Canadian Apartment Properties Real Estate Investment Trust (CARUN) Earnings Call Transcript & Summary

Good morning, and welcome to the Canadian Apartment Properties REIT Fourth Quarter and Year-end 2020 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to David Mills. Please go ahead, Mr. Mills.

Thank you, Denise. Before we begin, let me remind everyone that the following discussion may include comments that constitute forward-looking statements about expected future events and the financial and operating results of CAPREIT. Our actual results may differ materially from these forward-looking statements, as such statements are subject to certain risks and uncertainties. Discussions concerning these risk factors, the forward-looking statements and the factors and assumptions on which they are based can be found in our regulatory filings, including our annual information form and MD&A, which can be found at sedar.com. I'll now turn things over to Mr. Mark Kenney, President and Chief Executive Officer.

Thanks, David. Good morning, everyone, and thank you for joining us. Scott Cryer, our Chief Financial Officer, is also with me this morning. As we look back on 2020, I'm very proud of how our teams have responded effectively and in a timely manner to the significant challenges presented by the COVID-19 pandemic. As we've discussed over the last few quarters, with the advent of the pandemic last March, our teams began implementing programs at warp speed, aimed at ensuring that our residents and employees remain safe and healthy, preserving capital, maintaining a strong and flexible financial position, mitigating risk and generating the best operating results possible. Looking back, I believe we were successful in achieving these objectives, generating many significant achievements during this year. I'd like to touch on a few of these accomplishments this morning. The second wave of the pandemic last fall had an impact on our fourth quarter results, as you can see on Slide 5. Nevertheless, revenues were up over 8% on the same quarter last year, driven by the positive contribution from our acquisitions, increased monthly rents and continued high occupancies. NOI rose 9.5%, with NFFO up approximately 12%, generating another very conservative NFFO payout ratio of just under 60% in the quarter. Our growth also remains accretive to unitholders, with NFFO per unit up 6.2% despite the 5.4% increase in units outstanding. Turning to Slide 6. Despite the pandemic affecting our operations for most of last year, we still achieved record financial and operating performance in 2020, a testament to the skill and dedication of our people, the stability of our asset base and the resiliency of the rental residential sector in real estate in Canada. As you can see, we generated strong increases in revenues, NOI and NFFO in 2020 compared to the prior year. These record results once again demonstrated that CAPREIT can generate strong, stable and growing returns for our unitholders through both good and bad economic times. Over the last 23 years, we have built the team, the asset base and the operating platform that we believe will only accelerate this track record of performance as the pandemic eases in the future. Once again, on behalf of the Board of Trustees and all unitholders, I want to thank our people for their exceptional contribution to our performance last year, and we look forward to significant increases in our key financial benchmarks over the long term. From an operating perspective, we maintained our track record of solid performance in our stabilized portfolio, as you can see on Slide 7. Occupancies remained effectively at full levels, while net average monthly rent rose, driven by increases on turnovers and renewals. Our track record of organic growth also continues, with same-property NOI up 3.9%, while maintaining a strong NOI margin of over 65%. As you can see on Slide 8, we've experienced very stable occupancies through the pandemic. It's important to note that our vacancy at year-end is primarily related to a very small number of properties impacted the most by the pandemic, luxury properties in the downtown core locations and properties impacted by reduced student demand and lower immigration due to foreign travel restrictions. Not only is this a small number of properties, it's actually less than 10 across the majority of our portfolio. The bulk of the portfolio, the remainder, remains at near full levels. We also believe that our small vacancy rate is not reflected on the overall rental market, but the challenges of renting empty suites during the pandemic. As we emerge from this challenging time, we are confident occupancies will increase quickly to our historic near-full levels across the entire portfolio. Despite the constraints placed on us during the pandemic, we continue to generate increases on turnover and renewals, as shown on Slide 9. Clearly, turnovers are being impacted by the ability of residents to move or personally visit our properties. People just don't move around as normal during a pandemic. Still, almost 8% in the Canadian portfolio and over 9% in the Netherlands on turnovers are solid results, and we expect to return to our more traditionally high increases once the pandemic eases. Renewals have been affected by the rent increase freeze that we implemented in Canada on April 1 last year to help our residents work through these challenging times. We are now beginning to implement modest rent increases in certain markets in consultation with our residents. As Slide 10 shows, we significantly enhanced the size and scale of our Canadian property portfolio in 2020 with the purchase of another 2,847 suites and sites for $690 million. We also sold some noncore properties, including an underperforming asset in Calgary. We were also pleased to have completed the buyout of 12 of our 15 operating leases in the Greater Toronto area, as detailed on Slide 11, for a total cost of approximately $173 million. We have taken a highly opportunistic approach to our portfolio through the pandemic, and these buyouts are an excellent example. We acted on these buyouts earlier than scheduled, resulting in a 31% discount to the agreed-upon price of the properties, creating long-term value for our unitholders. Importantly, the transition to fee simple ownership for these properties adds material new financing capacity to fund our growth going forward, meaningful net asset value accretion and unlocked potential for potential new developments in the future. As we have discussed over the last few quarters, we successfully implemented many key initiatives last year to mitigate the impacts of the pandemic. As you can see on Slide 12, these programs allowed us to generate solid performance despite the many issues that we faced. The most important program began in the early days of the pandemic, with strategies to get closer to our residents, communicate with them and understand the issues that they were facing and help them stay safely in their homes, while at the same time ensuring that we collected as many of our rents as possible. Our Compassionate Care Program saw an average of 3,500 to 4,000 calls to residents each month. Despite not being able to have prospective new tenants visit our properties by moving our leasing activities online, we still generated over 2,700 new leases on average each quarter. And to facilitate more efficient rent collections, today more than 85% of our residents now pay electronically. These programs have had a lasting and positive impact on our cash flows. As of yesterday, bad debt stood at only 0.6% of revenues, while over 99% of our rents have been collected. We are very proud of these achievements and remain confident that these programs will result in stable collections moving forward. We have also made significant progress on our ESG program. This commitment is important, not only because it's the right thing to do but also because it's strong -- it's a strong business case to be made for reducing cost, attracting and retaining the best people, adopting strong governance policies and allowing us to provide innovative solutions to our market. A key element of this program is to focus on diversity and inclusion. As you can see on Slide 13, we hold an equal gender split between men and women in 2020. 52% of new employees hired were women. We also celebrate over 55 languages spoken amongst our employees, a reflection of the diverse makeup of the Canadian population and the residents that live in our communities. Additionally, we only have highly -- we have a highly multigenerational workforce. This focus on diversity helps us to better interact with and support the communities that we serve, the communities in which we live, where people work and where people are now investing. It enables us to deliver innovative approaches and solutions, both within and outside the organization. And as detailed on Slide 14, our environmental, social and governance programs are helping us reduce costs, attract and retain the best people, and ensure CAPREIT maintains strong governance policies and transparency. Our commitment to reducing our environmental footprint is enhancing the resiliency of our properties. It's building healthy communities and delivering strong returns on investment. In November, we were honored with a Green Star designation by the 2020 Global Real Estate Sustainability Benchmark program and a ranking of sixth amongst our North American real estate peers. Our employee recognition programs, courses and conferences and our career development programs continue to generate very strong engagement scores amongst our employees, while our satisfaction surveys ensure that we meet the standards and needs of our residents. We are pleased to be recognized for the seventh consecutive year in the top tier of Canada's best employers. I'll now turn things over to Scott.

Thanks, Mark. Turning to Slide 16. You can see that we are clearly in a strong financial position at year-end with a conservative debt-to-gross book value and historically high liquidity. We have $750 million of liquidity available through our credit facility and cash on hand. And in addition, we had $974 million in Canadian unencumbered properties to provide additional liquidity if ever it should be needed. In total, if we were to access all these sources of capital, we have available liquidity of approximately $1.9 billion. And even if we did this, our leverage ratio would still remain a very conservative 42%. Looking at our financings in 2020, we locked in a very low interest rate of 1.84% on our total refinancings and top-ups, and we expect we will continue to benefit from the current low interest rate environment for some time. At year-end, 99.3% of our mortgages incurred a fixed interest rate. We are also confident that debt markets and financing will remain highly available for our properties, given their stability and the strong fundamentals of the rental residential business. As of December 31, 2020, 98.7% of our properties hold CMHC-insured mortgages. At year-end, we recorded an almost $1.3 billion increase in the fair value of our property portfolio, including $600 million in fair market value gains, another strong indication of the stability of our business and the value of our properties that we bring to the unitholders. Turning to our balance sheet on Slide 17. You can see that we continue to maintain a strong and flexible financial position at year-end, with conservative leverage of 36%, strength in covered ratios, such as an almost 4x interest covered ratio. And in 2020, we continued to decrease our interest costs on our mortgage portfolio to 2.56% at a weighted average term to maturity of 5.8 years. We expect to continue this trend in 2021. Slide 18 outlines our debt strategy for 2020 and 2021. Starting in 2020, management modified its debt strategy to have longer amortization terms on its CMHC-insured mortgages, by extending the amortization period to 30 or 35 years compared to the 25 years historically used. By executing on the strategy, CAPREIT has been able to increase the amount of debt we can fund at the refinancing date and the total average debt outstanding over the term of such mortgages, thereby locking in more total debt at the current attractive long-term interest rates. Management believes this strategy will allow CAPREIT to use the CMHC top-up program in future years, which will reduce the overall CMHC cost related to premiums. In 2020, we accelerated our refinancings and acquisition financings and expect to continue to do so in 2021. CAPREIT completed $1.4 billion of total mortgages in 2020, which is approximately 30% of our total mortgage portfolio. And we expect to refinance another $850 million to $900 million in 2021 in order to lock in very low interest rates for long-term debt. With the 2020 refinancing, CAPREIT repaid the credit facility and made it available for potential future investments. Again, on Slide 19, we significantly accelerated our refinancing in 2020 compared to the prior year, and this has significantly reduced our interest costs and extended the average term to maturity. We had a total top-up of over $900 million in 2020, far exceeding the amounts provided in 2019. We have been very proactive in capitalizing on these low interest rates and will continue to do so this year, with rates coming off previous refinancings versus the current rate, all dropping straight to the bottom line. Our mortgage portfolio remains well balanced, as shown on Slide 20. And in any given year, no more than 11% of the total mortgages come due, thereby reducing risk in a rising interest rate environment. Looking ahead, our current ability to top up renewing mortgages through 2035 will provide further significant liquidity in the event of major capital needs. You can also see on this graph that we have considerable opportunity to reduce our long-term interest cost in today's attractive interest rate environment for years to come. The current 5-year and 10-year estimated rates of approximately 1.5% and 2.2% are well below expiring mortgage rates of between 3.1% and 3.3% over the next 3 or 4 years. Turning to Slide 21. Our European exposure is managed by utilizing a number of different tactics with very favorable impacts, including obtaining local euro third-party mortgages at very favorable interest rates and entering into cross-currency swaps on our local debt. Our European assets are currently 81% hedged using euro debt and cross-currency swaps. Swaps are now staggered between 1 to 5 years to take advantage of the low swap rates and make sure that they continue long into the future. In total, $676 million of Canadian debt is currently swapped with euro debt, with all-in effective rates between 24 basis points and 80 basis points, depending on the assumed mortgage term. As such, we have locked in significant interest savings while hedging European exposure. A key reason for our prime focus on the Canadian residential sector is the attractive spread between cap rates and interest rates. As you can see on Slide 2020 -- or 22, historically, there have been very strong spreads over the last 3 to 4 years. With forecast for interest rates to remain low for the foreseeable future, we are now seeing quite high overall spreads of between 200 and 250 basis points. Clearly, spreads are lower in key markets like Toronto and Vancouver, but there is still good accretive deal flow available to us, and we continue to evaluate and act on the opportunity to acquire properties in our target markets. I'll now turn things over to Mark to wrap up.

Thanks, Scott. Looking back over the past few months, as I've said in the presentation, I'm extremely proud of our teams and how they've responded to the COVID-19 pandemic. Our continuing growth and solid performance is a testament to our resiliency and ability to quickly and effectively adapt to these challenges. I can't thank our team enough for their efforts, their professionalism and their dedication. Looking ahead, I'm confident that the programs that we've put in place will continue to generate strong and stable performance in the coming months and will contribute to even stronger growth as the pandemic eases. A key factor in our success has been our focused asset allocation strategy, as detailed on Slide 24. On the apartment side, we continue to generate and target, I should say, value-add properties in the mid-tier segment. These properties are acquired at well under 50% of replacement cost. We have proven our ability to invest in them to increase value, and their stability is driven by their very affordable rental rates. We also continue to like the MHC sector, a highly stable, low-risk business with very strong potential to increase cash flows. Revenues are highly stable, and with residents owning their own homes, capital requirements and maintenance needs are significantly reduced. MHC properties also provide another level of diversification within our portfolio, allowing us to enter more rural and smaller markets than a residential focus on large urban regions. Our European presence is driving significant and growing dividend and fee income. Dividends in 2020 from ERES and IRES totaled $32.9 million, while our fee income for property management services increased 5.2% to $22.1 million. As the only professionally managed operating platform in Europe, the opportunities for further growth and enhanced value are significant. However, we will target our exposure to European markets and keep our exposure to Europe at approximately 15%. Another key attribute of our growing property portfolio is our focus on Canada's 3 largest and most vibrant rental markets, Toronto, Montreal and Vancouver. As you can see on Slide 25, in addition to offering quality rental accommodation in these high-demand markets, our rents constitute a very manageable percentage of total disposable income for our residents. Our rental rates are between $1.50 and $2 per square foot, are clearly affordable they are to be compared to other rental alternatives that are much more expensive. For example, Toronto, rents for new build and condo rentals are going upwards of $3 to $5 a foot. This clearly makes our product attractive to the mass mid-tier market. Quality properties and more space at affordable rents, this is the CAPREIT value proposition. True to this value proposition, our main growth focus going forward is on the mid-tier segment in suburban markets that offer size and affordability. With these mid-tier properties, we are providing quality suites at rates around $1.75 per square foot, far below the suburban average. Our apartment properties contain mainly 2-bedroom homes, space that is seeing strong demand. We are also the largest owner of townhome rental properties and the second largest owner of manufactured housing communities in Canada. Renters today want more space, and our properties provide a range of affordable options for them. Our recent acquisition in Halifax is a key example. These brand-new properties around the downtown core contain many 2 and 3-bedroom suites with lots of living space, and they rent for an average of only $1.20 per square foot. Again, value is being created by offering quality rental suites with more space at affordable rates. We continue to target these fundamentals going forward. Further to this point, you can see on Slide 27 that our residential suite portfolio is predominantly positioned in suburban markets around Canada's 3 largest cities. Our presence in downtown cores is minimal. For example, you can see in the GTA that approximately 22% of our total portfolio is located in suburban GTA markets, with only 5% of the portfolio being located downtown. Looking ahead, we will continue to build on our presence in more suburban markets or in nearby population centers with short commutes. We believe the affordability of our suites as well as its geographical allocation will continue to experience strong demand after the pandemic. In summary, looking ahead, we are very excited about our opportunities for further growth and enhanced unitholder value. Our focus on the mid-tier sector would see increased demand for affordable, high-quality homes. Our predominantly suburban locations outside downtown cores and our larger-sized suites, townhomes and MHC sites are meeting the needs for renters seeking more space. We are experiencing a strong pipeline of accretive acquisition opportunity and expect to see solid portfolio growth in the quarters ahead. The continuing low interest rate environment provides significant opportunities to acquire properties with strong cap rate spreads and to reduced interest costs on our refinancing initiatives. And most importantly, as our markets return to more normal conditions, we are confident we will see another year of record performance in 2021 and going forward. Thank you for your attention this morning, and we'd now be pleased to take any questions that you may have.

[Operator Instructions] Your first question comes from Dean Wilkinson with CIBC.

Mark, can you talk a little bit about sort of market rents and that 20% differential. I mean market rent is a bit of a nebulous term. Can you remind us what goes into your assessment of that 20% gap?

Yes. So in our case, when we look at our in-place rents versus what we surveyed to be the opportunity in the market, that's clearly the gap. How we do that, Dean, is we're constantly ranking our quality of offering versus the quality of offerings of buildings in the immediate location, and we price ourselves accordingly, okay? So for the #3 quality offering in competition for the local area, because apartments are a local business, we want to strive for being at least that rent level or higher, and constantly updated on a monthly basis.

So how should we think about -- I guess COVID kind of put us all on our heads in 2020. And your mark on turns was 8% versus the 20%. And I guess, in 2019, it was more in the mid-teens. What should we be thinking about for 2021? Is it going to be more of a self-regulating year around bumps on turns and maybe 2022 is more back to sort of that normal year that we would have saw sort of pre-pandemic?

Yes. I'll give you a very qualified answer because it's completely correlated to the vaccine rollout and the easing of the pandemic, okay? I wouldn't call anything that you see in the numbers a strong trend at this point other than the strong results you're seeing from us. But I wouldn't read too much into rent, and I'll tell you why. As we've all gone through this pandemic, and I mean all the apartment community has gone through it, we've really struggled to find -- how to find residents when there are no residents there for certain situations. So I call it -- like we've been fighting on lowering rents, incentives and improvements. The reality is people just aren't moving. They're staying at home. There's been this massive household consolidation going on, okay? We don't know the numbers, Dean, but there's more kids living with their mom and dads right now than ever before in Canadian history. And that's not a trend either, okay?

God, I hope not.

We believe that in -- and September is a magic month, okay, or as we get closer to September. And the reason why is that's when the government is calling for a vaccine rollout to be substantially complete, and that's when there's a return to school and that's when we believe things will start to get back to normal. I believe that, that marks the beginning of what we're going to see in terms of new trend. So if everything stays the way we think it's going to stay today, and it could move around, I think we could see back-to-normal rents probably in Q4 of this year and most likely Q1 of next. And what I'm talking about, like pre-pandemic rent levels if not higher. And the reason I say that, again, strange effects are going on in the marketplace. We've seen home value prices surge, so the affordability for home ownership has actually grown significantly during this pandemic because you've seen even further acceleration in home price valuations and a decrease in rents. So the gap is the largest gap we've ever witnessed.

And Dean, just to bridge the gap between, let's say, last year being 2019 at 13% or 14% on turnover versus 20% for the portfolio, we do see that the higher the gap between market and in-place rent, the less likely people are to leave. So we actually have more built up demand in older leases that are higher mark-to-market. So that's kind of -- that bridges the gap between our turnovers and our mark-to-market.

Yes. No, that does truly make sense. And then my second question, and it might not be one that you can answer. I guess there has been some growing concern around just the veracity of these new variants. Do you have an ability to track the incidences of positive case counts in your buildings? And have there been any sort of outbreaks or anything? Or is that just -- is that something that's maybe a little too invasive to track?

No, no, no. No, it's -- we have the ability to track it. We don't have the information. It's tracked by public health, okay? So for privacy reasons, we don't know what's going on. But public health guidelines across the country are basically the same. When declaring an outbreak in an apartment building, there has to be more than 3 cases. And we've only had 2 of those that breached 3, and very short-lived. People went into quarantine and it was fine. So we do know, but we only know through public health. And the incidence of outbreak has been virtually nonexistent.

Okay. Fair enough.

I'm sure we had more flu cases in the past. We certainly aren't aware of any deaths.

Your next question comes from Lorne Kalmar with TD Securities.

On vacancy, you guys are still doing pretty well. But what are your thoughts on sort of letting it drift a little bit higher over the course of the pandemic? And at what point would you start pushing occupancy?

Well, it's a little bit of science and a little bit of art. Because if you play the vacancy game too soon, you can really get behind and it's very, very hard to catch up, okay? And in the context of the pandemic, if the return to normal is expected to be September and that isn't quite right, then you've lost your leasing season because you get low lease velocity in January. So you've really only got fourth quarter to make up all the ground you've lost with accumulating vacancy, okay? So I -- my mind has changed on this because I'm the one that's been saying don't call a trend. It's not a trend, it's a pandemic effect. And I believe that wholeheartedly. So when it comes to holding out for value, we'll be more inclined to do that over the second and third quarter because our numbers aren't too bad and we don't have that many properties that need to catch up. And I really feel confident in the case of CAPREIT. If you look at the 10 buildings that we've got trouble in, the majority of those are student university-focused buildings, and they will fill up quickly. So we will hold off on value offering on those for sure.

Okay. Yes, you painted a pretty compelling picture of what you guys are expecting in September. Maybe just switching gears to acquisitions. Are there any other big portfolios out there that are in your wheelhouse?

There are. We'll be -- we'll remain restrained on value and what we pay. We've got a very refined, sophisticated acquisition department, the team does a great job, and we'll stick to our modeling. The market will determine what the market will pay always, but I'm never upset when we lose a deal. It's just validation that we're sticking to our disciplined approach.

Okay. And are there any markets where you're really seeing more opportunities than others?

I would say what the pandemic has taught us and moved our mind to is space. And so probably that the result in -- continued focus on suburbs, as I said in the presentation, and some open mindedness to smaller markets. And by smaller markets, I mean plus-200,000 population markets. We've seen how incredibly resilient those markets have been in the pandemic. And I think that if people have more flex work option, they'll be more likely to move themselves into those markets.

Sure. And then just one last one from me. Have you guys seen any increase in demand in the townhomes and MHC sites as a result of the pandemic, or a sustained increase, I guess?

Totally sustained.

Your next question comes from Matt Logan with RBC Capital Markets.

Mark, maybe just following up on Lorne's question. When you talk about acquisition opportunities in smaller markets, can you give us a sense for which markets you might be considering? Like would those be in Ontario, Québec or across the country?

Yes. We've been pretty open. We like the Ottawa market as an example. It's pretty much -- take any market across Canada that's got a population of, call it, 200,000 people, and we would just look to see what the opportunities are in those markets in terms of supply growth and demand.

And in terms of acquisition volume, would it be fair to say you're targeting something in line with what we've seen in 2020, or perhaps a bit more?

Yes. I think that's fair. Like we really have this like disciplined approach to valuation and bid in the market, and what happens, happens. So what's been consistently revealing itself is that we're successful about 5% of the time. And if we continue to be successful 5% of the time, given 300 deals of underwriting last year, we'll probably see ourselves in the same kind of space of acquisition. It wouldn't be unreasonable to assume $400 million to $800 million of acquisitions, but it's really hard to say.

Well, what you're doing certainly seems to be working. And maybe just changing gears to your letter to unitholders, you had talked about some growth opportunities in your MHC business to increase revenues. Could you give us some color on what that might entail?

Well, what the pandemic has also taught us is that the whole topic of affordable home ownership is on the minds of every government pretty much everywhere. So we know that the MHC market offers a very affordable homeownership option for people. And so it's our intention to build on the development and intensification, I should say, of our existing MHC sites and look to get into developing new MHC sites. It's the one area of development that I believe is underserviced and underappreciated, and it's an area that we have high expertise in.

Great color. And maybe a question for Scott in terms of the fair value marks in the quarter. Can you talk a little bit about what drove the higher normalized NOI assumptions? And where you're seeing the most cap rate compression in your portfolio?

Yes, for sure. I mean I think realistically, we came into Q1 with some very strong cap rate compression, and we are cautious on that. And obviously, in underwriting valuations in Q2 and Q3, we are, again, very cautious on what we were projecting from a stabilized NOI point of view. So I think really it's reflective in Q4 of more confidence, having been in this for a year, that maybe our underwriting on the NOI side was too conservative. And then the cap rates that -- I mean we continue to see incredible cap rate compression. I wouldn't say -- I would say we think it's going to continue. Obviously, the interest rate environment is a huge driver of that as well as the asset class, which is showing its resilience. So Q4 -- the majority of it for the year was a cap rate compression, but it was about 2/3 cap rate compression and about 1/3 stabilized NOI impact. As far as where the compression is greatest, definitely kind of the GTA and Ontario market would probably be where we saw the strongest compression.

That's great color. And maybe one more from me, and I'll turn it back. We're about 2 months into 2021. Has there been any material improvement or deterioration in the rental markets so far this year?

I would say, moderate deterioration. It's directly related to case count is all I can say, but it's not as severe as case count. So we can see that our traffic obviously slows down with case count, increases and improves when case count drops off. The second wave has been faster and probably just a far more quiet market because it was built on top of the slowest quarter of renting in the year, first quarter. So I'm expecting an improvement in Q2. But all of this is in the context and backdrop of CAPREIT's incredibly strong results. Like we're still, as I said in the presentation, bad debt at year-end stood at 0.6% and vacancies are obviously strong and still achieving [ these ] increases on turnover.

Your next question comes from Mario Saric with -- sorry, please state you company name.

All right. Scotiabank. Just a couple of follow-on questions. Maybe first off, on the 20% mark-to-market. It's probably hard to quantify, but within that number, what would you estimate would be the required kind of CapEx spend per suite to get that 20%? Or are you saying that 20% is simply the gap to market rent as the condition of the unit stands today?

I'd just go to traditional numbers, Mario. [ Do with ] the pre-pandemic spend on in-suite. I would apply those kind of assumptions as being the normalized way of getting at that mark-to-market. The mark-to-market is just a very difficult number right now because we believe that the market isn't truly indicative of what the market is because of the pandemic. And this is why I keep saying be very careful about looking at trend. There's the difference between pandemic effect and trend. And I think in the case of CAPREIT, you'll see a very, very fast reversal, which, again, it won't reverse with the trajectory of that change forever. It's just the end of the pandemic effect will result in a very quick normalization.

Okay. And I recognize that the student population in your portfolio as well, you mentioned roughly about 10 buildings. But I do think that one of the reasons why multifamily, yourselves included, may have -- there's been a little bit of pressure recently in terms of unit prices, the market uncertainty with respect to the vaccine rollout efficiency that the prime minister has laid out. You mentioned kind of September being the target date for the government. September is also the start of the new school year. So just maybe a couple of points here, a couple of questions. Number one, within your portfolio of international students, when they do come into the country for the school year, is it typically well in advance of September? Or do you typically see them come in kind of August, start of September?

It would be August. We'll have -- end of July, first week of August, we'll know exactly where we're at with the situation.

And your view...

I can't -- sorry, I can't say it enough. Like first of all, we've got 10 buildings. So in CAPREIT's case, we're talking about 6 to -- you could argue 8 because buildings that are just in the downtown core always have students, but 6 that are direct. And we're talking about 700,000 foreign students returning to the country. And then unlimited, we don't know -- sorry, you can't -- not unlimited, we can't quantify the double cohort effect of kids that didn't go to university that did courses online last year that are going to reenroll this year. And then the biggest one, by far, is the household consolidation line. And maybe I'm using the wrong words, just kids living at home with mom and dad that are not going to stay there. And anecdotally, I think we all have friends that have teenager, 20s or early 30 kids at home right now that aren't looking to stay and they're only home for safety reasons. And that release of consolidation of households, I think, is going to be profound. The other -- even though we're not core-core, I very much am of the belief that you'll see a really pronounced recovery in the core across the country once it's safe to live there. I mean the cities have become anti-lifestyle when cities have grown and urbanized because of their lifestyle offering. So the exact reasons why young people live in the big cities has become the exact reason you don't want to be there because of the deadly pandemic effect, anti-lifestyle.

Yes. I appreciate that. So when -- I guess the catalyst is really when the universities and colleges kind of determine when in-person classes will commence. Like in your view, do you -- like do you view that as the government hitting their targeted vaccination program, is that sufficient for universities to commence in-person classes in September? Or any thoughts on when we might get clarity on that front.

Yes. I -- like this is unconfirmed, it could be checked. Universities are starting to announce now in-class learning. And I could have this wrong, but I was told yesterday, McGill was either about to announce or had announced the return to in-class in September, and that's a positive sign at this early stage. I think we'll get real good clarity at the universities in the next quarter.

Perfect. I mean that's [indiscernible]. Maybe shifting -- just one quick question on the MHC discussion. Do you have a broad kind of sense in terms of timeline with respect to potentially kind of formulating your MHC strategy over the next like 3 to 5 years?

Yes. So what we will be doing, what CAPREIT has been doing has been adding somewhere in the neighborhood of 50 to 70 homes per year to our existing MHC portfolio by in-fill. What we are doing, hopefully in the spring, it's all permit pending on our existing lands, is looking at developing out -- intensifying the development on 4 locations. I'm hoping that gives us an additional 100 homes. And we're actively trying to understand the zoning process. That's the single biggest stumbling block to rolling out affordable ownership in Canada, is finding land that we can have zoned for this use. But politically, the people we've been engaging with has had a remarkably positive response. And so we're hopeful. We've got a track record of doing it, plus we're the second largest in Canada, and there's been very little MHC development in this country for decades. And I think there's plenty of room for capacity.

Right. So would it be fair to say unlikely a 2021 event, but also unlikely something that you have to wait for 5 years more in terms of...

Yes. It won't be 5 years, but we hope to give examples and evidence of our ability to develop these communities in 2021. That's my hope, to get some actual intensification going on in our existing sites.

Okay. My last question is just on the distribution. So in the -- I believe in 2019, you announced the distribution increase with Q4 results. The pandemic, obviously, took over 2020. In the past, you've announced distribution increases as part of the AGM more often than with Q4 results. I'm just curious in terms of what the Board thought process is on the distribution and whether it's simply a timing issue or whether it's kind of a wait-and-see approach in terms of how '21 transpires.

Yes. We're incredibly proud of the fact that not only are we lowering guidance on our distribution range, we've now moved it from 60% to 70%. We're touching the bottom of that range, as I said in the presentation. And the Board feels very comfortable that we're moving in that direction. It's great stability. We are going into a second wave. We're moving with caution, obviously, when these kind of decisions are made. But it's clear that we have the capacity to consider that option.