Q3 2023 Canadian Apartment Properties Real Estate Investment Trust Earnings Call
Yeah.
Yeah.
Good morning, everyone and thank you for standing by welcome to the Canadian apartment properties third quarter 2023 results Conference call. My name is chats and I'll be coordinating today's call. During the presentation. You can register to ask a question by pressing star followed by one on your telephone keypad and if you change your mind. Please press star.
Ralph will buy two I'd now like to turn nickel I bet, Nicole Dolan Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone.
Before we begin let me remind everyone that during our conference call. This morning. We may include forward looking statements about expected future events and the financial and operating results of Capri, which are subject to certain risks and uncertainties. We direct your attention to slide two and our other regulatory filings for important information about these statements I will now turn the call over to Mark.
President and CEO. Thanks.
Thanks, Nicole and good morning, everyone join.
Joining me. This morning is Stephen Ko, our Chief Financial Officer, Julian Sean <unk>, our Chief investment Officer.
Let's begin on slide four.
We're pleased to be reporting another quarter of robust operational performance.
Vacancies remained stable at all time lows with nearly 99% of our Canadian residential suites occupied a period at this.
This reflects the tight rental conditions that we're operating in today.
Driven by increasingly under supplied Canadian housing market.
As a result, our occupied EMR on.
From the total Canadian residential portfolio has grown to 1400 $90 a month as of September 32023.
We summarized our financial results for the third quarter on slide five.
Operating revenues were up by six 5%, which reflects our solid rent growth.
Especially in the context of a smaller portfolio.
Net operating income was up even higher growing by seven 1% with lower operating costs as a percentage of revenues.
As a result, our margin on the total portfolio expanded to 66, 5%.
In part this highlights the effectiveness of our strategy and.
And the strong earnings that come from our new construction rental properties.
As compared to the non core buildings that were selling.
It demonstrates that by upgrading the quality of our portfolio. We're also upgrading the quality of our earnings.
Diluted <unk> per unit increased by four 6% to 63 eight for the quarter, primarily due to this operational growth as well as attractive purchases.
Previously made under our NCI V program.
The decreased.
This decrease the weighted average number of units outstanding by two 8%.
Our diluted NAV per unit was down to 50 436 cents as of September 32023, mainly a result of the fair value loss recognized on our portfolio.
This is due to an increase in the weighted average cap rate.
Slide six highlights some key performance metrics year to date.
Operating revenues and NOI grew grew by five 7% and six 2% respectively.
Driving the expansion of our total portfolio margin to 65, 1% for the nine months ended September 32023.
This is up from 64, 8% in the comparative period.
Our same property margin also grew by 30 basis points to 65, 4%. This reflects the fact that our rent growth was strong enough to offset higher property operating costs, which resulted from inflationary pressures and increased repairs and maintenance expenses.
However, we are strategically inquiry is higher repairs and maintenance costs as we've intentionally scaled back on our discretionary value enhancing capital expenditure.
Which flows through our balance sheet, instead, we're allocating that capital to repairs and maintenance work, which impacts our margins. This strategic pivot we've taken in response to the tight rental market, we're experiencing across Canada.
Our consolidated operating costs, which include E. Reds were also inflated by movement in the exchange rate. However.
Yeah.
However, the similarities increased our foreign exchange operating revenues upon translation.
Diluted <unk> per unit was up by two 7%.
Again this was a result of our operational growth and CIB repurchases.
Partially offset by higher interest costs are.
Our payout ratio remain conservative at 65% for the current nine months period.
We're continuing to make solid progress on our strategic initiatives as displayed on slide seven.
Our portfolio of modernization program is front and center.
Briefly mentioned some benefits of the program that we're seeing come through in our financial results, but this strategy really does pursue an upgrading of the portfolio in every capacity, we're purchasing newly built rental properties located in strong performing quickly growing Canadian.
<unk> it.
Have higher returns and lower risk, we're funding purchases through the disposition of our older buildings that are no longer core to our strategy.
Considering our competencies and objectives. It is important to us. This recycling also contributes to the remediation of the Canadian housing crisis, we've established a robust development program that Additionally helps with the solution to the housing problem.
Without us having to deviate from our bread and butter business. We're working hard on this front to entitle, our excess land and crystallize the significant under realized value embedded throughout the portfolio.
In doing so we're opening the door to the vital development of new homes in Canada.
Nci's constitutes another value creation tool at our disposal, which we can leverage whenever that presents itself is the best use of capital.
Our proactive debt financing program is also a critical component of our strategy as Stephen will discuss it provides us with the financial flexibility, we need to execute on all our strategic objectives and bring everything together to collectively form the cap REIT too.
<unk> strategy.
I'll now turn things over to Julian to provide a more detailed update on our capital recycling.
Thanks, Mark Slide nine shows the extent to which we've been focused on repositioning our Canadian portfolio in recent years and we continue to make good progress on these initiatives in the past few months since the second quarter, we executed on the disposition of $122 million worth of our older non core property.
He is in Canada, and sale prices, representing a premium to <unk> fair value. This includes two transactions closing this month, where combined gross proceeds of $62 5 million.
That brings our total Canadian disposition volume to $415 million. So far in 2023, which represents the sale of over 2500 suites insights. We've also acquired $208 million worth of newly built rental properties. This year comprising approximately 500 high.
Quality suites located in regions growing regions with strong long term fundamentals. This has increased our portfolio allocation to 11% Newbuild today up from only just one 1% a few years ago.
Slide 10 showcases some of our latest strategic transactions with.
We featured our most recent acquisition of the Lincoln property inland in EMEA.
<unk>.
This highly monetized building was purchased for $51 million, excluding transaction costs and other adjustments. It was constructed in 2022 and contains 90 twos patients suites with modern appliances and high end finishes you can also see that we benefit from operational economies of scale and is located adjacent to the point.
And radio properties, which we purchased just a few years ago compare this to the older non strategic properties that we're selling a sample of which you can see on the top of the slide.
And we're looking forward to making continued progress on our asset recycling program and enhancing the diversification of our portfolio with these high quality and well located properties.
As Mark mentioned, our asset light development model means another priority for us as outlined on slide 11 throughout the past 26 years, we accumulated one of the largest rental apartment portfolios in Canada, which spans from coast to coast.
It came with substantial excess land, which now has significant under realized value that we're working on servicing as a reminder, we've identified over 6 million square feet of possible GSA across potential development site in just the GTA and you can see that we've already submitted timing application for over two five.
Millions square feet with more to come by first undertaking the lengthy and cumbersome entitlement process, we're able to sell our underutilized land to developers shovel ready. This makes it a win win opportunity added directly contribute to the development of new homes for Canadian while at the same time, we can crystallized significant.
Value upfront without having to take on any development financing or leasing risk.
With that thank you for your time this morning, and I will now turn things over to Steven for his financial review.
Thanks, Julian and good morning, everyone. You can see on slide 13 that we maintain a solid liquidity position.
As of September 32023, we had $258 million in available capacity on our Canadian credit facility, which had was recurring a weighted average interest rate of six 5%.
Since then we have repaid a significant portion of that and today have approximately $340 million in available borrowing capacity. In addition to the $1 $7 billion worth of properties that remain unencumbered at Purion M.
Our stacked or staggered mortgage portfolio in Canada carries one of the longest term to maturity in the industry at 545 years. Four years. We also have over 99% of our mortgage interest fixed at low weighted average effective interest rate of two 9%. This mitigates our volatility utility risk and innate.
<unk> us to proactively manage our debt, which forms an integral part of our larger business strategy.
We continue to build upon our balance and secure mortgage portfolio and are expecting to have completed net top up mortgage financing of approximately $200 million by end of this year.
Slide 14 displays our long term composition of our mortgage maturities you can see that these are staggered. So that we have no more than 14% of our total more Canadian mortgages coming due in any given year. This minimizes our renewal risk and we have been benefiting from this conservative debt strategy.
And the high interest rate environment of recent years.
Turning to slide 15, our debt to gross book value gross book value ratio ticked up slightly since the prior quarter to 41, 4% at period at this is driven by the decrease in our gross book value due to the fair value loss recognized on investment properties this quarter and also.
Because we're shrinking the size of our portfolio as we work on getting better and not bigger.
Although this metric remains conservative we aim to keep it on the lower slot side subject to our other accretive opportunities for capital deployment.
Importantly, all of our metrics remained safely within the limits of our covenants, including our debt service and interest coverage ratios I will now turn things back over to Mark Thanks, Steven.
We've talked a lot today about our strategy as we normally do and that's because we're very excited about its merits and the progress that we've been making by consistently executing on our strategic objectives quarter after quarter, we've been creating meaningful value for our unit holders and.
And that's been our primary goal, we're not just optimizing our portfolio to achieve this.
Turning to slide 17, we're optimizing on live work and invest affects every corner of our organization and every stakeholder in our organization at cap rate too.
We're enhancing our portfolio along with our communities our contribution to the housing solution and ultimately returns for our unit holders to accomplish this we've also been enhancing our people and teams to adapt and ensure alignment with this re envision strategy for success now.
And in the future.
Looking ahead, we remain extremely focused on generating as much value as possible.
Through his many means as possible.
We have ongoing opportunities for accretive uses of funds across our various strategic programs and we will continue to actively exercise leavers in tandem to keep maximizing value for our unit holders with that I would like to thank you for your time this morning and we.
Wed now be pleased to take your questions.
Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad now.
Your line. Please press star followed by Keith.
<unk> asked a question. Please ensure your device is unmated lately.
Our first question today comes from Scott LNG from Laurentian Bank. Please go ahead.
Okay.
Thank you and good morning.
Quick questions for me first.
Just looking at the fair value adjustments I was wondering.
How you feel about cap rates, so far in Q4 and for 2020 funding do you feel we reached a certain plateau or are you could see a bit more volatility from here and I realize it's a bit of an unfair question, but.
Just wanted <unk>.
I don't think its unfair at all.
I think what we're seeing is a little.
<unk>.
Of a relaxation on the long.
And the bond yields and that speaks very well for future valuations.
Think that most would agree that the tightening cycle is.
Least plateauing at this point and not expected to get much worse.
With that in mind, we see a real strong recovery in values.
Perhaps julien.
His thoughts too that Fred just give him a second here, yes, so CSR cap rates widen a little bit over the quarter and that was a direct result of the interest rates, which have increased we've had.
I'd say over the last week and to Mark's point with the forward curve showing a little bit of relief in the future.
Do you think the cap rate expansion is probably potentially I haven't deepa.
Looking forward you still have some exceptional rent growth going forward. So.
Hopefully that.
Hopefully that doesn't work.
Value uplift in the future.
That's totally fair, it's a good segue to my next question looking at your current target acquisitions.
Are you starting to see a change in the buyer pool or given where we are in the rate cycle or still a bit early.
Yes.
Yes.
So in terms of the acquisitions, we're looking at we're still finding is not anywhere near as competitive as a mark of a market as it was before just with the bond yields still being fairly high end capital being scarce.
Not as competitive as it was before.
So it still does remain a good market.
For.
I'd only add Brad.
We remain in a bit of an upside down world here, where.
There is good energy in the.
I will say, the lower end product or the less expensive price per door product and the opposite in the institutionally held market that was the most frothy going back two three years ago.
That ended the market is highly sensitive.
Too long long money.
Rates and again.
Youre going to see a real pickup probably Q2 Q3 of next year of the institutions getting back into.
The trading assets.
Okay. That's interesting. Thank you and then maybe last one.
In terms of.
Karen.
Karen rental rates are there.
Are there any markets, where you're starting to see a certain plateau or or.
Alright.
You started or where you're starting to see growing risk given the macro headwinds or things are remains pretty stable here.
No. It's quite stable you can see there is a slight slight uptick on our mark to market rents.
Dramatic downtick in the number of units that we can access the strongest market.
And candidates, clearly, Ontario, and Ontario is clearly the market, whether it's difficult to extract the value because low turnover, but again, it's a bit of an upside down world.
The two best province to be on a fundamental point of view does Ontario and.
It's all a function of the housing affordability crisis, where where people have nowhere to go and you see low churn and that's what we're looking at in Ontario for now, but the value and the mark to market of rents is just incredibly in this province of Ontario.
That's great. Thank you so much.
The next question on the line is from Jonathan Chang from TD Cowen. Please go ahead.
Thanks, Good morning.
First just like.
And I guess sort of following up on <unk> question on.
Acquisition market, we're starting to see more headlines.
Some distress developments.
Are you guys seeing any opportunities there yet or is it too early.
I guess secondly on that how would you like how soon would you take over the project.
Yes, I'll take that one so we are starting to see that.
I haven't seen it.
And then too drastic of a way, but we are definitely starting to see the merchant developers being under a little bit of pressure.
Pay off variable rate.
Your cost debt so.
That coincides with what Mark said earlier, where there's just a little bit less of an institutional bid for them. So.
There are some interesting opportunities we are able to act quick that's one of the very strong advantages that we have.
Here because of our size and scale and the capital recycling that we've done having sold over $400 million of given us some firepower to be able to take advantage of that so we do well.
We're being cautious with deploying capital, but we are looking forward to.
Taking advantage of some of those opportunities going forward.
I would only add that Jonathan.
Our reputation should not be underestimated in this environment <unk> has a.
Very long history of doing what we say, we're going to do and that carries tremendous way in a market where merchant developers are looking to close quickly.
Julian said, a wonderful response from the brokerage community knowing the cap rates there that definitely give this product gives us pricing advantage and thats 26 years of reputation at work.
The point of layer on there too with the CME HC financing delays like Youre looking at half a year to get that.
For a lot of folks they do rely on that to make their IRR and their targets work for us we have such a huge balance sheet and unencumbered assets that you can kind of synthetic we put that on a property right away and so that's a bit of a somewhat unique advantage that we have that can carry a lot of weight when negotiating with vendors.
Just happens to coincide perfectly with our strategy of recycling assets the opportunity and the market is there and that is bringing the scope of our strategy.
Do you think youll be more active on the acquisition front in 2024 versus 2023.
We will remain opportunistic it's hard to have a crystal ball I can describe the environment as having those opportunities right. Now we don't expect these opportunities will be there for the long term, but they are definitely in the marketplace now will be.
Strain will be <unk>.
Disciplined and we will stay completely on strategy, but the so far the strategy is working exceptionally well.
Okay and then my second question is just on me.
On your operations on the expense growth.
You did a good job of laying out laying it out versus versus capex spend but.
Have you have you sort of got to a level, where you want it beyond that.
Such that we can sort of look at this quarter's capex and kind of push that through next year and then similar on the on the expense side.
Yes, the whole team is quite proud of treating a dollar is a dollar and focusing our efforts on just being efficient.
<unk> the accountants decide it's going to land capital or repairs and maintenance. So we're just going to stay strong on that.
I feel very confident when you look at our capital spend you are seeing a dramatic change in discretionary items.
But somewhat increased commitment.
Carbon emission investments ghd reject reduction of investments in energy.
So.
Overall capex number is a little bit confusing when you look at our ESG investment commitment.
Fully in place and accelerating and when you look at our discretionary Capex, it's definitely being pulled back and it's that category.
Giving somewhat of an effect.
I'll be enough profound on the repairs and maintenance. The overall effect like I said is a dollar is a dollar and we're going to continue to run the business that way.
Okay.
Okay, but if we think about modeling for next year, how should we think about.
Our expense growth.
Hey, Jonathan So I think just in terms of R&M expense growth.
As Mark pointed out we are continuing to shift our dollars more of the R&M side as opposed to the Capex side that had been really start until like I would say.
Early Q, maybe late Q1 of this year and so therefore, there will still be some overall effect on the 2024 numbers if youre if youre modeling for next year.
But we'll continue to focus on that so I think.
Using this year, it's obviously, a little too high if you're modeling that but I would say it could definitely be lower next year.
Okay. Thanks, I'll turn it back.
The next question is from Kyle Sandy from does Jonathan. Please go ahead.
Thanks, Good morning, everyone.
Going back to your leasing commentary or the leasing spread commentary mark last quarter you'd mentioned that.
Turnover spreads were still benefiting from the after effects of Covid.
And that as a result, maybe the upward trajectory of the the turnover spreads were somewhat more limited.
As you highlighted we did see the spread tick up again this quarter. So just curious on the expectation moving forward how much further can spreads continue to expand and what is the runway for spreads maybe staying at these elevated levels.
Well the two numbers that are so co related to the turnover churn numbers and then the leasing spreads and when your churn turnover numbers dipped below 10% in provinces like Ontario, you can pretty much count on those leasing spreads to stay.
They are because we are a sample of the market Theres nothing unique going on I would say is when we have a great revenue team to cap rate.
So at the end of the day, it's the housing crisis, we can now use as the culprit to these limits and I don't expect to see very a historical.
New heights that I've ever seen in my.
35, plus year career here I don't expect.
That youre going to see an upward trajectory, but we're as I said historical historical levels right now.
At this point not seeing any relief on the apartment churn there's nowhere for folks to go.
Okay fair enough.
The book supporting that to just.
Touching on the comment I said earlier about the merchant developers.
Slowing down and doing the financial pressures variable high cost variable rate debt. So you have that happening at the same time the government has been increasing immigration consistently.
It continues.
Online really strong trajectory for the.
Apartment fundamentals in the future.
Yes.
I think that makes perfect sense.
You mentioned just turnover remaining low.
Some of your peers. This quarter have noted maybe a little bit higher turnover in the third quarter, specifically than they had expected is that something that you might have witnessed this quarter.
Or is your outlook for turnover I guess as we go into 2024 shifted at all or is it still kind of trending in that maybe lower teen level.
Now listen we've got great peers, but we cap rate has been such an exceptional job of our locations that our churn is our right in the heart of the housing prices. So our churn will always stay a bit lower just due to the I would call the superiority of the market locations that we have and <unk>.
It's a complete co relation between churn and leasing spreads. So when you want to talk quality of portfolio in terms of where the hot auction is look at cap rate lowest churn highest mark to market rents superior rental locations in the sense that were urban center heavy Ontario.
Heavy large Canadian city. So it's just a little bit of a difference this year.
Markets and you see those uptake churns, you've just got less of a housing crisis going on.
Okay. Thank you for that and just the last one you hit your disposition target of 400 to 500 million for this year, just wondering what kind of incremental disposition disposition activity we might see.
Next year.
Yes, we haven't provided guidance for that.
Probably not going to do that on the call, but we remain committed to our capital recycling strategy. It is going to be dependent on the market.
But we don't have any plans of stopping the momentum that we've that we've had this year and that we've achieved and so it will really just be opportunistic and market driven.
Okay makes sense. Thank you for that I'll turn it back.
The next question is from Mike Mccormack from BMO. Please go ahead.
Okay.
Thank you operator, good morning, everybody.
You guys have obviously been very successful in your strategy to upgrade the portfolio and I guess most of that's been done through buying assets.
But as the world evolves.
Seeing any opportunities to get involved in projects sort of midstream through let's say like a mezzanine loan type structure.
Julien as such and the investment team have done such a great job of keeping a pulse on the market.
We wouldn't have to go there to find great value today.
Got a great pipeline of opportunity that to match it with discipline on the dispose side, but.
We know.
That theres condo distress in the market, we're reading the newspapers, we can see what's coming but if you were asked to the investment group today the opportunities Theres, a big long list that we could go shopping with <unk>.
Before we have to go there I think thats the.
That's the later inning opportunity of 2024 for us.
Everything will be driven on our ability to properly recycle cash alright, Michael obviously, all the acquisitions, we've been doing and that we're looking at are all below replacement costs right and so given that we have those no development risk no lease up risk and we're able to buy them cheaper than <unk>.
If we were funding through mezzanine or other other.
Development alternatives. It just remains thus far more attractive to.
Forget it below replacement cost and already done now and in future market as Marc said, where it makes change we remain open to doing whatever is best for shareholder value, but for now this is clear.
Clear answer.
Okay. Thank you and then just last question for me just on the you referred to.
Expand the amount of entitlements that you guys have when you look at the entire opportunity set.
Is it easy to separate land parcels like you were able to do on Cavendish or do most of your opportunities require demolition and replacement of existing units.
I'll, let Julian answer this obviously, but.
Can't help myself.
<unk>.
The environment Couldnt be better for this part of our strategy as well obviously as we found ourselves in Canada in the deep dark depths of the housing crisis, we have less nimbyism and we have far more obviously read the newspaper governments are turning their eyes to how can we help.
First as anything else, so I'll, let Julian kind of describe the opportunity, but I can't help but try to give the market a bit of a peak here obviously the environment has changed for entitlement.
So when we're looking at how we prioritize and rank them, it's largely based on the most value we can surface which is.
Lot of cases going to involve involve high rise, sometimes it's going to be until like the two davids fill sites, sometimes theres going to be some demolition and rental replacement required but most of the ones, particularly where there is high value. There's a large enough parcel for it to be severed in Seoul and.
We've discussed this before but when you look in Toronto the value of condos versus brand new apartments. The spread is still quite large so they arent skills oriented more towards the.
Towards Congo quiet condo development.
For your question.
Most part there.
Easily enough severable.
Okay, and just following up on that.
How far away are we do you think.
From that becoming a bigger part of your your disposition program in terms of selling entitlement.
We.
Learned our lesson with giving the universe and even a path. So we're trying to be extremely restrained Julians group is very very hard at work.
Getting ready to announce new projects at advanced stage, but in terms of the market.
You should really keep focused on what we've announced is being.
In process, because even if these in process deals do take time.
You only have to drive by our assets and to understand my goodness, there is theres more years than anywhere.
But but really focus on what Julien.
Ed in his slides on the development front.
What we've got in action.
I'll just touch on those very quickly David fill ones I mean, youre, obviously at the mercy of the city, but we do expect to get those entitled early in 2024, so fairly imminently.
When that actually becomes a disposition, we're not we're not committed to having to do it right away, we're committed to getting the most value for shareholders. So at the time, we'll make an assessment of the market if.
If the market support of them.
And the optimal value and see what we can do there, but those would be even more <unk>.
And as Mark said, you might see more kind of added to the list team working hard in.
And that will continue to push there.
Understood. Thanks for the color.
The next question is from Jimmy <unk> from RBC capital markets. Please go ahead.
So just on the strategy of spending less on value add Capex I was wondering if you could put some numbers around the cost benefit analysis like that year.
You know you're spending 25000, you'll get $200 a month rent extra or you know extending a thousand units, but what's the calculus, there and then.
And then and then I guess also in that are you thinking about the cost of.
The spend in terms of like how you're financing it in at higher rates have gone up so it's incrementally not worth it felt like even from an IRR perspective.
Okay.
Yes, I think as we go forward here, we're going to give more color like the portfolio has now reached 10% new construction, but it starts with.
A variety of considerations it starts actually on the digital front looking forward to Capex growth total return.
Investment group does a phenomenal job with that and then we balance that against her.
Higher margin lower inflationary impact assets on the income side. So when we're buying these new construction assets Theyre fully sub metering is in most cases the rents are higher the margins as a result are much higher so the ongoing effect of inflation, we can't gauge that right.
Now, but we know when youre in a high margin asset you, obviously have less inflationary pressure that is just the lifecycle of capex. So when you are buying a brand new construction asset you are perfect planning on the Capex front, where we.
The noncore portfolio of value added portfolio has historically been at various stages of lifecycle reinvestment from the time, we buy it.
A long we've owned it.
So all of that has to.
Staggering math.
When staggering this means like different stages of the investments that are required Jimmy we can and we will give.
Better insights on the merits to these new construction assets and how they play out on.
On the long term, but really it starts with the disk both front and moves over to the pro forma on new construction I don't know Julian if you would add anything to that.
Just more specifically I guess to Jimmy your point in terms of the Capex that you'd spend the model has changed now and so when rents are becoming quite high in an affordable for folks.
Mount of extra money that youll get from doing a full renovation or doing the hull.
Given the always to the highest standards and everything it's not not like it was before.
And frankly, it makes the units even more on affordable for Canadians. So from our perspective, the IRR on that incremental capex arent, where they used to be and it also helps to kind of keep the units a little bit more affordable that said with respect to the license safety.
The Green Capex all of that stuff I mean, that's just a brand and we spend on that just because thats our model and we want to have.
Nice base energy efficient homes for all Canadians, but in terms of the incremental spend there.
You mentioned, the IRR Armstrong arent as strong anymore, given the high demand and low supply.
Again, we're just trying to get at.
Yes, Jimmy just to finish up.
The value add.
We couldn't have predicted in our pro forma this slowdown in churn.
Even the predictability of your income stream and some of the older assets.
Value is far more embedded if you look at the market rents in there and truly.
Unbelievable.
But extracting that value can be choppy.
And so that we just don't find that in the new construction assets.
You're at market rents.
Thats difficult to mine the value you tend to have more flexibility on the renewals is at a whole variety of things that are just difficult to pro forma and quantify.
I don't know yeah, I was trying to get at the sort of thing.
The decision not necessarily against the bill.
I think.
I think I think you addressed it Julien.
The other question I had was on.
The real costs.
We incurred so fucking provide some color on sort of what your initiative was to win in the organization.
Organization.
Yeah, Julian I mentioned in the presentation, we sold over 2500 suite, Steven has continuously talked about the better versus bigger companies getting higher.
Higher quality, but we are the <unk>.
Strategy changes, we're not a company built for.
Growth of unit count anymore.
And we were very much focused on the growth of unit count for decades that cap rate and so there's a lot of there was a lot of very senior and long term employees.
That we.
Unfortunately had to look at hard in terms of what's going to happen here over the next two to three years.
And that's what that restructuring is about.
Okay.
Okay, great. Thanks, guys.
The next question, we have is from Matt <unk> from National Life's financial. Please go ahead.
Hey, good morning, guys.
Just a quick follow up to Jimmy's last question. There net of the restructuring cost is that does that kind of what we should think of G&A.
On a run rate going forward or is it it looked a little low relative to where it was historically.
To that effect well.
Steven maybe pass comment that what we're talking about here is.
A mitigation of cost increased net 2020 for G&A as a percentage of revenue will be going down, but the overall cost of G&A in the model.
When you factor in increases in some other things that we're doing to restructure for the new cap rate there will be new job decided as.
As we go forward.
Yes, so Matt I would say if youre doing for modeling purposes for Q4, I think year to date numbers, excluding the nonrecurring severance costs and termination costs. That's a good run rate for for Q4. When we look into 2024 is kind of mark already pointed out.
There is going to be general increases across the board there's promotions they are new hires.
Replacements.
Those ones I would say just.
On a.
Run rate basis in 2023 is a good run rate go forward 2024.
Okay.
And then.
Just with regards to the fair value adjustment that you took in the quarter. It seems to be almost entirely concentrated in the GTA and I got the turnover is lower.
Rates on that portfolio were low, but how should we think of kind of the flip side being that land value is probably the highest in the GTA and you've got these redevelopment opportunities I assume that's not in your fair value number.
Just interested in the methodology and so why that market in particular had a write down this quarter.
It's a great conversation again, if anything we get criticized for being very conservative here.
Evidence of trades like the institutions, we're driving cap rates to the lowest in Canada in the GTA free pre pandemic.
And in our new interest rate environment. There is a pause so there's very few trades to look at okay, but when you look at the embedded value in the market rents is incredibly profound and as Julian said.
The condo land value opportunity in our portfolio is unparalleled.
So we have absolutely we have two volts of value in cap rate plan is to <unk>.
<unk> landed Toronto and it's the redevelopment wind in Vancouver, So both in the heart of Canadian housing crisis. So I think that you can see I'm going to predict probably in the middle of next year when interest rates moderated theres at least clarity on where things are going this will rocket back Theres no question.
But with the.
Evidence of trades.
It's the right thing to do to get proper clarity to investors.
So that's why we've taken that step.
Our first layer.
We had the lowest cap rates.
In the GTA and in our portfolio with what happened with interest rates in the quarter.
Obviously that is.
Packed irr's and models that I think more importantly, when you've got lower cap rate your DSD ours, becoming an issue and so for buyers.
The higher interest rates as they can't get as much debt financing so not only does that impact their IRR, but it impacts the amount of equity they need upfront and so it's just a little bit more sensitive.
In that market.
First rate increases and as Mark said Theres, a low amount of trade so theres a bit of a guessing game in there, but we are a priority with our IRS values is always first and foremost to just be accurate with it.
Sir that was our best kind of view.
But I mean, it gives investors a better case of loan to value and your Super Conservative as we are with the loan to value numbers.
Or what are most important to people more than cap rates and it gives us again that that conservatively translates into LTV, which we're holding together at a very very good good number.
Fair enough and the market is pricing and others sort of 70 basis points higher than where youre, marking the portfolio. So.
It still seems like a very good buy and we will see how the cap rates trend as rates hopefully come back, but I appreciate the commentary guys. Thanks.
Thanks, Matt.
The next question is from Mario <unk> from Scotia Bank. Please go ahead.
Hi, Good morning, guys, just a couple of clarification questions on my end.
Coming back to the G&A.
Yeah.
Cost of $4 $2 million or so this quarter.
How would you break that down between.
Corporate G&A.
Or.
Operating costs in terms of the savings going forward.
No. It's all it's all corporate.
And.
It was really.
Something in the neighborhood of 30 30 people.
Just under 4% of our workforce.
I'll, let the.
At the corporate.
Level.
Okay.
And then more of a it's more of a theoretical question Mark coming back to this notion of.
We value being locked into the buildings given the mark to market.
Very little turnover.
Turnover remains low as it gets.
And to note in terms of realizing that value.
The strategy, we will strive to be different.
But setting versus the public company in terms of extracting that value over time, what it means.
And the public markets focusing on quarterly results.
In the private market generally there's a longer duration in terms of view.
So does that do.
Does that change how you think about the value creation potential there over time.
It's all in the detail, but I remember the one of the first things I learned in this business.
Was the value always stays in the buildings.
I am very very mindful of the fact that the value is stored.
In our assets and our value bulk is bigger than anybody's. When you look at this mark to market number that's a peak of what's inside the doors and it is incredible that being said we are absolutely open to trading some of that value to move into our new <unk>.
Construction.
Approach, because we think theres a different form of value.
Stored in below replacement cost assets so to answer your question like theoretically.
We're going to be hyper <unk>.
Selective we will keep what we deem to be the cap REIT crown jewels for the type of structure that we are and we will treat a high value opportunities in exchange for what we believe to be even better value opportunities for unit holders and thats the entire thinking between.
With cap rate too.
Being highly laser focused on where we can treat and what's incredible value and just look at our mark to market rent. So it isn't theoretical it's there and moving it into <unk>.
Low inflationary exposed.
All market rents highly capex.
Well planned assets for the future.
So investment in Capex, but real flexibility in planning <unk> 2.0 keeps move if you watch the Capex program is going to vaporize to vary.
Very very low numbers and the inflationary pressure in the operating results will be highly mitigated.
Okay.
Okay. Thanks for that.
I don't have the presentation in front of me you may have been in this presentation, but I know you've got a past where you've kind of had a pie chart highlighted.
Percentage of the portfolio.
<unk> versus new construction I think it went up like 10% in terms of new <unk>.
Structure over the past 10 years or so.
When you when you think about that.
10 years, though like how is that 10% look like or are there levers that you can pull to really accelerate the shift in composition or do.
Do we think about 10%, becoming 20% 10 years from now.
Well I'd like to pick a number but we have.
I won't.
We have these crown jewel value add assets like we have in locations that are just irreplaceable and we want that value stored for generations to come okay. At the same time.
I'd love to advance this strategy, but not not at the expense of giving up value. We will just not give up value of cap rate.
And the investment team has again done a remarkable job that that growth from 1% to 11%.
Represent unbelievable restraint are far less disciplined company could have added at 30 by now and given away all kinds of value. We won't do that we have an exceptionally high quality portfolio that we think we've seen the opportunity to make it even better.
No.
To break it down we will be providing a little more clarity on where we're going in 2024, we're just not prepared to do that right now, but as Julian said the strategy is intact.
The team is.
In full action and we've never been more excited.
Got it okay my.
My last question just pertains to the tenant turnover I'm not sure. If you have this information, but as you mentioned, it's kind of sub 10% of Ontario.
Are you at all able to breakdown.
Turnover by lease duration.
Like for example.
I don't have it might look like for tenants that have been in the buildings for longer than five years and the.
Which one five years versus that sort of been there for less than two.
I can but anecdotally I will tell you that those 30% mark to market rents include short duration leases.
We've got some short duration leases, where theres virtually no mark to market and the rest and then we have others, where there's significant mark to market rent. So to me that is.
<unk> is a less interesting metric merial, but what you might want to see is the co relation between the churn and the most affordable buildings and the churn in the buildings that are less affordable, it's wondering huge band, but our most affordable buildings.
It's vaporized people just are not enough.
And so.
So the value store in those buildings are the highest so the private market will highly covet those those buildings and the buildings tend to be less affordable.
The churn is much higher.
We can we can.
Take that comment back and tried to give some more more color. It's an interesting question.
Okay. Thanks Mark.
Yeah.
We have no further questions on the question Keith I'd now like to hand back to Mark to conclude.
Well I'd like to thank everybody for your time today and if you have any further questions. Please do not hesitate to contact us at any time. Thank you again and have a great day.
Thank you everyone for joining the Canadian apartment properties third quarter 2023 results Conference call. You May now disconnect your lines and enjoy the rest of your day.
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