Hello everyone, and welcome to Canadian Apartment Properties REIT's first quarter 2025 results conference call. My name's Lydia, and I'll be your operator today. After the prepared remarks, there'll be an opportunity to ask questions. If you'd like to participate in the Q&A, you can do so by pressing star followed by one on your telephone keypad. I'll now hand you over to Nicole Dolan, Investor Relations, to begin. Please go ahead.
Thank you, Operator, and good morning, everyone. Before we begin, let me remind everyone that during our conference call this morning, we may include forward-looking statements about expected future events and the financial and operating results of CAPREIT, which are subject to certain risks and uncertainties. We direct your attention to slide two and our other regulatory filings for important information about these statements. I will now turn the call over to Mark Kenney, President and CEO.
Thanks, Nicole. Good morning, everyone. Joining me this morning is Stephen Co, our Chief Financial Officer, and Julian Schonfeldt, our Chief Investment Officer. Let's start on slide four, where we summarize some of the key performance highlights here today. You will see that we've completed CAD 265 million in non-core Canadian dispositions, and we closed on an additional CAD 135 million of property sales in Europe so far in 2025 at prices that are at or above previously reported IFRS fair values at the time of negotiation. We've reinvested CAD 137 million of net sale proceeds into the acquisition of recently constructed mid-market rental properties at prices that are meaningfully below replacement cost. We've also spent a further CAD 88 million on our value-enhancing NCIB program to buy back CAPREIT's trust units at a weighted average purchase price of approximately CAD 42 per unit.
This represents an average 25% discount to our NAV of CAD 56 per diluted unit as of March 31, 2025, which we've continued to prove by selling our off-strategy properties at premium pricing. This is all just to underscore the ongoing strength and standing stamina in the execution of our capital allocation strategy, which Julian will expand on shortly. Operationally, our Canadian Same Property Residential Occupancy improved since year-end, increasing to 97.9% as of March 31, 2025, while our Occupied AMR grew by 5.7% since March 31, 2024, reflecting the sizable mark-to-market built into our long-standing diversified portfolio. On the expense side, property operating costs were up due to elevated R&M and utilities, with higher weather-related expenses owing to a colder winter in certain regions. We also had an increased bad debt and advertising costs associated with changes in the rental marketplace, which we've been proactively addressing.
The net impact was a decrease in our Same Property NOI margin to 62.3% for the three months ended March 31, 2025, and I'll let Stephen elaborate more on that soon. One of our key priorities has been the reinforcement of our financial position, and today we're proud to have one of the strongest balance sheets in our peer universe. We've been delivering by paying down Canadian credit facility debt, and we have significantly lowered our total debt-to-gross book value ratio to 37.7% as of current period end. This low leverage means that we have significant room to lever up should additional funding be needed, and at the same time, we strategically retained cash on hand, which we were able to opportunistically deploy into our share buyback program.
With that overview of the first quarter, I'll now turn the call over to Julian to further expand on our capital allocation program.
Thanks, Mark. If you turn to slide six, I will just briefly talk to the diversification of CAPREIT's portfolio. Today, we have 16% represented by recently constructed properties, which provide access to market rents alongside the benefits of very low CapEx requirements. We have 67% comprised of our core legacy rental apartments, which contain significant embedded value that supports the stability in our long-run rent growth profile. We also have 5% of our consolidated portfolio in Europe. Of that, we recently announced that we've entered into an agreement to sell over CAD 500 million, with closing expected in the third quarter of 2025, which will bring this allocation down to less than 3%, all else equal.
With this divestment and our plans to launch a process for the sale of the remainder of the portfolio in Europe, we're excited to be making meaningful strides towards our objective of returning to our roots as a pure-play Canadian apartment REIT. On slide seven, we showcased our portfolio transformation over the past couple of years. We've been diligently upgrading the quality and earnings performance of our portfolio through enhancing exposure to high-quality recently constructed properties. As Mark mentioned, we've been acquiring these over the years at substantial discounts to replacement costs. However, the window of opportunity to purchase at these prices is limited. Going forward, we will continue to underwrite potential strategic acquisitions for as long as that opportunity exists and it remains financially attractive, and we have a very strong and liquid financial position to support our ability to execute.
At the same time, we've been selling our underperforming non-core and ancillary assets. Looking ahead, we're always going to be monitoring the composition, quality, and performance of our portfolio and seeking to continuously improve upon it year- over year. On slide eight, you will find a more detailed overview of our Q1 acquisition and disposition activity. We expanded our presence in Western Canada with the purchase of two recently constructed rental apartment properties for an aggregate CAD 98 million. Built in 2015 and 2019, these two mid-market properties are perfectly positioned for our portfolio, with affordable rents averaging around CAD 3 per sq ft. On the right side of the slide, you will see what we've sold: CAD 231 million worth of older properties that no longer meet our performance criteria.
Included in this, we were pleased to have transferred a 717-suite portfolio for CAD 104 million to the City of Montreal's Affordable Housing Initiative, and we look forward to working with more nonprofit organizations in the future as a way for us to contribute to the provision of affordable housing in Canada. With that, I will now turn the call over to Stephen to expand further on our operational and financial results.
Thanks, Julian. On slide 10, you can see that we've improved occupancy since the previous quarter. Our Canadian total portfolio in Same Property Residential Occupancy was up to 97.9% as of March 31, 2025. This demonstrates the success of our vacancy mitigation strategies, which we adjusted in response to recent shifts in market dynamics, including refining and enhancing our various marketing incentive and retention initiatives. Our average monthly rent was up, reaching CAD 1,677 on March 31, 2025, across all occupied apartments in Canada. This represents 8% growth since the prior year period, reflecting the mark-to-market embedded in our large legacy portfolio that protects our rent growth profile against the effects of short-term market swings. Turning to slide 11, with a focus on maintaining high occupancy while optimizing rent growth, our Same Property Operating Revenues were up by 4.3% for the current quarter.
However, on the expense side, property operating costs increased by 7.2% on the Same Property portfolio. Reasons for this variance include elevated R&M costs largely arising from weather-related expenses incurred this past winter season, primarily in Ontario and Quebec, and including higher snow removal costs. Colder weather also drove up electricity and natural gas costs due to increased consumption, which was compounded by increased natural gas prices in these two provinces. In addition, the quarter experienced higher bad debt costs due to delays in regulatory processes in Ontario, as well as other factors such as rising costs of living and increased past due balances that were not cleared by prior tenants. We also spent more on advertising across most Canadian regions to successfully combat the market-driven increases in vacancy.
One thing to highlight is that the savings from carbon tax on our utilities will have a positive effect in 2025 relative to 2024, effective April 1st. The estimated savings for the rest of 2025 will be approximately CAD 0.03 per unit. Taking everything into account, our Same Property NOI margin was down to 62.3% for the three months ended March 31st, 2025. Our diluted FFO per unit likewise decreased by 3.9% to CAD 0.58 for the first quarter due to lower NOI, predominantly from net disposition activity. This was partly offset by lower interest expense on credit facilities as a result of CAPREIT having repaid borrowings using proceeds from the significant disposition activity occurring in Q4, which lowered our leverage. It was also partly offset by reduced overhead costs, excluding organizational costs, as well as accretive trust unit repurchases and cancellations under our NCIB program.
It is important to note that if we maintained the same leverage on invested properties, all else equal, our earnings would have been approximately flat as compared to Q1 of 2024. I will let Mark speak to our strategy in that regard in a minute. Just before I pass the call over, on slide 12, I want to briefly remind everyone that our debt strategy is core to our capital allocation program. We proactively manage our mortgage financings in Canada, which carry a weighted average effective interest rate of 3.2% per annum. We have a weighted average mortgage term to maturity of five years, with no more than 13% of our total mortgages coming due in any given year.
We also have significant access to liquidity with nearly CAD 200 million in available borrowing capacity on our acquisition and operating facility as of period end, plus CAD 1.5 billion of unencumbered investment properties. This is in addition to our cash reserve of over CAD 100 million in Canada as of quarter end, which we have opportunistically reinvested to buy back shares post-period end. Our low debt-to-gross book value of 37.7% also allows us room to increase within our range as need be. This conservative and flexible balance sheet, which is one of the strongest in the REIT sphere, supports our primary goal of boosting cash flow generation and ultimately growing unit holder returns. On that note, I will turn the call back over to Mark to wrap up.
Thanks, Stephen. Referring to slide 14, I want to take a moment to really look at everything that is going on at CAPREIT today and what that means for the future, because the fact is there has been a lot of change recently, both internally and externally. We've been working hard to build a better platform for tomorrow and enhance the long-term performance of our portfolio and organization, but this means that we're currently in a period of transition, which comes with certain nuances that need to be navigated. We're managing through this four main initiatives. Firstly, as Stephen mentioned, we've strengthened the balance sheet by paying down significant amounts outstanding on our Canadian acquisition and operating facilities, and we've reduced our leverage to approximately 38% as of Q1 2025, down from 42% as of Q1 2024.
Secondly, with the high volume of transaction activity achieved as of late and the net cash proceeds which we've received, including the disposition of our entire MHC portfolio and a very large portion of our European portfolio, we've temporarily retained excess cash reserve, which we then opportunistically deployed into our NCIB program. Thirdly, we have increased exposure to recently constructed properties. As we highlighted earlier, these provide access to market rents both in good times and in bad, which means that in periods of moderating rents, we will see a corresponding increase in turnover rates across this segment. However, these properties also come with the benefit of very minimal CapEx requirements, which ultimately means they're producing meaningfully higher economic cash flows.
Last but not least, we've been managing our overhead while optimizing the CAPREIT team, organizational structure, and culture to ensure that we're primed and ready for a new and upcoming chapter of steady growth in long-term returns for unit holders. Although this is all resulting in some short-term turbulence, as we undergo this transformation, the pillars of our business remain strong, and the long-term fundamentals of the residential rental industry in Canada are robust. With this backdrop and these healthy fundamentals in view, we continue to work towards improving our operational and financial results through the remainder of 2025. To conclude on slide 15, which we highlight time and time again, this is all in line with our commitment to continuously strive to be the best place to live, work, and invest.
With that, I would like to thank you for your time this morning, and we would now be pleased to take your questions.
Thank you. Please press star followed by the number one if you'd like to ask a question, and ensure your devices are muted locally when it's your turn to speak. Our first question today comes from Jonathan Kelcher with TD Cowen. Please go ahead. Your line is open.
Thanks. Good morning. First question, just on the operations, the lifts on turnover were a little lower this quarter at 7%. Is that you guys just lowering rents a little bit to fill the suites? Maybe give us some color on that and the trend you expect over the balance of the year.
Yeah, thanks, Jonathan. It's important to actually kind of point out that the benefits of our newer construction portfolio and our legacy portfolio are working quite well to offset one another. Some of the issues that we saw in the quarter had to do with the legacy portfolio, which on the surface is surprising because there's such strong mark-to-market rents there. Really, when we took a deeper dive, what we're seeing is that those leases that were put out post-COVID, where we were seeing 30% mark-to-market rents, are the ones that are turning over now to more moderated market rents. We view this as a relatively short runway of flushing out those exceptionally high post-COVID rents and allowing the legacy portfolio then to kind of give power and strength to the mark-to-market rents that are embedded there.
That is a very, I'll say, very short-term effect that we think will bleed out in the next quarter or two.
Okay. And then start to grow again?
Absolutely start to grow again.
Okay. And then secondly, just on CAPREIT.
Sorry to interrupt there. Part of the strategy as well is that in the fourth quarter, we did increase our incentive use. We did do everything we could to fill the portfolio because going into this spring season, we wanted to be occupancy strong so that we could torque rents with confidence. That strategy is absolutely working. We're seeing good strength in that spring-summer market, and we feel extremely proud of how we've positioned ourselves going into it. By making our occupancies strong, we definitely are looking forward to excitement in Q2, Q3.
Okay. That's helpful. Secondly, just on capital allocation, you guys have lots of capital coming in through the res sales and selling some non-core assets that maybe need a little bit more CapEx. You are buying newer assets. Can you maybe talk about how this strategy fits with your operational focus, which has also shifted to spending less on overall CapEx, even if it kind of hits you on the R&M side?
Yeah. We're talking about overall expense deflation at CAPREIT. I am very focused on cash flow. We keep talking about cash flow. The capital allocation strategy of newer constructed assets is definitely getting us there much more quickly. It may be showing up slightly on the operating side, but it's not showing up on the ongoing CapEx side. We've got expense deflation overall at CAPREIT, and that's a message that we're trying to get out there. Of course, that strategy will accelerate as we buy ourselves into the newer constructed market and we become more cash flow self-sufficient. I'll let Julian maybe add a little bit of color to that, but we're extremely excited about how the strategy is working.
Yeah, it's worked out well so far. The market dynamics have allowed us to be buying at similar cap rates to what we've been selling, but with a fraction of the CapEx. So not only are we hydrating it and maintaining NOI, but at the same time, we're lowering CapEx. It's been fortunate that it hasn't been a hyper-competitive environment on the acquisition side, which is allowing us to do something that would have in other times been impossible to do. We're going to continue to take advantage of that while the window is there.
Julian's been also talking quite a bit about economic cap rates. When we're looking at the assets that we're selling, we're trying to look at the CapEx requirements of those assets and come up with a true economic cap rate. We're comparing those economic cap rates to the new construction assets with a CapEx profile that is much, much more easy to look at and see. When comparing those two economic cap rates, there is no question in our mind that this is a positive trade.
Okay. That was going to be my question. So Julian, when you're saying that you're buying and selling at the same cap rate, that's not like on an economic cap rate, you're buying better than you're selling, correct?
Yeah, absolutely. That's on a nominal cap rate. When you look at, and of course, we're targeting buildings with heavier CapEx profiles. When you're going from a nominal cap rate in the fours to low threes or even twos, that compares to new construction properties that are nominal and economic cap rates that start with the four. It's quite a bit more attractive from our perspective. There's a whole bunch of other benefits that we layer on that I've talked at at nauseam, but it feels like a great way to improve the CapEx portfolio in this window.
Okay. I will turn it back. Thanks, guys.
Our next question comes from Mike Markidis with BMO Capital Markets. Your line's open.
Thanks. Maybe just continuing on the economic cap rate discussion, very clear in terms of what the trade-offs are there. I am just curious, given the dynamics that you see today, how do you view the NOI growth profiles over the next five years of the legacy versus the stuff that you have recently bought?
I think we've got that perfect Mike. We're in the short to midterm working towards this 20% composition of new construction. Again, we love the market exposure that those 20% newly constructed have given us. We also love the freedom of the regulatory environment and the access to market rents, like I said, in both good times, but sometimes in bad. At the heartbeat of CAPREIT is the legacy portfolio, which has mark-to-market embedded of what we believe to be close to.
In the mid-20s type.
In the mid-20% range. That will help propel CAPREIT as we go forward, giving us strength and steadiness in that long runway of growth that we've talked about. We are really focused on expense deflation, which we are getting. Expense deflation is showing up in our total expenses, maybe not the operating expenses, but the total commitment of dollars out the door. That is the cash flow story. That story is working extremely, extremely well.
Okay. That's useful. Thank you. Mark made some pretty strong comments about your confidence in Q2 and Q3 from a leasing perspective. I'm just curious what you think is driving that, just given the changes that we've seen on the immigration side. Are you seeing any changes in terms of the composition of the type of tenant moving through? Supply is still pretty elevated in certain markets. I'm just maybe you can give us a little bit more confidence and maybe just give us a little bit more in terms of I don't know if you have your preliminary May occupancy or what your rent spreads are looking like in Q2.
Thanks for the question, Mike. In Q4, we gave pause to try to figure out what was happening in the marketplace. We saw a notable slowdown across the portfolio in traffic of visitors to the site. When we talked to peers, we talked significantly about weather and people just not moving because the weather was bad and who really wants to move on Christmas and all that business. We also started hearing a lot about Trump tariffs. People were afraid to make a move with all the tariff discussion. We were also in election mode in Canada. I'm going to say the anxiety levels in December were certainly higher than they are today now that we have clarity. What we did at CAPREIT was everything we could to make sure we were on strong footing going into the spring.
We utilized incentives, which have dropped off dramatically as of current month. What we found ourselves in a position now of being extremely strong footing on the occupancy front, which allows us to torque rents. What we are seeing is definitely the market has warmed up like the weather. We are getting a lot more traffic, and we are very, very confident about the outlook for the market in the short term. It feels like back to normal, and we are feeling quite good about that.
Okay. That's good to hear. Lastly, curious your thoughts on the recent election and how it's been finalized. Do you see any implications at all from the outcome, positive or negative, or pretty much status quo?
In terms of party platforms alone, we are interpreting that the Liberal government is very committed to growing Canada's population. We believe that that party will turn up the dial on immigration as soon as possible, as soon as there's positive signs. That is good. We definitely are paying attention to the funding of nonprofits. There was a government program of close to CAD 1 billion initially for nonprofits to acquire affordable assets in income-distressed neighborhoods. That speaks extremely well to valuations, at least in the area of the portfolio that we're looking to maximize our values on. Those fundamentals alone are very, very positive. What we can also look to is actual starts and completion data. The outlook is very positive on a fundamental point of view for Canadian Apartment Properties Coast to Coast. There is very little product that will be showing up in 2026, 2027.
The fundamentals across the board are looking very, very good for CAPREIT and perhaps not so great for the delivery of housing to Canada. The government has aspirations of turning that around. We'll see.
That's all from me. Thanks so much.
Our next question comes from Kyle Stanley with Desjardins. Please go ahead.
Thanks. Morning, guys.
Morning. Just going back to the capital allocation, I think it was mentioned earlier, obviously, a lot more capital coming in. How are you thinking about things? Is it safe for us to assume that the NCIB activity could ramp up? Is there a concern over the dilution from selling and sitting with cash, or is there a preference to being able to deploy capital into the opportunities as you see fit, meaning you kind of hold the cash for a bit longer?
It is a great question, Kyle. We are opportunistic. We are absolutely reserved in our underwriting. We are not going to fall to the temptation of just buying, okay? There is no doubt there is a limited number of deals that meet our criteria. I will let Julian speak more about that. The idea of buying these cash flow positive assets, new construction, no regulatory risk, less reputational risk, there is a whole host of reasons that we have talked about why we want in that market. That is the debate of what we do with our dollars. There is no question that the most accretive use of our money is the NCIB. We are hearing investors on that. We are trying to strike that balance for the long term, buying high-quality, well-purchased assets that are going to help our cash flow journey that we are fully committed to.
I'll see if Julian has any further comments on that.
No, that's exactly right. We find ourselves in a fortunate position in a tough market, having significant liquidity from our capital recycling journey and working very hard to take advantage of strong acquisition opportunities with low CapEx profiles, but then also taking advantage of buying back into our new and improved portfolio effectively at a five cap with no DB, none of the typical transaction risks. We are balancing between the two. Acquisitions, it's not as competitive of a market, but at the same time, we are negotiating or working against vendors that have higher construction costs and are struggling to sell at current market prices. We are staying active and we are staying in front of them. Between that and the NCIB, we have great options in front of us.
We want to keep our capacity strong. At the end of the day, Stephen can speak a little bit illustratively. He mentioned it in our presentation about our capacity. Our interest of growth and our ability to have the capacity to do that under the right terms is 100% there. Do you want to talk about that?
Yeah. So Kyle, from a debt capacity perspective, we do have an acquisition capacity. If we went up to, even if we went up to 45% LTV, again, really good assets, we can borrow around CAD 2 billion. Obviously, our credit facility is right now CAD 200 million, but we also have an accordion of CAD 400 million on that. It can go right up to CAD 600 million. That will be not a challenge for us to go to our banks to activate that accordion. We do have a lot of debt capacity, also inclusive of our unencumbered assets of CAD 1.5 billion. I would say we do have a lot of dry powder if the opportunity arises.
We're fully committed to growth at CAPREIT, but I underline accretive growth. That's what we continuously are saying to investors. Julian just has on his desk today, I would say, close to CAD 1 billion of acquisitions, of which we would probably do very little of it because they do not meet the terms that we want. We are going to be good custodians of unitholder capital, and we will be restrained. This is a company that is absolutely geared for growth, but accretive growth.
Okay. No, thank you. That's very clear. I mean, my next question, you kind of hit on it a little bit there in your answer, but just there's been a lot more emphasis, obviously, on the free cash flow generation and then potentially, at some point, becoming self-funding. Just curious, at this point here, how far ahead do we have to look before we can conceivably see CAPREIT being able to fund all CapEx distributions with internally generated cash flow based on kind of what you're doing today?
Thanks for the question, Kyle. That's what we all live and breathe over here. It's 100% a factor of selling and buying CapEx distressed assets and looking at getting rid of those lower economic cap rates and buying into newly constructed assets with higher economic cap rates. We would like that to be a short-term goal, but it is clearly a function of selling at top value and buying extremely well. We see it as a short to midterm goal with aspirations of getting there as quickly as we possibly can. We're close. We're close now.
Okay. Thank you for that. I will turn it back.
The next question comes from Jimmy Shan with RBC Capital Markets. Please go ahead.
Thanks. Just two questions on the expense side. On the carbon tax, I think it looks like you said for the next three quarters, it'd be roughly about CAD 5 million of savings. What would it be if you were to include Q1?
Yeah. I mean, I can give you the last trailing 12 months, really maybe 2024. That was around CAD 6 million, CAD 6-6.5 million of carbon tax. You can see that you can back into the numbers yourself there.
Yeah. Okay. And then on the OpEx growth with Canadian portfolio, if I strip out the weather-related growth, it looks like it would have been somewhere in the half of that. That's half of the 6% or 7% growth. Would that be your expectation for the balance of the year in terms of pace of expense growth on a year-over-year basis?
Yeah. I mean, I said it back in the Q4 conference call. I expect OpEx growth to be around 5-7%. Obviously, it's 7% if we continue to have really, really poor weather. I do expect the expense growth to moderate into Q2 to up to Q4.
Okay. Then last, on the promotions and incentives market, you mentioned seeing a pretty dramatic falloff into the spring. How dramatic are we seeing? It was CAD 4 million roughly for the quarter. Are we seeing half of that amount? Maybe if you quantify that for us a little bit.
I wouldn't want to put a number on it at this point, Jimmy, but I can tell you that the opportunity to use incentives has been eliminated in the majority of our buildings. There is still an ability to tap in to get deals done in buildings that are experiencing trouble. We have very few properties now that are suffering from acute vacancy. The use of incentives will be minimal at best.
Okay. Okay. Thank you.
The next question comes from Matt Kornack with National Bank Financial. Please go ahead.
Good morning, guys. I just wanted to delve into the 7% new leasing spread a bit more and wondering. I think you guys said you have some color in terms of the components of that. Can you give us a sense of maybe how much of that was negative marks on some of those pandemic rents versus kind of higher mark-to-markets on legacy leases? What kind of components of the turnover each of those make up?
I'd answer that. I'm just looking for my glasses here, but I'm going to ask Julian to read the chart and give you some information. Yeah.
Yeah, Matt. It is interesting to see about half of the turnover now is stuff that was signed in the last couple of years. That was actually on average negative. What is notable is that the turnover rate for the leases signed within the last couple of years is remarkably high, which makes sense because some of those leases now find themselves at or just above market. It is a bit of a tale of two cities where you have got half of the turnover coming from the recent leases negative and then the other half of the turnover being the rest of the leases, which are strongly positive. It shows up, again, with the turnover increases in the high single digits.
As those shorter-term leases that are at or just above market get worked through, we expect it to revert to something a little bit more normal for a portfolio with a pretty significant embedded mark-to-market.
The good news here is that the good news, bad news story is that during COVID and since we've had remarkably low churn. So the number of leases that are exposed to those 30% plus mark-to-markets are very small in numbers.
On that point, do you have a sense of what is the remaining portion of the portfolio that would be at above market rents or near market rents? Because that is the key point to your story is that you've got really low turnover during those high rent periods.
Yeah, exactly. I mean, look, if you look back, we were near 10% turnover for that. And it was a couple of years of it was a couple of years where that dynamic existed, right? You can kind of do your own math on that, but it's not a huge amount. Of course, it's going to dominate the turnover story in the very short term because of those dynamics I explained. The good news here is that the strategy of newly construction with legacy is working perfectly because those new constructed assets are doing what they're supposed to do with higher churn. If we get 40-plus % churn in new construction and rents are strong, that will help this issue. The underlying legacy portfolio, as we said, Matt, has mid-20% mark-to-market rents embedded in there. This will work out.
The combination of being able to access market rents on higher volume turnover and the very high embedded mark-to-market rents in the legacy portfolio are very strong fundamentals.
Fair enough. Turning to margins, and I know there's been this kind of allocation between maintenance CapEx and operating margins. Can you also give us a sense? You've done a lot of portfolio repositioning. I mean, obviously, if you switched old to new, that's margin accretive. You've also sold KeyRez, which is fully consolidated, and that was high margins. I'm not sure where MHC was. After all of kind of this portfolio churn, are you net neutral as to kind of the margin impact, or should we see improved operating margins at some point once all of this is done?
Matt, I mean, if we're looking at the same property basis on the Canadian side, I mean, I kind of spoke about the OpEx growth being 5-7%. And if you work out your math on the revenue side, I believe you're going to see pretty flat margins for the year. Therefore, as we go through the next couple of years, definitely there will be margin expansion as we believe revenue is going to outpace the OpEx growth. I mean, if you combine it on a total portfolio basis, factor in the sale of EREZ with higher margins and sale of the non-core legacy assets, which have lower margins, I believe we're going to be relatively flat there.
I think the mystery or the magic in the math, I should say, is on the MHC as an example, high margins, high 70s, low 80s, but the economic cap rates, back to that, were not what we were looking for for CAPREIT. Again, we're trading off economic cap rates. We could do the margins and do a CAPREIT calculation on an MHC portfolio that we were potentially eating 50% of the NOI with CapEx expenditure or more. I would say that is exactly what we're trying to avoid.
Likewise, in the case of EREZ, high margin assets, but then there's a lot of other issues with repatriating that capital on an ongoing basis and just Canadian pure play focus that as we buy our way into high margin new construction assets, that will have a bit of an engineered effect, if I'm going to say. Yes, we're going to do it organically, but there will be a return to higher margins as we get deeper into the new construction market. The real story, Matt, that I have to keep going to is economic cap rates. Again, we're trading out higher margin buildings with a high burden of ongoing CapEx. What is the economic cap rate is the question that we've been asking ourselves, and we want the market to fully understand this is what we're focused on.
No, that absolutely makes sense. Appreciate that. The last one for me is just, again, on the changing portfolio, you've shrunk in size at this point. Again, it may scale up over time, but how should we think about G&A in terms of kind of a quarterly run rate? Because I know you've done some restructuring along the way. So I'm not sure where that number ultimately will settle. But Stephen, I don't know if you've got a sense as to how we should model it this year.
Yeah. I mean, we've done a lot of work over the past couple of years in terms of optimizing our teams. There are some restructuring that occurred this year really to do with the European office that we had to close off and also some of the MHC-related type of G&A that we needed also to flow through in Q1. Aside from that, I think we're generally, I would say generally, we have completed what we've done on a large scale. Obviously, there might be some things that come in through the year, but generally, I would say a lot of the large restructuring has been completed so far. The one thing I would say, if you're looking at G&A as a run rate, I typically look at it as a percentage of revenues, and I think we've been trending downwards, and that's what our expectation is.
Relative to our peers, we've been probably the only ones who have been doing that, and I think that's something that we should be very proud of. Yeah, I mean, if you look at the current run rate on a four-year basis for 2024, our expectation is that's probably a good expectation, obviously excluding the separate and restructuring costs.
Yeah. Just to put a maybe more specific number on it, is that kind of 5% last year? I think we stripped out a whole bunch of stuff. Who knows what the true number was, but around 5% of revenue.
Yeah, that's right. Going down a little. Yeah.
Okay. Okay. Perfect. Thanks, guys.
Thank you. Our next question comes from Mario Saric with Scotiabank. Please go ahead.
Hey, good morning. I wanted to maybe stick on the OpEx side and just kind of reconciling potential same property NOI growth in 2025 relative to perhaps expectations last quarter, which I think we talked about kind of 4-4.5% was kind of the expectation, i.e., in line with long-term average. The carbon tax maybe adds 100 basis points, give or take, to that all of 2024 or the removal of the carbon tax. I think, Stephen, the 5-7% that you mentioned in terms of OpEx, I just want to clarify that assumes no carbon tax for the rest of the year.
That one was our 5-7% was sorry, Mario. That 5-7% was excluding the carbon tax benefit. With that carbon tax benefit, we'll see it come down. Now, the one thing I would say is we're working really hard internally, and we're looking at all our procurement strategy, sourcing to new vendors, really making it competitive for existing vendors or even a competitive process on the procurement side. We're hoping that we're going to be in the low end of the range. Obviously, that number was excluding the carbon tax benefit. Our expectation, hopefully, is that the OpEx growth would be much lower than what I've said.
We're 100% looking inside. All I'm going to say, Mario, there's never been so much work done on this in our history, and we're already seeing the benefit.
On the OpEx expense side of the discussion, we were feeling quite optimistic.
Okay. So there's some quits and takes here, but if we just go back and think about that 4-4.5% target, same turn why growth for 2025, you did 2.6% this quarter. Is the 4-4.5% still a reasonable number to think about?
Yeah, I think it is. We'd like to think that we can do better than that.
Perfect. Okay. That is helpful. I just want to clarify in terms of the accounting treatment for the incentives. Let's say you provided a CAD 1,500 incentive this quarter. That gets amortized as a revenue credit over the next 12 months or the expected lease term if it is greater than 12 months. Is that accurate?
That is correct.
Got it. Okay. And then the.
It is more expensive.
Okay. The composition of the incentives, I think last quarter, Mark, you were talking about the high recovery ratio or, sorry, the closing ratio by reducing asking rents as opposed to giving a free month rent or half-month rent. Was that similar in Q1? Like earlier, you focused more on reducing asking rents as opposed to giving free rent?
That strategy bled into Q1 and is not the strategy today. We're absolutely focused on optimizing, as I said earlier, that we've got the velocity is definitely showing up in the offices again, and moderation of rents is not on the menu.
Right. No, no. I was just referring to Q1, whether it was a similar strategy in Q1 as it was in Q4.
It was a similar strategy in Q1.
Got it. Okay. My last one, just maybe back to you, Mark. When you're referring to accretive growth in terms of deploying the substantial amount of liquidity and cash that you may have, when you define accretive growth, are you referring to leverage neutral, a full pre-unit growth, or something else?
I am just simply looking at what the portfolio delivers and how we can grow on those averages by acquiring new assets. There is a tilt definitely on this economic cap rate, free cash flow thinking because we are trying to be realistic at the end of the day. If values do not change, which we expect they are going to improve, but if we work on a baseline that they will not, we want economic cap rates on the table.
Okay. Great. Okay. That's it for me. Thank you.
We have no further questions. This concludes our Q&A session today. I'll now pass the call back to Mark Kenney for any closing comments.
Thank you, operator. I'd like to thank everybody for your time today. If you have any further questions, please do not hesitate to contact us at any time. Thank you again, and have a great day.
This concludes today's call. Thank you for joining. You may now disconnect your line.