Q3 2021 InterRent Real Estate Investment Trust Earnings Call
[music].
Okay.
Good morning, My name is Anna and I will be your conference operator today at this time I would like to welcome everyone to the entire run rate Q3 financial results Conference call. All lines have been placed on mute to prevent any background noise.
The speaker's remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press. The star one. Thank you Cindy Rose director of Investor Relations and sustainability you may begin your conference.
Welcome everyone and thank you for joining Interrent reads Q3, 2021 earnings call you can find the presentation to accompany today's call on the Investor Relations section of our website under events and presentations. We are pleased to have Mike Mccann CEO, Brad Cooke, President Curt Miller, CFO and Dave never in Seattle.
So on the line today as usual the team will present, some prepared remarks, and then we'll open it up to questions.
Before we begin I want to remind listeners that certain statements about future events made on this conference call are forward looking in nature any such information is subject to risks uncertainties and assumptions that could cause actual results to differ materially. Please refer to the cautionary statements on forward looking information in the news release and MD&A dated November 822.
One for more information.
During the call management will also refer to certain non <unk> measures.
Although the REIT believes these measures provide useful supplemental information about the financial performance. They are not recognized measures and do not have standardized meanings under ifr S. Please see the recent MD&A for additional information regarding non I've read some financial measures, including reconciliations to the nearest I've rest measures.
Over to you.
Thank you Sandy.
Again, it's nice to talk to everybody hope everybody is doing well.
And things are getting back to normal for everybody. We are certainly getting back to normal here.
Everybody back in the offices and head office regional offices and that has been that way for a while.
I think it's a lot more productive a lot more creative and it really helps our culture and especially the young people young people are really suffered in the last year and a half.
So I'm very happy to see it and I think it's going to really help our oh what's.
The things that we can be able to do.
It'll it'll help our results and it's going to have just actually help everybody as we go forward and a lot of different.
Different ways of manners, and I also want to thank everybody in our.
Our site level they work all the way through.
Through this.
Covid, which obviously I believe it's coming to an end and we're getting a lot more normalized.
Along with a lot of us in the office environment have worked all the way through in the office of that but it is nice to see a full complement of people.
Back here and.
As I guess kind of go into the meat of the matter.
As we talked about at the start of the year in our last few calls.
We were going to hold our rents.
And we thought that was a good strategic decision.
Still feel it is.
I think it's kind of proving itself a little bit on the numbers not to the extent that we would like committed really I'm not.
But some people say that I'm not sure.
So.
Maybe more unhappy with unusual but.
Anyways.
And I think Thats, a result of just the immigration.
Has not come in like we thought it would.
Obviously the.
There's reports of the immigration being out.
A decent levels right now, but we know most of that is really people over already presently on the ground and they're just getting Canadian status.
The good thing is is that we know that as we went through this last federal election, all the different parties all were encouraging more immigration and I think we're going to see.
Historical.
Hi figures for the next two to three years as we open up and I think we're going to be it's going to be a big beneficiary to Canada in a big beneficiary to our end of the business.
We also did not see the same amount of international students that we saw before we kind of added totally feel that's like about 10% to 20% we've seen in the <unk>.
I don't have hard figures, but thats, just what I have got from our people on the ground, which I continually ask questions from.
<unk>.
So I think when you put those level those two pieces and.
And just where vacancy as you can see us keeps trending down.
I think youre going to see like a really big tail winds and great results as we go forward.
Over the next couple of years, so I'm pretty pretty encouraged by that.
To say the least so I do see a lot of positivity and.
And I do see that there's going to be I mean, it was I'll also say our leasing cycle. This summer started a little later than we had hoped and again that was a lock the link lock in pounds and opening up.
And just to students approaching.
Coming back into campus.
A lot later than even the young kids, leaving their homes, we really did not get a push until we got into September we saw good leasing activity in August, but really in September and all of our peers. I believe will have the same kind of results depending on where they are.
If theyre more urban.
Our suburban portfolios, we got hurt in our urban sites.
You can even see that on the.
On the promos so.
I think that kind of cover slide five I'm going to go over to slide seven.
Yes.
And then kind of talk to you about the occupancy I do believe that we're going to get up to that 96% Mark before the end of the year and I think youll see a continual improvement as we go into the probably end of the first quarter early second quarter.
<unk>.
Of 2022.
Again as you know, we will always try to be mindful of not.
Pushing our.
Our revenue numbers, so we will try that.
Basically go below 3% will stay in that 3% to 4% range as we go forward into <unk>.
2022, but I do feel that as things open up and immigration international students come back it's going to be it'll be very it will be very favorable for our business.
The other kind of things that kind of wanted to point out as you can see that.
Decent.
I guess, a little decent growth on some of our <unk> and <unk>.
We add some we've kept our leverage down we have some CMA sea.
Mortgages right now I have to say like even though it shows we have 69% will be pushing.
Closer to 80%, we put a bunch of CMA sea mortgages in the pipe.
<unk> got lots of liquidity right now so I think.
We're in a really good position, we are seeing a lot of different.
Potential purchases, which we'll pursue it.
And.
And I think as I think.
It's still a very exciting time for our asset class, So I feel very favorable.
Last thing I also wanted to kind of touch on too.
As.
I am excited that we've been adding some more bench strength to our team. So as we've grown we were pretty small little shop, and as we've grown we've grown some pretty weak.
<unk> grown into being able to afford.
And also looking forward to some pretty talented people. So our bench strength of our team has improved tremendously well and I think youll see that come into play over the next.
Few years, so pretty excited about that.
And I think Thats I think I've touched on all the different matters. Thank you everybody now I'd like to pass you over to David Nevins.
Chief operating officer.
Thanks, Mike, Let's turn to slide number nine.
We showed this slide for the first time last quarter to give you a sense of our typical leasing seasonality and how that had been disrupted with the pandemic.
We also wanted to highlight that our occupancy level tends to run higher for our repositioned properties.
Our new acquisitions have higher vacancy by design as we went through our Capex program.
This quarter, we are pleased to show an occupancy improvement across all segments.
Of note, we're seeing excellent leasing activity in our Vancouver portfolio, which has seen a quarter over quarter occupancy improvement of nearly 600 basis points.
At this stage, we think it's safe to say, we've seen the trough and that we're in good shape to finish the year close to our historical 95%, 96% occupancy level.
Now I'll turn to slide number 10.
As you know we decided early on during Covid the whole grants and we continue to believe that was the right decision.
We posted 5% growth in average monthly rent in September and.
And that growth is visible in both our repositioning non reposition portfolios.
We continue to see a gap to market in excess of 20% across our portfolio on slide 11, you can see that all regions have seen a nice progression in average monthly rent in September and we again want to highlight the strong growth generated in Vancouver over the last six months.
We are optimistic about future rental growth across the portfolio as immigration returns and we continue to execute on our capital plans. So.
So let me turn things over to Brad to walk through our capital spend. Thank you. Thanks, Dave and good morning, everyone about a third of our portfolio is at various stages in our repositioning program.
Our approach will supply our expertise to create inviting safe and quality communities for a rather long call Hall.
The useful life of the building, thereby increasing <unk>.
And to create value for our unit holders and as seen by the differential in operating performance why we see this as a driver of future NOI growth.
Turning to slide 14.
<unk> been talking about the wall of capital entrusted in our sector all year on if anything has only gotten more friendly going into the back half of the year. The volume of opportunities is incredible and we are seeing record transactions both in terms of cap rates and deal size.
On our side, we are hunting for opportunities, but we remain disciplined in our approach and our underwriting assumptions.
We closed on a 94 suite property in Mississauga in Q3, Jonathan with our partner <unk>.
Just down the road from our recent acquisitions on one warehouse that we'll see a lot of value creation potential.
We've also closed on several transactions post quarter, which we're quite excited about.
We acquired two properties in our core trial at all in October that are in excellent locations.
We are closed on a small property in Montreal, just last week that is a nice complement to our offering downstream.
Vancouver, we're delighted to close on the land, which is a LEED gold certified property that was completed in 2020.
For each of these transactions, we see an opportunity to create value and drive synergies with our existing portfolio clusters.
Turning to slide 15.
On the development side will provide a few additional figures this quarter for our office to residential conversion in Ottawa.
Eight months into a 20 month project and we are on track to deliver in Q4 or next year with an attractive return profile.
Turning to slide 16.
We have three other development projects in various stages of planning and all in prime locations. We've indicated the earliest start date for these projects just to give me some time, but I want to reinforce that we have flexibility I want to press belt and as we look to deliver them to the best possible leasing environment as we get closer to breaking ground will give you additional details.
Both the financial metrics.
Financial metrics, let's turn it over to Kurt to go through the balance sheet. Thanks, Brad on Slide 18, we've again provided some color regarding our weighted average cap rate by region for our investment properties for the third quarter of 2021, we recorded a fair value gain of $85 5 million cap rate compression was a contributing factor, but the bigger driver of.
The gain this quarter was the improvement in the operational performance in our portfolios that Dave outlined previously.
Currently sit at a weighted average cap rate for the portfolio of 393% and given the current market environment and discussion with our external advisors. We believe there may be further cap rate compression in Q4 <unk>.
Moving to slide 19, you can see that the REIT is in a healthy financial position and our debt to GBP on 30 September was consistent with June 30th at 34, 4%.
Owing to limited acquisition activity in the quarter at the end of the Q. The REIT had mortgages of $1 3 billion at an average term to maturity of four years and a weighted average interest rate of 239%, reflecting a further two basis point reduction in the interest rate from last quarter.
We are currently working through a number of <unk> applications that should bring the share of <unk> insured mortgages above 80% and increase our average term to maturity to nearly six years.
We've seen rates move up recently, so we anticipate the impact of this financing to be an increase of 15 to 20 basis points on our overall weighted average interest rate depending on rate movements between now and the time of funding before I move things back over to Mike to wrap up we wanted to highlight some of the work we've been doing on the ESG side of things.
Very much thanks to sandy for pushing US alone we published our inaugural sustainability report today in which we share our philosophy around sustainability and how is that thinking is integrated into our business strategy.
As part of that report we have provided an update on current initiatives as well as where we plan to go in the next few years. Today. We are also sharing our results for the 2021 grasp real estate assessment for which we achieved a 25% increase in our score and a green star rating signaling strong ESG performance across the company.
We've identified target improvement areas to keep the positive momentum going into 2022, and we look forward to engaging with you on our progress Mike I'll pass the floor back to you for a few closing words. Thank you Kurt.
Again.
We're seeing encouraging signs as we go forward not again, not super happy with our Q, but we do see some really good light in the skies and that's nice.
Frank with you.
And.
We do we see some huge demand drivers as international students come back we think thats going to be an immigration I think we're just so well positioned we're really happy that we held our rents and we think that's the most strategic.
Strategic in the smartest move to do when we kind of build the read here for the long term and over the next 510 years. So we think that was a really prudent move and we think we'll be rewarded for it over time, you'll also see that we have done some.
Post Q acquisitions, we will still seeing a lot.
It is very competitive out there, we're very happy with the acquisitions, we've done to date again, I'll kind of go back to or even something like Vancouver.
Very extremely IPO that was great timing and were.
Yes.
We're beating our pro forma right now so we think that was a good strategic move and we will continue to push into Vancouver in these core areas that we are currently in.
I think there's some big benefits in being in there.
Technology based communities and we will see we will see some big benefits and.
Lastly, I guess, you've seen that we've had just not lastly, but you've seen that we've had or the distribution increase not sure. How many years. This was in a row, but again, we're very confident where we're going and we've got a low levered balance sheet I think we're doing all the good things and good.
Going forward I think you'll see some good numbers coming out of us over the next few quarters and I guess, the last thing I want to say thank.
Thank you sandy to put down a lot of the things that we've been doing for years on the sustainability.
Port.
A lot of it we've been doing it for years and years and just never really put it reduces the paper in <unk>.
Know how important it is to everybody and it's something that's important to us as we go forward and try to make ourselves a better company and.
And a lot of ways better for.
All of our stakeholders and better in our community and I think thats about it we are excited for the future.
We appreciate all the great work that our team has done they have been.
This has been a long year and a half and half.
I have to say how much we appreciate everybody in.
It's nice to see a lot of us we've been getting.
Yes.
Nice to see everybody in person and it's.
Great.
I think I think that's about it we'll open it up for the questions right now from from the Florida. Thank you.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Mike Mosquitoes with equity analyst days or that Youre line is on mute.
Hey, guys good morning.
Just hoping to dig in a little bit more into.
Property stats.
Your economic vacancy for September I think you showed meaningful gains went down to five 1% versus.
Seven 8% last quarter, but when we can sort of look at the average when you subtract vacancy in rebates.
And then the same property expense growth revenue figure Didnt move nearly as much I think it was only down 60 basis points still quite elevated. So I was just wondering if you could give.
Give us a little bit more color between the interplay of the timing of the leasing agents that you saw this quarter versus promotional activity.
Yes, the timing was much later, Mike It really came in and I think I said that on the call. It really came in a lot of September.
A lot of that again is around the <unk>.
Core.
Students the whole bit and even as I said.
Having the kids come back out of their parents homes.
Including my own.
Yes, so that really it really kind of hit September there is we've had some good.
Good movement in October too, but it was yes. It was late in the quarter.
Okay and then just following on Dave's comments, I think you said, 95%, 96% at the end of the year was that for the entire portfolio or just the same property portfolio.
Yes, I think I think we're leaning more like again thats more tire I, maybe I shouldn't speak for it.
I think you hit it I think it is across the entire portfolio.
You hit it right.
Okay, Great and then just.
And then last one for me before I turn it back just on I know you haven't used a ton of promotional activity, but there is some in the portfolio would it be safe to say that from an aggregate dollar perspective.
That's peaked or I guess, it will probably peak in the fourth quarter, but are we at the peak now do you think in terms of <unk>.
Peak fourth and then Youre going to have is you still have obviously some of them.
Q1 of next year, it'll start it'll be burning off as we go through.
But it will it will peak in Q4.
Okay.
Yes, sorry go ahead.
Yes.
I just couldn't tell you the only thing I would add Mike is yes.
Burn off throughout and to Mike's point, it will really start to burn off in the second half of next year, but then it will peak in Q4.
And just to add a little more color to the promotions.
In the urban core is really where we select properties, where we are.
Really felt the impact.
Damage.
Got it Okay, I will turn it back thanks very much.
Your next question comes from the line of Mario <unk> with Scotia Bank. Your line is muted.
Alright, good morning.
Oh.
Yeah.
Great.
Alright, great.
Alright, great.
Sure if you heard me, but yes.
Yes.
Maybe maybe for Dave in for Mike in terms of operations and capital allocation.
When you look into 2022, what would you characterize as being your top two.
Operational and capital allocation goal slash target RBC.
How do you see it today.
Well first Dave Okay, I'll go first and if I get the wrong answer Dave will.
Sure.
Really like we're all about driving we can we're trying to drive.
Growth.
And I'm trying to get return so we're as we're going forward, we're looking at everything and try to ascertain like Where's the best.
Revenue drivers and.
I think if you went through our portfolio and I know some of you have had the maybe not the most recent past but.
I've gone through our portfolio before we're in pretty good shape I would say like structurally in building envelope and that we're in really good shape. So we are really just trying to drive.
Different things, where we think we can maybe you can derive some.
I guess rental growth and really just make sure theyre more sustainable over the long run to thrown that ends for sandy.
And I think Dave you'd like to add Julian I'm, just going to add is just looking for other areas, where we can save on operational costs, but I think as you said most of the buildings are all in good shape and we are doing well on that side.
And I would add to that to David and nice comments, just so we have been investing in technology and we are finding wage and things that we can do to help offset some of the inflationary costs that we're seeing on the operating side to labor and it's not just us I am sure as your fellow a research analyst speaks in the morning meetings and whatnot.
It's across the board.
The labor shortage that we're seeing in this country and globally.
Nevertheless, that's really has helped accelerate our investment in technology and trying to find efficiencies within our portfolio to really reduce.
The pressure that we're seeing on the wage side of it.
And just maybe on the weight side with the recent uptick in the minimum wage in Ontario.
Sure.
Do you have any sense in terms of what the implications might be.
Your labor costs going forward as we've talked about.
How sensitive is the labor cost in relation to the minimum wage rates.
Honestly the minimum wage really it does not come into play because we pay all of our people over minimum wage so that's not even an issue.
The bigger issue is obviously there is.
A little bit of a change in.
And wage pressures Theres Big changes you know what I mean, so and I think we've got in front of it we've really kind of locked down a lot of the key people in that and going back to where brad's, saying, we're trying to make yourself a little bit more efficient.
We've pushed in through a bunch of different technology pieces that we think are going to help on the on the <unk>.
I guess, making us more efficient so.
That's it I really don't think the minimum wage has got anything to do this we don't there's nobody in our realm that we're paying minimum wage.
Got it.
In terms of the rent growth that you highlighted.
Our primary target like Mike earlier in the call you mentioned, 3% to 4%.
I wasn't sure what that specifically related to.
Vacation for 3% to 4% rent growth in 'twenty, two or in Q4, how should we think about them.
No I would say I would think I was just calling I think for more on the vacancy side that we're going to get to three 4% and I am saying into like into next year I think thats not.
Not talking to first start of the next year I think will be as we get going it will be the latter part of next year.
Yes.
And be mindful like we've always tried to stay but that's within our purview. We've always stated we have always tried to be within that 3% to 4%. So we just think everything is going to be more normalized as we get into the I guess the second half of 2022.
Okay, and then in terms of capital allocation.
Primarily start pick the markets so far in 'twenty, one, including two three acquisitions.
Is there a when.
When you think about capital allocation in 2022 are you looking to enter new markets or is there enough.
Product.
Good valuations, where you can expand the market currently.
I think were really were.
Again, we always look at it we discuss everything so.
I can.
<unk> will pass.
But right now we're very happy in the core markets that we're in.
We like all of them.
Greatly we think we're going to do really well and again a lot of them are I think are well positioned with technology being a big driver.
In health care and things of that nature being big drivers here.
So we like those markets.
So I think that's really just going to be concentrating on that unless something you know what it means comes out really compelling, but I mean thats.
That's not where we're at today.
Just to add to that now to mikes comment the nice thing about being in Canada, there's not a lot of markets got it covered it's not like the U S where there is a lot of Submarkets that you really got to get your head around so to Mike's point, we're really happy with the margins that will be focused on and they've got good underlying economic activity.
That are linked to technology and life Sciences, and institutionally education. However that said, there's only a couple of markets that we aren't in Canada, and we've been very well versus within those markets. So.
If an opportunity of scale King obviously, we would look at it but we're not hunting, we like the Americas growth.
Okay.
Got it Okay and my last question just on the Euro.
Your conference call as far as you mentioned the potential for core or core plus community acquisitions.
With a target IRR on those types of acquisitions to be a bit below kind of the high single digits.
What are you looking at for the value on or would it be somewhat similar.
Sorry, Matt I think what youre asking core versus value I think what we have said in the past if we see an opportunity that is strategic and that is close to an existing community that we'd be willing to.
Our return threshold of high Levered single IRR, but.
But we were searched for double digits on the on the value add and on development, we're searching for north of 15.
And I think some.
I won't say, that's always the case, because sometimes the quarters a good tuck in and it gives you a operational efficiency Mario but sometimes you find some.
I guess core assets are being marketed as core than maybe they maybe they've lost some of the potential.
Potential.
Rent that they should be getting.
Yeah.
Okay. Thanks, guys I'll turn it off maybe maybe it is a value creation and you don't and people don't realize it all the time.
Your next question comes from the line of Jonathan <unk> with TD Securities. Your line is on mute it.
Thanks, Good morning.
First question, just operating costs were a little higher in the quarter and I think the MD&A talks about <unk>.
Leasing volumes and increased marketing costs can you, maybe give a little bit more color on that and.
Maybe some guidance on how to think about that.
For next year.
Sure.
It's Kurt here Jonathan.
I think if you look at the year to date, they're pretty much in line.
What we've seen is a little bit of pressure in Q3 that would normally have been spread between Q2 and Q3 from the point of view is the leasing. So if you look at the leasing activity that happened.
And it was late in Q2 heavy in Q3, especially at the end a lot of things get driven with that from salaries to commissions to <unk>.
Advertising programs online advertising programs and special events that got pushed later into the summer versus earlier, given the state of lockdown in the different markets.
So there has been a little bit of pressure, but Mike spoke to a lot of it's been seen in Delaware already.
So those things will continue to exist, but I would say the bulk of that differential is mainly due to the timing.
Okay.
I'd say, a little bit of timing a little bit I think it's a little bit of things timing wage.
Technology investment was a big piece, which will be able to scale up for the future.
Good thing that Kurt touched on too is just we did do a lot of different activities to try to get our.
To get our communities back too.
I guess as normal as we can.
We're doing a lot of stuff for that so we think that's really important and we try to look we really try to view these things not on a quarter by quarter basis try to look at it more of a long run we think it is very very important to get them engaged again.
Yeah.
Okay.
<unk>.
And then I guess switching gears, Curt you talked a little bit about the financing in the opening remarks, but you do have.
Couple of hundred million dollars of mortgages maturing in Q4.
What what sort of terms and rates are you are you looking at and what do you think the up financing potential is on on that.
I'll start off with your findings financing potential Bay.
Based on what we have in this year and coming up early in 2022.
We're looking at right now there could be a total of north of 150 in between 115 $200 million.
Financing potential between sort of late this year and call it mid to late next year.
So there is lots of availability the timing Im sure if you've spoken to anyone who has been through our dealing with the CMA process right now.
It's just there's a lot of stuff going through there and the timing can be an issue what used to take a month to two months has now taken anywhere from at.
The speediest and three months and.
Normally from what I'm seeing and hearing it's five months.
Or minus a month or so.
Timing is.
Is it.
Critical.
Good thing is that the lenders.
Our all understand this nail work with you to give you a short extensions on existing mortgages.
Need to bridge or anything else. So there's no issues on that front.
In regards to rate.
Five year terms, we're seeing.
Q2 to Q4, right now and 10 year terms, we're seeing two 5% to two seven.
So when you look at what's coming up and I think we did speak to this.
In the presentation and in the MD&A, you will see a little bit of.
Pressure I mean, we've been we've been blessed with abnormally low rates for quite a few years, whether this will keep going who knows.
But I think if we do what we are planning on doing.
We will lock in long term financing, mostly on the mortgages that are coming up and we should be able to extend out our weighted average life to maturity. Once we're through these to be north of six years.
CMA Sea insured will go up over 80%.
The total impact on our weighted average interest rate, which is at $2 39 for the Q.
Probably end up somewhere in that 2525 to two six range. So historically by historical means still very low and will give us a very long runway with a weighted average life of six years.
And that will come with some deferred financing costs and some CMA Cps that'll get amortized in so as those start to sort of take hold in Q1 and Q2, we will make sure to communicate that for you.
Everyone can model it well.
Okay.
That's helpful I'll turn it back thanks.
Okay.
Your next question comes from the line of Mark Rothschild with Analyst Canaccord. Your line is now open.
Thanks, Good morning, everyone.
In regards to the improvement in occupancy and Mike I think you said that it was mainly from students should I assume I understand there was entirely from students and also going forward with the guidance for that with the expectation that you will improve occupancy maybe another 200 basis points over the next year.
What is that predicated on is that assuming that integration picks up over the next few months.
The.
Students.
Entering university that they will be leasing more just wanted to stand assumptions in there.
Yes.
First off nice talking to you Mark.
No its not all a university students.
Combination of University students and lot of the younger people that have graduated or and got their first second these days are fits job within three years and.
Anyways.
So a lot of them just leaving their parents' home and all of that actually I was like based on me to me very muted international students showing up and immigration I was like surprise when you kind of look at everything overall like I think youre going to see pretty good headwinds.
Sorry, a tailwind for us and.
And I think youre going to see like I think you'll see some pretty good results as of as we get into.
Yes more of the latter part of the second quarter of 2022.
We do see that we're going to still get some occupancy improvements and all that we're seeing where we're going right now over this winter and it looks it looks relatively good. So it's not really predicated a bunch of new people showing up or anything like that.
Mark is just what we're seeing we hope everybody shows up because it'll be a whole different.
Flavor of the call to be quite frankly.
So based on an outlook of immigration really recovering with the should we expect that there could be a much more material improvement in occupancy.
Yes, I think if we see immigration will see a big material improvement.
The way to look at it too on the students was we saw the domestic students come back but to Mike's point, we haven't seen international student come back anywhere near where it was we were very hopeful on the backdrop of that I think it would be fair to model.
We don't provide guidance, but I think somewhere around a 200 basis points improvement in total when you include HCM rebates.
Okay understood. Thanks, and then in regards to the Toronto acquisition that just closed a couple of weeks ago.
Is there a value add component of that that may be going in return would be even a little lower with greater potential or how should we understand that transaction.
Yes, we think there's some good value add potential we're really we're very happy with the acquisition.
We think there's some really good.
I guess some growth potential there.
And then maybe just lastly on that acquisition. So how much should we expect you to invest in that property over the next year or two.
But we haven't usually typically given guidance on singles.
To be quite Frank with you.
But I bucket, we always model in <unk>.
We're looking for good returns and we're looking in.
North of double digits here. So that's all I can tell you that the return.
And it's no different Martin typically right. It's always been between 102 hundred basis points I would try to improve the yield and that yield calculations includes any caps the capex needed to get to get there right. So this is no different.
We're extremely happy.
With this purchase.
Right.
Maybe I'll just ask the question a little differently.
This thing you can't disclose either but with the Capex would be built into the acquisition price that was announced.
Yes.
When we look at it.
Not built in when we look at our returns we build it in.
Okay. Thank you so much.
Thanks Mark.
Your next question comes from the line of Joanne Chen with BMO. Your line is muted.
Hi, good morning.
Maybe just a quick one from me on that with respect to the acquisitions that were completed.
Quarter end would you be able to kind of provide.
What sort of cap rates that you're seeing in some of your target acquisitions right now.
Yeah, Hi, Julien and theres not to be cute, but.
In our investment philosophy.
We always we won't sacrifice location and then from there we like things that.
Have a little bit for <unk>.
Lack of a better term here, where we can bring our vision to reposition so the going in yields a lot of times.
For us when we're looking on the acquisition, where it really matters for US is where we think we can take that going in yield and year kind of three through five once we give them enough time to kind of work.
<unk>, so we really.
We really don't like disclosing the going in yield because it's not the way we look at the overall acquisition, but you can look at our track record we will be investing in this if we didn't see a material improvement in what we thought we could take the underlying cash flows.
Alright, no of course not.
Well, thank you and I guess.
Given how.
You know type pricing is right now in some of these core markets, but what is your thinking.
Haps on any potential for disposition and capital recycling.
Yeah, we've talked about before we will probably some of our.
We think properties that we've kind of boring all the fruit out of them as much as we can or if there are.
Maybe not help us operationally that will probably exit out of those and I think youll start hopefully seeing it.
Over the next couple of quarters, a couple of them.
Okay.
Okay great.
Imagine the acquisition pipeline for the remainder of the year in 2022, Sylvan way you guys are going to be keeping busy on that.
Alright.
I think it's really busy there's a lot of it seems a lot of intergenerational trades happening right now theres a lot of.
I don't know I guess, we've seen some people paid isn't it.
And the media to a different.
Intergenerational stuff, but.
There's a lot of there's a lot of stuff out there both.
On market and off market.
So where we are we're very hopeful.
And the only thing I would add too is in today's world with.
Every time, there is as far as the taxes and policies and different things like that you are seeing a lot of people that own. These apartments during the private hands, but they own them and syndicates and now there's question with regards to different views of what the current environment is and you're starting to see a lot of people dissolve those partnerships because of it.
Can't come in and agreements with where their near term outlook.
Interesting.
No. That's really helpful. That's it from me I will turn it back thanks guys.
Your next question comes from the line of Brad Sturges with Raymond James Your line is now I mean it.
Hi, guys.
I guess.
Based on your comment that you are seeing still a pretty good pipeline of acquisition opportunities like how would you compare.
The opportunity set today versus maybe earlier in the year in terms of.
Investment size or opportunity.
Yes, no there's not.
Launched change Brad other than the fact that as the world gets back to a somewhat hormone by no means do I think we're back to a normal.
And only only when we start to really see the floodgates open with immigration.
<unk>.
Let's throw it out there Kurt has the exact numbers, but we looked at it right and you have seen record immigration numbers posted but but the reality is a lot of those immigration theyre getting counted in.
And posted in the media I really rather than that so we're already in Canada and in being given permanent resident status, which is great for us that means they are not going to be leaving Canada, and they're not leaving the rental pool, but we've yet to see the influx and the increase in the rental pool demand and we truly believe we're going to see it I think all three levels of government.
And I think all three parties are very much supportive.
And immigration policy.
I truly believe when we truly believe that the fundamentals are there anything on the continuing to tighten the least in the near term. So as you see that youre going to just continue to get into an environment, where you're trying to underwrite the top line and Thats really where we.
Where the magic will come in is really what your vision is for an asset where you can take those brands, however, backdrop and offset against where turnover will go.
There is a lot of there's a lot of capital chasing that product and that has not changed but theres a lot.
Increased deal velocity.
We kind of thought would be the case year in high school and it's playing out and then continues to play out. It just means we've got to be really disciplined and when we when we underwrite an asset we better really do our homework within the note and have a clear vision of where we can take that asset and those rents and really so for us nothing really.
Change other than the fact that you might have to spend a little more common in research.
Alright.
Your expectations for.
Further improvement on the occupancy side have you.
Would your expectation be for I guess, the next quarter or two per year.
Your net effective rent growth to kind of hold in at current levels before improving.
Early to mid next year, how do you think about the.
The trend on rent growth over the next few quarters.
I think it is going to hold them to be Frank with you.
I'm really looking forward to.
Normal times, so when we get into.
Middle of next year, I think youre going to see.
I mean, all things all signs point to some pretty good times and our asset sector. So.
Okay.
Alright, and just to go back to your earlier comment just on.
Some of the cost inflation, you're seeing but also you know occupancies improving margins have been stable for the year to date numbers that will trend do you expect to continue then it's kind of stable margins for now.
I believe so they are pretty stable I think we've got ahead of a lot of that stuff.
Okay, Great I'll turn it back thanks.
Your next question comes from the line of Matt <unk> with Nashville National Bank Financial your line is muted.
Hi, guys.
I'm, just wondering with the acquisitions in sort of core Toronto proper as that market. One that you see a material growth Avenue and are these just asset specific.
Acquisitions.
Okay.
We like that obviously.
As you know with US we like to have four core areas of focus areas. We will look at opportunities from a bottom up scenario. This is this was a two assets the portfolio sale that we thought we could do a lot with so we we were more than happy to.
Get it so we will continue to look.
Yeah.
We're not going to deviate from our from our core strategy of buying really well located.
That's what.
With upside potential rate, so nothing's really changed on that front, yes, it's probably the first core core, but if we can be lucky enough to find other assets that meet the same kind of.
Investment criteria, we'd be very happy to do so.
And are those carrying a little higher sort of vacancy then they would historically or are they pretty well leased at this point.
No we to be Frank with you every time, we get through a purchase.
Rightly or wrongly we always ask them to stop leasing once we start negotiating because we'd rather have the carry of the vacancy and be able to do the work we'd like to do on the.
On the different apartments, and kind of try to create some I guess some value for us. So we always do that upfront.
Okay, No fair enough.
And then given the state of the market you definitely seem optimistic and I think the numbers are proving it out across the board but.
Have you been encouraged maybe to pursue.
The redevelopment or repositioning projects that maybe you would have put on hold and you may not have put this one on old, but I'm thinking some of the Sherbrooke Street.
East assets at <unk>.
<unk> potential upside, but presumably I wouldn't have thought after you would've done renovations there until it maybe you did.
Those type of projects and how.
How should we think of that in terms of the potential capex spend going forward.
Well I think our capex is going to be pretty consistent from the years past.
We need to be we see a lot of different potential and we're really watching it as a pretty <unk>.
Fluid market to say, the least of what's going on out there. So we are continually watching and looking for the opportunities and sometimes the best opportunities you hit it right on the head matter or in our own portfolio. Some of the stuff that we did some repositioning even seven eight years ago kind of look at it now and seeing what's happened in those neighborhoods those nodes and the potential.
Maybe we should be looking at them again, so that's that happens from time to time too.
Okay.
Good morning, John I would add.
As an example, you use yes, we are in the middle of repositioning that asset Okay fair enough.
The trees in the lobby were interesting.
Anyway last one for me is.
Yeah.
Unfortunately against our ESG thing, we did we did take that three down Matt.
[laughter].
Be recycled it.
Last one for me.
Have you found I mean, I think young professionals have been fairly price sensitive theres been some shopping around during the pandemic because they've had an opportunity to for the first time in a while but with students coming back did you find that they were a little less price sensitive or were you also finding them to be negotiating at this point.
We're negotiating upfront like depending on how.
May not not everybody is.
As aware of the situation. So I think some of them were.
The thing is that you usually they'll stop at two or three places so it depends where they stop first.
But yes, so but I do believe that they got it you know what I mean and that was in that was happening and in.
In the quarter. So it was just it was competitive like everybody has gone through the same issues in the quarters I think we all feel very.
Some very good things are going to happen in the quarters as we come back and you can see it like give you. This come we go round of the restaurants and things of that.
People are coming back and again once we get the immigration pushing international student bus those are two big huge Bush's I really believe immigration is going to be.
I think we're going to hit like even higher potentially from what I've heard than what David had government misstating at one point.
So I think we're going to get some big pushes on those core markets.
Battle, there to add to that.
Because we mentioned Mike touched on again is the immigration pieces that to put it into perspective, so of the 30100, sorry 31000.
New immigrants in August that was announced by the government only 6800 80 of those were net new people into the country. So we did not see that push in August that often comes around with school or the start of the year and it sounds like thats going to happen coming forward here. Some of that we may see for January at least in what we're seeing so far but.
The immigration numbers at the end of August 222000 into the country.
Only just under 77000 of that was actually net new people into the country.
So that's half of what it typically is less than half actually what it typically is so I don't think we've seen that pressure yet and I think when we do it's going to make a big difference and a lot of these cities because a lot of them ended up in those core markets.
And do you know the student permit numbers actually looked okay, but what's that something similar as well maybe they got a permit but didn't necessarily come to the country or are those net new people to the country.
Yes, so far from what we've seen and it's.
That one is harder to get concrete data on.
At least timely data, but from what we've seen so far it appears that they've got the visas, but he didn't start getting rolled out until into the school year. So it's a matter of our peoples trickling in part way through or are they going to wait for January to start.
I think there'll be I think there'll be a mix of both so you won't see the same wave you often see.
I wouldn't count on it all coming in January I wouldn't want you to do that is for sure but I'll tell you there is.
I have my own kids in school.
Bye bye.
<unk> and second year at auto you he doesn't have any in person classes.
So.
You know what I mean, so that's and I think thats in a lot of different universities. So you know that gets reflected obviously in the number of people that are.
That are actually.
Choosing to live outside their home.
He has chosen to live outside his home anyways.
[laughter] probably for other reasons anyways.
Sounds good thanks for thanks for that guys.
Okay.
Your next question comes from the line of Matt Logan with RBC capital markets. Your line is now open.
Thank you and good morning.
Okay.
Okay.
Good morning.
Jim just following up on some of your commentary in terms of your outlook for January can you talk about how the leasing demand has trended in October and November and what your outlook is for the next couple of quarters.
It's a trend.
Trended pretty well, it's actually been a little bit.
Better than we've had previously.
Do I think we're going to see outsized demand in January I wouldn't want you to model that in for January I think it's going to be I mean, we don't know when the other pieces are going to open up I really would say that I would.
We'll probably see.
Two to 300 points between now and the end of probably mid <unk>.
Q2.
And then hopefully we will see an improvement or maybe at the end of Q2.
But I would say.
Unless something really changes and all the opening I wouldn't want you to model anymore not antelope, yes.
No I just wanted to add I totally agree with Mike's comments on anything I'd give you on a regional perspective, I think everything is there.
Lease the.
Leasing trends or at least at historical levels for this time, if not a little better except for Montreal is a little slower than we normally see and I think that goes back to the whole international students.
Most of the big portion.
Yeah.
So I guess really.
In line to slightly above seasonal trends with notebook to improving maybe in mid 2022 is immigration comes back.
Yeah, I would say that for sure.
And when you roll up your expectations for stable margins.
The occupancy gains do you think that supports organic growth somewhere in the high single digit to potentially low double digit range for 2022, and do you think that would moderate any in 2023.
If I was a near seen an AD model and you've got a lot of different variables.
I think the good news is the visibility on the right track as far as the topline so thats really good news.
Unfortunately, there has been.
Inflation pressures on things like insurance waters, and some utilities and we've mentioned the wages hopefully some of the investments we've been making over the last call. It two years on our technology in front will prove to get little more efficient.
Rather be on the conservative side and be flat, but we certainly won't be happy as a management group Matt.
If I were sitting in your shoes are just a lot of different variables offsetting some of that top line.
Yes.
Fair enough and last question for me, maybe just circling back to your Mark to market potential you had mentioned, 20% earlier on the call is that something that you're achieving on lease trade out so were more what you would expect as borders reopened.
Well I think the.
The mark to market that we're seeing is creeping back up and I think once.
The immigration comes back in line Youll see that get back north of that 25% and today, we're playing in that 20% to 25%. So I think we will get back north of that once immigration picks back up.
And on the turn side you get roughly in that area just depending as.
Who is turning over is it someone who has been there for four years or someone who's been there for one.
On average you get in that ballpark also.
And that 22 ish percent would include the benefit of renovations the suites.
For sure yes.
Includes everything it's it's obviously higher on the non repositioned assets typically because usually they are fairly significantly below market. So it's usually a little bit higher on the non repositioned.
That is the average of all and includes the capital work to go with it.
Alright, guys I appreciate the color I'll turn it back thank you very much.
Thanks, Matt Thanks, Matt.
Your next question comes from the line of Dean Wilkinson with CIBC. Your line is now open.
Thank you, Mike not to scary, but when they finished university they do come back home.
[laughter], Okay, that's good to know.
We feel as though was up.
Just given how tight the acquisition environment is.
Whats your guys thoughts on expanding the use of co ownership and joint ventures in order to get a little more.
Could you just out of the returns or do you want to keep that growth on balance sheet, given where your leverage is.
It's something that we talk about a lot to be Frank with you I think I mean again, we're really happy with our.
Our current partnerships will it expand.
It could for sure. There is no question about that but it's something that we talk a lot about so.
Anyways I would definitely say that would be I wouldn't say no.
From the fire that is part of it I think there's probably more at this point were more positive and probably growing at.
The only thing I would add Deane as are our partnerships big kind of calls in the real estate community. So not only are sourcing deals ourselves and whatnot, but there are also a great source of deals as well and thats been a partner with them as we benefit from that as well.
Actually.
It took a lot of good point Brad.
Well it is a small sandbox.
Have you had conversations with with them.
Just in terms of what that partner is that more on acquisition partnership or do they have a stable.
Asset component of that where you could potentially band in some of your more.
Mature reposition stabilized assets and so to give them some exposure to that or is it more of a growth vehicle.
No.
We look at it as an opportunity by opportunity basis play, we're not in a position to kind of discuss.
Their strategy on this call. So were just back to Mike's point, we're just really happy with the partners that we have and we are I'm sure there'll be different opportunities that will present themselves going forward in the future that will hopefully be able to transact on.
Yeah.
Great. That's it for me thanks, guys.
Your next question comes from the line of Mario <unk> with Scotiabank. Your line is now open.
Alright. Thank you sorry, two more quick ones for me just coming back to the mark to market.
The disclosed number was flat quarter over quarter of 20%.
Does that imply that you believe that market rents in your portfolio went up 2% quarter over quarter.
Similar to what your quarter.
Or are we talking about rounding.
Maybe I misspoke, but what I was trying to say was there in the 20 to 25 range not specifically 22.
And do I think there has been pressure and seeing them partially start to climb again in Q3, yes, we've seen that pressure late in the Q as Mike indicated earlier with September really improving.
At this point I wouldn't I wouldn't say it 22 number.
But I think we're starting to climb again and has immigration comes back we will see that once again get north of 25.
Okay.
Kind of more more thinking about the actual market Bronx.
And Europe markets quarter over quarter, those trough for Kumar.
Pardon.
We are seeing our competitors moved there and it really depends on the markets.
But we have seen our competitors moved to.
I mean, we all were all went through the same circumstances. So everybody you know and you can look at quite frankly, everybody reacted a little bit differently.
Depending on.
What they are what their strategy was but right now I think youre seeing a lot more normalized.
Across the board, especially.
Yeah.
In certain markets for sure you mean again, Brad kind of said like Montreal was a little bit harder.
But we're seeing we're seeing people push the rents.
Okay.
<unk>.
Just on tenant turnover.
Begin to stabilize.
More of a normal <unk>.
Barb do you foresee kind of turnover and with interest rates, where they are lower for longer or.
Sure.
Kind of trial recruitment back historical average.
Yeah.
And this is kind of like when you go to one of those real estate conferences and you'll have to talk about interest rates and everybody says eventually they got to go up.
And I and Mike.
Seeing now for three year, and I hate, saying it because it does sound like a broken record.
Our historical turnover.
Up closer in the low 30 range and that it has to come in we still believe we are asked to come in at some point, it's got to come in.
I think we'll we'll see that play out over the coming time over the coming call. It 12 months, just given where we think fundamentals will tighten too.
Okay.
Okay. Thank you.
Do a little bit of bottling the command <unk> Mario just to be conservative.
Got it.
Thanks.
Just thinking about all of the circumstances out there.
There are no further questions at this time, Mike I turn the call back to you.
Thank you very much I just wanted to say.
I appreciate how much our team has worked over the last year year and a half and.
They've done some really really great work and some pretty trying times I do look forward to much better.
Better results and.
Continually.
I guess more smiling and happy faces with the better results and I wanted to say. Thank you also for all the for everybody. Following us I really appreciate that too so thank you.
Hope everybody has a great day.
I just had one thing.
I'm very happy about our sustainability report going out this Q.
So thats available on the website for those who want to see it.
And if anyone is having problems located they can contact sandi and we'll make sure to get you a copy of it also good point Curt you have a sustainability report I think sandy did an excellent job. So hopefully everybody has a chance to take a look at it.
Thank you everybody.
Okay.
This concludes today's conference call you may now disconnect.
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Okay.
Yes.
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