Q2 2025 Canadian Apartment Properties Real Estate Investment Trust Earnings Call

Speaker #1: Hello, everyone, and thank you for joining the Canadian Apartment Properties second quarter 2025 results conference call. My name is Lucy, and I'll be coordinating your call today.

Speaker #1: During the presentation, you can register a question by pressing staff followed by one on your telephone keypad. If you change your mind, please press staff followed by two.

Speaker #1: It is now my pleasure to hand over to your host, Nicole Dolan, Investor Relations, to begin. Please go ahead.

Speaker #2: 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 Capri, which are subject to certain risks and uncertainties.

Speaker #2: 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 Kenney, President and CEO.

Speaker #3: Thanks, Nicole. And good morning, everyone. Joining me this morning is Stephen Co, our chief financial officer, and Julian Schonfeldt, our chief investment officer. Let's get started with an update on our ievements so far in 2025.

Speaker #3: As highlighted on slide four, to date, we've sold 274 million dollars of non-core underperforming assets in Canada, with the lowest cash returns. We've completed or committed to approximately 743 million dollars of dispositions in Europe.

Speaker #3: We've reinvested $165 million of the net proceeds into the acquisition of well-located, high-performing, low-CAPEX Canadian properties. Additionally, we've reinvested $187 million into our value-enhancing NCIB program.

Speaker #3: We've also been extremely focused internally on improving our operational performance. On our Canadian same property residential portfolio, we've increased occupancies to 98.3% as of period end.

Speaker #3: Across which our average monthly rent grew by 5.2% since June 30th, 2024. We've made meaningful strides on the expense side as well. And we've been working hard to contain and reduce controllable expenditures in all areas of the business, these improvements together drove the 40 basis points expansion in our same property NOI margin to 66.3% for the second quarter 2025.

Speaker #3: Additionally, our balance sheet fundamentals remain best in class, with a low total debt to gross book value ratio of 38.5% as of the current period end.

Speaker #3: With that initial overview, I will now turn the call over to Julian to expand further on our capital allocation progress.

Speaker #4: Thanks, Mark. Turning to slide six, you will see all the work we've put in the repositioning of our portfolio, not just this year, but over the course of the past several years.

Speaker #4: We now have 16% of our portfolio represented by new generation apartments in Canada, up from only 5% as of December 31st, 2019. Over the same period, ancillary segments are down from 17% allocation to 5% as of today.

Speaker #4: Subject to the completion of all committed and pending dispositions in Europe, that exposure would go down to only 2% of our consolidated portfolio, all else held equal.

Speaker #4: In addition, as announced by European residential REIT, a sale process is launched for the balance of the portfolio with the goal of surfacing its residual value and distributing the proceeds net of wind-up costs to investors.

Speaker #4: With this progress on our European divestment strategy, we're excited to be moving much closer to our vision of returning to a pure-play Canadian apartment REIT.

Speaker #4: On slide seven, we provide a visual snapshot of our portfolio. On the top right, our recently constructed properties come with strong cash flow profiles arising from largely unregulated rents that still contain embedded mark-to-market potential on acquisition, combined with low capital expenditure requirements and operating costs.

Speaker #4: Their prime highly sought-after locations also enhance our geographical diversification and the quality of our resident base, with improved affordability, characteristics that reduce our political and reputational risks.

Speaker #4: These properties represent the ideal complement to the stable long-run rent growth trajectory produced by our core legacy assets, which still account for the majority of our total portfolio at 67% today.

Speaker #4: We're also continuing to dispose of our non-core properties, which generally have the weakest economic returns with regulated rents and low cash flow yields. This repositioning is not only improving the overall quality of the Capri portfolio, but also our income profile and net cash generation.

Speaker #4: Turning to slide eight, our NCIB also remains a key strategic tool allowing us to invest in our own portfolio and earn a stronger return over acquiring comparable assets in the private market today.

Speaker #4: In 2025, we reinvested 187 million dollars of our own net disposition proceeds to buy back Capri's trust units at a weighted average purchase price of approximately $43 per unit.

Speaker #4: This represents an average 24% discount to our diluted NAV per unit of $56, as of June 30th, 2025, demonstrating the sizable disconnect that we're arbitraging to generate higher earnings for our unit holders.

Speaker #4: With that, I will now turn over the call to Stephen to expand further on our operational and financial results.

Speaker #3: Thanks, Julian. We've been working on the recalibrating our rent optimization and vacancy mitigation strategies in response to some short-term market-driven headwinds and in doing so, we're pleased to report that our idential occupancy in Canada are up again to 98.3% as of June 30th, 2025.

Speaker #3: At the same time, occupied AMR on the total Canadian residential portfolio was up by 7.4% to 1,693 dollars as of June 30th, 2025. This not only shows sustained demand for professionally managed rental housing, but it also demonstrates our flexible and proficient operational strategy is working.

Speaker #3: Turning to slide 11, let's focus maintaining high occupancies while optimizing rent growth. Our same property offering revenues were up by 4.4% for current quarter.

Speaker #3: Furthermore, we're pleased to have successfully mitigated the magnitude of cost increases which we were seeing at the outset of the year and for the three months ended June 30th, 2025, operating costs as a percentage of operating revenues decreased versus Q2 of 2024.

Speaker #3: This was in part due to the elimination of the federal carbon tax effective April 1, 2025, which lowered overall utility costs. In addition, repairs and maintenance spending was down, resulting from more competitive procurement practices and the implementation of more rigorous cost control measures, while not compromising on quality or service standards.

Speaker #3: The result was the expansion of our NOI margin by 40 basis points to 66.3% on the same property portfolio. This organic growth contributed to the 2.6% increase in our diluted FFO per unit to 66.1 cents in the current period.

Speaker #3: However, it was the accretive trust unit repurchases and cancellations under our NCIB program which mainly drove this increase in earnings. As well as to a lesser extent, lower interest expense, partly offset by decreased NOI due to dispositions.

Speaker #3: Results for the six-month ended June 30th, 2025, are shown on slide 12. As mentioned, operating costs as a percentage of revenues were up during the first few months of 2025, and our margins are therefore down year to date, despite our strong performance in the second quarter.

Speaker #3: Combined with the loss NOI due to disposed properties partly offset by lower interest expense as well as trust unit buybacks, our diluted FFO per unit was 1.246 for the six-month ended June 30th, 2025.

Speaker #3: Turning to our financial position as summarized on slide 13, we've continued to boast one of the strongest balance sheets in our peer universe. Our total debt to gross book value ratio remains low at 38.5% as of period end, which is down considerably from 41.5% as of June 30th, 2024.

Speaker #3: We take a conservative approach to managing our mortgages with staggered renewals and fixed interest costs, and we actively adjust the maximum borrowing capacity we have available on our acquisition and operating facility in order to reduce financing fees.

Speaker #3: Most recently, on July 9th, 2025, we strategically increased capacity from 200 million to 400 million effective until September 30th, 2025, to temporarily fund acquisitions capital investments and for other general trust purposes in anticipation of incoming capital from eRES's expected special cash distribution in September 2025, associated with its upcoming dispositions.

Speaker #3: This disciplined approach to debt financing provides us with the ability to efficiently manage our portfolio while capitalizing on available market opportunities that maximize value for unit holders.

Speaker #3: On that note, I will turn the call back over to Mark to wrap up.

Speaker #4: Thanks, Stephen. The past few months have been incredibly productive across every facet of the business, and the solid results we achieved during the second quarter of 2025 underscores the success and the merits of our strategy.

Speaker #4: That strategy is focused on high-grading the quality of our Canadian portfolio, improving its operational performance, and investing in our value-enhancing NCIB. On top of these initiatives, we have one overarching priority and that is our cash flow position.

Speaker #4: As highlighted on slide 14, all of our strategic objectives are ultimately working together to boost the generation of free cash flow and bring us closer to one-day funding capital expenditures and distributions entirely through our FFO.

Speaker #4: And that, in turn, drives stronger growth in earnings for our unitholders. We are well on our way to achieving that in the near future, and we have never had a better team in place to make it happen.

Speaker #4: With that, on slide 15, I would like to thank all of our unitholders for their ongoing support. As we continue working to enhance the future of our residents, our people, and our investors, we would now be pleased to take your questions.

Speaker #1: Thank you. To ask a question, please press staff followed by one on your telephone keypad now. If you change your mind, please press staff followed by two.

Speaker #1: When preparing to ask a question, please ensure your device is unmuted locally. The first question comes from Fred Blondo of Green Street. Your line is now open.

Speaker #1: Please go ahead.

Speaker #5: Thank you, and good morning. When looking at the new supply, how do you compare Toronto, Montreal, and Vancouver over the next 18 months or so?

Speaker #5: Is it fair to say that it looks like the GTA is a bit more immune when compared to Montreal? And Vancouver, it looks a bit more risky.

Speaker #5: Is that fair to say?

Speaker #3: Yeah, it is fair. I'll give it some Capri context, Fred. The problem is the most acute in Toronto, but Capri is the least affected I'll by that supply in Toronto because it's primarily in the Toronto core, and primarily a preponderance of bachelor and one-bedroom condominiums, which we're not competing with.

Speaker #3: Capri's portfolio is extremely suburban, featuring large suites and built for affordability. I would say, secondly, we're experiencing obviously the effects of supply in Vancouver, where it's affecting us a little bit more.

Speaker #3: Because that's been a primary focus zone for Capri's new construction investment program and high grading. And we've been able, obviously, to buy some exceptional assets, albeit not in the core, but still there's competition there.

Speaker #3: And then I would probably say Montreal ranks third, but that's a market for us where, again, we've invested in high-graded assets but have a nice blend of legacy assets and where, if anything, we're quite bullish on the future there.

Speaker #3: So I think you've got a good read on the market, but that's where Capri fits today.

Speaker #5: That's totally fair. Last one for me. How long do you think landlords will have to provide incentives on new builds in those three markets, Toronto, Montreal, Vancouver?

Speaker #3: Well, I don't ink there's a playbook. At the end of the day, we are finally getting our heads around this very complicated market. And I would just start off, Fred, by saying we are in a housing crisis, but we are now more in a affordability crisis, okay?

Speaker #3: And the real driver of weakness in the housing market is not immigration, in our humble opinion. It's got more to do with unemployment and wage issues out there.

Speaker #3: So this is what the finding the fine balance is. So incentives--well, there are still being used in the marketplace, and we have to use them where we're ing.

Speaker #3: Albeit not as much, but people are reacting more to the sticker price of the unit. And when you hit that right affordability spot, we're finding a very, very deep market in Canada.

Speaker #3: So it's really now more about an overall affordability crisis in Canada, more than it is a supply issue and the impacts of immigration. We're just not seeing that.

Speaker #5: So, what would be your scenario on this affordability crisis? Do you think it will still prevail in '26? Or do you think it's longer or shorter?

Speaker #3: I think the effect of tariffs is not fully absorbed into the Canadian economy, so I don't—I'm not an economist, but we're watching closely. That's not a tailwind.

Speaker #3: I would characterize that as a headwind. But I think our portfolio is exceptionally well-positioned to deal with any sort of economic downturn. We all know that apartments thrive in economic downturns.

Speaker #3: So that would be a tailwind. I think that right now it's the market has found stability. There's good leasing activity in the summer. We think that's probably a sign of people being concerned about the housing market and that will tilt in our favor.

Speaker #3: But I would expect a sort of steady state as we go into at least the next six months, looking at any further than that is pretty much guessing.

Speaker #5: Yeah. Now, totally agree on that. Thank you for the caller. I'll turn it back.

Speaker #3: Thanks, Fred.

Speaker #1: The next question comes from Mike Marketes of BMO. Your line is now open. Please go head.

Speaker #6: Thanks, operator. I could not notice that your incentive activity, just in terms of an aggregate dollar amount, declined fairly meaningfully quarter over quarter, at least versus Q1.

Speaker #6: I was wondering if you could just comment: was that a change in strength in the market, or was it just a change in terms of how you were adjusting your actual face rents quarter over quarter?

Speaker #3: That is a great question, and we have been kind of going back to the last question, trying to find that affordability sweet spot. We're getting definite feedback that incentives on their own are not effective.

Speaker #3: Fully. And we are in situations where there's housing providers offering multiple months free rent to get traffic in the door. And we're return volume with like one free month's rent, but not in all properties.

Speaker #3: And our focus is definitely around finding occupancy stability as we go into the winter months. But the trend is positive. Like we are definitely seeing a more active market than we did in Q4, and even in Q1.

Speaker #3: And I'm feeling relatively optimistic about the stability of the market.

Speaker #6: Yeah. And I'll just say that in terms of when we looked at the incentives, there are targeted buildings and we're obviously trying to be competitive within the region or in that area.

Speaker #6: And those incentives have come down dramatically. Obviously, we have adjusted the market rent as well to reflect that. So that is why you also see occupancy coming up.

Speaker #6: So yeah, they're mainly in select target buildings across the nation, but they're coming compared to Q1.

Speaker #5: Okay. And then just last one for me before I turn it back. I guess we're in August now, and it seems like you feel like things have stabilized.

Speaker #5: I'm just giving trying to get a sense of, I guess, the early read on Q3, just how the new leasing spreads have been trajecting thus far.

Speaker #3: Yeah. Again, the word we're focusing on is stability. I would like to remind everyone that we still have the issue of COVID leases that are continuing to bleed off.

Speaker #3: And those COVID leases we're seeing neutral to negative spreads, and we're seeing extremely encouraging spreads on the non-COVID leases. But using the word, I think, stable would be the direction I would give you, Mike.

Speaker #3: I'm pleasantly surprised. We weren't sure what the effects of unemployment were going to actually be. And I think it's being offset by this concern around the state of the housing market, which is the typical first few innings of a ing shift.

Speaker #3: You see people starting to go into rental as a safe haven. So that part is good.

Speaker #5: Okay. That's useful commentary. Thanks. I'll put it back.

Speaker #3: Thanks, Mike.

Speaker #1: The next question comes from Jonathan Kelcher of TD Cowan. Your line is now open. Please go ahead.

Speaker #7: Thanks. Good morning. Just to stay with that on the lift on turnover, is it a 4.6% in the quarter? Is that when you say stable, is it like so we should sort of think about four to five percent on turns over the next few quarters?

Speaker #3: Yeah. That would be a fair assumption based on our comments.

Speaker #7: Okay, fair enough. And then secondly, just a little modeling one, but there has been a lot of noise in your G&A the last few quarters.

Speaker #7: How should we think about a run rate pulling forward there?

Speaker #3: Yeah. Jonathan, so obviously there has been some structural changes within the organization. You know we're looking at our our teams and we're trying to optimize to make sure that it's set up for success.

Speaker #3: when you look the G&A numbers, what we've done in the financials or the MD&A is we separate it between trust expenses and reorg costs.

Speaker #3: Those reorg costs are what we consider non-recurring. And hopefully, you know we won't see that. Going forward, obviously, we're still going through our structural sorry, our structural review.

Speaker #3: But we don't hope to see that going forward, at least for the next Q4 onwards. But if you're looking at it from an operating perspective, I would say what we provided is a percentage of our operating revenues. I think that around 5% is a good modeling for going forward.

Speaker #3: You know.

Speaker #4: Capri's become a smaller unit count entity, albeit the rents are higher in the new construction buildings. But we are really digging internally. You know, Julian had talked about the capital allocation change, and to match that, we are, you know, having to optimize our overhead costs.

Speaker #4: And we're being very mindful looking forward into this new stable period of slightly lower mark-to-market rents. We're going to get the overheads exactly optimized to have great stable state going forward.

Speaker #4: But we've made a lot of progress today. There is not much more to do. But yeah, we're very excited about the improvements that have been made there.

Speaker #5: Okay. That's helpful. I'll turn it back. Thanks.

Speaker #3: Thanks, Jonathan.

Speaker #1: The next question comes from Sarim Serenadas of Cormac Securities. Your line is now open.

Speaker #8: I go, Peter. Good morning, everybody. Mark just going back to your comments on incentives, affordability. How do you overlay that onto the acquisition strategy and the portunities you're seeing out there for acquisitions of trade-off between long-term opportunity and short-term cost over there?

Speaker #3: Yeah, it's a great question. So the team does we do a lot of work in due diligence around market rents. And in many cases, it is hard to determine because you may have a construction asset surrounded by no real purpose-built competition.

Speaker #3: But then we use the data comparisons that have in every market and get comfortable with where things can be at. We, of course, look at the incentives that are being offered in market and put that also into place.

Speaker #3: And in many cases, the investment team will come to an arrangement in the short term on what incentives are required. Julian, maybe you can give some color on that?

Speaker #4: Yeah. I mean, one overarching point that I'll ion, and I know Mark and Stephen and myself have mentioned this, but oftentimes these types of buildings are actually the most affordable ones because the income of the tenants in there can be quite a bit higher.

Speaker #4: So the rent increases you put on there stretch their affordability a lot less. I'll also say that when we look across the whole spectrum of potential acquisition opportunities, even looking at some of the acquisitions that we have done this year so far, I look at the Beacon, McLaren, and Mondaz. Those buildings were all buildings with rents in the $3 per square foot range, which is still quite affordable, I'd say, for new construction.

Speaker #4: And many of those actually had embedded lost to leases or gaps between in place and market rents. So we are very tactical about trying to avoid getting the micro suites that are in the $6 per foot range.

Speaker #4: It doesn't mean we don't look at everything, but again, we think that we've got good properties that are affordable to the tenants in them in AAA locations.

Speaker #4: As well as a couple of small legacy buildings that we bought in Vancouver in just exceptional, exceptional AAA locations. With rents that are also quite affordable.

Speaker #8: Now, to take it further, Julian, Mark, thank you for that. Maybe just quickly on, I think earlier in June, I guess you guys put out a small release on potential developments that you could probably see or identification in the portfolio.

Speaker #8: Is that something that could be a part of the capital allocation program?

Speaker #3: Well, I'm going to let Julian talk to that, but we were so excited about this. And I'm really glad you brought this up because I really will take every opportunity I can to better describe what's going on there.

Speaker #3: Of course, development almost has a negative connotation to it, especially in Toronto. But what the investment team and development team put together here is really exceptional, where we did this with no parking costs because we're utilizing the parking in the adjacent building.

Speaker #3: No development fees. No land cost. Wood frame. And we're doing it with political support. We have the Mayor of Mississauga applauding us for adding new supplies.

Speaker #3: We're proud to add supply for families in Canada. And it's penning out to a very, very attractive cap rate. So I don't want to steal all the thunder on this, but Julian, can give some more color around how incredibly positive that announcement really was.

Speaker #4: Yeah. It's great. We think we can build that all in, all costs total for call it around $500 per square foot, which you can't get anything new in the GTA for that cost.

Speaker #4: And it's for all those reasons, Mark mentioned, there's an incredible amount of incentives and synergies in there. We're going be doing it at an incredible NOI margin because we don't ally have any staff that we need to use.

Speaker #4: We can use them from the existing high-rise tower. You know, you don't really incremental landscaping and snow removal, those types of costs for submetering everything.

Speaker #4: So I want to say like development's not our primary business. We're not converting to a developer. We're not going to be a REIT where you're going to look at it and say, "Wow, there's that huge percentage of assets under development." This is small tuck-in stuff that's incredibly accretive.

Speaker #4: And by way, for this low-rise wood frame stuff, it's very quick and very small amount of capital in there. So given all those synergies and incentives, there's enough margin that it'd be really hard to get in trouble with that.

Speaker #4: And it helps renew the GTA portfolio because you know at point that Fares mentioned is there isn't really much purpose-built rental to acquire in GTA because it was all historically done as condos.

Speaker #4: There's a little bit that was done purpose-built rental by some owners that are were long-term owners. And so again, small, fast, low-cost, tons of margin.

Speaker #4: Just a nice, neat tuck-in and a wonderful cash-flowing property. Like getting back to the cash flow story, this, as Julian said, brings renewal to the portfolio.

Speaker #4: We will not be able to buy new construction assets that were built with pre-COVID contracts forever. We were always noting that that new construction opportunity would be a moment in time in marketplace.

Speaker #4: But we've got our eyes to better cash flow. We've our eyes on these AAA locations. And at the of the day, we are fixated on renewing the quality of the portfolio.

Speaker #4: So cash flow improvements are here to stay for the long term. So it marries in very nicely the overall arching strategy. But it really is for Capri all about AAA locations, well cash flowing properties, and high grading the quality.

Speaker #8: And that sounds really exciting, guys. And just to clarify, that $500 per square foot number is excluding all the incentives and synergies you're seeing there?

Speaker #3: The $500 is the approximate estimated cost of all the hard costs, all the soft costs, financing costs, divided by the leasable square feet. So it's all inclusive.

Speaker #3: So again, we couldn't acquire anywhere near that cost. We're estimating it's going to be north of a 6% cap rate on our costs. And by the way, that's with rents that we're saying today are sub $3 per foot.

Speaker #3: So we think we're pretty conservative in a lot of our estimates to get to that. You know, we're not the type of folks that are going to do development for a 25 or 50 basis point spread on current cap rate.

Speaker #3: We're doing this because there's a really huge margin, and just tons of reasons. And again, it's very modest in size but a great opportunity.

Speaker #4: It might be helpful, Julian, you just comment on what purpose-built rental concrete is costing developers out there today on a per square foot basis for context.

Speaker #4: In the Toronto problem.

Speaker #3: Yeah. Well, actually, I was just on the phone with a pretty prominent developer a couple of ays ago, and we were trading numbers on a few things.

Speaker #3: But he was he was telling me that one of the projects that they're writing right now, without any land value in there, the cost went dividing all the costs by the leasable square foot for concrete was in the $900 per square foot.

Speaker #3: And again, that's what that was without profit. Or without land value. Which, to be honest, you'd be building at a loss with a huge timeline, a lot of risk, and a ton of capital.

Speaker #3: And so you ow for us, we view that as completely unviable. And something we don't like. But this stuff, again, 12 to 18 months construction period, you know around 500 bucks per square foot and very little risk.

Speaker #8: That is a very good color, Julian. Mark, ank you so much. I'll turn it back.

Speaker #1: The next question comes from Kyle Stanley of Desjardins. Your line is now open. Please go head.

Speaker #5: Thanks. Morning, guys. Maybe just going back to your optimization commentary from a bit earlier. You know now that you're approaching the end on the eRES value maximization program, it seems like a lot of the heavy lifting on the capital recycling front in Canada is finished.

Speaker #5: Where does management focus efforts next to find that next leg up or that extra value to add?

Speaker #3: Yeah. It's ruthless internal optimization. At the of the day, on all fronts, like it's the team we have the best, like I said, in the commentary, we have the team that we've had.

Speaker #3: That I can remember. Operational excellence is the focus of everyday conversation. Tensions are extremely high internally because we are digging very, very deep.

Speaker #3: And this feels like the Capri of many years ago, quite frankly. We are digging right in and looking at everything. Everything is under review.

Speaker #3: And I ink what we're seeing the results, but we're very excited about how our cost structure is looking going forward. And every day is revealing more good news in terms opportunities that we can harvest.

Speaker #5: Okay. No, that makes e. Thank you for . Maybe just looking at the performance in your southwestern Ontario portfolio, it did look quite strong in the quarter with the same property up 13%.

Speaker #5: Anything specific you can call out there that's contributing?

Speaker #3: Yeah. That was there was some lower R&M cost that was, I guess, you know we're really, I ess, kind of talking to what Mark was saying, operational excellence, looking at our contracts, looking at costs, make costs containment, and even looking at our urement effectiveness strategies.

Speaker #3: We were able to manage some of the R&M costs. While we did have higher operating revenues, partly there was some AGIs that were included in there that was helpful.

Speaker #3: So that drove the performance in Q2.

Speaker #5: Okay, thank you. And then just the last one: can you comment on maybe how active you expect to be on the transaction front in the second half?

Speaker #5: And more specifically, has the level of acquisition opportunity, has that changed at all maybe over the last quarter or two? Are you seeing any changes on seller pricing expectations?

Speaker #5: Just given maybe this softer market outlook that we've been talking .

Speaker #3: It's fantastic question. I'll let Julian handle . But I want to just, again, sort of footnote, our opportunity to find new construction buildings that were built with pre-COVID contracts are obviously coming through slowing down.

Speaker #3: Not that we're doing them, but they are definitely slowing down. The team has done a phenomenal job. This whole AAA location, AAA quality, optimization, synergy is definitely something the team is looking at.

Speaker #3: But, Julian, can you comment on some of the challenges, even?

Speaker #4: Yeah. I'll first answer, Kyle, your estion on the plans for the rest of the year. We still target doing we put in there that we're targeting dispositions of 400 million dollars in the Canadian side.

Speaker #4: We're still planning on achieving that. And we think we will. As it relates to acquisitions, we're ing to try and match those proceeds, see if we can do a little bit more, particularly given the repatriation of the European capital as Mark mentioned.

Speaker #4: There are other competitors now, you know, quite active on the new construction side. There's always a bid-ask spread just given the construction cost. To the point that actually we made in the last question, the construction costs are worth more than what the buildings are worth.

Speaker #4: And so that's never a fun discussion with a vendor when you're telling them it's worth less than what they put in. We do tend to try and look at ones that were done pre-COVID.

Speaker #4: Those are around, and we're teams working hard, hunting for them. It's another point I'll actually make: I'd say for most of the acquisitions we have, it takes almost—I don’t have a stat, but probably close to a year—to make it work.

Speaker #4: And really what it ends up happening is they come to market, you underwrite it, you tell them where it's worth, don't believe it, they go and test the market out.

Speaker #4: And there's a lot of waiting and back and forthing and keeping those relationships up. And so it's a lot of work. You know the team is hard at work on it.

Speaker #4: But there is a bit of competition, so we'll keep going with it. We feel good about being able to match our dispositions this year.

Speaker #4: We're hopeful to be able to essentially do a little bit more, and we'll continue going with it. But again, we're on a mission to high-grade the portfolio.

Speaker #4: AAA locations, and you know we feel good about that. I'm ceptionally proud of the team for the discipline. And we will remain disciplined. This high grading exercise is extremely exciting, but it is being constrained by discipline.

Speaker #4: And we will continue to balance the difficult market with discipline, keeping Capri unit holder value first and foremost in mind.

Speaker #5: Okay. Thank you that. That's great color. I'll it back.

Speaker #1: The next question comes from Jimmy Shan of RBC Capital Markets. Your line is now open. Please go ahead.

Speaker #7: Thanks. I just two questions. One, just to clarify, your answer to the question on sequential declining incentives. So does that have more to do with you dropping the face rents versus you not having to provide the incentive because the market conditions?

Speaker #7: I guess that would be the first question. And then the second one is, I know the turnover rate did pick up in the quarter.

Speaker #7: How do you e that trending over next few arters?

Speaker #3: Hey, Jimmy. So yeah, yeah. To your first question, yes. It has a lot to do with the, you know we brought down the asking rents.

Speaker #3: So therefore, it made it more competitive. So therefore, yeah, you'll provide less incentives. But I guess in general, like we as I kind of pointed out, we try to be competitive around the area for our buildings.

Speaker #3: If others are offering incentives with similar market rents, then we try we obviously have to adjust. So that part is where we're looking at.

Speaker #3: Just in terms of the turnover uplifts, I'm sorry, turnover, they are increasing as market rents are you could say now more stabilized. And have declined year over year.

Speaker #3: We have seen a higher turnover, and I would say if you look at Q2, that's a fairly good projection for the rest of the year.

Speaker #4: That is the good news that we were hoping for. As rents moderate, you loosen up the churn numbers and you can actually get to a better end result.

Speaker #4: But that's healthy for the market. And we're encouraged to see that actually.

Speaker #5: So, 5% was the turnover, so you're indicating we could potentially be at a 20% run rate on an annualized basis?

Speaker #3: That's the information we have. I think that is possible. Yes.

Speaker #5: Are there any discernible trends in terms of where those turnovers are happening?

Speaker #3: Yeah. Majority of those turnovers that we know is 50% are Mark kind of touched it and Julian touched on it previously. It's on those COVID leases.

Speaker #3: There are more one under two-year leases where the rents are quite high. Obviously, relative to today's market rents. And so those tenants are taking advantage of you ow moving out and obviously getting a better rent deal.

Speaker #3: Our story too, Jimmy, is a ittle bit now becoming little bit different than our peers. In the sense that the new construction portfolio will be churning higher numbers.

Speaker #3: And those market rents that are there will adjust to market. That's the positive attribute. Those are also holding up relatively well. But I call them stable.

Speaker #3: It's really the legacy AAA locations that are fueling our growth more than the market rents on new construction. And so within the legacy portfolio, we have this COVID lease turnover phenomenon that is slowing and we think coming to an end.

Speaker #3: That will be positive for the legacy portfolio contribution.

Speaker #5: Okay. Great. Thank you.

Speaker #1: The next question comes from Matt Cornack of National Bank Financial. Your line is now open. Please go ahead.

Speaker #7: Hey, guys. Just a quick follow-up on that last thought. Do you have a sense of how many of those leases existed and kind of what proportion of them you've churned through at this point?

Speaker #7: Just trying to get a sense because the mark-to-market, I think you guys would say within your portfolio is well above what you’re getting on new leasing spreads.

Speaker #7: So I'm ying to understand the timeline at which that may be reverts back to a more normal growth rate.

Speaker #3: Correct. We're not giving it the actual numbers at this point. But I can guide you around the period of time that we were seeing mark-to-market rents in the plus 25% range.

Speaker #3: And that lasted for multiple quarters. You can look back in time and see that. And those lease expiries are shorter in duration. And those are the ones that we're working through.

Speaker #3: Now, 's a little bit complicated because we have the new construction portfolio in there. And then you have new leases, obviously, as we've ked about.

Speaker #3: Coming to market. But it's whatever. We had low churn during that high mark-to-market rent period, and that churn is not exactly—we had higher churn today.

Speaker #3: Which would reveal more legacy leases coming to market? It's a little confusing math, but it's really looking back in time. You can kind of see with short duration how long it would take to bleed out.

Speaker #7: Yeah. I mean, if I look at it, it looks like it was five quarters of that 25% to 30% range. You've had kind of two depressed levels.

Speaker #7: But with higher turnover. But I guess maybe beyond that, so maybe there are two or three more quarters left of this. But do you expect the environment coming out of this to look like 2017 to 2020, where you were getting kind of 10 to 15 percent spreads?

Speaker #7: Or are we in a kind of 2010 to 2015 where you kind low single digits in s of spreads and renewals?

Speaker #3: Without providing guidance because I can't. And you know the market is in a period of transition, definitely. But your assumption and your thought process align exactly without.

Speaker #3: Once we don't have the negative impact of COVID leases, then you will see a jump. And it won't be a market jump. It'll just be the impact of the COVID leases going out.

Speaker #3: But those I'll let Stephen provide a little bit more color as well.

Speaker #4: Yeah, Matt. When we looked at our data, we think it's kind of spoken about. 12 to 18 months will be kind of how we roll out of the COVID leases.

Speaker #4: That have you could say a negative turnover uplift. And that represents currently like 50% of our turnover are those types of leases. So it'll take a little bit of time.

Speaker #4: But to Mark's point, I mean, once we get all those COVID leases, we'd have that very strong mark-to-market embedded growth of that those longer-term leases that will then show its form.

Speaker #4: So, they're currently in there. It's just when you blend it all out, it doesn't look as strong. So, I think—and repeat, Stephen—just so that we're clear on the 12 to 18 months.

Speaker #4: That's the duration of tenancy that we would expect from those COVID leases. And then you could look at the quarters of bleed, and we haven't guided on that either.

Speaker #4: But this wasn't the first quarter to start happening. This started happening probably two or three quarters ago. And so we're working our way through that period of time.

Speaker #4: So if you thought it was five quarters of those kind of numbers, you'll see about five quarters of the bleed out.

Speaker #7: Okay. Nope. That makes e. It's logical and we'd expect it to improve. And then an area of improvement this quarter, Stephen, on the margins and I understand that you guys are focusing on costs so should expect you've had kind of two quarters of R&M, I understand the portfolio is changing, but in that, call it, mid-40s range.

Speaker #7: Is that where the back half of the year, and kind of with normal growth, what we should expect is a normal number for this portfolio, understanding that the portfolio could change?

Speaker #3: Yeah. I'll be I'll just focus on the op-ex side. I mean, that is you know what you see in Q2 is hopefully what we'll see in the rest of the quarters for 2025.

Speaker #3: We are, again, as I pointed out earlier and Mark has alluded to, looking internally for operational excellence and really, really focusing on getting the best procurement practices and being very effective with our tendering.

Speaker #3: So hopefully, we can also contain costs, viously. And therefore, you know on that other operating cost line, you'll see not as a big increase relative to prior quarters.

Speaker #5: Okay. And then I guess there hasn't

Speaker #7: Been, of course, funding increase in CapEx. So presumably, you're continuing along on keeping that spend at a relatively low number as well. Is that fair on a percentage?

Speaker #3: No. Thank you for bringing that up, Matt, because that's the strategy we've been talking to the market about is the capital allocation programs towards newer construction, low CapEx assets is definitely playing a role there.

Speaker #3: But the operational excellence is is definitely what we're focused on. And even in the CapEx number, I can let Stephen talk about some of the interesting categories to bear in mind.

Speaker #4: Yeah. So, Matt, I mean, there are some increases in CapEx, particularly in energy and conservation. So that actually has a positive impact on both from a revenue perspective if we were to either apply for an AGI or not.

Speaker #4: And also on an expense side, where you have lower energy consumption. So, this is something that I think makes the math really work well because obviously it meets and is always above our hurdle rate.

Speaker #4: So, therefore, you know we'll make those investments as necessary. So, that is the only part that I would say that you'll see a higher increase in capital expenditure.

Speaker #4: But again, they have a payback year.

Speaker #3: So if ou back that out even better, it's all Stephen Julian.

Speaker #7: Okay. Fair enough. I reciate the color there.

Speaker #1: We take our next question from Mario Sarek of Deutsche Bank. Mario, your line is now open. Please go ahead.

Speaker #7: All right. Thank you, good morning, guys. Just a couple of kind of, I guess, rapid-fire questions. Coming back to the incentives, how would you characterize the 2.6 million that you offered during the quarter?

Speaker #7: How does that compare to your internal expectations for the quarter back in May?

Speaker #3: Sorry, you saying how does it compare to I missed that word there.

Speaker #7: Yeah. Like back in early May, how was your expectation for the intensive level for the quarter relative to the 2.6 that you provided?

Speaker #3: Yeah. I think when we look at what our expectation was in May, where we have a lot of uncertainty around tariffs and market rents, I think there's a little bit more visibility and clarity around that.

Speaker #3: And we have adjusted our ket rents down. So hello? Are you Mario, still there?

Speaker #5: Yeah, 'm still here. I'm just listening to the musical intervention.

Speaker #3: Oh, I'm okay. Sorry.

Speaker #4: It looks like we're in a nightclub. Sorry, there's a ittle serious concern on. So yeah, obviously, our expectations are much lower now. In terms of where we were the incentives for are given, in Q2 and hopefully, by Q3, Q4, it'll a little bit smaller market rents have stabilized.

Speaker #3: Yeah. Sorry, we apologize. We don't know what operators are there or what's going on. We haven't got a clue. Okay, thank you, operator. I don't know what happened there.

Speaker #4: Mario, did you that answer?

Speaker #7: Yeah. I did. So just on the back of that, your occupancy is up 30 basis points sequentially to 90.2%. Capri's been higher in the past, but it's not by very much.

Speaker #7: So is there is there a target occupancy that you want to hit before you really start to kind of taper those incentives? Or are the incentives simply a function of what others are doing in the market?

Speaker #7: And do we have to wait until the spring season next year, when seasonally strong demand starts picking up again, in order for the incentives to really...?

Speaker #3: Yeah, definitely the TER is driving higher.

Speaker #4: Yeah, it's definitely the latter, Mario. Like we're not doing macro strategy, definitely. I mean, it's kind of just literally building by building and local competition more than macro competition.

Speaker #4: But I don't think we'll have to wait until the spring. We're getting a sense here just as we move month by month. We're seeing rapid change.

Speaker #4: And as Stephen said, like it's highly focused in certain properties. And so as those properties, like fully stabilize and the competition adjusts, then you could see a ick drop.

Speaker #4: The we're dropping and changing, obviously by month. But because we're amortizing incentives over 12 months, it is a burn period. And so, you know, immediate changes are kind of still with us for the next 12 months.

Speaker #4: But the trend is generally downwards. And it's so difficult at this stage to predict the state of the market given tariff discussions, impacts around that kind thing.

Speaker #4: And so, what we’re seeing is good traffic flow, good lease conversion, and a market that is definitely still alive and well. It’s literally a matter of trying to figure out the effects of rising unemployment on affordability and immigration, which is, to a lesser extent, our problem.

Speaker #4: And the fear of the housing market crisis. And that which does draw people into our into our product. So it's definitely a volatile period of time on a macro sense.

Speaker #4: But in terms of the Capri portfolio's experiencing, it's stable.

Speaker #5: Are you still seeing an occupancy uptick in July into August, or is it too early to say? And are you starting to see your asking rents stabilize or even increase a little bit in Q3 thus far?

Speaker #3: Yeah, our occupancy is in pretty good shape. It's optimal for where we would like it to be. It's the COVID lease drop-off phenomenon that we've been seeing.

Speaker #3: That will really, and again, I don't want the market to think there's some sort of rapid change in the marketplace. It's literally a matter of leaning out those plus 25% mark-to-market leases and allowing more room for the legacy rents to kind of, you know, settle in.

Speaker #3: But I think that without a change in the market, you're going to see positive outlook on that front because of the COVID lease bleed-off.

Speaker #5: Okay, last question. I know your exposure to students is relatively low, but in your kind of student-oriented buildings, do you have any initial thoughts on student demand heading into the school year relative to last year?

Speaker #3: No. We're in university markets that are in pretty good shape, with more domestic students than foreign students. And we have nothing to report of alarm there.

Speaker #3: In any sort of material way.

Speaker #5: Great. Okay. Thanks, uys.

Speaker #1: Thank you, Mario. We take our next question from Dean Wilkinson of CIBC. Your line is now open. Please go ahead.

Speaker #8: Thanks. Morning, everybody. Markus might be a bit of an esoteric question. When you look at a new Capri residence, can you give us a sense of where they're coming from?

Speaker #8: Are they coming to condos specifically for price? Or are they coming to Capri because they are now recognizing the value of a stable landlord who might not sell their unit or renovate them or something like that?

Speaker #8: Like, where are the people coming from?

Speaker #3: That's a great question. I would report no real change in the demographic of who we're seeing. As the portfolio gets newer, and the market rent buildings take a bigger position within Capri, we're obviously dealing more young professionals, high-income earner young professionals.

Speaker #3: And that's why as Julian pointed out earlier, those are the most affordable units we have in the portfolio. The markets that attract those young professionals.

Speaker #3: Those same young professionals, Dean, are in a very bizarre environment where they can't afford to buy homes. Like, our predominant buying has been in BC.

Speaker #3: But the Ontario story, to me, is incredible. The average age of a first-time home buyer now in Ontario is 40 years old. People are well into their professional careers at 40.

Speaker #3: And with no real outlook to be able to afford to buy a home, the affordability crisis and interest rate environment are keeping young people out of home ownership, which is really sad for our country.

Speaker #3: But that is why we see opportunity in that part of the market. In terms of the legacy portfolio, it's the same people. And maybe those people, like families, for the most part, and for those people, again, home ownership has come a little more scary.

Speaker #3: And it's become a little more unattainable.

Speaker #8: Okay, yeah, that helps. I know my own two young professionals are lamenting that they'll never own a home. They're happy renters. So, thanks for the color.

Speaker #8: I'll turn it back.

Speaker #4: Yeah. Thanks, Dean.

Speaker #1: We have no further questions in the queue, so I will turn back to Mark Kenney for any closing remarks.

Speaker #3: Thank you, operator. And apologies for that music interlude we had. But we got beyond that somehow. I'd like to thank everyone for your time today.

Speaker #3: And if you have any further questions, please do not hesitate to contact us at any time. Thank you, and have a great day.