Good morning, ladies and gentlemen, and welcome to the InterRent REIT Q2 earnings conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you need assistance, please press star zero for the operator. This call is being recorded on Tuesday, August 9, 2022. I would now like to turn the conference over to Sandy Rose. Please go ahead.
Welcome, everyone. Thank you for joining InterRent REIT's Q2 2022 earnings call. You can find the presentation to accompany today's call on the investor relations section of our website under events and presentations. Please join Brad Cutsey, President and CEO, 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 wanna 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 in MD&A dated August 9, 2022 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 its 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. Brad, over to you.
Thanks, Sandy. Turning to slide five. Let's quickly run through the quarter. As usual in Q2, our occupancy has come in slightly. We're comfortable with our same-store portfolio sitting near 96%. We're seeing encouraging demand across most of our regions to date in Q3. As expected, given the 2021 record acquisition year, the total portfolio posts a strong operating revenue and NOI growth trends for the quarter, ending us at nearly 20% NOI growth year to date. We're also happy with the robust growth figures for our same property portfolio again this quarter, since this demonstrates the organic growth potential embedded in our portfolio and the strength of our teams on the ground in their communities.
Looking to the right side of the slide, you'll see that we closed on one acquisition this quarter in Montreal South Shore, and we continue to be very selective with external growth in the current environment. Curt will share more details around our balance sheet later in the call. The work his team has done to manage our debt ladder has reduced interest rate exposure for the REIT. Finally, at the bottom right, you'll see that our FFO and AFFO growth in Q2 has come in a bit relative to Q1 on the back of higher cost base, yet continues to be solid and demonstrates the operating torque embedded in our business. To that end, we thought it'd be helpful to illustrate our trend for the same property NOI.
The takeaway here is that with the exception of 2020, the pandemic effects were most impactful on our occupancy numbers. We have consistently generated revenue growth that has outstripped expense growth. Although we are certainly feeling the impact of inflation in our operating expense, as you can see by the year-to-date figure, the top line growth expectations should continue this positive NOI growth trend in 2022. The continued strength in fundamentals in our sector, and we saw 7.1% growth in average monthly rent in June relative to last year. It is worthwhile to mention that the figure is impacted by mix changes, with increased exposure to high market rents such as downtown Toronto and Vancouver being an important factor.
At the regional level, we continue to see steady year-over-year growth in the average monthly rent across all regions in June, suggesting that the strengthening fundamentals aren't isolated to any specific regional pockets. As you'll hear from Dave, we continue to be positive on the Montreal market, given its relative affordability to other major cities. Dave, over to you. Take us through some of the operating highlights.
Thanks, Brad. Last quarter, we explained that we usually see a seasonality effect in Q1 that can cause occupancy to slip anywhere from 50-100 basis points from December before recovering in our highest leasing season of Q2 and Q3. This year, however, we bucked that trend in Q1 and held our March figure relative to December. Given that context, our overall portfolio occupancy of 95.1% at the end of June is in line with the seasonal expectations. Looking at our same property portfolio, we saw our June 2022 occupancy slip 80 basis points relative to March, which was largely driven by a dip in the National Capital Region. Encouragingly, this region is seeing strong demand post-quarter, which should support an improved figure in Q3.
Inversely, soft rental demand in Montreal has so far continued into the summer, and there's a chance we'll carry some of that vacancy into the fall if the international students opt to study in other provinces. On that note, we wanted to share a spotlight on Montreal to reinforce the attractiveness we see there over the mid to long-term range. As Brad mentioned, the key attribute we love about Montreal is the rental growth runway we see. As you can see from the bottom left chart, Montreal rents haven't seen the strong growth profile of Toronto and Vancouver yet, but we expect the trajectory to catch up in years ahead. Additionally, we are favorable on the strong employer base in the region, from tech to universities to healthcare, and we do expect that some students from around the world will continue to call Montreal their home away from home.
Before we turn things over to Curt, I want to touch on our CapEx spend so far in 2022. On the left side of the slide, you can see that in our maintenance CapEx in Q2 has come back to historical levels after being a touch light on a per suite basis in Q1, and that we continue to allocate about 90% of our spend on value-enhancing investments. As you can see by the right-hand charts, we see excellent value creation in our repositioning program, and we will continue to strategically invest in our portfolio. It's worth saying again that our individual suite upgrades follow the cadence of natural resident turnover.
Thanks, Dave. In Q2, we had a CAD 28 million fair value gain, which results from our continued strong operational performance. We are currently sitting at a weighted average portfolio cap rate of 3.83%, which is one basis point increase from Q1. The slight increase comes from minor tweaks to a few properties which have made great strides in the repositioning program. From our discussions with our internal acquisition team as well as our external appraisers, there is a sense that cap rates should most likely come up a little. However, with most people feeling like interest rates were going to overshoot and pull back, there has not been a significant amount of activity in the market as sellers and buyers pause to see where things land.
The recommendation from our appraisers is to hold cap rates steady for this quarter and to reevaluate as interest rates stabilize and there is more transactional data to support any adjustments. The REIT continues to be in a healthy financial position. Our debt-to-GBV on June thirtieth increased slightly to 37.3% from 36.4% at the end of Q1. In the quarter, we had CAD 111 million in net financings on CAD 51 million of maturing loans. We renewed and extended CAD 30 million of maturities and added CAD 71 million of new mortgages to end the quarter with CAD 1.65 billion in outstanding mortgages on our books. With the changes in the quarter, we have increased the average term to maturity to 4.8 years, our CMHC insured mortgages to 73%, and our weighted average interest rate to 2.8%.
There's been a lot of activity on the financing front that has been solidified post quarter end. Looking at what has closed or is committed as of the end of July, we have only CAD 92 million in 2022 maturing mortgages left to deal with. The impact of these mortgages is that the REIT's weighted average interest rate as of July 31 is now 2.99%. With the current market conditions, we expect the remaining CAD 92 million as well as some early 2023 maturities to bring our weighted average interest rate into the 3.2%-3.3% range by year end. We also expect to have our variable rate exposure in the mid-single digits by the end of the year, which will reduce the uncertainty in our financing costs.
During our Q1 call, we reminded you of our sustainability commitments, and we wanted to provide a quick update this quarter on the concrete actions we're taking. Our climate change work continues, and we are pleased to advance on our commitment to set a science-based target in the coming months. We have also increased the transparency around the topic through our first disclosure to CDP's climate change questionnaire and have opted to complete the full version of the questionnaire with broad public disclosure. Earlier this spring, we participated in a joint communication with many of our industry peers to support refugees from Ukraine. We expanded our program to include Afghanistan refugees and have fulfilled our commitment to provide homes to 75 families across our portfolio. We are also in the early stages of a partnership with the Halton Multicultural Council in our Greater Toronto and Hamilton region.
Finally, we have enhanced our governance around sustainability by introducing new guiding policies and enhancing existing structures to incorporate such items as climate risk and targets for board gender diversity. These are but a few examples of our ongoing work to move forward on our sustainability commitments, and I wanna thank our entire team for their efforts. I'll turn things back to Brad to walk through our capital allocation.
Thanks, Curt. Last quarter, we told you we were exploring new builds in some regions to generate strong cash flows on day one while still generating upside potential from our expertise in marketing and leasing. Today, we're pleased to share a successful acquisition that closed on June thirtieth in Brossard. We're delighted to add this 254-suite luxury community to our Greater Montreal area portfolio, which was created just last year. For those not familiar with the region, Brossard sits in Montreal South Shore and offers easy access to downtown Montreal, complementing our presence in the downtown core.
The community contains a full range of amenities and offers standout sustainability features, including urban agriculture through a community garden, 19 dedicated electric vehicle stalls, zero-emission car share program, 500 bicycle parking spots encouraging active mobility, composting program, energy efficiency initiatives including LED lighting, low-flow fixtures, and smart thermostats. As a result, closing was funded in part by using CMHC insured financing to qualify for the MLI Select program, use energy efficiencies and greenhouse gas emissions criteria. You've heard us say before that building on new supply is key to solving the housing affordability issue in Canada, and we're committed to play a role in delivering that supply.
We are progressing well on our office to residential conversion in Ottawa at 473 Albert, which is being branded as The Slate. Construction is fully underway, and current costs are now 95% contracted. Although we revised down our expected yield slightly on interest rates, marketing activities have already started, and we look forward to welcome their first residents later this year. Development will become a bigger part of the REIT story in the coming years. We're working with great partners to bring this supply to market, and we're looking forward to sharing additional details as we get closer to getting shovels in the ground. You'll notice that the change in interest rates have had an impact on expected yield ranges on these projects. We will continue to refine these estimates over time, but we want them to be transparent in their current expectations.
We had a good quarter and are encouraged that most of our regions are seeing fundamental strength and demand building going into Q3. Although Montreal is currently lagging, other regions are not. We continue to be positive on the mid- to long-term attractiveness of the market, and we are excited about a new acquisition of Brossard. We are not immune to inflationary pressures, but we keep a close eye on our costs, both at the operating level and in the overhead base. On the capital allocation front, we remain focused on select acquisitions in our core markets.
Pace has definitely slowed due more to us wanting to see where things stabilize. However, opportunities remain vast. We continue to work through our disposition program, and we will earmark some of these proceeds from the successful disposition program to our NCIB and development. Thanks to you all for your continued support. I look forward to seeing you in person this fall. Let's open it up for Q&A.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request. If you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Brad Sturges at Raymond James. Please go ahead.
Hi, guys. Maybe just starting on your comments there on Montreal and the, I guess, the expectation for a little bit continued softness. I assume that's just some of the buildings that have been impacted by less students in the market. Just curious to get your thoughts on, you know, the vacancy trend for Montreal in the short term and kind of your expectations for Montreal overall.
Yeah. Hi. Thanks for the question, Brad. We'll turn it over to Dave Nevins from ops to answer. Over to you, Dave.
Hi. Yeah, thanks, Curt. Brad. The occupancy in Montreal, obviously the same in the student areas is lagging, but we are seeing positive signs in the area of students returning. We're encouraged and hope to see a good Q3 with the rental numbers there.
Yeah. I just add some color anecdotally, Brad. We're starting to see foot traffic pick up in the downtown core, so that's encouraging. We are starting to see some more interest come in from the international student community. August and September last year were really big months for us as you saw in our results last year, and you saw the quarter-over-quarter gain specifically in our core markets being Ottawa and Montreal. As we kind of highlighted in the press release, Ottawa is actually trending quite nicely along that front, and we are hopeful that Montreal will continue. It's important to keep in mind Montreal came out of their restrictions a little later, so we do think that had an impact on students overseas.
If you were thinking about going to McGill or Concordia versus McMaster, you'd likely probably choose McMaster just knowing that Ontario is a little more favorable if you're a planner. Montreal is, oddly enough, though, one of those markets where sometimes a lot of the students will land and start to look. This month will be very important. We remain hopeful, but that said, we will have a lot of leases coming up in September in that area because last year, August and September were really big weeks for us in that area.
Okay. That's quite helpful. I guess just, you know, your revenue growth is quite strong with inflation on the expense side obviously. It's been a little bit of a challenge for the firm. How do you see margins playing out over the next couple quarters? Do you see any opportunity for margins to start to expand again, given that you're starting to see the better rent growth?
I mean, we were hopeful that we would see margin expansion, I think this quarter. If you'd asked us that six months ago, I don't think anybody anticipated the level of inflation that we're currently experiencing specifically, too, on probably more on the utility side, to be really honest, Brad. The good news is we've over the years, as you know, within InterRent, we've spent a lot of money reinvesting back into energy efficiencies. We continue to look at our portfolio and what we can do there. The one thing we can't control necessarily is commodity prices, but we can try to help control consumption through efficiency measures.
We're working through the teams working through our trying to install throughout where we haven't already installed building automated systems so that we can really dial right down into it. Now that said, seeing the kind of revenue growth that we've seen, we continue to believe we're gonna continue to see this pace of growth. I think previously we thought 4%-8% was a reasonable number. We still quite believe in that, we believe that it could be even higher if the community can't deliver supply faster. So that said, under that kind of scenario, if inflation was to come in a little, there's no reason why we couldn't get closer to that 66% NOI margin that you saw pre-pandemic back in 2018. That said, we are comfortable kind of in that 64%-64.5% range where we kind of sit today under the current environment.
In terms of your book value, you held cap rates fairly steady for the quarter as you talked about in your preamble there. Just given the comment on do you expect cap rates to go up a little, what would be kind of your rough baseline assumption on where cap rates could turn in the next three to six months?
I'll start and then maybe I'll hand it over to Curt, because obviously Curt spends a lot of time with the IFRS valuation model and whatnot. Obviously, the public markets is telling us cap rates have increased. I can only speak to what we've seen in the private market from what's actual. To be quite honest, there's still some prints to be disclosed. I think there have been some prints that's been disclosed. Maybe they haven't disclosed the cap rates, but. It's not for us to comment on them. We do know where, based on our underwriting, would be where they sit. I can tell you there is a case to be made that what has transacted still would suggest flat to compressed.
That said, the reality is that the bid has kind of put their pens down. I think there's still a lot of capital allocated to the asset class, but I think there's a lot of people taking a wait-and-see approach. So there's not as many bidders at the table. So where cap rates will truly pencil out, I'm not sure. I think this management group thinks the truth lies somewhere in between. We definitely don't believe it's where the public market has priced them. As in you would not be able to replace our portfolio or and I'll throw one out for a peer or any of our peers at the levels of where we're trading.
That said, I think vendors expectations do have to come up a little as far as being able to transact in an environment where your cost of capital and the volatility in your cost of capital is bouncing around as much as it is. Is it 25 basis points? I don't know, Brad, but I can tell you this, from our understanding, institutional capital still wants exposure to this asset class. They're just taking a pause right now.
Yeah, Brad covered that all pretty thoroughly. I think the comment is more along the lines of when you think about where are interest rates going to stabilize, when is the bond yields, you know, going to stop fluctuating 20-30 basis points on any given day? Where that settles, and I can tell you where cap rates will settle. As of right now, if it was to settle where it is today, then you should see those rates come up a little bit, somewhere between 20 and 30 basis points, I would think, given the demand that Brad spoke to and given the underlying just replacement cost value of these assets. If the bond comes back in, that could be maybe on the low end of that maybe, you know, 15, 20, 10.
If the bond yield continues to blow out like it did at some point in the last few months, could that be 30 or 40 or 50? Could be. Like Brad said, I think the truth is probably somewhere in between. My gut today is, you know, somewhere around 10-20 basis points. If interest rates sort of pull back a little bit, like the bond yields kind of suggest it's going to. It's such a volatile time. I haven't seen it in my 12 years here. Speaking to everybody else, I don't think anyone remembers bond rates moving this much, this fast over this length of a time, up and down. It's a bit of a guess at this point.
No, definitely understood on that front. I'll turn it back to Nicole.
Thank you. Next question comes from Frank Liu at BMO Capital Markets. Please go ahead.
Good morning, everyone. I'm just curious about the dip in National Capital Region. Could you help like expand a bit on that front? What's the trigger of the occupancy dip quarter over quarter?
Yeah, sure. Good morning, Frank. We'll turn it over to Dave.
Looking at the occupancy in the National Capital Region.
Yeah.
Just a split.
Yeah.
Quarter-over-quarter.
Yeah, a little bit over Q1 over Q2, but we've seen some really good progress post close of the quarter. Things are trending in the right direction. It looks like the student market's tightening up in the area. With the recent discussions of return to work in downtown Ottawa, we're confident that the numbers will continue to improve, and we'll see good numbers at the end of this quarter and at the end of the year.
Yeah. I wanted to add to that. I totally agree. I think we're being really pleasantly pleasant with what the trend has shown post-quarter. The student base really has started to pick up. From our understanding, there's a lot of universities that were late in getting acceptance out, and we're seeing it. The good news is we're seeing the demand come back. That's a great thing. Also from our understanding, when the government employees are coming back to the core, that should actually rejuvenate some energy down in the core. I think that will only help strengthen a market that's already strengthening. That's great.
The one thing we should keep in mind, while last year was an anomaly given the pandemic, historically pre-pandemic, we always did see a slip in our occupancy quarter-over-quarter due to seasonality factors. I really do wanna stress that because I don't want to overemphasize the 30 basis points drop quarter-over-quarter as being a weakening in demand. This is something we've always seen in our portfolio pre-pandemic. Now, granted, last year, we started off the year at a record level of vacancy, and it was easy to have quarter-over-quarter improvement. I think things are trending the right way seasonally, and our core markets are really performing quite well. They are on trend to perform in line with historical norms.
I think by year-end, we should be able to meet our kind of ops target that we've always kind of put out there of 96%. Sure, Montreal might be a little softer than the other three. The other three markets are really firing and are well on the way through the recovery. I think it's just a little too soon to call Montreal on that front. Again, anecdotally, we're seeing some good signs in Montreal.
Thanks. Thanks, Brad. Also like, just following up on that front. I wonder, you know, something other than the seasonality, you know, like some temporary dip in some regions. I mean, like, we can tell, like the market rent has gone up, like significantly in urban cities. Do you still plan, continue to plan, like execute the strategy like to maximizing rents, maybe holding some units running like vacant in the near term?
Yeah. Yeah. For Frank, I mean, we'll just stick to our strategy, right? We always look to maximize the rent, right? There's no deviation from our game plan.
Yeah. I think maybe the only thing I would add to that is, you know, we've been talking about trends of turnover decreasing for several years now, and we've seen it for many years. We've been fortunate that our turnover has stayed where it has in the past couple of years. We are definitely seeing turnover come in a little bit. When turnover is coming in a little bit, maximizing your rent on initial lease strategy, we feel is just that much more important.
Yeah. Thank you. That's great color. Just turning gears to the financing front. I'm just wondering where the, you know, the mortgages renewed or refinanced during the quarter, were those mostly shorter term or longer term, let's say like three years versus five years or 10 years?
It was a combination of what goes in there. What we really tried to do is our traditional approach on the mortgages has been very much barbell, right? We've had our repositioned portfolio sitting at well over 90%, in the mid-90s almost for CMHC insured. We've used short-term money on the new acquisitions as we're going through the program on them. What we sort of came into, and then quite frankly, and this is on me, you know, got caught a little surprised by how fast the rates went up, not just how much they went up, but how fast they went up. Wish I had locked a little bit earlier.
What we did through this exercise is really look at our mortgage ladder and instead of having a real heavy barbell approach with very short and very long, we're kind of taking that stuff that was in the very short pool and sort of spreading it out over the next couple of years to have a more even pattern over that, you know, zero to four to five-year mark and then still pushing other stuff out longer after that.
I'd say there's a combination in the queue. Specifically, like we discussed, gave a little color around July because we had so many things that just didn't quite close by June thirtieth that were closing in July, so we wanted to give some color on it. We really used the opportunity to fill out the ladder. I think probably more towards the shorter term, given the inverted yield curve and the fact that those rates should come back soon.
Okay. Sorry, I just want to get more color on the 3.2%-3.3% range you mentioned at the beginning of the call. Is that the, like, the target towards the end of this year? Probably I missed it. Just, would you mind providing more color? Is that like the refinancing of like remaining 2022 maturities plus some maturities in 2023?
Correct. We have a couple maturities very early 2023 that, you know, we probably would have been dealing with in 2022. Sort of that's my attempt to give a bit of color around what the overall weighted average interest rate could look like if rates stay where they are today. You know, if they go up a little bit or down a little bit, that'll fluctuate a little bit. Given it's sort of CAD 92 million on CAD 1.65 billion, you know, ten or fifteen basis points one way or the other shouldn't throw that range off by too much.
Okay. All right. Thank you very much. I appreciate the color, and I'll turn it back.
Thank you.
Thanks, Frank.
Thank you. Next question comes from Jonathan Kelcher at TD Securities. Please go ahead.
Thanks. First, just on the Brossard acquisition, is that property stabilized?
Yeah. Yeah, it is, Jonathan.
Okay. The financing, you got the MLI. How much savings with that versus a typical CMHC financing?
The savings weren't so much in the sense of interest rates, it's still CMHC financing one way or the other. We're running a CMHC financing model. The advantage through the MLI Select program is that, unlike a normal property where, you know, you'll have a long operating history to look at when CMHC's underwriting it, there wasn't a long operating history given when it was built. The MLI Select program sort of gives you a little more flexibility around some, you know, engineering reports to use certain numbers where they won't be too aggressive one way or the other way.
Probably the biggest thing is, the 1.1 DSC on it, versus a traditional 1.2 or 1.3 for five or 10-year money, gives you that much more financing. Off the top of my head, I think we were about, you know, probably ended up with about an extra CAD 8.5 million on it, because of the better DSC, which given the current interest rates in the market, it's not fair market value that's sort of capping any property when you're going for a mortgage on it. It's your debt service coverage, right? That factor sort of puts about, you know, another 8.5 million debt on the property that wouldn't otherwise be there if it wasn't for the MLI Select program.
Okay. That's helpful. Then just, I guess in terms of capital allocation, you're talking about dispositions and potential NCIB. Is it fair to say we should expect some dispositions this year, or is it something you're sort of exploring? If you get your price, you'll do it, and if not, you don't really need to.
As you know, Jonathan, we've never been married to our assets. Whenever we can maximize the value in a property, we will always entertain offers on that kind of property if it meets our expectations. You're 100% right. We will transact if it meets our expectations and our view of value for the properties. We have earmarked some properties that fall in that category. If there is an opportunity to transact at what we believe the value is, then we will transact, and then we will recycle that capital into things like developments and then NCIB.
Okay. Do you have any properties out there listed now?
We don't have anything listed per se. I think sort of there is some properties out there that are known that we would entertain an offer.
Okay. Lastly, just on the G&A, I think, Curt, you said the Q2 run rate was good for this year. Is it sort of fair to say for next year you just sort of expect small bumps to the run rate? There's no more step-ups?
It just depends on how much Brad's gonna pay me next year, Jonathan.
Just kidding.
Yeah, no.
The CFO salary.
I think we said it. Yeah. I think we said this at Q4. I think we sort of tried to give some indication that an expected run rate of about CAD 16-CAD 16, you know, CAD 16-CAD 17, CAD 4-CAD 4.25. We were a little heavier on that this Q, but we were a little lighter in Q1. Some things we thought we're gonna get in Q1 shifted to Q2. I think if you're modeling that sort of CAD 16-CAD 16.5 for this year, you're probably safe. I think for next year, I wouldn't imagine. I don't see anything in our current conversations or our budgets that would cause us to tweak that by too much. If there is, as we get through that later this fall, we'll make sure to highlight it as part of our Q4 call.
Okay. Thanks. I'll turn it back.
Thank you. Next question comes from Kyle Stanley at Desjardins. Please go ahead.
Thanks. Morning, everyone. I'm just wondering if there are any non-recurring or timing-related items within general OpEx this quarter? Or was the increase really just reflective of the inflationary environment we're seeing?
Most of it was just related to the inflationary environment there. There's always. I can total up, there's probably about CAD 100 thousand-CAD 150 thousand one time, but it's an operating business. There's always one time things that kind of hit you that weren't expected, right? Is there about CAD 100 K in there that I don't think would be recurring? Yes. Could there be CAD 100 K next Q that I don't think is recurring? I can't say no to that either, right? It wouldn't be anything material or significant.
I would add to that, Kyle, from a budget perspective, I won't get into it, but from an operating perspective, we were pretty much in line with where we anticipated, beginning of the year on the budgeting. We did anticipate that we were going to see wage pressure and some other pressures as far as on the R&M. I think what we didn't anticipate was the Ukraine war and the resulting natural gas price and whatnot flow-through on that line.
Where we kinda are off would be on the price of the utility side of it. While, yes, operating costs were up, we did anticipate they would be up. Now, like I said, the good news is, to reiterate, the top line, there's real visibility that the top line remaining where it is. If we're successful in continuing our energy conservation efforts and whatnot, we're hopeful that at some point we can return to a margin expansion and at least stabilize where margins are today.
Okay, that makes sense. Just looking at Montreal, I mean, you gave a lot of commentary earlier, but just wondering if some of the softness you mentioned in that market could be attributable to, you know, InterRent's focus or operating focus on maintaining rental rate. You know, would it really just be generally temporary demand issues that you mentioned? I guess maybe put another way, are, you know, potential tenants in Montreal a little more price sensitive than maybe what you're seeing in some of your other markets?
Montreal has always been a very much a price sensitive market for sure. Pre-pandemic though, the rate of change, like the second derivative in the rental rate was extremely robust. As you know, we're very bullish on Montreal. Our views haven't changed on Montreal, and similar to the rest of the portfolio, we're quite happy that we didn't sacrifice price in any regions in which we operate, because we would've really trapped a lot of the value creation opportunity. We feel no different about Montreal, Kyle, to be quite honest. It's just Montreal being slower out of the gate. Be it from a COVID perspective, be it from some of the universities getting their acceptance letters out. It just seems to be moving at a slower pace.
I wouldn't say we're saying Montreal is weak, and I think I don't wanna give that impression. All we're saying is our other three core markets are recovering quite strongly. Montreal is just not keeping pace with the other three markets. That's not to say Montreal is not recovering. It is. I just don't want to overshoot either on Montreal. We did a lot of leases in Montreal in August and September of last year, and so that means we're gonna get a lot of leases back in this month and next month. In order to fill some of those leases that are coming back to us, we do need to see the student community here. Now, that said, anecdotally, we're starting to see more leads, more inquiries, and we're starting to see more foot traffic downtown, which all points to good news.
Okay, great. I'll hand it off to you.
Yeah. To add something to that commentary too, and Montreal, we discussed this with the management team also to look at it, and Dave sort of brought this up with us, is that it's not all of Montreal that's sort of seeing a bit of that softness that we talked about earlier. The sort of outskirts of Montreal are very much more robust than the downtown core. Although we're not 100% student centric in the downtown core, when you bring that many students into your downtown core, as we talked about before, there is a definite domino effect to it. We see that. Keep in mind, you know, the government is talking about how they're they have been delayed in processing student visas and their backlog has continued to grow.
Even some of the universities, you know, anecdotally from conversations with people at McGill, they were delayed in getting out their acceptance letters to a lot of the foreign students. You know, those things have those repercussions in your downtown core that are around universities, whether or not student centric or not. Again, anecdotally from our sales team, Dave had talked to us about this, is that we are starting in the last sort of week, starting to see that foot traffic come back and starting to see the student demand come back a little bit more in Montreal. It sort of starts with a trickle, and we're hoping and expecting it to continue to build. Did I miss anything on that, Dave?
Well, no, I think you hit it right. Like you're starting to see the areas around McGill and Concordia are starting to see a lot more foot traffic, as you're saying, and people on the street out looking for apartments to rent. So traffic is up, so it's encouraging. And not to mention, when you break it down the difference between reposition and repositioning, most of the vacancy is sitting in our repositioning, which is aligned with our business model.
Good point. Okay, great. Yeah, definitely seems more on the temporary demand side, and then nothing else. Okay, great. Then just lastly, I think the question comes up usually every quarter, but, you know, where do you see, the mark-to-market opportunity currently across the portfolio? Has it expanded at all maybe since last quarter?
Yeah. I think we continue to be, you know, pleasantly surprised with the return of demand. As you saw, the mark-to-market, we kind of updated that. We're currently estimating it's about 27% across the whole portfolio. It's continued to grow and as we trend back on the immigration front. During COVID we saw what was normally a 75% of immigrants, immigration being net new people to the country, 25 being already in-country. We saw that actually flip completely, right? We were going at 75 in-country, 25 net new, which doesn't drive a lot of economic demand. Early part of 2023 saw very much.
Sorry, 2022. I'm already a year ahead of myself. Thanks, Sandy Rose. Early part of 2022, we saw that trend had continued with a lot of the people being already in-country. We're very encouraged in May, and I'm looking over some of that number. I think it was 61%. Yeah, there we go. 61% in May was net new on the immigration front. Starting to see that number trend back to historical norms I think will make a big difference.
Great. Okay.
We have seen reports, those The Globe and Mail articles. There's different reports around with people going pinned down or even pulling out of construction projects because of interest rates.
When you see those things happening and the demand numbers coming back up, I think that sort of tells you there's gonna continue to be a bit of a squeeze around those rents, and we should continue to see upward pressure on market rents. Keeping in mind that, you know, for us who travel down to the US a bit and look at those markets or see its peers in other countries, by any measure of international standards, rents are still very low in Canada on a per sq ft basis.
Right. Okay. Thank you very much. I'll turn it back.
Thank you. Next question comes from Matt Kornack at National Bank Financial. Please go ahead.
Hey, guys. Just wanted to quickly touch on the Brossard acquisition. It's a newer property. No real value add component to it. And we've seen this, I think, across some of the peers as well, where the target has been recently built or developed assets. Is that or should that be an indication of a shift in strategy as to what you're targeting going forward? Or is it one-off opportunistic acquisition of a property that makes sense within the portfolio?
Thanks. Thanks for asking the question. I guess it depends how you define value add. We believe a lot of the value add in our value add model is our people and the way we deliver a certain experience and some of the programming that we've learned to deliver in some of our other higher or a little more of our luxury offerings. We thought this building, given the amenity package and where it sat relative to the competitive set, that we could continue to increase the top line by being able to bring in and deliver a program similar to some of our other buildings and thought that there was an opportunity to be able to increase the rents.
From a marketing perspective, just being able to use and leverage off of our marketing expertise. We also thought there was an ability to continue to increase. While, yes, it's new and quite, it's a great quality, it's a very quality build and the programming of the assets is the amenity space that's being built out has been great. I think you'll see us being able to kind of win on this asset from leveraging off our operating team and our experience with similar type assets.
We still view it as a value add. I should also kind of point out we're extremely excited to be doing this with our joint venture partner, Touchstone. We're excited that they too saw what we saw in it and provided some capital. It's not as big of an equity check for InterRent to write on an asset that we're thrilled to be owning right now.
No, that makes sense. Remind me, I think in Quebec you get sort of five years from completion, where there's no rent control. Is that correct or am I mistaken?
Yeah, yeah. 100%. Then that's a second component to some of the rationale and you'll see that more in Ontario as well, is when you can take out the wild card of turnover because, fortunately or unfortunately, the fundamentals are strengthening for housing in Canada and there is less turnover. On new builds in Ontario, you take away that wild card and in Montreal you take away that wild card for the first five years.
Okay. No, that makes sense. On CapEx, I don't know if I should read too much into a single quarter sequential decline. How are you thinking about investing in the assets at this point, and doing some of the repositioning work as well as going after maybe higher end suite turns? Is the sequential decrease in CapEx just a seasonality issue as a result of lower leasing turnover versus Q4? Is it, or should we expect CapEx generally to trend lower across the portfolio from the existing portfolio?
Well, it's kind of funny because you gotta break down the different buckets of what CapEx you're looking at, because typically, your CapEx will go up in Q2 and Q3, when you're doing building improvements and more to the envelope, because a lot of times you need the weather to cooperate. But on suite turns, it's really a function of how much you're sitting in vacancy. The one nice thing, if you look at one nice thing of the pandemic, we had record high vacancy, which allowed us to get into a lot of suites and spend a lot of money on turns within those suites, right? Sometimes depending on the suite turn CapEx, it's really as a function of where you sit on your vacancy and where you sit on your turnover.
Okay. No, that's fair enough. Thanks, guys. Appreciate it.
Thank you. Next question comes from Jimmy Shan at RBC Capital Markets. Please go ahead.
Thanks. Hey, guys. Just a follow-up on the Ottawa occupancy or how much has it improved since the quarter, in terms of improvement? Then when we think about kind of the student impact and the work from home impact and are there really those two kind of the main drivers or are there any other factors that we should think about?
Good morning, Jimmy. I actually encourage someone else to repeat the second part of your question because we would never give any post quarter details. So I don't think we're prepared to go there. I think what you can take from our commentary, we are happy and satisfied with where things have trended post-quarter in the National Capital Region. I think our stakeholders will be too. Second part of the question?
Yeah, I couldn't hear that. To me, it was very faint, but I don't know if you can repeat it, please.
Yeah, I know.
Yeah, I know.
Bigger picture in Ottawa on an absolute basis, you know, vacancy is higher than what it was pre-pandemic. Beyond the student factor and the impact of downtown, are there any other factors that are in play that we should be thinking about?
Let me try to answer this way. We remain extremely bullish in Ottawa on what we're seeing in Ottawa. I think what Ottawa has to offer in the context of what you're seeing from a housing affordability in other major regions, Ottawa will continue to be a net beneficiary of it. This is the one market that it is somewhat of a driven by a government town, and it is a well-known fact that the government aren't back in their office.
Any signs of government coming back to the office will only add to an already strengthened core that we're already starting to see. We're quite encouraged and quite happy to be invested at the levels that we are investing, and we've added to that investment in Ottawa with what we've seen with the current trend and where we believe those trends will go. I don't know, Dave and Curt, if you wanna add any color to that.
Well, I think the only part I guess to add on was that we're following a typical trend of a typical rental season where we have the move-outs in May and a regular summer turnover. Last year was not typical with the pandemic. This year seems to follow a more typical rental cycle.
Okay. Just quickly on the Brossard acquisition, you mentioned it is stabilized. Maybe if you could share kind of the economics on that, on that asset. And then the fact that it's in MLI Select. I think you implied you had a low DSC. Like, what does that look like on an LTV basis, that you have on it?
I don't know if you want me to go into all the details of the specific property. We typically don't. On a loan-to-value basis, I can give you a little color there to help in terms of some of your modeling. We're at about 61%-ish loan-to-value if that helps you sort of in modeling of the mortgage side of the equation.
Maybe the cap rate range?
Kevin, we typically haven't gone there. Put it this way. We still believe that we'll be able to better the yields that we're going into on this acquisition by about 150 basis points. This acquisition will be accretive to the
Okay. Thanks, guys.
Thanks.
Thank you. Next question comes from Yohann Rodriguez at Industrial Alliance. Please go ahead.
Hey, guys. So just on you know, either the Brossard acquisition or some of the developments, you know, like 473 Albert Street, where you know, you don't have rent control, you're not subject to rent control. What kind of rent growth are you underwriting versus you know, properties in Ontario and Montreal where you are subject to rent control?
Sorry, just to make sure we got that right, Yohann, because it broke up a little bit. Was the question around what we're underwriting in rental growth on Mellem and 473 Albert given
Yeah.
We're not subject to turnover.
Yeah. Yeah, exactly.
Typically, when we talk about the sort of rental growth, we keep it at a high-ish level. I think what I can say without sort of overstepping too much, and Dave, Brad, feel free to slap me here. I feel like I'm saying too much on it, but I think what I'd say is that our yields that we've sort of shown in our underwriting of 473 Albert, I think is very conservative. We wanted to make sure, given it's sort of one of the first conversions from office to multifamily, that we're not sort of overpromising and under-delivering. I think we'll be able to better what we said, what we have out there once full lease-up is in place.
I think we're being very conservative in our underwriting around the rents given the strength we're seeing in the fundamentals in the market. I think that same logic applies to Mellem with Montreal. As Brad mentioned earlier, we really do believe that Montreal will come back. It's just lagging a little bit some of the other areas like Vancouver and GTHA and now Ottawa. The rental growth that we're seeing if you go back and look at what we were seeing in rental growth pre-pandemic in Montreal we think that that's coming back, and having that asset as a new build is not subject to those same controls. We think will allow us to achieve good rental growth in that market from that asset and continue to sort of improve the yield on those properties.
Definitely it's well within the range of what we are actually achieving in the call it the last 12 months of what you've seen from us as far as overall absolute re-rent growth. I can start with that as far as on underwriting, and I would say it's probably more on the lower side of that range because we tend to be a little more conservative. Just to Curt's point on 473, I can tell you that 473 typically on a new build acquisition, you would probably.
That would be some of your highest rents within the portfolio. I can tell you we're achieving higher per square foot rents in some other properties than what we're actually needing for a pro forma. I'm not gonna give you the numbers for obvious reasons, Yohann, for competitive reasons and whatnot, but that should give you an indication on the conservatism that we are underwriting that development asset.
Okay, great. That's helpful, Brad. Thanks. Curt, earlier, you know, you made a comment about cap rates possibly rising. You know, I think you said splitting the difference somewhere between 10 and 20 basis points, depending on what bond rates stay at. Is that across the board, i.e., including Toronto, Vancouver, Ottawa, or is that mostly, you know, you'd expect that to be Montreal and then, you know, secondary markets, other Ontario kind of thing?
I think we talked about this Q4, Q1 also, and I think the logic still holds. We haven't really seen it materialize yet, as far as transactions in the market as Brad has spoken to. Through sort of the tightening we've seen over the last couple of years, you've seen two things happen. One is the differentiation between the quality of the asset has really not been as much of a factor as it used to be. Where you might have 20, 30, 40 basis points difference, that was squished.
The other thing you saw as that happened, when people were chasing sort of yield on their assets, is you saw secondary and tertiary markets who would again, you'd normally see an increase in the cap rate A B-grade for one of those stemming out from urban core, you saw those coming. Your differentiation between a sort of class A core asset and a class C tertiary asset was really nowhere close to what it normally was. My expectation, and I don't think it's a huge leap in logic, is that as things sort of come back, what you're gonna see is those lower quality assets in those tertiary markets start to get priced out differently a little bit more.
You can see those cap rates trickle in first as far as numbers starting to go up. Like dropping a stone in the water, that ripple gets less and less as you get further and further out. Because you get further up the value chain as far as the quality of the asset and closer to a core, that sort of increase in cap rate will sort of become less and less and less.
I'd also say too, Yohann, institutions aren't backing away from the asset class. They're taking the summer off, okay? The volatility to their cost of capital. We don't need to transact today. I think the pause. It's not to say that there's something that has changed their investment thesis on the asset class, okay? That's the one thing. The second thing. The second part is, though, vendors. We are seeing lots of different opportunities in the marketplace because some vendors are definitely, who tend to be on the older part of their life cycle, they're starting to think, "Okay. I really was thinking about selling. I will definitely entertain selling now." So there's this great phenomenon happening where the vendors are starting to be a willing participant. However, there's no bid.
That's where the commentary is coming from, it's under that scenario, you would have to think cap rates will reset and come up a little. Now, with all that said, with the transactions that have actually been printed, we haven't seen that yet. We don't have our head in the sand. We believe that there will be a little bit of an adjustment. I don't think it's truly what you see, what the public market is pricing in.
Got it. Okay. Thanks. I'll turn it back.
Thank you. That's all for the questions. You may proceed.
Great. Thanks, everyone, for your participation and your questions. They were well received, and we look forward to reporting Q3 sometime in late October or early November. Everybody have a great day.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.