Message from Management
Management is pleased to report on the 2021 outcomes, both in terms of achieved growth and financial results. The residential portfolio increased to 830 units from 405 the year before. We expanded our core markets to the Okanagan and Victoria through portfolio purchases, while continuing to add infill purchases in existing markets. The Okanagan’s market dynamics are similar to Vancouver Island, and we were able to expand where we have existing property management capabilities in place through Devon Properties. We entered the competitive Victoria market with a leasehold portfolio purchase. Although the REIT is the freehold owner of the land, 189 of the 307 units of the portfolio are occupied by unrelated leasehold owners. The right to occupy these units expire in 2074, at which point all rights revert to the REIT. The properties are in core downtown areas, and the current land appraisals on these properties far exceed the purchase price paid. More information is available in the financial statement notes.
Most of the REIT’s purchases occurred in the last quarter of 2021, resulting in rental revenues not increasing in direct proportion to property values. Including fair value increases, property values increased from $94M to $199M between 2020 and 2021, while rental revenues increased from $6.4M to $8.0M. Management estimates that if there are no changes to the existing portfolio, rental revenues will reach around $13M for 2022.
This growth was achieved through the combination of $29M equity raises and $68M mortgage closings throughout the year. Management wants to express their gratitude to Integral Wealth Securities, whose efforts secured the equity financing. Management also took full advantage of opportunities in the interest rate market while it lasted. Although the REIT’s LTV target is 50%, Management intentionally pursued higher leverage while interest rates were favourable, locking it in for 10-years where possible. Overall, our portfolio is well positioned to maintain a steady yield even if interest rates increase.
Our portfolio was revalued higher by $9.7M. This was achieved through the combination of value-add activities where rents are increased on turnover and valuation capitalization rates decreasing. The remaining fair value increase represents three properties that were sold during the year. These sales triggered a $1M taxable capital gain, which flows through to investors. Those investors who do not have their holdings in registered accounts will have to report these gains on their tax returns. All the required information is available on the T3 slips that were distributed to relevant investors.
This all culminated in a NAV per Unit increase of 10.8% to $15.92. Distributions are maintained at 3% of NAV per Unit, resulting in a proportional increase to these allocations.
Management continues to believe in the fundamentals of investing in our core markets and will continue to grow the portfolio in an accretive manner. Management is taking a more conservative approach in the short term, considering the recent movement in interest rates. While our acquisition pipeline is still robust with value-add opportunities, we do believe that capitalization rates could soon stabilize and possibly increase in the medium term. Although such movements could adversely affect property values, they present an opportunity to increase yields for those buyers who know their markets well.
(1) As of December 31, 2021. Excludes property dispositions.
(2) AFFO Payout ratio is a non-IFRS measure used to evaluate the Trust’s ability to cover its distributions.
(3) An annualized return based on a single unit investment in the AIE REIT, inclusive of unit price changes and distributions.
These materials are not to be distributed, reproduced or communicated to a third party without the express written consent of All Island Equity REIT. These materials should be read in conjunction with the Trust’s Offering Memorandum dated March 15, 2021 and as amended on August 18, 2021, including the risk factors identified therein. This letter has been provided for general information purposes only and is not intended to be a solicitation to purchase Units of AIE REIT or advice regarding the suitability of the investment for specific investors. This letter contains forward-looking statements. These statements relate to future events or the Trust’s views or predictions of possible future performance, operations, acquisitions and strategy based on assumptions and expectations which may not prove to be accurate. Such forward-looking statements involve risks, uncertainties and other factors, including the impact, severity and duration, of COVID-19, which may cause actual results, performance or achievements of AIE REIT to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. For more information on these risks and uncertainties, you should refer to the Trust’s most recent Offering Memorandum. Any opinions expressed herein are effective as at the date of the letter. Management does not undertake to notify the reader of any subsequent change of circumstance or opinion unless required by law. Past results are not indicative of future performance. There is no assurance that the properties acquired by the Trust will perform as expected. NAV and AFFO are not measures recognized under IFRS and does not have standardized meaning prescribed by IFRS. The Trust’s calculation of NAV, AFFO, and Annualize Returns may differ from other REITs.