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

Hello, everyone, and welcome to the Canadian Apartment Properties First Quarter 2022 Results Conference Call. My name is Juan, and I will be coordinating your call today. [Operator Instructions] I would now like to turn the call over to your host, David Miller. Please, David, go ahead when you're ready.

Thank you, Juan, and welcome, everyone. Before we begin, let me remind everyone that the following discussion may include comments that constitute forward-looking statements about expected future results 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 obtained at sedar.com. I'll now turn things over to Mark Kenney, President and Chief Executive Officer.

Thanks, David. Good morning, everyone, and thank you for joining us. Stephen Co, our Interim Chief Financial Officer, is also with me this morning. So turning to Slide 4. We booked another solid year in 2021. Despite operating for a full year under the challenges presented by the pandemic, 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's also important to note that we continue to experience very few rent collection issues. To date, we have collected over 99% of our rents as we continue to get close to our residents and understand their issues. Turning to Slide 5. While we were pleased with our results in the first quarter, we experienced certain increased costs compared to last year that led to a smaller increase to our quarterly NFFO. The key challenges were an acceleration of largely weather-related and COVID catch-up maintenance costs. Remember that in last year's first quarter, we were in total lockdown in Ontario and Quebec as well as increased gas cost and consumption due to the colder weather this year and higher realty taxes. NFFO per unit was impacted by the 1.7% increase in the number of units outstanding in the quarter. Having said this, revenues were up over 8%, driven by the contribution from our acquisitions, increased monthly rents and continuing high occupancies, resulting in a 4.4% increase in our NOI. However, like all issuers today, we believe inflationary cost pressures will impact our results over the short term. From an operating perspective, our ability to generate solid performance in both good times and bad is clearly demonstrated by the results of our stabilized portfolio, as you can see on Slide 6. Occupancies improved again in the first quarter, while net average monthly rents continue to increase. As mentioned, our same-property NOI was impacted by the increased costs we experienced in the first quarter. Higher maintenance costs, the increase in natural gas costs and consumption and slightly higher realty taxes. We believe such inflationary cost pressures will impact our NOI over the next few quarters. Our leasing and marketing programs continue to generate increasing occupancies, as you can see on Slide 7. After 2 years operating under significant pandemic restrictions, our occupancies remained highly stable at 98% at quarter end. You can also see our bad debts as a percentage of total revenues have remained low throughout the pandemic and continue to track historic low levels. Tenant incentives also continued to decline to pre-pandemic levels, and we expect the majority of the amortization of our lease incentives to be completed by the end of 2022. A key factor in our ability to generate solid results is the solid increase in rents on turnover we are achieving, as shown on Slide 8. While turnovers have been impacted by the pandemic, we are now starting to see solid increases as we move rents closer to market at more than 10% increase on turnover in the Canadian portfolio, we believe, is a solid result. And we expect to see this to continue and grow in the balance of the year. Our churn rates are also strengthening and tracking historical trends of seasonal variations. Renewals also started to improve in the first quarter. We noted last year, we increased rents on January 1 by the mandated amount of 1.2% in Ontario and 1.5% in BC as of quarter end. Ontario and BC represent over 57% of our total NOI. As mentioned, we experienced a solid and positive trend in rent increase on turnover each quarter since we bottomed out at the height of the pandemic in Q1 of last year, as shown on Slide 9. Looking ahead, we are experiencing more in-person and online visits. We expect we will start to see more and higher mark-to-market rent increases in the quarters ahead, moving us toward the higher levels of increase we generated prior to when the pandemic set in. Turning to Slide 10. 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 BC markets. And another 1,015 suites and sites have been acquired to date in 2022. Our acquisition pipeline remains strong and robust. And despite cap rates compression, we expect to generate further accretive portfolio growth in the quarters ahead. I'll now turn things over to Stephen for his financial review.

Thanks, Mark, and good morning. As you can see on Slide 12, our balance sheet and financial position continues to remain strong and flexible at quarter end with a conservative debt to growth value and continuing high liquidity. Our $1.3 billion in Canadian unencumbered properties, which includes $652 million of MHC properties, provides additional liquidity should it be needed. Looking at our financings in the first quarter, we locked in interest rates of approximately 2.8% on our refinancings and extended our term to maturity. We expect to finance a total of approximately $1 billion in mortgages and top-ups in 2022. Importantly, over 99% of our mortgage portfolio incurs a fixed interest rate protecting us from potential future interest rate increases. In total, if we were to access all our available sources of capital, we would have liquidity of approximately $1 billion at quarter end. As you can see on Slide 13, we continue to reduce our interest costs in Canada and extending the term to maturity. In fact, we have one of the longest terms to maturity and the lowest weighted average interest rate among our publicly traded peers. This provides us with strong protection against renewal risk, given where interest rates are as of today. The ability to capture strong spreads and low interest costs in the Netherlands is also contributing to our lower overall interest costs and extending the term. As mentioned, over 99% of our mortgage portfolio incurs a low fixed interest rate, protecting us from expected future rate increases. We continue to monitor the interest rate environment for any opportunities to prepaying maturing mortgages and to hedge against rising interest rates. As of today, we have locked approximately 70% of our 2022 maturing mortgages at a 3.1% interest rate. Further to our strong and flexible financial position, looking back over the last few years, you can see on Slide 14 that we have met our goal of maintaining a very conservative debt and coverage ratios even throughout the pandemic. This conservative approach underpins the stability and resiliency of our business and the sustainability 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 15. As you can see, in any given year, no more than 12% of our total mortgages come due, thereby reducing risk in the rising interest rate environment. Looking ahead, our current ability to top up renewing mortgages through to 2036 will provide further significant liquidity in the event that pandemic lasts longer than we hope. As we expect the interest rate will continue to rise further after the Bank of Canada announced its first policy rate increase in early March of 2022, and subsequent aggressive monetary policy tightening to fight back higher-than-expected inflation, we've moved up our refinancing opportunities for our 2022 matured mortgages from the second half of the year to Q1 of 2022 by paying some hedge costs and prepayment penalties. We were able to achieve financing cost savings through closing or pre-locking rates for the 5-year and 10-year mortgages. Their rates were 2.8% and 3.1%, respectively, lower than the current 5-year and 10-year with estimated rates of approximately 3.6% and 4%. I'll turn things back to Mark to wrap up.

Thanks, Stephen. 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 long term. We will continue to focus on our proven asset allocation strategy as detailed on Slide 17. 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 well 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 their very affordable rental rates. Our second focus is the MHC sector. Revenues are highly stable 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 for families looking for quality residences at significantly lower cost. Our third focus is on Europe. As one of the only professionally managed operating platforms in Europe, the opportunities for enhanced value are significant. Key to our growth in the upcoming 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 to increased demand. The pandemic generated what we call household consolidation as students and young people return to their homes to save cost and safety. We see these young people moving back to the rental accommodations as soon as offices reopen and in-class learning fully returns. Demographics are also on our side as the growing seniors population looks to the rental market to meet their needs. We believe our quality and well-located properties, offering more space on one floor at affordable rates will see increased demand by seniors looking to capitalize on the significant equity they built in their homes. We also see families looking to quality rental accommodation as highly affordable alternative to the increasing cost of homeownership. Additionally, cash flows will increase as we prudently and responsibly increase rents. Finally, our ongoing property investments, as outlined on Slide 19, are reducing costs through energy savings and other initiatives, enhancing resident safety and making our properties more attractive. Our technology solutions are increasing our operating efficiency, and were helping us to meet our ESG commitment to enhance environmental performance. All of these investments are generating strong increases in our net asset value. As Stephen mentioned, we recorded an over $1 billion gain in our net asset value in 2021 with another $20 million in the first quarter. With increasing demand and little new supply of rental properties, we believe the value of our asset base will only grow going forward and provide another strong driver for unitholder value over the long term. In summary, we remain very excited about our future. Our focus on the mid-tier sector meets an increased demand for affordable, high-quality homes. Our predominantly suburban locations outside 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 industry-leading balance sheet, leverage and liquidity position provide stability and the ability to grow going forward. And with demographic trends and increasing immigration, we are confident we will continue to drive value for our unitholders in the years ahead. Looking ahead, we are confident we will gradually be returning 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 you may have.

[Operator Instructions] The first question comes from the line of Jonathan Kelcher from TD Securities.

First question, just on the operating costs. I guess, as COVID-related, they were higher for Q4 and Q1. What was the remainder of 2021 like? Was it more normal?

Yes, we're definitely seeing a return to normal. I think I had even indicated on our call last time. Sadly, we ended up with a different type of repair problem in Q1 than we had in Q4. The majority of our costs in Q1 were weather-related. We had a very, very cold winter season across the country. And the catch-up in terms of maintenance, we couldn't affect during the pandemic is, in our minds, essentially caught up.

Okay. So for the balance of the year, if we think of inflation type increases for operating costs, that sounds about right?

Yes. I mean, Jonathan, I think we should expect some inflationary pressures. We're starting to see that now. So we would see some cost pressures from that perspective. But overall, I would say, if you were using margins from last year to project out this year, I would say that would be a safe assumption for Q3, Q4. But I would put a little bit more pressure on Q2 because that's when we're starting to see it.

The reality is it's happening quite quickly. In Q4, we still were not seeing the effects of inflation to a great extent. We're now starting to see it show up with wage pressures, with employees most certainly. And you can see with the utilities, fortunately, we were hedged out. But things like the transportation costs and other elements of utility costs their prices have gone up.

And then secondly, just based on where your share price is right now, what's the Board's thinking in terms of share buybacks at these levels? .

Yes. We had announced the activation of our NCIB. We didn't block it there and unable to start using NCIB, but we are committed to taking advantage of this incredible value. We said it before, what's completely disconnected is the value of properties that are trading in the market and the value of REIT stocks, I'll say everywhere, especially apartment REIT stocks. It really is a global phenomenon. And there's no question we see incredible value in our portfolio. So it will be a balancing act here as we go forward in terms of how much stock we want to buy back and the potential disposition of assets that are premium priced. You've already seen us do a few buildings. I think I talked about the 3 one-cap deals that we have transacted on and we've got our eye to more opportunities like that. I can't help but see incredible value in selling mid-1 caps and buying cap rates at plus 4.

Our next question comes from the line of Jimmy Shan from RBC Capital Markets.

Mark, just to follow up on that NCIB question. I'm just curious what -- it wasn't in your focused priorities on the deck. I'm just kind of curious what other priorities are you balancing that with given that, as you say, there is a big public, private market disconnect? I'm just kind of curious why you won't be where at least the Board would be more aggressive on the NCIB front at this stage?

Yes. I appreciate it. We're -- again, we're in lockout. So we are committed. The attentions though that I've been cautious on in the deck, although I'm saying it now, is around disposition opportunities. And I will continue to look at this problem in a very linear way. The acquisition market is still open for us where we have the opportunity to buy newer construction assets with in-place financing that's favorable where we can find yield spread, okay. So we're not going to be quiet and silent on acquisitions because there still are accretive opportunities where you can assume low interest rate financing. That will be open to the being part of the supply equation in Canada is very much near and dear to our heart. So we're going to continue on that path and looking at assets that we're very proud of the reinvestment programs that we've changed communities, we've done the good work where we can realize good value for unitholders will be open to disposing of. Now I wouldn't look at this as a wholesale change at CAPREIT. It will be opportunistic. There's an extent or the limitations on what we can do in the NCIB anyway. But if I can match equity gains in selling selective nonstrategic assets of premium pricing and reinvested in CAPREIT stock, I think that investors will applaud that. I'm a unitholder, and I'm very much excited to get on with this.

Okay. And then just on the turnover spread, where would that sit today? Is it still in that 10%-ish range?

Yes, it's -- you follow the curve. It's pretty fair to use your ruler. The only thing that's kind of lagging behind, yes, like the curve is straight up. Like at the end of the day, pre-pandemic, I think we were around 15% mark-to-market rents. Today, we're definitely in the double digits. The reality is that traffic is great. We're being typical CAPREIT fashion, cautious on maximizing revenue, but the return is there. I would say that the final step of the pandemic appears to be full return to office, and that's not taken hold completely in the country. But as that ramps up, you can just expect to see that directly co-related. The CAPREIT vacancy pressure, revenue pressure really, at the end of the day, came exclusively from the under 30 cohorts. Buildings that had under 30 cohort, whether they were students or young professionals, that -- those are the people that went home and for safety be with mom and dad and bank some money. Look at Canadian savings rates, they're the highest I think they've ever been in our history. So we expect that as people return and start coming back to the cities in full force due to mandated back to work, you're going to see big changes there. But it's on a very predictable path.

Our next question comes from the line of Mario Saric from Deutsche Bank.

Mark, just on the back of your sub-30-ish cohort, do you have any sense of what percentage of the portfolio would be represented by that cohort today?

Well, we're at 99% occupancy essentially. It's more driving the demand at this point than people that are missing from the market. And I would say when you look at CAPREIT, we were probably one of the less impacted apartment REITs because we had suburban locations. So I think it's just the final demand driver to come back that will really give the same oxygen to the market that we saw prepandemic.

So essentially, at this point, the lost demand from that cohort is taking the occupancy from 98.6% to meet 99% or something like that?

That's right. Our peer recovery is very much driven by exactly the same dynamic. For what it's worth I do believe the dynamic in Canada was very different than the U.S. Canadian under 30s tend to live within an hour of mom and dad. It's just a cultural thing, whether it be Toronto, Vancouver, Montreal, whereas in the U.S., you'll see the under 30s will live 5 states away. And again, that tends to be more cultural. So we were definitely in Canada, culturally, in my view, culturally more impacted by the under 30s going home than other places.

And then just coming back to Jimmy's question on the new lease spread, it was 10.2%. So it sounds like it's improving. So essentially, you think internally to 10.2% in April, May so far might be like 11% and then kind of when return to work kind of really comes back and goes from like 11%, 12% up to the 15%. Is that relative the trajectory of it?

It's a very steady path. But remember, we're very cautious of CAPREIT. So we're renting apartments 60 days in advance. And in the case of Quebec, almost 6 months in advance. So our pricing is following the reality of what's probably happening in the market. If we were holding our units vacant to the last minute, we could be probably achieving potentially higher rents, but we're renting in advance. And we are managing, as we always have, that occupancy line at 99%. I've been very, very impatient with getting rid of these incentives. It's not in our culture to offer incentives. So we've got great progress on incentives. We've got great progress on occupancy, and we're renting into the future here. So our pricing, I can assure you, for the next 60 days and forward, is not at these current rates that we're seeing mark-to-market.

And then just on those incentives, the amortization in Q2 is $1.6 million. How should we think about the pace of decline in that $1.6 million amortization through Q3 and Q4 this year?

Yes. I would say you can bring that down to -- it's going to basically wind down by the end of Q3 of this year. So I would just say you can model that then, there will be some lingering incentives just the way that the business runs. But overall, it's going to be winding down close to 0.

If you go back to historical numbers for CAPREIT, essentially, that's what Stephen said.

Okay. And then just in terms of the -- sorry, Mark, go ahead. .

Go ahead.

In terms of the 2023 allowable rent increase on renewal that typically, I think, comes out in kind of June, July. Is that your expectation to date? Or is kind of the expectation depending upon the election outcome?

No, the guideline increase will happen regardless of the election income. So that would follow a back of inflationary items and -- but we would not expect to see inflationary increases. We've got CAPREIT now in Ontario to just over I think it's 2%. So it's not the increases to residents are completely impacted by any sort of election talk.

Right. But I guess in terms of the timing in June, July, do you think that's a reasonable time frame for the announcement?

That's the date they're supposed to do. We don't typically hear that until end of summer.

Just my last question, maybe coming back to the capital allocation. You're saying that there's still some accretive acquisitions available, and it sounds like it's mostly on assets that already have in place financing. It wasn't too long ago that the private market was probably paying lower cap rate for unencumbered assets on multifamily side and perhaps that's changing given the 3.6% to 4% market cost today. Is that what you're seeing in the market in terms of maybe pricing being more aggressive with assets that have in-place financing? And then kind of secondly like where can you get to the type of product that you want, where can you get cap rates that are north of 4%, if you can?

It's a great observation on financing. I would say we're amongst a very few that look at the yield spread the way that we do. So there's no question that we have valued in-place financing. I hope in the next quarter, I'll do a more fulsome rollout of the new construction assets that we've actually been buying. There's been quite -- if you look back now over the last 3 years, there's a predominance of new construction assets. And part of those new construction opportunities would be in-place financing. So we have tended to value that. I will tell you though that, again, the market is really turning out to be something very different. So 95% of apartment owners in this country are private and the predominant talk amongst brokerage is inflation and replacement cost. So what you're really seeing in the marketplace are extremely low cap rates. You're going to see some recorded twos in the marketplace where financing is now for 10-year money, 4%. So yield spread is in our lens of value, but it's not in the lens of value of the dominant private market and it's the resiliency of the income. It's the lack of obsolescence for housing. It's the impossibility to build with inflationary pressures. One thing I probably again should have spoken more about was with these new construction assets, we believe now could be 20% below replacement cost. So if you were taking possession of vacant buildings that are in lease-up, they are probably 20% below replacement cost or more. That's never happened in my history, in my experience in this business. So that is also pushing the replacement cost proposition of the value-add buildings. We say 50. You can do your own checking. It's probably high 30s at this point because of what's happening with inflation.

With all that said, does the -- you touched on it a little bit earlier, but the discount in that -- the trading discount in that, which is highly unusual, the magnitude of it today for CAP. Does that change how you think about the acquisition pipeline going forward? And does it shift you to perhaps becoming a net seller or kind of net neutral in terms of the acquisitions that you're looking at are really being funded by asset sales as opposed to being kind of big net buyer like you were last year? Like how does that thought process change based on the cost of capital?

I think we've definitely -- we're in very moving times here. But when property valuations continue to surge, we will have our eyes on the disposition program and with the idea of matching proceeds with buying back stock. I'm not that comfortable levering up the company to buy back stock in a big way because things are definitely moving around. But I'm extremely comfortable of the natural hedge of selling buildings at low cap rates and buying back the equivalent amount in stock. Now there's some tax implications to all this, and we're going to have to figure all this out. But the good business of matching high value with high discount is, I think, a sensible approach. So that's number one. That being said, we do see opportunities in these high-quality new construction assets that will never be built at these prices per foot again. Given inflation, I don't see us retreating backwards with the cost of labor, with the cost of construction, with the length of time to build, with the cost of financing. So I keep -- I'm keeping a very keen eye on new construction opportunity where CAPREIT can be part of the supply solution for Canada. If we can be part of that solution and find good value for unitholders, we'll be doing the good work that we've been doing for 25 years. I'm going off in a bit of a tangent here now, but for the history of our company, we've been reinvesting in our assets and turning communities around and been very, very proud of that. Now it's time to look at those maximized opportunities and potentially take them to market, but not in a wholesale directional way. You'll see us doing it opportunistically.

Is it too early to provide any quantum in terms of like an asset disposition range to think about?

Yes. It's a little bit early. But I want to -- I'm really excited about continuing our 1 -- midpoint 1 CAPREIT disposition program. I'll be happy to do that. We're going to be opportunistic with it.

It doesn't seem to be a bad trade. It's only 1.5 when financing costs are forward.

I think it went a little bit unnoticed. Like we've done 3 of them now, and I keep speaking loudly about it. And I think there's just such skepticism of what kind of market are we actually in right now, it's hard to see that trade as being sustainable, and I get it. But CAPREIT, we're going to prove that out. And if the current environment is such that value capturing for unitholders is this path versus just income, then, as a unitholder, I'm very happy to see that happening.

Our next question comes from the line of Jenny Ma from BMO Capital Markets.

I want to drill into the other operating costs a bit more. So Mark, based on your comments, it sounds like the R&M catch-up is essentially done as of the end of Q1. Did I get that correctly?

You did get that correctly.

So some of the weather-related maintenance costs, do you expect any of that to show up in Q2? Or is that -- are those costs that are sort of deep cold induced and very much limited to Q1? Or do you expect to see some more of that in the early months of Q2, just given that's it has been a colder spring?

No, it's gone. Look, it's pretty good there today, but it is done.

Okay. When we think about same-property NOI then over the next few quarters, the inflation, I'm not sure how much of it is fully baked into Q1, but it sounds like that's accelerating into Q2. The other costs sound like they're going down and then you've got rent acceleration. So when you put that all together, are you expecting same-property NOI to split positive starting in Q2 and beyond?

I like your beyond part. Like it's definitely moving through Q2 in the right direction. And by Q3, I can't make forward-looking statements. We're not supposed to. But it's, like I said, use your ruler and you start to figure it out. But you've got it exactly correct. The confusion is -- sadly, we had this weather-related repair expense in Q1 that I think I did -- we did our Q4 conference call. I think we're middle -- in the middle of it. But if we look at what's going on, what Stephen has been saying, there is some inflation in both the repairs and maintenance and our wages cost and these transportation costs for utilities. So of course, we're going to see some increased utility costs because we can't change the cost of transportation, and we can't change some of the other factors that are involved in utility price acceleration. It's not just the cost of the commodity. That part we've got greatly hedged out. So yes, there's a bit of effect in that. But the real question is, where do the rents end up traveling to offset those inflationary pressures. And I'm highly confident on the revenue story, and we're adjusting to this cost. Did I answer your question Jenny or did I mush it all up?

Well, I guess that's our job to figure it out, but no, that's helpful. Just turning to the IFRS cap rate, we saw -- and this is tiny, of course. So we saw a bit of a tick up for Alberta and then Ontario and BC. Is that really just the math of the asset mix with some of the acquisitions? Or is there something else going on there?

We took a very cautious approach in terms of our fair values. What we've seen is we've seen stabilized NOI growth but what we did is we basically kept the value the same and adjusted our cap rate slightly. We just see that with the rising interest rates, we just want to be very cautious in how we approach fair values this quarter. But if the markets continue to perform well and there's good trades out there, we will make those adjustments in Q2.

Even we're -- to build on Stephen's caution, when you see 10-year money at 4%, you would expect to see cap rates go up. We are seeing evidence of the market of them going down, but it's not widespread. It's not like so many comps in each market that we can have total confidence, but this is why you go back to this opportunistic selling thing. If we can find that arbitrage, we'll do it. But we're very -- have a big long history of being very cautious on a lot of different things. But when it comes to NAV calculation, I echo what Stephen said there completely. We had lots of spirited discussions about this.

So when you're saying that it's a bit of caution going to the cap rate, is that a reflection of the interest rate move through to March 31? Or would it reflect the wholesome interest rate move to today?

Yes. And despite the fact that we saw some trades, although not a lot with lowering cap rates, it's just very hard to do our whole portfolio with conviction with this interest rate thing moving in the background. But the struggle and it was a real struggle was we did see evidence of declining cap rates.

Right. To be clear, the IFRS is that through to March 31 on interest rates or your view? Or is that through to early May? .

No, that's through to March 31.

March 31. I guess what I'm getting at then is that based on the move that we've seen so far, assuming it doesn't change to June 30, I suppose, then all else being equal, then the pressure there would still continue to be upwards?

We don't know. Like really, again, if you talk to brokerage and you talk to what's happening in the market, we're not -- it's not happening for reasons that are new. And I think it has a lot to do with the private market thing. Why wouldn't you buy apartments in an inflationary environment? Replacement cost is plummeting and look at the market fundamentals. They take long view. And so that's very different than the income buyers that are buying yield spreads and REITs are geared to that communication. But it's really back to what I've said, Jenny, the apartment REIT sector is a tiny part of the sector. It's dominated by the privates. It's unlike any other real estate sector in Canada, office, industrial, retail, hospitality. These are dominated by big players. In the apartment space, it's dominated by private players. So how they behave is differently than how we think and what we're seeing the evidence of is high valuation in these uncertain times that are not based on income. Again, I'm going on here a little bit, but one of the most peculiar things that I saw was during the pandemic, high vacancy buildings were the most valuable because the private market wanted to sit on those vacancies until the market returned. So that was highly unusual event #1, and we're seeing more unusual behavior or not unusual, different behavior in the private market. They just want to lock in assets that are so incredibly cheap on a price per door.

Yes. And Jenny, just to make sure you're fully aware, like these values are valued as of March 31, based on the information that we have. So we don't adjust possible increases in financing costs up until May. We'd go up to March 31, if there is a change in cap rates. But now to Mark's point, what we've seen in the market is slightly different. We've just taken a very cautious approach. So if we continue to see trades at below what our implied cap rates are, we will adjust that in Q2. But right now, I think we just want to be very cautious just because the pronounced increase in interest rates over a very short period of time.

And then my last question is for Q1 in your G&A, were there any nonrecurring items specifically related to the CFO transition that we don't expect to see in Q2?

I mean I think there would be -- I think we put in the note. I mean, there was like a bit of -- I think it was $1.8 million, and there's a celeration of some RUR's that were baked into the G&A. So you have to adjust for that to normalize it. But I would say, using the G&A of Q1 is a pretty good proxy as a run rate going forward.

Our next question comes from the line of Matt Kornack from National Bank Financial.

Just wanted to quickly go back on the margin side. Up until the pandemic margins have been improving from an NOI standpoint as a result of rent growth outstripping expenses, we've been kind of stable through the pandemic. When you underwrite assets going forward and all of the secondary question because you've been buying new, so presumably margins are higher there, but I'm not sure if that was by design from an inflation standpoint. But yes, generally, are you underwriting sort of stable margins or continual expansion as a result of rent growth outstripping expense growth?

Again, we take a really conservative approach, stable. We -- it's really difficult to predict growth in general right now. Despite all the fundamentals, again, we're being extremely cautious on the acquisition front. I remain fully committed to being part of the new rental supply story in Canada and where there's good opportunities for investors. I'm really looking to the -- again, the value matched with income stability. So we're not going to get aggressive on growth expectations in pro formas. I'd like us to be able to do these -- be part again at the new supply story in Canada going forward. But to summarize, Matt, we're taking a very, very cautious approach on acquisitions as well.

Fair enough. And then -- but generally speaking, I guess, for these newer properties, your R&M is lower because they're new, right? So I guess, at least in the near term, a little bit more inflation protected?

Yes. We'll have our might. Like again, I love the MH sector for that reason, and I love the new construction market. Another reason is cost mitigation. When you're dealing with high-margin assets where there's more pass-through to the residents, then we have less exposure there. And I think in an inflationary environment, you have to just be real about that.

And then on being part of the supply side of things, in terms of where you're deploying that capital in the assets that you're buying, is it mostly suburban? Would you become part of the new sort of high-rise downtown supply? Or are the yields just too tight on that type of product?

For now, we continue to get and ready our land for new construction. The opportunities though appear to be in merchant builders that are looking for capital partners in form of forward sales for purchases. So we are again cautious about performance in this inflationary environment, but we will continue to push forward hard on the zoning of our lands with the optionality to build, but the acquisitions will in all likelihood come from merchant builders.

And are there preferred partnerships on that front? Or is it just you underwrite the quality of the building that's been produced and buy accordingly?

It's the latter.

Our next question comes from the line of Brad Sturges from Raymond James.

Just one quick question for me. Since the federal budget came out, obviously, there's a federal review ongoing at the federal level here. Just wondered if you could characterize how your discussions have gone to date and some initial thoughts or takeaways of where that might -- where those discussions might go for the review?

I think it's an education process, the -- I go right back to what we said earlier about all the apartment REITs in Canada are a very small percentage of the total stock. The notion that apartment REITs are hurting affordability is we have a strong disagreement with that. And how do you explain rents going up in markets that REITs don't even exist in -- apartment REITs existing. You see lots of examples of this going on. So that is part of the education. The misunderstanding around rent eviction, this is something CAPREIT has never done in our 25-year history. These, again, are private landlord behaviors. Egregious rent increases, okay? We are bound to guideline increases. Where in the private market, you'll see 30%, 40% rent increases hitting the media and who do you blame, the big guys, where we can't actually do that. People being kicked out of their homes because their homes are being sold or family members of ownership want to move in. These are not behaviors that the apartment REITs participate in. So I think that there is a real opportunity to educate. I think that the supply narrative needs to be understood. And I think the fact that there's apartment REITs around the world that are embraced by governments, we are hopeful that this message will be properly received in Canada. So the -- I think government understands they simply cannot build all the rental supply for this country and private partnership is important and private partnership with experience and responsibilities is important. So I won't even get into well, I guess I am ESG, corporate governance, all the good behaviors that we all follow as responsible housing providers resides in the public sector. And there are no balance to behavior in the private sector other than provincial legislation. So I think there's definitely the education that needs to happen. We're very optimistic with the fact our stories being heard, and we'll carry forward.

Our next question comes from Dean Wilkinson from CIBC.

Mark, I totally agree with you on the mischaracterization of REITs jacking up rents and the rest of that. But the question then becomes given the economics of new construction, development fees, all of the rest of that stuff, can you even get to a point where you build affordable housing? Or like you can't replicate $1,200 a month rent by putting shovel in the ground, right?

Dean, first of all, and everybody on the call, I look forward to reading in realty reports. All of the things that I've said about how responsible apartment REITs are. So thank you for highlighting that in your report.

You're welcome.

I'm kidding. Obviously, but I'm not. I would say, we all, the apartment REITs, have the advantage of freelance. Not freelance, but land that's already baked into our IFRS valuations, okay. So that opportunity to do something is there. What you're really doing is highlighting the affordability of our portfolios. Like when you talk about the challenges in supply, what you're really saying is you guys are the affordable sector. What would Canada do with a responsible ownership in the affordable sector? So we agree with you, 100%, like these are going to be challenges. But really, it won't be our CAPREIT's problem with growth. It's going to be Canada's problem with growth. How are we going to get through affordable housing if the entire country is under huge pressures with development charges, land cost, the cost of labor, supply chain issues, these are big issues for Canada. CAPREIT is going to be part of that definitely as well. But if anybody has the advantage, it's us. And if anybody can do something and be part of the affordable solution, it's CAPREIT. You got me worked up here a little bit, but like we are the largest -- a private partner of rent supplement units in this country, okay. In terms of responsible ownership, CAPREIT is the company that stood forward in the biggest way with the government to be partnered on rent supplement. That is probably the most efficient way to provide affordable housing in this country. So we welcome government engaging with us to be part of the solution.

Not what you hear often, right? Yes. On another sort of tangential question to that then. When I look at the amount of rent increases that you struck on the renewals, I guess, for anyone who didn't turn, you had an eligibility to increase those rents on January 1. It looks like you didn't market the entire portfolio. Was that just you were waiting for rollover on some? Or did you hold some back to do later in the year? Just like is it just part of your good governance? Or is there something else going on in there?

So Dean, we actually did rolled out for our portfolio, so Ontario and BC. So they're all affected. I mean I think when we say 44%, that includes all of our apartments.

Yes, look, there are other provinces that didn't have moratorium. And so those provinces, we were able to continue the normal course of issuing rent increases. But the moratorium built up the ability for us to serve both provinces in full.

Okay. So it's all caught up. There's no adjustments, sort of bigger bumps coming in Q1 or Q2. Okay. And then my last question -- MHCs is -- I mean, it's a great business, but is land still the constraining factor for you to be able to do a little more around owning those or perhaps developing them?

The problem here, I'll give you my MHC speech in frustration now. MH has been used in the U.S. 3x in its history to solve affordable housing crisis, 3x. Double-digit percentage of the U.S. population lives in a manufactured home land lease community. It's unbelievable, okay. In Canada, that compares to less than 1%. So what's the problem? It's not that we don't have any land. Canada has vast quantities of land. Problem happened about 15 years ago with changes to the municipal planning acts moved residential to city services, okay. So until we break that thinking and municipalities wake up and realize there are a lot of homes in the country side that are on wells and septic systems, everywhere even when you drive down the 401, that's all you can see are people on wells and septic systems. So what is the problem with building land of these communities. We have more fresh water in this country than anywhere on the planet earth. So the notion that water is the issue is frustrating. But I do think, again, I'm slowly getting progress because if there's a willingness to bring affordable housing to Canada, manufactured housing is a very attractive alternative for people. Owning a home for under $200,000 a year where CMHC financing is available on that home, not the land but on the home, gets people into home ownership for less than the cost of average rent. So when you talk about the number, Dean, of people that are developing manufactured home communities in Canada, it's one that we're aware of Park Ridge. We're moving down that track. We have a couple of little communities on the go right now, but this should be full blown focus for the country, not something that's not getting attention. We've got the answer right next to us in the U.S.

Yes. Well, hopefully, someone listens. And if you're interested in buying my house at 1 cap, it's for sale.

Very good. We hear you. Yes, you're welcome.

Thank you. We currently have no further questions. So I will hand over back to Mr. Kenney for any final remarks.

Well, thank you for that very spirited question-and-answer period. We're always available to answer questions. Please feel free to reach out to either Stephen or myself. Let me thank you again for your time and attention today. As I said, don't hesitate to give us a call. We'll host our virtual 2021 Annual Unitholders Meeting via webcast on June 1 at 4:00. Instructions on how to access the meeting can be found on our website. We hope that you can join us and see you virtually. Thanks, again, and goodbye.

This concludes today's call. Thank you so much for joining. You may now disconnect your lines.