Q2 2022 InterRent Real Estate Investment Trust Earnings Call
Good morning, ladies and gentlemen, and welcome to the instrument late Q2 earnings conference call. At this time all lines are in a listen only mode. Following the presentation. We will conduct a question and answer session. If at any time. During this call you need assistance. Please press star zero for the operator.
Call is being recorded on Tuesday August nine 2022, and I would now like to turn the conference over to Sandy Riley. Please go ahead.
Welcome everyone. Thank you for joining Interrent reads Q2, 2022 earnings call you can find a presentation to accompany today's call on the Investor Relations section of our website under events and presentations.
Just to have bad cut C, President and CEO , Curt Miller, CFO , and Dave <unk> and Cielo 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.
Refer to the cautionary statements on forward looking information in the news release and MD&A dated August nine 2022 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 its financial performance. They are not recognized measures and do not have standardized meanings under ifr S. C.
Please see the rates MD&A for additional information regarding non <unk> financial measures, including reconciliations to the nearest <unk> measures.
But over to you.
Thanks, Sandy turning to slide five.
Script, you run through the quarter as usual in Q2 occupancy has come in slightly but we're comfortable with our same store portfolio sitting near 96%, we're seeing encouraging demand across most of our regions to date in Q2.
As expected given the 2021 record acquisition here.
Total portfolio posted strong operating revenue and NOI growth trends for the quarter.
And then that's nearly 20% NOI growth year to date.
We're also happy with the robust growth figures for our same property portfolio again this quarter.
This demonstrates the organic growth potential embedded in our portfolio and the strength of our teams on the ground in their communities.
Looking to the right side of the slide you'll see that we closed on one acquisition this quarter in Montreal, So short.
Tended to be very selective with external growth in the current environment.
Eric will share more details around our balance sheet, David on the call.
But the work this team has done to manage our debt ladder is reduce interest rate exposure for the REIT.
And finally at the bottom right, you'll see that our <unk> growth in Q2 has come in a bit relative to Q1 on the backs and higher cost base that.
Continues to be solid and demonstrates the operating torque embedded in our business.
To that end, we thought it'd be helpful to illustrate a trend the same property NOI.
Takeaway here is that with the exception of 2020, but dammit.
It's actually most impactful on the numbers, we have consistently generated revenue growth that has no strict expense.
Although we are certainly feeling the impacts of inflation in our operating expense as you can see by the year to date CAGR top line growth expectations.
Can you is positive NOI growth in 2022.
Contingency the strengthening fundamentals in our sector and saw seven 1% growth in the average monthly rent in June relative to last year.
It worthwhile to mention that the figure is impacted by mix changes with increased exposure to high macro events, such as downtown Toronto and Vancouver.
An important factor.
At the regional level, we continue to see steady year over year growth in average monthly rent across all regions and dew.
Suggestion that the strengthening fundamentals arent isolated to any specific regional pockets.
And you'll hear from Dave will continue to be positive on the Montreal market, Jim Thats relative affordability at the major cities Dave.
Dave over to you take us through some of the operating highlights.
Thanks, Brad last quarter, we explained that we usually see a seasonality effect in Q1 that can cause the occupancy to slip anywhere from 50 to 100 basis points from December before recovering in our highest leasing season of Q2 Q3. This year. However, we bucked that trend in Q1 and held our March figure relative to December .
Yeah.
Given that context, our overall portfolio occupancy of 95, 1% at the end of June is in line with seasonal expectations.
Looking at our same property portfolio, we saw our June 2022 occupancy slipped 80 basis points relative to March which was largely driven by a dip in the national capital region. Encouragingly. This region is seeing strong demand post quarter, which should support an improved figure in Q3 <unk>.
Firstly soft rental demand in Montreal has so far continued into the summer and Theres a chance will carry some of that vacancy ended the fall if the international students after studying other provinces.
No we wanted to share a spotlight on Montreal to reinforce the attractiveness, we see there over the mid to long term range.
As Brad mentioned.
The key attribute we love about Montreal as rental growth runway, we see as.
As you can see from the bottom left chart Montreal rents haven't seen the strong growth profile of Toronto, and Vancouver, yet, but we expect the trajectory to catch up in the years ahead. Additionally were favorable on a strong employer base in the region from tech to universities to health care. When we do expect that some students from around the world.
We'll continue to call Montreal their home away from home.
Before we turn things over to Curt I wanted to touch on our Capex spend so far in 2022.
On the left side of the slide you can see that in our maintenance Capex in Q2 has come back to historical levels after being a touch light on a per suite basis in Q1.
And that we continue to allocate about 90% of our spend on value enhancing investments.
As you can see by the right hand chart, we see excellent value creation, and our repositioning program and we will continue to strategically invest in our portfolio. It's worth saying again that our individuals' suite upgrades follow the cadence of natural resident turnover.
Thanks, Steve.
In Q2.
$28 million fair value gain which results from our continued strong operational performance.
We're currently sitting at a weighted average portfolio cap rate of 383%, which is one basis point increase from Q1 slightly.
A slight increase comes from minor tweaks to our few properties, which have made great strides in our repositioning program.
From our discussions with our internal acquisition team as well as our external appraisers.
There's a sense that cap rates should most likely come up a little.
However, with most people feeling like interest rates were going to overshoot and pullback there has not been a significant amount of activity in the market as sellers and buyers paused to see where things land.
The recommendation from our appraisers.
You hold cap rates steady for this quarter and to reevaluate as interest rates stabilize and there is more transactional data to support any adjustments.
<unk> continues to be in a healthy financial position our debt to <unk> on June 30 increased slightly to 37, 3% from 36, 4% at the end of Q1.
In the quarter, we had $111 million and up financings on 51 million of maturing loans, we renewed and extended $30 million of maturities and added $71 million of new mortgages to end the quarter with 165 billion outstanding mortgages on our books.
With the changes in the quarter, we have increased the average term to maturity to four eight years, our CMA, she insured mortgages to 73% and our weighted average interest rate to two 8%.
There's been a lot of activity on the financing front that has been solidified post quarter end.
Looking at what has closed or is committed as of the end of July we have only $92 million in 2022 maturing mortgages left to deal with.
The impact of these mortgages is that the reach weighted average interest rate as of July 31 is now $2 99%.
At the current market conditions, we expect the remaining $92 million as well as some early 2023 maturities to bring our weighted average interest rate into the three two to three three range by year end.
We also expect to have our variable rate exposure in the mid single digits by the end of the year, which will reduce the uncertainty in our financing costs.
During our Q1 call we reminded you of our sustainability commitments and we wanted to provide a quick update this quarter on the concrete actions, we're taking are.
Our climate change work continues and we are pleased to advance on our commitment to set a science based target in the coming months we.
We have also increased the transparency around the topic through our first disclosure to Cdp's climate change questionnaire and have opted to complete the full version of the questionnaire with broad public disclosure.
Earlier. This spring we participated in a joint communication with many of our industry peers to support refugees from Ukraine.
We expanded our program to include Afghanistan refugees and have fulfilled our commitment to provide homes to 75 families across our portfolio.
We are also in the early stages of a partnership with the Halton Multicultural Council and our greater Toronto and Hamilton region.
And finally, we have enhanced our governance around sustainability by introducing new guiding policies and enhancing existing structures to incorporate such items as climate risk and targets for board gender diversity. These.
But a few examples of our ongoing work to move forward on our sustainability commitments and I want to thank our entire team for their efforts.
I'll turn things back to Brad to walk through our capital allocation.
Thanks, Kurt last quarter. We told you we were exploring new builds in some regions to generate strong cash flows on day, one we're still generating upside potential from their expertise in marketing and leasing today. We're pleased to share our successful acquisition that closed on June 3rd yet and bit Sir.
Delighted to add this 200 picture for suite luxury community to have greater Montreal area portfolio.
Which was completed just last year.
For those not familiar with the region.
Montreal, So sure and offers easy access to downtown Montreal.
Complementing our presence in the downtown for.
The community contains a full range of amenities and offers standout sustainability features including urban agriculture through a community garden now.
19 dedicated electric vehicle sales.
Hello admission car sharing program 500 bicycle parking spots encouraging active mobility.
<unk> program energy efficiency initiatives.
Sure.
Low flow fixtures smart thermostats.
As a result closing was funded in part by using seem HC ensured financing to qualified ml lies select program.
Use energy efficiency and greenhouse gas emissions Greg here.
You've heard us say before bringing on new supply is key to solving the housing affordability issue in Canada, and we're committed to play a role in delivering that supply.
We are progressing well on our office to residential conversion in Ottawa at 473, Albert which has been granted the slate.
Traction is fully underway and higher cost are now 95% contracted.
Although we revised down unexpected yields slightly on interest rates market activities have already started and we look forward to welcoming that gross rather that's later this year.
Development will become a bigger part of the restore in the coming years working with great partners to bring the supply to market and we'll look forward to sharing additional details that will get closer to getting shovels in the ground.
You'll notice that the change in interest rates have had an impact on the expected yield on these projects. We will continue to refine these estimates over time, but we want to be transparent.
<unk>.
We had a good quarter in the current multi very reasons the same fundamentals strengthen the demand building going into Q3.
Although in Montreal is currently lagging the other regions are not see we continue to be positive on the mid to long term attractiveness of the market and we're excited about our new acquisition of Missouri.
We are not immune to inflationary pressures, but we keep a close eye on our costs.
At the operating level and in our overhead base.
On the capital allocation front, we remained focus on select acquisitions in our core markets.
Pes is definitely slow due more to us wanted to see where things stabilizes. However opportunities remain bass, we continue to work toward our disposition program and we will earmark. Some of these proceeds from a successful disposition program tour and CIB and developments.
Thanks to all for your continued support and look forward to seeing you in person. This fall, let's open it up for Q&A.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone.
You will hear three compounds acknowledging your request if you I assume a speaker phone please lift the handset before pressing any key.
First question comes from Brad Sturges at Raymond James. Please go ahead.
Hi, guys.
Maybe just starting on your comments around Montreal, and the I guess the expectation for a little bit continued softness I assume that.
Just some of the buildings that have been impacted by less.
Students in the market I'm, just curious to get your thoughts on.
The vacancy trend for Montreal in the short term and.
And kind of your expectations for Montreal overall.
Yeah, Hi, thanks, Thanks for the question, Brad I will turn it over to David Nevins.
Over.
Over to you David.
Yes, Thanks, Curt Brad.
The occupancy in Montreal, obviously, we retain and the student area is lagging, but we are seeing positive signs in the area of.
Students returning so we're encouraged and.
Hope to see hope to see.
Q3, with the with Rockwell number Sir yes.
Just add some color anecdotally, Brad we're starting to see foot traffic picks up and the Dod.
So thats encouraging and we are starting to see.
Some more interest come in from the international student community. So.
August and September last year were really.
Big months for US as you saw in our results last year, and we saw the quarter over quarter gain.
Specifically in the core of Americas, being Ottawa and Montreal.
We kind of highlighted in the press release, Ottawa is actually trending quite nicely on that front and we are hopeful the Montreal will continue its important to keep in mind Montreal came out of their restrictions a little later, so we do think that had an impact.
Students overseas, if you were thinking about garnering mcgill Concordia versus Mcmaster you'd likely gladly cheap like last year, just knowing that Ontario, la more favorable if you're if you're a planner.
Montreal is.
Hardly enough one of those markets, where sometimes a lot of the students.
Start to look so this months will be very important we remain hopeful but that said we will have a lot of leases coming up in September in that area.
Last year August September really busy for us in that area.
Okay.
That's quite helpful and then I guess just.
Your revenue growth is quite strong but inflation on the expense side honestly is it's been a little bit of a challenge for term how do you see margins playing out over the next couple.
A couple of quarter do you see now opportunity for margins to search expand again, given that you're starting to see the better rent growth.
I mean, we were hopeful that we would see margin expansion I think this quarter Jeff.
As that six months ago, I don't think anybody anticipated the level.
Inflation.
Now that we're currently experiencing specifically two on probably more on the utility side to be to be really honest Brad. The good news is we've over the years as you know within revenues, but a lot of money reinvesting back into energy efficiencies. So.
We continue to look to add our portfolio. What we can do that one thing we can't control necessarily as commodity prices, but we can try to hub.
Control.
Consumption to efficiency measures. So we're working extremely hard the team.
China and installed throughout where we have been already installed.
Building automation systems, so that we can really do.
Style right down into it now that said.
And the kind of revenue growth that we've seen we continue to believe we're going to continue to see.
This pace of growth and I think previously we've got 4% to 8% was a reasonable number we still quite believing that we can believe that it could be even higher.
If the community can't deliver supply.
Faster.
So that so that said under that kind of scenario and inflation was to come in a little.
There is no reason why you couldn't get maybe get closer to that 66% NOI margin that you saw pre pandemic back in the 2018.
That said, we are comfortable kind of in that 64, 64, and a half range, where you kind of sit today under the current environment.
In terms of your your.
Book value held.
Cap rates fairly steady for the quarter as we talked about in your preamble there just.
Given the comment on do you expect cap rates to go up a little what would be kind of your.
Rough baseline.
Assumption on where cap rates could trend in the next three to six months.
I'll start and then maybe I'll hand, it over to Kirk because obviously, Chris there's a lot of time.
Alright address valuation model and whatnot.
Obviously, the public practice of selling those cap rates.
Increase.
Can only speak to what we've seen in the broadband market.
Whats actual to be quite honest theres still some print to be disclosed.
There's been some credits that's been disclosed maybe they havent disclosed the cap rates, but.
It's hard for us to comment on them, but we do know were based on our underwriting would be where they said and I can tell you. There is a case to be made that what has transacted still would suggest flat to compress that said the reality is that the.
The bid has has kind of put the.
Hands down I'd say, there's still a lot of capital allocated to that the class.
There's a lot of people, taking a wait and see approach. So there's not as many bidders at the table, so where cap rates will truly pencil im not sure.
I think this management, who thinks the truth lies somewhere in between we definitely don't believe is where the public market prices.
You would not be able to replace our portfolio are and I'll throw one out for a period or any of our peers.
Levels of where we're trading.
That said I think vendors expectations do you have to.
Come up a little as far as.
Being able to transact in.
Environment, where your cost of capital and the volatility in copper capsule capital is bouncing around a bunch of this so it is at 25 basis points I don't know, Brad, but I can tell you. This from our understanding of institutional capital still wants exposure to this asset class just taken a pause right now.
Yes, Brad covered that pretty thoroughly.
It's more along the line.
That is more along the lines of.
When you think about where our interest rates and the stabilized what is the bar.
I'm going.
Stop fluctuating 20 to 30 basis points on any given day and where that settles in I can tell you there Kathryn.
As of right now.
If it was the settled where it is today and you should see those rates come up a little bit somewhere between 20, and 30 basis points I would think.
Given the demand that Brad spoke to and given the underlying just replacement.
Yes.
If the volume comes back and that can be maybe on the low end of that maybe <unk> 2010.
As the bond yield continues to look at it at some point in the last few months could that be 30, or 40 or 50 could be.
But like Brad said I think the truth is probably somewhere in between my gut today is somewhere around 20 basis points.
If interest rates sort of pull back a little bit like the bond yields.
Got it.
But.
It's such a volatile I haven't seen it in my 12 years here.
Speaking with everybody else I don't think anyone remembers bond rates moving this much this fast.
Yes.
A bit of a guess at this point.
Okay.
Definitely understood on that front, the alternative I think Paul.
Thank you next question comes from Frank Lee at BMO Capital markets. Please go ahead.
Good morning, everyone.
So I'm just curious about the depth in National capital region could you help like expand a bit on that Sean what's the trigger off the occupancy in that quarter over quarter.
Yes, sure good morning, Frank we'll turn it over to Dave.
So.
Looking at the occupancy in the National capital region.
Yes.
Yeah, a little bit.
Over Q Q1 over Q2, but we've seen some really good progress.
Post close of the quarter end and things are trending in the right direction. So it looks like the.
The student student markets tightening up in the area and with the recent discussions have returned to work in downtown Ottawa, We're confident that the numbers will continue to improve and we will see good numbers at the end of this quarter and at the end of the year, yes, the only thing to add to that and I totally agree I think we're being really.
Bye bye.
Pleasant with what the trend is shown.
Post quarter end.
The student basis really has started to pick up from our understanding that there was a lot of universities that were late in getting the acceptance out and we've seen it but the good news is where we're seeing the demand come back. So so that's a great thing and also from our understanding.
When the government is.
Employees are coming back to the core that shot actually rejuvenate some of the LNG down in the Florida.
<unk> helped strengthen America's Thats already strained so.
So that's great. The one thing we should keep in mind, while last year was.
Nominally given the pandemic historically pre pandemic, we always did see a slip in our occupancy quarter over quarter due to the seasonality factor and I really do want to stress that because I don't want to overemphasize the.
30 basis points dropped quarter over quarter.
Being a weakening in demand this is something we.
But always seen in our portfolio pre pandemic now granted last year, we started off the year at a record.
Will of vacancy and it was easy to have quarter over quarter. So again, I think things are trending the right way way in our core markets.
Are really performing quite well on a trend to perform within.
<unk>, it's a historical bar.
By year end, we should be.
To meet our kind of oxy target, we've always kind of put out there of 96% sure Montreal it might be a little softer than the other two EBITDA of the three markets are really firing well.
Well on our way through the recovery.
And I think it's just a little too soon to call Montreal.
On that front, but again anecdotally, we are seeing some some good sides in Montreal.
Thanks, Thanks, Brian also like.
<unk>.
Just farm.
On that front I wonder.
Some are done the seasonality like some temporary pain.
In some regions do you guys do you plan to I mean, like we can tell like the market rate has gone up significantly.
Significantly our urban CD do you still plan on continuous pilot execute the strategy like to maximizing grants, maybe holding some units Ronnie vacant in the near term.
Yes.
Great.
We'll just stick to the strategy right.
While we look to maximize right right. So there is no deviation from our from our game.
Yes, I think maybe the only thing I would add to that is we have we've been talking about trends turnover decreased seat for several years and we've seen it through many peers. We've been fortunate that our turnover has stayed where it has in the past couple of years, but we are definitely seeing turnover coming in a little bit and when turnover is coming in a little bit.
Maximizing your rent on initial lease strategy, we feel is just that much more important.
Yeah.
Yeah. Thank you that's great color and just turning gears to the financing front I'm, just wondering where that the mortgages renewed or refinanced during the quarter were those mostly mostly shorter term or longer term, let's say three years versus five years or 10 years.
There was a combination.
Items in there.
We've really tried to do with our traditional approach on the mortgages has been very much bar mill, we had our repositioning portfolio sitting up well over 90%.
Mid ninety's almost.
For CME insured and we've used short term money on the new acquisitions as we're going through that program.
What we sort of came into and then quite frankly and this is on me.
Talk a little surprised by how fast the rates went up not just how much they went up.
We've had lots of little bit earlier.
But what we did through this exercise is really look at our mortgage ladder instead.
Instead of having a real heavy barbell approach with very short and very long.
Were kind of taken that step is in the very short pool and sort of spreading it out over the next couple of years to have a more even pattern over that zeroed out four to five year, Mark and then pushing others out that longer after that.
So there is a combination of the queue and specifically like we discussed a little color around July because we had so many things that.
Quite close by June 30.
Closing in July to August Colorado.
We really use the opportunity to fill up the ladder and I'd say, probably more towards the shorter term given the inverted yield curve and the fact that losing reached going to come back in.
Okay.
Sorry, I just want to.
Got more color on the 3% to 3.3% range you mentioned at the beginning of the call is that the.
That target towards the end of this year, probably I missed it.
Uh huh.
I'll provide more color is that like the way the refinancing our remaining 2022 maturities plus some maturities in 2023.
Correct, Yeah, we have a couple of maturities very early 2023.
We are dealing with in 2022.
So does that does that.
My attempt to give a bit of color around what the overall weighted average interest rate could look like if rates stay where they are today.
I would say go off a little bit or down a little bit that will fluctuate a little bit, but given the sort of $92 million on 165 billion.
10, or 15 basis points, one way or the other shouldnt throw that Raymond job by too much.
Okay alright. Thank.
Thank you very much I appreciate the color and I'll turn it back.
Thank you thanks, Brian .
Thank you next question comes from Jonathan Kellner at TD Securities. Please go ahead.
Thanks first just on the <unk> acquisition.
Is that property stabilized.
Yes.
Yes, yes, yes.
Jonathan.
Okay and then the financing you got the MLR how much.
Savings to do do you get by with that versus a typical so you may see.
Financing.
So the savings Werent so much in the sense of interest rates is still see MHC financing, one way or the other but you are getting CWC financing on it.
The advantage through the <unk> program is that on.
Unlike a normal property, where youll have a long operating history to look at it we achieved underwriting it there was a long operating history given what it has done so at the end of lifecycle programs sort of gives you a little more flexibility around some.
Engineering reports to use certain numbers, but it won't be too aggressive on any of the other way and.
And probably the biggest thing is the one we're in DSD on him.
Versus the traditional one two or one three for five or 10 year money.
It gives you that much more financing so off the top of my head I think we were about probably ended up with the extra $8 5 million.
On it.
Because of the better DSC, which given the current interest rates in the market, it's not fair market value and that sort of capping any property when youre going for a mortgage on it gets your debt service coverage right. So.
That factor sort of puts about another $8 5 million of debt.
On the property that wouldnt otherwise be there if it wasn't true gateway select program.
Okay. That's that's.
That's helpful and then just.
I guess in terms of capital allocation, you were talking about dispositions and potential in CIB.
Is it fair to say, we should expect some dispositions this year or is it something you're sort of exploring if you get your price, you'll you'll do it and if not.
You don't really need to.
Yes.
Yes.
As you know we've already we've never been married to our assets whenever we can maximize the value of that property.
We would entertain.
<unk> on that property, if it meets our expectation so yes, 100% rate, we will transact there.
If it meets our expectations and.
Our.
Our view of value for the properties, we have earmarked.
Some properties that fall in that category and Thats there is.
I had an opportunity to transact on what we believe the value is then we will transact and then we will recycle that capital.
And two things like.
Our developments in CIB.
<unk>.
Okay do you have any properties out there listed now.
We don't have anything listed per se.
I think softly there is some properties out there that.
That we would entertain.
And offer.
Okay, and then lastly, just on on the G&A.
I think Curt you said the run the Q2 run rate was good for this year is it sort of fair to say for for next year are you just sort of expect small bumps to to the run rate. There is no no more step ups.
Just depends on how much Brad is going to pay me next CEO Jonathan.
Just kidding.
Yes, I would just CFO .
Yes, I think we said that the.
Q4, I think we tried to give some indication that an expected run rate of about 16 to 16 16 to 17, 4% for the quarter, we were a little heavier on that issue, but we were a little lighter in Q1 of things we thought were going to hit in Q1 shift into Q2.
So I think if you're modeling that sort of 16 16 and a half for this year, you're probably safe.
And then I think for next year I wouldn't imagine I don't see anything in our current conversations or are budgets that would cause that to tweak up by too much.
There is as we get through that later on we will make sure to highlight that as part of our Q4 call.
Okay. Thanks, I'll turn it back.
Thank you next question comes from Carlo Stanley at Deutsche Bank. Please go ahead.
Thanks, Good morning, everyone. I'm, just wondering if there are any nonrecurring or timing related items within general Opex. This quarter or was the increase really just reflective of the inflationary environment we're seeing.
So most of it was just related to the inflationary environment there.
I can throw out there is probably about 100 to 150000 of one time, but it is an operating business. There's always one time things that kind of hit you that were unexpected right. So.
Is there about 100 came there that I don't think we'd be recurring yes could there be 100 Kt next SKU that I don't think is recurring.
I can't say no to that either right. So it wouldn't be anything material or significant.
I would add to that trial.
From a budget perspective, I won't get into it.
From an operating perspective, we were pretty much in line with where we anticipated.
The beginning of the year on the budgeting. So we did anticipate that we're going to see wage pressure in some other pressures as far as on the R&M.
What we didn't anticipate was the.
Ukraine War.
The resulting natural gas price and whatnot through on that line. So we're we kind of are would be.
On the price of the utility side of it so while yes operating costs were up we did anticipate they would be now like I said the good news is to reiterate the top line.
And then just real visibility with the top line and remaining where it is and if.
It does and the first successful in continuing to a.
And our energy conservation efforts and whatnot, we're hopeful that at some point, we can return to margin expansion at least stabilize where margins are today.
Okay that makes sense.
Just looking at Montreal, I mean, you gave a lot of commentary earlier, but just wondering if some of the softness you you mentioned in that market could be attributable to <unk>.
<unk> focus our operating focus on maintaining rental rate or.
It would really just be generally temporary demand issues that you mentioned or I guess, maybe put another way our potential.
Potential tenants in Montreal, a little more price sensitive than maybe what youre seeing in some of your other markets.
But Charles has always been a very very much a price sensitive market for sure pre pandemic sales the rate of change second derivative and the rental rate.
As extremely robust.
As you know, we're very bullish on Montreal, our views haven't changed our Montreal and.
Similar to the rest of our portfolio, we're quite happy that we didn't sacrifice price.
In regions in which we operate because every one of them.
Really chopped a lot of the value creation opportunity, we feel no different about Montreal, Kyle to be quite honest, it's just montreal being slower out of the gate.
The Covid perspective, right from some of the University getting their acceptance letters out so it just seems to be moving at.
A slower pace.
Wouldn't say, we're saying my child.
I don't want to give that impression at all we're saying is the other are the other three core markets are recovering quite stratos, Montreal, just not keeping pace with the other three markets, but that's not to say Montreal, it's not recovering.
So.
Just don't want to over I, just don't want to overshoot, either our Montreal, we did a lot of leases in Montreal in August September of last year.
And so that and we're going to get a lot of leasing back in this month and next month.
In order to fill some of those leases I will come back to us we do need to see in the student.
Either now that said anecdotally, we're starting to see more leads more enquiries, even starting to see more foot traffic downtown which all points today.
Okay, great so on the telephone.
Yes.
To that commentary too.
Montreal.
The management team also have looked at.
Can you sort of brought this up.
It's not all of Montreal that sort of seeing a bit of that softness that we talked about or activate the sort of outskirts of Montreal are very much more robust in the downtown core and although we're not 100% of student centric in the downtown core when you bring that many students into a downtown core as we've talked about before there is a definite domino effect to it.
You see that and keep in mind. The government is talking about how they are they have been delayed processes there.
Their backlog has continued to grow and even some of the universities.
Ability for conversations with people at Mcgill they were delayed in getting their acceptance letters. So a lot of the foreign students. So those things have those repercussions in your downtown or at or around University student centric or not.
And again anecdotally from our sales team David could talk to US about this is that we are starting in the last sort of week starting to see that foot traffic come back in certain peak demand.
And as far as parts of the Triple and we are hoping.
Hoping and expecting to continue to bill did I missed anything on that.
I think you hit it right like they're starting to see the areas around Magellan Concordia are starting to see a lot more foot traffic as youre, saying people on the street.
Looking for apartments to rent so traffic is up so that's encouraging and not to mention the breakdown basically between reposition and repositioning most of the vacancy is sitting in our repositioning which is very which is aligned with our business model.
Good point.
Okay, great. So yeah definitely seems more on these temporary demand side.
And then nothing else Okay, Great and then just lastly, I think the question comes up usually every quarter, but where do you see the mark to market opportunity currently across the portfolio has it expanded at all maybe since last quarter.
Yeah.
Yes, I think we continue to be.
Pleasantly surprised with the return of demand as you saw the mark to market kind of updated that we're currently estimating its about 27% across the whole portfolio.
So it's continued to grow in.
As we trend back on the immigration front. So COVID-19. We saw was normally a 75% of integrated immigration being net new people to the country 25 already.
We saw that actually split completely right. So we were going to 75% in country 25, net new which doesn't drive a lot of incremental demand.
Early part of 2023 solid very much.
2022 are already a year ahead of myself. Thanks, Andy.
Prior to 2020.
We saw that that trend has continued with lots of people being already getting country.
We're very encouraged in may and I'm looking over some of that is the number I think was at 61% at 60.
61% in May with net new on the immigration front.
Do you have that number to trend back to historical norms, I think will make a big difference.
Great Okay.
Can I just add a little more about it when we have seen reports of the global mail order from the different reports around with people going down or even pulling out of construction projects because of interest rates.
When you see those things happening and the demand numbers coming back up I think that sort of tells you. There is going to continue to be a bit of a squeeze around those brands and we should continue to see.
Upward pressure on market rents keeping in mind that for Austin travel down to the U S. A bit and look at those markets are speaking to peers in other countries by by the needs of international standards rents are still very low in Canada on a per share basis.
Right. Okay. Thank you very much I'll turn it back.
Thank you next question comes from Matt <unk>.
At National Bank financial Please go ahead.
Hey, guys.
Just wanted to quickly touch on on the <unk> acquisition.
It's a newer property no real value add component to it.
And we've seen this I think across some of the peers as well where the target has been recently built or developed assets.
Or should that be an indication of a shift in strategy as to what you're targeting going forward or is it one off opportunistic acquisition of a property that makes sense within the portfolio.
Thanks, Matt.
I guess the defined.
It depends how you define value add we believe a lot of the value add in our value added model is our people and the way we deliver a surgeon experience and some of the programming that we learn to deliver on some of our other are higher.
A little more of our luxury off road. So we thought just.
Building, given the amenity package and where is that relative to.
To the competitive set that we could continue to increase the topline by being able to bring in.
And deliver.
A program similar to some of our other buildings and thought that there was the opportunity to be able to increase the rents also too from American perspective, just being able to do.
Use and leverage off of our marketing expertise, we also thought.
There was an ability to continue to increase so while yes, it's new and it's quite a.
It's a great quality, great quality build and the programming of the assets.
Many space that's being built out has been great I think youll see us being really kind of went on this asset.
Leveraging off our operating team and our experience with similar type assets. So we still view of the value add and I should also I should also point out we're extremely excited to be doing this with a joint venture partner <unk>.
Cited that they to sell what we saw in it and provided some capital so not as big of an equity check to write.
On an asset that we're thrilled to be owning right now.
No that makes sense and remind me I think in Quebec, you get sort of five years from completion.
Where theres no rent control is that correct or am I missing.
100%.
That's the second component.
Some of the rationale and Youll see that more in Ontario as well.
Is when you can take out the wildcard of turnover, because fortunately or unfortunately.
There the fundamentals.
Our strengthened for housing in Canada, and there is there is less turnover. So on Newbuild, Ontario is the takeaway that wildcard in Montreal, you take you take away that wildcard for the first five years.
Okay, no that makes sense and then on Capex.
I don't know if I should read too much into a single quarter sequential decline.
But how are you thinking about investing in the assets at this point and doing some of the repositioning work as well as a.
Going after maybe higher end suite turns.
The sequential decrease in Capex, just a seasonality issue as a result of lower leasing turnover versus a <unk>.
Q4 or is it a or should we expect capex generally to trend lower across the portfolio for the existing portfolio.
Got it Friday, because you've got a breakdown on the different boxes of what Capex will look in that because typically.
The Capex will go up in Q T in Q3.
When you're doing the building improvements and more to them because a lot of time do you need the weather to cooperate but on suite turns it's really a function of how much you sent in Bacon and the one nice thing.
Look at one nice thing of the pandemic, we had a we had record high vacancy, which allowed us to get into a lot of suites and spend a lot of money on turns within those suites right. So sometimes on the on depending on the suite turn Capex. It's really is a function of where you sit on your <unk>.
You said on your turnover.
Okay. No. That's that's fair enough. Thanks, guys I appreciate it.
Thank you next question comes from Jamie Shen at RBC capital markets. Please go ahead.
Thanks, Hey, guys I.
Just a follow up on the Ottawa occupancy or.
How much has it improved since the quarter.
So.
Movement, and then and.
And then when we think about kind of the student impact and the work from home and shocked and are there really those two kind of the main drivers are there any other factors that we should be thinking about.
Good morning, Jamie I'll answer your first one and I'll get you to repeat the second part of your question.
And the second part.
We've never given post quarter details. So I don't think we're prepared to go there I think what you can take from our commentary.
We are happy and satisfied with where things have trended post quarter in the national capital region.
And I think I think our stakeholders it will be too.
Okay.
Second part of the question Jack couldn't hear that Jimmy was very things that are if you could repeat it. Please.
Yeah, I know when I G.
Bigger picture in Ottawa and <unk>.
Absolute basis.
The vacancy is higher than what it was pre pandemic into.
Beyond the student factor in the impact of downtown.
Are there any other factors that are that are in.
Play that we should be thinking about.
Okay.
Let me let me try to answer this way we remain extremely bullish it's Ottawa and what we're seeing in Ottawa.
I think.
What Ottawa has to offer in the context of what Youre seeing from the housing affordability and other major regions Ottawa will continuing to be a net beneficiary of it. This is the one market that it is somewhat of a driven by a government town and is well known fact.
That's the government backing.
Back in the office.
Any person.
Centers of government coming back to the office will only add to an already strong from core that we're already starting to see so we're quite encouraged and quite happy to be invested at the levels that we are investing then would add to that investment in the Ottawa with what we've seen with the <unk>.
Current trends and where we believe those trends will go I don't know David if you want to add any color to that I think the other part.
I guess to add on was that we're following a typical trend of a typical rental season, where we have the move outs in the regular summer turnover. So.
Last year was there was not typical with the pandemic. This year's just following a more typical rental cycle.
Okay.
And then just quickly on the <unk> acquisition, you mentioned it has stabilized.
So maybe if you could share kind of the economics on that on that asset.
And that and then the fact that it's in.
And my life select them. So I think you implied you had.
So DSC so like what does that look like on an LTV basis.
But do you have on it.
I don't I don't know if we wanted with the all the details of our specific property, we typically don't but on a loan to value basis.
I can give you a little color there now in sort of some of your modeling.
We were at about 61%.
Loan to value.
If that helps you sort of in and modeling out your mortgage side of the equation.
And then maybe the cap rate range.
Okay.
Jeremy we typically haven't gone there put it put it this way.
We still believe that we'll be able to better the yields that we're going into on this acquisition by about 30 basis points.
And this this acquisition will be accretive.
To internet.
Okay.
Okay. Thanks, guys.
Thanks.
Thank you. Our next question comes from Johann Rodrigues with Industrial Alliance. Please go ahead.
Hey, guys I'm so.
So just on you know either the <unk> acquisition or are some of the developments you know like were 73 Albert Street wear.
You don't have rent control are not subject to rent control what kind of rent growth are you underwriting versus you know proper.
Properties in Ontario, and Montreal, where you are subject to rent control.
Okay.
Sorry, just to make sure we got that radio access it broke up a little bit with the question around what we're underwriting and rental growth on Belgium, and 473 Albert given.
Yeah.
Yes exactly.
I don't know.
Typically when we talked about the sort of rental growth, we keep it at a high level.
I think what I can say without sort of overstepping too much and Dave feel free to slap me or.
Thanks, so much on it but I think what I would say that.
Our yields that we've sort of shown in our underwriting. Unfortunately, three Albert I think is very conservative we wanted to make sure given its sort of one of the first conversions from office multifamily that we're not sort of over promising and under delivering so I think we'll be able to better.
Then what we have out there one months.
We will lease up is in place.
Because I think we're being very conservative in our underwriting around the rents given the strength, we're seeing in the fundamentals in the market.
And I think that same logic applies to melanoma with Montreal as Brad mentioned earlier, we really do believe that when travel will come back. It's just lagging a little bit some of the other areas like Vancouver, and GTH and now a lot of work.
So.
The rental growth.
That we're seeing we were seeing if you go back and look at what we were seeing in rental growth pre pandemic in Montreal, We think that that's coming back and having that asset thats a newbuild is not subject to those same controls.
We think will allow us to.
Achieve good rental growth in that market from that asset continue to sort of improve the yield on those branches.
Said differently, it's well within the range of what we are are actually achieving.
Call. It the last 12 months of what you've seen from us as far as overall absolute rent growth. So I can start with that as far as on the underwriting and I would say is probably.
More on the lower side of that range that we tend to be little more conservative and then just to carriage point, an unfortunate event three.
I can tell you that four.
473, typically on a Newbuild acquisition, you would probably that would do some of your highest rents within your portfolio and I can tell you we're achieving.
Per square foot rents and some other properties than what we're actually union pro forma I'm not going to give you the number for obvious reasons Joanne for competitive reasons and whatnot, but that should give you an indication on the conservatism that we are underwriting that development asset.
Okay, Great. That's helpful bread things and Curt and then Kurt Yeah earlier, you know you made a comment about cap rates, possibly rising and you know I think I think you said splitting into different somewhere between 10, and 20 basis points, depending on what on rates stay at is that across the board.
Including China Vancouver Auto are or is that mostly you know you you would expect that to be Montreal, and then secondary markets other Ontario kind of thing.
Yes.
We talked about this Q4 Q1 also and I think the logic still holds we haven't really seen it materialize yet as far as transactions in the market as Brian has spoken to you.
But through sort of the tightening we've seen over the last couple of years you saw you've seen two things happened one is the differentiation between the quality of the asset has really not been as much of a factor as it used to be so where you might have 2030 40 basis points difference that was switch and then the other.
The thing you saw that happen when people were chasing yield on their assets as you saw secondary and tertiary markets, who would again you'd normally see an increase in the cap rate bump for each one of those is stepping up your core you saw those come in so that your differentiation between sort of class a core asset in a class C tertiary.
Yes, it was really nowhere close to what it normally was so my expectation and I don't think its a huge leap in logic is that as things sort of come back with youre going to see as those lower quality assets and those tertiary markets start to get priced out differently, a little bit more so you'll see those cap rates tripling versus ours.
Number is starting to go up.
And then the lately dropping.
Stone in the water that Rick will get less and less as you get further and further out so I think as you get further up the value chain as far as the quality of the asset and closer to our core.
That that sort of increase in cap rate will sort of become less and less and less.
Yeah I would also I would also say to you all in.
Institutions aren't backing away from that class to taken the summer off okay. The volatility to their cost of capital there, we don't need to transact today, and I think that the pausing. So I have to say that there is something that has changed there.
That's the thesis on the asset class, Okay that that's that's the one thing back.
The second part is <unk>.
Vendors, we are seeing lots of different opportunities in the marketplace because some vendors are definitely.
Tend to be on the older <unk>.
Their lifecycle is starting to think okay, I really was thinking about selling.
I will definitely entertain.
So there is a.
Great phenomenon happening, where the vendors are starting to be a willing participant. However, there's no debt. So that's where the commentary thats coming from is under that scenario you would have to think cap rates will reset.
Then come up a little now with all that said with the <unk>.
Transactions that have actually been printed we haven't seen that yet.
We don't have had in the sand.
We believe that there will be a little bit of an adjustment, but I don't think thats currently what you see what the public market is pricing it.
Got it okay. Thanks, I'll turn it back.
Yes.
Thank you there are no further questions you may proceed.
Great. Thanks, everyone for your participation and your questions. They were well received and we look forward to reporting our Q3 sometime in late October early November .
Everybody have a great day.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and we ask that you. Please disconnect your lines.