Q1 2025 Canadian Apartment Properties Real Estate Investment Trust Earnings Call
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Lydia: Hello, everyone and welcome to your Canadian apartment properties first quarter 2025 results Conference call. My name is Lydia and it'll be off rates today.
After prepared remarks will be an opportunity to ask questions.
Lydia: We'd like to participate in the Q&A you can do so by question stock led by one on your telephone keypad.
Lydia: Now how enjoy that Nicole Dolan Investor relations to begin. Please go ahead.
Nicole Dolan: 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 in our other regulatory filings for important information.
Speaker Change: Nation about these statements I will now turn the call over to Mark Kenny President and CEO.
Mark Kenny: Thanks, Nicole and good morning, everyone. Joining me. This morning is Stephen Ko, our Chief Financial Officer, Julian Shawn Cole, our Chief investment Officer.
Mark Kenny: Let's start on slide four where we summarize some of the key performance highlights year to date.
Mark Kenny: You will see that we've completed $265 million in noncore Canadian dispositions and we closed on an additional $135 million of property sales in Europe. So far in 2025 at prices that are at or above previously reported <unk> values.
Mark Kenny: At the time the negotiation.
Mark Kenny: We've reinvested $137 billion of net sale proceeds into the acquisition of recently constructed midmarket rental properties at prices that are meaningfully below replacement cost. We've also spent a further $88 million on our value enhancing and CIB program to buyback cap.
Mark Kenny: <unk> Trust units at a weighted average purchase price of approximately $42 per unit.
Mark Kenny: This represents an average 25% discount to our NAV of $56 per diluted unit as of March 31, 2025.
Mark Kenny: Which we've continued to prove by selling our off strategy properties at premium pricing.
This is all just to underscore the ongoing strength in Santa Monica in the execution of our capital allocation strategy, which Julian will expand on shortly after.
Mark Kenny: Operationally, our Canadian same property residential occupancy improved since year end, increasing to 97, 9% as of March 31, 2025, while our occupied EMR grew by five 7% since March 31 2024.
Mark Kenny: Selecting the sizable mark to market built into our long standing diversified portfolio.
Mark Kenny: On the expense side property operating costs were up due to elevated R&M and utilities with higher weather related expenses, owing to a colder winter in certain regions. We also had an increased bad debt and advertising costs associated with changes in the rental market.
Mark Kenny: Base, which we've been proactively addressing.
Mark Kenny: The net impact was a decrease in our same property NOI margin to 62, 3% for the three months ended March 31, 2025, and I'll, let Stephen elaborate more on that soon.
Mark Kenny: One of our key priorities has been the reinforcement of our financial position and today, we're proud to have one of the strongest balance sheets in our peer universe.
Mark Kenny: Delevering by paying down Canadian credit facility debt and we have significantly lowered our total debt to gross book value ratio to 37, 7% as a current period and this low leverage means that we have significant room to lever up should additional funding.
Mark Kenny: You need it and at the same time, we strategically routine cash on hand, which we were able to opportunistically deploy into our share buyback program.
Mark Kenny: With that overview of the first quarter I'll now turn the call over to Julian to further expand on our capital allocation progress. Thanks.
Julian: Thanks, Mark if you turn to slide six I will just briefly talked about diversification of cap rates portfolio. Today, we have 16% represented by a recently constructed properties, which provide access to market rents alongside the benefits of very low capex requirements, we have 67% comprised of our core legacy ramp.
Julian: <unk> apartment, which can gain significant embedded value that supports the stability in our long run with rents growing profile. We also have 5% of our consolidated portfolio in Europe of that we recently announced that we've entered into an agreement to sell over $500 million with closing expected in the third quarter of 'twenty.
Julian: 25, which will bring this allocation down to less than 3% all else equal with this divestment and our plans to launch a process for the sale of the remainder of the portfolio in Europe, we're excited to be making meaningful strides towards our objective of returning to our roots as a pure play Canadian apartment REIT.
Julian: of our portfolio, through enhancing exposure to high quality, recently constructed properties.
Julian: However, the window of opportunity to purchase at these prices is limited. Going forward, we will continue to underwrite potential strategic acquisitions for as long as that opportunity exists and it remains financially attractive, and we have a very strong and liquid financial position to support our ability to execute.
Julian: At the same time, we've been selling our underperforming, non-port and until REIT Looking ahead, we're always going to be monitoring the composition, quality and performance of our portfolio and seeking to continuously improve upon a year over year.
Julian: On slide 8 we will find a more detailed overview of our Q1 acquisition and disposition activity.
Julian: We expanded our presence in Western Canada with the purchase of two recently constructed rental apartment properties for an aggregate $98 million dollars.
Julian: Built in 2015 and 2019, these two-minute market properties are perfectly positioned for our portfolio with affordable rents averaging around $3 per square foot. On the right side of this slide, you will see what we sold. $231 million worth of older properties that no longer meet our performance criteria.
Julian: Included in this, we were pleased to transfer 717 sweet portfolio for $104 million to the City of Montreal's Affordable Housing Initiative, and we look forward to working with more nonprofit organizations in the future as a way for us to contribute to the provision of affordable housing in Canada.
Stephen: With that, I will now turn the call over to Stephen to expand further on our operational and financial results.
Stephen: Thanks Julian. On slide 10, you can see that we've improved occupancy since the previous quarter. Our Canadian total portfolio and same property residential occupancy was up to 97.9% as of March 31st, 2025.
Stephen: This demonstrates the success of our vacancy mitigation strategies, which we adjusted in response to recent shifts in market dynamics, including refining and enhancing our various marketing, incentive and retention initiatives.
Stephen: Our average monthly rent was up, reaching $1,000 and $1,677 on March 31, 2025, across all occupied apartments in Canada.
Stephen: This represents 8% growth since the prior year period, reflecting the March to Market Embedded in our large legacy portfolio that protects our rent growth profile against the effects of short-term market swings.
Stephen: Turning to slide 11, with a focus on maintaining high occupancy while optimizing rent growth, our same property offering revenues were up by 4.3% for the current quarter. However, on the expense side, property operating costs increased by 7.2% on the same property portfolio.
Stephen: Reasons for this variance include elevated R&M costs largely arising from red weather-related expenses incurred this past winter season, primarily an Ontario and Quebec, and including higher snow removal costs.
Stephen: Colder weather also drove up electricity and natural gas costs due to increased consumption which was compounded by increased natural gas prices in these two provinces.
Stephen: In addition, the quarter experience higher bad debt due to delays in regulatory processes in Ontario, as well as other factors such as rising cost of living and increased past due balances that were not cleared by prior tenants.
Stephen: We also spend more on advertising across most Canadian regions to successfully combat the market-driven increases in vacancy.
Stephen: One thing to highlight is that the savings from carbon tax on our utilities will have a positive effect in 2025 relative to 2024, effective April 1st.
Stephen: Taking everything into account, our same property NY Margin was down to 62.3% for the three months and at March 31st, 2025.
Stephen: Our diluted effortful per unit, likewise decreased by 3.9% to 58.5 cents for the first quarter due to lower NOI, predominantly from net disposition activity.
Stephen: This was partly offset by lower interest expense on credit facilities as a result of Capri having repaid borrowings using proceeds from the significant disposition activity occurring in Q4, which lowered our leverage.
Stephen: It was also partly offset by reduced overhead costs, excluding organizational costs, as well as creative trust-unit, repurchases and cancellations under our NCIP program.
Stephen: It is important to note that we maintain the same leverage on and invested properties all else equal. Our earnings would have been approximately flat as compared to Q1 of 2024. I will let Mark speak to our strategy in that regard in a minute.
Speaker Change: Just before I pass the call over, on slide 12, I want to briefly remind everyone that our debt strategy is core to our capital allocation program.
Speaker Change: We proactively manage our mortgage financing in Canada, which carry a weighted average effective interest rate of 3.2% per annum.
Speaker Change: Acquisition and operating facility as a period at plus one 5 billion of unencumbered investment properties. This is in addition to our cash reserve of over $100 million in Canada as of quarter end, which we have opportunistically reinvest it to buy back shares post period end, our low debt to <unk>.
Speaker Change: Book value of 37, 7% also allows us room to increase within our range as need be.
Mark Kenny: This conservative and flexible balance sheet, which is one of the strongest in the REIT fear supports our primary goal of boosting cash flow generation and ultimately growing unitholder returns on that note I will turn the call back over to Mark to wrap up.
Mark Kenny: Thanks Steven.
Mark Kenny: Referring to slide 14, I want to take a moment to really look at everything that is doing on a cap rate today and what that means for the future. Because the fact is there has been a lot of change recently, both internally and externally we've been working hard to build a better platform for tomorrow and then.
Mark Kenny: Hence the long term performance of our portfolio and organization, but this means that we are currently in a period of transition which comes with certain nuances that need to be navigated we're managing through this four main initiatives.
Mark Kenny: Firstly as Stephen mentioned, we've strengthened the balance sheet by paying down significant amounts outstanding under Canadian acquisition, and operating facilities and we've reduced our leverage.
Mark Kenny: Approximately 38% as of Q1 2025 down from 42% as of Q1 2024.
Mark Kenny: Secondly, with the high volume of transaction activity achieved achieved as of late and the net cash proceeds, which we received including the disposition of our entire MHC portfolio and a very large portion of our European portfolio, we've temporarily retained.
Mark Kenny: Excess cash reserve, which we then opportunistically deployed into our and CIB program.
Mark Kenny: Thirdly, we have increased exposure to recently constructed properties as we highlighted earlier these provide access to market rents both in good times and in bad which means that in periods of moderating rents, we will see a corresponding increase in turnover rates across the segment.
However, these properties also come with the benefit of very minimal capex requirements, which ultimately means theyre producing meaningfully higher economic cash flows.
Mark Kenny: Last but not least we've been managing our overhead while optimizing the cap REIT team organizational structure and culture to ensure that we're primed and ready for a new and upcoming chapter of steady growth in long term returns for unitholders. Although this is all resulting in some.
Mark Kenny: Short term turbulence, we under as we undergo this transformation the pillars of our business remains strong and the long term fundamentals of the residential rental industry in Canada are robust with this backdrop and these healthy fundamentals in view, we continue to work towards improving our operational.
Mark Kenny: <unk> and financial results through the remainder of 2025.
Mark Kenny: To conclude on slide 15, which we highlight time and time again. This is the this is all in line with our commitment to continuously strive to be the best place to live work and invest with that I would like to thank you for your time. This morning, and we would now be.
Mark Kenny: Pleased to take your questions.
Speaker Change: Thank you. Please press star followed by the number one if you'd like to ask a question and answer all your devices, Amit you'd likely participate.
Speaker Change: Our first question today comes from Jonathan <unk> with TD Cowen.
Speaker Change: Please go ahead your line is open.
Speaker Change: Thanks.
Speaker Change: Good morning.
Speaker Change: First question just on the operations.
Speaker Change: Lifts on turnover.
Speaker Change: A little lower this quarter at 7%.
Speaker Change: You guys, just lowering rents a little bit to Phil Phil a sweets, maybe give us some color on that and the trend you expect over the over the balance of the year.
Phil Phil: Yeah. Thanks, Thanks, Jonathan it's important to actually.
Phil Phil: 0.2, the benefits of our newer construction portfolio and our legacy portfolio are working quite well to offset one another.
Phil Phil: Some of the issues that we saw in the quarter had to do with the legacy portfolio, which on the surface is surprising because there is such strong mark to market rents there, but really when we took a deeper dive what we're seeing is that those leases that were put out post COVID-19, where we are.
Phil Phil: We were seeing 30% mark to market rents are the ones that are turning over now to more moderated market rents. So we view this as a relatively short runway of flushing out those exceptionally.
Phil Phil: Exceptionally high post COVID-19 rents and allowing the legacy portfolio, then to kind of give power and strength to the mark to market rents that are embedded there, but that's a very oh.
Phil Phil: Very short term effect that we think will bleed out in the next quarter or two.
Phil Phil: Okay, and then start to grow again.
Phil Phil: And in Africa, we start to grow again.
Phil Phil: Okay, and then I can only just started.
Phil Phil: Sorry to interrupt their part of the strategy as well is that in the fourth quarter. We did increase our incentive use we did do everything we could to fill the portfolio because going into the spring season, we wanted to be occupancy strong so that we could torque wrench with car.
Phil Phil: Evidence and that strategy is absolutely working were seeing good strength in that spring summer market and we feel extremely proud of how we've positioned ourselves going into it by making our occupancies are strong we definitely are looking forward to excitement in.
Phil Phil: In Q2 Q3.
Phil Phil: Okay.
Phil Phil: Secondly, just on capital allocation, you guys have lots of capital coming coming in through the E <unk> sales and selling some non core assets.
Phil Phil: That maybe need a little bit more capex.
Phil Phil: You are buying new newer assets.
Phil Phil: Talk about how the strategy fits with.
Phil Phil: Your your operational focus which has also shifted spending less on overall capex, even if it kind of hits you on the R&M side.
Phil Phil: Yes, we are.
Phil Phil: Hockey bid overall expense deflation to cap rate I am very focused on cash.
Phil Phil: Cash flow, we keep talking about cash flow the capital allocation strategy as newer constructed assets is definitely getting is there much more quickly.
Phil Phil: It may be showing up slightly on the operating side, but it's not showing up on the ongoing capex side, we've got expense deflation overall cap rate and Thats a message that we're trying to get out there of course that strategy will accelerate as we buy ourselves into the newer constructed market and we become more cash flow.
Phil Phil: <unk> sell.
Phil Phil: Self sufficient.
Phil Phil: Let Julian maybe add a little bit of color to that but we're extremely excited about how the strategy is working yes. It's worked out well so far the market dynamics have allowed us to be buying at similar cap rates to what we've been selling but with a fraction of the capex. So we're not only are we high grading it and maintaining it and why but at the same time were low.
Phil Phil: And Capex.
Phil Phil: Been fortunate that it hasnt been a hyper competitive environment on the acquisition side, which is allowing us to do something that would have been other times, it's been impossible to do so so we're going to continue to take advantage of that while the window is there.
Phil Phil: Julian has been also talked and then typically quite a bit.
Phil Phil: Quite a bit of good economic cap rates. So when we're looking at the assets that we're selling we're trying to look at the capex requirements of those assets and come up with a true economic cap rate and we're comparing those economic cap rates to the new construction assets with a capex profile that is much much more easy to look at it and see.
Phil Phil: And when comparing those two economic cap rate. There is no question in our mind that this is a positive trade.
Phil Phil: Yeah.
Speaker Change: Okay that was going to be my question. So so julian when you're saying that you're buying and selling at the same cap rate. That's that's not like at an economic cap rate you are buying.
Speaker Change: Better than all of that correct, yes, absolutely that's on a nominal cap rate, but when you look at and of course, we're targeting buildings with heavier capex profile, when you're going from a nominal cap rate in the fours to low threes or even twos and that compares to new construction properties that are nominal and economic cap rates that start with a four.
Speaker Change: It's quite a bit more attractive from our perspective, there's a whole bunch of other benefits that we layer on that I've I've talked at an AD nauseum, but it feels like.
Speaker Change: Great a great way to improve the cap REIT portfolio in this window.
Speaker Change: Okay, I will turn it back thanks guys.
Speaker Change: Our next question comes from Mike Martinez with BMO capital markets.
Speaker Change: Your line is open.
Speaker Change: Okay.
Speaker Change: Thanks.
Maybe just continuing on the economic cap rate discussion.
Speaker Change: Very clear in terms of what the tradeoffs are there, but I'm just curious given the dynamics that you see today, how do you view.
Speaker Change: I grew up profiles over the next five years of the legacy versus the stuff that you've recently bought.
Speaker Change: Yeah.
Speaker Change: Well I think we've got that perfect mix like we are.
Speaker Change: In the.
Speaker Change: Short to mid term working towards this 20% composition of new construction and again, we love the market exposure that those 20% nuclear constructed given us and we also love the freedom of the regulatory environment and the access to market rents.
Speaker Change: I said in both good times, but sometimes in that but at the heartbeat of cap rate is the legacy portfolio, which has.
Speaker Change: Mark to market embedded.
Speaker Change: Of what we believe to be close to in the mid Twenty's mid 20% range and that that will help propel cap rate as we go forward, giving a strength and steadiness in that long runway of growth that we've talked about and we're really focused on expense deflation, which we are getting.
Speaker Change: <unk> deflation is showing up in our total expenses, maybe not the operating expenses, but the total commitment of $1 out the door and that's the cash flow story and that story is working extremely extremely well.
Speaker Change: Okay.
Speaker Change: Okay. That's useful thank you.
Speaker Change: Yes, Mark you made some pretty strong comments about your confidence in Q2 and Q3 from a leasing perspective.
Speaker Change:
Speaker Change: I'm just curious.
Speaker Change: Where do you think is driving that just given the changes that we've seen on the immigration side are you seeing any changes in terms of the composition of the types of tenants moving through.
Speaker Change: <unk> still pretty elevated in certain markets. So I'm, just maybe you can give us a little bit more confidence and maybe just give us a little bit more in terms of I don't know if you have your preliminary may occupancy or what your what your rent spreads are looking like in Q2.
Speaker Change: Okay.
Speaker Change: So thanks for the question Mike in Q4.
Speaker Change: We gave pause to try to figure out what was what was happening in the marketplace. We saw a notable.
Speaker Change: Slow down across the portfolio.
Speaker Change: In traffic of visitors to the site and when we talk to peers, we talk.
Speaker Change: Significantly about weather and people just not moving because the weather was bad and he really wants to move on Christmas and all of that business, but we also started hearing a lot about Trump tariffs people were afraid to make a move with all the tariff discussion and we were also election mode in Canada, and then I'm going to say the anxiety.
Speaker Change: Level in December were certainly higher than they are today now that we have clarity. So what we did at cap rate with everything we could to make sure we run strong footing going into the spring and we utilized incentives, which have dropped off dramatically as of as of current months.
Speaker Change: And what we found ourselves in a position now of being extremely strong footing on the occupancy front, which allows us to towards rent. So what we're seeing is definitely the market has.
Speaker Change: Warmed up like the weather, we're getting a lot more traffic and we're very very confident about the outlook for the market in the short term it feels like back to normal and we're feeling quite good about that.
Speaker Change: Okay, that's really good to hear and then responsibly.
Speaker Change: I'm curious your thoughts on the recent election and now it's been fine lines do you see any implications at all from the outcome positive or negative or pretty much status quo.
Speaker Change: Well in terms of party platforms alone.
Speaker Change: We are interpreting that the liberal government is very committed to growing candidates population and we believe that that party will turn up the dial on immigration.
Speaker Change: As soon as possible as soon as there is positive signs.
Speaker Change: That's good.
Speaker Change: We definitely.
Are paying attention to the funding of nonprofit there there was a government program.
Speaker Change: Close to $1 billion initially for acquiring.
Speaker Change: For nonprofits to acquire affordable assets and income distressed neighborhoods that speaks extremely well to valuations at least in the area of the portfolio that we're looking to maximize our values arent. So those fundamentals alone or are very very positive.
Speaker Change: What we can also look to is actual starts and completion data and the outlook is very positive on our fundamental point of view for Canadian apartments coast to coast, there's very little product that will be showing up in 'twenty six 'twenty seven.
Speaker Change: Fundamentals across the board are looking very very good.
Speaker Change: For cap rate and perhaps not so great for the delivery of housing to Canada, but the government has aspirations of turning that around so we'll see.
Speaker Change: That's a that's all for me thanks, so much.
Milestone Lee: Our next question comes from milestone Lee with Jpmorgan.
Speaker Change: Please go ahead.
Milestone Lee: Thanks, Good morning, guys.
Speaker Change: Good morning, just going back to the capital allocation I think it was mentioned earlier, obviously a lot of a lot more capital coming in.
Speaker Change: How are you thinking about things is it safe for us to assume that the NCI activity could ramp up but is there a concern over.
Speaker Change: The dilution from selling and sitting with cash or is there a preference to.
Speaker Change: Being able to add to deploy capital and to the opportunity to as you see fit meaning you kind of hold the cash for a bit longer.
Well, it's a great question Kyle.
Speaker Change: We are we are opportunistic we are absolutely reserved in our underwriting we are not going to fall to the temptation of just by okay.
Speaker Change: And there is no doubt.
Speaker Change: There is a limited number of deals that meet our criteria I'll, let julian to speak more about that but the idea of buying these.
Julian: Cash flow positive assets, new construction no regulatory risk.
Speaker Change: Less reputational risk.
Speaker Change: Whole host of reasons that we've talked about why we want in that market that is the debate of what we do with our dollars. So there is no question that the most accretive use of our money is the NCI.
Speaker Change: And we're hearing investors on that.
Speaker Change: But we're trying to strike that balance for the long term buying high quality.
Speaker Change: Well purchased assets that are going to help our cash flow journey that we are fully committed to let me I'll see if Julian has any further comments on that.
Speaker Change: That's exactly right and we find ourselves in the fortunate position.
In a tough market, having significant liquidity from our capital recycling journey and working very hard to take advantage of a strong acquisition opportunities with low Capex profile, but then also taking advantage of buying back into our new and improved portfolio at effectively at a five cap.
Speaker Change: With no D D.
Speaker Change: No none of the typical transaction risk so.
Speaker Change: We're balancing between the two.
Speaker Change: Acquisitions are.
Speaker Change: It's not as competitive as the market, but at the same time we're.
Speaker Change: Negotiating and working against vendors better have higher construction costs and are struggling to sell at current market prices, but where we're staying active in where we're standing in front of them and between that and then February we've got great options in front of us.
Speaker Change: We want to keep our capacity strong.
Speaker Change: At the end of the day, Steven can speak a little bit illustrated leave he mentioned it in our presentation a bit our capacity.
Speaker Change: But our interest of growth and our interest and our ability to have the capacity to do that under the right terms is is 100% Derek talked it out because socal from a debt capacity perspective, we do have an acquisition capacity. If we went up to even if we went up to 45% LTV.
Speaker Change: But again really good assets, we can go up we can boral around $2 billion.
Speaker Change: Obviously, our credit facility is right now $200 million, but we also have an accordion of $400 million on that so if you can go right up to $600 million and that will be not.
Speaker Change: A challenge for us to go to our banks to activate that accordion. So we do have a lot of that capacity. It also.
Speaker Change: Lucid of R. R.
Speaker Change: Unencumbered assets of $1 $5 billion. So I would say, we do have a lot of dry powder. If the opportunity arises we are fully committed to growth of cap rate, but I underline accretive growth and that's what we continuously.
Speaker Change: We are seeing to investors.
Speaker Change: Julian just hasn't his desk today, I would say close to $1 billion of acquisitions of which we would probably do very little of it because they don't meet the terms that we want so we are going to be good custodians of unit holder.
Speaker Change: Our capital and we will be restrained, but this is a company that is absolutely geared for growth, but accretive growth.
Speaker Change: Okay. Thank you that's very clear and I mean, my next question you kind of hit on it a little bit there in your answer but there's been a lot more emphasis obviously on the free cash flow generation and then potentially at some point, becoming self funding I'm just curious at this point here like how how far ahead do we have to look.
Speaker Change: Before we can conceivably see cap rates being able to fund all capex distributions with internally generated cash flow based on kind of what youre doing today.
Kyle: Well thanks for the question Kyle.
Kyle: What we all live and breathe over here, so, it's a 100% factor of selling and buying selling capex distressed assets.
Kyle: And looking at getting rid of those lower economic cap rate and buying into newly construction assets with higher economic cap rate and we would like that to be a short term goal, but it is clearly a function of selling at top value in buying extremely well. So we see it as a short to mid term goal with aspiration.
Kyle: Of getting there as quickly as we possibly can but we're close we're close now.
Speaker Change: Okay. Thank you for that I will turn it back.
Speaker Change: The next question comes from Jim Wilson with RBC capital markets. Please.
Speaker Change: Please go ahead.
Speaker Change: Yeah.
Speaker Change: Thanks, just two questions on the expense side. So on the carbon tax I think it looks like you said for the next two quarters.
Speaker Change: Roughly about $5 million of savings so what would it be if you were to include Q1.
Speaker Change: Yes, I mean I guess.
Speaker Change: I can give you the last two.
Speaker Change: Trailing 12 months really maybe 2024.
Speaker Change: That was around.
Speaker Change: 6 million $6 $6 $5 million of carbon tax. So you can see that if you back into the numbers yourself there.
Speaker Change: Yeah, Okay, and then on the Opex growth for Acadia portfolio I confused if I strip out the weather related.
Speaker Change: Growth it looks like it would have been somewhere in the maybe half of that let's say half of the 6% to 7% growth.
Speaker Change: So would that be your expectation for the balance of the year. It does the pace of expense growth.
Speaker Change: On a year over year basis.
Speaker Change: Yes.
Speaker Change: I've said it back in the Q4 conference call I expect.
Speaker Change: Opex growth to be around.
Speaker Change: 5% to 7%.
Speaker Change: Obviously, it's seven presented if it was we continue to have really really poor weather, but.
Speaker Change: But I do expect the expense growth to moderate into Q2 to up to Q4.
Speaker Change: Okay.
And then last on the the promotions and incentives.
Speaker Change: You mentioned seeing a pretty dramatic falloff in spring.
Speaker Change: I'll dramatic or we've seen 4 million roughly for the quarter.
Speaker Change: We are seeing.
Speaker Change: Half of that amount quantified.
Speaker Change: Quantify that for us a little bit.
Speaker Change: Well there is.
Speaker Change: Wouldn't want to put a number on it at this point, Jimmy but I can tell you that the opportunity to use incentives has been eliminated in the majority of our buildings. So there is still an ability to tap in to get deals done in buildings that are experiencing trouble, but we have very few properties now that are suffering from acute vacancy so the.
Speaker Change: Use of incentives will be.
Speaker Change: Minimal.
Speaker Change: At best.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: The next question comes from Mike Mccormack with.
Speaker Change: Thanks Simon.
Speaker Change: Go ahead.
Speaker Change: Good morning, guys, just wanted to delve into the 7% new leasing spread a bit more and wondering I think you guys said you had some color in terms of the components of that.
Speaker Change: But can you give us a sense that maybe.
Speaker Change: Maybe how much of that was.
Speaker Change: Negative marks on some of those pandemic rents versus kind of higher.
Speaker Change: Mark to markets on legacy leases.
Speaker Change: And what kind of component of the turnover each of those make up.
Speaker Change: Yes.
Speaker Change: Well I'd answer that I'm, just looking for my glasses here, but I'm going to ask Julian says.
Speaker Change: Art.
Speaker Change: Some information.
Speaker Change: So it is interesting to see about half of that turnover now is stuff that was signed.
Speaker Change: And the last couple of years and that was that was actually on average negative so.
Speaker Change: And what's notable is the turnover rate for the leases signed within the last couple of years is remarkably high which makes sense because a lot of some of those leads now finds itself at or just above market. So it is a bit of a tale of two cities, where you have got half of the turnover coming from the recent leases negative and the other half of the turnover being.
Speaker Change: The rest of the leases, which are strongly positive and so it shows up.
Speaker Change: Again with the turnover increases in the high single digits, but as those shorter term leases that are at or just above the market get worked through.
Speaker Change: We expect it to revert to something a little bit more normal for our portfolio.
Speaker Change: With a pretty significant mark to market embedded mark to market. The good news here is that the good news Bad news story is that during during Covid since you've had remarkably low churn. So the the number of leases that are exposed to those.
Speaker Change: 30% plus mark to markets are very small in numbers.
Speaker Change: On that point do you have a sense of the.
Speaker Change: What is the remaining portion of the portfolio that would be at.
Speaker Change: Above market rents or near market rents.
Speaker Change: Because that is the key point to your story is that you've got really low turnover during.
Speaker Change: During those periods.
Speaker Change: Mhm, Yeah, exactly I mean look if you look back we were near 10% turnover for that and it was a couple of years.
Speaker Change: It was a couple of years, where that dynamic existed right. So you can kind of do your own math on that but it's not it's not a huge amount.
Speaker Change: But of course, it's going to dominate the turnover story in the very short term.
Speaker Change: Because of those dynamics I explained the good news here is that the strategy of newly construction with legacy is working perfectly because those new constructed.
Speaker Change: Assets are doing what they're supposed to view with higher churn because if we get 40 plus percent churn in new construction and rents are strong that will help. This this issue.
Speaker Change: And then the underlying legacy portfolio as we said Matt.
Speaker Change: Yes.
Speaker Change: Mid 20% Mark to market rent embedded in there so.
Speaker Change: It will work out and then the combination of being able to access market rents on high volume higher volume turnover and the very high embedded mark to market rents in the legacy portfolio are very strong fundamentals.
Speaker Change: Yes.
Speaker Change: Fair enough.
Speaker Change: Some margins and I know, there's been this kind of allocation between.
Speaker Change: Capex.
Speaker Change: Operating margin, but can you also give us a sense you've done a lot of portfolio repositioning I mean, obviously you switched all the news that's margin.
Speaker Change: Accretive, but you've also told heroes, which is fully consolidated and that was high margins and I'm not sure where MHC was so after all of kind of this portfolio churn.
Speaker Change: Net neutral at a kind of a margin impact or should we see improved operating margins at some point once all of this in time.
Matt: Well, Matt I mean, if you if we're looking at.
Matt: Same property basis on the Canadian side, I mean, I kind of spoke about.
Matt: The opex growth being 5% to 7%.
Matt: If you work on your math on the revenue side, I believe youre going to see pretty pretty flat margins for the year.
Matt: Therefore, as we go through the next couple of years, it's definitely there will be.
Matt: Margin expansion as we.
Matt: We believe revenue is going to outpace the opex growth I mean.
Matt: If you combine that on a total portfolio basis factor in the sale of E rate with higher margins.
Matt: Sale of the noncore legacy assets, which have lower margins I believe were going to be relatively flat.
Matt: There I think the ministry or the magic in the math I should say is on the MHC as an example high margins high <unk> low <unk>, but the economic cap rates back to that or we're not what we were looking for for the long term for cap rate.
Matt: Again, we're trading off economic cap rate. So we can do the margins and do a cap rate calculation on MHC portfolio.
Matt: You were potentially eating 50% of the NOI with capex expenditure or more and I would say that is exactly what we're trying to avoid likewise in the case of Derisked High high margin high margin assets, but then there is a lot of other issues with repatriating that capital on an ongoing basis and just.
Matt: Pure play focus so as we buy our way into high margin new construction asset that will have a bit of an engineered effect, if I'm going to say so yes, we're going to do it organically, but there will be a return to higher margins as we get deeper into the new construction market, but the real story, Matt that I have to keep going through his economic cap.
Matt: Again, we're trading.
Matt: Your margin buildings with a high burden of ongoing Capex what is the economic cap rate is the question that we've been asking ourselves and we want the market to fully understand this is what we're this is what we're focused on.
Matt: That absolutely makes sense I appreciate that.
Matt: Last one.
Matt: For me just again on the changing portfolio.
Matt: You've shrunk in size at this point again.
Matt: Scale up over time, but.
Matt: How should we think about G&A.
Matt: G&A in terms of kind of a quarterly run rate because I know you've done some restructuring along the way so I'm not sure where that number ultimately will settle but see tonight.
Matt: I don't know if you have that.
Matt: How we should model this year.
Matt: Yes.
Matt: We've done a lot of work over the past couple of years in terms of optimizing our teams.
Matt: There are some restructuring that occurred this year really to do with.
Matt: You know the European office that we have to close the often and also some of the.
Matt: MHC related type of G&A that we needed also to to.
Matt: Flow through in Q1, but.
Matt: Aside from that I think we're generally.
Matt: We are I would say generally we have completed.
Matt: What we've done.
Matt: On a large scale, obviously there might be some things.
Matt: Things that come in through the year, but.
Matt: Generally I would say a large lot of the large.
Matt: Restructuring has been completed so far.
Matt: The one thing I would say if youre looking at G&A as a.
Matt: Run rate.
Matt: I typically look at it as a percentage of revenues and I think it's.
Matt: You know, we've been trending downwards and Thats, what our expectation is and relative to our peers. We have been probably the only ones who have been doing that and I think that's something that we should be very proud of.
Matt: So yes, I mean, if you look at the current run rate on a full year basis for 2024 are.
Matt: Our expectation is that's probably a good expectation would obviously, excluding the severance and restructuring costs.
Matt: Yeah. So just to put it maybe more specific number on it is that kind of 5% last year.
Matt: Yeah.
Matt: But right.
Matt: Around 5% of.
Matt: Yeah, Yeah, that's right.
Matt: Going down a little.
Matt: Okay perfect. Thanks, guys.
Matt: Okay.
Speaker Change: Thank you and our next question comes from Mario <unk> with Scotia Bank. Please go ahead.
Speaker Change: Hey, good morning.
Speaker Change: I wanted to maybe stick on the Opex side, and just kind of reconciling a potential same property NOI growth and 25 relative to perhaps expectations last quarter.
Speaker Change: I think we talked about kind of four to four 5%.
Speaker Change: The expectation I E in line with long term average.
Speaker Change: The carbon tax maybe.
Speaker Change: On the 100 basis points give or take.
Speaker Change: To that all else equal are the removal of the carbon tax.
Speaker Change: So the 5% to 7% that you mentioned in terms of Opex.
Speaker Change: Just want to clarify that.
Speaker Change: Assumes no carbon talk to you the rest of the year.
Speaker Change: That one was our best of luck with the 7% was sorry, a mirror of that 5% to 7% was excluding the carbon tax benefit.
Speaker Change: What that carbon tax benefit, we'll see it come down.
Speaker Change: Now the one thing I would say is we're working really hard internally.
Speaker Change: And we're looking at all our procurement strategy sourcing to new vendors.
Speaker Change: Really making a competitive for existing vendors or even competitive competitive process on the procurement side. So we're hoping that that we're going to be at the low end of the range. Obviously that number was excluding the carbon tax benefit. So our expectation hopefully is that the opex would be much lower than what I said.
Speaker Change: We're 100% looking inside.
Speaker Change: And.
Speaker Change: All I'm Gonna see merit, there has never been so much work done on this.
In our history.
Speaker Change: And we're already seeing the benefits. So we're on the on the Opex expense side of the discussion we're feeling quite optimistic.
Speaker Change: Okay. So there's some puts and takes here, but if we just go back and think about that four to four 5% target same store NOI growth for 25 to two six.
Speaker Change: This quarter is the 4% to four and a half still a reasonable number to think about.
Speaker Change: Yes, I think it is we'd like to think that we.
Speaker Change: We can do better than that.
Speaker Change: Yeah.
Speaker Change: Perfect Okay.
Speaker Change: And then just want to clarify in terms of the accounting treatment for the incentive so let's say you provided the 1500 older incentives this quarter.
Speaker Change: That gets amortized to the revenue credits over the next 12 months or the expected lease term if it's greater than 12 months is that accurate.
Speaker Change: That is correct.
Speaker Change: Got it okay.
Speaker Change: On the comp.
Speaker Change: Okay.
Speaker Change: And the composition of the incentives I think last quarter, Mark you were talking about.
Speaker Change: <unk>.
Speaker Change: Hi.
Speaker Change: The higher recovery ratio or sorry, the closing ratio by reducing asking rents as opposed to giving a free months rent per half months grant.
Speaker Change: Similar in Q1 like every year, you focus more on reducing asking rents as opposed to giving free rent.
Speaker Change: The strategy bled into Q1 and is not the strategy today, we're absolutely focused on optimizing it.
Speaker Change: You said earlier that we've got the velocity is definitely showing up in the in the offices again and more.
Speaker Change: Moderation of rents is not on the menu.
Speaker Change: Alright, and then I'm, sorry, I was.
Speaker Change: Just referring to Q1, whether it was a similar similar strategy in Q1 and it wasn't too.
Speaker Change: It was it was a similar strategy in Q1.
Speaker Change: Okay.
Speaker Change: Last one just maybe back to you Mark when you are referring to accretive growth in terms of deploying.
Speaker Change: The substantial amount of liquidity and cash that you may have.
Speaker Change: When you define accretive growth or are you, referring to leverage neutral equal roof or something else.
Speaker Change: Well I'm I'm, just simply looking at the what the portfolio delivers and how we can grow on that those averages by acquiring new assets. So.
Speaker Change: It's always it's there's a tilt definitely on this economic cap rate free cash flow.
I'm thinking because we're trying to be realistic at the end of the day, if values do not change, which we expect that youre going to improve but we're gonna baseline that they won't.
Speaker Change: We want economic cap rates on that on the table.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Great. Okay. That's it for me thank you.
Speaker Change: Okay.
Mark Kenny: We have nice all the questions. So this concludes our Q&A session I will now pass the call back to Mark any final closing comments.
Mark Kenny: Thank you operator, 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.
Speaker Change: This concludes today's call. Thank you for joining you may now disconnect your lines.
Speaker Change: [music].