Good morning, ladies and gentlemen. Welcome to the Killam Apartment Real Estate Investment Trust Q3 2023 Financial Results 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 require assistance, please press star zero for the operator. This call is being recorded on November 8, 2023. I would now like to turn the conference over to Mr. Philip Fraser, President and CEO. Please go ahead.
Thank you. Good morning, and thank you for joining Killam Apartment REIT's Q3 2023 Conference Call. I am here today with Robert Richardson, Executive Vice President, Dale Noseworthy, Chief Financial Officer, and Erin Cleveland, Senior Vice President of Finance. Slides to accompany today's call are available on the investor relations section of our website under Events and Presentations. I will now ask Erin to read our cautionary statement.
Thank you, Philip. This presentation may contain forward-looking statements with respect to Killam Apartment REIT's operations, strategies, financial performance, conditions, or otherwise. The actual results and performance of Killam discussed here today could differ materially from those expressed or implied by such statements. Such statements involve numerous inherent risks and uncertainties, and although Killam management believes that the expectations reflected in the forward-looking statements are reasonable, there can be no assurance that future results, levels of activity, performance, or achievements will occur as anticipated. For further information about the inherent risks and uncertainties in respect to forward-looking statements, please refer to Killam's most recent annual information form and other securities regulatory filings found online on SEDAR. All forward-looking statements made today speak only as of the date which this presentation refers, and Killam does not intend to update or revise any such statements unless otherwise required by applicable securities laws.
Thank you, Erin. We are very pleased with our strong financial and operating results for the third quarter of 2023. Killam delivered FFO per unit of CAD 0.32 in the quarter, a 3.2% increase from CAD 0.31 per unit in Q3 2022, and achieved 8.1% same property NOI growth across the portfolio. As we continue to capture market, mark-to-market opportunities on the unit turns, we have exceeded our 6% NOI growth target in the first nine months of the year. We ended the quarter with 42.8% debt to total asset ratio, the lowest in our operating history, and continue to focus on strengthening our balance sheet through our capital disposition program and the positive lease up momentum on our recently completed developments.
Dale will now take us through our financial results, followed by Robert, who will discuss our operational results. I will conclude with an update, excuse me, on our current and recent developments in our capital allocation strategy. I will now hand it over to Dale.
Thanks, Phil. Key highlights of Killam's Q3 financial performance can be found on slide five. Killam generated strong earnings growth in the quarter, with net income of CAD 68.3 million. This includes CAD 38.5 million in fair value gains on investment properties, a result of rent acceleration translating into higher NOI. Value enhancements from this NOI growth were partially offset by an uptick in cap rates in Ontario, B.C. and PEI, where we increased cap rates between 10 and 25 basis points in Q3. In the last year, we've increased cap rates in Ontario and B.C. by between 35 and 50 basis points. As Phil noted, we continue to exceed our forecasted NOI growth and have again increased our same property NOI target for the year to over 7%, up from over 6%.
A summary of our strategic targets and performance to date can be found on slide six. Revenue is the key driver of strong NOI performance. Slide seven breaks down the rental growth achieved on renewals and turns by quarter, reflecting ten rents for tenants whose leases renewed in the quarter and for new tenants who moved into a unit in the quarter. In Q3, Killam achieved its highest weighted average increase, with a combined same property rental rate growth of 5.9%, including an average increase of 16.8% on turns and 3.2% on renewals. Year-over-year, from September 2022 to September 2023, the average rent for our same property portfolio is up 4.7%.
With acceleration in rent growth over the last four quarters, our average rent increase in 2024 will exceed the 4.7% we've realized over the last 12 months. Lower turnover continues in this tight rental market. Slide eight provides a summary of turnover by region, including turnover activity through to the end of October. We are anticipating turnover for 2023 to be approximately 19%. Although down from last year, at 19%, new leasing activity continues to be an important contributor to our rent growth. In addition to increasing top line, we are managing operating expenses. For the second consecutive quarter, expense growth remained below 1%, with total same property operating costs up 0.7%. As seen on Slide nine, general operating expenses increased 1.7%, a deceleration from the previous quarter.
We are starting to see an easing of inflationary pressures and are benefiting from the impact of expense management initiatives. For example, lower HVAC and plumbing maintenance costs reflect preventative maintenance programs and lower insurance premiums aligned with our strong risk management program, both of which have been evolving over the last five years. We are pleased to report continued expansion of our operating margin, a 120 basis point increase on our same property portfolio, achieving a 64.1% margin for the first nine months of the year. Slide 9 shows the steady progression of our margin expansion. In addition to NOI growth, our margin is further expanding from the introduction of new developments, with margins well above 70%, as well as the sale of lower margin properties. Maintaining a healthy balance sheet is a core focus.
With the successful execution of our capital recycling program and placing permanent financing on recently completed developments, we've reduced our variable rate debt by CAD 110 million year to date. As a percentage of total debt, variable rate debt has decreased to 4.9%, compared to 9.6% at the start of the year. This will continue to come down in Q4. In addition, debt to total assets improved, ending the quarter at 42.8%, the lowest level in our operating history. Debt to normalized EBITDA also improved, ending the quarter at 10.5x. Finally, slide 11 shows our average apartment mortgage rates by year versus prevailing CMHC insured mortgage rates. Our mortgage maturities are strategically staggered to avoid overexposure in any one year.
Looking forward, we have CAD 83 million of mortgages maturing in Q4 with a weighted average rate of 3.3%. In addition, we have two development loans totaling CAD 42 million, which will move from variable rate construction facilities to fixed rate mortgages during Q4. I will now turn the call over to Robert, who will discuss our commercial and MHC results, along with the ESG update.
Thank you Dale, and good morning, everyone. Killam's commercial portfolio, consisting of three major properties, the 389,000 sq ft Royalty Crossing in Charlottetown, Halifax's 152,000 sq ft Brewery Market, and the 306,000 sq ft Westmount Place in Waterloo, have all experienced impressive leasing in 2023. Same property commercial net operating income increased 18.9% for the quarter, attributable to an increase in total commercial occupancy of 230 basis points to 94.8% from 92.5% at 30 September 2022. Plus, continued success with strong rental growth on lease renewals. Year to date, we have completed 29 lease renewals totaling 77,150 sq ft at a weighted average rental increase of 29%, having a weighted average lease term of 6.9 years.
We also executed 29 new commercial leases totaling 52,600 sq ft at a weighted average net rent of CAD 22.45 per sq ft, having a weighted average lease term of 7.6 years. Killam's MHC properties include 31 permanent communities and nine seasonal resorts. Collectively, these properties delivered solid results in Q3 2023, achieving 5.4% total same property NOI growth. The seasonal resorts, which only operate for the Q2 and Q3 each year, performed very well, producing 7.1% in NOI growth year to date, 2023, compared to the same period last year. Although representing a relatively small segment of Killam's business, our permanent and seasonal communities are steady performers, consistently contributing to Killam's bottom line.
The permanent MHCs have a five-year average operating margin of 65%, while the seasonal resorts' five-year average margin is slightly less, at 60%. Slide 13 illustrates this historical trend and the relationship between the two property types based on the time of year. In 2023, Killam completed its 5th annual GRESB submission, receiving a green 3-star designation and maintaining a strong score on our performance and disclosure ratings. The GRESB requirements and the ESG sustainability landscape continues to evolve, and Killam has identified areas where we can improve our climate-related disclosure. We recognize that climate change-related impacts are increasing in frequency and severity. Therefore, Killam must develop resiliency plans to protect our portfolio. This includes exploring best practices that identify, assess, and mitigate climate change risks, so we can prioritize the more significant exposures and likewise effect countermeasures.
Finally, we are proud to announce that based on the results of our 2023 employee survey, Killam has been recognized as an employer of choice for Nova Scotia and New Brunswick by the Best Companies Group. Our third-party administered survey results show an overall satisfaction score of 81%, highlighting that 85% of Killam employees are satisfied with their role. 87% report excellent relationships with their supervisors. 90% feel positively about Killam's diversity efforts, and 92% of employees like their coworkers. Killam utilizes the results of its annual employee survey to ensure we maintain a positive work environment for our employees, communicating to them that their contribution is both recognized and valued. We embrace the survey's insights, using these to keep Killam current, so we may make changes as necessary.
Next quarter, we look forward to sharing the details of Killam's annual tenant survey with you. I will now hand you back to Philip to provide further details on our renewable energy projects and an update on our development and disposition activities.
...Thank you, Robert. During the quarter, Killam invested CAD 2.5 million in energy initiatives. Back in 2020, Killam started investing in solar energy production, and we now have solar panels installed at 19 properties located in Nova Scotia, PEI, Ontario and Alberta. Our current production capacity of 1,900 MWh per year produces approximately 4.1% of our operational control electricity, moving towards our long-term goal of 10% of our electrical consumption sourced through renewables by 2025. In addition, we have five additional solar projects underway that are expected to produce an additional 700 MWh per year. We have also been active in rolling out electric vehicle charging stations, with 355 units installed across 47 properties.
This number continues to grow, and we are committed to investing CAD 900 thousand in EV charging installations in 2023, targeting over 400 chargers across 54 properties, with all our new developments being built to incorporate this technology. A key component of this year's strategy was to recycle capital by divesting out of slow growth secondary markets or lower-yielding assets, while focusing on our development program and strengthening our balance sheet. As of September 2023, Killam has sold five properties for CAD 97 million, and subsequent to the quarter, have closed three additional properties for CAD 33.5 million. The majority of the proceeds have been used to reduce our floating rate debt.
With completed dispositions in Ottawa, Halifax, Charlottetown, Miramichi, and Sydney, totaling 815 units, we have exceeded our target of CAD 100 million for the year. These planned dispositions meet our criteria for recycling capital and will also further increase our percentage of NOI generated outside Atlantic Canada, thereby enhancing our geographical diversification. On the growth side, we have completed CAD 94 million of high-quality developments this year. The Governor, a 12-unit property in downtown Halifax, and Civic 66, a 169-unit property in Kitchener. Both properties are built with several advanced green technologies and will reduce operating costs, greenhouse gas emissions, and our exposure to energy pricing. We have two active developments: the second phase of Nolan Hill, shown on slide 19 and 20, and The Carrick on slide 21.
The second phase of Nolan Hill, a three-building, 234-unit development in Calgary, is expected to be completed in December of this year. Killam owns a 10% interest and has a commitment to purchase 100% of the development for CAD 65 million. We are currently leasing the first building, which is 42% leased, and will close the transaction once the other two buildings are finished. This will add an additional 234 units to our Alberta portfolio, and with current rent growth in the region, we are expecting the all-cash yield to be over 6.5%. The Carrick is expected to be completed in the second half of 2025 and will add 139 units adjacent to our existing commercial property in Waterloo.
The construction industry for single-family homes, condos, and apartments has not kept pace with the population growth over the last 10 years. The insufficient housing supply, three years of high inflation, and 18 months of rising interest rates has created a housing affordability crisis and a housing shortage. Recently, a number of provincial governments and the federal government have started to shift their attention to this issue and are working towards a solution to help the development industry create more supply by reducing the time it takes to receive a building permit and eliminating the GST/HST tax. This is creating many exciting opportunities for Killam. We own a number of development sites and a number of large redevelopment sites that will create value by building housing on land that we own for many years. We are experienced developers.
We have been building rental housing complexes for the last 15 years and have built over 1,900 units in six provinces. We are actively working on a number of new and exciting developments. To conclude, we are very pleased with our Q3 performance. I would like to thank our employees for their hard work and dedication. We are excited for the future and will continue to execute on our strategy and create value for all of our unitholders. Thank you. I will now open up the call for questions.
Thank you. And ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the number one on your telephone keypad. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the number two, and if you're using a speakerphone, please click the handset before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Mark Rothschild from Canaccord. Your line is open.
Thanks, and good morning, everyone. Just in regards to-
Good morning, Mark.
Hey, in regards to the transaction market, are you seeing any pickup in large transactions actually, you know, looking like they, they might get done? Obviously, interest rates have been somewhat volatile. Maybe in that note, how do you see assets being valued with interest rates where they are and the large rent growth that will take a while to come but should come from many assets?
... Mark, to answer your first question, I'm not aware of any large, actively marketed transactions in the marketplace across Canada, that are actually going through. What we've been able to accomplish, they have been relatively small deals, and there's been local interest for those deals.
And in regards to how property is being valued on the smaller deals, is it more just, you know, maybe families that look at things differently?
I think it is. I mean, obviously, they're private, buyers, and they're looking long term. They're looking at maybe there is upside, in these properties, especially when you look at it from a, per door basis, and they're just happy to be able to sort of acquire, this type of asset in some of the smaller markets.
Okay, great. Then maybe just if I can look at the same property, NOI, which has been very strong, but, you know, the operating expenses cost, the cost of expenses have come down. Should I infer from your comments that with the rent growth continuing next year and maybe some easing on the operating cost side, internal growth could potentially be even stronger? Don't want to read into your words too much, but just want to make sure I understand.
Yeah, certainly. I mean, I think that, on our general operating expenses, I think that that's fair. Property tax is the one I think we would have talked about this last call, too. Certainly, we're not going to see the reduction in property taxes in PEI and New Brunswick next year that we would have seen. So that's one line item on the expense side that we anticipate will be higher next year. But still, I think it's, you know, we're quite bullish on the NOI for next year, but not sure expenses will be as low, but still be very healthy on top line in NOI growth next year.
Excellent. Great. Thank you so much.
Thank you.
Your next question comes from the line of Mike Markidis from BMO Capital Markets. Your line is open.
Thank you, operator. Good morning, Gail, Phil, and Erin. First question from me is just on the dispositions, and referring to the slide in your deck. I get the FFO accretion, given the pay down of the high cost variable rate debt. The slide verbiage also refers to NAV accretion. And what I just wanted to clarify, is that simply a reference to sale price that you captured versus prior IFRS value, or does it take into account your future expectations for operating performance and CapEx of those assets, specifically?
I think it takes into consideration the fact that we're paying down debt when we're looking at, you know, our NAV, you know, lower debt on that as well, as part of that.
Because of our investments, we're seeing some improvement, too, just in terms of operating costs.
Thanks, Rob. I didn't mean to omit you in my good morning.
That's fine.
You're near and dear to my heart.
Okay, thanks for that.
What about the in-place NOI yield? I don't know if you're able to provide us with a range, but just given the markets that you've sold recently, you know, Sydney, Miramichi, and Saint John, where roughly are you able to provide us with a rough yield range on those items?
Yeah, I mean, the earlier ones, the properties like in Ottawa, the one in Halifax, and even the first transaction in PEI, they were all into the high 3%s, or mid-4%s or lower. Once we got into sort of the markets that we had one asset, which would have been the Miramichi and the two buildings that were side by side up in Cape Breton, they were roughly about 6.5%.
Okay, thank you. And then Nolan Hill, last one for me before I turn it back. Nolan Hill, I think, last call, you deferred and said you might give us a little bit more of an update on the parameters of your expected return based on your, your development and fixed purchase price on the remaining 90%. Do you have anything for us on that one?
Yeah. I mean, again, we are leasing it as a group in terms of our ownership group today, the first building. The other two buildings should be finished around the middle of December, and then we'll be in position to be able to purchase it. We stated a couple of times that the 100% ownership of this second phase is CAD 65 million, and you got to think about that. We are 10% of the ownership now, so there's a development profit going to us, and then we'll purchase it at the CAD 65 million mark, and roughly, it's close to, it's well over a 6%, maybe 6%/ 6.5%. And that has basically...
The reason it's that is because we would have done this purchase and sale agreement two and a two and a half years ago, when the rents were roughly about CAD 1,500, probably on a pro forma basis, and they're now plus CAD 1,800.
Yes, got that. Okay, perfect. And then just, just to clarify, so the first building, you're leasing that as a group, and then you're buying the second, too. So the stabilized yield, it will take several months for that to stabilize up?
Yes. We're buying three of them altogether, but it will be a stabilized yield. We have to lease the remaining two buildings up throughout the first half of the year of 2024.
Understood. Thank you very much. That's all for me.
Thanks.
Your next question comes from the line of Jonathan Kelcher from TD Cowen. Your line is open.
Thanks, good morning. First question, just following up on Dale on your property tax comment on unforeseen property NOI. There's no reason to think that it's going to be a big number, just back to more typical annual growth there?
Correct.
Okay. And then switching the repositioning, your repositioning program, it slowed a little bit in Q3. I guess given the strength in the markets and the higher cost of capital, how do you think about that program going forward?
Yeah. So, yes, it's a program we certainly enjoy. We have 304 completed so far, budgeting for 450 for the year. It's the turnover that can impact us, but we are still seeing some good activity and, and healthy increases, so we're going to try and convert as many as we can.
Okay. So it's still full steam ahead. It's just a function of what units you get back?
Yes.
Okay. And then lastly, just on the capital recycling program, this is really the first time you guys have started doing that, and I guess it's something you want to continue. But how should we think about the pace going forward? I'm guessing you got rid of a lot of the low-hanging fruit right off the bat, but how should we think about that in terms of volumes for on an annual basis?
I don't know if we have a number that we could give you today on an annualized basis, but I think the part of that answer would be that we're going to continue to look at selective assets to dispose on every single year on a go-forward basis. So we could give you more guidance in February, but it's safe to say that the program will continue next year. And we're going to go and spend the next month or so to figure out which assets we might look at disposing of.
Okay. Do you think it'll be more than this year or less than this year?
Oh, I would probably say by the time we finish this year and maybe some of those slip into the beginning of next year or whatever, this is a pretty good, sort of number, if we can achieve CAD 100 million a year, and so maybe some years it might be less. But I right now, it would be hard to see us selling CAD 200 million-CAD 300 million in a year.
Okay, that works. I'll turn it back. Thanks.
Thanks.
Your next question comes from the line of Kyle Stanley from Desjardins. Your line is open.
Thanks. Morning, everyone.
Hi, Kyle.
So we know, we know the renewal rent growth for next year is going to be strong, especially with the 5% growth in Halifax. But just on the turnover side of things, two questions. So you indicated you expect turnover to be about 19% for this year. You know, where does that trend for 2024, based on what you're seeing? You know, do you... Where would you say maybe the turnover floor is in, in your portfolio? And then just secondly, I mean, the turnover spreads have obviously continued to accelerate materially year to date. You know, would you, would you say the running expectation is that those continue to trend towards maybe that 25%-30% mark-to-market opportunity?
I'll answer the first part of that. I think from a turnover point of view, we were kind of projecting 18%, and now we're back up to 19% to finish the year. I think it's going to be plus or minus a couple points off of that 19% for next year. I don't see it continuing down on a sort of a year-over-year basis at the same rate. Now, Dale, what's your thought or comments on-
Yeah, on the turn?
Turns.
You know, I mean, we're looking at that closely to say... You know, the big question we're having around the table here is have we, you know, are we starting to see plateau in market rents? And I'd say in some regions, select assets, we might be, but there's still acceleration in others. So, you know, you've seen the trend in the MD&A that continues to accelerate on turns. I think that there is still some room to continue to set up. I'm not sure they'll keep at the same pace that we've been seeing. So lots of room there in terms of the mark-to-market. So we're looking at, you know, 28%-30% mark-to-market overall. I think that there is still room in a number of our markets that that's continuing to move up.
Okay. That's, that's great color. And I guess kind of building on that a little bit, you know, maybe a bit of a higher level question, but, you know, the underlying fundamentals that you just talked about in the space continue to be quite strong. Where do you see the biggest risks that could derail maybe the fundamental picture? You know, would it be regulatory, new supply, immigration, policy-driven, or, you know, how are you thinking about that today?
So you just mentioned three. One is basically new supply is going to take a long time in terms of our world to sort of bring on. You know, everybody has to do their part. So even today, if you were ready to put a shovel in the ground, it's probably 24-30 months. So you can sort of project out there. Immigration, whether they, whether the federal government slows it down a little bit, a lot, or just continues at the same pace, that will create the demand that we have for housing again for the next 5+ years, for sure. The third, the first one you said was? Sorry.
Uh, regulatory.
Which I shouldn't have, even slipped my mind. That could be the one that we don't know. That's the unpredictable one. But I think everything that we've been hearing for the last number of months is there is a housing shortage, and the governments, all levels are aware of it, all three levels, and everybody, I think, is starting to sort of rally around the, the fact that we need more housing. I think the lack of cooperation among the various levels of government is interesting to note, and it's in the paper today again. So they have to, I think, figure it out, and we're optimistic they will get together and cooperate. The other thing I, I think is a constraint is skilled labor.
That's gonna be an issue as you're trying to increase supply, and so we're optimistic that part of the immigration takes a hard look at skilled labor as one of the components that we can welcome back to Canada. And we all need it going forward.
Okay. No, that all makes sense. And then just the last one, kind of, I guess, building on that. You've got seven projects expected to start development between 2024 and 2026. You know, how are you thinking about breaking ground on new projects today? You know, how many of those seven would you look at maybe starting next year, or, you know, is that maybe something for 2025 or 2026?
Well, I guess it's a complex answer or even a complex question in terms of you're looking at a lot of different variables. So one is that we have a development program that is basically the areas of concentration are right across the country. So there's opportunities in Alberta. Obviously, there's opportunities in the two or three big markets in Ontario and then here in Atlantic Canada. So you're looking at really what are the underlying fundamentals in all those markets.
You're looking at what's availability from the, from the trade and construction sort of capacity to be able to, from a pricing point of view, and then you get into even the next level, which is, are we looking at larger projects that might be 30 stories high, that's gonna take 3 years to build, or are there opportunities to go and do 4 or 5-story combination of concrete and stick and basically get it into the ground and finished within 18 months? So we are, we're juggling a lot of sort of opportunities, and I think the, the, the fundamental objective is to be able to say: Can we get one or two projects ready to be able to say, we're announcing them, and we're gonna start building?
Because we want to be part of that solution and take advantage right now that essentially, in a lot of provinces, the HST is off, which is a really big cost savings for all developers.
Perfect. Thanks for all the color. I'll turn it back.
Thank you. Your next question comes from the line of Gaurav Mathur from Laurentian Bank. Your line is open.
Thank you, and good morning, everyone. When I'm looking at the debt ladder going forward and the CAD 280 million in mortgage maturities, are those maturities staggered across the year, or are they somewhat lumpy in nature?
Sort of light on the first two quarters. The majority of it is in the back, Q3 and Q4.
Okay, great. And would it be possible for you to provide some color on the conversations with your lenders that you're currently having and where spreads currently lie?
Yeah, I mean, I think that when we look at today, you know, CMHC this week, you know, probably 4.8% that we can get in terms of really 5% and 10%s is pretty similar in terms of that rate. So that's come down, quite nicely from a week or two ago. So it is ever-changing, but, nice to see that sub-5%. So I think looking forward, if, based on today's bond yields and market, that's probably reasonable to expect, but also with an expectation that second half of the year, that that come down.
Right. Thank you so much. And then just my last question. When you're looking at debt total assets, you know, we've seen you guys make a lot of progress on it. But, where would that be trending to towards the end of the year and potentially for 2024?
Certainly, you know, we do expect to continue to pay down more of that variable rate debt, so that alone should improve it. The big question is, you know, fair value in Q4, that we'll be spending a lot of time on that, but we continue to grow that top-line growth, so that's an important contributor. So I think the trend that you've seen is, it's reasonable to expect that to continue based on what we have underway.
Fantastic. Thank you for the color. I'll turn it back to the operator.
Thanks.
Thank you. And your next question comes from the line of Jimmy Shan from RBC Capital Markets. Your line is open.
Thanks. Just to follow up on the future development program, I know there are a lot of variables that you'd consider, when you decide to push forward with a project, but what's your return threshold today? If 4%-4.5%, sounds like that's what it was before, what would it be today?
Well, I think we still work on, and we want at least 150 basis points spread between the cost of debt that we're anticipating, and the yield that we get to achieve. And so really it means that, if you're to start a project in the next three to six months, most likely that you'd be looking at some of the CMHC financing opportunities that they have currently out there.
Okay. So that would put you in at least 5% plus?
... Sorry, what's his?
6%.
I didn't hear that.
Roughly, yes.
Yeah.
Okay. And then just a quick, the construction loan on Civic 66 and The Governor, that's being replaced. That's already been done, or is that happening in Q4? And what was the amount again in combined?
Civic 66 was done at the end of July. The Governor would not be done yet and will be done in Q4.
Okay. It's just Governor left. And, how much is that, roughly?
Today, we'd have about CAD 14 million in construction financing.
Okay, perfect. Thank you.
Your next question comes from the line of Matt Kornack from National Bank Financial. Your line is open.
Hey, good morning, all. Just with regards to the balance sheet flexibility that you've been able to achieve here and, and improving debt levels, should we think of that as a structural shift, or is that kind of in preparation for eventually getting more active on the development side?
I think it's more structural. I think for years we've been talking about wanting to improve our balance sheet and have been executing on that plan. So, I think it's just continuing on that strategy that we've had, recognizing the value in having that flexibility. So if opportunities come up, we can evaluate that, but I think this is more strategic initiative to bring those debt levels down.
Okay. Well, that makes sense. And then as you look at the development pipeline, is there any thought towards maybe bringing a partner in to some of these projects in order to reduce the capital that you'd need to put into it and maybe get a bit of a fee stream and benefit from the platform you've built with regards to development? Or would you do them all on book?
You never say never. I mean, there are opportunities, but again, what we know, and maybe we don't know everything in terms of the opportunities that are out there for us in terms of new partners. But typically, you got to have it ready, shovel-ready and ready to go, so there's no issues on or no delays on the zoning, the permitting, or any of that, and you have a pretty good sense of your budget. But really, it would be only if we decide to do a very large building that we might even entertain a partner. Otherwise, the typical buildings that are 100 to 150 to 200 units, they're kind of bite-sized for us these days.
Okay. No, that makes sense. And then lastly, just a technical one: As a result of these asset sales, are you anticipating any tax consequences, or is there enough kind of return of capital component of your distribution that you wouldn't have to necessarily do a special or something along those lines?
Yeah, we're not anticipating a special distribution. We have enough room for the year.
Okay.
Perfect. Thank you.
Thanks, Matt.
And once again, if you would like... Thank you. And once again, if you would like to ask a question, simply press star followed by the number one on your telephone keypad. Your next question comes from the line of Mario Saric from Scotiabank. Your line is open.
Hi, good morning. Just one really quick question on the new lease spreads. Specifically thinking about the 17% this quarter versus the quoted 28%-30% mark-to-market. I guess theoretically, over time, those two should converge. They should be fairly consistent, but that would assume kind of constant tenant turnover across lease duration, which I suspect isn't the case now. So is that - does that explain the majority of the gap between the 17% and the 28%-30%, or is there anything else of consequence-
Well, it's really-
-preventing you from hitting closer to 30%?
Part of it's location of where things are turning to. So when you look at our turnover and, you know, some of our highest mark-to-market spreads would be in the GTA, Kitchener, Waterloo, and that is where our lowest turnover is. So when we're looking at that mark-to-market spread opportunity, you know, the weighting makes a difference of where our assets are turning. So that's the biggest factor. And you're right, what depends which unit, you know, what, what is the average rent? How long, you're right, the duration of people have been in there. So, all those factors come into play, and that's why we see a bit of a differentiation. Because we're, you know, it's a weighted average when we're looking at what we've been able to achieve.
Okay. And are you seeing a notable trend in terms of like the... So the 18%-20% turnover expectation in 2024, I think that kind of for reference, plus or minus, relative to 2023. Are you seeing the turnover trend where you're seeing, like, a notable uptick in turnover for residents that have been around for less than 2-3 years, relative to a year ago? Or is it fairly stable on that front?
Yeah, we don't have, you know, in terms of duration on turnover. We haven't got those stats on hand, but I would say, you know, we, it is higher than we had expected this year. Certainly, the trend that we're not seeing such a significant trend as we've seen some other years in terms of that reduction. So it just, it just varies by property and by region.
Got it. Okay. Thank you.
Great. Thanks.
Thank you. There are no further questions at this time. I would like to turn it back to Philip Fraser for closing remarks.
I would like to thank everyone today for listening and participating in our Q3 2023 conference call, and we look forward to our Q4 in February of 2024. Thank you.
Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.