Q2 2023 InterRent Real Estate Investment Trust Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to the inter rent Q2 2023 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 require immediate assistance. Please press star zero for the operator.
This call is being recorded today Wednesday August the second 2023.
I would now like to turn the conference over to Rene Wei. Please go ahead.
Welcome everyone and thank you for joining <unk> Q2, 2023 earnings call. My name is Rene Wei director of Investor Relations with an ability you can find a presentation to accompany today's call on Investor Relations section of our website under events and presentations.
We're pleased to have Brad could be pregnant and CEO , Curt Miller, CFO and Dave <unk> CFO 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 assumptions that could cause actual results to differ materially for more information. Please refer to the cautionary statements. All forward looking information in the news release and MD&A dated August back in 2023.
During the call management May also refer to certain non <unk> measures. Although the rate believes these measures provide useful supplemental information about its financial performance. They are not recognized measures and do not have standardized meanings under I've already please either MD&A for additional information regarding non <unk> financial measures, including reconciliations to the nearest <unk>.
Measured.
Europe .
Thanks Renee.
And good morning, everyone, let's get started by reviewing our Q2 highlights same property in total portfolio occupancy came in at 95, 4%.
80 basis points increase from June last year.
Total occupancy was down 140 basis points and same property occupancy was down 150 basis points compared to March this year.
This decrease is due to seasonality impact that typically results in a decline of anywhere between 50 and 200 basis points last March to June .
As its typical for resins not apparent occurred during this period.
When analogs in June obviously rates the last six years it becomes evident that the occupancy has rebounded to pre pandemic levels and is in line with long term average.
We achieved a 15% same property NOI growth of 16, 8% total portfolio NOI growth.
As you can see on the right hand side of the slide our organic NOI growth in operating revenue.
<unk> returned to pre pandemic levels.
Furthermore, we've also delivered an impressive 300 basis point expansion in the NOI margin for same property and total portfolios.
It's our ability to contain operating cost paired with reduction of <unk> base. This quarter topline growth flows through directly to improved NOI demonstrating the efficiency of robustness of our operating platform and our extraordinary teams on the ground continue to innovate and served its munis are residents probably call.
The fundamentals of our portfolio and then there's the continuing to strengthen.
As demonstrated by the consistent six 8% growth in average monthly rent relative to a year ago.
During the second quarter rent growth for our non reposition portfolio has outpaced that of our repositioned portfolio.
This is due to changes in our portfolio composition, resulting from our acquisition strategy over the last few years that is focused on core urban markets such as trauma Vancouver.
So we believe we will continue to benefit from immigration and population mill.
The regional level, we continue to see a steady average monthly rent across all our core markets with other Ontario, GTA, Jay and then to believe in the past.
Rental growth Montreal is also steady with the four 6% year over year increase and we believe there's a significant run rate still ahead for that market.
<unk> increased three 7% to $19 6 million and on a per unit basis is up two 3% to $13 four.
<unk> increased three 8% to $16 9 million.
This growth despite the new normalization of higher financing costs during the quarter.
We are focused on enhancing our debt portfolio and managing interest rate risk and have made incremental progress there.
The result of the team's efforts will become evident in the next few quarters, Kurt will provide further details into our balance sheet later in this call.
Our debt to gross book value continues to be at historically low levels stable available liquidity of $282 million, we remain in a strong financial position to execute on our strategy.
Amid heightened volatility in the debt markets.
Dave over to you take us through some of the operating highlights.
Thanks, Brad.
As Brad previously mentioned, our overall occupancy has increased marginally when compared to June of 2022 and has shown a decrease from March of this year. This can be explained by a rental market seasonality typical for Q2 as highlighted in this five year chart.
Encouragingly, we've seen strong demand in activities for the rest of the summer following the quarter.
As our occupancy rate historically show a noteworthy bump from June to September .
During the quarter, we have seen turnover remaining in the mid 20% range. However, due to the tight markets. We continue to expect turnover to decrease towards the low 20% range for the year the vacancy rate differential between our reposition of Nam reposition portfolios have widened to 200 basis points, demonstrating the effectiveness of our repositioning.
Program and our ability to continue to capture additional revenues through it.
We take pride in running a well maintained portfolio on this slide you can see our capex spend so far this year, our maintenance Capex came in at $5 2 million for the year to date.
$1020 on an annualized per suite basis in line with historical levels on.
On the right hand side, you see we consistently allocate anywhere between 86% to 92% of our capex spend on value add investment as we continue to see excellent value creation and our repositioning program.
As of the end of June we have 2541 suites or 20% of our portfolio at various stages in our repositioning program. We have established a well recognized track record of enhancing our resident experience.
At the same time, creating value with strategic investments in our communities through energy conservation programs prepare and upgrades to both the exterior and interior of our properties and in sweet renovations as a result, our reposition suites experienced lower vacancy rates and greater NOI margins.
During the second quarter occupancy rates and NOI margins for repossession portfolios are 200 basis points at 160 basis points higher when compared to non repositioned portfolio.
Before I turn things over to Kurt I want to give a quick update on our first office conversion project, the slate, which we transitioned from active development to income producing properties during Q1.
The construction side of the building is nearly complete and the lease rate has surpassed 60% despite being surrounded by ongoing city construction.
With its excellent location in downtown Ottawa, just steps away from two LRT lines in the Parliament. The building has attracted significant interest, especially from students and government workers.
With the city construction outside the building nearing completion and the remaining work on the rooftop of many space, including we're confident that strong momentum will continue throughout the busy leasing season.
With that I'll hand, it over now to Kurt to discuss our balance sheet and sustainability efforts.
Thanks, Steve.
Every quarter, we review the major assumptions around rent turnover costs and cap rates with our external appraisers based on this review and consistent with expectations, we have seen slight upward adjustments in cap rates in non core markets and assets we have.
Currently sitting at a weighted average portfolio cap rate of 4.07% up minimally from 4.04 in Q1.
Even with this increase we recorded a fair value gain of $7 4 million due to the robust rental demand.
We had close to $1 7 billion in mortgages outstanding at the end of June a marginal decrease from where we ended the previous quarter.
Weighted average cost of mortgage debt increased marginally from March 2023% to 343% and variable rate exposure ended the quarter at 5%.
Substantial decrease when compared to the same period last year.
36% of our 2024 maturities as highlighted in this mortgage maturity schedule chart as it related to our Vancouver portfolio, which is in the process of being refinanced with CMA Chi insured mortgages are all of the asset with anticipated funding to happen in late Q3 early Q4.
We have continued to strategically smoothed out our mortgage maturities with no more than 13% of our total maturities due in any given year over the next five years.
Our average term to maturity has decreased by 0.2 years to $4 nine years the.
The majority of our 2023 and 2024 maturing mortgages are currently at various stages of the review and approval process with <unk>.
Look forward to reporting the results of these initiatives as they materialize in the next few quarters.
As you can see on slide 17, our proportionate debt to gross book value at 37, 7% reflected a decrease of 30 basis points over Q1 and remains at historically low levels.
Available liquidity was $282 million also in line with the previous quarter.
Our liquidity levels and prudent debt strategies have continued to provide us with the financial flexibility for future capital programs development opportunities and acquisitions.
Moving to slide 19.
During the quarter, we continued to make important progress on our sustainability objectives.
On the consumption front through our various ongoing energy efficiency projects, we achieved a 12% year over year reduction in gas use it usage as compared to a 4% decrease in heating degree days.
On the environmental front, we submitted our updated 2022 emission calculations, including our scope three emissions data through the science based targets initiative or <unk>.
We are currently awaiting validation of our science based emission reduction targets.
On the governance front with the election of our newest board member Megan O'hara Fraser at our 2023 AGM in June we officially increased our female representation on the board to over 30%.
We are also actively expanding our building certification program with six pilot buildings in the GTA and National capital region on track to earn the Canadian rental building certification in the coming weeks.
I'll turn things back to Brad to walk us through our capital allocation strategy.
Thanks, Kurt we have disclosed our agreement to sell a 54 suite property in Ottawa for proceeds of $11 5 million, which exceeded our <unk> value.
We have been communicating to the market that we would drive some of the proceeds from our capital recycling programs towards and CIB.
During the quarter, we purchased 26300 units at an average price of $12 47 per unit through that CIB, well below perhaps value subsys.
Subsequent to the quarter, we remained active in purchasing additional units through the automatic unit purchase plan.
We have identified various assets that meet our strategic disposition criteria that can potentially provide net proceeds of $5 million over the next 12 months, which will help fund further growth opportunities and strengthen our balance sheet and allow us to continue to be active in CIB.
Taking a closer look at the development pipeline, a key part of our pizza and part of the solution to the current housing supply situation in Canada.
We currently have three ongoing development projects in various stages of the development cycle.
Provide close to 4000, new homes all of these projects are in our core markets in the GTA and then Ottawa strategically located near mass transit hubs, where there's a strong demand for housing supply amongst students and professionals alike.
However, we remain cognizant of the headwinds from the original hard and soft costs as well as financing constraints related to construction.
We are exploring various programs such as <unk> and <unk>.
<unk> programs to achieve optimum financing terms the decision to move forward on any of our development projects and we've made after thoughtful consideration as part of our broader capital allocation strategy.
Over to slide 24.
I'd like to take this last moment in the presentation to highlight the conditions of Canada's housing market.
This means to our industry.
It's an understatement to say that the housing market is far from a balanced state and at the core issues lie and the disparity between housing supply and demand last.
Last year, Kansas population grew by an unprecedented $1 1 million people most of them permanent and temporary newcomers during.
During the first five months of this year alone Ken and welcome to over 200000 international students.
As of July 16, Kevin met the historic milestone of reaching a population of $40 million. Meanwhile, housing completions in Canada has remained stagnant zelman of that flatline over the past 10 years, our population growth per housing completion reach a staggering three two ratio last year compared to the already elevated historical average of.
<unk>.
So you might see estimates of $5 8 million housing units are needed by 2030.
We are currently on track to build less than half that needed amount.
We remain steadfast in our commitment to be part of the solution to address the housing supply shortage, you've heard about almost 4000 suites in various stages of developments.
Peers are rallying to procure two.
But this kratos supply shortage does not have the click fits.
We expect to see streamed tight market conditions persist in the coming years, especially in our core markets.
Some of the most desirable destinations for newcomers students and tech workers.
In order to meet our strategic growth plan to stay ahead in the future, but housing supply and demand will eventually become more balanced we focus on building resilience through investments in our platform and our teams.
We have always stressed under our most valuable assets and Thats why were giving them the best tools and technology to help them reach the next level.
We've taken steps to invest in cutting edge business intelligence and best in class cloud platforms and more to improve efficiencies. So that the teams can plan more time for higher value add activities and deliberate or even better more personalized service to our residents.
Meaning our sustainability objectives is important to us.
Opt to creative solutions, such as building automation systems, and renewable energy technologies to ensure our communities are resilient in the face of climate changes and that our operations continue to stand on the sustainable Foundation.
At the heart of our business lagged our residents who are carefully design and woven technology in every aspect of our residents experience. This seamless integration allows us to better serve our residents and achieve incremental operational optimization of the process.
Create an experience that is customizable and responsive resolve some happier residence and Steve for a more vibrant communities.
As part of our ongoing investment in our platform. We are also making important progress in enhancing our brand.
And the early stages of launching a new branding, which aligns with who we are and our visions for the future we can't wait to share more details with you later this year.
Finally, I'd like to conclude by reiterating why we're so optimistic about continued strong NOI and that's a slow growth in the future.
Backed by three compelling reasons, the first being the fundamentals in the Canadian rental markets remained solid.
To support long term top line growth.
To our operating platform and best in class team have a proven track record of delivering value. We will continue to empower them with cutting edge technology and investments in training as we scale and achieve our strategic growth plans.
And lastly number three we are truly excited about our various development projects, where we bring in trusted partners with experience and expertise. These opportunities not only contributed to Canada's housing supply, but also have the potential to elevate in the rent.
And our portfolio to the next level.
With that let's open it up to Q&A.
Thank you Sir.
Ladies and gentlemen, we will now begin the question and answer session.
If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
If your question has been answered and you would like to withdraw from the queue. Please press star followed by the number too.
And if you are using a speaker phone please lift your handset before pressing any keys.
One moment. Please for your first question.
Your first question will go to Mike Mark Itis at BMO capital markets. Please go ahead.
Thanks, operator, good morning, and rent team congrats on a very strong operating quarter.
Couple of questions I guess I'll start off just with the seasonal decline in occupancy.
Chart that you've got their seats in line with historical average maybe you could just unpack that a little bit more I mean I get that.
I get that more people move just because it's a little bit warmer in the second quarter, but.
Coinciding with that I would have thought more people leased units as well so maybe just a little bit more color as to why we typically see that decline.
Okay.
Hi, Thanks, Thanks, Mike It's Dave.
Typically we do see this decline in that time of the year, because we do have more people moving out and youre getting suites ready.
But then again picks up later later in the summer with a strong with strong rental demand. So I don't think it's any different than what we've normally seen in the past.
Okay.
Just natural Tianjin, new type people people don't want to move into a move out in the call. So typically in the summer.
You'll see a lot more movement.
B B.
Even further details further or are you kind of get southwestern Ontario that leasing season stretched even further.
You typically see.
More move out.
<unk>.
Relatives colder climates, such as Ottawa and Montreal and.
In southwestern Ontario.
You don't want to be.
Very environment until you're ready to.
In the summer.
Arizona.
Okay, and I guess as you as turnover increases naturally in Q2, you guys would have higher.
Economic downtime just from doing more work on <unk> suites, I would think as well right.
Given your business correct, Okay, Thats correct okay.
Great trend line of the chart on the operating revenue I guess southern how many quarters. It's been now, but I guess, we're at five or six in a row it kind of close to 10% on the on the Rev line.
If we think about maybe a year ago it was occupancy gains.
Now, it's less occupancy year over year and more.
<unk> and augmented buyer incentives reduction or the incentive amortization reduction.
So just given your comments on lower turnover throughout the rest of this year, how do you expect or how are you thinking about year over year operating revenue sort of as we move through the rest of this year and into next year like is <unk> going to youre going to lose the incentive benefit so.
So I guess my question is am are going to continue to March higher market rents as turnover.
We believe so I think I think the markets are so tight right now Michael that we don't see any pressure after leaving off the EMR.
Anytime soon.
Unfortunately for.
Renters out there its going to get tighter given the amount of demand that's driven by immigration so that.
It's going to continue to be under pressure and you are right going forward top line growth will be primarily driven by that also.
Sure.
Whats augment that will be.
Is that above guidelines increases generally.
Portfolio.
And this on the last call was finding getting creative with our communities and adding new.
New homes within those communities finding space.
And kind of converting.
Adding to that in one of those examples would be our success.
In Montreal, we haven't.
We took a class a office space, which is closed.
Almost obsolete.
Office space and created two to 16.
Great and we have a number of those opportunities that we have identified within the portfolio. So that should help augment that topline growth.
As well that hasn't hit.
At a top line as of yet we do have some commercial space that we've had.
<unk> made some inroads on as far as leasing up that should also help augment that.
That top line with Dot Anr that youre talking about so.
I think here, we feel strong that we should be able to continue to produce.
Above.
High single digit topline revenue growth in the foreseeable future.
Okay.
Great color last one for me before I turn it back more of a high level question I guess, we haven't announced change.
At the ministerial.
The level for candidates cabinet and maybe if you could just give us a quick update if that actually means anything or if it's.
Change at the top so to speak.
Stalled or impacted your continued GR relations effort for you and your peers.
I think it's Kurt here Mike.
I'll speak for ourselves I think our peers will feel the same that we're actually very encouraged with.
How the government is trying to work with private sector at all three levels of government to move things forward. It's there's a lot of moving parts with that so its not that as fast as any of us would like probably but again.
<unk> by the progress.
The fact that the minister.
That does with immigration housing has sort of moved.
Moving over to the housing side, we think there'll be even a better tie in between the two and the need for housing supply to align with immigration policy, which is kind of walk us in all of our peers have been advocating for so.
We think it's a positive not a negative by any means.
And it's just going to take more time to continue to work through the different levels.
Got it thanks, very much guys I'll turn it back.
Your next question will come from Jonathan culture at TD Cowen. Please go ahead.
Thanks, Good morning.
<unk>.
First question just on the operating costs in the quarter was was that.
A pretty clean number or is there anything in there.
Tough for timing reasons may have gotten pushed to Q3 or Q4.
It's Kurt here Jonathan.
Morning.
No it's fairly clean I mean, there's always there's always stuff that flows from one quarter to another just from timing perspective, but nothing nothing major that we caused that to be.
Significantly.
So from a from a quarter run rate perspective.
I think it's pretty clean.
Okay and then.
How much.
Youre talking about lower turnover.
How should we think about that impacting operating costs.
It's an interesting question I'm looking at David Brad also it's an interesting question.
Theres a couple of things that go with that rate it should lower them a little bit.
From the point of view of move ins move outs and the extra operating costs that goes with that.
On a major carrier capex in that versus expensing. It if youre doing in sweet repairs and upgrading the suite. So you might see a little bit.
The reduction, but I don't think you see a big reduction from that a lot of your costs were.
Cutting the grass and the property is clean your utilities and all that other pieces not going EMEA effected by that so.
I don't see a big decrease there would be gradual.
I totally agree with.
With that I think.
The way to look at it as how many units.
Actually do an award to and I think in today's environment.
You'll take the opportunity to upgrade the suite so to <unk> point, those will be capsules, a capitalized cost so.
To that point that you're doing a back to back.
Jonathan you would see.
Come in.
But here at <unk>.
We haven't done.
That's not a big part of our business model.
We take every opportunity that we have to.
To put money back in their hands.
Okay Fair enough and then just switching gears on the.
A slate.
When when would you expect that it sounds like.
Leasing philosophy should pick up in the back half of this year when would you expect that to be stabilized.
Thanks, Dave.
Dave here.
Hey, first off we're really happy with the traction that we're getting on the rentals team is doing a great job.
The construction from the city is kind of wrapping up the sites, which is really going to be make a big difference, but we're looking to be in that 90% range before the end of the year.
Okay and then.
Asset.
That will not be subject to rent control correct. This is new or is it because of the conversion.
Yes, correct the stock subject to rent to rent controls.
And then because it because the previous use was non residential so therefore, it's counted as new.
Okay.
Got it.
Yes, Thanks, Paul I'll turn it back.
Thanks, Jonathan.
Your next question will come from Kyle Stanley at Chardan. Please go ahead.
Thanks, Good morning, guys.
So your international student commentary in your disclosures continues to be very positive I'm just wondering in your discussions with the universities in your markets whats the outlook for demand from the student population as we approach the fall.
Hi, its Dave here.
The outlook is good it's strong it's back to normal.
The student population is picking up we see that and we see the trends going in the right direction. So we're anticipating it to be strong throughout the rest of the leasing season and into September .
I mean, that's.
Janet.
And when talking with us and also to augment that with talking with our actual leasing teams on the ground.
We're seeing we're back to <unk>.
<unk> levels, but you want something.
Hold hang your hat on I'm looking over at Renee and making sure I'm not mistaken, but I'm pretty sure study permits are at an all time high and Thats something Thats out there and you can hang your hat on so we're seeing it.
Discussions with their app leasing traffic with their teams and with discussions with the different institutions that we try to partner up with so.
We're quite happy with what with what we're seeing on that front for sure Kyle.
Okay. Thanks, I guess, so with that in mind would you see occupancy trending maybe back towards where we would have finished the year last year or kind of where we were in Q1 throughout the balance of the year.
Yes.
August is on all imports of months when it comes to that student population I believe it or not there is still.
A large number.
The student body that actually lands in Canada and.
Find short term a combination and then secure longer term.
Nominations and the other thing I would mention I think we mentioned this.
On other calls.
As we have a bigger uptake.
The lease is expiring in September than we would have an average created by.
Pandemic so.
Next couple of months will be telling but there is nothing to suggest that what we've seen to date that we won't be able to near the successes that we had.
Towards the end of last year.
Okay.
Just switching over to the the disposition front I mean, great to see the post quarter disposition. Just wondering if you could get a bit more detail on the process the type of buyer.
A number of interested parties, just I guess, what's going on in the market now that you mentioned potentially $75 million of incremental proceeds.
How do we get there over the next 12 months.
Yes, im not im not giving any guidance too much of the details on where that program, but for the first time, we thought we try to help.
The analyst community with what kind of numbers that we could be.
You're looking at as far as.
The proceeds just to understand.
The whole recycling of our capital allocation and the different opportunities that we have.
One of us.
I would say Kyle it still does remain more of a smaller private buyer for the type of assets.
But we are disposing up so yeah.
<unk> is a much longer process in late <unk>.
Dissipate when it's the institutional buyer and the main reason being no shocker as the conditions of financing they tend to the private buyer or tend to finance at higher leverage in the process right now to get through <unk> and you'd see is a lot longer than what it has historically.
<unk>. So that's been one of the challenge so we're not pulling some out and saying we have different we are.
Yes.
Communities.
Parts of the process right now it's in that disposition program. So.
We are confident and believe that we should be.
Achieve what we put out there but.
Sure.
Only time will tell.
Perfect and just one one last one from me over to Kurt.
Talk about using the early rate locks when appropriate for the debt refinancing I'm just wondering just given the higher in place rates.
For the maturing debt in 2024, it sounds like you've already made progress on that but just curious like how much of that is maybe been rate locked to date, and where would that rate potentially be.
And the <unk>.
Scott the variable rate debt that we have in 2024, none of that is locked at this point.
We got to a point in the cycle, where we can rate lock it but we didn't like where things were at given the 10 year money was like so we're already at eight point between now and the time it gets through CMA Sea, if we see anything like what happened with SBB and rates come back in.
Radio.
With and move forward with it but at this point that full amount is sitting at.
At market rate.
Okay Fair enough that's it for me I'll turn it back thanks, guys.
Thanks Scott.
Your next question will come from Brad Sturges at Raymond James. Please go ahead.
Hi, good morning.
Just to follow up on Kyle's question, there on the financing you're looking to do at the end of the year at this point do you have a preferred.
The term that you might look to.
Execute on and would there be incremental liquidity or proceeds that you would generate from that financing at this stage.
If you get it done by late Q3 Q4.
Yes, I mean, what are the what are the big ones. We were working on this year with the takeout.
Slate.
Which just.
Just closed yesterday, so that's that's in the bag now.
We probably have another.
10 ish million on equity takeout on the ones that are coming through the remainder of this year.
And we've already started working on most of the front half of 2024 and.
Basically the fall of 2020 for.
Probably somewhere between another $70 million to $80 million in equity take those potential there.
As far as.
Yes.
That will get us through 2024, and see where things are at.
And do you have a preference sorry on term at this point given where rates are today I mean, if you were to.
Refinances are.
We prefer to be longer or shorter.
I think the.
What we've moved to we talked about this over the last few calls with what has been variable rate exposure and everything around that but we've been communicating to the market for the last few quarters is that we really are trying to make sure that we don't take a bet on any given year and see that our mortgage lender. So we will continue to do that.
Five year money is more expensive than 10 right now.
Yeah.
And you can always throw 10 year money on in the.
The rates come back to you and you can always look at doing the very pass through our top ups and typhoon.
Mortgage on top of it three or four years as with the value creation.
And the lower rates.
It makes sense. So I think we will probably trading to the longer side and we'll continue to fill out the mortgage ladder.
I would add to I think the team's done a really good job.
Filling in that mortgage ladder.
Dealing with any of the near term expiries. So.
With that said I think times on your side, given where we are.
The reason the rate Heights alright.
I think.
Our lease here in Canada.
I don't want to I'm not.
Not paid enough to call the fixed income market, but I would say certainly it feels like as far as rate base, we're pretty close to the top if not at the top so with that said I think now times on your side, we're obviously.
We run 12 two.
18 months ago.
Your recent against the clock.
Yes.
Okay.
Just to go back to the.
The capital recycling on the asset sales I, just want to clarify that $75 million was a net number correct.
Yes, yes.
That was after those assets.
Is there any debt on those assets or is that a clean slate.
Are those assets unencumbered.
No there would there would be debt on those assets.
And how would that sort of best of luck.
Just to be clear just to be clear sorry that 75 as of the date yet.
Yes.
Passenger genes again, thats not asset value net proceeds.
How would that leverage profile look compared to where you are running across the portfolio.
It would be similar to our portfolio average I mean, it's going to depend a little bit from <unk> to the other which ones yet because not all of them are exactly at that number.
But you'd be in that range. So if you do the back math, which I think is what youre getting at Youre, probably at around $200 million.
Okay, great. Thanks, I'll turn it back.
Your next question will come from Mario Sarak at Scotiabank. Please go ahead.
Hi.
Good morning.
Just.
Just sticking to the asset sales.
To the extent you provide the detailed how thorough review of the portfolio would you say the REIT went through to get to that $200 million.
Gross level and is there upside to that number.
But I think we've gone through a very thorough review.
Alright.
I'm not really sure how to answer that.
Obviously.
When looking at credit losses.
Also comments, but obviously, we will look at what we believe the potential is over the next five to seven years, and we will look at different that charter such as <unk> and different things and then what other opportunities we have.
Currently looking at over the next 12 to 24 months and we've got a way to two off of each other.
And I think of them in a day.
Shown in the past.
Dispose of assets.
We believe we've taken as part of it is we can now that doesn't necessarily mean, a different buyer can't do something different with it right. So it's all how that fits into some of these portfolios so very much.
A little.
Stocks and bonds, it's how do these different communities all fit within as well so there's a lot of it.
Uptake in.
Take into consideration, but there's obviously a very thorough financial review.
Do you believe the asset or the community can produce over the next couple of years and then also looking at it how does it fit within our own.
Operating and strategic.
<unk> within our portfolio.
Alright got it.
Yes.
Yes, I think you've answered it I think that's where I was going to go with it is that we look at it every year every year as part of our budgeting in our planning process. We look at all of our properties and look at the yields we look at everything.
In certain times, when you're getting a lot of high turnover and big rent growth and declining cap rates and declining interest rates.
You see a lot of upside potential in those properties and you want to hang onto them to capitalize on some of that as you get into a market where interest rates are going up turnover is coming down you got to look at the total asset management side of things and where do you see the returns going and look at colleagues and that's something we've done over time at different points in any cycle like we did it with the <unk>, we did it with kings and we did it.
Sarnia.
Over the years.
Got it.
So just curious in terms of whether like these are assets that.
Specific non solicited bids on it and things like that versus a more comprehensive review.
Barbara.
More of a review from our site.
Got it okay.
Jim.
Yes.
Yes, no sorry go ahead Maria.
Okay.
Shifting gears to the operational side I think Brian you mentioned an expectation for above.
Single digit topline growth for the foreseeable future given the strong demand.
You are seeing in the market.
How sustainable is 0.6% same store expense growth year over year.
Over the next couple of quarters.
On the expense growth side, the <unk>, 6% in Q over Q.
<unk>.
I think it boils down to some of the costs as being related to salaries and reviews and we do that on an annual basis. So that's I think partially why you saw Q1 sort of be a little higher as ethylene all those rules.
So I think Q2 Q3 Q4 will continue around the lines, where we are today that Q2 is a good run rate on that side.
All of that because I haven't talked to the operating costs not the utilities portion of our overall operating expense because that fluctuates for every quarter as you know.
So I think.
Overall for the year, we've talked in the past about being around that 5% Mark and I think we will still be around that when you look at an overall annualized basis, okay great.
And we could have.
Have talked in the past.
Narrow that we think 2020 forward is going to be a year that we wouldn't see the same level of pressure on the operating cost and we still believe that.
Okay. Okay.
Thank you.
And within.
On the supply side, but we're also seeing that on the labor side back to Chris' point, we believe the majority of the.
Wage pressures have already.
Being.
Inherent in the numbers.
Okay.
And then just lastly, maybe kind of going back to occupancy.
I appreciate the commentary on the seasonality can you share with us where total portfolio occupancy stood at the end of July .
Versus the 95 for quarter end.
Yes.
We haven't typically sort of gotten into quarter end disclosure around it.
I can tell you that from a historical perspective.
It usually June to July is a big improvement in the occupancy. It's typically starts to get better in August and September because you get that movement for August and September move ins.
In July we have seen the improvement over June .
It really is the latter half of the Q, where you see that ramp up happen.
Okay.
I was kind of mentioned before if you go back over.
Alright, sorry, Matt just said different.
Our back into pre pandemic type leasing cycle, there's nothing today.
We look at that's abnormal to what we've seen.
<unk> two <unk>. So we're right back at other than the fact that two of them.
More leases.
New leases in 2022 in late Q4, that'd be the only difference than from previous cycles. So we're quite encouraged.
We remain quite bullish on the fundamentals of our business right now.
Got it okay. So if we go back over time, and we look at that.
Chart.
Included in taken average Q2, Q3 versus Q2 occupancy, we should see kind of a similar bump.
We believe.
In relation to broke language.
Yes.
Okay.
And then.
Coming back to Mikes question on the seasonality.
Does that is that seasonality fairly similar across the markets thought of law.
The change in occupancy.
Was higher than what we saw in other markets Q2 versus Q1. So it's not all just weather related as you mentioned was there something else going on there.
No I don't think Theres, Brad commented earlier that there is a bit of a change it's a little bit different in southwestern Ontario versus <unk> versus Ottawa.
Look it over Dave to base a lot closer to this I'm. So maybe I'll just be quiet for a second.
I think you hit it but even like even Vancouver has a lager leasing season, right. So Vancouver, Southern Ontario is a lot different.
Just because of weather related right so people move but.
I think all regions.
It looks very similar to a normal year.
Okay prepay now.
Okay last one for me.
They can see rebates as a percentage of revenue went up 60 basis points.
Quarter four 8%.
Is that also primarily kind of seasonality related or did.
Did you increase incentive offerings in any specific markets.
It was hard to hear the beginning of that questions can you just repeat it.
Sure. So they can see rebates as a percentage of revenue went up 60 basis points from Q1 to four 8% of revenue.
Is that uptick also primarily seasonality related or whether incentive offerings in specific markets or buildings during the quarter.
It wasn't it wasn't related to the promos that was pretty much flat. It was related to just the normal uptick in the.
The vacancy cider that down to the occupancy.
Got it.
Okay.
Yes.
Thanks, Dara Thanks Pam.
Your next question will come from Dean Wilkinson at CIBC. Please go ahead.
Thanks, and good morning.
Brad you guys are one of the few who have been able to actually successfully do in office conversion. When you look at slate at around 520th door, how would that compare to say ground up new construction.
Well it all depends.
Where you're at.
But I mean, that's still at a discount it's not much of a desktop.
To be fair <unk> saw it and don't go into this particularly.
Looking at this that it's going to be a lot cheaper from the underground options certainly from a.
From an ability to get things done and it does take a lot of expertise and skills and time, because youre dealing with the unknowns, but I think that's something and you just highlighted I think that's something that really.
Really highlights about this team and our partners with these office convergence, but you're really doing it for that for the reason that you believe one eight is really well located.
And to the sustainability aspect of it right. So.
Carbon.
Footprint.
The carbon savings of roughly call it 55%.
When you're looking at so when you look at the fact that you can make and meet your economic returns threshold and then you look at you are converting obsolete space.
As in the downtown.
<unk> be able to do it by reducing what would normally be.
Newbuild by 55% is a lot of the some stakeholders that are winning.
Sure.
Our stakeholders are winning from a sustainability.
Standpoint are.
Citizens in Ottawa Wilmington, the delivered much needed homes, and we're still making and meeting our return requirements, but I wouldn't see the main motivation is from a cost perspective.
It is quite the opposite and really we're working with governments at all levels of government to help explain yes office conversions can be a part of the housing.
Supply issue and a solution to it.
But it will need to take a lot of collaboration with them.
<unk> with the provincial governments and even at the federal government I know Curt you've had some discussions with CNBC and how they can get involved.
Yes, we can.
We need to work with CMS on that front are quite interested is that a lot of senior people at the towards the asset we're working with the city of Ottawa with our development partners and the city of Ottawa to look at different potential around it. So there's a lot of encouraging there nothing to really report it but a lot of movement and a lot of interest. The other thing that I would add is that time to market you probably shave off.
Anywhere from a year to date correct me, if I'm wrong by year, two or year and a half yes, no failure on there and your time to market with.
The conversion because youre superstructure has already done.
I guess that does actually create significant cost savings just vis vis.
Carry on the construction financing right because thats, 67% money.
So was that.
Was that the same view on the sort of post quarter acquisition for the 25% stake in the next office conversion project and can you talk a little more to that or is that something we can look forward to in the coming months and quarters.
I think it is something that you can look forward to in the coming months, but we really love the location, but what I can tell you is we really love the location.
And we actually like the footprint of this.
This structure, even even more solid slate. So we've learned a lot from slate, we're extremely happy with the.
The progress on what we've seen that slate and I think it's been in let's just say it's been a win win on a lot of different fronts. The slate. So we were really excited.
When this opportunity came up that we thought that we can mirror something similar too.
Two the slate.
Okay, well stay well stay tuned on that and then Curt you mentioned that the slate takeout financing was completed are you guys able to provide.
Where that sort of appraised out for for the financing or.
Is it just going to say higher and Thats it.
Yeah look I'm not going to get into the appraisal because.
Third party appraisal, our internal number and with CME. She uses for their evaluation on our financing and I'll be a little bit different what.
What I can tell you is that the.
Mountain Dew raised on this we were able to actually take advantage of a dip in the market and locked the rate in a little while back on it. So we were able to lock it in it.
Basically an all in rate of about three 9%.
And we were able to pull out.
Just a little north of $60 million on it.
Okay great.
Backs me into the number that's it thanks guys.
No problem. Thanks, Jamie.
Your next question will come from Gaurav mother at IAA capital markets. Please go ahead.
Thank you and good morning, everyone. Congrats on the strong operating performance.
Just very quickly when I look at your maintenance Capex number and noticed a slight uptick.
It would be great. If you could provide some color on what's driving that and how we should think about it over the next couple of quarters.
I think if you look at if you look at it compared to last year. If you annualize sort of first half of the year compared to last year, it's actually down a little bit.
If you go back and look at it over several years, it's out, but it's not really up by much more than inflation. If you will.
And I think when you look at the.
I always worry when we show this number to be honest is that when youre showing a couple of months and Youre annualizing. The number that can be tricky because theres a lot of timing issues that can hit maintenance capex right. So they just take a few quarters annualized is a little bit tricky, we do it to try and give people a sense.
But.
When you sort of take the history of where we've been tracking over the last five years and you look at a normal CPI type inflationary rate on that.
It feels right in line with with where we have been.
Okay. Okay, Great and then just switching gears to the capital recycling program and the <unk>.
As such if identified for dispositions.
Could you provide some color on what the buyer pool looks like on what bid ask spreads are across the market.
Yes.
Yes.
I'm not going to get into too much details with the disposition program because we're at various stages, so really don't want to be.
Self dealing with big disposition program. So I'm just I wanted to start with commentary and I hope everybody can appreciate that on the call and whatnot. So we typically don't provide this information, but we felt that quite honestly, we inherit for not providing it. Okay. So we're giving you what we believe.
As a realistic number that we can meet over the next 12 to 18 months as far as what net proceeds we believe we can take out.
Can tell you that the the portfolio and the different communities. We're looking at so there are different reasons.
Going back to <unk> question as being a full.
We view analysis from a financial standpoint, and also from an operating standpoint.
So optimization standpoint.
I Hope I hope you can appreciate.
My commentary.
I do I appreciate the time.
But I would say I'll reiterate because we have maintained that.
So just to be a bit the buyer pool.
Some of them some of the communities that we're looking to dispose of are more typically.
<unk>.
Higher.
Makes a lot of sense because the majority of the rental stock is owned by.
<unk> described it.
Landlords are owner.
Alright.
Alright.
Okay, great. Thanks for the color gentlemen, I'll turn it back to the operator.
Thanks, Sir.
Your next question will come from Matt Hornack at National Bank. Please go ahead.
Yes.
Maybe just taking the opposite side of that discussion from a capital allocation standpoint at this point I know you did a bit on the N CIB, but.
Where do you see the most attractive place to deploy funds at this point.
Between kind of development stabilized assets buying back your stock repaying debt.
Well.
I'll start off and CIB, we've always been on record as saying that we believe in buying back units when it's trading below <unk> values and we all understand that.
<unk> been on record, saying, we're not going to lever up our balance sheet to do it as well.
You saw that we are active we we did go firm on traditional on one one of our communities and we felt that.
We felt comfortable enough.
Clothes, and we went into the market mine, where our units are trading obviously, we were very frustrated as a management group that our units are trading where they are because when you look at the type of organic growth and organic growth, we feel that we see over the next two years.
At well below replacement value call it over 50%.
When you have an asset that can generate double digit organic growth. So there is a major disconnect and we are having.
To be quite honest quite frustrated with it so for sure buying back our units will makes sense, but there's also other there's also other capital allocation decisions that makes a lot of sense to India.
Your line of credit as expensive as it is up.
Close to 7% it makes a lot of sense to use some proceeds to pay down your line of credit.
As one and then we also have longer term.
Growth generating initiatives, such as office conversions and are developments that will make a lot of sense of adding.
Value on a NAV basis over the longer term right. So we have to as a group balanced short term.
Creation initiatives with some of those longer term because quite honestly I think youre going to see a mix one of the easiest things to do is obviously in the short term pay down your LLC and buybacks on the units, but you want to be mindful of your development program and your balance sheet to make sure that you use.
Got enough conservatism and flexibility in your balance sheet to be.
Execute on those longer term growth initiatives.
Okay, No that makes sense and then it's tough because of the public markets are I would say much more yield focused in basis at this point.
But how.
How do you think about the interplay between those two because obviously you have assets that are well below replacement cost.
Current point, they may not be yielding as much. So when you make investment decisions. What is the primary driver of your decision making.
Yes, that's really actually an easy one because my net worth tied up in this thing and the majority of this management team.
As well so we're not waking up every day looking at unit price why would frustrated because dictates where our cost of capital is today and.
We will govern how we allocate capital and how many opportunities we can participate in.
We wake up every day going five years out 10 years 15 years out what does this.
I know you looked like how much value will be created.
And how much are we strengthen the operating platform.
And I can tell you the operating platform the nucleus of this and we will continue to invest in our people and will continue to invest in technology to make sure that we are industry, leading and in the position to be able to continue to provide above average industry growth.
Over the longer term, Matt I think that is where you will eventually realize and I think the microbe MCP payments for that.
Absolutely makes sense and I guess that like last question for me, but it's a tangent off of that.
With regards to expenses and margins, we did see some expansion.
But is some of that expense kind of benefit to your investment in the platform in the Permian form of prop tech or maybe doing more and more with less in terms of employees et cetera.
And is that margin expansion kind of sustainable going forward given more investments in that type of.
I think you had mentioned I am going to give you the shortage congrats that's the answer ever yes.
I'll take that for now it's been a long call.
Yeah.
We were happy with that we're happy with our prop tech investments and like a lot of investments when you're first putting the capital to work in them, it's a bit of a drag because youre changing processes, you're changing systems, you're fixing things are correcting things whatever so it starts out it actually being in addition to your cost the first couple of quarters as you're pushing through these things.
But I think we're seeing the benefit of it now we've worked out a lot of pieces that we need to work through.
For us we've built a solid foundation with those different prop tech investments that we've done and we see ourselves being able to continue to build on them and actually find more efficiencies as we go forward. So we're very happy with the work we've done around that our investment in our CRM system, our investment in sweet spot, which helps our operations team substantially.
And our investment in wind that way all of them have really.
Well, we're very happy with all three.
Okay, that's great color thanks, guys.
Thanks Pat.
There are no further questions on the phone lines. So I will turn the conference back to Renee Lee for any closing remarks.
Well that concludes our call today. Thank you everyone for your time.
Any further questions. Please don't hesitate to reach out anytime.
Have a great day.
Ladies and gentlemen, this does conclude your conference call for this morning, we would like to thank you all for participating and ask you to please disconnect your lines.
Okay.
Okay.
[music].
Okay.