Hello everyone, and thank you for joining the Canadian Apartment Properties s econd quarter 2025 results conference call. My name is Lucy, and I'll be coordinating your call today. During the presentation, you can register a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two. It is now my pleasure to hand over to your host, 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, and good morning, everyone. Joining me this morning is Stephen Co, our Chief Financial Officer, and Julian Schonfeldt, our Chief Investment Officer. Let's get started with an update on our achievements so far in 2025, as highlighted on slide four. To date, we've sold CAD 274 million of non-core underperforming assets in Canada, with the lowest cash returns, and we've completed or committed to approximately CAD 743 million of dispositions in Europe. We've reinvested CAD 165 million of the net proceeds into the acquisition of well-located, high-performing, low-CapEx Canadian properties, and we've reinvested CAD 187 million into our value-enhancing NCIB program. We've also been extremely focused internally on improving our operational performance. On our Canadian same-property residential portfolio, we've increased occupancies to 98.3% as of period end, across which our average monthly rent grew by 5.2% since June 30th, 2024.
We've made meaningful strides on the expense side as well, and we've been working hard to contain and reduce controllable expenditures in all areas of the business. These improvements together drove the 40 basis points expansion in our same-property NOI margin to 66.3% for the second quarter of 2025. Additionally, our balance sheet fundamentals remain best in class, with low total debt-to-gross book value ratio of 38.5% as of the current period end. With that initial overview, I will now turn the call over to Julian to expand further on our capital allocation programs.
Thanks, Mark. Turning to slide six, you will see all the work we've put in the repositioning of our portfolio, not just this year, but over the course of the past several years. We now have 16% of our portfolio represented by new-generation apartments in Canada, up from only 5% as of December 31st, 2019. Over the same period, ancillary segments are down from 17% allocation to 5% as of today. Subject to the completion of all committed and pending dispositions in Europe, that exposure would go down to only 2% of our consolidated portfolio, all else held equal. In addition, as announced by European Residential REIT, a sale process is launched for the balance of the portfolio, with the goal of surfacing its residual value and distributing the proceeds net of wind-up costs to investors.
With this progress on our European divestment strategy, we're excited to be moving much closer to our vision of returning to a pure-play Canadian apartment . On slide seven, we provide a visual snapshot of our portfolio. On the top right, our recently constructed properties come with strong cash flow profiles arising from largely unregulated rents that still contain embedded mark-to-market potential on acquisition, combined with low capital expenditure requirements and operating costs. Their prime, highly sought-after locations also enhance our geographical diversification and the quality of our resident base, with improved affordability characteristics that reduce our political and reputational risks. These properties represent the ideal complement to the stable long-run rent growth trajectory produced by our core legacy assets, which still account for the majority of our total portfolio at 67% today.
We're also continuing to dispose of our non-core properties, which generally have the weakest economic returns with regulated rents and low cash flow yields. This repositioning is not only improving the overall quality of the CAPREIT portfolio, but also our income profile and net cash generation. Turning to slide eight, our NCIB also remains a key strategic tool, allowing us to invest in our own portfolio and earn a stronger return over acquiring comparable assets in the private market today. In 2025, we reinvested CAD 187 million of our own net disposition proceeds to buy back CAPREIT's trust units at a weighted average purchase price of approximately CAD 43 per unit. This represents an average 24% discount to our diluted NAV per unit of CAD 56 as of June 30th, 2025, demonstrating the sizable disconnect that we're arbitraging to generate higher earnings for our unitholders.
With that, I will now turn over the call to Stephen to expand further on our operational and financial results.
Thanks, Julian. We've been working on recalibrating our rent optimization and vacancy mitigation strategies in response to some short-term market-driven headwinds, and in doing so, we're pleased to report that our residential occupancy in Canada is up again to 98.3% as of June 30th, 2025. At the same time, occupied AMR on the total Canadian residential portfolio was up by 7.4% to CAD 1,693 as of June 30th, 2025. This not only shows sustained demand for professionally managed rental housing, but it also demonstrates that our flexible and proficient operational strategy is working. Turning to slide 11, with focus on maintaining high occupancies while optimizing rent growth, our same-property offering revenues were up by 4.4% for the current quarter.
Furthermore, we're pleased to have successfully mitigated the magnitude of cost increases which we were seeing at the outset of the year, and for the three months ended June 30th, 2025, operating costs as a percentage of operating revenues decreased versus Q2 of 2024. This was in part due to the elimination of the federal carbon tax effective April 1st, 2025, which lowered overall utility costs. In addition, repairs and maintenance spending was down, resulting from more competitive procurement practices and the implementation of more rigorous cost control measures while not compromising on quality for service standards. The result was the expansion of our NOI margin by 40 basis points to 66.3% on the same-property portfolio. This organic growth contributed to the 2.6% increase in our diluted FFO per unit to CAD 0.661 in the current period.
However, it was the accretive trust unit repurchases and cancellations under our NCIB program which mainly drove this increase in earnings, as well as, to a lesser extent, lower interest expense partly offset by decreased NOI due to dispositions. Results for the six months ended June 30th, 2025 are shown on slide 12. As mentioned, operating costs as a percentage of revenues were up during the first few months of 2025, and our margins are therefore down year to date despite our strong performance in the second quarter. Combined with the loss NOI due to disposed properties partly offset by lower interest expense as well as trust unit buybacks, our diluted FFO per unit was CAD 1.246 for the six months ended June 30th, 2025. Turning to our financial position as summarized on slide 13, we continue to boast one of the strongest balance sheets in our peer universe.
Our total debt-to-gross book value ratio remains low at 38.5% as of period end, which is down considerably from 41.5% as of June 30th, 2024. We take a conservative approach to managing our mortgages with staggered renewals and fixed interest costs, and we actively adjust the maximum borrowing capacity we have available on our acquisition facility in order to reduce financing fees. Most recently, on July 9th, 2025, we strategically increased capacity from CAD 200 million-CAD 400 million effective until September 30th, 2025, to temporarily fund acquisitions, capital investments, and for other general trust purposes in anticipation of incoming capital from E RES' expected special cash distribution in September 2025 associated with its upcoming dispositions. This disciplined approach to debt financing provides us with the ability to efficiently manage our portfolio while capitalizing on available market opportunities that maximize value for unitholders.
On that note, I will turn the call back over to Mark to wrap up.
Thanks, Stephen. The past few months have been incredibly productive across every facet of the business, and the solid results we achieved during the second quarter of 2025 underscore the success and the merits of our strategy. That strategy is focused on high grading the quality of our Canadian portfolio, improving its operational performance, and investing in our value-enhancing NCIB. On top of these initiatives, we have one overarching priority, and that is our cash flow position, as highlighted on slide 14. All of our strategic objectives are ultimately working together to boost the generation of free cash flow and bring us closer to one day funding capital expenditures and distributions entirely through our FFO, and that in turn drives stronger growth in earnings for our unitholders.
We are well on our way to achieving that in the near future, and we have never had a better team in place to make it happen. With that, on slide 15, I would like to thank all of our unitholders for their ongoing support as we continue working to enhance the future of our residents, our people, and our investors. We would now be pleased to take your questions.
Thank you. To ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. The first question comes from Fred Blondeau of Green Street. Your line is now open. Please go ahead.
Thank you, and good morning, everyone. Looking at the new supply, how do you compare Toronto, Montreal, Vancouver over the next 18 months or so? Is it fair to say that it looks like the GTA is a bit more immune when compared to Montreal and Vancouver? It looks a bit more risky. Is that fair to say?
Yeah, it is fair. I'll give it some CAPREIT context, Fred. The problem is the most acute in Toronto, but CAPREIT is the least affected, I'll say, by that supply in Toronto because it's primarily in the Toronto core and primarily a preponderance of bachelor and one-bedroom condominiums, which we're not competing with CAPREIT's portfolio is extremely suburban, large suites, and built for affordability. I would say secondly, we're seeing obviously the effects of supply in Vancouver, where it's affecting us a little bit more because that's been a primary focus zone for CAPREIT's new construction investment program and high grading, and we've been able to, you know, obviously buy some exceptional assets, albeit not in the core, but still there's competition there.
I would probably say Montreal ranks third, but that's a market for us where, again, we've invested in high-graded assets but have a nice blend of legacy assets, and we're, if anything, we're quite bullish on the future there. I think you've got a good read on the market, but that's where CAPREIT sits today.
That's totally fair. Last one from me. How long do you think landlords will have to provide incentives on new builds in those three markets, Toronto, Montreal, and Vancouver?
I don't think there's a playbook. At the end of the day, we are finally getting our heads around this very complicated market. I would just start off, Fred, by saying we are in a housing crisis, but we are now more in an affordability crisis, okay? The real driver of weakness in the housing market is not immigration, in our humble opinion. It's got more to do with unemployment and wage issues as there. This is what finding the fine balance is. Incentives are still being used in the marketplace, and we have to use them where we're competing, albeit not as much, but people are reacting more to the sticker price of the unit. When you hit that right affordability spot, we're finding a very, very deep market in Canada.
It's really now more about an overall affordability crisis in Canada more than it is a supply issue and its impacts of immigration. We're just not seeing that.
What would be your scenario on this affordability crisis? Do you think it will still prevail in 2026, or do you think it's longer or shorter?
I think the effects of tariffs are not fully absorbed into the Canadian economy. I am not an economist, but we're watching closely. That's not a tailwind. I would characterize that as a headwind. I think our portfolio is exceptionally well positioned to deal with any sort of economic downturn. We all know that apartments thrived in economic downturns, so that would be a tailwind. I think that right now the market has found stability. There's good leasing activity in the summer. We think that's probably a sign of people being concerned about the housing market, and that will tilt in our favor. I would expect a sort of steady state as we go into at least the next six months. Looking at any further than that is pretty much guessing.
Yeah, no, totally agree on that. Thank you for the caller. I'll turn it back.
Thanks, Fred.
The next question comes from Mike Markidis of BMO . Your line is now open. Please go ahead.
Thanks, Operator. I could not notice that your incentive activity, just in terms of an aggregate dollar amount, declined fairly meaningfully, quarter over quarter, at least versus Q1. I was wondering if you could just comment, was that a change in strength in the market, or was it just a change in terms of how you were adjusting your actual face rents?
That is a great question. We have been kind of going back to the last question, trying to find that affordability sweet spot. We're getting definite feedback that incentives on their own are not effective fully. We are in situations where there are housing providers offering multiple months free rent to get traffic in the door, and we return volume with one free month's rent, but not in all properties. Our focus is definitely around finding occupancy stability as we go into the winter months. The trend is positive. We are definitely seeing a more active market than we did in Q4 and even in Q1, and I'm feeling relatively optimistic about the stability of the market.
Yeah, I'll just say that in terms of when we looked at the incentives, they're targeted buildings, and we're obviously trying to be competitive within the region or in that area. Those incentives have come down dramatically. Obviously, we have adjusted the market rents as well to reflect that, which is why you also see occupancy coming up. They're mainly in select targeted buildings across the nation, but they're coming down compared to Q1.
Okay. Just the last one for me before I turn it back. I guess we're in August now. It seems like you feel like things have stabilized. I'm just trying to get a sense of, I guess, the early read on Q3, just how the new leasing spreads have been trajected.
Yeah, I would, again, that stability is the underscored word we're using here. I would just remind, like we have this issue of COVID leases that are still bleeding off, and those COVID leases we're seeing neutral to negative spreads and seeing extremely encouraging spreads on the non-COVID leases. Using the word, I think, stable would be the direction I would give you, Mike. I'm pleasantly surprised. We weren't sure what the effects of unemployment were going to actually be, and I think it's being offset by this concern around the state of the housing market, which is the typical first few innings of a housing shift. You see people starting to go into rental as a safe haven. That part is good.
Okay, just one commentary there. I'll put it back.
Thanks, Mike.
The next question comes from Jonathan Kelcher of TD Cowen. Your line is now open. Please go ahead.
Thanks. Good morning. Just to stay with that on the lift on turnovers at 4.6% in the quarter, is that when you say stable, is it like, so we should sort of think about 4% - 5% on turns over the next few quarters?
Yeah, that would be a fair assumption based on our comments.
Okay. Fair enough. Secondly, just a little modeling one, but there has been a lot of noise in your G&A the last few quarters. How should we think about a run rate going forward there?
Yeah, Jonathan, so obviously, there have been some structural changes within the organization. We're looking at our teams, and we're trying to optimize to make sure that it's set up for success. When you look at the G&A numbers, what we've done in the financials or the MD&A is we separated between trust expenses and reorg costs. Those reorg costs are what we consider non-recurring, and hopefully, we won't see that going forward. We're still going through our structural review, but we don't hope to see that going forward, at least for the next, you know, Q4 onwards. If you're looking at it for modeling purposes, I would say what we've provided is a percentage of our operating revenues. I think that 5%, around 5%, is a good modeling for going forward.
You know, CAPREIT's become a smaller unit count entity, albeit the rents are higher in the new construction buildings, but we are really digging internally. Julian had talked about the capital allocation change, and to match that, we have to optimize our overhead costs. We're being very mindful looking forward into this new stable period of slightly lower mark-to-market rents. We're going to get the overheads exactly optimized to have great stable state going forward. We've made a lot of progress to date. There is not much more to do. Yeah, we're very excited about the improvements that have been made there.
Okay, that's helpful. I'll turn it back. Thanks.
Thanks, Jonathan.
The next question comes from Sarim Serenidis of Cormark Securities . Your line is now open.
Hi, Operator. Good morning, everybody. Mark, just going back to your comments on incentives, affordability, how do you overlay that onto the acquisition strategy and the opportunities you're seeing out there for acquisitions of data between long-term opportunity and short-term costs over there?
Yeah, that's a great question. The team does a lot of work and due diligence around market rents, and in many cases, it is hard to determine because you may have a new construction asset surrounded by no real purpose-built competition. We use the data comparisons that we have in every market and get comfortable with where things can be at. We, of course, look at the incentives that are being offered in the market and put that also into place. In many cases, the investment team will come to an arrangement in the short term on what incentives are required. Julian, maybe you can give some color on that.
Yeah. I mean, one overarching point that I'll mention, and I know Mark, Stephen, and myself have mentioned this, but oftentimes, these types of buildings are actually the most affordable ones because the income of the tenants in there can be quite a bit higher. The rent increases you put on there stretch their affordability a lot less. I'll also say that we look across the whole spectrum of potential acquisition opportunities, but even looking at some of the acquisitions that we have done this year so far, I look at the Beacon, McLaren, Mondev. Those buildings were all buildings with rents in the CAD 3 per square foot range, which is still quite affordable, I'd say, for new construction. Many of those actually had embedded lost leases or gaps between in-place and market rents.
We are very tactical about trying to avoid getting the micro suites that are in the CAD 6 per foot range. It doesn't mean we don't look at everything, but again, we think that we've got good properties that are affordable to the tenants in them, even AAA locations, as well as a couple of small legacy buildings that we bought in Vancouver in just exceptional, exceptional AAA locations with rents that are also quite affordable.
That's really good conversation, Mark. Thank you for that. Maybe just quickly on, I think earlier in June, I guess you guys put out a small release on potential developments that you could probably see or densification in the portfolio. Is that something that could be a part of the capital allocation program?
I'm going to let Julian talk to that, but we were so, so excited about this. I'm really glad you've brought this up because I really will take every opportunity I can to kind of better describe what's going on there. Of course, development almost has a negative connotation to it, especially in Toronto. What the investment team and development team put together here is really exceptional, where we did this with no parking costs because we're utilizing the parking in an adjacent building, no development fees, no land cost, wood frame, and we're doing it with political support. We have the Mayor of Mississauga applauding us for adding new supply. We're proud to add supply for families in Canada. It's penning out to a very, very attractive cap rate.
I don't want to steal all the thunder on this, but Julian, if you could give some more color around how incredibly positive that announcement really was.
Yeah, it's great. We think we can build that all in, all costs total for, call it around CAD 500 per square foot, which you can't get anything new in the GTA for that cost. It's for all those reasons Mark mentioned. There's an incredible amount of incentives and synergies in there. We're going to be doing it at an incredible NOI margin because we don't really have any staff that we need to use. We can use them from the existing high-rise tower. You don't really have incremental landscaping and snow removal, those types of costs for sub-metering, everything. I want to say like development's not our primary business. We're not converting to a developer. We're not going to be a REIT where you're going to look at it and say, "Wow, there's that huge percentage of assets under development." This is small tuck-in stuff that's incredibly accretive.
By the way, for this low-rise wood-frame stuff, it's very quick and a very small amount of capital in there. Given all those synergies and incentives, there's enough margin that it'd be really hard to get in trouble with that. It helps renew the GTA portfolio because the point that bears mentioning is there isn't really much purpose-built rental to acquire in GTA because it was all historically done as condos. There's a little bit that was done as purpose-built rental by some owners that were long-term owners. Again, small, fast, low cost, tons of margin, just a nice, neat tuck-in.
A wonderful cash-flowing property. Getting back to the cash flow story, this, as Julian said, brings renewal to the portfolio. We will not be able to buy new construction assets that were built with pre-COVID contracts forever. We were always noting that new construction opportunity would be a moment in time in the marketplace. We've got our eyes to better cash flow. We've got our eyes on these AAA locations. At the end of the day, we are fixated on renewing the quality of the portfolio. Cash flow improvements are here to stay for the long term. It marries in very nicely to the overall arching strategy, but it really is for CAPREIT all about AAA locations, well-cash-flowing properties, and high grading the quality.
That sounds really exciting, guys. Just to clarify, that CAD 500 per square foot number is excluding all the incentives and synergies you're seeing there?
The CAD 500 is the approximate estimated cost of all the hard costs, all the soft costs, financing costs divided by the leasable square feet. It's all inclusive. We couldn't acquire anywhere near that cost. We're estimating it's going to be north of a 6% cap rate on our costs. By the way, that's with rents that we're saying today are sub CAD 3 per foot. We think we're being pretty conservative in a lot of our estimates to get to that. We're not the type of folks that are going to do development for a 25 or 50 basis point spread on a current cap rate. We're doing this because there's a really huge margin and just tons of reasons. It's very modest in size, but great opportunity.
It might be helpful, Julian, if you just comment on what purpose-built rental concrete is costing developers as they're today on a per square foot basis for context in the Toronto problem.
Yeah. Actually, I was just on the phone with a pretty prominent developer a couple of days ago, and we were trading numbers on a few things. He was telling me that one of the projects they're underwriting right now, without any land value in there, the cost when dividing all the costs by the leasable square foot for concrete was in the CAD 900 per square foot. That was without a profit or without land value, which, to be honest, you'd be building at a loss with a huge timeline, a lot of risk, and a ton of capital. For us, we view that as completely unviable and something we don't like. This stuff, again, 12 months- 18 months construction period, around CAD 500 per square foot and very little risk.
That was a very good call, Julian. Mark, thank you so much. I'll turn it back.
The next question comes from Kyle Stanley of Desjardins. Your line is now open. Please go ahead.
Thanks. Morning, guys. Maybe just going back to your optimization commentary from a bit earlier. Now that you're approaching the end on the ERES value maximization program, it seems like a lot of the heavy lifting on the capital recycling front in Canada is finished. Where does management focus efforts next to find that next leg up or that extra value to add?
Yeah, it's ruthless internal optimization. At the end of the day, on all fronts, like it's the team we have the best, like I said in the commentary, we have the best team that we've had that I can remember. Operational excellence is the focus of everyday conversation. Tensions are extremely high internally because we are digging very, very deep. This feels like the CAPREIT of many years ago, quite frankly. We are digging right in and looking at everything. Everything is under review. I think we're seeing the results, but we're very excited about how our cost structure is looking going forward. Every day is revealing more good news in terms of opportunities that we can harvest.
Okay. No, that makes sense. Thank you for that. Maybe just looking at the performance in your Southwestern Ontario portfolio, it did look quite strong in the quarter with the same property up 13%. Anything specific you can call out there that's contributing?
Yeah, there were some lower R&M costs that was on it. Like, I guess, you know, we're really, I guess, kind of talking to what Mark was saying, operational excellence, looking at our contracts and looking at costs, cost containment, and even looking at procurement effectiveness strategies. We were able to manage some of the R&M costs while we did have higher operating revenues. Partly, there were some, you know, AGIs that were included in there that were helpful. That drove the performance in Q2.
Okay. Thank you. Just the last one, can you comment on maybe how active you expect to be on the transaction front in the second half? More specifically, has the level of acquisition opportunity changed at all maybe over the last quarter or two? Are you seeing any changes on seller pricing expectations, just given maybe this softer market outlook that we've been talking about?
It's a fantastic question. I'll let Julian handle it. I want to just, again, sort of footnote our opportunity to find new construction buildings that were built with pre-COVID contracts are obviously coming, they're slowing down. Not that we're not doing them, they are definitely slowing down. The team has done a phenomenal job. This whole AAA location, AAA quality, optimization, synergy is definitely something the team is looking at. Julian, can you comment on some of the challenges even?
Yeah. I'll first answer, Kyle, your question on the plans for the rest of the year. We still target doing, as we put in there, that we're targeting dispositions of CAD 400 million on the Canadian side. We're still planning on achieving that, and we think we will. As it relates to acquisitions, we're going to try and match those proceeds, see if we can do a little bit more, particularly given the repatriation of the European capital. As Mark mentioned, there are other competitors now, you know, quite active on the new construction side. There's always a bid-ask spread just given the construction cost, like to the point that actually we made in the last question. The construction costs are worth more than what the buildings are worth. That's never a fun discussion with a vendor when you're telling them it's worth less than what they put in.
We do tend to try and look at ones that were done pre-COVID. Those are around, and our team's working hard hunting for them. Another point I'll actually make is I'd say for most of the acquisitions we have, it takes almost, I don't have a stat, but probably close to a year to make it work. Really what ends up happening is they come to market, you underwrite it, and you tell them what it's worth. They don't believe it. They go and test the market out. There's a lot of waiting and back and forth and keeping those relationships up. It's a lot of work. The team is hard at work on it, but there is a bit of competition. We'll keep going with it. We feel good about being able to match our dispositions this year.
We're hopeful to be able to potentially do a little bit more, and we'll continue going with it. We're on a mission to high grade the portfolio, AAA locations, and you know, we feel good about that.
I'm exceptionally proud of the team for the discipline, and we will remain disciplined. This high-grading exercise is extremely exciting, but it is being constrained by discipline, and we will continue to balance the difficult market with discipline and keep CAPREIT unitholder value first and foremost in mind.
Okay. Thank you for that. That's a great caller. I'll turn it back.
The next question comes from Jimmy Shan of RBC Capital Markets. Your line is now open. Please go ahead.
Thanks.Q I just have two questions. One, just to clarify your answer to the question on sequential decline in incentives. Does that have more to do with you dropping the face rents versus you not having to provide the incentive because of market conditions? I guess that would be the first question. The second one is, I know the turnover rate did pick up in the quarter. How do you see that trending over the next few quarters?
Hey, Jimmy. To your first question, yes, it has a lot to do with the, you know, we brought down the asking rent. Therefore, it made it more competitive. Therefore, you'll buy less incentives. I guess in general, like I kind of pointed out, we try to be competitive around the area for our buildings. If others are offering incentives with similar market rents, then we obviously have to adjust. That part is where we're looking at. In terms of the turnover uplifts, I'm sorry, turnover, they are increasing as market rents are, you could say, now more stabilized and have declined year- over- year. We have seen a higher turnover. I would say if you look at Q2, that's a fairly good projection for the rest of the year.
That is the good news that we were hoping for. As rents moderate, you loosen up the churn numbers, and you can actually get to a better end result. That is healthy for the market. We're encouraged to see that, actually.
5% was the turnover. You're thinking potentially we could be at a 20% run rate on an annualized basis?
That's the information we have. I think that's possible. Yes.
Are there any discernible sort of trends in terms of where those turnovers are happening?
Yeah, the majority of those turnover that we know is 50% are, and Mark kind of touched on it, and Julian touched on it previously, it's on those COVID leases. They're more one under two-year leases where the rents are quite high, obviously, relative to today's market rents. Those tenants are taking advantage of, you know, moving out and obviously getting a better rent deal.
Our story, too, Jimmy, is a little bit now becoming a little bit different than our peers in the sense that the new construction portfolio will be churning higher numbers, and those market rents that are there will adjust to market. That's the positive attribute. Those are also holding up relatively well, but I call them stable. It's really the legacy AAA locations that are fueling our growth more than the market rents on new construction. Within the legacy portfolio, we have this COVID lease turnover phenomenon that is slowing and we think coming to an end. That will be positive for the legacy portfolio contribution.
Great. Thank you.
The next question comes from Matt Kornack of National Bank Financial. Your line is now open. Please go ahead.
Hey guys, just a quick follow-up on that last thought. Do you have a sense of how many of those leases existed and kind of what proportion of them you've churned through at this point? Just trying to get a sense because the mark-to-market, I think you guys would say within your portfolio is well above what you're getting on new leasing spreads. I'm trying to understand the timeline of what maybe reverts back to a more normal growth rate.
We're not giving the actual number at this point, but I can guide you around the period of time that we were seeing mark-to-market rents in the + 25% range. That lasted for multiple quarters. You can look back in time and see that. Those lease expiries are shorter in duration, and those are the ones that we're working through now. It's a little bit complicated because we have the new construction portfolio in there, and then you have new leases, obviously, as we've talked about, coming to market. We had low churn during that high mark-to-market rent period. That churn is not exactly—we have higher churn today, which would reveal more legacy leases coming to market. A little confusing, Matt, but it's really looking back in time, and you can kind of see with short duration how long it would take to bleed out.
Yeah. I mean, if I look at it, it looks like it was five quarters of that 25% -3 0% range. You've had kind of two depressed levels, with higher turnover. I guess maybe beyond that, maybe there's two or three more quarters left of this. Do you expect the environment coming out of this to look like 2017 to 2020, where you were getting kind of 10% - 15% spreads? Or are we in a kind of 2010 to 2015 where you had low single digits in terms of spreads and renewals?
Without providing guidance, because we can't, and you know the market is in a period of transition, definitely. Your assumption and your thought process aligns exactly with ours. Once we don't have the negative impact of COVID leases, you will see a jump. It won't be a market jump. It will just be the impact of the COVID leases going out. I'll let Stephen provide a little bit more color as well.
Yeah, Matt. I think when we looked at our data, it's, you know, we think it's like we kind of spoke about it. Twelve to eighteen months will be kind of how we roll out of the COVID leases that have a, you know, a, you could say, negative turnover uplift. That represents currently like 50% of our turnover are those types of leases. It will take a little bit of time. To Mark's point, once we get all those COVID leases, we have that very strong mark-to-market embedded growth of those longer-term leases that will then show its form. They're currently in there. When you blend it all out, it doesn't look as strong.
Yeah, I think, Stephen, just so that we're clear on the 12 months- 18 months, that's the duration of tenancy that we would expect from those COVID leases. You could look at the quarters of bleed, and we haven't gotten in on that either, but this wasn't the first quarter this started happening. This started happening probably two, three quarters ago, and we're working our way through that period of time. If you thought it was five quarters of those kind of numbers, you'll see about five quarters of the bleed out.
Okay. That makes sense. It's logical, and we'd expect it to improve. An area of improvement this quarter, Stephen, on the margins, and I understand that you guys are focusing on costs. Should we expect you've had kind of two quarters of R&M? I understand the portfolio is changing, but in that, call it, mid-40% range, is that where the back half of the year and with normal growth, what we should expect is a normal number for this portfolio, understanding that the portfolio could change?
Maybe I'll just focus on the OpEx side. I mean, that is, you know, what you see in Q2 is hopefully what we'll see in the rest of the quarters for 2025. We are, again, as I pointed out earlier, and Mark has alluded to, we are looking internally, looking for operational excellence and really, really focusing on getting the best procurement practices and being very effective with our tendering. Hopefully, we can also contain costs, obviously. Therefore, on that other operating cost line, you'll see not as a big increase relative to prior quarters.
Okay. I guess there hasn't been a corresponding increase in CapEx, so presumably, you're also continuing along on keeping that spend relatively low, number as well, a fair amount of percentage.
Thank you for bringing that up, Matt, because that's the strategy we've been talking to the market about. The capital allocation program towards newer construction, low CapEx assets is definitely playing a role there. The operational excellence is definitely what we're focused on. Even in the CapEx number, I can let Stephen talk about some of the interesting categories to bear in mind.
Yeah. Matt, I mean, there are some increases in CapEx, particularly in energy and conservation. That actually has a positive impact both from a revenue perspective if we were to either apply for an AGI or not, and also on an expense side where you have lower energy consumption. This is something that I think the math really works well because obviously it meets, it should, it always meets and is above our hurdle rate. Therefore, you know, we'll make those investments as necessary. That is the only part that I would say that you'll see a higher increase in capital expenditure. Again, they have a payback.
Give back that. It's even better. That's all Stephen drove it.
Okay. Fair enough. I appreciate the call, guys.
We take our next question from Mario Saric of Deutsche Bank . Mario, your line is now open. Please go ahead.
Hi. Thank you. Good morning, guys. Just a couple of kind of, I guess, rapid-fire questions. Coming back to the incentives, how would you characterize the CAD 2.6 million that you offered during the quarter? How did that compare to your internal expectations for the quarter back in May?
Sorry, you were saying, how does it compare to—I missed that word there.
Yeah. Like back in early May, what was your expectation for the incentive level for the quarter relative to the CAD 2.6 million that you provided?
Yeah. I think when we look at what our expectation was in May, where you know we have a lot of uncertainty around tariffs and market rents, I think there's a little bit more visibility and clarity around that. We have adjusted our market rent down.
Hello? Are you, Mario still there?
Yeah, I'm still here. I'm just listening to the musical instruments.
Oh, okay. Sorry. It looks like we're in a nightclub. Sorry. You'll hear the music turned on. Our expectations are much lower now in terms of where we've heard the incentives are given in Q2, and hopefully, Q3, Q4, it'll be a lot lower as well if market rents have stabilized.
Sorry. We apologize. We don't know. Operator, what's going on? We haven't got a clue. Thank you, Operator. I don't know what happened there. Mario, did you get that answer?
Yeah, I did. Just on the back of that, your occupancy is up 30 basis points sequentially to 90.2%. It's been higher in the past, but not by very much. Is there a target occupancy that you want to hit before you really start to kind of taper those incentives, or are the incentives seeking a function of what others are doing in the market? Do we have to wait until the spring season next year when seasonally strong demand starts picking up again in order for the incentives to get?
Yeah, it's definitely the latter, Mario. We're not doing macro strategy. Definitely, I mean, kind of just literally building by building and local competition more than macro competition. I don't think we'll have to wait till the spring. We're getting a sense here, just as we move month by month, we're making rapid change. As Stephen said, it's highly focused in certain properties. As those properties fully stabilize and the competition adjusts, then you can see a quick drop. We're dropping and changing, obviously, by month, but because we're amortizing incentives over 12 months, it is a burn period. Immediate changes are kind of still with us for the next 12 months, but the trend is generally downwards. It's so difficult at this stage to predict the state of the market given tariff discussions, impacts around that kind of thing.
What we're seeing is good traffic flow, good lease conversion, a market that is definitely still alive and well. It's literally a matter of trying to figure out the effects of unemployment rising on affordability and immigration, which is to a lesser extent our problem, and the fear of the housing market crisis, and that which does draw people into our product. It's definitely a volatile period of time in a macro sense, but in terms of the CAPREIT portfolio's experiencing, it's stable.
Are you still kind of seeing occupancy uptick in July into August, or is it too early to say? Are you starting to see your asking rents stabilize or even increase a little bit in Q3 thus far?
Yeah. Our occupancy is in pretty good shape. It's optimal for where we would like it to be. It's the COVID lease drop-off phenomenon that we've been discussing. That will really, I don't want the market to think there's some sort of rapid change in the marketplace. It's literally a matter of leaning out those plus 25% mark-to-market leases and allowing more room for the legacy rents to kind of settle in. I think that without a change in the market, you're going to see positive outlook on that front because of the COVID lease bleed-off.
Okay. Last question. I know your exposure to students is relatively low, but in your kind of student-oriented buildings, any initial thoughts on kind of student demand heading into this school year relative to last year?
No, we're in university markets that are in pretty good shape, and more domestic students than I'll say foreign students. We have nothing to report of alarm there in any sort of material way.
Great. Okay. Thanks, guys.
Thank you, Mario. We take our next question from Dean Wilkinson of CIBC. Your line is now open. Please go ahead.
Thanks. Morning, everybody. Mark, this might be a bit of an esoteric question. When you look at a new CAPREIT residence, can you give us a sense of where are they coming from? Like, are they coming from condos specifically for price, or are they coming to CAPREIT because they are now recognizing the value of a stable landlord who might not sell their unit or rent evict them or something like that? Like, where are the people coming from?
That's a great question. I would report no real change in the demographic of who we're seeing. As the portfolio gets newer and the market rent buildings take a bigger position within CAPREIT, we're obviously dealing with more young professionals, high-income earner young professionals. That is why, as Julian pointed out earlier, those are the most affordable units we have in the portfolio, the markets that attract those young professionals. Those same young professionals, Dean, are in a very bizarre environment where they can't afford to buy homes. Our predominant buying has been in BC, but the Ontario story to me is incredible. The average age of a first-time home buyer now in Ontario is 40 years old. People are well into their professional careers at 40 and with no real outlook to be able to afford to buy a home.
The affordability crisis, interest rate environment is keeping young people out of home ownership, which is really sad for our country. That is why we see opportunity in that part of the market. In terms of the legacy portfolio, it's the same people, maybe those people, like families, for the most part. For those people, again, home ownership has become a little more scary, and it's become a little bit more unattainable.
Okay. Yeah, that helps. I know my own two young professionals are lamenting that they'll never own a home, and they're happy renters. Thanks for the caller. I'll turn it back.
Yeah, thanks, Dean.
We have no further questions in the queue, so I will turn back to Mark Kenney for any closing remarks.
Thank you, Operator, and apologies for that music interlude we had, but we got beyond that somehow. I'd like to thank everyone 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. You can now disconnect your line.