Good morning, ladies and gentlemen, welcome to the InterRent REIT Q4 Earnings Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Tuesday, March 7th, 2023. I now would like to turn the conference over to Craig Stewart, VP, Finance. Please go ahead, sir.
Good morning, and welcome, everyone. Thank you for joining InterRent REIT's Q4 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. We're pleased to have 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 discussions. 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. For more information, please refer to the cautionary statements on forward-looking information in the REIT's news release and MD&A dated March 7, 2023. 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. Over to you, Brad.
Thanks, Craig. Let's start by reviewing the highlights of our fourth quarter. I'm thrilled to announce that the positive occupancy commentary from our last call regarding the National Capital Region and the Greater Montreal area is now reflected in our numbers. We have improved our overall occupancy by 120 basis points over both Q3 2022 and Q4 2021, and our same-store occupancy by 110 basis points over Q3 2022 and 80 basis points over Q4 2021. These strong results have put us in a better position than last year as we enter the harder-to-rent winter months of Q1 2023 to the occupancy levels that we have not seen since well before the pandemic. Looking ahead, we anticipate a tight market throughout 2023 due to various factors, such as strong immigration targets and limited rental supply.
We are confident that our team can continue to meet the opportunity of rising demand across all regions. We remain optimistic about the future and our ability to maintain our pre-pandemic occupancy levels. Thanks to the strong demand we've seen, coupled with our tempered use of promotions throughout 2022, we are thrilled to report a CAD 1.3 million reduction in vacancy and rebates compared to Q4 of last year. This translates to a 310 basis points reduction in vacancy and rebates as a percentage of gross rental income for Q4 year-over-year. On a 12-month basis, our vacancy and rebates have reduced by an impressive CAD 4.8 million. This improvement supports our position of maintaining the face value of our rents during the pandemic.
Our past success stories demonstrate that it typically takes 18 months to start to see the financial impact of a strong acquisition period. We understand the value of patience and perseverance in achieving long-term success. Thanks to our record-breaking acquisition numbers in 2021, our restrained targeted growth in 2022, and our strong occupancy figures, we are pleased to share that our total operating revenues have increased by 13.1% to CAD 56.9 million for the quarter and 16.9% to CAD 216.4 million for the year ended 2022. When viewed on the same property basis, our operating revenues have increased by 8.7% to CAD 49.2 million for the quarter and 9.4% to CAD 189.9 million for the year.
This continues to demonstrate the organic potential embedded in our portfolio. Our growth numbers are a testament to our team on the ground and the commitment to delivering unparalleled value to our clients and stakeholders. Despite the challenging economic environment and rate environment, we have remained steadfast in our efforts to maintain a strong balance sheet while managing our interest rate risk. Curt will provide further insight into our balance sheet later in this call. I'd like to take a moment to underscore our continued commitment to this objective. We've been able to maintain our liquidity levels, which in turn positions us well to continue executing on our business model with confidence.
As you can see in the bottom right portion of the slide, our strong revenue and NOI prints were unfortunately offset by increased financing costs resulting from the interest rate headwinds, as well as increased mortgage debt compared to Q4 of 2021. This led to a decrease in FFO and AFFO both in the total column and a per unit basis when comparing Q4 of last year. Despite this challenging quarter, I'm pleased to report that our FFO for the full year grew by 5.6% overall and 4.3% on a per unit basis, and our AFFO for the full year grew by 3.8% overall and 2.4% on a per unit basis. This demonstrates our ability to navigate the current economic climate effectively while delivering value to our stakeholders.
In light of a robust same-property performance this quarter and fiscal year, we would like to highlight our same-property NOI trends. Our revenue growth has consistently surpassed expense growth, except during the peak of COVID pandemic in 2020 when occupancy numbers were notably impacted. Nevertheless, it's worth noting, and it is quite visible that the current inflationary environment has impacted our operating expenses. Despite these challenges, our 2022 financial figures continue to illustrate our ability to maintain positive NOI growth in spite of these headwinds. As shown, not all expenses have experienced the same levels of inflationary pressures. We continue to focus on investment in software and systems, improvement in our process, implementing robust team training programs, and strategic capital expenditures.
We remain confident that our proven track record of top-line growth may serve as a cushion against prevailing inflationary pressures, and that we will be able to sustain the historical positive trend in the NOI throughout 2023. We are pleased to report that the fundamentals of our portfolio and sector continue to strengthen, as evidenced by a 7.1% growth in average monthly rent in December compared to the previous year. It is important to note, however, that this figure is influenced by the changes in the mix of our portfolio as we have increased our exposure to higher rent markets like Toronto and Vancouver. These changes in the mix are a significant factor to considering in interpreting the growth figures. We anticipate that a tight rental market currently predicted for 2023 will allow us to see continued strong AMR growth within our portfolio.
The significant year-over-year growth in average monthly rents across all regions in December is a positive indication that the strength in fundamentals are not limited to specific areas. This demonstrates the robustness of our portfolio and affirms our commitment to achieving growth and stability across all regions. Dave, over to you to take us through some of the operating highlights.
Thanks, Brad. As Brad previously mentioned, our overall occupancy reached 96.8% at the end of the year, representing 120 basis point improvement compared to December 2021. This occupancy level marks the strongest going into a new year that we have experienced in over 5 years. Turning our attention to our repositioned portfolio, we are pleased to report a 60 basis point year-over-year increase in occupancy for December 2022. This brings our occupancy to a level that is comparable to pre-pandemic levels at to the end of 2022.
When these figures get taken into account with our reduced utilization of promotional incentives and our strong average month rental growth in all regions, it is clear indication that we have successfully addressed the challenges faced in the National Capital and Greater Montreal regions during the summer and have established a firm foundation for growth and stability in the coming year. As we review our 2022 CapEx spend, our maintenance CapEx for the year came in at CAD 1,069 per suite, a figure consistent with our previously reported quarterly amounts. It is important to note that when you exclude our development costs, approximately 90% of our capital spend goes towards not only maintaining, but improving our communities. On the right side of our slide, we are proud to showcase the excellent value creation from our ongoing repositioning program, which remains a key priority for us.
By strategically investing in these suites, we can unlock value creation potential that will benefit our residents and our stakeholders for years to come. As a responsible member of the housing community, we remain committed to investing in our communities to create beautiful, safe, and high-quality living environments for our residents. Our repositioning program has enabled us to maintain a well-managed portfolio that not only extends the lifespan of existing housing supply, but also positions us favorably to navigate any fluctuations in the market. I'll hand it over now to Curt to discuss our balance sheet and sustainability efforts.
Thanks, Dave. Consistent with last quarter, we conducted a review of key assumptions regarding rents, turnover, input costs, and cap rates with our external appraisers. As in previous years, for Q4, we also have our external appraiser complete a portfolio-wide valuation. Resulting from this review, we have made the decision to tweak some input costs and turnover rate assumptions, as well as selective cap rates for various properties and markets. The cap rate change, bringing our weighted average cap rate for the portfolio to 4.04%. The combination of these adjustments has resulted in an overall fair value loss for the year of CAD 8.3 million. Of note, we have increased our cap rate by 18 basis points since the end of 2021 and 22 basis points since Q1 of 2022.
You can see that the REIT continues to be in a financially healthy position. As of December 31st, our Debt to Gross Book Value increased to 38.3%, representing an increase of 90 basis points quarter-over-quarter. However, it is important to also note that despite this increase, we maintain a conservative balance sheet and our leverage levels remain historically low for the REIT, providing the continued flexibility to navigate uncertain times and make strategic capital allocation decisions. As for our mortgages, we had a total of CAD 1.7 billion outstanding at the end of December, with an average term to maturity of 5.2 years. This represents an increase from the previous year-end, where the average term to maturity was 3.6 years.
Our weighted average interest rate also increased to 3.22%, which is within the expected range that we had previously mentioned during our Q3 earnings call. Our CMHC insured mortgages increased to 82% of our mortgage portfolio, providing added protection against liquidity risk in the market. The variable rate exposure was reduced to 5% at the end of the year. We expect to continue to maintain it in this 4%-6% range. Going into 2023, we had CAD 266.7 million of mortgages maturing, much of which mature in the second half of the year. We have already renewed a handful of 2023 maturities and continue working on the remaining balances as we smooth out our debt ladder and balance out the amount of debt we have maturing in any given year.
2022 was marked by an unprecedented level of volatility in the interest rate market. It appears that these fluctuations will continue through 2023, with currently the 5 and 10-year CMHC rates sitting in the low to mid 4% range, whereas 3 weeks ago, they were in the 3.65%-3.85% range. Turning now to slide 16. This year we continued to engage with several investor associations and also added external advisors to our discussions as we continue to make positive steps forward on our sustainability journey. We are proud of the insights that we have gained and the work we have done around climate change, climate disclosure, and diversity in the workplace training, as well as the support we have provided for many community-focused organizations.
Dave touched on our capital reinvestment earlier in the call. It is worth mentioning that from a sustainability standpoint, by reinvesting in our portfolio, we extend the benefit of the embodied carbon in existing structures as we invest in extending their useful life and improving their energy efficiency. We know there is still much work to do. We look forward to sharing our 2022 progress as well as our commitments for the future with you as part of our 2022 sustainability report later this spring. I'll turn things back to Brad to walk through our capital allocation.
Thanks, Curt. We remain committed to addressing the ongoing housing affordability issues in Canada and firmly believe that increasing the housing supply is one of the key solutions. To that end, we are proud to play an active role in bringing new supply to the market with over 3,500 units of rental housing in various stages of development. The Slayte project in Ottawa, our first office conversion project, is nearing completion, and we have received occupancy permits up to the 11th floor of the property. Despite the challenging seasonal conditions of a lease-up during winter, we have successfully marketed the property, and we are delighted to welcome residents starting in October of 2022. We anticipate a substantial completion of the project to occur in late Q1, 2023. This project creates capacity while demonstrating our commitment to sustainability.
As The Slayte nears completion, our focus on development has grown and will remain a key part of the REIT's future. We are proud to collaborate with exceptional partners to bring this much-needed supply to market and eagerly anticipate sharing further details as we move closer to breaking ground on each of our exciting projects. It is important to note that fluctuating interest rates through 2022 and so far in 2023 have affected the expected yield ranges for these projects. While we continue to refine our estimates as we monitor the ongoing rate and economic situations, we want to be transparent and communicate our current expectations. Turning to slide 21.
Demand in late 2022 was abnormally strong for the time of year, and we saw many trends continuing around return to office, return of foreign students, and the % of new immigrants that are net new in country returning to historical norms. No one has been immune to inflationary pressures, but we are keeping a close eye on both our operating and G&A costs. We have continued to be extremely vigilant managing our mortgage ladder and are pleased with the progress we have made in the second half of the year. I'd like to thank all of you for your continued support and we look forward to seeing you in person in the near future. Let's open it up for Q&A.
Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by 1 on your touchtone phone. You will then hear a three-tone prompt acknowledging your request. If you would like to withdraw from the question queue, please press star followed by 2. If you're using a speakerphone, we ask that you please lift the handset before pressing any keys. Please go ahead and press star 1 now if you have any questions. Your first question will be from Frédéric Blondeau at Laurentian Bank Securities. Please go ahead.
Thank you. Good morning. Just one quick question from me, looking at the GMA market. I was wondering if you currently see or expect continuing improvements in 2023. More specifically in terms of Brossard, what do you currently see on the ground over there? Do you have like a carved-out strategy for Brossard, or we should view this market in the context of your overall GMA strategy? Thank you.
Good morning, Fred. Thanks for the question. We're as you can see, there's some pretty robust growth in our GMA market. As we alluded to on the previous conference call, we thought we liked the traffic that we were seeing and that it continued, now you're seeing that prove out in the results. We are very happy with the SoSure purchase on Brossard. Quite honestly, I think the market will continue to strengthen in Montreal. I think it's still. It lagged the recovery of some of our other regions, as you've seen, it's kind of caught up. This upcoming kind of leasing season t will be very telling when it comes to the foreign students, if they continue to return at the same pace.
There's nothing to believe that that won't be the case, Fred. As you're very well aware, the foreign student is one of the bigger drivers of incremental demand on the markets in Montreal. We're very hopeful that we'll continue to capture our share of that, specifically in the urban regions of Montreal, which makes up about 70% of our portfolio. For Brossard specifically, I think we'll carry on with the way we looked at it through our underwriting. There'll be more young professionals. I think that's driving our demand there.
Mm-hmm. No, that makes sense. I guess my real question is whether you see growth opportunities in Brossard itself or you just see Brossard as part of your overall GMA strategy. The reason why I'm asking is-
I think it's a very.
There's lots of.
Yeah, sorry.
There's lots happening, there's lots happening in Brossard. That's why I'm asking.
Yeah. No, fair enough. I think to be quite honest, Fred, with the immigration targets where they're federally, I think Montreal as a whole is gonna continue to benefit from the supply disequilibrium in all of our markets. I think Montreal will be a beneficiary, given the fact there tend to be a little more supply being delivered in that marketplace. I think from a macro top-down, I think Brossard will do just fine. Are we specifically just targeting Brossard? Not necessarily. I think when it comes to the greater Montreal area, we're looking at any opportunities from the ground up.
The very nature that our portfolio is so urban, then we've been able to consolidate and bring our exposure to that market up to where it is, has allowed us to look out into other nodes within Montreal, like Brossard. Like I said, we're quite happy with what we've seen so far with Brossard. Yes, we would look at if the right opportunity presented itself, but we're not just zeroed in on Brossard. I hope that answers your question.
100% that makes sense. Thanks so much. That's it for me.
Thank you. Next question will be from Mark Rothschild at Canaccord. Please go ahead.
Thanks. Good morning, hey guys. Maybe in regard to the cap rate moves for IFRS. Can you talk to us a little bit about is this based on the values that you're seeing assets trade, or is this just appraisers, where they think the market is or should be? How do you look at that now versus what you're seeing in the market?
Yeah. Thanks, Mark, and good morning. It's Curt Millar here. We had a lot of discussions around this because as you know, there hasn't been a lot of trades in the market. We are starting to see more product come, and we believe that in the next quarter or two, we'll see more trades that you can point to really sort of re-benchmark cap rates across the board. However, in discussion with our external appraisers and looking at the portfolios, looking at the data we had around prices per door and different things, we just felt that that was the right amount to bring it down selectively on certain assets. You know, we've talked about this with institutional investors over the last few months that you are seeing or we believe you will see a reversion to different markets.
Meaning your secondary and tertiary markets are gonna have a little more expansion than your core. Within those individual markets, your class A is gonna have a little less expansion than your class B or your class C. We believe that'll revert because those things compressed a lot in the tightening cycle and sort of the chasing of the yield that people had. Just sort of trying to get ahead of it, looking at the cost, looking at the turnover, all those things combined into what we presented in Q4. If you look at overall for the year from Q1, which was our low on cap rates, we brought our cap rates up 22 basis points over the course of the year. We feel we're fairly well aligned with the market at this point.
Okay, great. Thanks. Maybe just following up on some of your earlier comments in regard to different markets performing differently and some markets recovering. Are you seeing any trends or differences in the rate of turnover and how that's moving with the rent growth in the market?
Yeah, I think, and Dave, correct me if I'm misspeaking here, so I'll ask Dave to jump in if I say anything wrong. I think what we're seeing is, we like you've seen from peers, like you've seen in the CMHC data that's been published, I wouldn't say that our trends are dissimilar. We do have more turnover in all of them versus what has been reported and what's out there. The quantum of difference between them is fairly similar, meaning certain markets, where we are very core, like Ottawa, Montreal, where we're very, very core around the schools and downtown, we get a little more turnover versus markets where we're maybe a little more suburban. I think that matches up fairly well with the CMHC data when you look at it for the different markets.
Okay, great. Thanks so much.
Thank you.
No problem. Thanks, Mark.
Next question will be from Brad Sturges at Raymond James. Please go ahead.
Hi, good morning. Just on the IFRS discussion there for a second. You obviously alluded to also changes in turnover rate assumptions. I guess I'm curious to get a little bit more color in terms of what your expectations are for 2023 and how that compared to what you realized in 2022.
Yeah. Thanks, Brad. We, we typically, you know, we've had previously maybe in the 30% or not maybe, we've had in the 30% turnover overall in our portfolio. We've brought that in over the last year and a bit, to the sort of the mid-20s. What we model is a little more conservative just to be on the safe side. We typically will model, in the very low 20s, for our turnover in our, in our appraisal model or our FNB model.
You expect it could be maybe a little bit better than that given your conservatism in your assumptions?
It's hard to say. We hope it will be. It's hard to say, though. It's come in a lot in the last year and a half. We've seen it in our portfolio. We've seen it from what CMHC has published. We've seen it from what our peers have presented. Like I said, we do tend to have more turnover, just the nature of our repositioning, and what that is as a percentage of our portfolio. and also just the nature of being very core in certain markets. I don't wanna promise anyone that we're gonna be hitting 25%-26% turnover because at this point it's really an unknown. Ask me in September, I'll give you a pretty good idea for the year.
Yeah. It's Brad Cutsey here. Just to follow up on current commentary. I mean, I think ourselves and our peers get this question asked a lot, and it is the wild card when you're dealing with vintage product such as ourselves and when you have a business model, reinvesting back into communities and bringing those communities back to life. The one issue is we've been saying for a while, the market is tightening up, and that's due to a lack of supply. I know ourselves and a lot of other industry participants are trying really hard to deliver new supply to be part of that solution.
That said, it is a wild card, and Curt and I and the management team has been saying that turnover will come in. It's finally started to come in. Granted, it's not as in maybe as much as CMHC, so we're doing a little better than the CMHC, and we don't have as much turnover as we did historically. It's not to the lows that we're using their fair value model. Like Curt said, we'd rather be conservative, and we just feel that there's such a supply demand disequilibrium that turnover is going to continue to come in.
Yeah, that makes sense. Thanks for that. Just on your development program as you're trying to continue to allocate capital there, on Richmond and Churchill. What's the timing on that right now? Would that be early 2024 in terms of breaking ground, or where would you be in that process?
It's really gonna come down to Brad just getting the drawings to a point where we can get more cost certainty, then tender package before we will break ground. We're definitely getting closer. Rents are continuing to go the right way. Costs are obviously up relative to 3 to 4 years ago when you'd be looking at this project. The flip side to that is rents have also increased at a pace to offset. You're essentially still able to achieve the yields that you wanted. For really for us to kind of go forward on this and break ground, we wanna get more cost certainty to make sure when we do break ground, we know what we're dealing with.
That could be closer to mid-2024 scenario.
Do you have a rough budget for the project at this stage, or are you still doing the analysis around that?
I don't think we've disclosed that yet. Brad, obviously we have a pretty good idea internally, but I don't think we have disclosed that yet.
I think until we get cost certainty and we get the tender packages back, we're sort of at that 95% cost certainty, we're gonna hold and make sure we got everything buckled down.
Okay. Last question. Just on the mortgage maturities for this year, Curt, just I guess you talked about, you know, staggering the debt ladder, and filling in some of the gaps there is, you know, so does that lean you towards a little bit more shorter term debt on refi right now? What type of rate would you expect?
Yeah. I think we're looking at sort of filling in the ladder. As you can see in there's a couple of spots where we don't have a lot of maturity, 2024, 2026 being two of them. There may be a little bit where there's properties that are still going through repositioning where we might drop them into those buckets. Anything that's further along the cycle, then we'll just look to extend out. There's other years down in the ladder that are also light that you just don't see because we go out 5 years in there. You know, we may toss some into some 6 or 7 years also, just to sort of ladder it out a little more evenly than we have in the past.
As you know, over the last 12 years, we've used very much a barbell approach, with our short term debt and our reposition properties. Then long term as we've gone through the repositioning phases. I think right now the strategy is just to balance out so that we don't have any huge maturities in any given year or any years where there's none. Right now, like if you want to do 1 year, 1 year money is more expensive right now, not drastically so, but you got to weigh that off. The CMHC numbers, the CMHC debt has come back in a little bit. If you look at the last couple of months, it's been as low as about 3.65%.
For 5-year money, it's been as high as about 430, 435. Right now we're hanging in around that 420. We'll just see where it ends up. A chunk of our debt is sort of at the beginning of this year, was January, and then the sort of, you know, roughly, probably 40%-ish of our 2023 maturities. The rest of it is sort of June, July, August, late June, July, August. The next few months will be sort of telling to see what happens here with the interest rates.
Okay, great. I'll turn it back. Thanks.
Thank you. Next question will be from Michael Markidis at BMO Capital Markets.
Hi, everybody. Good morning. Curt, just wanted to clarify if I heard you correctly on that. Was it 40% of this year's mortgages were January maturities?
Yeah. In that ballpark, yeah.
In that ballpark. Okay, great. just focusing in on the CapEx, I guess you guys took up your AFFO reserve by about CAD 100 per affected suite this year. Yeah, I guess from a non-development CapEx was CAD 90 million this year. I guess two questions. What are you thinking on the AFFO reserve heading into 2023? From a total CapEx excluding development, where do you think that CAD 90 million trends in 2023?
Yeah. On the maintenance CapEx, I think we might be able to see that trend out slightly, to be fair, Michael. I mean, there was a lot of inflation, some supply chain issues, so we might be able to see that come down a little. I don't think it's gonna come down drastically, but I do think on that front, we might be able to see that come in a little bit. As far as the remaining CapEx, for modeling purposes, I would do something similar to the 90 that you saw in 2022.
Okay. In doing something similar, is that just slightly lower over turnover and continued cost inflation? Is that kinda how to think about it or?
There is some of that. I do think we've dealt with a lot of the inflationary pressure through the CapEx, which is why there might be some inflationary pressure in some of the line items. Some of it has been offset by the actual inputs of some of the materials, Michael. Some of that would due to maybe a little bit of the lower turn. But the overall repositioning, non-repositioning portfolios has been pretty stable, and we're still executing through those detailed CapEx programs.
Okay. Last one for me before I turn it back. Curt, was there anything abnormal in the interest expense line, this quarter?
No. There wasn't anything crazy as far as big changes or whatever. There would've been a small write-off on some of the amortized deferred financing related to one of the properties that we redid. There would've been about CAD 140K into that. That'd been about the only thing that was sort of really not sort of everyday activity.
Okay. Perhaps after the call we can follow up on the line 'cause I think it's we're probably missing something, but it just seemed higher than what we would've expected based on your year-end disclosures.
Happy to touch base with you after, Mike.
Thank you.
Thanks, Mike.
Next question will be from Kyle Stanley at Desjardins. Please go ahead.
Thanks. Morning, guys. It was great to see.
Morning, Kyle.
The big pickup in occupancy, especially in Montreal, in the fourth quarter. Just wondering how you're seeing leasing demand trend, you know, as we kind of approach almost the end of the first quarter here. Has that persisted? You know, would the expectation be that maybe hold occupancy around these levels through the year?
Thanks, Kyle. We're really happy with the trend on the leasing traffic across the portfolio, not just Montreal. It's been quite strong in all of our four core regions for sure. As you know, on the full year, we kind of go for that 94.5% to 95%. 95%-96.5% as far as for occupancy on an average for the year. Typically, you will see us in Q4 if the leasing market and activity cooperates with us. You'll see us end go into the winter months at a high, and I think this is no different.
I think, if any indication of the, call it, the last 4 months of leasing activity is any indication of 2023, I think we're back to pre-pandemic levels and more normalized pattern. The one thing I would say, just to add a little color to is, coming into 2022, we were carrying an abnormally high amount of vacancies in those winter months coming into 2023. It will take a while to get our leases back to a ladder of where they will expire into the prime, and that's just the nature of the natural cadence of turnover.
We will be working hard over the next couple of years to make sure some of the 12-month leases that were signed at the end of last year get rolled out and expired into maybe the stronger leasing activity. It's fair to say we're back, Kyle, to pre-pandemic level. I don't know if Dave wanna add color to that or not.
Yeah, no. I think you hit it really. It's, you know, it's obviously going strong in all the key markets. It looks like it's gonna continue that way for the next little while. Obviously, we get more turn in the months over coming summer, so we'll be watching that. I think it's gonna continue strong for the year.
Okay, thanks. That's good color, especially on the kind of the cadence of the lease maturities. That makes sense. You know, in the MD&A, you mentioned mild winter weather, lower natural gas pricing as, you know, potential OpEx tailwinds early in the year. Can you provide some just high-level thoughts on what the outlook for OpEx inflation might be in 2023?
Yeah. I'll pass it over to Curt. I mean, obviously we've been very thankful for this mild weather. Not so much me personally. I'm a ski family, so I actually kind of like the cold weather and the snow. It, it has been an abnormally warm Q1. Q4 wasn't, actually. Q4 on a year-over-year basis was actually colder. But Q1 it kind of switched. So far it's trending in the right direction, but I'll pass it over to you, Curt, if you wanna add anything to that.
I think it's more just on the utility side. I think on property operating costs and taxes, we're not expecting things to stay flat or go backwards, given what's happened with natural gas pricing and given the mild Q1, at this point, we could actually see utility costs, if things sort of continue on the trend they are now, we could actually see utility costs in line or slightly lower in 2023 than we have for 2022. That could be. You know, given current modeling, it's only 2 months into the year. Given current modeling, that could be at 20-ish basis points. It's hard to say how, you know, what happens with natural gas prices over the next 10 months and what happens with the weather this summer. Is it crazy hot, which means more electricity and AC?
Is it a crazy cold fall? That's kind of where we are there. On the property tax side, we're looking at that sort of, you know, 3%-4% range, given the work we've done with our outside advisors on it. Then on property operating costs per se, Brad and I have been talking about this with people for a while. It's probably in that 4%-6% range, and I think that's probably reasonable, probably more towards the higher end than the lower end of that. In that range, I think is still fairly reasonable.
Okay, great. That's very helpful. Just one last one for me. I mean, a number of the apartment peers have identified disposition programs as a goal for 2023. I think demand for, you know, value add type assets has been fairly strong, at least according to what they're saying. Could you just talk about opportunities you're maybe seeing on the disposition side, if any?
I mean, our commentary is not gonna change much, I think, from our previous commentary. We've always engaged in disposing of non-core assets. We've had a pretty good track record, I think, over the last 10 years of kind of disposing some of the assets in which, in our view, we've been able to kind of maximize value, at least from our vision for the asset. There's definitely interest out there for this asset class. The assets that we would be looking to dispose of are typically a little on the smaller side, and whatnot, so they tend to be more desirable for the private buyer, which at this point, given we're...
The private buyer, as we all know, tends to employ a little more leverage. For them to arrange financing is being a little more, a little trickier. It's not that there's an interest here at these levels. It's just essentially some of the private buyers being able to arrange financing that's conducive to their own economic situation. As we continue to evaluate our disposition program, and if we go firm on disposition, we will announce it.
Okay, great. That's it for me. I'll turn it back. Thanks, guys.
Thanks, Kyle.
Next question will be from Jonathan Kelcher at TD Cowen. Please go ahead.
Thanks. Good morning. First, just turning back to the mortgages, you said you did 40% of the year in January. How much did you get in top ups, and how much do you expect to get in top ups over the balance of the year?
The stuff in the earlier part of the year, a big chunk of it was related to that Vancouver portfolio, which is sort of shorter term as we sort of start to move some of those properties into CMHC insured, which we started to do, end of last year, beginning of this year. On those, we're not actually looking for top ups. We're just rolling them into CMHC at or around what's currently sitting on them. On the other properties we've done, there's about CAD 10 million of financing in the first couple of months. Not a ton there. We weren't really looking for those to be a major source of capital.
Some of that'll come sort of later in the year and will be the second half of the year where there's some properties in there that are sort of more earmarked to topping up and pulling capital out of them.
Okay. Roughly how much do you think you can get if you're just looking at it today?
We're probably looking, somewhere between CAD 75 million and CAD 100 million.
Okay. Secondly, just turning to market rents and your expectation, you noted a 30% mark to market. Where do you see market rents going this year? How much higher do you think they go?
It's a catch-22 is the million-dollar question, Jonathan. I think they're gonna go higher, that's for sure. I mean, we have pretty ambitious immigration targets, which I think most of Canada truly believe in our immigration policy. The other side of that is the housing policy. We've got to find out ways to deliver that supply faster so that we can relieve a little bit of the pressure on the rents. I mean, you saw the CMHC report. Those are some of the strongest growths that I've seen out of that report ever, and I don't see that abating. I mean, your guesstimate is as good as mine. You've been studying the market as long as I have. I could say this much with a lot of confidence.
I'm pretty sure rents, the market rents are gonna grow at a faster pace than where inflation is right now. That I'm pretty confident in saying.
Okay. That's good color. I'll turn it back. Thanks.
Thanks, Jonathan.
Next question will be from Mario Saric at Scotiabank. Please go ahead.
All right. Thank you. Good morning. Maybe starting off on the operational side, I think, Brad, you mentioned in your prepared remarks that you expect a historical positive trend in NOI in 2023. Can you clarify what you're referring to?
Positive trend in NOI? Well, I think our top line is gonna continue to grow at rates that you've been accustomed to seeing over these last 12 months. Under that kind of scenario, we don't see the same kind of pressures on the operating costs as we did in 2021, 2022. We still see that there is pressures on that line item. If you kind of extrapolate from there, I believe that high single digit NOI growth is reasonable and is plausible.
Got it. Okay. high single-digits in store NOI growth, including margin expansion in 23.
Yep.
Okay. Just regionally, I noticed when I looked at the Q4 rents and occupancy versus Q3, so quarter-over-quarter as opposed to year-over-year, it seemed like the GTHA was the softest of the regions. Occupancy fell Q4 versus Q3. The rent growth decelerated a little bit to 0.4%. I know there's some seasonality involved, and maybe there's more seasonality in some regions than others. I don't know. Is there, you know, maybe you can comment on what you're seeing in that region and why some of those numbers may have been a bit softer than the other regions.
I think they're all pretty strong to begin with, Mario. I think that market has seemed solid. It's hard when you look quarter-over-quarter. If looking over year-over-year, I think it's similar and in line with other regions. I think it's just experienced, ever since the recovery, one of the fastest to come out of the recovery. It's been posting really strong growth all the way through. I wouldn't read too much into that, to be honest.
The other factor too is that the GTHA at the end of Q3 had very strong occupancy, so there wasn't a lot of turnover necessarily in Q3 or a lot of empty units going into Q4, sorry, from that portfolio, right?
Got it. Okay. Just maybe associated with that, how should we think about your Ontario, lease renewal rates for 2023? Like, should we see most of those increases come in Q1, or will they be more spread out over the year relative to what we saw in 2022?
I mean, there's an effect on the. Because of what happened with the pause that the government had been placed a couple of years ago around the guideline increase. For sitting rents, that sort of all got reset to be earlier in the year. You do see that for the ones that don't have turnover. In regards to the turnover and the cadence on that, I think you'll see things start to return to a more normal cadence that we've seen in the past, given like Brad mentioned earlier, given the return of the international student, given the return of the downtown core and more and more people being, you know, moving back to working back in the office.
Got it. You know, I was specifically referring to the lease renewal rate. Essentially, if you increase the rent on January 1, 2022, the increase will be coming through January 1, 2023 this year.
I think in Ontario, you'll definitely see. I think it'll come in from where it was because you had some turnover From the point where the government reset that, you know, we've had some turnover. It's not gonna be as much into that 1st January this year as we had last year. Next year it'll get even better, and the year after that it'll get even better because the turnover happens not necessarily in January, typically. It'll take a few years for that trend to even back out. If you go back historically, yes, it'll be more January than we have historically. If you go back to last year, it should be less than last year.
Got it. Okay. That makes sense. Just on the repositioning program, I'm not sure if you can answer this, of 3,659 suites that are under various repositioning initiatives at the end of the year. Do you have a sense of what that number would look like at the end of this year, assuming no new acquisitions?
Yeah. I don't have that in front of me, Mario. Maybe I can circle back with you. It's based on the acquisition date, right? What moves in and out of that bucket is just dependent on the acquisition date. I can, I can provide that to you separately if you want or anyone else that wants it. Reach out, and I can give you the dates of what moves into which bucket at what point in time.
Okay. The timeframe of three to four years may vary by project to some extent. Just curious whether there's any large projects that we should be aware of that are coming to completion this year?
Yeah.
Okay.
Typically from the point of view of what we report, though, we've been consistent. Like, it sometimes takes anywhere from three to five to do it, so we kinda set a cutoff of four years on that. We've been consistently applying that for the most part. I think there was one exception in the last six or seven years, and we noted that. Typically, we've been applying the four years consistently across the board.
Okay. Just maybe two more on my end. From an acquisition standpoint, is there a reasonable range of net acquisitions that you're thinking about in 2023?
Sorry, Yeah, net acquisitions? Yeah, I think the acquisition market's starting to thaw, Mario, and you're starting to see a little more deals. It maybe hasn't actually translated into ink per se, but it does feel like the market is thawing, and there looks like there might be a little more velocity happening. Similar to our previous commentary, we'll continue to look at different opportunities within our core markets.
If there's something that meets our investment criteria, we'll likely enter into a scenario where we'll partner with our joint venture partners and use private capital to go in and take ownership interest in a project with a co-ownership type structure and hopefully be able to maybe structure something where it might take a little smaller of a, of a ownership interest and be able to have the optionality to kind of buy up our interest. I think until there's a little more certainty around cost of capital is a good way to approach our external opportunities.
Got it. Okay. Is it fair to say that, like, a vast majority of any acquisition activity done this year will be through the JV structure as opposed to 100%?
If our cost to capital stayed where it is, that's a fair comment.
Okay. Then, just lastly, not a question, but similar to Mike's question on the interest expense, if we can maybe just touch on that offline. It was up CAD 2 million quarter-over-quarter on the mortgages, and I'm having a difficult time of getting to that CAD 2 million quarter-over-quarter increase. Any incremental color would be helpful.
Sorry, Mario. It was very faint. It was hard to hear what you were saying there.
He's having a difficult coming up with the extra CAD 2 million quarter-over-quarter increment in the interest cost.
Okay.
If you could help him offline.
Yeah. I can touch base with you after, Mario.
Great. Thanks, Curt. All right. That's it.
Great. Thanks, thanks a lot, Mario.
Next question will be from Gaurav Mehta at iA Capital Markets. Please go ahead.
Thank you, and, good morning, everyone. Just, on the refinancing.
Good morning.
... front, would you be potentially looking at a shorter term with a view that rates could be more favorable 2-3 years out, as you look forward? Just what's sort of that thinking when you're thinking about, you know, term versus rate?
Sorry. I got the first part, so I'll answer that. Maybe I'll get some clarity on the second part of the question. The main focus on sort of looking at that 1-year, 3-year, and a few other sort of year buckets right now is not necessarily driven by the fact that we believe rates will come down. It's more driven by flattening out our, or evening out our mortgage ladder. Now, I do believe that the rates potentially will, and when you look at a tightening cycle, it's often followed by a loosening cycle, if you will, from the way the Fed does stuff and the federal government in Canada does stuff. That's not the primary driver. That'll be a benefit if it happens. The primary driver is just flattening out the mortgage ladder.
The second part of the question, though, I'm not sure I heard properly.
I was just wondering how you're thinking through, you know, term versus rate, I do believe you gave me some color on that, but if there's anything additional, I'd appreciate it.
Sorry, the first two words are getting garbled there. The what rate?
Sorry. you know, on mortgage terms versus mortgage rates, how you're thinking about balancing that out?
I think Curt would allude into that, actually, Gaurav. I think really. As you know, we've always had the barbell strategy, given the value add nature of our business model. It has served us pretty well in the past, where we've in the near term on the mortgage ladder, we've had minimal exposure to essentially real ladder. I think given the nature of how volatile rates have been over this, over this last kind of year, we've taken the view that we're just gonna smooth out the mortgage ladder. We really wanna not make any one bet on when interest rates are gonna start to come down or up.
Yes, that may cost us as we fill in some of the short part of the mortgage ladder, but as we fill in the 4 and 5 years out of the mortgage ladder, you'll benefit from the inverted yield curve. Really the strategy right now going forward is just smoothing out that mortgage ladder and not making any one bet at any given time.
Okay, great. Thank you for that. Just lastly, on the increase in cap rates, do you think there's more to come, or are we probably in the later innings as far as valuation re-ratings are concerned?
Well, it's been a really thin transaction markets, and as we all know, appraisers have a tough job. They really look backward-looking. It's not because they don't have the ability to look forward, it's just really they rely on print, right. They rely on ink deals, and the nature of a lot of real estate deals can take anywhere from one month to as long as a year to close. Really they're at the mercy of kind of looking back and seeing what transactions actually close. I think there's a little bit of catch up being played by a lot of the major appraisal firms. The fact that it feels like the sentiment towards acquisition market, that there are more eyeballs, looking on deals to me means there is some thawing out.
Maybe, maybe there'll be a little more price discovery to happen in 2023. Time will tell if there's still room left for cap rate, but it does feel like for the core. The core hasn't moved too much. It has come up a little. I would say they've come up a lot more in the non-core secondary, tertiary market, probably as much as 50 basis points, and that's where you've seen a lot of movement. You've actually seen the kind of risk return quality spectrum revert to a more positive sloping curve, where it in the kind of pre-pandemic days really kind of flattened out. You weren't really achieving a risk premium for a triple A located asset versus a secondary non-core asset.
Okay, great. Thank you for the color, gentlemen. I'll turn it back to the operator.
Sure.
Next question will be from Jimmy Shan at RBC Capital Markets. Please go ahead.
Thanks. Just two questions from me. Just following up on the 30% plus mark to market opportunity. Wondered if you could be a bit more precise on what that number looks like, 'cause last quarter it was 30, and I thought market would've moved a decent amount, quarter to quarter? Then the second related to that is, are you finding that your tenants are starting to hit some affordability issues on some of those, lease turnover activity?
On the mark to market, when you think about the turnover that we got and the lift on the market, Jimmy, it shows you that the market, if we're still sort of north of 30 a little bit, that the market has moved in line to keep us there. It has grown a little bit, otherwise the mark to market would've come back in. In regards to affordability, we do know that given our housing policy and given our immigration policy, that it is becoming more and more difficult. With the protection that's in place in most of the provinces we operate in, it's not becoming more difficult for the tenant or the resident that's been in that suite for a long period of time and has been there already.
It's more difficult for the new person. The new immigrant coming to Canada or the, you know, person leaving their parents' home for the first time. It's more difficult for them, but it's not more difficult for the sitting tenants given the rent protection in place in all of our rent controlled markets.
Yeah. I mean it's been pretty well publicized, Jimmy. It really is the demand supply imbalance and we just have to do a better job at all three levels of government and the private sector getting together and collaborating and being able to deliver the supply. I know all four parties are actually quite willing and wanting the same outcome, so that's the good news. I think we're all on the same page when it comes to wanting to deliver the supply. Now we just gotta kinda work through it and hope that some of that immigration policy, some of those heftier targets are targeting skilled labor that we can bring in to actually help deliver some of that supply.
I think the one thing I would mention just on the affordability issue side of it is the actual rent growth that has been experienced for a sitting tenant, to Curt's point, the disposable income per household has grown at a much faster clip than the actual rent increases to use Ontario as an example. Listen, nevertheless, there's a major imbalance and companies like InterRent and some of our peers are at the forefront of helping and wanting to help deliver some of that new supply. And lastly, I would just say too is on affordability issue, which probably not as well understood, is all of the REITs have a pretty big percentage of their portfolios that does meet that affordability definition.
That's other thing I would just remind the listener or the reader too as well.
Okay, thank you.
Thanks, Jimmy.
Next question will be from Matt Kornack at National Bank Financial. Please go ahead.
Hey, guys. Just quickly on Montreal, it was obviously a very active leasing quarter. Would you say the bulk of the 190+ units that you leased in the quarter would have been to students? And can you comment as to whether there was any discounting or incentives involved in leasing that space?
There was a little bit of incentives, and but as you can see from the quarter, our incentives have come in quite a lot, so it'd be very minimal, Matt. It'd be just in a situation where maybe there's a little bit of supply competing, but I think really it was a non-event. I think it was a combination of foreign students coming back and the pent-up demand working the way through the system. I wouldn't underestimate the impact of Montreal slowly coming back to the office. I don't think it's still quite where Toronto is, but the younger professional is starting to come back downtown.
The other phenomenon I think you're starting to see is Airbnb, which were essentially Airbnbs. They went conventional apartments. I think you're starting to see the tourism pick up a little in Montreal, and I think that started to have an impact as well. The good news is, I think all the traditional kind of rental demand is really or the two traditional rental demand is slowly back to where it was. The additional supply brought on by the conversion of the Airbnbs, I think some of that left the market.
Fair enough. I-
We have overall, Matt. Sorry, Matt, I was gonna say, we have overall continued to see as we've talked about before, flows burn-off, like rebates burn off in the quarter. It's continued to come down. We are getting back or approaching a more historical sort of frictional rebate rate that we have that we sort of experienced in the last year and a half.
Fair. No, that makes sense. I would assume that we're at a point where given where occupancy has trended in the market broadly and your portfolio pricing power probably builds into the spring in that particular market. Also could you just, there was a sequential decline in occupancy in Vancouver. I don't know if there was anything to it. The rent growth was pretty strong, but if you could maybe quickly highlight that market as well.
Yeah, I don't think there's anything particular to that, Matt. It's a little bit of a different market. They get to want to give 30-day notice in that market, and it tends to be a longer season by the very nature of the weather. I don't see any just concerning trends on the quarter-over-quarter basis. I think we're happy with where the traffic has been and thrilled with that market.
Yeah. Keep in mind, Matt, that Q3 vacancy for that market was 0.8% now.
Mm-hmm.
Seeing it tick up a little bit is not a concern.
Fair enough. Okay. We're over an hour, so we'll turn it back.
Thanks, Matt.
Thanks, Matt. Next question is from Dean Wilkinson at CIBC. Please go ahead.
Thanks. Morning, everyone. Brad, just turning to
Good morning.
30%. Hey. Turning to that 30% mark to market and potentially growing, how are you guys looking at sort of, you know, yield maximization versus, you know, wanting to just, you know, get the thing fully leased up? Sort of, you know, the point being, do you buy some occupancy now to pick up potentially a bigger gain, you know, a year or two out? What's the opportunity for perhaps selective lease buyouts to increase churn?
Yeah. Dean, like, I don't think it's gonna have any change as far as the way we approach our top line growth. Like, as far as the way we go about price discovery on our vacant units, we'll continue the same process, and we'll continue to manage our top line the way we have historically. We tend to operate, like I said, in that kind of 95.5%-96.5% type range for the full year, and we'll continue to manage towards that. Yeah, there's really no change on that.
Okay. That's all I had. Thanks, guys.
Great. Thanks, Dean.
Thank you. At this time, we have no other questions registered. Please proceed with any closing comments.
I'd like to thank everybody for taking the time and for the question and answer. If we didn't get to any of your questions, please reach out to the management group, and we'll be more than happy to try to answer those for you. Otherwise, have a great day and enjoy the rest of the earnings season.
Thanks, everyone. Thank you. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines.