio as well.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [24]

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Yes, looks like Quebec's rent growth numbers were fairly strong year-over-year. Have you seen general improvements? It seemed like the economy in Montreal is improving, but how has your Montreal portfolio been doing? And you also acquired a fair bit there. How has that been acting relative to sort of your pro forma view?

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [25]

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It's backing beyond our expectations in terms of what we acquired. We're very positive on Montreal. There's good -- positive change is happening in that economy and we remain optimistic there. And quite frankly, the markets, even in Alberta, we think that we're slowing down the downward trend there and seeing a floor.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [26]

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Great. Last question, with regards to your credit facility, it looks like you had about $87 million or so of borrowing capacity. But a portion of that is tied up in funding your European exposure. Do you anticipate getting more facility? I would think you could get a larger credit facility if you wanted to. Or...

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Scott Cryer, Canadian Apartment Properties Real Estate Investment Trust - CFO [27]

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Yes, we definitely have a borrowing base for it and the appetite from the bank to increase it if we wanted to. The equity will offering largely reload our Canadian component of the credit facility, so we'll be almost fully loaded on that piece, and it would just be the euro exposure that we keep as is. So we wouldn't expect to need to increase that in this year at all.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [28]

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Okay. And just because you've got limited mortgage maturities, it's harder to up-finance or get significant up-financing out of it. Do you have unencumbered assets that you'd potentially want to encumber in terms of getting extra financing, or will it be funded by equity in the bank facility?

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Scott Cryer, Canadian Apartment Properties Real Estate Investment Trust - CFO [29]

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No, I think we definitely have -- it's a lower amount due this year, but we have -- we've identified an additional $100 million of seconds that we could do pretty economically efficient with the way CMHC fees are structured. So we do have the ability to move on second financings from a mortgage point of view, and then the unencumbered would be after that if we ever did that type of liquidity, but we don't see the need.

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Operator [30]

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And there are no further questions registered. I'll turn the meeting back over to Mr. Ehrlich. Please go ahead, sir.

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David Ehrlich, Canadian Apartment Properties Real Estate Investment Trust - Former Trustee [31]

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Thanks again, everyone, for your time and attention this morning. And as always, if you have any further questions, please don't hesitate to contact us at any time. Thanks again and goodbye. Have a great day.

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Operator [32]

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Thank you. The conference has now ended. Please disconnect your line at this time. We thank you for your participation.