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

Good morning, and welcome to today's Canadian Apartment Properties Conference Call. My name is Bailey, and I will be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host, David Mills. David, Please go ahead.

Thank you, operator, hardly the host. But 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 CAPREIT's regulatory filings, including our annual information form and MD&A, which can be obtained at sedar.com. I'll now turn things over to Mr. Mark Kenney, President and CEO.

Thanks, David. Good morning, everyone, and thank you for joining us. Scott Cryer, our Chief Financial Officer, is also with me this morning. While we are pleased with our performance in the fourth quarter, we did experience certain increased costs that led to a smaller-than-expected increase to our quarterly NFFO. The key change was an acceleration of repair and maintenance costs in the quarter as we started to play catch up after 2 years of reduced spending due to COVID-related restrictions on our property activities and increasing interest expense on the acceleration of CMHC mortgage amortization. NFFO per unit was impacted by the 1.8% increase in the number of units outstanding in the quarter. The unexpected increase in omicron case loads across the country also led to increased uncertainty in some of our markets. However, we believe we are now working our way through this situation. Having said this, revenues were up almost 7%, driven by the contribution from our acquisitions, increased monthly rents and continuing high occupancies, driving a 3% increase in our NOI. Turning to Slide 5. We booked another solid year in 2021. All of our key benchmarks were up, including revenues, NOI and NFFO and we continue to generate solid and accretive growth for our unitholders. It is also important to note that we have experienced very few collection issues through the pandemic. To date, we have collected over 99% of our rents as we work with our residents to understand their issues and ensure we collect on a timely basis. Our payout ratio remained stable despite the significant 5% increase in monthly cash distributions last September. Our strong performance through the pandemic allowed us to increase our distributions while maintaining a very conservative payout ratio. Looking ahead, we expect to see further increases in occupancies, accelerated growth, and much improved operating performance as we work our way out of the omicron pandemic and gradually return to more normal markets and operations. From an operating perspective, our ability to generate solid performance in both good and bad times is clearly demonstrated by the results from our stabilized portfolio. As you can see on Slide 6, occupancies improved again in the fourth quarter, while net average monthly rents continue to increase. Our leasing and marketing programs continue to generate increasing occupancies, as you can see on Slide 7. After 2 years of operating under significant pandemic restrictions, our occupancy has remained highly stable, rising to over 98% at year-end. You can also see that our bad debt as a percentage of total revenues have remained low throughout the pandemic. While we did experience some issues with our commercial portfolio last year due to the pandemic, the residential portfolio continues to track its historic low level of bad debt. A key factor in our ability to generate solid returns during the pandemic is the solid increase in rents on turnover we are achieving, as shown on Slide 8. Clearly, turnovers continued to be impacted by the ability of residents to move or personally visit our properties. However, an almost 6% increase on turnover in the Canadian portfolio is a solid result, with rent increases moving higher sequentially through each quarter in 2021. It is also important to note that our churn is increasing up to 22% from 19% last year, a good sign that we should see more mark-to-market rent increases in the quarters ahead. Our increasing churn rate, up significantly from pre-pandemic periods, speaks well for our ability to achieve higher mark-to-market rent increases going forward. Renewals continue to be affected by the rent increased freezes legislated in Ontario, British Columbia, and other regions. But looking ahead, we are pleased to see Ontario's 2022 guideline increase of 1.2% and 1.5% in British Columbia. CAPREIT has served notice to over 45% of Canadian tenants across the weighted average rental increase was 1.3% effective January 1, 2022, capturing a full year of increased income. As of year-end, Ontario and BC represented approximately 56% of our total NOI. Nova Scotia has cap rent decreases at 2% for apartments and 1% for MHCs in 2022, and we will be monitoring how we can implement these increases through 2022. As mentioned, we experienced a solid and positive trend in rent increases on turnover each quarter since we bottomed out at the height of the pandemic in Q1 last year, as shown on Slide 9. With churn also rising beyond pre-pandemic levels, the lower turnover numbers in Q4 is normal. As you can see in the past, few families want to relocate during the holiday season. Looking ahead, we are experiencing more in-person and online visits and expect we will start to see more higher mark-to-market increases in the quarters ahead, moving us towards the higher levels of increase we generated prior to when the pandemic set in. Through most of the last 2 years, our ability to invest in our properties was also significantly curtailed by the pandemic and our focus on conserving cash. Through the latter months of 2021, we ramped up our efforts to further enhance the value and income-producing potential of our property portfolio. As you can see on Slide 10, we targeted in-suite and common area improvements last year, ensuring our properties remain the most attractive in our markets and provide residents with safe and comfortable homes. Our investment in energy-saving initiatives is also reducing costs and helping us improve our environmental footprint, a key goal of our ESG program. All of these key investments serve to increase NOI more quickly compared to other investment categories. Turning to Slide 11. We continue to increase the size and scale of our property portfolio. Through 2021, we acquired 3,744 suites and sites, the majority in our key GTA and BC markets. Our acquisition pipeline remains strong and robust. And despite cap rate compression, we expect to generate further accretive growth portfolio in the quarters ahead. We also sold 593 noncore suites for $143 million, the majority in the GTA, where we are achieving very strong returns selling to experienced property developers wanting to develop downtown locations. We continue to evaluate our total portfolio to assess whether recycling certain capital will contribute to more accretive growth. I'll now turn things over to Scott for his financial review.

Thank you, Mark, and good morning. As you can see on Slide 13, our balance sheet and financial position remains strong and flexible at year-end with a conservative debt to gross book value and continuing high liquidity. Our $1.2 billion in Canadian unencumbered properties, which includes $615 million of MHC property, provide additional liquidity should it be needed to grow. In addition, we had $458 million available in cash and on our credit facility at year-end. Looking at our financing last year, we locked in a very low interest rate of under 2.2% on our refinancings and top-ups in 2021 and extended our term to maturity. We expect to finance a total of $1.1 billion in mortgages and top-ups in 2022. Importantly, at year-end, over 99% of our mortgage portfolio incurred a fixed interest rate, protecting us from potential future interest rate increases. In total, if we were to access all these sources of capital, we have available liquidity of approximately $1.2 billion at year-end. And even if utilized, our leverage ratio would still remain a very conservative 40%. We were also pleased to see another significant increase in the fair value of our property portfolio, increasing by just over $1 billion in 2021, following a $596 million increase in 2020. As you can see on Slide 14, we have capitalized on the low interest rate environment over the last few years, reducing interest costs in Canada and extending the term to maturity. The ability to capture strong spreads and low interest costs in the Netherlands is also contributing to our overall lower interest costs and extending the term. And as I mentioned, over 99% of our mortgage portfolio incurs a fixed interest rate. We continue to monitor the interest rate environment for any opportunities to prepay mortgages and to hedge against rising interest rates. As of today, we have locked approximately 35% of our 2022 maturity mortgages at a 2.9% interest rate, mitigating against the expected rise in interest rates throughout the year. By April of this year, we will have locked close to 60% of our total mortgage portfolio over the last 2.25 years at an average rate of 2.34% and a 9-year term. Further to our strong and flexible financial position, looking back over the last few years, you can see on Slide 15 that we have met our goal of maintaining very conservative debt and coverage ratios, even through the pandemic. This conservative approach underpins the stability and resiliency of our business and the stability of our monthly cash distributions to unitholders. This focus on maintaining one of the strongest balance sheets in our business will continue going forward. Our mortgage portfolio remains well balanced, as shown on Slide 16. As you can see, in any year, no more than 15% 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 2036 will provide further significant liquidity in the event that pandemic lasts longer than we hope. You can also see that we have many opportunities to reduce our long-term interest costs. The current 5- and 10-year estimate rate of approximately 2.6 to 3.1 are below expiring mortgage rates of between 2.6 and 3.4 over the next 3 or 4 years. We also believe we're in a strong position despite forecast for interest rate increases this year and going forward. I'll turn things back to Mark to wrap up.

Thanks, Scott. At CAPREIT, we are committed to fully integrated strategy, enhance our environmental, social and government performance. These initiatives contribute to our mission to be the best place to work, live, and invest. Our ESG objectives, as outlined on Slide 18 reflect our understanding the evolving global market has introduced new risk factors and opportunities for value creation. Our integrated ESG strategy helps us proactively address these risks. Our investments extend beyond managing our buildings to include the people we employ, the residents we have and the suppliers we engage and the communities in which we operate. Through these strategic alignments, we believe we will generate enhanced returns for our unitholders while making meaningful contribution to our communities and the environment. Our ESG objectives continue to evolve and undergo constant review and assessment, all integrated with our operating plans, assuring we achieved the highest levels of ESG benchmarks over time. A key initiative is our comprehensive ESG checklist that we use to evaluate potential acquisitions as detailed on Slide 19. All opportunities are evaluated on current and potential risk factors related to environmental performance, including energy consumption and our ability to implement suite metering, energy-efficient light and water usage, waste, recycling programs, among other factors. We also examine ways we can enhance resident engagement and resident safety systems. In addition, we look at working conditions within the property, in line with our goal to attract and retain the best people in our business. All of these criteria are aimed at linking our ESG goals to creating increased value for our unitholders. In 2021, we achieved a number of key accomplishments as outlined on Slide 20, a testament to our commitment to our ESG strategies. Once again, for the 8th year running, we were ranked in the top tier of the best employers in Canada with a very strong score on diversity and employee engagement. Late in the year, we received a BOMA award for innovation, reflecting our goal to enhance the value of our asset base. We received the award for Habitat, our state-of-the-art property-wide building automation systems that results in enhanced comfort for our residents while conserving energy, lowering operating costs, and driving sustainability. We are also proud the drivers -- my apologies, the diverse nature of our employee base, including by gender and ethnic background reflects our markets and the overall Canadian population. This commitment to diversity helps us understand and address issues and concerns among our communities and our resident base. We are excited to issue our next ESG report in May, outlining all of our successes over last year. Looking ahead, we see a number of very positive value drivers that we are confident will generate strong and growing returns for our unitholders over both the short and the long term. We will continue to focus on our proven asset allocation strategy as detailed on Slide 22. We primarily target value-add apartment properties in the mid-tier segment in well-located suburban markets in and around Canada's 3 largest cities: Toronto, Vancouver, and Montreal. We are acquiring these properties at under 50% of replacement cost and have proven our ability to invest in them to increase value. Cash flows remain strong and highly stable due to the very affordable rent levels. Our second focus is the Canadian MHC sector. Revenues are highly stable and with residents owning their own homes, capital requirements, and maintenance needs are significantly reduced. With homeownership costs rising across the country, MHCs provide a real alternative as prices have not appreciated to the same extent. Our third focus is on Europe. As one of the only professionally managed operating platforms in Europe, the opportunities for enhanced value are significant. As you know, our investment management agreement with IRES terminated on January 31. While we are losing the fees from IRES, it frees up management and operations time and resources to focus more on our European platform, where we believe we have a much larger opportunity to grow. Key to our growth in the coming months will be our ability to capitalize on a number of market trends as we return to pre-pandemic conditions. Demand for our quality properties will grow as immigration accelerates with new Canadians seeking affordable homes in our largest urban markets. The return of international students will also contribute. The pandemic generated what we call a student [indiscernible] costs and to stay safe. We see these young people moving back to rental accommodations as offices reopen and in-class [indiscernible] as the growing seniors population looks to the rental market to meet their needs. We believe our key to properties offering more space on one floor at affordable rents looking to capitalize on the significant equity they have found in their homes. We also see families looking to quality rental accommodations to the increasing cost of homeownership. Additionally, cash flows will increase as we prudently increase rents. Finally, our ongoing property investments, as outlined on Slide 24, are reducing costs through energy saving and other initiatives, enhancing resident safety and making our properties more attractive, are increasing our operating efficiency, helping us to meet our ESG commitment to enhance environmental performance. All of this is in our net asset value. As Scott mentioned, we recorded an over $1 billion gain in our net asset value, following a $596 million gain in the year prior. With increasing demand and little new supply and rental properties, we believe that many of our asset base will only grow forward going forward and provide another strong driver for unitholder value over the long term. I'm very excited about our future. Our focus on the mid-tier sector meets increased demand for affordable, high-quality homes. Our predominantly suburban locations outside of downtown cores and our larger-sized suites are meeting the need for more space. We are experiencing a strong pipeline of accretive acquisition opportunities and expect to see solid portfolio growth in the quarters ahead. Our leverage and liquidity to grow going forward. With demographic trends and increasing immigration, we are confident we will see -- to drive value for our unitholders in the years ahead. In closing, I want to once again thank your hard work and dedication over the last 2 years. These have been very, very difficult a 2-year period, but our experienced, engaged, and dedicated team has risen to the challenge. I also want to thank our residents for their patience during these challenging times. Looking ahead, we are confident we will gradually return to more normal market conditions and continue our 25-year track record of growth, strong operating performance, and delivering enhanced value to our unitholders. Thank you for your time this morning, and we would now be pleased to take any questions that you may have.

[Operator Instructions] Our first question comes from Our first question today comes from Jonathan Kelcher from TD Securities.

First question, just on the operating costs, Mark, I guess you said that there was some deferred R&M in there. Have you largely caught up? Is the Q4 catch up? Or is there more of that, that we'll see in 2022?

I would say really was what we would describe as the return to normal quarter. Looking back, Omicron really started showing up for all of it and in the months leading up to that, residents were getting a lot more comfortable with inviting us into their apartments to do work, safety concerns were fading. We forget all this now because we're back in it again. But I think the short answer to that, Jonathan, is yes, we did a significant catch-up in Q4. But every time we go through a shutdown period, we're seeing this effect of people being concerned about us going into their homes and then letting us back in again. So the propensity to put a work order in the portal goes down when there's fears of the virus effects.

That's helpful. And the one chart did show that you are starting to see increases on turnover. Do you think that gets back to 2019 levels over the course of 2022?

I think the fundamentals are stronger. We've had record integration. We've had record price house valuation increases, and we've got increased churn. So with all of those things working in our favor, it's like we're on the momentum now. The reality is timing-wise, for omicron to show up in the middle of December was good. It's not a big churn quarter for us to a new apartment in January 1. Those rentals had already been done anyway. In February had essentially been done. So we've not seen really an impact on revenue in all strongly. And with things restricted here, we'll just see what we see each time like another wave of demand.

And then just last one for me. I see that the bad -- you showed bad debt jumped a little bit in Q4 after sort of trending down. And maybe I think you might have addressed this with commercial properties. Can you maybe give us a little bit of color on that?

Yes. It was -- the jump itself was really related to commercial tenants specifically. So we're not seeing any major trend negatively that way. I think it's pretty much in line for the quarter.

The next question today comes from Matt Kornack from National Bank Financial.

On the margin front, so if then R&M to come down in Q1 and then maybe see a bit of a catch-up again, an inflation. You seem to be doing pretty well on property taxes and utilities [indiscernible] NOI margins going forward?

Well, Q1, the effect of the weather, I'm going to say has been difficult. We've had record snow across the country. Clear in our direction on inflation and cost blips, like we talked about the catch-up effect for repairs and maintenance. We've now got a difficult weather quarter. No doubt effects of snow removal and we've seen some other effects of just weather-related expense. That's not a trend. It's an unfortunate back-to-back event. I think on the inflation front, we're okay. Wages is at a lot of frontline workers staff, and we've tried to address their needs. On the margin expansion front, overall, though Matt, without stating the obvious, as our revenue story improves, and the story is getting better and better each quarter and incentive initiation falls off, which as you know, we track our incentives or book them as amortized over a 1-year period after initiation. So the real question is incentive initiation is on the decline. Occupancy is strengthening even though we're at almost record levels. mark-to-market rents are following that path back to double digits very quickly. And all of those revenue lines will naturally assist margins. So it's -- I'm not trying to be coy. I'm trying to navigate the effect of the pandemic in March, then I would expect on Q2. If there's a delayed effect of the virus, it puts a little bit more risk in the system. I don't know if that does it for you or not. But basically, the revenue story is opening up again, and the expense story is not inflationary driven for us.

Fair enough, mitigated to some extent. And then on -- with this weird kind of end to the moratorium on rent increases, are you now going to have 40% of your portfolio in maturing in January, at least for the near term? Or how does that work in terms of rent increases?

Yes, I think we've got that old Quebec province effect, material BC. It will stick with us for years and years. Assuming you don't have vacancy periods to reset renewal dates, we've got a new renewal date of January 1, which makes modeling a little more easy and predictable, I guess. But yes, the only thing that moves an anniversary date now is vacancy that is prolonged and where a new tenant initiates a lease outside of January. Otherwise, I predict it will be with us for a decade at least.

Last one for me on the accounting side for IRES. Outside of the management fee side of things, is there any change in the way, just the recognition of maybe FFO versus dividends or how we should think of that from an operating standpoint in the income statement?

We're finalizing our assessment on this. But with the loss of the management contract, we will likely move to a point where we just -- it's fair value as opposed to equity-based accounting. So there will be a change in that basis.

Okay. But it shouldn't be hugely material at the end of the day to FFO figures, should it? Or am I missing something there?

No. It shouldn't. They have a high payout ratio on their income, et cetera. So it should be very [indiscernible].

The next question today comes from Joanne Chen from BMO Capital Markets.

Okay. Maybe just following up on the kind of the turnover activity. How do you think it's going to trend through 2022? And I know you did talk about the mark-to-market opportunity, but could you perhaps provide some color on -- I think you didn't mention those would be double digits, but could you maybe comment by market with your portfolio where you're seeing the most strength?

Yes. So I mean kind of trending through Q4, we saw actually the strongest in December was in the Halifax market. And I believe it was 13% or 14%. So that was the strongest overall followed by Ontario and then BC. Montreal, we still have some work to really get those up. And I think July will be kind of a kickoff with rental increases in general and some new leasing. So those are kind of by market. We're looking at double digits, definitely nationally kind of coming through today effectively. So that's the general trend. It's been pretty -- there's the graph in our conference call kind of shows it upwards right now. And as Mark said, we think that will only continue with some of that returning students, foreign students returning in the household. So we think there's just a ton of fire-up to that market rental growth rate.

I'm just going to add to what Scott said is on the household consolidation, this is a real Canadian Mainland Canada effect that they have not seen in the U.S. We hold a belief that culturally, under 30s live within an hour of mom and dad. We sell to that under 30 cohort going home during the pandemic, if they were renting and they just went home. With restrictions in the cities, there wasn't much of a city lifestyle and with workplaces shut down, work from home was possible. So I really -- we all feel very strongly, different than the U.S. where if you're from Houston, you work in Seattle, and it's very, very different cultural situation with where people live and follow their careers. But we feel extremely strongly that when workplaces start to get comfortable with back to work, this is going to have a big effect. There is still a big cohort of under 30s that are at home. And like we said, through the pandemic, like I don't believe it's a permanent effect. I don't believe under 30s are going to live out their retirement with mom and dad. But we do know anecdotally, it's between Toronto, Vancouver, Montreal. These are the places where it happened. So we see that effect as back to work start to change.

Maybe just, I guess, on -- you commented on each of your markets. I guess, it seems like this quarter, it was a little bit more Atlantic Canada continues to hold up quite well, but there would seem to be a little bit of softness in Quebec and BC. Could you comment on whether it's just kind of more because of -- on the expense side of things? Or are you seeing any other trends in Quebec that's different than the other provinces?

Our portfolio, not to generalize that but our downtown core portfolio is highly reliant on foreign students. You've got this multiple. You got the University of Montreal. You've got McGill, you've got Concordia, you've got [indiscernible]. You've got all of this happening in the core. And these are world-known schools and attract a tremendous number of foreign students. So our Montreal experience in the core was really affected by the foreign student market. And every market is a little bit nuanced in the at-home. I think everywhere was really focused on the under 30s going home or foreign students not being here. If you just call it one cohort effect, if you have mobility and you're in rental, you have the optionality of giving notice and going home. And that's the household consolidation point that Scott was talking about.

Quebec got hit by a couple of things. That was probably one of our higher areas of incentives throughout the year, and it continues to be through Q4 as far as granting of incentives. And then similar to some of the other regions, [indiscernible] and utility costs, et cetera, and a little bit higher vacancy. So it was a culmination of a bunch of factors specific to Quebec.

But Scott talks about incentives. We're very proud of how we manage the pandemic. And our incentives are something that's not in CAPREIT's history at all. But when you look at the total effect of incentive granting, it really equates, as Scott has said, in today's environment, we think of that as vacancy loss. Like, we mitigated vacancy loss through incentive use. And it's not something we believe in, but under the circumstances, we had to embrace because others were also raising incentive use. But it's important to highlight that that burn-off effect is really about incentive initiation. And we've done a very, very good job in my mind of managing that prudently.

And on the incentive front, December was the lowest month for incentive granting for the year. So we do see that burning off throughout 2022. So by the time we hit Q4, it should be much more insignificant. But it takes -- it's a lagging effect on revenue as opposed to vacancy only, which comes back more immediately.

It's been building is the problem. Like when we were using incentives, it was a slow build and now it's a slow burn. So I think we crested the top initiation curve. Well, we have pressed at the top of it.

I guess maybe just one more on, I guess, the expense side of things. I know obviously, Q4, there was a lot of catch-up that you guys did. But how should we think about the run rate, I guess in 2022, given the current inflationary environment?

We never do this. We're not as impacted by inflation as our numbers may suggest. Again, we are looking at a difficult January with weather-related expense across the country. But it's not inflationary driven. It will be very -- it's unfortunate that it backs onto that catch-up quarter, but it's not inflationary pressure. We have inflationary pressure on the wage front but dollar-wise, it's our frontline workers that we've had to address. So from a quantum of dollars, it's not significant from a percentage of increase it is. But from a dollar effect, that's where it is, but we don't view that as material. We view the revenue catch-up and overachievement due to higher churn to be a [indiscernible].

And like on the natural gas front, we've hedged 85% of our 2022 consumption. We see a lot of electricity costs are passed on to our sub-metering pros. So it's more around consumption and rate, we believe, from where we are today. Insurance, we're getting indications that that should be a more positive story for 2022, we renew in March, than the larger increase we saw kind of this year. So there's some hopefully some good news on upfront.

Maybe just one last quick one for me. I guess on the acquisition side, you guys obviously been keeping busy. But I guess, could you maybe comment on which markets are you seeing the most attractive opportunities for you guys right now?

It's been a slow quarter for new product launch for the type of assets that we're we identify as opportunities. We've got a couple of things in the scope right now. But it's also clear that the market still has an incredible appetite for apartments. And we continue to evaluate disposition opportunities as well where we see value creation, significant value creation, a lot of assets CAPREIT has held for many, many years. that really are trading at unbelievably attractive valuations. And we've got that whole diversification modernization strategy in mind. So we'll be looking at that as well. I would not call it material change, but definitely something we're excited about.

The next question today comes from Mario Saric from Scotia Bank.

I [indiscernible] on the operating costs, and then I want to touch on the large fair value [indiscernible] quarter, during the quarter. So just on the operating cost, your same [indiscernible] NOI came down 2% in this quarter, it wouldn't have been up 1% if it wasn't for the other expenses category, which was up 13% [indiscernible] the year to $40 million. [Indiscernible] having to spend but can you provide us with a bit more granularity on the breakdown of that $40 million of other expenses this quarter, between R&M, insurance, or anything else? That would be helpful.

The majority of that would be R&M. I think through the year, I think we had about a 20% increase in insurance, but either direct wages or wages through subcontracted. It was largely driven by the increase in R&M and a little bit of inflation in the wage side. That was the real key driver.

Of the $40 million, say, like, 70% or 80% plus would be the R&M expense or more?

Yes, that's a reasonable estimate.

So then the commentary on kind of the catch-up, if it was $40 million in Q4, it was up 13% year-over-year. So is it fair to say that in Q4 of '22, that $40 million is 10% lower than it was this year kind of thing? Does that sound reasonable?

[Indiscernible] going on with the pandemic. So I'd hate to put 10% on it, but that seems reasonable on the surface, Mario. It's the catch-up. Like, if we have a stabilized go forward from here in terms of apartment entry, then yes, I think that would be more than conservative. If we have another surge, obviously, in Q2 and Q3, then you can see a drop off, followed by another increase. So yes, that's a reasonable assumption. It's all pandemic-related sadly. It's not just the normal operating business. There's clearly a start-stop effect with the pandemic.

So then just shifting focus to large fair value gain. I think the one thing that [indiscernible] with the quarters is the same property NOI declined during the quarter, which you explained and the increasing in fair value gain that was taken. Most of that was due to higher NET OPERATING INCOME, not cap rate, which was particularly interesting. So that's maybe a 2-part question. What happened in Q4 that drove kind of the cumulative period of value gain year-to-date from higher NOI up to $417 million versus just $27 million year to date in Q3?

Yes. I mean, first of all, we obviously do our full valuation process with our third-party appraiser in Q4. Historically, if you look at the last [indiscernible] of our increases come in that final stage. We're obviously cautious through the quarters to bump too fast. And then you have the pandemic effect through different quarters as well. So that's the reason it generally comes in Q4, and there were a lot of transactions also to support those gains. The NOI side, really, obviously, 2020, the assumptions with 0% increases in BC and Ontario and really lower mark-to-market rents were apparent in our valuations in 2020 and through the first half of the year. With the announcement of the BC and Ontario renewal rates, which come into effect Jan 1 had a very large impact on our stabilized 2022 NOI. And then again, as we saw through October, November, December, we saw a real ramp-up in the mark-to-market rents. We have budgeted increases in R&M. So there is some inflationary pressure built into our valuations because we use our budget numbers to a large degree. But really, it's really that top line change, a combination of vacancy drop off of bad debt. TIs don't come into play as much from a valuation point of view. So it's really a top line story with the momentum in Q4. If you look at the trend through 2021, we hit a cumulative low of vacancy -- or higher vacancy, and bad debt and et cetera, in June. And so as we've come into the December month, all those figures have really improved and built out a very strong stabilized NOI for 2022 from a valuation point of view.

Mario, I think it's appropriate if I could add something on the valuation front that we don't talk about a lot. All of the apartment REITs in Canada who value income, make up an incredibly small percentage of the ownership pool. And we calculated less than 5% of the ownership pool for rental. So the apartment sector in the public domain owns the smallest slice in the pie, okay, compared to office, compared to industrial, compared to -- and so what we're seeing in the market or in fact, the counterintuitive thing happened during the pandemic. Apartments with large vacancy rates that market sees it as a revenue opportunity and if it doesn't really run its business quarter-to-quarter like a lot of the REITs do. Well, we don't run it that way, but they just take a different view. And the other factor that has nothing to do with income is this replacement cost thing we keep talking about. So the private market says, my goodness, we come at less than 50% of replacement cost, there's value in that. So I think on the valuation front, it's something that we don't talk about a lot. We are a very, very different sector of real estate to our other sector peers. And the valuation has really got -- over the last 5 years, I've seen it, so much less to do with actual income and so much more to do with NAV.

Mark, just maybe one follow-up on that. It's an interesting point that you're making, like we're seeing in the industrial space where the buildings are occupied or vacant [indiscernible] valuation because of the conviction and being able to lease up the space at a very good rent. Are you finding in the private market, highly sought after notwithstanding, let's say, some of the regulatory clear uncertainty that exists for residential today? Are people buying vacancy today aggressively?

Again, oddly, not as much today as a year ago. Not a lot of products available today. So you had this movement of the private sector said it was peaking a year ago and vacancy and income had nothing to do with it. Nothing to do with valuation at all. Well, I shouldn't say nothing. But very -- there was a surprising reaction in the acquisition market, as I said, where vacancy was seen as a positive. We run around. We're afraid of incentive use. The private sector kind of like -- they really value the inherent asset. So I'm saying the same thing over and over again. But the conversation in the private market is more about price per unit than it is about what's your income effect next quarter.

Props on the fair value gain and you may not have the information handy. But what would you say is the ballpark gap in the valuation that you're using between stabilizing the line that is embedded in the fair value? And then as your NOI will have been in place on the LTM or MTM basis.

So I'm trying to -- yes, I mean we might need to just take that offline, but are you kind of talking about what we're budgeted from a stabilized versus?

Yes. Because one of the challenges with the fair value mechanism is that it's generally based off of stabilized NOI, which, in some cases, could be 2, 3 years down the road as opposed to today. So I'm just trying to understand kind of what the gap between those 2 numbers may be.

No, realistically, I mean, we run a 2022 value stabilized for our valuations. We run rent rolls based on what we're seeing in the markets based on renewal rates that we know are in place. And that's what I'm saying was a huge driver of the valuation increase through NOI for year-end was the fact that we do model 1-year forward stabilize. So it's not -- we're not 2 and 3 years out. Like, I know some other companies do that. We're basically a year forward. We're quite conservative from that point of view. And given where our occupancy is at, where we're seeing rental rates and renewal rates at, we think the top line is pretty predictable from that point of view.

Our throughout-the-year process is based on income changes, but it's not forward-looking, as Scott said, it's like in-place income calculation. But the cap rate, the market probably looks ahead, and that's what we were just talking about, the private market valuing vacancy loss. So when we do the year-end cap rate adjustments, that's when there's the catch-up effect. But the typical -- we believe that CAPREIT has probably one of the most conservative valuation models out there. We have multiple third parties. We vetted internally and we typically lag, what, by a small margin. But we keep that robust system in place so that we're never overstating really. What's exciting though, and part of what some of our dispositions have revealed, is this significant gap in CAPREIT use depending on the attribute of the disposition.

We do -- especially in the pandemic, we use DCF models just to look at the short-term impact of bad debt and vacancy, which doesn't have real large valuation impact. Obviously, if you're not getting market rents and if you're getting low renewal rates, that has more of a lasting effect. But we do DCF as well, as kind of check our heads against a direct cap method on a 1-year forward stabilized basis. So when we look at per door and we look a whole bunch of other things. But we do look for, but that's not our primary basis for valuation.

The next question today comes from Mike Markidis from Desjardins.

A couple of quick ones just to begin. Scott, you said that 85% of your natural gas consumption was hedged. Can you remind us where the price level is, where you were for 2021?

I think probably the -- I think the metric I could give you -- my recollection is gas prices are maybe -- natural gas prices were kind of almost 30% to 50% higher. I think the mark-to-market on our 1 year of natural gas was somewhere in the $2 million range and for the 3 to 4 years, like $6.5 million. That was the last time I looked at it. I haven't been following that natural gas prices during the last 2 months, given how busy we are. But it was substantially higher. I would say, close to 50% at one point.

Sorry. So just to make sure I understand you correctly. So the mark-to-market, I guess, that's a favorable event just from having the hedge in place. But in terms of the actual price level where you're fixed, is that compared to 50% higher that you spoke of?

Sorry. Fixed price is almost bang on the same like for the next 3 years. I thought we were talking about compared to spot market or forward market, which is -- I think it was between 30% and 50%.

In summary, he's saying there's not a significant 2022 effect over 2021. I think that's what you're saying, right?

Exactly.

Thanks for clarifying that. Just on the significant presence there. New Brunswick is seeing some hyperinflation. Are there any other regions where you're kind of concerned about? Or are you generally feeling good about property taxes over the next, I don't know, 12 to 24 months?

Yes. We work with advisers and whatnot. It doesn't seem to have any major pressure points. We saw a change in Alberta that's already hit us through 2021. We're not getting any indication of any major spikes. And of course, we'll continue to go back and fight any major increases like we have for the last 15 years.

Last one for me before I turn it back. Mark, you made some comments in your opening statements just with regards to reallocating the resources you have, people from IRES to focus on other opportunities in Europe. So should we take that as an indication that you're not planning on repatriating any capital from Europe back to Canada?

No. In the resources, it's our Toronto head office, it's resources that we had dedicated on the corporate side. We have the ERES platform. We're very excited about what's happening with ERES and our efforts can be fully dedicated to the success of that platform.

Repatriating capital, there's no plans to bring any money back from Europe at this juncture?

No.

The next question today comes from Jimmy Shan from RBC Capital Markets.

Just on the turnover spread, what is that tracking so far in the year? Did you say it was double digit?

Yes. Look, nationally all in, I'm not getting too far ahead of myself. We kind of hit that 10%. And again, I think the numbers are the strongest in the Halifax market than the GTA and Ontario and then followed BC.

I'm like a broken record on this, Jimmy. I'm not telling anything you don't know. But the revenue story is what's so strong. Increased churn alone, even with lower mark-to-market rents can generate a better bottom line. Better mark-to-market rent is clearly the path that we're on quarter-over-quarter. There's no reason to suspect that if the under 30s that are at home come back to mandated work and immigration numbers continue the way they are, we should be seeing stronger than pre-pandemic mark-to-market rents. Our occupancy gains are already the first part to recover in our revenue story. That's the way we run this. And incentive generation has crested and initiation of incentives is dropping. Bad debt stayed stable. The revenue story is quite strong. And the trajectory of that story has been, as we said, gradual, but predictable in an upward direction. The worst, as Scott said, in June of last year. And the results in June weren't that bad. But there's always a bit of a lag effect. So we've got this building momentum now on there, slightly into Q4 by some operating expenses, hopefully, not too weather-related in Q1, we'll see. But the story is very, very strong.

And on the under 30 cohort, what percentage do they make up of your tenant base roughly?

They make up about 95% of our vacancy. I'm not kidding. [Indiscernible] was all the under 30 cohort. There was no exception. The suburbs [indiscernible] was unaffected and there's not a building in Canada that I'm aware of that was impacted that didn't have the under cohort. You can call them foreign students, if you want. You can call them the workforce city dwellers if you want. The reality is -- and I picked 30, maybe 32. But that's the entire effect of the pandemic. And that's why I was making this point, it's a cultural Canadian effect, okay? In the U.S., if you're 30 years old, it's not unusual to be working in Houston and mom and dad are in Seattle. In Canada, for whatever, we live within an hour, and especially in the big cities. If you're from the east side of Toronto, I'm going to guess that your family is on the east side of Toronto. It's that specific. So when it comes to Canadian vacancy effect, [indiscernible] phenomenon, and it's age cohort related 100% to the pandemic. Who [indiscernible]? It's that cohort. That's why the downtown cores were affected. Where are the universities? Big city downtown cores.

Yes, that all makes sense. And then just quickly in terms of your engagement on that front and advocating for the industry. I noticed you're also pretty active on social media now. And so any update -- do you hear anything...

Thank you for the mention.

I'm one of the followers. Any update on that front, federal?

I'm doing my best. Anyway, that's another story. But I'm doing my best to actually tell the affordable housing story. It's not even telling the rental story. I'm telling the affordable because it does not serve our industry well to have these run out of control home prices or further property doubling in value in the last 3 years. And I really did feel strongly about the fact, of course, we have embraced immigration. We're all immigrants. However, you can sit here and wonder why prices are run away. And yes, there's [indiscernible]. Yes, there's a flooding of capital in the market that has driven prices. The reality is, is that for people to have affordable homes, there's never been an example in the history of the world ever where supply didn't help that problem. And we're way behind on this. So we've got the municipal level site development. We've got the federal [indiscernible] demand into the system, and we have the 4 provinces trying to solve the problem, and they have the least impact. And at the end of the day, the rental sector is demonized even though our rents are actually not doing anything compared to the larger housing market. So there's my speech. I'm not very -- like I said, I'm not sure too many people following Mark Kenney on Twitter, but that's the story we're trying to get out there.

But are you hearing anything that's come out recently or discussions underway that you might be hearing or otherwise?

Not really. I think that there's -- as of this morning, a preoccupation with other issues, but not really. Between the truckers and what's happened in Europe over there, that seems to be the attention. But we're doing our best to get the message on the need for more housing and the need for government to address the affordable issue, especially in the context of immigration.

There are currently no further questions registered. So I'd now like to hand back to Mr. Kenney for closing remarks. Please go ahead.

I would like to thank everybody. If you have any questions, please feel free to reach out to Scott and myself. Wishing you all a nice day.