Good morning. Thank you for attending today's Canadian Apartment Properties REIT Fourth Quarter and Year-End 2022 Results Conference Call. My name is Forum, and I will be your moderator for today's call. All lines will remain 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 telephone keypad. It is now my pleasure to pass the conference over to our host, Nicole Dolan, Associate Director of Investor Relations for CAPREIT. Miss Dolan, please proceed.
Thank you, operator. Good morning. 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'll now turn things over to Mark Kenney, President and CEO.
Thanks, Nicole. Joining me this morning is Stephen Co, our Chief Financial Officer, as well as Julian Schonfeldt, our Chief Investment Officer. Starting with slide four, you will see that 2022 was another strong performing year for CAPREIT, with positive increases across the board. Revenues and NOIs both up, the result of higher occupancy, growth in average monthly rents of nearly 5%, and contributions from our net acquisition activity. This drove the increase in our NSFO, which was more modest due to the impact of certain inflationary and other unexpected costs. We experienced higher repairs and maintenance costs, including catch-ups from COVID-19 related delays, as well as increased energy expenses. However, we've effectively implemented numerous mitigating programs in response, which I will expand on shortly.
This all accumulated in the approximate 1% increase in our diluted FFO per unit, despite the 0.5% increase in the weighted average number of units outstanding. Our fourth quarter results, as detailed on slide five, show a snapshot of our improving operational and financial returns. Operating revenues and NOI were both up by approximately 7% compared to the fourth quarter of last year, while our diluted NAV per unit grew nearly 3% versus Q3 of 2022. Diluted FFO per unit did increase more moderately, up by 1.4% compared to the same period last year. This is double the increase, which we realized on an annual basis. This demonstrates the beginning impact of the many cost mitigating programs we put in place and prioritized this year.
For instance, we've refined our robust procurement practices and are proactively monitoring natural gas rates in order to hedge as much as possible. The strategic modernization of our portfolio further contributes to inherently higher margins, and we're accelerating our sub-metering and other energy-saving investments across our more vintage assets. As a year-end, energy costs, approximately 65% of our Canadian portfolio are now the responsibility of our residents. In addition to lowering costs, this also lowers consumption, contributing to our ESG commitment to enhance our environmental footprint. The increase in our same-property NOI margin to 64.3% this past quarter evidences the effectiveness of these initiatives, which we will continue to prioritize going forward. Elaborating on that strong same-property performance, slide six shows it's continuing to strengthen from an annual perspective as well.
With significant increases in demand for quality rental accommodation, we are seeing net average monthly rents rise alongside consistent near full occupancy. Slide seven further demonstrates the effectiveness of our highly skilled and experienced leasing and marketing teams, who have kept occupancy high and stable even throughout the pandemic, while simultaneously achieving meaningful rent increases, which are up 5% on average compared to the prior year. A key driver for the strong increases in monthly rents over the past few quarters is the positive trend on turnover that we are seeing post-pandemic, as detailed on slide eight. We are generating unprecedented increases on turnover prior to the pandemic and have quickly returned to record-breaking increases. Our rental uplift on turnover for this past fourth quarter was 24.3%, which is up substantially from the 8.6% we realized in the fourth quarter of 2021.
This not only reflects a return to our normal and increasing productive sales and marketing programs, but also the worsening of the housing crisis in Canada, which we expect will continue to drive mark-to-market rent increases in the quarters ahead. I'll now turn things over to Julian to outline how we are repositioning and remodeling the quality of 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. Throughout 2022, our strong acquisitions team successfully added 1,537 high-quality suites and sites to our portfolio. The majority of these acquisitions were new build assets and strong targeted geographies in line with CAPREIT's strategy of rejuvenating its asset composition and increasing our geographic diversification into desirable high-growth markets in Canada. Importantly, our acquisition of newly constructed purpose-built rental apartments also stimulates the market for new build and multifamily assets, which represents just one of the ways in which CAPREIT is contributing to the increase of new supply in Canada. A key component of our core asset allocation and portfolio optimization strategy includes our disposition program. Our investment strategy has evolved from a focus on portfolio growth to a focus on portfolio quality.
As such, we are engaged in a highly strategic capital recycling program, where certain older value-add properties are being sold in the mid 3% CAPREIT range, with the proceeds reinvested in the 4% range through the purchase of higher quality new build properties, as well as our own trust units via our NCIB program. Many of these non-core assets being considered for disposition are attracting premium pricing, and we are successfully divesting at above their IFRS fair values. As shown on slide 11, we've been selectively executing on these strategic dispositions, having disposed of almost CAD 350 million worth in 2022. We're continuing to make active strides on this initiative in the new year, which we kick-started with the disposition of our 50% non-managing interests in three non-core properties in Ottawa for gross consideration of just over CAD 136 million.
With these being our last jointly owned buildings, we now own 100% of our entire Canadian portfolio. Not only do these strategic dispositions enhance the quality of our overall portfolio, but they also result in disposition gains and a highly attractive source of new capital to fund our more accretive capital deployment priorities. One of these priorities is the NCIB program that I mentioned. This represents a critical cornerstone of how our capital allocation strategy. Slide 12 summarizes how we've been doing this. By selling non-core assets at or above NAV and repurchasing units at a major discount to NAV, we are arbitraging the significant spread and realizing immediate value for our unit holders.
To date, CAPREIT has invested over CAD 245 million in our NCIB program, with the purchase of 5.4 million units at an attractive average price of approximately CAD 45 per unit, which is well below our CAD 58.01 year-end net asset value per unit. We will continue to stand by CAPREIT's strong fundamentals and invest in our own portfolio of increasing quality as long as it is prudent and economical to do so. Slide 13 showcases the real progress we've made on repositioning our portfolio to reduce our exposure to older value-add properties while increasing our allocation toward new build, more modern properties. In successfully upgrading our portfolio in this way, we've not only improved its quality, but have also diversified our tenant base and geographical exposure in specifically targeted underrepresented markets.
We additionally improve our margins given the high growth profile of these newer assets, coupled with the lower operating costs that result from enhanced energy efficiency and sub-metering. Lower Capital Expenditure needs also reduce our exposure to inflationary pressures. In summary, we are strengthening our environmental and operational performance and ultimately enhancing our risk-adjusted return profile. Thank you for your time this morning, and I will now turn things over to Stephen Co for his financial review.
Thanks, Julian. Good morning, everyone. As you can see on slide 15, our balance sheet and financial position remains strong and flexible at year-end. With the conservative debt to gross book value and continuing high liquidity. Our CAD 1.3 billion in Canadian unencumbered properties provides additional liquidity should it be needed. In total, if we were to access all of our available sources of debt capital, we would have up to approximately CAD 1.2 billion accessible at year-end. Looking at our financings through 2022, we locked in favorable interest rates on our refinancing and extended our term to maturity. Based on our current property portfolio, we expect to refinance between CAD 750 million and CAD 800 million in mortgages and top ups in Canada in 2023.
Our disposition and capital recycling initiatives further supplement our debt program by enhancing our ability to proactively manage and reduce our reliance on debt. Slide 16 demonstrates our success at controlling interest costs in Canada. 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 rates among our publicly traded peers. This provides us with strong protection against renewal risks, especially in the context of the current interest rate environment. Nearly all of our debt, mortgage debt carries a fixed interest rate, positioning us well to continue mitigating the impact of future interest rate volatility.
Diving deeper into our mortgage portfolio, you will see on slide 17 that it remains well-balanced over the next decade, with no more than 15% coming due in any given year, which again reduces risk in this volatile interest rate environment. Looking ahead, we will continue to take an active approach to debt management and thoughtfully renew and top up our mortgage financing t o optimize our overall debt and liquidity profile. To that end, with current five year and 10-year all-in indicative rates both at approximately 4.3%, we will consider availing of relatively short terms upon renewal of our more imminent mortgage maturities, with a view to minimizing our interest costs over the longer term. Further to our healthy financial position, you can see on slide 18 that we have consistently 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 unitholders. Our focus on maintaining one of the strongest balance sheets in our business will continue going forward. 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 unitholders for the years to come. We will continue to actively execute on our proven investment strategy, which is summarized on slide 20. First, on the apartment front, we will seek to continuously heighten the quality of our portfolio by disposing of our non-strategic value-added properties and reinvesting in more modern, newly built properties located in high-growth and diversifying markets. Yields are attractive, growth is strong and stable, margins are higher, and CapEx is modest. Our second focus is on our NCIB program. As long as our unit price remains disconnected from the strong pricing we see in all of the private markets, we will continue to crystallize the spread and secure instant value creation for our unitholders.
The third pillar of our capital redeployment program revolves around upgrading our debt profile through delivering or delaying refinancing in this highly volatile interest rate environment. Our asset-light development model also plays an important role in our strategy. We are actively working through zoning processes in order to serve and monetize our excess land, which generates additional funding for us to allocate towards CAPREIT's core competencies. Our ability to capitalize on the increasing favorable fundamentals in the market will further stimulate our growth. Canada's housing supply and affordable housing crisis are front and center. There are simply not enough homes. The homes that we do have are just not affordable for Canadians to purchase and own. This alone is driving demand for rental accommodation to historic highs. On top of this, we have a host of additional factors that are further fueling the fire.
Accelerating immigration is, in particular, compounding the crisis. While the post-pandemic return to the workplace and in-class learning drives the incremental household formation and demand, demographic trends are factoring in as well, including delayed family formation, seniors independent living longer, and overall smaller household sizes. Magnifying all of this is the fact that the cost to build is skyrocketing, which is significantly hindering the increase in new supply needed to address this unprecedented demand. As you can see on slide 22, these demand drivers are resulting in rental growth across all age groups in Canada. In fact, renters have increased at three times the rate of home ownership over the last decade. Supply and affordability pressures, demographics, and a preference to renting, especially in the real estate market currently fraught with uncertainty, have driven this growth.
We will continue to do so in the years ahead. We also continue to extensively invest in our core portfolio, generating a number of key benefits as outlined on slide 23. Our energy-saving initiatives and technology upgrades reduce our costs and improve the operating efficiency and environmental performance of these properties. That, in turn, contributes to our ESG commitments. Our focus on enhancing the safety of our residents further increases the attractiveness of our properties and the satisfaction of our tenants. Finally, as I mentioned earlier, Canada is experiencing the worst crisis of housing supply and affordability in a generation. As one of the largest publicly listed providers of quality housing, CAPREIT is a key part of the solution to Canada's housing crisis, and has taken a leading role in that discussion.
Along with our peers, the other large publicly traded Canadian residential REITs, CAPREIT has led the launch of the Canadian Residential Housing Providers for Affordable Housing. This coalition has advanced numerous proposals to address issues around additional housing supply and affordability in Canada, some of which are outlined on slide 24. One of our objectives is to educate policymakers and the public and do a bit of myth-busting in order to ensure that workable solutions are informed by facts and evidence.
For example, the fact that the REITs represent less than 3% of Canada's rental market, or the fact that over half of our suites are rented at rates that meet the government's definition of affordable, or even the fact that CAPREIT has never done a renoviction in its 25-year history. With our experienced Senior Vice President of Tax and Government Relations, CAPREIT has been working hard on many fronts to effect meaningful change, and we have engaged in productive dialogues with a variety of government officials. Most recently, we enthusiastically welcomed BC Premier Eby's announcement of a $500 million rental protection plan, having been strongly advocating for a government-led acquisition program as one of the most cost-effective ways to preserve existing affordability in housing.
From our vantage point, we are both hopeful and optimistic that we will see constructive policy announcements in the near term. This past September, we celebrated 25 years of strong performance and value creation. Since inception, CAPREIT has grown from owning only 2,900 apartment suites in Ontario to closing out 2022 with interest in almost 67,000 suites, townhomes, and manufactured home community sites, which are well diversified across all major Canadian markets and internationally. Our total investment property portfolio now exceeds CAD 17 billion. From the beginning, our goal at CAPREIT is to provide a safe and pleasant rental housing experience, second to none in our chosen markets, and we believe that 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 see further value generation for all of our stakeholders. In closing, we remain very excited about our future. Moving forward, we will seek to actively upgrade our property portfolio on a perpetual basis. One. By targeting the acquisition of new build properties in Canada's strongest markets. Two. By strategically disposing of select non-core value add assets. Our divestiture program will also remain focused on unlocking and monetized development value from excess density. We will additionally use net proceeds from this capital refresh strategy to proactively manage our debt profile where prudent. We will also invest in our NCIB to convert that growing portfolio quality into immediate returns for our unitholders.
Responsible monthly rent increases and consistent near term full occupancies will further contribute to higher revenues, as will increasingly strong fundamentals in the Canadian market. We are confident this will all result in CAPREIT's continued ability to generate strong and growing returns for the foreseeable future. Thank you for your time this morning. We would now be pleased to take any questions that you may have.
Certainly. 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. Our first question comes from the line of Mark Rothschild with Canaccord. Mark, your line is now open.
Thanks. Good morning. Maybe just talking about the capital recycling and looking at how you're trading out of maybe some older properties into buying newer. Does this analysis also go into geographical decisions, or is it really just based on the types of properties? Like for example, certain markets in Canada having stronger population growth than others, maybe job growth. Are you looking at it that way? Maybe just expand on that and how you look at different markets.
I'm gonna let Julian touch on this, but I would say, you know, because of our reputational placement in the market coast to coast, we look at all deals in the markets we're interested in. The best new build opportunities for us are properties that are nearing construction completion or recently finished. That really does limit the pool. Calling it a specific market would be hard to say. Focusing on the markets that we're familiar with, we get the yields that we're seeking is definitely an objective. Julian, why don't you add to that?
Yeah. No. What you said, Mark, is exactly right. We do, we're limited in what we can, in what we can buy and what's out there to bid on. Certainly there's markets that we have greater appetite for and we'll target a little bit more if we can. Things that do drive our views on that is, are waiting in that market. Are we underweight? Are we overweight? Is there forecasted strong population growth, forecasted strong economic growth? Is there a lot of supply or is there, you know, where's the supply-demand imbalance most acute? You know, we factor all of that in our bidding process.
Maybe just to clarify a little bit what I'm trying to get at is, you know, besides from buying new, if you're when you look at markets like, let's say, Halifax or Alberta, where, you know, fundamentals might be changing a little different than Ontario, would you buy older properties there if you see better rent growth? If you could just talk about how you look at the Alberta market now?
No, we're pretty much exclusively focused on the new build assets right now. Our appetite is significantly stronger for those. Certainly within those markets that you described, you know, where we do see very strong fundamentals, you'll see us have a bit stronger appetite than in others.
Okay, great. Thanks.
Let me add one thing, Mark, just to be clear. We have come across situations where there's a brand new build that's attached to a value-add property. You may see, you know, unique situations where we deviate from the strategy, but not in a conviction to value-add, just where it makes absolute sense when we own something or have to buy something together. It's not an exclusively a moratorium on not buying value-add, but it's a really a focus on new construction.
I got it. Makes sense. Thank you.
Okay.
Our next question comes from the line of Dean Wilkinson with CIBC. Dean, your line is now open.
Thanks. Morning, guys. I actually like to continue on that same vein of the new construction. Mark, do you think that the foreign ban on foreign investment causes new construction, in particular, maybe your desire to construct new to become a bit of an unintended consequence there? What do you think the outcome of that ends up being?
I think this issue has to get shaken out of government. The intention was not to stop rental development. We've had conversations with government. I suspect that the implications will be better understood in the short-term. I'm optimistic on that front. I think what it does for CAPREIT is it could create an opportunity with near completion rental products that are attracting less capital that could make financing and value a little more compelling. In the short-term, I think this is a blip, and it's one that we will take advantage of if we see opportunities in the marketplace.
Dean, one thing I've heard theoretically, and we'll see if it pans out, is, you know, if there's less demand for... I mean, when folks have a development site for residential, there's a decision, do we do purpose-built rental or condo? To the extent that this theoretically lowers demand for condo, you know, there's a possibility it would add more to purpose-built rentals, we'll see if that actually pans out then.
Yeah. You know, I can't help but throw this on the table. We all are very aware that in the large Canadian cities, the primary supply of rental has come in the form of condominiums and foreign buyers funding the purchase of those condominiums. If that softens the demand of really the rental sector as we knew it over the last decade, that will further exacerbate the problem in the marketplace. Like, quite bluntly
Yeah.
Most of the rentals in Toronto have been condos that were bought by foreign investors. If that ban, sticks at that level, we're in for even more rough waters with respect to getting supply to market. These are the unintended consequences that I think have to be thought through carefully by policymakers.
Yeah. I guess it's a bit of a moving target, and they don't know what they're shooting at. The other question I had was just on that big lift on the suite turns. Do you have a sense of what the duration of those tenants that turned the suite back to you was during the quarter? Is that sort of a number that we can think about sort of as a new baseline?
Historically, we know that higher rents generate higher turnover rates. People don't hold their leases. That kind of goes away. We are not seeing any evidence of this with at all in the churn. If you look at. Now it's early innings here, but the churn is basically unchanged. Even with these higher rates, we're not seeing an increase in churn rates. We'll see. We'll see. I do think we're well. Yeah.
Our next question comes from the line of Jonathan Kelcher with TD Securities. Jonathan, your line is now open.
Thanks. Good morning. Just to follow along Dean's question there. Do you think for 2023, you can continue to get sort of north of 20% uplifts on turnover?
Well, I caught myself stumbling at the end of that sentence to allow your question, what I was gonna say is that we're bumping up against the ceiling of affordability. I wouldn't expect to see the chart continue to accelerate at this pace. Jonathan, if you look at the, I think it might be slide 18, that shows the kind of the sector in the pandemic. It's exactly what we were telling the market in terms of the household consolidation impact, the lack of foreign students. All these factors resulted in a massive reduction of mark-to-market rent in the 3% range. When you draw the line pre-pandemic to where we are right now, it's just a steady increase that shows the supply problem happening. It's not a marked event.
It's exactly what was going to happen in the market had the pandemic not happened. We lost three years in the supply conversation because it appeared on paper rents were falling and vacancies were abundant, but it was because everybody was in a consolidated household and we stopped the flow of foreign students. We're just back to a normalized chart here that you can probably, you know, I keep using the ruler to, you know, example. You can probably just predict quite on a stable basis now where this line is going. It will moderate.
Okay, you've got a lot of catch-up, right?
The catch-up-
Your mark-to-market's gotta be what? 20%-25%?
I think the evidence of the actual rents are, say, 20-25%. That's for sure. You know, I don't believe in this mark-to-market rent business. The mark-to-market rents are what we posted last month in terms of what we actually achieved. I think that with at these occupancy levels, we're gonna have a very hard time getting at the upside. The demand is astonishing.
Okay. If we flip to expenses, what are you guys thinking for expense growth for 2023?
In Q3, I kind of said that we're expecting for 2023 around 4% or 5%. I mean, looking at, you know, the weather, that's been occurring in January and February, a lot moderate weather. I think we, you know, probably on the lower end of the range. Yeah, I think that's kind of where we're still guiding 4%-5%, and all on consolidated OpEx area, but, maybe on the lower end, if anything.
I think we've been talking obviously a great deal about the jolts that we've experienced with repairs and maintenance, a whole variety of factors that conspired against us, you know, from one quarter to the next. The team feels very confident that the worst is now behind us, and inflation is baked into the actual expense wise. We wouldn't expect to see inflationary jolts. We don't expect to see catch-up jolts. We don't expect to see a number of the factors that we sadly encountered during the last few quarters.
Okay. Sounds good. I'll turn it back. Thanks.
Our next question comes from the line of Mario Saric with Scotiabank. Mario, your line is now open.
Hi. Good morning, guys. Just sticking to the OpEx, appreciate the color on maybe the, you know, the cost coming in at the lower end of the 4%-5% range, primarily due to the weather. Like when comms were made back in Q3, were they made inclusive of the notion that you were reviewing the cost structure going forward? I'm just curious whether, like, the 4%-5% is still quite conservative in your view, and whether there's the possibility to kind of surprise to the upside on that based on recently implemented initiatives.
I mean, that's kind of on the stable basis. I think we have, as Mark alluded to in his script, you know, there's some procurement initiatives that we're undertaking within OpEx. There's also, some of the, we could say, MH type of maintenance costs that we incurred in 2022 that we hope to have resolution on in 2023, so that may help as well. 4%-5% is kind of stable state without any type of, you know, efficiencies that we were gonna build in. To your point, it could get lower if we can initiate on those and execute on those.
Got it. Okay. More of a bigger picture question, just sticking to operations. Like, the top line revenue growth is getting stronger. You know, you're making a bit of progress on the expense issues that you documented, so it's really driving much better same-store wide growth this quarter than what we saw for most of 2022. That said, the recurring FFO was kind of flattish, up 1% year-over-year. The question really pertains to your thoughts internally on your ability to convert what appears to be, you know, strongly improving same-store wide growth into improved FFO growth per unit in 2023 relative to what you did in 2022.
Yeah. Listen, we have a track record that was disturbed by some quarters of, you know, unfortunate one-time events. In a 25-year history, you're gonna hit these patches, and we sadly hit it. We're very confident that we're back to normal state, and CAPREIT's proven itself over the decades now to be highly effective at cost control and highly effective revenue yield managers. There's just incredible excitement around not just the expense growth but, you know, a more normalized CapEx spend. As Julian continues on the path of purchasing newer high-quality assets, they have that attribute of lower CapEx. That results in lower jolts to the system, especially in a world where, you know, our interest rate carrying costs on those CapEx investments are quadruple what they were two years ago.
Our strategy fits perfectly into that as well. Like, we're in a really quite exceptional state here now. It's been a very difficult three years for CAPREIT. We managed occupancy exceptionally well. We did not know how long the pandemic was gonna last. I stick to our strategy of minimizing vacancy effects. Our strategy is working exactly as we had planned. We're coming out of the pandemic. It's exactly what we called in terms of demand throughout the pandemic with household consolidation. The team is fired up. Get ready for more excitement from CAPREIT.
Got it. Okay. Two more quick ones on my end. I don't know if you'll have this number, but the 24% new lease spread was much stronger than the 14% in Q3. Do you have a sense of what the average cost per suite to turn was this quarter versus last quarter?
No change. If anything, we're seeing slightly lower costs to renovate because it's the market, the market is just there with or without the renovation.
Okay. No, that makes sense. That's good to. Then lastly, just for maybe Steve, just pertaining to your comment on maybe going shorter term on the debt on refinancing. Like, what kind of term are you thinking, and where would the costs for that term be today in relation to the 4.3% for five and 10-year money that you referenced?
I mean, five-10-year money is pretty much at 4.3% for CMHC financing. I mean, it all depends. I mean, I have constant conversation with Julian, where he has dispo proceeds and where my line of credit is sitting at maybe like 5%, 6%. That's pretty good use of proceeds and paying down the line. It's really, you know, it's a moving target in some ways or a moving strategy in how we deploy those proceeds. If the maturity is coming up on the mortgage, I may actually just not renew, or we just pay down the debt. It's all dependent on what Julian can do. It's really a more active debt management strategy.
You know, as an opportunity to highlight the investment team's work here, we are absolutely focused, I mean, on a delivering strategy. If we can continue to generate dispose in the three cap range, you don't have to be a mathematician to know 6% on your revolver is a heck of a good use of that 3% use of proceeds. We've got a lot of instant ways to deploy capital between our NCIB program, our delivering exercise, and the acquisition market. We are sitting on unbelievable instant use of proceeds.
Got it. Okay. Just for clarity, like, outside of the recycling, just in your normal course, kind of debt refinancing, like, when you talked about going shorter term, were you referring to the five-year debt, or were you referring to something shorter than that?
No, I'm referring to five year, or I can use the revolver, but it's likely going to be the five year.
Got it. Okay. Great. Thank you, guys.
Thanks.
Thanks.
Our next question comes from the line of Brad Sturges with Raymond James. Brad, your line is now open.
Hi. Good morning. Just on the disposition program, obviously, you know, you've been quite focused on the value add assets with intensification potential. I'm just curious if, does that program or analysis expand into looking at smaller markets where maybe the returns aren't as favorable or the, you know, the regulatory environment's changed where it may not allow for capital allocation into that market? I'm just curious if we'll continue to see more of the kind of urban value add assets being sold or, you know, are your analysis or opportunities to sell out of other smaller markets?
Brad, we're really open to selling anything that's not performing well or where we don't see good future returns. There are some markets that have been, yeah, subject to worse regulatory regimes or that have less population growth going forward or that have more supply than other markets. We're really combing through the entire portfolio, looking at the risk-adjusted returns of all of our assets and where we see strong or at least decent demand. That's how we're kind of filtering through and picking what we're gonna dispose of.
Yeah, just to build on it, Brad, we built out in the investment development group a fine group of talent, which is really now focused on asset management analysis. That really kicked into high gear, I'm gonna say almost six months ago. As Julian said, we're agnostic to markets. It's all about performance at this stage. We have great conversations now about future outlook, performance, and really just being completely agnostic to the real estate and focused on yield.
Okay. It sounds like you're still seeing that Cap rate spread between what you can sell and what you can buy still, you know, at least 100 basis points between the two.
Well, it's still low. It's such a low... Like, I'll let the guys chime in, but I can't help myself. When you're talking 3% cap, Stephen's got 6% on the revolver, Julian's got 4.5% caps in new construction, and we got an NCIB program that can also juice returns. It's, it's an incredible situation. Proceeds are not our problem.
Yeah. Yeah, Brad, I'll say that won't necessarily preclude us from selling stuff that are higher cap rates if there's no growth or heavy CapEx burdens or, you know, really onerous regulatory regime in the area. You'll see some of those as well. Like, we are really focused on total returns, not just the cap rate, but, you know, factoring in the CapEx, the growth and, you know, other considerations. Generally speaking, that is what we're seeing on the disposition front for some tighter cap rates than what we're buying.
You know, with the Ottawa sales executed, I assume that was initially used to repay the line, but assuming that eventually gets redeployed into new build acquisitions.
Yep. That's a good assumption.
Okay.
Okay.
The opportunity set that you were viewing on the, on the disposition side, that's still called around the CAD 600 million mark, in terms of potential assets that could be under consideration?
Yeah, for the year, if I could do CAD 500 million. I mean, it's all market dependent. you know, we're in negotiations on a bunch of different things, and, you know, we're working through it. if I could get another CAD 500 million or CAD 500 million for the year, it would be, you know, we would view that as positive.
We've also absolutely led the charge, as we said in the presentation, on acquisition fund opportunities. We're in active dialogue with the province of British Columbia and very much offering up ways to help with the federal government. Should there be announcements on that front, that could accelerate opportunity on the disposition front, but we're not factoring that in. When Julian's talking about that range, we're hopeful that the private market will deliver that. I got a point out, though, the team works very, very hard, and the dynamics of selling in this market to the private market, it's a different profile of buyer. Deals are really never deals until closing, one minute after closing date. You know, that's the environment that we're in.
It's worth the effort, and the team's doing a great job. We're very, as I said, extremely excited about the exercise we're going through.
If you were to contribute to that BC initiative, would that be a tie to, I guess, a third-party appraisal? Would you, does it sound like to you or based on your discussions with them, do you think there's appetite either in other provinces or at the federal level to do a similar type of initiative?
There's been announcements in Toronto and for a very, very small scale, maybe about CAD 60 million or something. This idea is taking hold in provinces, in municipalities and at the federal level. Our commitment is, of course, as always, is to our unit holders and value in that regard. We think we can strike that balance between, you know, protecting unit holder value and doing some good for Canada. As leaders, that's our responsibility. That's why I've been so vocal on this front is, you know, the notion of being able to buy buildings at, you know, 40% of replacement cost, something government needs to understand. We're trying to help them understand that.
Okay. Great. Thanks. I'll turn it back.
Our next question comes from the line of Kyle Stanley with Desjardins. Your line is now open, Kyle.
Thanks. Morning, guys. Just looking at your turnover spreads again, I'm just wondering, you know, the level that you achieved in the quarter, would you say that was more reflective of just underlying market fundamentals? Or, you know, would you say there's been a strategic shift or focus on kind of pushing rate a little bit more within the organization?
Yeah, no, it's definitely, market dynamics. Certainly we're always focused on maximizing value for our unit holders. This wouldn't be unique to CAPREIT. I mean, the whole market's really been experiencing pressure, and it's as we've alluded to, it's a, you know, a very large population growth matched with the, a shortage of new supply being added.
when in the
Okay.
This is also on a small number of units as well. I probably get caught up in the headlines, but when you look at the total rent increase passed on to CAPREIT customers, in place customers, we're talking sub 2%. This is what's helping offset the market. Julian makes a very important point that I touched on in the slide presentation, is that all the REITs in Canada combined are, I think it's like we're sitting at about 2.6% of the market with our dispos. We're a very, very, very small sample of the Canadian market, but reflective of what's happening in the markets that we're in.
Right. Okay. Thank you for that. Just digging into performance just from some key geographies, would you be able to comment maybe on the OpEx improvements you saw in, you know, Montreal, Halifax and Vancouver? It seemed like the, the strong same-property NOI growth obviously accompanied by strong rent growth, but, you know, it really seemed to be OpEx driven. Just wondering, maybe what drove some of that?
We had in a more remote geography. I think we said it throughout the pandemic, Montreal was really hit quite hard during the pandemic. We had definite staffing challenges there and we've got new leadership and really rebuilding the team there in Quebec, and it's having great results. I think we had some operational challenges. you know, from a margin point of view, the expenses show up because rents are lower. We're feeling, you know, very, very good about where we're at with the team in both the East and in Quebec.
Okay, great. Just one last one for me. Just on the septic issues within the MHC portfolio. I'm just wondering if you could comment on, you know, just provide an update, I guess, on where we stand currently.
Yeah. I'll click. I'll pass Julian on what we're trying to do. The reality is, you know, I think we have to own the problems that we've learned through older communities. The septic systems were in the 50-year range. It all had to do with falling costs. We had just another, you know, tragic coincidence of 3 sites at the same time. Why don't I pass it over to Julian to help share what we're doing on that front?
Yep. We've been working with the ministry and with some of our vendors to mitigate or lower the hauling costs as much as possible. On my end, to the extent that I can do it effectively, I'm gonna look to dispose at appropriate values, some of the worst offenders. It's certainly tough assets to get liquidity on, but it's something we're exploring and making sure that we do at proven price levels.
I mean, I would also just add on that front that the high grading of the CAPREIT portfolio is moving into our MH sector as well. We love this sector, but we're taking, with the help of our asset management team, a much closer look at returns. Like, the tradition is to love the sector. Now we're looking to love the returns. More refinement in total returns will help drive the high grading of the MH portfolio as well.
Okay, great. Thanks for the color. I will turn it back.
Our next question comes from the line of Jimmy Shan with RBC Capital Markets. Jimmy, your line is now open.
Thank you. Mark, I think you mentioned that the market rent that you always achieve on this quarter on turn starting to hit the affordability ceiling. Do you have a sense of what?
Yeah.
what the rent-to-income ratio would be on your tenant base on those terms?
That's a great question. A lot of this is gonna depend on the profile of the asset that we own. If you look back, we can get you the slide deck, but we had a deck, it might be in our investor relations pack still, that shows that the income-to-rent ratio in our portfolio is around 25%. This is incredibly affordable, and this is the point that we continue to make on how affordable the portfolio really is. When you've got home ownership ratios at 70%, 80% in the big cities, CAPREIT portfolio in major markets was 25. That 25 is now moving up into the low 30s, but it's still exceptionally affordable. You know, in the assets...
This is a bit of a thread the needle and understand the difference between the new portfolio and the old. If you're buying those value-add assets, you're targeting certain income brackets. Those will bump up against affordability ceiling much more quickly than the brand-new, high-quality luxury assets where family incomes are probably in the plus CAD 200,000 household range. It really is not just a sector. It's a tale of two different sub-submarkets within a rental universe.
Based on your comments that, given the terms that you've seen this quarter and especially the value, I assume a lot of that 24% would be on the value-add type of assets, that you're hitting that ceiling and that your expectations.
That's right.
Further mark-to-market rent on those particular assets, they really didn't have that much more room to grow. Would that be fair?
Well, 24% is a lot of growth. Yes, is 24 gonna turn into 30? Probably not. If you look at the slide deck where I think Julian was talking about the percentage of the portfolio value, I think we were at 86%, if I go by memory, value add, 9% new construction. We're gonna keep tilting that. 86% is still value add. This is what's 100% driving the big mark-to-market gains. Let's see if I got. Yeah, 86. The. Then the offset to that, Jimmy, you heard us talk about the margins in the newer buildings are much higher.
You don't have the inflationary exposure in the new construction assets that you have in the value add, but you have higher mark-to-market, and you don't have the CapEx, and the list goes on that we've executed as to the rationale for the strategy.
Right. Okay. Then, just on the natural gas hedging, I think you said 70%-ish in hedge. Like, how would that compare, the rate compare with the average of 2022?
Maybe I'll have to look into that, Jimmy, and maybe I'll take that offline with you.
Okay. Okay.
Yeah.
That's it for me. Thank you.
Our final question comes from the line of Matt Kornack with National Bank Financial. Matt, your line is now open.
Good morning, guys. It would be hard to believe that it would exist, but are there any pockets of weakness still within the portfolio at this point? Is everything kind of running on full steam ahead at this point?
Yeah, no. It's all markets are covered. The area of focus for CAPREIT is around some select lease-up assets, newer construction lease-up assets in Montreal. They're completely on target. That is for sure. We don't see any trouble in the actual market itself. I'll share a challenge, though, that we're now very much aware of. As we high grade the portfolio, you don't have to, again, be a mathematician to know if you're selling value-add buildings and buying brand-new construction, without using the NC before the NC of the year or paying down debt. The portfolio is getting smaller. We're gonna have to manage G&A as we go forward here. We've got, you know, I believe one of the most spectacular resi teams in North America.
We've got to preserve that team as the portfolio gets smaller. That'll be a headwind in maybe two, three quarters from now if all goes to plan on the dispo front. We have to manage that. These are things that we're working through, that we're aware of, and we've adjusted to most of the cost increases in G&A at this point with salary adjustments. Those are now behind us. Now it's just managing the team for a smaller portfolio and the effects of G&A.
Fair enough. Also this quarter was pretty heavy on the CapEx front. I think it was in line with your budget for the year. Have you thought to or provided any guidance on 2023 CapEx expectations?
No. I think we were conscious that in putting around, like, a CapEx budget, what we did provide was, I think, more of a estimate in terms of the non-discretionary CapEx. As Marcus kind of alluded to, you know, in suite improvements given the very strong rental market, we may be able to scale back on some of that CapEx spend. Areas that we will focus on, that we will put a lot more money into is the energy and conservation area. That way we can, you know, reduce some of the utility costs or even reach some of our ESG goals in terms of energy, so.
Okay, fair enough. I think, I mean, this quarter was, I think, the lowest turnover you've ever had in at least post-financial crisis, as far as our data goes back. Presumably, the opportunity set on suite renovations may be a little lower as well. Is that a fair comment?
That's an absolutely fair comment.
Okay. Just a quick one, Stephen. On the interest on bank indebtedness sequentially, is there anything in that? I would have thought it would have gone up, but it went down. I know there's some consolidation stuff with ERES, so I'm not sure exactly how it works on the financial statements. Any comment there?
Yeah. Matt, maybe I'll look into that. We'll take that offline.
Okay, sounds good. The last one for me, starts were fairly elevated, I'm not sure, for purpose-built rental during the pandemic when financing costs were exceptionally low. It seems like they're falling off a cliff, and I don't know, the few purpose-built rental entities in the public markets seem to not think the numbers make a lot of sense to start projects right now. Can you give us a sense as to, A, how you think that ultimately impacts the existing rental market, but also the opportunity set to buy some of these newer assets? I presume you'll have deliveries, elevated deliveries through this year, but they may fall off thereafter.
We're acutely aware of that problem. Like, there may be short-term distress, is all you're saying, in the market right now. That might represent an opportunity for CAPREIT to take on some of these projects. We've got underneath this, Julian can talk about it a bit more, but we're making tremendous strides on the entitlement front. Hopefully, those entitlements will be in place at the perfect time, call it 3 years from now. CAPREIT, again, Why don't you talk about our development program, what we're doing, Julian?
Yep. We're working through combing through the portfolio and identifying excess land, there is a significant amount of it. Going through the entitlement process and really trying to maximize the value of that land that doesn't really show up in our IFRS value and take that cash and redeploy it into our core competency of acquiring and operating apartments. To touch a little bit on what you were saying earlier there, it is something that we do see as being a problem for the supply of purpose-built rental going forward. The economics of developing apartments is becoming more and more challenging, given the higher cost of development and frankly, the still problematic entitlement process.
While we are still seeing new supply, there is a very real possibility that that starts to drop off as projects now become more and more challenging to launch. While that could potentially present a problem in acquiring more assets, on the flip side, it also will make the constrained supply even more constrained and drive higher rental growth. You know, it's a double-edged sword.
I guess taking that one step further, let's say we get to 2025, interest rates are a bit lower, we have a significant need for new rental and people can start again. Would you be inclined to build on your book at that point or sell the excess density so that someone else can build?
Hard to say what we'll do, you know, two or three years out from now. You know, we are in the business of acquiring and operating apartment buildings. It's not to preclude us from doing anything in the future, you know, we'd really evaluate it in the context of what, you know, where we can deploy our capital, how much capital is available to us, what, you know, what our risk appetite is at the time. For now, you know, for the foreseeable future, the strategy is what it is.
You know, Matt, we saw some merchant rental builders enter the market, really starting five, seven years ago. These are the projects that we're now seeing available in the marketplace that we've been acquiring. It is an incredibly unfortunate situation that we are where we are right now, because really what's happened now is going to determine what happens four or five years from now. I can't help but go back to what Julian said, looking two or three years out. All I know, and all we know here is that CAPREIT has an apartment portfolio, that is, you know, bigger than all of our peers combined, at a time that we have unbelievable use of proceeds.
We are so anxious to monetize the value of some of our lower tier assets because we have this use of proceeds, whether it be NCIB, delivering or buying some of these luxury new builds that we're seeing in the marketplace. Right. All we can say is right here and now, it's never been better in terms of the capital recycling opportunity. That we're very focused on. We're also very focused on unlocking finally the value of some of the land, and the team is making some great strides in that area. That will be the repositioning that will set us up for, I think, incredible opportunity three years out, whether it be selling that land, developing that land, maybe it's developing it for condos.
It's hard to say right now. It all depends on the environment at the time, but we're definitely setting ourselves up for success in the next three to five.
That absolutely makes sense to me. Thanks, guys. Appreciate it.
Thanks, Matt.
This concludes our question and answer session for today's call. I will now pass back to Mark Kenney for any closing remarks. Thank you.
I'd like to thank everybody for their time today. If you have any further questions, please don't hesitate to contact us at any time. Thanks again. Have a great day.
This concludes today's Canadian Apartment Properties REIT fourth quarter and year-end 2022 results conference call. Thank you for your participation. You may now disconnect your line.