Good morning, everyone, and thank you for standing by. Welcome to the Canadian Apartment Properties third quarter 2023 results conference call. My name is Chad, and I'll be coordinating today's call. During the presentation, you can register to ask a question by pressing star followed by one on your telephone keypad, and if you change your mind, please press star followed by two. I'd now like to turn the call over to Nicole Dolan, 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, and good morning, everyone. Joining me this morning is Stephen Co, our Chief Financial Officer, and Julian Schonfeldt, our Chief Investment Officer. Let's begin on slide four. We're pleased to be reporting another quarter of robust operational performance. Vacancies remain stable at all-time lows, with nearly 99% of our Canadian residential suites occupied at period end. This reflects the tight rental conditions that we're operating in today, driven by the increasingly undersupplied Canadian housing market. As a result, our occupied AMR on the total Canadian residential portfolio has grown to CAD 1,490 a month as of September 30, 2023. We summarized our financial results for the third quarter on slide five. Operating revenues were up by 6.5%, which reflects our solid rent growth, especially in the context of a smaller portfolio.
Net operating income was up even higher, growing by 7.1%, with lower operating costs as a percentage of revenues. As a result, our margin on the total portfolio expanded to 66.5%. In part, this highlights the effectiveness of our strategy and the strong earnings that come from our new construction rental properties as compared to the non-core buildings that we're selling. It demonstrates that by upgrading the quality of our portfolio, we're also upgrading the quality of our earnings. Diluted FFO per unit increased by 4.6% to CAD 0.638 for the quarter, primarily due to this operational growth, as well as attractive purchases previously made under our NCIB program. This decreased the weighted average number of units outstanding by 2.8%.
Our diluted NAV per unit was down to CAD 54.36 as of September 30, 2023, mainly a result of the fair value loss recognized on our portfolio. This is due to an increase in the weighted average cap rate. Slide 6 highlights some key performance metrics year to date. Operating revenues and NOI grew by 5.7% and 6.2%, respectively, driving the expansion of our total portfolio margin to 65.1% for the 9 months ended September 30, 2023. This is up from 64.8% in the comparative period. Our same property margin also grew by 30 basis points to 65.4%.
This reflects the fact that our rent growth was strong enough to offset higher property operating costs, which resulted from inflationary pressures and increased repairs and maintenance expenses. However, we're strategically incurring these higher repairs and maintenance costs as we've intentionally scaled back on our discretionary value-enhancing capital expenditure, which flows through our balance sheet. Instead, we're allocating that capital to repairs and maintenance work, which impacts our margins. This strategic pivot was taken in response to the tight rental markets we're experiencing across Canada. Our consolidated operating costs, which include ERES, were also inflated by a movement in the exchange rate. However, the similarity increased our foreign exchange operating revenues upon translation. Diluted FFO per unit was up by 2.7%. Again, this was a result of our operational growth and NCIB repurchases, partially offset by higher interest costs.
Our payout ratio remained conservative at 60.5% for the current nine-month period. We're continuing to make solid progress on our strategic initiatives, as displayed on slide seven. Our portfolio modernization program is front and center. I've briefly mentioned some benefits of the program that we're seeing come through in our financial results, but the strategy really does pursue an upgrading of the portfolio in every capacity... We're purchasing newly built rental properties located in strong-performing, quickly growing Canadian geographies that have higher returns and lower risk. We're funding purchases through the disposition of our older buildings that are no longer core to our strategy. Considering our competencies and objectives, it is important to us this recycling also contributes to the remediation of the Canadian housing crisis.
We've established a robust development program that additionally helps with the solution to the housing problem, without us having to deviate from our bread-and-butter business. We're working hard on this front to entitle our excess land and crystallize the significant under-realized value embedded throughout the portfolio. In doing so, we're opening the door to the vital development of new homes in Canada. The NCIB constitutes another value creation tool at our disposal, which we can leverage whenever that presents itself as the best use of capital. Our proactive debt financing program is also a critical component of our strategy. As Steven will discuss, it provides us with the financial flexibility we need to execute on all our strategic objectives, and brings everything together to collectively form the CAPREIT 2.0 strategy.
I will now turn things over to Julian to provide a more detailed update on our capital recycling.
Thanks, Mark. Slide nine shows the extent to which we've been focused on repositioning our Canadian portfolio in recent years, and we've continued to make good progress on this initiative in the past few months. Since the second quarter, we've executed on the disposition of CAD 122 million worth of our older, non-core properties in Canada, at sale prices representing a premium to IFRS fair value. This includes two transactions closing this month, where combined gross proceeds of CAD 62.5 million. That brings our total Canadian disposition volume to CAD 450 million so far in 2023, which represents the sale of over 2,500 suites and sites.
We've also acquired CAD 208 million worth of newly built rental properties this year, comprising approximately 500 high-quality suites located in regions, growing regions with strong long-term fundamentals. This has increased our portfolio allocation to 11% new build today, up from only just one, one percent a few years ago. Slide 10 showcases some of our latest strategic transactions. We featured our most recent acquisition of the Lincoln property in Langley, BC. This highly amenitized building was purchased for CAD 51 million, excluding transaction costs and other adjustments. It was constructed in 2022 and contains 92 spacious suites with modern appliances and high-end finishes. You can also see that we benefit from operational economies of scale, as it's located adjacent to the Point and Meridian properties, which we purchased just a few years ago.
Compare this to the older, non-strategic properties that we're selling, a sample of which you can see on the top of the slide. We're looking forward to making continued progress on our asset recycling program and enhancing the diversification of our portfolio with these high-quality and well-located properties. As Mark mentioned, our asset-light development model remains another priority for us, as outlined on slide 11. Throughout the past 26 years, we've accumulated one of the largest rental apartment portfolios in Canada, which spans from coast to coast. That came with substantial excess land, which now has significant under-realized values that we're working on surfacing. As a reminder, we've identified over 6 million sq ft of possible GFA across potential development sites in just the GTA, and you can see that we've already submitted planning applications for over 2.5 million sq ft, with more to come.
By first undertaking the lengthy and cumbersome entitlement process, we're able to sell our underutilized land to developers, shovel-ready. This makes it a win-win opportunity, as it directly contributes to the development of new homes for Canadians, while at the same time, we can crystallize significant value upfront without having to take on any development, financing, or leasing risk. With that, I will thank you for your time this morning, and I will now turn things over to Steven for his financial review.
Thanks, Julian, and good morning, everyone. You can see on slide 13 that we maintain a solid liquidity position. As of September 30, 2023, we had CAD 258 million in available capacity on our Canadian credit facility, which was incurring a weighted average interest rate of 6.5%. Since then, we have repaid a significant portion of that, and today have approximately CAD 340 million in available borrowing capacity, in addition to CAD 1.7 billion worth of properties that remain unencumbered at pure net. Our staggered mortgage portfolio in Canada carries one of the longest terms to maturity in the industry at 5.4 years. We also have over 99% of our mortgage interest fixed at low weighted average effective interest rate of 2.9%.
This mitigates our volatility risk and enables us to proactively manage our debt, which forms an integral part of our larger business strategy. To that end, we continue to build upon our balanced and secure mortgage portfolio, and are expecting to have completed net top-up mortgage financing of approximately CAD 200 million by end of this year. Slide 14 displays the long-term composition of our mortgage maturities. You can see that these are staggered so that we have no more than 14% of our total mort- Canadian mortgages coming due in any given year. This minimizes our renewal risk, and we have been benefiting from this conservative debt strategy in the high interest rate environment of recent years. Turning to slide 15, our debt to gross book value, gross book value ratio ticked up slightly since the prior quarter to 41.4% at period end.
This is driven by the decrease in our gross book value due to the fair value loss recognized on investment properties this quarter, and also because we're shrinking the size of our portfolio as we work on getting better and not bigger. Although this metric remains conservative, we aim to keep it on the lower slot side, subject to our other accretive opportunities for capital deployment. Importantly, all our metrics remain safely within the limits of our covenants, including our debt service and interest coverage ratios. I will now turn things back over to Mark.
Thanks, Steven. We've talked a lot today about our strategy, as we normally do, and that's because we're very excited about its merits and the progress that we've been making. By consistently executing on our strategic objectives quarter after quarter, we've been creating meaningful value for our unitholders, and that's been our primary goal. We're not just optimizing our portfolio to achieve this. Referring to slide 17, we're optimizing on live, work, and invest. It affects every corner of our organization and every stakeholder in our organization. At CAPREIT 2.0, we're enhancing our portfolio, along with our communities, our contribution to the housing solution, and ultimately, returns for our unitholders. To accomplish this, we've also been enhancing our people and teams to adapt and ensure alignment with this re-envisioned strategy for success now and in the future.
Looking ahead, we remain extremely focused on generating as much value as possible through as many means as possible. We have ongoing opportunities for accretive uses of funds across our various strategic programs, and we will continue to actively exercise levers in tandem to keep maximizing value for our unitholders. With that, I would like to thank you for your time this morning, and we would now be pleased to take your questions.
Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask a question, please ensure your device is unmuted locally. Our first question today comes from Fred Blondeau from Laurentian Bank. Please go ahead.
Thank you, and good morning. So three quick questions for me. First, just looking at the fair value adjustments, I was wondering, how you feel about cap rates so far in Q4 and for, 2024? I mean, do, do you feel we reach a, a certain plateau, or, or you could see a bit more volatility from here? And, and I realize it's a bit of an unfair question, but, just wanted your view on that.
No, I don't think it's unfair at all. I think what we're seeing is, you know, a little bit of a relaxation on the long end of bond yields, and that speaks very well for future valuations. I think that most would agree that the tightening cycle is at least plateauing at this point and not expected to get much worse. With that in mind, we see a real strong recovery in values. Perhaps Julian could add his thoughts to that, Fred. Just give him a second here.
Yeah. So you saw our cap rates widen a little bit over the quarter, and that was a direct result of the interest rates, which have increased. You know, we've had a little bit of relief, I'd say, over the last week, and to Mark's point, with the forward curve showing a little bit of relief in the future. I do think the cap rate expansion is, you know, probably at potentially at its peak, but, you know, looking forward, you still have some exceptional rent growth going forward. So, hopefully, that does support some value uplift in the future.
That's totally fair. It's a good segue to my, my next question. Looking at your current target acquisitions, are you starting to see a change in the buyer pool or, you know, given where we are in the rate cycle, or it's still a bit early?
Yeah. So in terms of the acquisitions we're looking at, we're still finding it's not anywhere near as competitive as a market as it was before. Just with the bond yields still being fairly high and capital being scarce, it's not as competitive as it was before. So it still does remain a good market for buying.
I'd only add,
Yeah
Fred, we remain in a bit of an upside-down world here, where, you know, there's good energy in the, the, I'll say, the lower-end product or the least less expensive price per door product, and the opposite in the institutionally held market that was the most frothy going back two, three years ago. That end of the market is highly sensitive to long money rates. And again, we're I think you'll, you're gonna see a real pickup, probably Q2, Q3 of next year, of the institutions getting back into the trading of assets.
That's interesting. Thank you. Then, maybe last one, in terms of current rent, current rental rates, are there any markets where you're starting to see a certain plateau or where you're starting to see a growing risk, given the macro headwinds or things remain pretty stable here?
No, it's quite stable. You can see there's a slight uptick in our mark-to-market rents and a dramatic downtick in the number of units that we can access. The strongest market in Canada is clearly Ontario, and Ontario is clearly the market where it's difficult to extract the value because low turnover. But again, it's a bit of an upside-down world. Like, the best province to be on a fundamental point of view is Ontario, and it's all a function of the housing affordability crisis, where people have nowhere to go, you see low churn, and that's what we're looking at in Ontario for now. But the value in the mark-to-market of rents is just incredible in this province of Ontario.
That's great. Thank you so much.
The next question on the line is from Jonathan Kelcher, from TD Cowen. Please go ahead.
Thanks. Good morning. First, just, I guess, sort of following up on Fred's question on, on, acquisition market. We're starting to see more headlines of, of some distressed developments. Are you guys seeing any opportunities there yet, or is it, too early? And I guess secondly on that, how would you—like, how soon would you take over a project?
Yeah, I'll take that one. So we are starting to see that. You know, I haven't seen, you know, in too drastic of a way, but we're definitely starting to see the merchant developers being under a little bit of pressure to pay off variable rate higher-cost debt. So, you know, that coincides with, you know, what Mark said earlier, where there's just a little bit less of an institutional bid for them. So, you know, there are some interesting opportunities. We are able to act quick. That's one of the very strong advantages that we have here because of our size and scale. And the capital recycling that we've done, having sold over CAD 400 million, has given us some firepower to be able to take advantage of that.
So, you know, we're being cautious with deploying capital, but we are looking forward to taking advantage of some of those opportunities in the... going forward.
I would only add, Jonathan, our reputation should not be underestimated in this environment. CAPREIT has a very long history of doing what we say we're gonna do, and that carries tremendous weight in a market where merchant developers are looking to close quickly. Julian's had a wonderful response from the brokerage community, knowing that CAPREIT's there, and that definitely gives us pricing advantage, and that's 26 years of reputation at work.
Another point I'll layer on there, too, is with the CMHC financing delays, like, you know, you're looking at half a year to get that. For a lot of folks, they do rely on that to make their IRRs and their targets work. For us, we have such a huge balance sheet in unencumbered assets that we can kind of synthetically put debt on a property right away. And so that's a bit of a somewhat unique advantage that we have that can carry a lot of weight when negotiating with vendors.
It just happens to coincide perfectly with our strategy of recycling assets. The opportunity in the market is there, and that is right in the scope of our strategy.
Do you think you'll be more active on the acquisition front in 2024 versus 2023?
We'll remain opportunistic. It's hard to have a crystal ball. I can describe the environment as having those opportunities right now. We don't expect these opportunities will be there for the long term, but they're definitely in the marketplace now. We'll be restrained, we'll be, you know, disciplined, and we will stay completely on strategy. But so far, the strategy is working exceptionally well.
Okay. And then my second question is just on your operations, on the expense growth, and you did a good job of laying out—laying it out versus CapEx spend. But have you sort of got to the level where you want to be on that, such that we can sort of look at this quarter's CapEx and kind of push that through next year and similar on the expense side?
Yeah, the whole team is quite proud of treating a dollar as a dollar and focusing our efforts on just being efficient, not where the accountants decide it's going to land, capital or repairs and maintenance. So we're just going to stay strong on that. I feel very confident. When you look at our capital spend, you're seeing a dramatic change in discretionary items, but a somewhat increased commitment to carbon emission investments, GHG reduction investments in energy. So, you know, overall CapEx number is a little bit confusing. When you look at our ESG investment commitment, it's fully in place and accelerating, and when you look at our discretionary CapEx, it's definitely being pulled back.... and it's that category that's having somewhat of an effect, albeit not profound on the repairs and maintenance.
The overall effect, like I said, is a dollar is a dollar, and we're going to continue to run the business that way.
Okay, but if we think about modeling for next year, how should we think about R&M expense growth?
Hey, Jonathan. So I think just in terms of R&M expense growth, I mean, as Mark pointed out, we're continuing to shift our dollars to more of the R&M side as opposed to the CapEx side. That didn't really start until, like, I would say, early maybe late Q1 of this year. And so therefore, there will still be some overall effect on the 2024 numbers if you're modeling for next year. But we're continuing to focus on that. So I think you know using this year is obviously a little too high if you're modeling that, but I would say it's going to definitely be lower next year.
Okay, thanks. I'll turn it back.
The next question is from Kyle Stanley from Desjardins. Please go ahead.
Thanks. Morning, everyone. Just going back to your leasing commentary or the leasing spread commentary, Mark. Last quarter, you'd mentioned that, you know, turnover spreads were still benefiting from the aftereffects of COVID. And that as a result, maybe the upward trajectory of the turnover spreads were somewhat more limited. You know, as you highlighted, we did see the spread tick up again this quarter. So just curious on the expectation moving forward, you know, how much further can spreads continue to expand? And, you know, what is the runway for spreads maybe staying at these elevated levels?
Well, the two numbers that are so correlated is the turnover churn numbers and then the leasing spreads. When your churn turnover numbers dip below 10% in provinces like Ontario, you can pretty much count on those leasing spreads to stay where they are because we're a sample of the market. There's nothing unique going on. I would say that then we have a great revenue team at CAPREIT. So at the end of the day, it's the housing crisis we can now use as the culprit to these limits, and I don't expect to see we're in historical new heights that I've never seen in my 35+ year career here. I don't expect that you're going to see an upward trajectory, but we're in, as I said, historical levels right now.
At this point, not seeing any relief, though, on the apartment churn. There's nowhere for folks to go.
Yeah, I'll-
Okay.
Later on, just support, supporting that, too. Just touching on the comment I said earlier about the merchant developers, you know, slowing down and dealing with the financial pressures of the variable high-cost variable rate debt. You know, so you have that happening at the same time the government's been increasing immigration consistently. It, you know, it continues to outline really strong trajectory for the apartment fundamentals in the future. Yeah. No, that, I think that makes perfect sense. What you mentioned, you know, just turnover remaining low. Some of your peers this quarter have noted maybe a little bit higher turnover in the third quarter, specifically, than they had expected. Is that something that you might have witnessed this quarter?
Or, you know, has your outlook for turnover, I guess, as we go into 2024, shifted at all, or is it still kind of trending in that maybe lower teen level?
Now, listen, we've got great peers, but CAPREIT's done such an exceptional job of our locations that our churn is right in the heart of the housing crisis. So our churn will always stay a bit lower due to the, I would call, the superiority of the market locations that we have. And again, it's a complete correlation between churn and leasing spread. So when you want to talk quality of portfolio in terms of where the hot action is, look at CAPREIT. Lowest churn, highest mark-to-market rents, superior rental locations in the sense that we're urban center, heavy Ontario, heavy large Canadian city. So it's just a little bit of a difference. If you're in markets and you see those uptick churns, you've just got, you know, less of a housing crisis going on.
Okay, thank you for that. Just the last one, you hit your disposition target of CAD 400 million-CAD 500 million for this year. Just wondering what kind of incremental disposition activity we might see next year.
Yeah, we haven't provided guidance for that, and probably not going to do that on the call, but, you know, we remain committed to our capital recycling strategy. It is going to be dependent on the market, but, you know, we don't have any plans of stopping the momentum that we've had this year and that we've achieved. And so it'll really just be opportunistic and market-driven.
Okay, makes sense. Thank you for that. I'll turn it back.
The next question is from Mike Markidis, from BMO. Please go ahead.
Thank you, operator. Good morning, everybody. You guys have obviously been very successful in your strategy to upgrade the portfolio, and I guess most of that's been done through buying assets outright. But as the world evolves, are you guys seeing any opportunities to get involved in projects sort of midstream through, let's say, like a mezzanine loan type structure?
... Julian had such, and the investment team have done such a great job of keeping a pulse on the market. We wouldn't have to go there to find great value today. We've got a great pipeline of opportunity that'll match it with discipline on the dispo side. But we know that there's condo distress in the market. We're reading the newspapers, we can see what's coming. But if you were asked to the investment group today about the opportunities, it's-- there's a big, long list that we could go shopping with before we have to go there. I think that's the, that's the later inning opportunity of 2024 for us. Again, everything will be driven on our ability to properly recycle cash.
Right. Like, Mike, I'll just layer on, like, the acquisitions we've been doing and that we're looking at are all below replacement costs, right? And so given that we have those, no development risk, no lease up risk, and we're able to buy them cheaper than, you know, if we were funding through a mezzanine or other development alternatives, it just remains to us far more attractive. So to get it below replacement cost and already done. Now, in the future market, as Mark said, where things change, we remain open to doing whatever's best for shareholder value. But for now, this is, you know, the clear answer.
Okay, thank you. And then just last question for me, just on the, you know, your effort to expand the amount of entitlements that you guys have. When you look at the entire opportunity set, is it easy to sever land parcels like you were able to do, on Cavendish? Or do most of your opportunities require demolition and replacement of existing units?
I'll let Julian answer this, obviously, but I can't help myself. The environment couldn't be better for this part of our strategy as well. Obviously, as we, you know, found ourselves in Canada in the, you know, the deep, dark depths of a housing crisis, we have less nimbyism, and we have far more, obviously, you read the newspaper, governments are turning their eyes to how can we help versus anything else. So I'll let Julian kind of describe the opportunity, but I can't help but try to give the market a bit of a peek here. Obviously, the environment has changed for entitlement.
Yeah. So when we're looking at how we prioritize and rank them, it's largely based on the most value we can surface, which is, you know, in a lot of cases, going to involve high rise. Sometimes it's going to be infill, like the two Davisville sites. Sometimes there's going to be some demolition and rental replacement required. But most of the ones, particularly where there's high value, there's a, you know, a large enough parcel for it to be severed and sold. And, you know, we've discussed this before, but when you look in Toronto, the value of condos versus brand-new apartments, the spread is still quite large, so they are still oriented more towards towards condo condo development. But to answer your question, for the most part, they're easily enough severable.
Okay. Just following up on that, how far away are we, do you think, from that becoming a bigger part of your disposition program in terms of selling entitlement?
We've learned our lesson with giving the universe an even a path, so we're trying to be extremely restrained. Julian's group is very, very hard at work getting ready to announce new projects at advanced stage. But in terms of the market, I think you should really keep focused on what we've announced as being in process, because even in these in-process deals do take time. You know, you only have to drive by our assets and to understand, my goodness, there's more here than anywhere. But really focus on what Julian's laying out in his slides on the development front, that we've got in action.
Yeah, and I'll just touch on those very quickly. Like the Davisville ones, I mean, you know, you're obviously at the mercy of the city, but we do expect to get those entitled early in 2024, so fairly imminently. You know, when that actually becomes a disposition, you know, we're not committed to having to do it right away. We're committed to getting the most value for shareholders. So at the time, we'll make an assessment if the market's supportive of an optimal value and see what we can do there. But those would be the more imminent ones. And as Mark said, you might see more kind of added to the list. Teams are working hard and yeah, we'll continue to push through.
Understood. Thanks for the color.
The next question is from Jimmy Shan from RBC Capital Markets. Please go ahead.
Thanks. So just on the strategy of spending less on value at CapEx, I was wondering if you could put some numbers around the cost-benefit analysis. Like, is it that you're, you know, you're spending CAD 25,000, you'll get CAD 300 a month in rent extra, or you're now spending CAD 1,000, you get CAD 50? Like, what's the calculus there? And then, I guess, also in that, are you thinking about costs of the spend in terms of, like, how you're financing it, and the higher rates have gone up, so it's incrementally not worth it from an even from an IR perspective? Maybe give us some thought there.
Yeah, I think as we go forward here, we're going to give more color. Like, the portfolio is now, you know, reached 10% new construction, but it starts with a variety of considerations. It starts actually on the dispo front for the CapEx growth, total return. Investment group does a phenomenal job with that. And then we balance that against higher margin, lower inflationary impact assets on the income side. So when we're buying these new construction assets, they're, you know, fully sub-metered in, in most cases. The rents are higher, the margins as a result, are much higher. So the ongoing effect of inflation, we can't gauge that right now, but we know when you're in a high, high margin asset, you obviously have less inflationary pressure. Then it's just the life cycle of CapEx.
So when you're buying a brand new construction asset, you have perfect planning on the CapEx front, where, you know, the, the non-core portfolio or value-add portfolio has historically been at various stages of life cycle reinvestment, from the time we buy it to the, you know, how long we've owned it. So all of that has staggering math. When staggering just means, like, different stages of investment that are required, Jimmy. We can and we will give you know, better insights on the merits to these new construction assets and how they play out on the long term. But really, it starts with the dispo front and moves over to the pro forma on new construction. I don't know, Julian, if you would add anything to that.
No, I mean, just more specifically, I guess, to Jimmy, your point in terms of the CapEx that you spend. I mean, the model has changed now, and so when rents are, you know, becoming quite high and unaffordable for folks, the amount of extra money that you'll get from, you know, doing a full renovation or doing the hallways, you know, keeping the hallways to the highest standards and everything, it's not like it was before. And frankly, it makes the units even more unaffordable for Canadians. So from our perspective, the IRRs on that incremental CapEx aren't where they used to be, and it also helps kind of keep the units a little bit more affordable.
That said, with respect to the life and safety, the green CapEx, all of that stuff, I mean, that's just ingrained, and we spend on that just 'cause that's our model, and we wanna have a, you know, nice, safe, energy-efficient homes for all Canadians. But in terms of the incremental spend that, you know, as you mentioned, the IRRs aren't strong-- aren't as strong anymore, given the high demand and low supply.
And again, we're just referring-
Yeah, that's what I was trying to get at.
Yeah, like, Jimmy, just, just to finish up. The value add, again, we couldn't have predicted in a pro forma this slowdown in churn. So even the predictability of your income stream in some of the older assets, the value is far more embedded. You look at the market rents and, and they are truly unbelievable. But extracting that value can be choppy. And, and so that we just don't find that in the new construction assets. You're, you're at market rents, it's less difficult to mine the value. You tend to have more flexibility on the renewals. It's just a whole variety of things that are just difficult to pro forma and quantify.
Yeah, no, no. Yeah, I was trying to get at the sort of decision, not necessarily against new build, but just the... I think you addressed it, Julian. The other question I had was on the reorg cost that you incurred. So can you provide some color in sort of what your initiative was, so within the organization there?
Yeah. You know, Julian mentioned in the presentation, we sold over 2,500 suites. Steven has continuously talked about the better versus bigger. Company's getting higher quality, but we are, you know, the strategy changes. We're not a company built for growth of unit count anymore. And we were very much focused on the growth of unit count for decades at CAPREIT. And so it's a lot of, there was a lot of very senior and long-term employees that we unfortunately had to look at hard in terms of what's gonna happen here over the next two to three years. And that's what that restructuring is about.
Okay. Okay, great. Thanks, guys.
The next question we have is from Matt Kornack, from National Bank Financial. Please go ahead.
Good morning, guys. Just a quick follow-up to Jimmy's last question there. Net of the restructuring cost, is that kind of what we should think of G&A on a run rate going forward, or is it, it looked a little low relative to where it was historically, but that may be the net effect?
Well, I'll let Steven maybe pass comment, but what we're talking about here is, a mitigation of cost increase net 2024. G&A, as a percentage of revenue, will be going down, but the overall cost of G&A in the model, when you factor in increases and some other things that we're doing, to restructure for the new CAPREIT, there will be new jobs added, as we go forward. Steven?
Yeah. So Matt, I would say if you're doing for modeling purposes for Q4, I think year-to-date numbers, excluding the non-recurring severance costs and termination costs, that's a good run rate for Q4. When we look into 2024, as kind of Mark already pointed out, you know, there is gonna be general increases across the board. There's promotions, there are new hires, and replacements. And those ones, I would say just, you know, on ah ... run rate basis, I think 2023 is a good run rate goal for 2024.
Okay. No, that, that's perfect. And then just with regards to the fair value adjustment that you took in the quarter, it seems to be almost entirely concentrated in the GTA. And I get that turnover is lower, cap rates on that portfolio were low. But how should we think of kind of the flip side being that land value is probably the highest in the GTA, and you've got these redevelopment opportunities? I assume that's not in your fair value number, but just interested in the methodology as to why that market in particular had a write down this quarter.
Well, it's a great conversation. Again, if anything, we get criticized for being very conservative here. Just got evidence of trades, like the institutions were driving cap rates to the lowest in Canada in the GTA pre-pandemic. And in our new interest rate environment, there's a pause, so there's very few trades to look at. Okay? But when you look at the embedded value in the market rents, it is incredibly profound. And as Julian said, you know, the condo land value opportunity in our portfolio is unparalleled, okay? So we have absolutely, you know, we have two vaults of value in cap rate land. It's the severed land in Toronto, and it's the redevelopment land in Vancouver, so both in the heart of Canadian housing crisis.
I think that, you can see, I'm gonna predict probably in the middle of next year, when interest rates moderated, there's at least clarity on where things are going. This will rocket back, there's no question. But without evidence of trades, it's the right thing to do to give proper clarity to investors. So that's why we've taken that step.
I'll just layer in, too. You know, we had the lowest cap rates in the GTA, in our portfolio. With what happened with interest rates in the quarter, obviously, that it you know impacts IRRs and models. But I'd say more importantly, when you've got lower cap rates, your DSCRs become an issue. And so for buyers, with the higher interest rates, they can't get as much debt financing. So not only does that impact their IRRs, but it impacts the amount of equity they need upfront. And so it's just a little bit more sensitive, in that market to the interest rate increases. And as Mark said, there's a low amount of trade, so there's a bit of a guessing game in there.
You know, our priority with our IFRS values is, you know, always first and foremost to just be accurate with it. You know, that was our best kind of view on the direction to take it.
It gives investors a better take on loan-to-value. When you're super conservative, as we are with this, the loan-to-value numbers, I think, are what are most important to people more than cap rates. And it gives, again, that conservatively translates into LTV, which we're holding together at a very good number.
Fair enough, and the market's pricing you another sort of 70 basis points higher than where you're marking the portfolio. So, it still seems like a very good buy, and we'll see how the cap rates trend as rates hopefully come lower. But appreciate the commentary, guys. Thanks.
Thanks, Matt.
The next question is from Mario Saric from Scotiab ank. Please go ahead.
Hi, good morning, guys. Just a couple of clarification questions on my end. Coming back to the G&A cost, the CAD 4.2 million or so this quarter, like, how would you break that down between corporate G&A and like R&M or operating costs in terms of the savings going forward?
No, it's all. It's all corporate. And, you know, it's really something in the neighborhood of 30, 30 people.
Yeah. Just under 4% of our workforce.
But all at the corporate level.
Yeah. Okay. And then, more of a, it's more of a theoretical question, Mark, coming back to this notion of, like, massive value being locked into the buildings, given the mark-to-market and very low turnover. You know, if turnover remains low, just it gets extended out in terms of realizing that value. Does the strategy, like, will the strategy be different in a private setting versus a public company in terms of extracting that value over time? What I mean is that, in the public markets, like, the focus is on quarterly results, whereas in the private market, generally, there's a longer duration in terms of view. So does that change how you think about the value creation potential there over time?
It's all in the detail. Though I remember one of the first things I learned in this business was the value always stays in the buildings. And I'm very, very mindful of the fact that the value is stored in our assets, and our value book is bigger than anybody's. When you look at this mark-to-market number, that's a peak of what's inside the doors, and it is incredible. That being said, we are absolutely open to trading some of that value to move into our new construction approach, because we think there's a different form of value stored in below replacement cost assets. So to answer your question, like, theoretically, we're going to be hyper, so, selective.
We will keep what we deem to be the CAPREIT crown jewels for the type of structure that we are, and we'll trade out high-value opportunities in exchange for what we believe to be even better value opportunities for REIT unit holders. That's the entire thinking between, with, with CAPREIT 2.0, is it's being highly laser-focused on where we can trade out what's incredible value. Just look at our mark-to-market rent. It's not even theoretical, it's there. Moving it into low inflationary, exposed, all market rents, highly CapEx, well-planned assets for the future. Like, little investment in CapEx, but real flexibility in planning. CAPREIT 2.0 keeps moving. You watch the CapEx program, it's going to vaporize to very, very low numbers, and the inflationary pressure in the operating results will be highly mitigated.
Okay. Well, thanks for that. I don't have the presentation in front of me. It may have been in this presentation, but I know you've had it in the past, where you've kind of had a pie chart, and you've highlighted the percentage of the portfolio that's, it's value add versus new construction. I think it went up, like, 10% in terms of new construction over the past 10 years or so. When you, when you think about that 10 years out, like, how does that 10% look? Like, are there levers that you can pull to really accelerate the shift in composition, or, do we think about the 10% becoming 20% in 10 years from now kind of thing?
Well, I'd like to pick a number, but we have these crown jewel value- add assets. Like, we have in, like, locations that are just irreplaceable, and we want that value stored for generations to come, okay? At the same time, I'd love to advance the strategy, but not, not at the expense of giving up value. We will just not give up value at CAPREIT. And, and the investment team has again, done a remarkable job. That, that growth from 1%- 11%, represents unbelievable restraint. A, a far less disciplined company could have had it at 30 by now and given away all kinds of value. We won't do that. We have an exceptionally high-quality portfolio that we think we've seen the opportunity to make it even better.
So, you know, to break it down, we will be providing a little more clarity on where we're going in 2024. We're just not prepared to do that right now. But as Julian said, the strategy is intact. The team is in full action, and we, we've never been more excited.
Got it. Okay. My last question just pertains to the tenant turnover. I'm not sure if you have this information, but as you mentioned, it's kind of sub 10% in Ontario. Are you at all able to break down the tenant turnover by lease duration? Like, for example, what the tenant turnover might look like for tenants that have been in the buildings for longer than five years or in the suites for longer than five years versus tenants that have been there for less than two, kind of thing?
I can't, but anecdotally, I'll tell you that those 30% mark-to-market rents include short-duration leases. Like, you know, we've got some short-duration leases where there's virtually no mark to market in the rent, and then we have others where there's significant mark-to-market rents. So to me, that is a less interesting metric, Mario, but what you might wanna see is the correlation between the churn in the most affordable buildings and the churn in the buildings that are less affordable. It's not a huge band, but, you know, our most affordable buildings is, it's vaporized. Like, people just are not moving. And so the value stored in those buildings are the highest, so the private market will highly covet those buildings, and the buildings that tend to be less affordable, the churn is much higher.
But we can take that comment back and try to give some more color. It's an interesting question.
Okay. Thanks, Mark. Thanks, guys.
We have no further questions on the question queue, so I'd now like to hand back to Mark Kenney to conclude.
Well, I'd like to thank everybody for your time today, and if you have any further questions, please do not hesitate to contact us at any time. Thank you again, and have a great day.
Thank you, everyone, for joining the Canadian Apartment Properties third quarter 2023 results conference call. You may now disconnect your lines and enjoy the rest of your day.