Good morning. Thank you for attending today's Canadian Apartment Properties REIT's Third Quarter 2022 results conference call. My name is Alexis, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your keypad. I would now like to pass the conference over to Mr. David Mills. You may proceed.
Thank you, Alexis, and good morning, everyone. 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, and 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 our regulatory filings, including our annual information form and MD&A, which can be obtained at SEDAR.com. I'll now turn things over to Mr. Mark Kenney, President and Chief Executive Officer. Please go ahead, sir.
Thanks, David. Good morning, everyone, and thank you for joining us. Stephen Co, our Chief Financial Officer, is with me this morning, as is our Chief Investment Officer, Julian Schonfeldt. You may have noticed on our opening slide that we're celebrating our 25th anniversary as a publicly traded REIT. Founded in September 1997, CAPREIT has grown to become Canada's largest REIT with assets exceeding more than CAD 17 billion. I'll have more to say about this significant milestone later in the call. Turning to our results on slide four, it was another solid quarter for the REIT, with revenues and NOI up on strengthened occupancies, higher average monthly rents, and the contributions from our acquisitions over the last 12 months. FFO was flat, primarily due to inflationary cost pressures. Turning to slide five, our results for the first nine months of 2022 remain solid.
Again, strong occupancies rising to 98.1% from 97.9% last year. Higher monthly rents and portfolio growth continued to drive increases in revenue and NOI. NOI and FFO continued to be impacted by the increased costs we are experiencing. Higher maintenance costs, the increase in utilities, and higher realty taxes. We believe such inflationary cost pressures will continue to impact the results over the next few quarters, and we are employing a number of programs to mitigate these inflationary pressures. In May this year, we began purchasing our trust units for cancellation under our approved normal course issuer bid. As of the end of the third quarter, we have purchased approximately 4.4 million units for an aggregate purchase price of CAD 202 million.
We believe, given that our units are trading at a significant discount to our net asset value of CAD 56.44 per unit, that these purchases are another way we are enhancing long-term value for our unit holders. From an operations perspective, coming out of the pandemic, we are now seeing near full occupancies and growing revenues across our stabilized portfolio, as shown on slide six. Occupancies improved again in the third quarter, while net average monthly rents continued to increase. As I mentioned, we are also exploring a number of ways to mitigate the inflationary pressures on our cost structure, including fixing our price and transport costs for the natural gas we use and increasing hydro sub-metering in our Canadian portfolio.
As of quarter end, approximately 65% of the total 59,683 suites in Canada are sub-metered or directly metered. Additional suites and sites have sub-metering or direct metering in place that will be assumed by new tenants on turnover. We continue to evaluate implementing sub-metering in all of our remaining suites and sites. Sub-metering lowers cost consumption, resulting in a smaller environmental impact, lowering operating expenses and lower inflation exposure. Our leasing and marketing programs continue to generate increasing occupancies and average market rent, as you can see on slide seven. After two years of operating under significant pandemic restrictions, our occupancy continues to strengthen, rising to 98.1% in the third quarter, up from 97.9% last year.
You can also see that rents for the total portfolio have risen 3.4% compared to the same time last year. Tenant incentives are continuing to decline to pre-pandemic levels, and we expect a majority of the amortization to be completed by the end of the year. It is interesting to note on slide eight the positive trend in rent increases on turnover we are generating since we bottomed out at the height of the pandemic in Q1 last year. Looking ahead, we are experiencing more in-person and online visits, and we expect we will start to see more and higher mark-to-market rent increases in the quarters ahead. I will now turn things over to Julian to outline how we are repositioning and strengthening our property portfolio.
Thanks, Mark. Turning to slide 10, we continue to focus on increasing the quality of our portfolio through our active asset management program. Through 2021, our strong acquisitions team added 3,744 high-quality suites and sites to our portfolio, focusing on our key markets with another 1,537 suites and sites acquired to date in 2022.
Importantly, the majority of our acquisitions represent new build assets in strong targeted geographies. These new additions to our portfolio are in line with CAPREIT's strategy of rejuvenating its asset composition and increasing our geographic diversification into desirable major markets in Canada. Additionally, we're happy to contribute to stimulating the market for new build multi-family assets, contributing to the increase of new supply in Canada. Looking ahead, our acquisition pipeline remains strong, and we intend on leveraging our best-in-class acquisition and operating platforms to generate further accretive portfolio growth in the quarters and years ahead. Highlighting our growth strategy are two strategic acquisitions completed during the third quarter as detailed on slide eleven. Both properties are new, located in key growth markets, not subject to rent controls, and both feature numerous amenities desired by today's discerning residents.
With new build properties, we also reduce our future capital investment needs and enhance our environmental footprint compared to more value-add properties. In addition to acquisitions, CAPREIT is also using dispositions to advance its core capital allocation strategy. CAPREIT's CAD 17 billion asset base is the result of 25 years of acquiring, operating, and enhancing multi-family properties. Some of our assets were bought decades ago with strategic criteria that no longer perfectly align with our current strategic objectives, making some of those assets non-core. Many of these non-core assets continue to attract premium pricing and generate bids that are above our IFRS NAV. As shown in slide 12, we've been selectively executing dispositions which have so far amounted to almost CAD 350 million in 2022.
These strategic dispositions not only enhance the quality of our overall portfolio but also result in disposition gains and introduce an incredibly attractive source of capital to fund our capital deployment priorities, which we previously discussed being our new builds, acquisitions, and NCIB program. We're committed to increasing the quality of the portfolio and enhancing returns and unitholder value. A key component of our capital allocation strategy is our NCIB program, as shown on slide 13. By selling certain non-core assets at or above IFRS NAV and repurchasing units at a major discount to NAV, we are arbitraging this significant spread for our unitholders while concurrently enhancing portfolio quality. Year-to-date, CAPREIT has spent CAD 202 million on its NCIB program, having purchased 4.4 million units.
As you can see on slide 14, we are making real progress in repositioning our portfolio to reduce our exposure to older value-add properties and increasing our presence in new build properties and MHC sites in markets where CAPREIT wants to increase exposure. Our strategy is enhancing our portfolio quality, diversifying our tenant base and geographical exposure, decreasing our operating expenses and CapEx exposure in these inflationary times, and ultimately enhancing our risk-adjusted return profile. With that said, I'd like to thank you for your time this morning, and I will now turn things over to Stephen for his financial review.
Thanks, Julian, and good morning, everyone. As you can see on slide 16, our balance sheet and financial position remain strong and flexible at quarter end, with a conservative debt to gross book value and continuing high liquidity. Our CAD 1.3 billion in Canadian unencumbered properties, which includes the majority of our MHC properties, provides additional liquidity should it be needed. Looking at our financings through the first nine months of 2022, we locked in interest rates of 3.15% on our refinancings and extended our term to maturity. We expect to finance a total of CAD 1.1 billion in mortgages and top-ups in 2022. Importantly, over 99% of our mortgage portfolio incurs a fixed interest rate, protecting us from potential future interest rate increases.
In total, if we were to access all of our available sources of debt capital, we would have approximately CAD 1.2 billion available at quarter end. Slide 17 shows we are successfully controlling our interest costs in Canada and extending the term to maturity. In fact, our strategy to leverage 10-year CMHC insured mortgage debt has resulted in CAPREIT having one of the longest terms to maturity and lowest weighted average interest rate among our publicly traded peers. This provides us with strong protection against renewal risks, given where interest rates are at today. Additionally, another benefit of our disposition program is lower reliance on debt. As I mentioned, over 99% of our mortgage portfolio incurs a low fixed interest rate, protecting us from expected future rate increases.
As of today, we have locked approximately 77% of our 2022 maturing mortgages at a 3.19% interest rate. Further to our strong and flexible financial position, looking back over the last few years, you can see on slide 18 that we have met our goal of maintaining very conservative debt and coverage ratios, even through the pandemic. This conservative approach underpins the stability and resiliency of our business and the sustainability of our monthly cash distributions to unit holders. This focus on maintaining one of the strongest balance sheets in our business will continue going forward. Our mortgage portfolio remains well-balanced, as shown on slide 19.
As you can see, in any given year, no more than 14% of the total mortgages come due, thereby reducing risk in a rising interest rate environment. Looking ahead, our current ability to top up renewing mortgages through to 2036 will provide further significant liquidity in the future. As we expected, interest rates have risen after the Bank of Canada announced rate increases so far this year. In anticipation, we moved up the refinancing opportunities for our 2022 matured mortgages from the second half of the year by paying some hedge costs and prepayment penalties, and we were able to achieve financing cost savings through closing our pre-locking rates for those 5- and 10-year mortgages. Their rates were 2.8% and 3.3% respectively, lower than the current five-year and 10-year estimated rates of approximately 4.2%.
I'll turn things back to Mark to wrap up.
Thanks, Stephen. Looking ahead, we continue to see a number of very positive value drivers that we are confident will generate strong and growing returns for our unit holders over both the short and long term. We will continue to focus on our proven asset allocation strategy as detailed on slide 21. On the apartment front, we are primarily targeting the acquisition of new build, modern properties in well-located markets in Canada's strongest markets. Yields are attractive, growth is strong and stable, and CapEx is modest. We are also seeing condo rental rates increasing significantly in major urban centers, increasing the appeal of our more affordable rental rates. With respect to our MHC focus, revenue and revenue growth are as robust as our apartment properties and have a very low risk profile. With residents owning their own homes, CapEx and maintenance needs are significantly reduced.
Additionally, with home ownership costs rising significantly across the country, CAPREIT's large MHC portfolio provides an affordable alternative for families looking for quality residence at a truly affordable cost. Our third focus is on our NCIB program. While our unit price remains disconnected from the strong pricing we are seeing in the private markets, we will continue to crystallize the value spread and execute instant value creation for our unit holders. Key to our growth in the coming months will be our ability to capitalize on a number of market trends. Demand for our quality properties is growing as immigration accelerates, with new Canadians seeking affordable homes in our largest urban markets. The return of international students is also contributing to increased demand. The pandemic generated what we call household consolidation as students and young people returned home to save on costs.
These young people are now moving back to rental accommodation as offices reopen and in-class learning returns. Demographics are also on our side as the growing seniors population looks to the rental market to meet their needs. We believe our quality and well-located properties offering more space on one floor at affordable rates will see increased demand by seniors looking to capitalize on significant equity in their homes. We also see families looking to quality rental accommodation, including our MHC properties, as a highly affordable alternative to the increasing costs of home ownership. Additionally, cash flows will increase as we prudently and responsibly increase rents.
Finally, our ongoing property investments, as outlined on slide 23, are helping to manage our costs and reducing our exposure to commodity prices through energy saving and other initiatives, increasing our operating efficiency through technology upgrades, enhancing resident safety and making our properties more attractive, and importantly, helping us meet our ESG commitment to enhanced environmental performance. As I mentioned earlier this morning, we are extremely proud to celebrate our 25th anniversary in September. Over the last 25 years, CAPREIT has grown from owning interest in only 2,900 apartment suites in Ontario to where we now have interest in approximately 67,000 suites, townhomes, and land lease community sites, well diversified across all major Canadian markets and internationally. Total asset value now exceeds more than CAD 17 billion.
From the outset, our goal at CAPREIT was to provide high quality, safe, and pleasant rental housing experience second to none in our chosen markets, and we believe we are meeting this objective. By building a modern, high quality portfolio, investing in our properties, and leveraging the significant experience and commitment of our team, we are confident the next 25 years will generate further exceptional growth and value for our unit holders. In closing, we remain very excited about our future. Our strategy of acquiring new build properties increases portfolio quality, diversifies our asset base, reinforces revenue growth, and reduces our CapEx exposure. Our focus on high-end demand locations in strong Canadian markets is responding to this population growth and is meeting the need for more housing space. We continue to leverage our best-in-class acquisitions and operations teams to create value through our portfolio.
Our industry-leading balance sheet, leverage, and liquidity position provides stability and the ability to grow going forward. With demographic trends and increasing immigration, we are confident we will continue to drive value for our unit holders in the years ahead. Thank you for your time this morning, and we would now be pleased to take any questions that you may have.
We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question comes from the line of Mark Rothschild with Canaccord Genuity. You may proceed.
Thanks, good morning, everyone. Mark, you spoke about immigration briefly and, you know, that you would like to help address this, but your portfolio is pretty much full. It takes a while to build, and it's not like anyone's gonna be able to build enough anytime soon. Do these new levels of new immigration the government's talking about, do they actually help you? Do they matter, or is it just gonna make it a tighter market overall for everyone?
Well, I think it helps the business by the lineup of people that we're seeing for our product. We share the view, Mark, that the country needs more housing supply, and we're doing absolutely everything we can to participate in that solution. That's why we're trying to focus on new build acquisitions. But we're just, you know. Across the board, everybody you talk to now, the demand is surging even further because there's a bit of uncertainty in the housing market. When you start seeing, you know, housing prices drift down, people get a little more cautious about investing in the market. Where do they go? Rental.
We've got immigration backups, we've got this housing value uncertainty, and we've got no clear line of sight on the path to really build what we need to build in this country, where we need somewhere in the neighborhood just to get our heads around this, CAD 5 trillion to meet what CMHC views as the amount of housing our country requires to come back into balance. You know, all of this is just backing up demand to never-before-seen levels.
Okay, great. Then you spoke about, you know, the single-family housing market slowing down. Besides for just maybe driving a little bit more demand, although most of the people that we're looking to buy homes are not necessarily the core tenant for most of CAPREIT's buildings, does that impact your portfolio in any other way?
I disagree. I think especially in the new construction assets, it's exactly that quality offering that people that are participating in the single-family home market are looking at as an alternative. I think that, again, you've been around long enough, you've seen it in the U.S., play out, Mark, that when there is uncertainty in the housing market, there is surging demand in the rental market. They correlate. We've forgotten all of this because rentals were doing good in good economic times from an affordability point of view. We forget, I've been through multiple cycles, where rental demand surges in bad economic times because of uncertainty.
This is yet another tailwind behind our offering that I think our choice to move into this new construction high-quality offering is gonna really play out well for us. We're already seeing it.
Okay, great. Thanks. That's helpful. Maybe just one more question. With the move in interest rates, you know, you've adjusted the cap rates you're using for IFRS very slightly, and it seems like there are still deals going on. But do you anticipate any further change based on the move in rates? Obviously, it's more difficult to have a very highly profitable going-in return, although the long-term rent growth is still there. How do you see this playing out?
I see it playing out that all apartments are not the same. We are extremely fortunate at CAPREIT to have assets that have alternative value offerings, okay? What I mean by that, I think we talked about it on our investment day, is a lot of developers are now turning to legacy product as their next pipeline of development, okay? What we're seeing in the market is that your commoditized apartment building, if you have a suburban apartment building with no development opportunity and it's a commoditized asset, then those values are gonna be impacted with rising interest rates. They're strict yield play. In the assets that have alternative value embedded in the asset themselves, those cap rates, if anything, are compressing further.
It's not about yield spread, it's more about the specific assets that you own and whether it's a commoditized asset or whether it's an alternative value asset.
I'll just layer onto that, Mark, too. As we're looking at acquisitions, I mean, you know, CAPREIT's one element of the return, but people are looking at, you know, IRR, on an IRR basis. You know, the other parts that feed into that are CapEx and growth. Really the growth is, as Mark alluded to, has just completely been skyrocketing over the last few months. The interest rate environment, you know, hit, and it hit hard earlier, and it's been kind of somewhat stable on the 10-year GOC and the 3s, in the mid-3s now. Every month, we continue to see the rent growth going higher and higher, and that's been kind of putting an opposing pressure to the interest rate environment we've seen.
Okay, great. That's helpful. Thanks so much.
Thank you, Mr. Rothschild. The next question comes from the line of Jonathan Kelcher with TD Securities . You may proceed.
Thanks. Good morning.
Morning.
Just following on Mark's question there. I guess you talked a little bit about pricing and the different dynamics, but what are you seeing right now in the market in terms of deal flow? Do you think you guys will be net buyers or sellers of assets over the next few quarters?
I would like to think that we're net sellers at above IFRS valuation with a very keen eye on market opportunities for new construction. We are absolutely continuing to underwrite new construction assets in key markets and very keen to pull out potential development value that we couldn't exercise ourselves. That strategy is holding up pretty well so far.
Okay. I guess just.
Jonathan? Yeah, I was just gonna say, our focus is becoming better, not bigger. That is definitely the tagline in the office. It's all about being better, not bigger.
Yeah. Jonathan, just to recap on the strategy a little bit. We're, you know, at a leverage level where we're generally pretty happy. The way we focus or fund our capital allocation is through dispositions now. Really we sell something, and then we allocate that to various buckets, either NCIBs or new build acquisitions or revolver repayment or some of the development initiatives. If, you know, when you run that through, that's gonna have us being a net seller given that all of that's funded by selling.
There might be some opportunities in the market, but I will not betray shareholders by issuing equity at these kind of discounts. There's absolutely no. That's not on the table for CAPREIT at all. We're in the very fortunate position, like I said, of Julian and the investment team being able to seek out above IFRS valuation on some of the dispositions. It's a very unique moment in time.
Okay. That's helpful. Just switching to operations. The MHC portfolio, you had elevated costs in the quarter. Were they mostly one time, or does some of that flow through to Q4?
Yeah. That is, I would say costs that are more of the interim basis. We're waiting for those septic tanks to be replaced. It will probably be a number of quarters before we see those costs.
Stop
I mean, we're working with the municipalities to get those approved, and therefore, we can then replace those septic tanks, and those costs hopefully will run out.
It is a frustrating situation. CAPREIT absolutely wants to invest in infrastructure and go back to the municipal process being a challenging one. It's not a matter of anything more than municipal delay in replacing infrastructure.
Jonathan, it just. I'm guessing you're asking for your model, anywhere between 6-12 months of time there is what we're expecting, but it's really kind of out of our control a little bit.
Yeah. We'll do outreach once we have better clarity on timelines.
Okay. I guess just another modeling question. How should we think about margins in Q4 for the apartment portfolio compared to last year, given that like the utility costs are still lapping an easy year-over-year comp?
I think you can use, like, last year as a basis. We're fairly comfortable. I mean, there is still some inflationary pressures, and we talked a little bit about the septic tank maintenance cost. You see a little bit of pressure there. Overall, if you use, you know, Q4 last year as a basis for this year, that's a good starting point, and then just play into the septic tank and a little bit of inflation pressures.
Okay. That's helpful. I'll turn it back. Thanks.
Thank you, Jonathan Kelcher. The next question comes from the line of Johann Rodrigues with Industrial Alliance. You may proceed.
Hi, everyone. The Montreal market was still a bit soft. How is the international student recovery in that market going?
Yeah, I'd say it's good. The problem is, again, a slow supply coming to market at the same time. Montreal continues to produce one of the highest per capita condo rates in the country in terms of development. It's just absorption at this point. I wouldn't call it a market trend. I'd call it an absorption issue.
Johan, another thing to layer on is, as you know, in Quebec, the majority of it's done for July first. You know, you really have to kind of look more toward there to see any major trends. There's not too much leasing that goes on throughout the rest of the year. You know, stay tuned to see how it does then.
Right. Okay. Just on Jonathan's question on the MHC side, you know, I understand the costs were elevated, but the revenue was also down on the same property basis. Was that due to occupancy slippage due to septic tanks, or what's behind that?
I think it's probably some occupancy issues, but not relating to the septic tanks.
Okay. Just due to occupancy then?
Yeah.
Okay, thanks. Oh, sorry, one more. Refresh my memory: is the expected degree of dispositions for 2023?
Targeting?
Yeah.
Are you asking for a targeted acquisition number?
No, disposition.
Oh, dispositions. Hard to say. I would say very fair to assume same kind of quantum as 2022. Obviously, you know, our ambitions on that front are a little higher, but it's difficult for me to say, Johann.
Yeah. I mean, I know last quarter we touched on a CAD 600 million-CAD 700 million list, and I'll comment that that list is, you know, ever-changing. Some things get added, some things get taken off. We're not at all a panic seller, so we're very much a strategic seller. Whatever makes sense to have on there or not is what we'll do and we'll never, you know, sell in desperation at a discounted price. You know, sometimes things will have to get taken off the list if we don't get what we like. We'll add on, you know, as we go through our disposition process.
Okay. Thanks. I'll turn it back.
Thank you, Mr. Rodrigues. The next question comes from the line of Kyle Stanley with Desjardins. You may proceed.
Thanks. Morning, guys. Just building on the
Morning.
dispositions there, you know, I'm just wondering, what are you seeing out of the potential buyer pool? I guess, what are your expectations with being able to execute, just given, you know, the overarching macro and interest rate environment that we're kind of advancing through here?
Well, I'll give you probably more insight than I should. I would say that the tier one buyers of apartment buildings in Canada have taken a step back, which has allowed the tier two privates a real chance to step up on opportunistic basis. Really what this means is, a lot of sellers would value track record of the likes of CAPREIT, as an example, as being clean closers. Even if they had pricing the same or slightly better from a private, they were less likely to engage with an unknown name than they were a reputationally sound name. The reputationally sound names have taken a bit of a step back, which has allowed some of the privates to come in with aggressive pricing without track record.
The bet that we're making on some of these transactions is that they will actually complete, but because their lack of track record that is not a typical path for a seller, but it's one that we're finding opportunistic. In our case, we're seeing sales above what we would have thought the market would have paid because we're allowing these tier two buyers to step up.
Okay. No, I think that's some good insight there. Thank you for that. You did mention obviously the enhanced focus on new construction. Is there a point where you would look to be an equity provider or funding partner with a developer to, you know, enhance that pipeline or maybe a group of developers? Just trying to think about that, as you look to advance the kind of new build side.
There's so much opportunity in the marketplace. We don't really have to pursue things like that. I wanna say, too, it's interesting. This strategy is nothing new for CAPREIT. If you go back to really since I became the CEO, and actually when I started doing all the Canadian acquisitions, there's been an absolute focus on new construction. We're just broadcasting it more, and we're really out of the value add business now. That's a slight tweak. If you go back and look at the composition chart that Julian touched on in his presentation, I think we're making some pretty good progress here. There's no real change. We've been doing this for a few years now.
Okay. Thanks. Just last one for me. I mean, looking at some of your geographies, could you compare or contrast what some of the differences are on the OpEx side? I mean, Alberta, where inflation was elevated this quarter versus, you know, costs that were fairly contained in BC. I'm just wondering, you know, if there's specific drivers to that and, you know, if you can comment.
There's no specific drivers. I think we've seen elevated costs and inflation. I mean, MHC, for example, was a septic tank maintenance. It's just really very area specific. You can say the drivers are really inflation related.
Yeah. The only thing I would really point to that we can see, and I think you're seeing it possibly with peers, is on the demand side, the laggard is definitely Quebec, Montreal. That's really the only thing that kind of steps out as being material.
Okay. That's great. Thanks for that. I will turn it back.
Yeah.
Thank you, Mr. Stanley. The next question comes from the line of Brad Sturges with Raymond James. You may proceed.
Hi, good morning. Just on the leverage, I think Julian, you touched on it. I think, you know, leverage is about 40%. I guess if you're thinking through all the allocation decisions with capital coming from the disposition program, we should be assuming that you're seeking to hold leverage around the 40% level, here today.
Yeah. Generally speaking, like I said, we're looking to allocate between the three buckets, but we're pretty happy with where leverage is. You know, again, to the extent that we don't have great acquisitions, therefore not happy with the NCIB pricing, neither of which is the case at the current time. If that was the case, then we have a revolver where we can pay down.
We're targeting around 35%-40% leverage. I mean, there may be periods where it may be slightly elevated, but our plan is always to be just under 40%. We hope to go through a bit of a de-levering exercise here as the dispos pile up. We're also so conservative on our valuations that we're kind of holding ourselves back from what would be deemed real progress because we want to be very conservative on the valuation front. Even though we're not entering into some refi during these more expensive times, our leverage is going to hold right around that 40% mark as we stay conservative on that.
As you continue to pivot towards new build assets, do you have a kind of a medium-term target in terms of the weighting in the portfolio you would like to get to?
The way we're going to do this is, again, right back to the DISPO program. We're going to wait for things to close. When that money is in hand, we're going to allocate between our NCIB, new acquisitions, and pushing off refi. It'll be a bit of a mixture of all with the primary focus of the long-term vision of the company is a high-grading exercise. The least attractive opportunity, quite frankly, are probably some of the immediate brand new construction assets. Long term, they will probably turn out to be the best investment. It's hard, though, to turn away from the NCIB and it's very difficult to turn away from a guaranteed accelerated interest cost on refi. Like, that's the guaranteed way of return.
Okay. That's helpful. I'll turn it back.
You'll see each quarter, it'll go into one of those three buckets or all three.
Yeah. Maybe last question. Just on the mark-to-market, obviously, it accelerated in the quarter and you're talking about demand surging. Where do you see that turning in the next couple of quarters? Do you see it continue to accelerate through the slower or the winter months? Or do you see more of a stabilized mark-to-market in Q4, Q1, and then more of a pop again in the spring?
You can continue to use the same ruler that you were using in the last quarter.
Okay. Yep. Sounds good. Thanks a lot. Turning it back.
It will flatten out at some point, but right now it's like I said to you at the beginning of the call, the demand is just packed right up.
Thanks a lot.
Thank you, Mr. Sturges. The next question comes from the line of Mike Markidis with BMO Capital Markets. You may proceed.
Good morning, everybody. Thanks for taking my questions. Two from my end. I guess just circling back to your comments at the beginning of the call, you talked about some strategies that you were undertaking or thinking about undertaking to fix the price and transport costs on the utility side. I was just wondering, to begin with, if you could talk about how that would change from what you've employed historically or what you currently have in place.
Yeah. Hey, Mike. We have a hedging strategy. We typically hedge three years out. This year we were close to, like, 90% hedge. Next year I think we're close to 60%-70%. At these current rates, I don't think we're gonna be hedging any further on the unhedged component. We'll continue to observe the market. If there's any good opportunity, we will. Right now at this point, we're gonna just keep with the hedges that we have in place. We are hopeful. We've invested pretty heavily in our procurement department, and I think we touched on that. We've assembled a new team. We're very hopeful that that will also help.
I think, though, I said to Stephen, I'm a little embarrassed at some of these one-time costs that keep showing up on the expense front, but, septic tank issue in particular. We feel that inflation is baked in now. If anything, we're feeling more optimistic on utilities. In terms of other inflated factors like wages and property taxes and even repairs and maintenance, we think that we're stabilized effect there now.
Okay, great. Thanks for that. Just lastly, I guess there's been some media attention with respect to you know a focus at the tribunal to speed up a big backlog of AGI applications. If they're successful, and I guess that's a big if, is that something that could potentially be a tailwind for you in Ontario? Is it not material in 2023?
It's a tailwind. You know, it helps, but it's not something we're gonna count on success in 2023 over.
Okay. Tailwinds. Mark, you always come up with these great phrases. Thanks for that.
Yeah.
Thanks so much. Great to connect again and, congrats on the quarter.
Thank you. Congratulations.
Thank you, Mr. Markidis. The next question comes from the line of Jimmy Shan with RBC Capital Markets. You may proceed.
Thanks. Just on these inflationary pressures again. How should we think about expense growth next year? You know, year-to-date, you're tracking 7% or 8%. You're saying you seem to be saying that this inflation are kind of baked in. Is it your expectation that this pace of growth on a year-over-year basis next year will look about the same or accelerate or decelerate?
I mean, in my opinion, I think we will. We don't see the elevated inflation that we saw this year. I think we're still seeing inflation pressures in certain categories. In my opinion, I think for modeling purposes, I would still build in, like, 4%-5% inflation pressure overall with an acceleration in mark-to-market rents. The mark-to-market rents, the churn has really slowed down. Like, we're just touching on double digits. The mark-to-market story is very strong. Unprecedented.
Right. Okay. 4%-5% on the expense growth. That would imply that, you know, things would decelerate somewhat. Is kinda would be your best guess at this stage.
Yeah.
I apologize, but the septic tank maintenance costs and the manufactured housing business, I actually don't quite follow, like, what's going on there. Like, what makes it interim? Like, how does the municipality delay cause the cost increase? Maybe if you could comment on that.
We have five different sites that all have reached, in our mind, end of useful life. We take remarkable steps to make sure pumping and testing is done when we identify sites being at end of useful life, and it's simply getting the new infrastructure put in place, like replacing them all. It's a planned activity that we're stuck in this holding period of for life safety purposes, health safety purposes, doing all the necessary things required to keep things safe. It's frustrating because we're ready to go on the project front, but we need the approvals. When the approvals process comes up, there's all kinds of things that the municipalities. You have crossover approvals from multiple departments. We're pushing hard here, but it's frustrating because we're trying to do the right thing.
there's ongoing maintenance expense, accelerated maintenance expense until you can actually do the disconnects and put in the new tanks.
I see. Okay. I got you.
It goes away for 30 years.
Right. Okay. I understand. The actual cost itself, though, would be capitalized and not expensed at one point.
Yeah. All capital.
Yeah. Okay.
Yeah. This expense completely disappears once the new tanks are put in place.
Okay. Okay, thanks. Last question from me on the dispose side. Maybe if you could comment on, kinda as you look at that list, you know, have you put assets in the market, and you know they're kinda falling through? You spoke about the tier two buyers, and I'm just kinda wondering, do they have access to financing, or are you having to do more VTB-type deals, you know, to get some of the sales done?
I'll let Julian field that. Our appetite for VTB has been nonexistent, but I'll let Julian take that.
Yeah, no, assets with in-place financing tend to attract more interest. You know, we have a couple of portfolios in the market. One's actually with some of your colleagues, Jimmy. Other than that, a lot of it's been off-market approaches. You get developers, you get folks assembling land that they may own properties across the street or to the side or have operational efficiencies, and it's a lot of those private buyers that target this. We've got a few requests for VTBs. It's been something we haven't been really entertaining at this point. To the extent if we get really premium pricing and it was something that was completely necessary to bridge a transaction, then you know, sure, we might consider it.
you know, we're not a bank, and we're not in that business, and it's something we're gonna try to avoid.
Okay. Great. Thanks, guys.
Thank you, Jimmy Shan. The next question comes from the line of Matt Kornack with National Bank Financial. You may proceed.
Hey. Hey, guys. Just a quick follow-up on Jimmy's question there with regards to margins. Is there anything within R&M that you can potentially get efficiencies on going forward or that is controllable? It sounds like, I know, Q4 of 2021, there was accelerated maintenance, and then the winter weather was pretty bad in Q1. Those seemed like they'd be potentially transitory issues that wouldn't necessarily recur in early 2023. Any sense there as to potential savings?
Yeah. It is. Again, I hate to keep talking about septic tanks, but here we are again. That is an expense that will stop as soon as the projects are completed. We're very aware of the one-time nature of the expenses that we've been talking about quarter by quarter. Sadly, as I said to Stephen this morning, we've had a number of one-time events that are not trending. It's just, again, this latest one is outside of what we would see as normal things for a cost. So the answer to your question is, like I said, I believe that the inflation is baked into the expense lines. We're not seeing the acceleration that we were, and there has been a stabilization there.
Yeah, I would just say, like, we're expecting, you know, improved margins because of revenue gains. We're expecting improved margins because some of the dispos that we're doing are lower margin assets. Some of the acquisitions are higher margin assets.
There's hopefully, as we said, efficiencies in utilities, in terms of our hedging program. The kind of pricing that we're seeing going into this winter is better than what we saw last. The environmental energy programs that we put in place this year will really kick in in the Q4 and Q1. A variety of factors, Matt, I think gives us a great deal of comfort that we've got stability in the margins. If anything, improvement in the margins.
Okay. No, that's helpful. We'll model 4%-5% and hope you beat us on that front.
One other-
Sure.
I guess two other quick ones. On alternative value, I think you've done a bit more work, with regards to entitlements and looking at the potential within the portfolio, with regards to density, and then obviously you have the province out, trying to encourage development and reduce timelines, in Ontario, that is. Can you give us a sense as to how your thoughts have changed potentially, or if there's been any change in terms of the opportunity set within the portfolio? Not necessarily that you'd execute on it, but, yeah, any view there.
I'll let Julian respond, but I'd like to thank you for management's response because you just gave it. You know, the reality is there is far more of an appetite and pressure being put on municipalities to loosen up on this front. That has tremendous effect. The team orientation at CAPREIT has 100% been moved into entitlement preparedness. I'll let Julian build on that.
Yeah. Pretty much the strategy now has been just looking at high land value sites and going through the entitlement process, and afterwards deciding what we're gonna do there. You know, that can include any range of outcomes. Right now the bias is more towards getting the sites entitled, realizing the higher land value, and potentially separating and selling and redeploying that otherwise zero-yielding asset into our core business being right now the new build properties. You know, you saw on the property tour one of the sites that we had entitled and severed.
You know, we are working on a couple of other sites here in Toronto that are very attractive to us, where there's completely underutilized adjacent land and going through those entitlements and seeing what we come up with. That's really the focus on the development strategy now.
Okay. No, that's fair enough. We'll look forward to seeing what you guys find out there. My last question is not material, but we're coming up on time, so I'll leave it there.
Call us any time. We always love talking to you.
Will do.
Thank you, Mr. Kornack. The next question comes from the line of Mario Saric with Scotiabank. You may proceed.
Hey, guys. Good morning.
Morning.
I'll continue on the theme of just talking about the operating costs, maybe from a slightly different angle. You've provided a lot of color on the call already. One of the Q4 2021 expense was impacted by what we thought was kind of a bring forward of expenses due to not being able to get into people's suites and whatnot, the common areas due to COVID. That description in the disclosure is still there this quarter. Like, at what point does that go away in terms of the higher costs being driven by-
Yeah. That is.
The lower ability to simply work?
Yeah. That will have been bled off in Q4 of this year. You know, there you can help.
Yeah. I think we're seeing. You know, last year we were incurring a lot of R&M costs related to the deferred maintenance around the tenant suites. We're now offset by some of the inflationary pressures that we're seeing built into our margin. I just typically a little bit more conservative to say that if you look at Q4 margin, I would use that as a basis for this year if you were to project that out to for Q4 2022.
Okay. Just switching to the capital allocation strategy. Again, you provided a lot of color, but just to be clear, in terms of having a net buyer or a net seller, it sounds. Is it fair to say that it's very unlikely for you to be a net buyer in the next six months, meaning that any acquisition opportunities on the new build side are really gonna be contingent upon closing some of the assets that you have in the market for distribution? Is that a fair comment?
For clarity, we're a net seller because just like having the NCIB and the refi, you have to be a net seller. We're not gonna incur more debt. Yes, we will be taking our dispo money, we will be buying new assets on a selective basis. We will be exercising our NCIB, and we will be putting off refi where applicable. That by definition just says we're a net seller.
Got it. Do you have any sense in terms of the amount of net selling that could be accomplished this year or into 2023 without the requirement of providing special distributions to unit holders? Based on what you're looking to sell.
Well, I think the cap gains lead to a conclusion here of something that's about to happen. I'll let Stephen talk about that.
Yeah. Well, we've done some calculation. There will likely be a special distribution this year. We're likely gonna announce that later in the month or, sorry, in December when we finalize the numbers, because we still have two months to go in terms of where our taxable position will be. We'll be announcing something in the coming months.
I wouldn't underwrite any significant dispositions for the rest of the year. What Stephen's saying is based on what's kind of already closed, and we're getting close to kind of the end of the year now. I think most of the disposition activity is gonna be focused next year, Mario. To answer your question on quantum, Mario, again, we're cautious because we're dealing with a more unproven tier two private buyer group. We are actively looking at opportunities, but cautious on completion. Julian said it well.
Right.
Like, we're not desperation sellers here. It's all opportunistic.
Yeah. When you look out into 2023 on that front, presumably income will be higher in 2023 relative to this year as you continue to see that revenue growth that you're talking about. How do you think about reallocating capital from asset sales in the event that the requirement for increasing special distributions is there? Does that change the quantum of assets that you're looking to sell and the quantum of assets you're looking to buy?
All I can say is that we are fully committed to the CAPREIT balance sheet, and I'm focused on getting better, not bigger. I'm absolutely focused on growing earnings per share, not the size of the company. Decisions around what to do with capital generated from dispositions will be fully focused on improvements to the balance sheet.
Got it. Okay. That's great. Thanks, guys.
Thanks.
Thank you, Mr. Saric. There are no additional questions waiting at this time, so I'll pass the conference over to Mr. Mark Kenney for closing remarks. You may proceed.
Okay. I'd like to thank everyone for their time and their attention today. As always, if you have any further questions, please do not hesitate to contact us at any time. Thanks again, and have a great day.
That concludes the conference call. Thank you for your participation. You may now disconnect your line.