Good morning. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the InterRent REIT Q3 Financial Results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Sandy Rose, Director of Investor Relations and Sustainability, you may begin your conference.
Welcome, everyone, and thank you for joining InterRent REIT's Q3 2021 earnings call. You can find the presentation to accompany today's call on the investor relations section of our website under events and presentations. We are pleased to have Mike McGahan, CEO, Brad Cutsey, President, Curt Millar, CFO, and Dave Nevins, COO, on the line today. As usual, the team will present some prepared remarks, and then we'll open it up to questions. Before we begin, I want to remind listeners that certain statements about future events made on this conference call are forward-looking in nature. Any such information is subject to risks, uncertainties, and assumptions that could cause actual results to differ materially. Please refer to the cautionary statements on forward-looking information in the REIT's news release and MD&A dated November 8, 2021 for more information. During the call, management will also refer to certain non-IFRS measures.
Although the REIT believes these measures provide useful supplemental information about the financial performance, they are not recognized measures and do not have standardized meanings under IFRS. Please see the REIT's MD&A for additional information regarding non-IFRS financial measures, including reconciliations to the nearest IFRS measures. Mike, over to you.
Thank you, Sandy. Again, it's nice to talk to everybody. Hope everybody's doing well, and things are getting back to normal for everybody. We are certainly getting back to normal here. We have everybody back in the offices, in our head office, regional offices. It has been that way for a while. I think it's a lot more productive and a lot more creative, and it really helps our culture, and especially the young people. The young people have really suffered in the last year and a half.
We're very happy to sit, and I think it's gonna really help our the things that we can be able to do, and it'll help our results, and it's gonna just actually help everybody as we go forward in a lot of different ways and manners. I also wanna thank everybody out at our site level. They worked all the way through, you know, through this COVID, which obviously I believe it's coming to an end, and we're getting a lot more normalized. Along with a lot of us in the office environment have worked all the way through in the office and that. It is nice to see a full complement of people back here.
As I guess kinda going to the meat of the matter, as we talked about at the start of the year in our last few calls, we were gonna hold our rents, and we thought that was a good strategic decision. We still feel it is. You know, I think it's kind of proving itself a little bit in the numbers, not to the extent that we would like. Admittedly, I'm not happy, but some people say that I'm never happy. Maybe more unhappier than usual. I think that's a result of just the, you know, the immigration has not come in like we thought it would.
I mean, obviously, there are reports of the immigration being at, you know, at decent levels right now, but we know most of that is really people that were already personally on the ground and they're just getting Canadian status. The good thing is that we know that as we went through this last federal election, all the different parties all were encouraging more immigration, and I think we're gonna see historical high figures for the next 2-3 years as we open up. I think it's gonna be a big beneficiary to Canada and a big beneficiary to our end of the business. We also did not see the same amount of international students that we saw before.
We kind of anecdotally feel it's like about 10%-20% of what we've seen in the past. I don't have hard figures, but that's just what I've got from our people on the ground, which I continually ask questions from. I think when you put those two pieces in and just where our vacancy, as you can see, keeps trending down, I think you're gonna see, like, really big tailwinds and great results as we go forward over the next couple of years. I'm pretty encouraged by that, to say the least. I do see a lot of positivity. I do see that there's gonna be.
I mean, it was. I'll often say our leasing cycle this summer started a little later than we had hoped. Again, that was like locking towns and opening up and just the students approaching coming back into campus a lot later and even the young kids leaving their homes. Like, we really did not get a push until we got into September. We saw a good leasing activity in August, but really in September. All of our peers, I believe, will have the same kind of results, depending on where they're if they're more urban or suburban portfolios. We got hurt in our urban side. You can even see that on the promos.
I think that kind of covers slide five. I'm gonna go over to slide seven if that's fine. I kind of talked to you about the occupancy. I do believe that we're gonna get up to that 96% mark before the end of the year. I think you'll see a continual improvement as we go into the probably end of the first quarter, probably early second quarter of 2022. Again, as you know, we will always try to be mindful of not pushing our revenue numbers. We will try to. We won't basically go below 3%. We'll stay in that 3%-4% range as we go forward into 2022.
I do feel that as things open up and immigration, international students come back, it's gonna be. It'll be very favorable for our business. The other kind of things I kind of wanted to point out, as you can see, that decent, you know, I guess a little decent growth on some of our AFFO and FFO. You know, we've kept our leverage down. We have some CMHC mortgages right now. I have to say, like, even though it shows we have 69%, we'll be pushing closer to 80%. We've got a bunch of CMHC mortgages in the pipe. We've got lots of liquidity right now. I think we're in a really good position.
We are seeing a lot of different potential purchases which we'll pursue. You know, I think it's still a very exciting time for our asset class, so I feel very favorable. Last thing I also wanted to kind of touch on too is I am excited that we've been adding some more bench strength to our team. As we've grown, we were a pretty small little shop, and as we've grown, we've grown into being able to afford and also looking forward to some pretty talented people. Our bench strength of our team has improved tremendously well, and I think you'll see that come into play over the next few years. Pretty excited about that. I think that's.
I think I've touched on all the different matters. Thank you, everybody. Now I'd like to pass you over to Dave Nevins, our Chief Operating Officer.
Thanks, Mike, and let's turn to slide nine. We showed this slide for the first time last quarter to give you a sense of our typical leasing seasonality and how that had been disrupted with the pandemic. We also wanted to highlight that our occupancy level tends to run higher for our reposition properties, while our new acquisitions have higher vacancy by design as we work through our CapEx program. This quarter, we are pleased to show an occupancy improvement across all segments. Of note, we're seeing excellent leasing activity in our Vancouver portfolio, which has seen a quarter-over-quarter occupancy improvement of nearly 1,600 basis points. At this stage, we think it's safe to say we've seen the trough and that we're in good shape to finish the year close to our historical 95%-96% occupancy level. Now turn to slide 10.
As you know, we decided early on during COVID to hold rents, and we continue to believe that was the right decision. We posted 5% growth in average monthly rents in September, and that growth is visible in both our repositioned and non-repositioned portfolios. We continue to see a gap to market in excess of 20% across our portfolio. On slide 11, you can see that all regions have seen a nice progression in average monthly rents in September, and we again want to highlight the strong growth generated in Vancouver over the last six months. We are optimistic about future rental growth across the portfolio as integration returns, and we continue to execute on our capital plans. Let me turn things over to Brad to walk through our capital spend. Thank you.
Thanks, Dave, and good morning, everyone. About a third of our portfolio is at various stages in our reposition program. Our approach is to apply our expertise to creating inviting, safe, and quality communities for our residents to call home, to extend the useful life of the building, thereby increasing the housing stock, and to create value for our unitholders. You can see by the differential in operating performance why we see this as a driver for future NOI growth. Turning to slide 14. We have been talking about the wall of capital interest in our sector all year. If anything, it's only gotten more friendly going into the back half of the year. The volume of opportunities is incredible, and we're seeing record transactions, both in terms of cap rates and deal size.
On our side, we're hunting for opportunities, but we're remaining disciplined in our approach and our underwriting assumptions. We closed on a 94-suite property in Mississauga in Q3, jointly with our partner, Crestpoint. This community is just down the road from our recent acquisitions on Inverhouse, and we see a lot of value creation potential. We've also closed on several transactions post-quarter, which we're quite excited about. We acquired two properties in core Toronto in October that are in excellent locations, and we have closed on a smaller property in Montreal just last week that was a nice complement to our offering down the street. In Vancouver, we're delighted to close on The Link, which is a LEED Gold certified property that was completed in 2020.
For each of these transactions, we see an opportunity to create value and drive synergies with our existing portfolio clusters. Turning to slide 15. On the development side, we provided a few additional figures this quarter for our office-to-residential conversion in Ottawa. We're about eight months into a 20-month project, and we're on track to deliver in Q4 next year with an attractive return profile. Turning to slide 16. We have three other development projects in various stages of planning and all in prime locations. We've indicated the earliest start date for these projects just to give you a rough sense of timing, but we want to reinforce that we have flexibility and want to proceed to build, and as we look to deliver into the best possible leasing environment. As we get close to breaking ground, we'll give you additional details about the financial metrics.
Speaking of financial metrics, let's pass things over to Curt to go through the balance sheet.
Thanks, Brad. On slide 18, we begin providing some color regarding our weighted average cap rate by region for our investment properties.
For the third quarter of 2021, we recorded a fair value gain of CAD 85.5 million. Cap rate compression was a contributing factor, but the bigger driver of the gain this quarter was the improvement in the operational performance in our portfolio that Dave outlined previously. We currently sit at a weighted average cap rate for the portfolio of 3.93%, and given the current market environment and discussion with our external advisors, we believe there may be further cap rate compression in Q4. Moving to slide 19, you can see that the REIT is in a healthy financial position. Our debt-to-GBV on 30th September was consistent with June 30th at 34.4%, owing to limited acquisition activity in the quarter.
At the end of the quarter, the REIT had mortgages of CAD 1.3 billion at an average term to maturity of four years and a weighted average interest rate of 2.39%, reflecting a further two basis point reduction in the interest rate from last quarter. We are currently working through a number of CMHC applications that should bring the share of CMHC-insured mortgages above 80% and increase our average term to maturity to nearly six years. We've seen rates move up recently, so we anticipate the impact of this financing to be an increase of 15-20 basis points on our overall weighted average interest rate, depending on rate movements between now and the time of funding. Before I move things back over to Mike to wrap up, we wanted to highlight some of the work we've been doing on the ESG side of things.
Very much thanks to Sandy for pushing us along. We published our inaugural sustainability report today, in which we share our philosophy around sustainability and how that thinking is integrated into our business strategy. As part of that report, we have provided an update on current initiatives as well as where we plan to go in the next few years. Today, we are also sharing our results for the 2021 GRESB Real Estate Assessment, for which we achieved a 25% increase in our score and a green star rating, signaling strong ESG performance across the company. We've identified target improvement areas to keep the positive momentum going into 2022, and we look forward to engaging with you on our progress. Mike, I'll pass the floor back to you for a few closing words.
Thank you, Curt. Again, we're seeing encouraging signs as we go forward. Again, not super happy with our quarter, but we do see some really good light in the skies, and that's a nice change to be frank with you. We do see some huge demand drivers as international students come back. We think that's gonna be and immigration. I think we're just so well-positioned. We're really happy that we held our rents and we think that's just the most strategic and the smartest move to do when we kind of build the REIT here for the long term and over the next 5-10 years. We think that was a really prudent move, and we think we'll be rewarded for it over time.
You also see that we have done some post-Q acquisitions. We're still seeing a lot. It is very competitive out there. We're very happy with the acquisitions we've done to date. Again, I'll kind of go back to, even something like Vancouver. We're very extremely happy on that. It was great timing, and we're beating our pro forma right now, so we think that was a good strategic move, and we'll continue to push into Vancouver and these core areas that we are currently in. I think there's some big benefits in being in there, all you know, technology-based communities and we'll see some big benefits.
Last, I guess you've seen that we've had our distribution increase. Not sure how many years this is in a row, but again, we're very confident where we're going, and we've got a well-levered balance sheet. I think we're doing all the good things and going forward, I think you'll see some good numbers coming out of us over the next few quarters. I guess last thing I wanna say, thank you to Sandy to put down a lot of the things that we've been doing for years on the sustainability report. A lot of it, we've been doing it for years and years and just never really put it reduced it to paper.
We know how important it is to everybody, and it's something that's important to us as we go forward and try to make a better company and, in a lot of ways, you know, better for all our stakeholders and better in our community. I think that's about it. We are excited for the future and we appreciate all the great work that our team has done. This has been a long year and a half and I have to say how much we appreciate everybody and it's nice to see a lot of us. It's nice to see everybody in person and it's great. I think that's about it.
We'll open it up for any questions right now from the floor. Thank you.
At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Mike Markidis with Desjardins. Your line is unmuted.
Hey, guys. Good morning. Just hoping to dig in a little bit more into same property stats. Your economic vacancy for September, I think you showed meaningful gains, went down to 5.1% versus 7.8% last quarter. When we just sort of look at the average, when you subtract vacancy and rebates in the same property stats from gross revenue, the figure didn't move nearly as much. I think it was only down 60 basis points, and it's still quite elevated. I was just wondering if you could give us a little bit more color between the interplay of the timing of the leasing gains that you saw this quarter versus promotional activity.
The timing was much later, Mike. It really came in and I think I said that on the call. It really came in a lot in September. A lot of that again is around the core students, the whole bit. Even as I said, having the kids come back out of their parents' homes, including my own. Yeah. That really kind of hit September. We've had some good movement in October too, but it was late in the quarter.
Okay. Just following on to Dave's comments, I think you said 95%-96% at the end of the year. Was that for the entire portfolio or just the same property portfolio?
Yeah, I think we're leaning more. It's like, again, that's more in there. Maybe I should speak for Dave.
I think you hit it though. I think it is across the entire portfolio. You hit it right.
Okay, great. Last one for me before I turn it back, just on, you know, I know you haven't used a ton of promotional activity, but there is some in the portfolio. Would it be safe to say that from an aggregate dollar perspective, that's peaked? Or I guess it will probably peak in the fourth quarter, but are we at the peak now, do you think, in terms of incentive coming out?
It's gonna peak fourth and then you still have obviously some in the Q1 of next year. It'll start like it'll be burning off as we go through. Yeah, but it is, it'll peak in Q4.
Okay.
Yeah.
The only thing I would add.
Yeah.
Sorry, go ahead.
I was just gonna say the only thing I would add, Mike, is it'll burn off throughout, and to Mike's point, it will really start to burn off in the second half of next year, but it will peak in Q4. Those, just to add a little more color to the promotions, they were in the urban cores, really where we select properties where we really felt the impact of the pandemic.
Got it. Okay. I will turn it back. Thanks very much.
Your next question comes from the line of Mario Saric with Scotiabank. Your line is unmuted.
Hi, good morning, everyone.
Great. How are you, Mario?
Good, good. Sorry, I wasn't sure if you could hear me, but.
Yeah.
Just maybe for Dave and for Mike in terms of operations and capital allocation. When you look into 2022, what would you characterize as being your top two operational and capital allocation goals/targets as you see today?
Go first, Dave? Okay. I'll go first, and if I get the wrong answer, Dave will pipe in. Really, like we're all about driving. We're trying to drive, you know, I mean, growth, and trying to get return. We are, you know, as we're going forward, we're looking at everything and trying to ascertain, like, where is the best, you know, revenue drivers. I think if you went through our portfolio, and I know some of you have had the, maybe not most recent past, but, have gone through our portfolio before, we're in pretty good shape. I'd say, like, you know, structurally and, you know, building envelope and that, we're in really good shape.
We are really just trying to drive, you know, different things where we think we can maybe derive some, I guess, rental growth and really just make sure they're more sustainable over the long run too. Throwing that in for Sandy. Anything Dave you'd like to add?
No, the only thing I was gonna add is just looking for other areas where we can save on operational costs. I think as you said, most of the buildings are in good shape and we're doing well on that side.
Yeah. The only thing I would add to that, to Dave and Mike's comments, just that we have been investing in technology and we're finding ways and things that we can do to help offset some of the inflationary costs that we're seeing on the operating side through labor. It's not just us. I'm sure as your fellow research analysts speak in the morning meetings and whatnot, it's across the board, the labor shortage that we're seeing in this country and globally. Nevertheless, that's really has helped accelerate our investment in technology and trying to find efficiencies within our portfolio to really reduce the pressure that we are seeing on the wage side of it.
Just maybe on the wage side, with the recent uptick in the minimum wage in Ontario, do you have any sense in terms of what the implications might be for your labor costs going forward as you look? How sensitive is labor cost in relation to the minimum wage rate?
Honestly, the minimum wage really does not come into play 'cause we pay all of our people over minimum wage, so that's not even an issue. The bigger issue is obviously there's a little bit of a change in wage pressures. There's big changes, you know what I mean? I think we've got in front of it, we've really kind of locked down a lot of the key people in that. Going back to what Brad's saying, we're trying to make ourself a little bit more efficient. We've pushed in through a bunch of different technology pieces that we think are gonna help on the, on the, I guess, making us more efficient. That's it.
I really don't think the minimum wage has got anything to do, 'cause there's nobody in our realm that we're paying minimum wage.
Got it. In terms of the rent growth that you highlighted, as a primary target, I think Mike earlier in the call you mentioned 3%-4%. I wasn't sure what that's specifically related to. Was that the expectation of a 3%-4% rent growth in 2022 or in Q4? How should we think about that?
No, I would think I was just calling for more on the vacancy side, that we're gonna get to 3%-4%. I'm saying into like, into next year. I think that's and I'm not talking the first part of the next year. I think we'll be as we get going, it'll be the latter part of next year. Being mindful, like we always try to stay, that's within our purview. We've always stated, we've always tried to be within that 3%-4%. We just think everything's gonna be more normalized as we get into the, I guess, the second half of 2022.
Okay. In terms of capital allocation, you primarily stuck to existing markets so far in 2021, including two or three acquisitions. When you think about capital allocation in 2022, are you looking to enter new markets or is there enough product good valuations where you can expand in an existing market only?
I think we're really, you know, again, we always look at it. We discuss everything, so it's a, I mean, there, it's a continual path. Right now we're very happy in the core markets that we're in. We like all of them, you know, greatly. We think we're gonna do really well. Again, a lot of them are, I think they're, you know, well positioned with, you know, technology being a big driver and things of that nature being big drivers here. We like those markets, you know. I think that's really our, it's just gonna be concentrating on that unless something, you know what I mean, comes out really compelling. I mean, that's not where we're at today.
Just to add to that, Mario, to Mike's comment, the nice thing about being in Canada, there's not a lot of markets you gotta cover. It's not like the U.S. where there's a lot of sub-markets that you really gotta get your head around. To Mike's point, we're really happy with the markets that we focus in. They've got good underlying economic activity that are linked to technology and life sciences and institutions like education. However, that said, there's only a couple markets that we aren't in Canada, and we've been very well-versed within those markets. If an opportunity of scale came, obviously we would look at it, but we're not hunting. We like the markets we're in.
I got it. My last question, just on, I think on your conference call slide, you mentioned the potential for core or core plus community acquisitions. Would the target IRRs on those types of acquisitions be a bit below kind of the high single digit that you're looking at for the value add, or would they be somewhat similar?
Sorry, Mario. I think what you're asking, core versus value. I think what we have said in the past, if we see an opportunity that's strategic and that is close to an existing community, that we'd be willing to meet a return threshold of highly levered single IRRs. But we're searching for double digits on the value add. On development, we're searching for north of 15.
I think sometimes I won't say that's always the case, 'cause sometimes the core is a good tuck-in, and it gives you operational efficiency, Mario. Sometimes you find some I guess, core assets are being marketed as core that maybe they've lost some of the potential rent that they should be getting.
Okay. Thanks, guys. I'll turn it back.
Maybe it is a value creation and you don't and people don't realize it all the time.
Your next question comes from the line of Jonathan Kelcher with TD Securities. Your line is unmuted.
Thanks, good morning. First question, just, operating costs were a little higher in the quarter, and I think the MD&A talked about leasing volumes and increased marketing costs. Can you maybe give a little bit more color on that and maybe some guidance on how to think about that for next year?
Yeah, it's Curt here, Jonathan. I think if you look at the year to date, they're pretty much in line. What we've seen is a little bit of pressure in Q3 that would normally have been spread between Q2 and Q3 from the point of view of the leasing. If you look at the leasing activity that happened, and it was light in Q2, heavy in Q3, especially at the end, a lot of things get driven with that, from salaries to commissions to advertising programs, online advertising programs and special events that got pushed later into the summer versus earlier, given the state of lockdown in the different markets. You know, there has been a little bit of pressure, what Mike spoke to.
A lot of that's been seen and dealt with already. You know, those things will continue to exist, but I'd say the bulk of that differential is mainly due to a timing.
Okay. That's.
I would say a little bit of timing, a little bit of things, timing, wage, technology investment was a big piece which will be able to scale us for the future. Good thing that Curt touched on too is just we did do a lot of different activities to try to get our communities back to I guess as normal as we can. We were doing a lot of stuff for that. We think that's really important, and we really try to view these things not on a quarter-by-quarter basis, try to look at it more of a long run too. We think it's very, very important to get them engaged again.
Okay. I guess switching gears, Curt, you talked a little bit about the financing in the opening remarks, but you do have CAD 200 million of mortgages maturing in Q4. What sort of terms and rates are you looking at, and what do you think the refinancing potential is on that?
I'll start off with the up financing potential. Based on what we have in this year and coming up early in 2022, you know, we're looking at right now there could be a total of north of 150 and between CAD 150 million and CAD 200 million of financing potential between sort of late this year and call it mid to late next year. So there's lots of availability. The timing, I'm sure if you've spoken to anyone who's been through or dealing with the CMHC process right now, it's just there's a lot of stuff going through there and the timing can be an issue. What used to take, you know, a month to two months has now taken anywhere from at the speediest end, three months.
Normally, from what I'm seeing and hearing, it's five months ±1 month. The timing is critical. The good thing is that the lenders, you know, all understand this. They all work with you to give you short extensions on existing mortgages if you need to bridge or anything else. So there's no issues on that front. In regards to rates, five-year terms, we're seeing, you know, 2.2%-2.4% right now, and ten-year terms, we're seeing 2.5%-2.7%. When you look at what's coming up, I think we did speak to this in the presentation, in the MD&A, you will see a little bit of pressure.
I mean, we've been blessed with abnormally low rates for quite a few years. Whether this will keep going, who knows? I think if we do what we're planning on doing, we will lock in long-term financing mostly on the mortgages that are coming up, and we should be able to extend out our weighted average life to maturity once we're through these to be north of six years. Our CMHC insured will go up over 80%. The total impact on our weighted average interest rate, which is at 2.39% for the quarter, probably ends up somewhere in the 2.5%-2.6% range. Historically, by historical means, still very low and will give us a very long runway with a weighted average life to six years.
That'll come with some deferred financing costs and some CMHC fees that'll get amortized in. As those start to sort of take hold in Q1 and Q2, we'll make sure to communicate that for you, so that everyone can model it well.
Okay. That is, that's helpful. I'll turn it back. Thanks.
Your next question comes from the line of Mark Rothschild with Canaccord. Your line is now open.
Thanks, and good morning, everyone. In regard to the improvement in occupancy, Mike, I think you said that it was mainly from students. Should I understand that it was entirely from students? Also going forward, the guidance for or the expectation that you will improve occupancy, maybe another 20 basis points over the next year, what is that predicated on? Is that assuming that immigration picks up over the next few months or that the students entering university, that they will be leasing more? We just want to understand the assumptions in there.
Yeah. First off, nice talking to you, Mark. Yeah, no, it's not all university students. It's a combination of university students and a lot of the younger people that have graduated and got their first, second, these days, their fifth job within three years. Anyways, they just leaving their parents' home and all that. Actually, I was like, based on the, to me, very muted international students showing up and immigration, I was, like, surprised when you kind of look at everything overall. Like, I think you're gonna see pretty good headwinds, sorry, tailwinds for us.
I think you'll see some pretty good results as we get into I guess more the latter part of the second quarter of 2022. We do see that we're gonna still get some occupancy improvements and all that. We're seeing where we're going right now over this winter, and it looks, you know, relatively good. It's not really predicated a bunch of new people showing up or anything like that, Mark. It's just what we're seeing. We hope everybody shows up because it'll be a whole different flavor of the call, to be quite frank with you.
Based on an outlook of immigration really recovering, should we expect that there could be a much more material improvement in occupancy?
Yeah. I think if we see immigration, we'll see a big material improvement.
Mark, I think the way to look at it too, on the students was we saw the domestic student come back. To Mike's point, we haven't seen an international student come back anywhere near where it was. We're very hopeful. On the backdrop of that, I think it'd be fair to model, and we don't provide guidance, but I think somewhere in around the 200 basis points improvement in total when you include same property base.
Okay. Understood. Thanks. In regards to the Toronto acquisition that just closed a couple of weeks ago, is there a value add component of that maybe the going in return would be even a little lower with greater potential? Or how should we understand that transaction?
Yeah, we think there's some good value add potential. We're really very happy with the acquisition. We think there's some really good, I guess some growth potential there.
Maybe just lastly on that acquisition, so how much should we expect you to invest in that property over the next year or two?
Well, we haven't usually typically given guidance on single investments to be quite frank with you. But look, we always model, and you know, where if we're looking for good returns and we're looking in, you know, north of double digits here. That's all I can tell you in return.
Yeah, it's no different, Mark, than typically, right? It's always been between 100 and 200 basis points that we try to improve the yield. That yield calculations includes any CapEx needed to get there, right? This is no different. We're extremely happy with this purchase.
Thank you.
Yeah.
Maybe I'll just ask the question a little differently, and maybe this is something you can't disclose either, but would the CapEx be built into the acquisition price that was announced?
Yeah, no. When we look at it, that's not built in. When we look at our returns, we build it in.
Okay, thank you so much.
Thanks, Mark.
Your next question comes from the line of Joanne Chen with BMO. Your line is unmuted.
Hi, good morning. Maybe just a quick one for me on that with respect to the acquisitions that were completed subsequent to quarter end. Would you be able to kind of provide what sort of cap rates that you're seeing in some of your target acquisitions right now?
Hi, Joanne. It's not to be cute, but you know our investment philosophy, right? Like, we won't sacrifice location, and then from there, we like things that have a little bit, for lack of a better term, hair, where we can bring our vision and reposition. The going-in yield a lot of times is irrelevant for us when we're looking at that acquisition. What really matters for us is where we think we can take that going-in yield in year kind of three through five once we've given it enough time to kind of work our magic. We really don't like disclosing the going-in yield because it's not the way we look at the overall acquisition. You can look at our track record.
We wouldn't be investing in this if we didn't see a material improvement in what we thought we could take the underlying cash flows.
Right. No, of course. No, that's still helpful. Thank you. I guess, you know, given how, you know, tight pricing is right now in some of these core markets, what is your thinking perhaps on any potential for dispositions and capital recycling?
Yeah, we've talked about before, we'll probably some of our, we think, properties that we've kind of borne all the fruit out of them as much as we can, or if they're maybe not help us operationally, that we'll probably exit out of those. I think you'll start hopefully seeing it over the next couple of quarters, a couple of them.
Okay. Okay, great. I would imagine the acquisition pipeline for the remainder of the year into 2022 is still gonna. You guys are gonna be keeping busy on that, right?
I think it's really busy. There's a lot of intergenerational trades happening right now. There's a lot of, I don't know, I guess we've seen some of the people parading in the media too, as far as intergenerational stuff. There's a lot of stuff out there, both you know on market and off market. We're very hopeful.
The only thing I would add, too, is in today's world, with where everything is as far as the taxes and policies and different things like that, you're seeing a lot of people that own these apartments, they're in private hands, but they own them in syndicates. Now there's questions with regards to different views of what the current environment is. You're starting to see a lot of people dissolve those partnerships because they can't come to an agreement with where their near-term outlook is.
Interesting. No, that's really helpful. That's it for me. I will turn it back. Thanks, guys.
Your next question comes from the line of Brad Sturges with Raymond James. Your line is now unmuted.
Hi, guys. I guess you know, based on your comments that you're seeing still a pretty good pipeline of acquisition opportunities, like how would you compare the opportunity set today versus maybe earlier in the year in terms of investment size or opportunity?
Yeah. You know, not a lot's changed, Brad, other than the fact that as the world gets back to a somewhat normal, by no means do I think we're back to a normal, only when we start to really see the floodgates open with immigration. Let's throw it out there, as Curt has exact numbers, but we looked at it, right, and you're seeing record immigration numbers posted. But the reality is a lot of those immigrants that are getting counted and posted in the media are really residents that were already in Canada and have been given permanent residence status, which is great for us. That means they're not gonna be leaving Canada, and they're not leaving the rental pool.
We've yet to see the influx and the increase in the rental pool demand, and we truly believe we're gonna see it. I think all three levels of government, and I think all three parties are very much supportive of an immigration policy. I truly believe, and we truly believe that the fundamentals, if anything, are gonna continue to tighten, at least in the near term. As you see that, you're gonna continue to get in an environment where you're trying to underwrite the top line, and that's really where the magic will come in, is really what your vision is for an asset and where you can take those rents. However, backdrop and offset against where turnover will go. There is a lot of capital chasing the product, and that has not changed. There's a lot
Of increased deal velocity, which we kind of thought would be the case a year and a half ago, and it's played out, and it continues to play out. It just means we've got to be really disciplined, and when we underwrite an asset, we better really do our homework within the node and have a clear vision of where we can take that asset and those rents. For us, nothing's really changed other than the fact that you might have to spend a little more time on your research.
All right. With your expectations for further improvement on the occupancy side, have you know, would your expectation be for, I guess, the next quarter or two for your net effect of rent growth to kind of hold in at current levels before improving, call it early to mid-next year? Or how do you think about the trend on rent growth over the next few quarters?
I think it's gonna hold, to be frank with you. I'm really looking forward to normal times. When we get into the middle of next year, I think you're gonna see, I mean, all things, all signs point to some pretty good times in our asset sector.
Right. Just to go back to your earlier comment just on some of the cost inflation you're seeing, but also, you know, occupancy's improving, you know, margins have been stable, you know, for the year-to-date numbers. Is that still a trend you expect to continue then as kind of stable margins for now?
I believe so. They're pretty stable. I think we've got ahead of a lot of that stuff.
Okay. Great. I'll turn it back. Thanks.
Your next question comes from the line of Matt Kornack with National Bank Financial. Your line is unmuted.
Hi, guys. Just wondering, with the acquisitions in sort of core Toronto proper, is that market one that you see a material growth avenue in, or are these just asset-specific acquisitions?
We like it, Matt, obviously. As you know with us, we like the four core areas, our focused areas. We'll look at opportunities from a bottom-up scenario. This was two assets, a portfolio sale that we thought we could do a lot with. We were more than happy to get it, we will continue to look. We're not gonna deviate from our core strategy of buying really well-located assets with upside potential, right? Nothing's really changed on that front. Yes, it's probably the first core, if we can be lucky enough to find other assets that meet the same kind of investment criteria, we'd be very happy to do so.
Are those carrying a little higher sort of vacancy than they would historically, or are they pretty well leased at this point?
No. To be frank with you, every time we get through a purchase, rightly or wrongly, we always ask them to stop leasing once we start negotiating, because we'd rather have to carry the vacancy and be able to do the work we like to do on the different apartments and kind of try to create some, I guess, some value for us. We always do that up front.
Okay. No, fair enough. Given the state of the market, you definitely seem optimistic, and I think the numbers are proving it out across the board. Have you been encouraged maybe to pursue some of the redevelopment or repositioning projects that maybe you would've put on hold? You may not have put this one on hold, but I'm thinking some of the Sherbrooke Street East assets that had significant potential upside. Presumably, I wouldn't have thought after you would've done renovations during COVID, maybe you did. Those type of projects and how should we think of that in terms of the potential CapEx spend going forward?
Well, I think our CapEx is gonna be pretty consistent from the years past. We see a lot of different potential, and we're really watching. It's a pretty fluid market to say the least of what's going on out there, so we are continually watching and looking for the opportunities. Sometimes the best opportunities you hit it right on the head, Matt, are in our own portfolio. Some of the stuff that we, you know, did some repositioning even seven, eight years ago, kind of look at it now and seeing what's happened in those neighborhoods, those nodes and the, you know, the potential to, you know, maybe we should be going looking at them again. That happens from time to time too.
Okay.
The only thing that I would add is the example you used, yes, we are in the middle of repositioning that asset.
Okay. Fair enough. The trees in the lobby were interesting. Anyway, last one for me is.
We unfortunately, against our ESG thing, we did take that tree down, Matt.
Hope you recycled it. Last one for me. I mean, I think young professionals have been fairly price sensitive. There's been some shopping around during the pandemic because they've had an opportunity to, for the first time in a while. With students coming back, did you find that they were a little less price sensitive, or were you also finding them to be negotiating at this point?
We're negotiating up front, like, depending on how, I mean, not everybody is aware of the situation, so I think some of them were. You know, the thing is that usually they'll stop at two or three places, so it depends where they stop first. Yeah, I do believe that they got it, you know what I mean? That was happening. In the cores, it was just competitive. Like, everybody's gone through the same issues in the cores. I think we all feel very, you know, some very good things are gonna happen in the cores as we come back. You can see it. Like, if you just come and go around to the, you know, restaurants and things like that, people are coming back.
You know, again, once we get the immigration push and international student push, those are two big, huge pushes. I really believe immigration is gonna be, I think we're gonna hit like even higher potentially from what I've heard than what they, the government was stating at one point. I think we're gonna get some big pushes in those core markets.
Matt, I'll just add to that 'cause we mentioned, and might touch on again, is the immigration piece, that to put it into perspective, so of the 31,000 new immigrants in August that was announced by the government, only 6,880 of those were net new people into the country. We did not see that push in August that often comes around with school or the start of the year. It sounds like that's gonna happen coming forward here. Some of that we may see for January, at least in what we're seeing so far. The immigration numbers of, you know, at the end of August, 222,000 into the country, only just under 77,000 of that was actually net new people into the country.
That's half of what it typically is, less than half actually of what it typically is. I don't think we've seen that pressure yet. I think when we do, it's gonna make a big difference in a lot of these cities because a lot of them end up in those core markets.
Do you know, the student permit numbers actually looked okay, but was that something similar as well? Maybe they got a permit but didn't necessarily come to the country or those net new people to the country?
Yes. So far from what we've seen and that one's harder to get concrete data on, at least timely data. From what we've seen so far, it appears that they've got the visas, but they didn't start getting rolled out till into the school year. It's a matter of are people trickling in partway through, or are they gonna wait for January to start? I think there'll be a mix of all. I think there'll be a mix of the both, so you won't see the same wave you often see.
It may not. I wouldn't count on it all coming in January. I wouldn't want you to do that's for sure. But I'll tell you just I have my own kids in school. You know, my one son there is in second year at Ottawa U. He doesn't have any in-person classes. You know what I mean? That's I think that's in a lot of different universities. You know that gets reflected obviously in the number of people that are actually you know choosing to live outside their home. He has chosen to live outside his home anyways, probably for other reasons. Anyways.
Sounds good. Thanks. Thanks for that, guys.
Your next question comes from the line of Matt Logan with RBC Capital Markets. Your line is now open.
Thank you and good morning.
Good morning, Matt.
Just following up on some of your commentary in terms of your outlook for January, can you talk about how the leasing demand has trended in October and November and what your outlook is for the next couple of quarters?
It's trended pretty well. It's actually been a little bit better than we've had previously. Do I think we're gonna see outside demand in January? I wouldn't want you to model that in for January. I think it's gonna be, I mean, we don't know when the other pieces are gonna open up. I really would say, you know, we'll probably see, you know, 200-300 points between now and the end of probably mid Q2. You know, hopefully we'll see an improvement or maybe the end of Q2. I would say, you know, unless something really changes in all the opening, I wouldn't want you to model any more than that. I don't know if that's
The only thing I'd add, I totally agree with Mike's comments. The only thing I'd give you on a regional perspective, I think everything is at least leasing trends are at least at historical levels for this time. If not a little better, except for Montreal is a little slower than we'd normally see. I think that goes back to the whole international students, the missing big portion.
I guess really, you know, in line to slightly above seasonal trends with an outlook to improving maybe in mid-2022 as immigration comes back.
Yeah. I would say that for sure.
When you roll up your expectations for stable margins, you know, the occupancy gains, do you think that supports organic growth somewhere in the high single digit to potentially low double digit range for 2022? Do you think that would moderate any in 2023?
If I was in your seat and I had a model and then you got a lot of different variables at you, I think the good news is the visibility is on the right track as far as the top line, so that's really good news. Unfortunately, there have been inflation pressures on things like insurance, waters and some utilities, and we've mentioned the wages. Hopefully, some of the investments we've been making over the last, call it two years on our technology front will prove to get a little more efficient. I rather be on the conservative side and be flat, but we certainly won't be happy as a management group, Matt, at flat. If I was sitting in your shoes, there's just a lot of different variables offsetting some of that top line.
Fair enough. Last question from me.
Maybe just circling back to your mark-to-market potential. You had mentioned 20% earlier on the call. Is that something that you're achieving on the straight outs or more what you'd expect as borders reopen?
Well, I think the mark-to-market that we're seeing is creeping back up, and I think once the immigration comes back in line, you'll see that get back north of that 25%. Today we're playing in that 20%-25%. I think we'll get back north of that once immigration picks back up. You know, on the turn side, you get roughly in that area, just depending as who's turning over. Is it someone who's been there for four years or someone who's been there for one? On average, you get in that ballpark also.
That 22-ish% would include the benefit of renovations for the suites?
For sure. Yes, it would. It includes everything. It's obviously higher on the non-repositioned apartment assets, typically, because usually they're, you know, fairly significantly below market. It's usually a little bit higher on the non-repositioned. That is the average of all and includes the capital work to go with it.
All right, guys, I appreciate the call. I will turn it back. Thank you very much.
Thanks, Matt.
Thanks, Matt.
Your next question comes from the line of Dean Wilkinson with CIBC. Your line is now open.
Thank you. Migration is scary . When they finish university, they do come back home.
Okay, that's good to know.
The food bill goes up. Just given how tight the acquisition environment is, what's your guys' thoughts on expanding the use of co-ownerships and joint ventures in order to get a little more, juice out of the returns? Or do you wanna keep that growth on balance sheet, given where your leverage is?
It's something we talk about a lot, to be frank with you. I think, I mean, again, we're really happy with our current partnerships. Will it expand? You know, it could for sure. There's no question about that. It's something that we talk a lot about. Anyways, I would definitely say that, I mean, I wouldn't say no for, you know, I mean, that's from the farthest part of it. I think there's probably more. At this point, we're more positive in probably growing it.
The only thing I would add, Dean, is our partnerships have big tentacles in the real estate community. Not only are we sourcing deals ourselves and whatnot, but they're also a great source of deals as well. Us being a partner with them is we benefit from that as well.
And, and would you.
Actually, they end up helping us a lot. Good point, Brad.
Well, it is a small sandbox. Have you had conversations with him just in terms of what that partner is? Is that more an acquisition partnership, or do they have a stable asset component of that where you could potentially blend in some of your more, you know, mature, repositioned, stabilized assets and sort of give them some exposure to that? Or is it more of a growth vehicle?
No, the way we look at it's on an opportunity-by-opportunity basis. Like, we're not in a position to kinda discuss their strategy on this call. So we're just, back to Mike's point, we're just really happy with the partners that we have. I'm sure there will be different opportunities that will present themselves going forward in the future that we'll hopefully be able to transact on.
Great. That's it for me. Thanks, guys.
Your next question comes from the line of Mario Saric with Scotiabank. Your line is now open.
All right. Thank you. Sorry, two more quick ones for me. Just coming back to the mark-to-market. The disclosed number was flat quarter-over-quarter at 20%. Does that imply that you believe that market rents in your portfolio went up 2% quarter-over-quarter, similar to what your quarter-over-quarter average rent increase was? Or are we talking about rounding?
Maybe I misspoke, but what I was trying to say was they're in the 22%-25% range, not specifically 22%. Do I think there has been pressure and seeing them partially start to climb again in Q3? Yes, we've seen that pressure late in the quarter, as Mike indicated earlier, with September really improving. At this point, I wouldn't say a 22% number, but I think we're starting to climb again, and as immigration comes back, we'll see that once again get north of 25%.
Okay. I was kind of more thinking about the actual market rents. Like comparing your rents in your markets quarter-over-quarter, have you seen those trough and start to move higher?
We are seeing our competitors move there. It really depends on the markets, but we have seen our competitors move too. I mean, we all went through the same circumstances, so everybody, you know. You look at, quite frankly, everybody reacted a little bit differently, depending on, you know, what their strategy was. Right now, I think you're seeing a lot more normalized, across the board, especially, you know, in certain markets for sure. I mean, again, Brad kind of said like Montreal was a little bit harder. We're seeing people push the rents.
Yeah. Okay. Then, just on tenant turnover, like as things begin to stabilize, we get into more of a normal environment, like do you foresee tenant turnover being similar to interest rates, whether lower for longer, or do you envision tenant turnover rates coming back to historical average?
Listen, this is kind of like when you go to one of those real estate conferences and you ask to talk about interest rates, and everybody says eventually they gotta go up. Curt and I and Mike have been saying now for three years, and I hate saying it because we sound like a broken record. Our historical turnover has been up closer in the low thirties range and that it has to come in. We still believe it has to come in. At some point, it's gotta come in. I think we'll see that play out over the coming, call it, 12 months, just given where we think fundamentals will take them to.
Okay, thank you.
I would do a little bit of modeling to come in if I were you, Mario, just to be conservative.
Got it. Okay.
Just thinking about all the circumstances out there.
There are no further questions at this time. Mike, I turn the call back to you.
Thank you very much. I just wanna say I appreciate how much our team has worked over the last year and a half, and they've done some really great work in some pretty trying times. I do look forward to much better results and continually I guess more smiling and happy faces with the better results. I wanna say thank you also for everybody following us. I really appreciate that too. Thank you, and I hope everybody has a great day.
I just add in one thing. I'm very happy about our sustainability report going out this quarter. That's available on the website for those who wanna see it. If anyone's having problems locating it, they can contact Sandy, and we'll make sure to get you a copy of it also.
Good point, Curt. Yeah, the sustainability report, I think, Sandy did an excellent job. Hopefully everybody has a chance to take a look at it. Thank you, everybody.
This concludes today's conference call. You may now disconnect.