Good morning, welcome to the Canadian Apartment Properties REIT second quarter 2023 results conference call. All lines have been placed on mute during the presentation portion of the call, with an opportunity for question and answer at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to turn the conference call over to our host, Nicole Dolan of Investor Relations. Please go ahead.
Thank you, operator, and good morning, everyone. Before we begin, let me remind everyone that during our conference call this morning, we may include forward-looking statements about expected future events and the financial and operating results of CAPREIT, which are subject to certain risks and uncertainties. We direct your attention to slide two and our other regulatory filings for important information about these statements. I will now turn the call over to Mark Kenney, President and CEO.
Thanks, Nicole, good morning, everyone. Joining me this morning is Stephen Co, our Chief Financial Officer, Julian Schonfeldt, our Chief Investment Officer. Let's start with an overview of our operational performance on slide four. As you can see, this slide demonstrates the increasingly tight rental market that we're experiencing across Canada. For Canadian residential portfolio, occupied AMR increased by 6.5% compared to the same period last year, 5.1% on a same property basis. This was achieved alongside consistently high occupancies of nearly 99%. Moving to slide five, our robust rent growth drove increases in operating revenues and NOI, both up by approximately 5%. Our operating margin remained strong at 65.9% for the three months ended June 30th, 2023.
Margin expansion was held back slightly due to higher repairs and maintenance costs, which we incurred from a combination of general inflationary pressures and a reduction in discretionary capital expenditure spend. As the rental market in Canada tightens, we're instead allocating that capital into in-suite maintenance. Diluted FFO per unit increased by 1.2%, primarily due to organic NOI growth and, to a lesser extent, our accretive NCIB repurchases. This was partially offset by higher interest being incurred on our credit facilities. Our payout ratio remained strong at 61.5%, and our diluted NAV per unit decreased slightly to CAD 57.08. This was mainly driven by the fair value loss on our European portfolio. Operating results were strong for the 6 months ended June 30th, 2023, as you can see on slide six.
Operating revenues were up by 5.3% compared to the same period last year. This drove the increase in our margin to 64.3% on the total portfolio and 64.9% on the same property portfolio, up by 20 and 50 basis points, respectively. Our diluted FFO per unit increased by 1.7%. Again, this was a result of our strong organic growth, along with NCIB repurchases, partially offset by higher interest costs. Our payout ratio remained conservative at 62.5% for the current six-month period. We continue to execute on our CAPREIT 2.0 strategy, as displayed on slide seven, I'm excited about the progress we've made to date.
On the asset side, we're continuously improving the quality of our portfolio by selling our older, non-core properties and buying new, purpose-built rental properties in Canada's fastest-growing and highest-density cities. Importantly, this allows us to support the supply of new construction rental housing where it's needed the most. We're also contributing to the crisis through our entitlement program. We're using development as a tool to extract and maximize significant underlying land value in our portfolio, which in turn paves the way for the construction of new housing supply. This asset management program accompanies our debt and equity initiatives as well. We've been investing in our NCIB to produce meaningful accretion for CAPREIT unit holders, and we also actively manage our debt strategy and mortgage portfolio. These programs are integrated with our broader capital allocation plan to ensure that we're putting net proceeds to the best use.
I'll now turn things over to Julian to provide a more detailed update on our capital recycling.
Thanks, Mark. Turning to slide nine, you can see the solid progress we've made since we started repositioning our portfolio. Far this year, we have sold $293 million worth of our non-strategic properties and have reinvested $208 million of net proceeds into newly built rental properties located in thriving regions throughout Canada. These high-quality, modern buildings now represent 10% of our Canadian portfolio, and we will continue to increase that allocation moving forward.... Slide 10 presents an example of our asset refresh in the second quarter. On the left, we show a property that we sold containing 393 residential suites and two commercial units in the Saint Laurent neighborhood of Montreal, Quebec, for $68.9 million, excluding disposition costs.
The property was built in 1971 and was sold at a premium to IFRS fair value. We reinvested net disposition proceeds into the growing city of Langley, British Columbia, through the purchase of Park on Park for $53.7 million, excluding transaction costs. The amenity-rich property was built in 2022 and contains 93 suites that have an average size of over 1,000 sq ft. It's located next to a park and a major transit station that provides direct access to Vancouver City Center, and it is also near several of CAPREIT's other new build assets in the area. The energy-efficient building is topped with 250 solar panels, and all of its suites are individually metered, which lowers utility consumptions and costs. We're excited to continue improving the quality of our portfolio through strong transactions such as these.
On slide 11, you will find an update on our NCIB. We've invested $339 million in the program to date, including $101 million in 2023, repurchasing our trust units at steep discounts to NAV and therefore crystallizing this value for unitholders. Moving on to slide 12, as Mark mentioned, our asset-light development model unlocks and maximizes land value across our portfolio. This not only generates proceeds for us to redeploy back into our bread-and-butter business, but it also plays an important role in contributing to the construction of new housing supply in Canada. Our development strategy is first focused in Ontario. We've identified an excess of 6 million sq ft of possible GFA across potential development sites in the GTA alone.
We're currently working with several best-in-class development partners on the entitlement and subdivision or severance process for over 2.5 million square feet of GFA. As for the planning applications we've submitted, this would provide for over 3,500 new residential homes in key strategic growth areas and major transit station hubs across the city, and we're actively working on several more projects in our entitlement pipeline. With that, I will thank you for your time this morning, and I will now turn things over to Stephen for his financial review.
Thanks, Julian. Good morning, everyone. Referring to slide 14, you can see that we have $265 million in available capacity on our Canadian credit facility at June 30th, and we plan to hold this capacity relatively constant for the foreseeable quarters ahead. Even after taking into account reduced interest, which we were able to arrange through our swap agreements, our Canadian credit facility is carrying a weighted average interest rate of 6.4%. As a result, with our elevated borrowing being stable for the short term, we expect to continue incurring higher interest costs. On our mortgage portfolio, we're fixed over 99% of our interest, and it currently carries a relatively low weighted average effective interest rate of 2.7%.
By fixing our interest costs, we're mitigating our volatility risk and enabling ourselves to proactively manage our debt. Our mortgages have a weighted average term to maturity of just over five years at period end, and we're expecting to up-finance between CAD 250 million and CAD 300 million by the end of 2023. Slide 15 shows the staggered maturity profile of our mortgages, which provides us with flexibility and reduces the renewal risk as well. You can see that we have no more than 14% of our Canadian mortgage debt coming due in any given year. You can also see that we have only 5% of our Canadian mortgage debt maturing in the remainder of this year and 8% in the total for 2024, which positions us well in the current environment.
Turning to slide 16, we continue to conservatively manage our debt metrics and ensure they remain safely within covenant thresholds. Our debt-to-gross book value was 40.4% at June 30th, 2023, and our coverage ratios remain stable and high. I will now turn things back over to Mark.
Thanks, Stephen. A key priority at CAPREIT is the continuous enhancement of our environmental, social, and governance performance. I want to take a moment to feature our progress on that front. Following the release of our latest ESG report, which is now available on our website, in 2022, we achieved a number of key ESG accomplishments, as highlighted on slide 18. We invested almost $20 million in energy efficiency, including the acceleration of our suite sub-metering program, which will lower consumption and improve our environmental footprint. As of June 30th, 2023, Canadian tenants who pay their electricity charges directly through the sub-metering or direct metering represent 68% of our total suites and sites in Canada.
We are also proud to have been recognized by Equileap in their 2023 Gender Equality Global Report and Ranking as the only Canadian company to have achieved gender balance across all levels. This includes our board of trustees, where we've exceeded our 30% target for female representation. Importantly, we are actively developing our corporate approach to climate action. In 2022, we identified our key climate-related risks and opportunities and performed a gap assessment to determine our priorities in aligning with the Task Force on Climate-related Financial Disclosures recommendations. This climate action plan is being integrated with all three pillars of our strategy, as shown on slide 19. We are proud to be taking that one step further with our enterprise-wide initiative to consolidate all of our many ESG-related commitments and actions.
Our trustees, senior executives, and managers from across the country have worked together to formulate a robust and comprehensive ESG program, which is now being incorporated into our organizational objectives and overall business strategy. This strategic alignment contributes to our core mission of being the best, best place to work, live, and invest. As you can see on Slide 20, we are committed to generating enhanced returns for our unitholders, while also empowering our employees and making meaningful contributions to our communities. We are pleased with how far we've come on meeting these objectives to date. We're excited to keep making progress on our strategic goals going forward. We continue to recycle our capital in the most productive ways possible. We're actively and carefully allocating our resources to the highest-yielding outlets.
We're ultimately seeking to create real value for all our stakeholders, and this means that we're focusing on modernizing our portfolio and contributing to the solution to the Canadian housing crisis. After many proud years of expanding and improving the value-add portfolio, we've entered a new CAPREIT era in which bigger is not necessarily better. We're thrilled to be optimizing our portfolio and growing earnings per share instead of our suite count. However, as this shrinks the size of our portfolio, we're cognizant that we must similarly optimize our organization. We need to make sure that we have the right teams to provide the right level of service for the right business, both now and in the future. By prioritizing our operational efficiencies and overhead as we are doing today, we're ensuring that CAPREIT 2.0 is set up for sustainable success in the long run.
With that, I would like to thank you for your time this morning, and we would now be pleased to take any of your questions.
Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If for any reason you'd wish to withdraw your question, it is star followed by two. 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 of Canaccord. Your line is now open. Please go ahead.
Thanks, good morning, everyone.
Good morning.
In, in, hey, in regards to raising rents, whether it's on, on turnover, on renewals, there's been some negative news a-as some have tried to, to push rents higher, even if they're not pushing it fully to market. Has this... Have you guys seen any of this in your portfolio, and is this impacting at all the way you're looking at managing your, your rental rates?
No, we're, we're actually taking, you know, a very conservative, balanced market approach to the rents. The, the reality is that, you know, during COVID, we had a lot of competition with respect to apartment rental. We saw rents fall quite dramatically into single digits, and as time elapses here, we're now seeing those leases come to market. It's quite often, you know, the, the more recent leases that come to market, and I think we're just seeing the, the after effects of COVID. I, I would say, no, we're measured in our approach and there's not a lot of opportunity, quite frankly, in the turnover, but I think we're doing a good job of finding that, that right balance.
How much will you be able to push it on the turnover?
Like, I think now we're in moderation phase. I wouldn't expect to continuously see the results. In fact, if anything, you're going to see a moderating, I think, of, of mark-to-market rents. It's not a, we're seeing post-COVID effects here now catching up, like I just mentioned, and I wouldn't think you're going to see much more acceleration on that front.
Okay, great. Thanks. Just on the asset values and the asset sales, are there the cap rates or maybe returns that you will look to increase the pace of selling? Interest rates have risen more, and the cap rates still appear low. So I'm just curious how you guys look at that as you progress through this program.
I'm going to ask Julian to kind of give a market overview, what he's seeing, and he's very active in the field. Julian?
Yeah. Thanks, Mark. With the rise in interest rates, it, it has become a little bit tougher, certainly the financing delays that, that have been caused, you know, particularly with the, with that increase of in the fees that came in, in June and created a bit of a backlog. It has made the environment a little bit tougher, we are still seeing good liquidity or decent liquidity in, in certain assets with, with, with private investors. You know, as you mentioned, the, the, the changing market dynamics can, can, can make some, some assets more attractive to sell, again, in a, in a tougher market, we just have to do what we can with the, with the existing liquidity.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Mike Markidis of BMO Capital Markets. Your lines are open. Please go ahead.
Good morning. Happy Friday, everybody. Mike here. Maybe just to quickly follow up on, on Mark Rothschild's question on the, on the rents, Mark Kenney. The comment, I just want to make sure I understood you correctly when you said that you don't expect to see any more upward pressure. Was that a market rent comment, or was that more of I'm trying to just relate that to your leasing spreads. I guess, directly asking the question is: is mid-twenties sustainable, in the near term?
The short answer to that is yes. you know, it's gonna hover anywhere from low 20s to mid, and that's the short term. That's as far as we can kind of see out, which is really only 90 days...
Yeah
in the marketplace. Yeah, that, that is, that is, the range that we're seeing. Again, I have to kind of be, be direct here. These rents are still incredibly, highly affordable relative to the alternative rentals in the marketplace, especially the condo space. Despite the numbers, which seem quite high, we are seeing that they're, they're still incredibly affordable on an income ratio basis. What it's really speaking to is that Canada really needs to get its supply story going. We're talking about it, we're acknowledging it finally, and more supply is what's going to really help ease pressure here.
No, absolutely. Anecdotally, my, my colleague on the research side was showing us a, two-bedroom condo rent that was CAD 4,400 yesterday. Totally get your point on that. Just with respect, with respect to, the comments on R&M and, and less discretionary CapEx and more capital being allocated to in- allocated to in-suite spe- expenses, I guess, or R&M that you expense. Maybe I'm missing something here, but I'm just kind of looking at, your CapEx, both on the non-discretionary and discretionary side. It's, it's virtually flat year-over-year, and, and you've got, less units. So I'm just trying to circle the square with respect to what you guys are getting at there.
I'll let Stephen provide more color, but in short, we are not letting up on our energy climate-related investments. You'll see increases in that particular category. We are taking approach with all other categories, that a dollar is a dollar, and let's just spend it efficiently. If that means doing maintenance versus capital work, so be it. I'm, I'm thrilled, quite frankly, to see the team move towards this model of just treating a dollar as a dollar, especially in a higher cost of capital environment. That's also not fully baked in. Stephen, you want to you want to comment more on the CapEx spend?
Yeah, yeah, of course. Yeah. We are also considering that inflation plays a part into that. We have, as you pointed out, Mike, you've seen CapEx be relatively flat over last year, but one component of that has increased is, as Mark has pointed out, our energy investment has increased considerably, and that will be for the remainder of the year. You will see meaningful decreases in, in discretionary and non-discretionary CapEx for the remainder of the year. There, there, we have taken a proactive approach around, you know, given that it's a tight rental market, we are reallocating capital, and, and you will see a slightly higher maintenance cost going forward into Q3, Q4.
Okay. So the, the year-over-year increases on general OpEx will continue just because you, you see the pace of CapEx coming down?
Yes, exactly.
Yes. Okay. No, great. Okay. One last one for Stephen Co. Just on the G&A, I think it came down, I don't have the numbers in front of me, but it came down pretty significantly quarter-over-quarter. Maybe you could just give us an update in terms of what you're expecting on the G&A line for the full year?
Yeah. Yeah, I would, I would use, I would use the six months as a, as a run rate for the remainder of the year, and also just build in some inflationary pressures. Otherwise, I think the six-month run rate is a better, better representation for the remainder of the year.
Okay. That's, that's it for me. I'll turn it back. Thanks so much. Have a great long weekend.
Thanks.
Yeah. Thanks, Mike.
Thank you. Our next question comes from the line of Jonathan Kelcher of TD Cowen. Your line is now open. Please go ahead.
Thanks. Good morning.
Morning.
Just on the, just on the, the asset sales, I guess you've, you've done about CAD 300 million this year. You're looking to do CAD 400 million-CAD 500 million. Have you the last CAD 100 million-CAD 200 million, have you identified those, those assets yet?
Yeah, I would, I would turn it over to Julian, but I just wanted to make a little comment, just on this from last time. Where Julian is focused in having quite good success is exactly in the category of assets that we're looking to, to move on, which would be the lowest quartile of the portfolio. Those buyers are still quite active. Julian, why don't you provide Jonathan with some more color on our disco program?
Yes. To answer your question, Jonathan, yes, we have identified those assets, and they're at various stages in the, in the disposition, process.
Okay. In terms of the other side, you have bought assets this year. Are you starting to see more opportunities from developers or, or maybe some smaller owners that, that kind of are out over their skis a little bit and, and getting hurt by the higher interest costs?
Yeah, for sure. On, on- yeah, you bet. Yeah, for sure. On the, on the acquisition front for the new build assets, there's definitely good opportunities and, and for some of those merchant developers that have floating rate debt that they use to fund it, the current environment is, is painful, and that's coinciding with, with, you know, a, a lack of institutional buyers. There's definitely good opportunities. We are being measured in, in, in our deployment of capital, just given, we're, we're trying to restrict it to the, the dispositions we're making. You know, with the, with the higher interest rates and a little bit less certainty, we're, you know, we're trying to be prudent in deploying that capital. There certainly are good opportunities out there.
Okay. Then just, just to sort of round it all together, if you're, if you're looking at selling and you're looking at some of those opportunities, what's, what's the sort of delta in the cap rates between what you think you can sell your, I guess, Mark called it, lowest quartile assets for it and what you can buy brand-new stuff at?
It really depends on the region. Yeah. Yeah, no, it really depends on the region and any specific assets. You know, it, it'll on, on the stuff we're selling, it, it, it'll hover between, you know, just under 4 and just above 4 cap rates, and, and on what we're buying, it'll be, you know, low to mid-fours. There's still a little bit of a, a little bit of a spread in there. What that doesn't factor in as well is the, the CapEx difference, right? Because those cap rates are based on NOI, and, and clearly the value adds we're selling will be, you know, significantly heavier on the, on the CapEx front, being 1960s or 1970s buildings typically, and, and the new construction assets will, will have very light CapEx requirements.
Okay. Then just one quick one for Stephen. For 2024 on your mortgage renewals, what sort of up financing are you targeting at this point?
Well, I'll probably have to get back to you on that. We're, we're currently evaluating based on the values, and we're working with our lenders. I'll, I'll take that offline with you.
Okay, thanks. I'll, I'll turn it back.
Thanks.
Thank you. Our next question comes from the line of Kyle Stanley of Desjardins. Your line is now open. Please go ahead.
Thanks. Morning, everyone. Just going back to,
Good morning.
Mike's questions earlier, just on the capital spend. You know, I'm just wondering how your commentary kind of relates to, you know, the 4%-5% OpEx inflation target you mentioned earlier? Would that still be intact, based on maybe more spend going towards, you know, the kind of nondiscretionary?
Yeah, I think, seasonal changes taken into account, I think the inflation is built in the, in the spend now, and you wouldn't expect to see anything more dramatic. In terms of the, allocation towards repairs and maintenance, we're kind of in a stable state there now. Using this quarter as an example, I would say, that's, that's a decent assumption. Stephen, would you add color to that?
Yeah, no, I agree. I think, if you use this quarter as, as a basis for OpEx growth for the remainder of the year, I think that's justified.
Okay. Thank you for that. Just one quick clarification, just on your CAD 400 million-CAD 500 million disposition target, is that incremental to what's already been sold, or is that in, you know, inclusive?
That would be our target for 2023. Yeah, you would count what we've sold to date in that 400-500 number.
Okay, perfect. That's what I thought. You know, just another one. On your-- you know, just given with how the, you know, the unit price has, has been trading, can you just talk about your capital allocation pecking order today and maybe how that's changed since we last spoke?
Yeah, it's, it's a great question, and it will continue to change, not because we're not convicted in strategy, but, but things do change. You know, Stephen has done, and team, have done a remarkable job on the debt ladder. We did a remarkable job, actually advancing mortgages at opportune times. It's really our revolver debt right now, which is the drag. Today, with any form of liquidity, we would definitely be focusing that cash on the revolver debt. It's a bit of a competition, quite frankly, because Julian, as he mentioned, is finding quite good opportunities in the market on the acquisition front. You know, those two things have to be balanced out against one another.
My, my inclination today is to pay down that revolver debt, because the balance of our debt is incredibly stable and, and incredibly well managed. In fact, it's the longest debt ladder amongst peers, so, so we're in great shape from a debt point of view. If we can use that money for revolver debt, that would be, that would be opportune.
Perfect.
Yeah, and.
Just one last... Okay, go on.
No, I was going to say the NCIB program, as you can expect, is, is, been put on pause.
Yeah, fair enough. That makes sense. Just the last one, Mark, a bit of a higher level question, but, you know, you've obviously been very active on advancing the housing affordability file in Canada over the last year or two, you know, ramping up government relations as part of the job. Just looking back on it all now, you know, could you walk us through your thoughts on maybe how the industry has progressed and maybe where you're still seeing some opportunities to improve?
I think, you know, I, I think that the, as I said on prior calls, the education, has, has definitely taken effect. You know, the more we've been able to dialogue with the federal government, there's a, there's a real understanding now that it's not corporate landlords that are raising rents, it's a supply and demand problem that we have in the country. That, that is reassuring. The provinces are doing their absolute best, quite frankly. You know, provinces like Ontario and BC are really kicking into high gear, and doing their, their very, very best. Like, I keep saying, the number one influence is at the municipal level, and it's coordinating and incenting those municipalities to free up density and to build capacity, quite frankly, to take on more density.
You know, we're, we're doing our, our very, very best to kind of explain the dynamic. All of this is, is under incredible pressure with population growth and, and quite frankly, financing costs and just general supply chain costs and, and labor costs. There's lots of inflationary pressure out there that are making pro formas wonky, and, and, and land values are going to stay high until we increase capacity in, in the country. Again, you know, it's a slow process, and, and Canada has an exceptional challenge because of the three level of governments that, that really need to get coordinated, that all have sort of competing ideals.
Right. Okay. No, thank you for that, very helpful. I'll turn it back.
Thank you. Our next question comes from the line of Brad Sturges of Raymond James. Your line is open, please go ahead.
Hey, good morning. Just to follow on Kyle's last question there. Just on based on the recent cabinet shuffle, you got a new housing minister. As you highlighted, you've been in discussion with the government for a little while here. Do you see this change in the cabinet extending or changing timelines in terms of where or when we might see some initiative announced by the federal government? Like, could we see anything by the full economic update or could this delay things a bit?
I think that for our industry, having Sean Fraser as the Housing Infrastructure Minister is highly productive. He comes with very strong immigration understanding, and that is, as we've said, primary thing that we're looking for on the resume. He gets it, and I'm quite optimistic. It's very clear now, I think, that the federal government is really under a lot of pressure here to, to help move the file along, and I think that we're, we're in good shape. Yes, the fall economic statement, I, I hope to be indicative. These are, these are new ministers, fresh in the job.
Hopefully, they're up to date on the files, but I think I would call that the general environment is, is turning more positive in terms of understanding the real issues affecting supply and demand in Canada.
Would you think that, like, one of the, the key or one of the new initiatives still could be, like an affordability fund at the federal level, as one of the, kind of maybe the first initiatives that they could announce or one of the first?
This is, this is kicking, a lot of excitement, at all levels of government. You've got the cities in the game now, provinces talking about it, and the feds. The reality is that there has been, almost a neglect in the investment of social housing so long that they, they need to catch up, and there's only one way to catch up, and that is to buy existing assets. You know, the lack of social housing, the need for social housing, and quite frankly, the inflationary pressure that's been put on income-constrained Canadians is just driving the housing crisis into overdrive. Quick action will need to be taken, and these acquisition funds are a quick way to help ease the crisis. You know, that's logical in my mind.
Let's, let's just hope that there's funding at various government levels and, and that the sensibility really, you know, makes it into policy.
Okay. last question for me, just, you know, going back to your opening comments on, on the development applications, the entitlement process, it sounded like, and, and correct me if I'm wrong, if there's more applications that could start... I guess I'm curious to know if, if you were to go through all the, the potential projects or sites, say, what's the total opportunity set in the portfolio in terms of net? Is that still a g o ahead?
Well, I'm just going to say the CAPREIT team is revving up front, and I can tell you it's one of the most exciting meetings that I'm able to kind of tuck my, my nose into. The investment team and development team is doing an exceptional job at, you know, being laser-focused and figuring out how we can do this. I'll just tell you, Brad, you know, it is so much work on a site-by-site basis, but the enthusiasm and the excitement about helping Canada bring more land entitlement into the fold at a time that we need more housing is really exciting for the team from a broader point of view. Obviously, it's unleashing value that you just, you know, your eyes pop out.
like, you know, I don't want to be too macro big in terms of the, the, scale here, but we're going site by site, and it's very, very exciting.
I, I guess historically, CAPREIT talked about, like, net 10,000 suites. It sounds like maybe you might not want to give a number today, but is, is, is that still ballpark where we could be?
We have the best team we've ever had, and the team is. It pushes me on being cautious, 'cause it does take so much time to get a real clear picture on what it is. I would say that wait for updated guidance on that front. All I can tell you is the initiative and effort and competency that we currently have at CAPREIT is the best it's ever been. We're getting at it.
Yep. I, I appreciate that, Mark. I'll, I'll turn it back.
Thanks, Brad.
Thank you. Our next question comes from the line of Jimmy Shan of RBC. Your line is now open. Please go ahead.
Yeah, thank you. Just on that 10% of the portfolio that's new build, I was wondering if you're seeing any, any difference in, in revenue growth, or any other metrics sort of in that bucket versus the rest?
Well, Jimmy, it's again, why this, this investment is, is not that difficult to... It's kind of a no-brainer because we are seeing uplifts in the new construction assets that are, that are just as impressive as the value add. Again, the market is really, really looking for quality, and when, when we're looking, we're moving assets from developer ownership into professional management, there's definitely yield spread there that, that can be had. Julian, I don't know if you would add any more color on some of the examples, or, or experiences we've had through the underwriting process.
Yeah, perfect. Thanks. You know, good examples of the property we picked up in Ottawa earlier in the year, we, we'd underwritten low single digit, revenue increases, but, we're managing to exceed that, by, by significant amounts, not just on turnover, but on, on renewals as well. Just given the, the, the, the difference in regulatory treatment for those types of, for those types of properties. It's been, it's been pretty strong on that front.
If you were sort of-- it would be fair to say that if you were to bracket that portfolio and look at the sort of pace of revenue growth, even though some of those assets are new and presumably the rents are closer to market, because of your ability to drive everything to market, the revenue growth in that bucket would be today slightly better than the rest, and presumably going to be consistently better than the rest. Is that?
Well, it's faster. It's faster. It follows the market far more quickly. Like, the runway on the value add portfolio is decades deep because it takes time. The new construction assets, too, it's a matter of speed. You can get there very fast, but the runway is not exactly the same. It's more, you know, more volatile to down market changes that we don't see on the horizon at this stage. You know, it's, it's just a matter of adjusting to market more quickly.
Okay. On the, the turnover rate, do you have a sense, sort of, what's the range of turnover, churn rates based on geographies or type of assets? Are there any-- I mean, intuitively, I would think kinda your best location, older assets with a lot of below-market rent or the deeper it is, the, the longer, or the lower the turnover rate. But I wondered if you had any observation on any kinda big ranges or specific pockets that stand out to you in terms of turnover rate being high or low?
Well, Ontario is where we're seeing, you know, the, the greatest amount of, of lease holding, I'm going to say, where turnover has really gone, gone down significantly. You know, Canada is starting to look a lot more like Europe in terms of churn rates, and quite frankly, we don't really see that changing anytime soon, just because there's a lack of optionality out there. I think the trend is basically to slow down everywhere. Again, CAPREIT, we made the decision during the pandemic, because we didn't know exactly when the pandemic was going to end. We're not scientists here, but we made the choice to manage our, our occupancy.
So we're not-- we don't have the catch-up that, that others may have right now, but everyone is going to be experiencing the same kind of churn rates going, going forward, you know, into 2024. I think it's a-- an across-the-country, all-market-segment phenomenon. See slightly more turnover, obviously, in the new construction assets because they are at market, and easier to, to, you know, walk, give up a lease. You know, the value add portfolio for all markets, I think, is going to be very stable in the low double digits.
Okay. Thank you.
Thank you. Our next question comes from the line of Gaurav Mathur of iA Capital Markets. Your line is now open. Please go ahead.
Thank you, good morning, everyone.
Morning.
Just on your disposition strategy, you know, could you provide some color on what the buyer pool looks like now? How have bidder spreads-
been when compared to the beginning of the year?
Julian, why don't you provide some dialogue there?
Thanks. Morning, Gaurav. What we've been seeing in, in the dispositions we've been doing is it's been predominantly private, private investors. It's in most cases, it's folks that we haven't had interactions with in the past before. It makes it a little bit, a little bit trickier to navigate, just given the lack of track record and kind of lack of reputation. But, there's a lot of creative and willing folks still out there. And, in terms of the bid-ask spread, it really depends on the property and the investor. It, it just takes a little bit more time working with the brokerage community or working with, with contacts we have and, and finding the right buyer.
Once you find, you find the right buyer, it and are creative in the way you go about the deal, we're able to tighten that bid-ask spread and get prices that we need. We're, you know, and we've said this before, but we're not in any desperate mode to sell. You know, everything we've done so far has been at or above our IFRS, NAV values, and we'll continue with that strategy.
Okay, great. Mark, you did mention earlier on the call that there is a preference to pay down the revolver. When thinking through the active debt management strategy, just what's, you know, how are you thinking through repayments versus refinancing here?
Yeah. Well, again, it's all available. Our source of equity today is dispositions, and, and, and opportunities in the marketplace are the challenge to, to paying down, debt in general. Our thinking is, depending on the amount of liquidity that we gain, today, first preference up to almost three, almost, well, CAD 300 million, almost CAD 400 million, would be to attack that 6.5% revolver debt. There will be ongoing competition internally based on-
Right
... opportunity to acquire existing buildings. It's kind of.
Right.
It's that simple. Like, if, if we were loaded with equity-
Okay.
If, if we were loaded with equity, we would then consider, after paying down the revolver debt and having no acquisitions to buy, to stay out of the debt market on refi, and, and to think about our CapEx funding for next year. We've got lots, lots and lots of use of proceeds.
Okay, fantastic. Thank you for the call, gentlemen. I'll turn it back.
Thank you. Our next question comes from the line of Matt Kornack of National Bank Financial. Your line is now open. Please go ahead.
Hey, guys. just on that, that last point with regards to the source of funding, I mean, you do have the ability to up finance existing mortgages, and I understand some of that goes to CapEx. Would a portion of that not also bring down your, your facility draws at this point?
Absolutely. You know, again, that's why it is fluid. Stephen, you can, you can explain the thinking there in terms of your debt strategy.
Yeah, absolutely. I mean, kind of what Mark said. I mean, wherever we can get top-up financing, if it's not paying our CapEx program, it's definitely going to pay down the debt. Just, just to touch on, like on the 2024, we do expect to finance around CAD 500 million-CAD 600 million of debt. Including that is the top-up financing. We will be looking at opportunities to pay down that very expensive debt.
I would only add, Matt, that I would just, just to sort of give color here in the thinking. You know, as Julian said, and rightfully so, we are in no desperate mode in terms of selling our assets. We want premium valuation to IFRS and, and the buyer pool, for a variety of reasons, the, the deals are not as fluid and certain as they once were. We're patient with time. Because of that, the timing of use of proceeds does move around a little bit because we're not going to rush to, to, to sell under any circumstance. We have this wonderful flexibility of our balance sheet, where we can use multiple sources of capital. If we're not-- if we, we're gonna-- we may refinance, we may use equity from a large sale. We.
All of these factors are difficult to pro forma because our rigor around, you know, staying convicted in the, in the long vision is there.
Okay. No, no, that, that makes sense. Appreciate the color. With regards to allowable or guideline rent increases, I think you highlighted that based on Ontario's inflation number, it should be around 6%. I think Quebec is, has been somewhat rational. You can push through 3%-5% on renewal spreads. Is there anyone in the government that's kind of hearing that maybe it's better to get landlords some money so they can maintain their assets, as opposed to getting all of your rent increases on turnover?
Well, I can only tell you that the frustrating narrative is, despite policy decisions, not all renters are being income constrained. We believe very firmly that those that can afford to pay should carry their fair share. Policy that only surrounds the most income-distressed part of the population is not healthy for a housing crisis. This sounds really common sense and straightforward, but, you know, it's, it's a matter of the, the, the politics of making change. We should all be united in our voice to government if we care about the Canadian housing crisis, to really, you know, chance the reality of, you know, not all renters are income distressed.
Yeah, no, that's fair. Inflation is 6%, and you have costs as a landlord, and you're large can and can afford them, but not everybody can. Just as a tangent to that, geography-wise, and in terms of where you'd put capital on the acquisition front, if you are buying new assets, are there specific locations that make more sense at this point? I know you've been kind of suburban and secondary/student-oriented markets, but is there anything else that you look at to justify kind of getting at the rent growth on a new asset?
Well, my favorite geography is opportunity, but I'll turn it over to Julian to, to provide some additional color.
I like Mark's answer, and I, I think I've heard you make the analogy that, it's not like a grocery store, where you can just kind of pick whatever you want off the shelf. It really is opportunity driven. Factors that we'll consider will be, you know, what's the supply of housing in the area? What's the rental stock? How affordable are the alternatives? You know, what operational synergies do we have? What do we expect future market rent growth to be? Population growth? You know, what, what types of cap rates can we get on, on the acquisitions in there?
It's, it's really a whole host of factors that boil into our total return expectations, as well as the risk of attaining those returns. Yeah.
Nope, fair enough. We'll, we'll continue to watch and see where you deploy your capital, and, and, been to that effect so far in terms of what you've targeted. Thanks for the color.
Mm-hmm.
Thanks, Matt.
Thank you. Our next question comes from the line of Mario Saric of Scotiabank. Your line is now open. Please go ahead.
Hi. Good morning, guys.
Good morning.
Just a couple on my end. First one, just a clarification on the OpEx question, the 4%-5% guidance before. Stephen, are you saying essentially if you're pegging us to the Q2 number, essentially the 4%-5% becomes closer to 5%-5.5% for the full year? Is that a fair way to look at it?
Yeah. Yeah, that's, that's a fair way to look at it.
Okay. Okay. Then maybe a, a question for Julian. On, on this density pipeline, the 2.5 million sq ft of GFA that you've submitted, what, what's your, what's your best sense today of what the value per buildable square foot could be on that once it gets approved?
Yeah. We don't really provide guidance on that. I mean, the thing to factor in and is, you know, these are gonna be coming online at various stages over the coming years. Some are gonna be a little bit more imminent, but I mean, the Peel Pan-Greensone is 3 years out. There's a lot of factors that go into those into those values. It's just not something we'd want to provide guidance on at this point.
Okay. Then maybe two more kind of philosophical questions, perhaps. Mark, you, you've talked about CAPREIT 2.0, which includes more focus on per unit growth and let's say, less, less focus on overall suite growth. I'm not sure if you can answer the question, I'll give it a shot. Look, if you, if you look out over the next three, five, 10, 20 years, you can pick whatever timeframe you'd like, if we just assume interest costs, let's take them out of the equation, let's say they're flat. Again, is there, is there a target FFO per unit or a unit growth rate that you think CAPREIT 2.0 can deliver over whatever timeframe you want to choose?
It's the question on the minds of all investors, no doubt. It's certainly a question that we, we, talk about and try to address every single day. Again, it's, it's this, it's the sphere of expectations and guidance. All I can tell you is, we have a, a approach now to our assets, that we look at returns, and we try to achieve premium pricing on dispositions, and we will do that in every possible opportunity where our criteria has circled those opportunities, period. We will take that capital, and we will deploy it into the highest and best use of net proceeds. As you heard, Mario, the, the, the trick is, I'm not trying to be cagey. Today, it's the revolver, but even today, that revolver debt may be pushed aside for an incredible opportunity on, on the acquisition front.
Regardless, we are gonna be unrelentless in pruning and working on growing earnings per share. Everything else is ego, and investors don't invest in ego. We're not interested in that. We are laser focused on growing earnings per share. The rigor around evaluating our assets and evaluating highest and best use of funds is one that you'll see from CAPREIT going forward into the future, and that's what we're excited about. I, I'm not answering your question directly. I think track record is a, a pretty good measure of looking, but we hope to accelerate that track record. Again, the potential of increasing value to the balance sheet through the development groups initiatives and unlocking land value is not fully baked in or realized into our, our track record at this point.
We are very focused on that for the reasons I talked about. It's providing land to help, help ease the Canadian housing crisis and, and most importantly, to bring value to CAPREIT unit holders. A lot of different factors here, but nothing's slowing down. The engine is revving up, and you can expect incredible things from CAPREIT going forward here now. We are coming out of post-COVID. We are making all the right moves, and I'm incredibly excited about what I'm looking at going down the pipe. We've got a great team.
Got it. Okay, that's fair. Speaking about revving the engine, Mark, what is your sense on market rent growth, kind of quarter-over-quarter these days? Have you, have you seen any slowdown in that growth, perhaps due to affordability question marks, or is it continuing at the same pace of, let's say, 2%, 3% per quarter, like it has been over the past year?
Well, I think, yeah, I think, you know, we're just going to see a moderating here because again, the leases that move out are always the most recent leases when you look at churn, okay? We're getting some post-COVID effect here. As I talked about earlier, it's moderating, but truly, we've got to do a better job of expressing to the market how incredibly affordable these new rents are. You know, they're, they're sure they're accelerated post-COVID, but we're talking about affordability option in the marketplace that just doesn't exist anywhere else. Like, we heard about $4,400 condos. This is a real affordability option for people. We shouldn't be as focused on those mark-to-market rents. They will, they will ease into the range we talked about, but they're still highly, highly affordable.
The runway is long on this now. Very long. The housing crisis was building five years ago. We did nothing about it, and the population growth, pressures have been exaggerated to never before seen Canadian levels. I don't see an easing at all on the demand side, and I don't see a lot of movement on the supply.
Got it. Yeah. The question was more, not so much on your, on your turnover spread, but let's say, for example, your typical building charges, $1,000, next quarter, it's $1,020, the market rent or $1,025. Like, is that, $25 per quarter, the pace of that, given the demand and lack of supply, is that essentially continuing?
Yeah. But not, not accelerate, but yes, continue.
Got it. Okay, last one for me. Just, it, it seems like there's a significant opportunity to buy new build in the market, and perhaps what's constraining your ability to do so is the financing delays in terms of being able to sell some of your older assets. You know, you're trading at a 12% discount to your IFRS. Now, you've talked a lot about buying back shares. What are your thoughts on if, if the private market in terms of sales is challenging, what are your thoughts about actually raising equity? Call it a 4-4.5 cap implied to buy new assets at a mid 4 cap. Does that make sense?
I just fundamentally don't believe in issuing equity below what we think is a very conservative NAV, very conservative NAV. Like, again, we're on a broken record here, and we've got to get the results out on the street, but our, our development land potential alone is not fully baked into that NAV, and I, I just don't, I don't believe in it. Like, we're patient. We're here to serve the investors of CAPREIT, and I, I don't want to dilute anybody because I think there's, there's a, there's an opportunity. We will find sources, but we will remain disciplined. You know, as Julian said, we're in no rush to sell at all, but where we can find those arb opportunities, we've become very, very good at it, and we'll continue on the pace that we can.
When we raise equity, finding the best place for that equity to, to, to sit on the balance sheet, and, and that'll be the discipline. I don't, I don't feel when, you know, CAPREIT, by market cap, is more than half the Canadian apartment REIT market. We've got a big balance sheet here. We got lots of flexibility, and we're in no rush. I'm not, I'm not afraid of losing opportunities because we're very good at finding them, and we're very good at, at implementing that opportunity into the balance sheet.
That's great color. Okay, thanks, Mark. Thanks, guys.
Thanks.
Thank you. We now have a follow-up question from Mike Markidis of BMO Capital Markets. Your line is now open. Please go ahead.
Thanks. I'll be quick here, just not trying to delay the call too much more. Just given the strategy and, and the increase in, in new build assets, one thing that kind of sticks out is that your same property margin is higher than your total portfolio, and that seems counterintuitive to me. If you could just address that, that'd be great.
You've touched on another feature of the new construction portfolio, which is they do enjoy higher margins, and that is good for inflationary cost pressure control going into the future. With those higher margins, we don't have as much exposure to inflation. It does have an effect. It's, it's another hidden attribute of, of the strategy that Julian and his team are, are putting to work. And yeah, I don't know if that answers the question directly, Mike?
Yeah, no, I, I hear you on the higher margin on the new assets. Shouldn't total portfolio NOI margin be higher in the same property?
Yeah, it should, yeah. Depending on the quantum. Like, absolutely, Once you enter a higher, high enough quantum of new construction, it will obviously start to move the overall margins. It's just a small percentage that's creeped in slowly over time. If we didn't add 10% new construction assets last week, over time, that margin will generally get pushed up.
Mike,
Yeah, go ahead.
Yeah, Mike, it's just this, it's also some of the, some of the costs that are on, you could say, are on disposed properties are included in your total NOI. You know, we, we did get rid of several properties that were, you could say, the culprits of our septic tank issues. You see a lot of those costs that are hitting the margin on a total NOI margin basis, which is, you know, lower than your same story.
Yeah, no, that, that makes sense to me. Okay, thanks, Stephen. Appreciate that.
Yep. Thanks.
Thank you. As there are no additional questions at this time, I'd like to hand the conference back over to CEO, Mark Kenney, for closing remarks.
Thanks so much. I'd like to thank everybody for your time today. If you have any further questions, please do not hesitate to contact us at any time. Thanks again. Have a great day.
Ladies and gentlemen, this concludes today's Canadian Apartment Properties REIT's second quarter, 2023 results conference call. Thank you for joining. You may now disconnect your line.