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

Good morning and welcome to the Canadian Apartment Properties REIT's Second Quarter 2023 Results Conference Call. [Operator Instructions] I would now like to hand the conference call over to our host, Nicole Dolan of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Before we begin, let me remind everyone that during our conference call this morning, we may include forward-looking statements about expected future events and the financial and operating results of CAPREIT which are subject to certain risks and uncertainties. We direct your attention to Slide 2 and our other regulatory filings for important information about these statements. I will now turn the call over to Mark Kenney, President and CEO.

Thanks, Nicole, and good morning, everyone. Joining me this morning is Stephen Co, our Chief Financial Officer; and Julian Schonfeldt, our Chief Investment Officer. Let's start with an overview of our operational performance on Slide 4. As you can see, this slide demonstrates the increasingly tight rental market that we're experiencing across Canada. For Canadian residential portfolio, Occupied AMR increased by 6.5% compared to the same period last year and 5.1% on the same property basis. This was achieved alongside consistently high occupancies of nearly 99%. Moving to Slide 5, our robust rent growth drove increases in operating revenues and NOI, both up by approximately 5%. Our operating margin remains strong at 65.9% for the 3 months ended June 30, 2023. Margin expansion was held back slightly due to higher repairs and maintenance costs, which we incurred from a combination of general inflationary pressures and a reduction in discretionary capital expenditure spend. As the rental market in Canada tightens, we are instead reallocating that capital into in-suite maintenance. Diluted FFO per unit increased by 1.2% primarily due to organic NOI growth and to a lesser extent our accretive NCIB repurchases. This was partially offset by higher interest being incurred on our credit facilities. Our payout ratio remains strong at 61.5% and our diluted NAV per unit decreased slightly to $57.08. This was mainly driven by the fair value loss on our European portfolio. Operating results were strong for the 6 months ended June 30, 2023, as you can see on Slide 6. Operating revenues were up by 5.3% compared to the same period last year. This drove the increase in our margin to 64.3% on the total portfolio and 64.9% on the same property portfolio, up by 20 and 50 basis points respectively. Our diluted FFO per unit increased by 1.7%. Again, this was a result of our strong organic growth along with NCIB repurchases partially offset by higher interest costs. Our payout ratio remained conservative at 62.5% for the current 6 month period. We continue to execute on our CAPREIT 2.0 strategy as displayed on Slide 7 and I'm excited about the progress we've made to date. On the asset side, we're continuously improving the quality of our portfolio by selling our older non-core properties and buying new purpose-built rental properties in Canada's fastest-growing and highest-density cities. Importantly, this allows us to support the supply of new construction rental housing, where it's needed the most. We're also contributing to the crisis through our entitlement program. We're using development as a tool to extract and maximize significant underlying land value in our portfolio, which in turn paves the way for the construction of new housing supply. This asset management program accompanies our debt and equity initiatives as well. We have been investing in our NCIB to produce meaningful accretion for CAPREIT unitholders and we also actively manage our debt strategy and mortgage portfolio. These programs are integrated with our broader capital allocation plan to ensure that we're putting net proceeds to the best use. I'll now turn things over to Julian to provide a more detailed update on our capital recycling.

Thanks, Mark. Turning to Slide 9, you can see the solid progress we've made since we started repositioning our portfolio. So far this year, we have sold $293 million worth of our non-strategic properties and have reinvested $208 million of net proceeds into newly-built rental properties located in thriving regions throughout Canada. These high-quality modern buildings now represent 10% of our Canadian portfolio, and we will continue to increase that allocation moving forward. Slide 10 presents an example of our asset refresh in the second quarter. On the left, we show a property that we sold containing 393 residential suites and 2 commercial units in the Saint-Laurent neighborhood of Montreal, Quebec, for $68.9 million, excluding disposition costs. The property was built in 1971 and was sold at a premium to IFRS fair value. We reinvested net disposition proceeds into the growing city of Langley, British Columbia through the purchase of Parque on Park for $53.7 million, excluding transaction costs. The amenity-rich property was built in 2022 and it contains 93 suites that have an average size of over 1,000 square feet. It's located next to a park and a major transit station that provides direct access to Vancouver City Center and it is also near several of CAPREIT's other newly built assets in the area. The energy-efficient building is topped with 250 solar panels, and all of its suites are individually metered, which lowers utility consumptions and costs. We're excited to continue improving the quality of our portfolio through strong transactions such as these. On Slide 11, you will find an update on our NCIB. We've invested $339 million in the program to date, including $101 million in 2023, repurchasing our Trust Units at steep discounts to NAV and therefore crystallizing this value for unitholders. Moving on to Slide 12, as Mark mentioned, our asset-light development model unlocks and maximizes land value across our portfolio. This not only generates proceeds for us to redeploy back into our bread-and-butter business, but it also plays an important role in contributing to the construction of new housing supply in Canada. Our development strategies first focus in Ontario and we've identified in excess of 6 million square feet of possible GFA across potential development sites in the GTA alone. We're currently working with several best-in-class development partners on the entitlement in subdivision or severance process for over 2.5 million square feet of GFA as for the planning applications we've submitted. This would provide for over 3,500 new residential homes in key strategic growth areas and major transit station hubs across the city and we're actively working on several more projects in our entitlement pipeline. With that, I will thank you for your time this morning and I will now turn things over to Stephen for his financial review.

Thanks, Julian, and good morning, everyone. Referring to Slide 14, you can see that we have $265 million in available capacity on our Canadian credit facility at June 30. And we plan to hold this capacity to relatively constant for the foreseeable quarters ahead. Even after taking into account reduced interest, which we were able to arrange through our swap agreements, our Canadian credit facility is carrying a weighted average interest rate of 6.4%. As a result, with our elevated borrowing being stable for the short term, we expect to continue incurring higher interest costs. On our mortgage portfolio, we're fixed at over 99% of our interest and it currently carries a relatively low weighted average effective interest rate of 2.7%. By fixing our interest costs, we're mitigating our volatility risk and enabling ourselves to proactively manage our debt. Our mortgages have a weighted average term to maturity of just over 5 years at period end and we're expecting this to up finance between $250 million and $300 million by the end of 2023. Slide 15 shows the staggered maturity profile of our mortgages which provides us with flexibility and reduces our renewal risk as well. You can see that we have no more than 40% of our Canadian mortgage debt coming due in any given year. You can also see that we have only 5% of our Canadian mortgage debt maturing in the remainder of this year, and 8% in the total for 2024, which positions us well in the current environment. Turning to Slide 16, we continue to conservatively manage our debt metrics and ensure they remain safely within covenant threshold. Our debt to gross book value was 40.4% at June 30, 2023, and our coverage ratios remain stable and high. I will now turn things back over to Mark.

Thanks, Stephen. A key priority of CAPREIT is the continuous enhancement of our environmental, social, and governance performance. I want to take a moment to feature our progress on that front following the release of our latest ESG report which is now available on our website. In 2022, we achieved a number of key ESG accomplishments as highlighted on Slide 18. We invested almost $20 million in energy efficiency, including the acceleration of our suite sub-metering program, which will lower consumption and improve our environmental footprint. As of June 30, 2023, Canadian tenants who pay their electricity charges directly through the sub-metering or direct-metering represent 68% of our total suites and sites in Canada. We are also proud to have been recognized by Equileap in their 2023 Gender Equality Global Report & Ranking as the only Canadian company to have achieved gender balance across all levels. This includes our Board of Trustees, where we've exceeded our 30% target for female representation. Importantly, we're actively developing our corporate approach to climate action. In 2022, we identified our key climate-related risks and opportunities and performed a gap assessment to determine our priorities in aligning with the task force on climate-related financial disclosure recommendations. This climate action plan is being integrated with all 3 pillars of our strategy as shown on Slide 19. We are proud to be taking that one step further with our enterprise-wide initiative to consolidate all of our many ESG-related commitments and actions. Our trustees, senior executives, and managers from across the country have worked together to formulate a robust and comprehensive ESG program, which is now being incorporated into our organizational objectives, and overall business strategy. This strategic alignment contributes to our core mission of being the best place to work, live, and invest. As you can see on Slide 20, we're committed to generating enhanced returns for our unitholders while also empowering our employees and making meaningful contributions to our communities. We are pleased with how far we've come on meeting these objectives today and we're excited to keep making progress on our strategic goals going forward. We continue to recycle our capital in the most productive ways possible and we're actively and carefully allocating our resources to the highest-yielding outlets. We're ultimately seeking to create real value for all our stakeholders. And this means that we're focusing on modernizing our portfolio and contributing to the solution to the Canadian housing crisis. After many proud years of expanding and approving the value-add portfolio, we've entered a new CAPREIT era in which bigger is not necessarily better. We're thrilled to be optimizing our portfolio and growing earnings per share instead of our suite count. However, as this shrinks the size of our portfolio, we're cognizant that we must similarly optimize our organization. We need to make sure that we have the right teams to provide the right level of service for the right business, both now and in the future, by prioritizing our operational efficiencies and overhead as we're doing today, we're ensuring that CAPREIT 2.0 is set up for sustainable success in the long run. With that, I would like to thank you for your time this morning and we would now be pleased to take any of your questions.

[Operator Instructions] Our first question comes from the line of Mark Rothschild of Canaccord.

In regards to raising rents, whether it's on turnover or on renewals, there's been some negative news as some have tried to push rents higher even if they're not pushing it fully to market. Has this -- have you guys seen any of this in your portfolio and is this impacting at all the way you're looking at managing your rental rates?

No. We're actually taking a very conservative balanced market approach to the rent. The reality is that during COVID, we had a lot of competition with respect to apartment rental. We saw rents fall quite dramatically into single digits. And as time elapses here, we're now seeing those leases come to market. It's quite often the more recent leases that come to market and I think we're just seeing the aftereffects of COVID. But I would say, no, we're measured in our approach, and there's not a lot of opportunity, quite frankly, in the turnover, but I think we're doing a good job of finding that right balance.

And how much will you be able to push it on the turnover?

Like I think, now, we're in moderation phase. I wouldn't expect to continuously see the result. In fact, if anything, you're going to see a moderating, I think, of mark-to-market rents. It's not a -- it's -- we're seeing post-COVID effects here now, we're catching up like I just mentioned and I wouldn't think you're going to see much more acceleration on that front.

And then just on the asset values and the asset sales. Are there the cap rates that -- or maybe returns that you will look to increase the pace of selling, interest rates have risen more, and the cap rates still appear low. So I'm just curious how you guys look at that as you progress through this program?

May I ask Julian to kind of give a market overview of what he's seeing in here? He's very active in the field. Julian?

Yes. Thanks, Mark. So with the rise in interest rates, it has become a little bit tougher and certainly, the financing delays that have been caused, particularly with that increase in the fees that came in June and created a bit of a backlog, it has made the environment a little bit tougher, but we are still seeing good liquidity or decent liquidity in certain assets with private investors. As you mentioned, changing market dynamics can make some assets more attractive to sell. But, again, in a tougher market to -- we just have to do what we can with the existing liquidity.

Our next question comes from the line of Mark Markidis (sic) [ Mike Markidis ] of BMO Capital Markets.

Maybe just to quickly follow up on Mark Rothschild's question on the rents, Mark Kenney. The comment, I just want to make sure I understood you correctly when you said that you don't expect to see any more upward pressure. Was that a market-rent comment or was that more of a -- I'm trying to just relate that to your leasing spreads. And I guess directly asking the question, is mid-20s sustainable in the near term?

The short answer to that is yes. I would -- it's going to hover anywhere from low 20s to mid and that's the short term. That's as far as we can kind of see out, which is really only 90 days in marketplace. But, yes, that is the range that we're seeing. And, again, I have to kind of be direct here. These rents are still incredibly highly affordable relative to the alternative rentals in the marketplace, especially in the condo space. So despite the numbers would seem quite high, we are seeing that they're still incredibly affordable on an income ratio basis. And what it's really speaking to is that Canada really needs to get its supply story going. We're talking about it, we're acknowledging it finally, and more supply is what's going to really help ease pressure here.

No. Absolutely. Anecdotally, my colleague on the research side was showing us a 2-bedroom condo rent that was $4,400 yesterday. So totally, I get your point on that. Just with respect to the comments on R&M and less discretionary CapEx and more capital being allocated to in-suite expenses, I guess, are ergonomic expense. It's just that maybe I'm missing something, but I'm just kind of looking at your CapEx both on the non-discretionary and discretionary side, it's virtually flat year-over-year and you've got less units. So I'm just trying to circle the square with respect to what you guys are getting out there.

I'll let Stephen provide more color. But in short, we are not letting up on our energy climate-related investments. You'll see increases in that particular category. And we are taking approach with all other categories that a dollar is a dollar and let's just spend it efficiently. And if that means doing maintenance versus capital work, so be it. So I'm thrilled quite frankly to see the team move towards this model of just treating a dollar as a dollar, especially in a higher cost of capital environment. That's also not fully baked in. But Stephen, do you want to comment more on the CapEx spend?

Yes, yes, of course. Yes. So we're also considering that inflation plays a part into that. We have, as you pointed out, Mike, you've seen CapEx be relatively flat over the last year, but one component of that has increases as Mark has pointed out, our energy investment has increased considerably and that will be for the remainder of the year. But you will see meaningful decreases in discretionary and non-discretionary CapEx for the remainder of the year. So there we have to take a proactive approach around given that it's a tight rental market, we are reallocating capital and you will see a slightly higher maintenance cost going forward into Q3 and Q4.

So the year-over-year increases on general OpEx will continue just because you see the pace of CapEx coming down.

Yes. Exactly.

One last one for Stephen just on the G&A. I think it came down, I don't have the numbers in front of me, but it came down pretty significantly quarter-over-quarter. Maybe you could just give us an update in terms of what you're expecting on the G&A line for the full-year.

Yes. Yes, I would use the 6 months as a run rate for the remainder of the year and also just build in some inflationary pressures. But otherwise, I think the 6-month run rate is a better representation for the remainder of the year.

Our next question comes from the line of Jonathan Kelcher of TD Cowen.

Just on the asset sales. I guess you've done about $300 million this year. You're looking to do $400 million to $500 million. Have you in the last $100 million to $200 million, have you identified those assets yet?

Yes. I would turn it over to Julian, but I just wanted to make a little comment just on this from last time. Where Julian is focused and having quite good success is exactly in the category of assets that we're looking to move on, which would be the lowest quartile of the portfolio. Those buyers are still quite active. But Julian, why don't you provide Jonathan with some more color on our dispo program?

Yes. To answer your question, Jonathan, yes, we have identified those assets and they're at various stages in the disposition process.

And then in terms of the other side, you have bought assets this year, are you starting to see more opportunities from developers or maybe some smaller owners that kind of are out over their skis a little bit and getting hurt by the higher interest costs?

Yes, for sure. On…

Yes, you bet.

Yes, for sure. On the acquisition front for the new build assets, there's definitely good opportunities. And for some of those merchant developers that have floating rate debt that they used to fund it, the current environment is painful, and that's coinciding with a lack of institutional buyers. So there's definitely good opportunities. We are being measured in our deployment of capital just given we're trying to restrict it to the dispositions we're making and with the higher interest rates and a little bit less certainty, we're trying to be prudent in deploying that capital. But there certainly are good opportunities out there.

And then just to sort of round it all together, if you're looking at selling and you're looking at some of those opportunities, what's the sort of delta and the cap rates between what you think you can sell your, I guess, Mark called it lowest quartile assets for it and what you can buy brand-new stuff back?

It really depends on the region. Yes? Yes. No, it really depends on the region and the specific assets, but it will -- on the stuff we're selling, it will hover between just under 4, just above 4 cap rates and on what we're buying, it will be low to mid-4s. So there's still a little bit of a spread in there. But that doesn't factor in as well with the CapEx difference, right? Because those cap rates are based on NOI and clearly the value adds we're selling will be significantly heavier on the CapEx front being 1960s or '70s buildings typically and the new construction assets will have very light CapEx requirements.

And then just one quick one for Stephen. For 2024, on your mortgage renewals, what sort of up-financing are you targeting at this point?

I'll probably have to get back to you on that. We're currently evaluating based on the values and we're working with our lenders. So I'll take that offline with you.

Our next question comes from the line of Kyle Stanley of Desjardins.

Just going back to Mike's questions earlier just on the capital spend. I'm just wondering how your commentary kind of relates to the 4% to 5% OpEx inflation target you mentioned earlier. Would that still be intact based on maybe more spend going towards the kind of non-discretionary?

Yes. I think if seasonal change is taken into account, I think the inflation is built in the spend now and you wouldn't expect to see anything more dramatic in terms of the allocation towards repairs and maintenance. We're kind of in a stable state there now. So using this quarter as an example, I would say that's a decent assumption. Stephen, would you add color to that?

Yes. No, I agree. I think if you use this quarter as a basis for OpEx growth for the remainder of the year, I think that's justified.

Just one quick clarification. Just on your $400 million to $500 million disposition target, is that incremental to what's already been sold or is that inclusive?

That would be our target for 2023, which would -- you would count what we've sold to date in that $400 million to $500 million number.

That's what I thought. And then just another one. So on your -- just given with how the unit price has been trading, can you just talk about your capital allocation pecking order today and maybe how that's changed since we last spoke?

Yes. It's a great question. It will continue to change not because we're not convicted in strategy, but things do change. So Stephen has done and the team have done a remarkable job on the debt ladder. We did a remarkable job actually advancing mortgages at opportune times. But it's really our revolver debt right now, which is the drag. And so today, with any form of liquidity, we would definitely be focusing that cash on the revolver debt. It's a bit of a competition, quite frankly, because Julian, as he mentioned, is finding quite good opportunities in the market on the acquisition front. But those 2 things have to be balanced out against one another. And my inclination today is to pay down that revolver debt because the balance of our debt is incredibly stable and incredibly well managed. In fact, it's the longest debt ladder amongst peers. So we're in great shape from a debt point of view and if we can use that money for revolver debt, that would be opportune.

Perfect. And just one last.

No, I was going to say the NCIB program, as you can expect, has been put on pause.

And just the last one, Mark, a bit of a higher-level question, but you've obviously been very active on advancing the housing affordability file in Canada over the last year or 2, ramping up government relations as part of the job. Just looking back on it all now, could you walk us through your thoughts on maybe how the industry has progressed and maybe where you're still seeing some opportunities to improve?

I think that the -- as I said on the prior calls, the education has definitely taken effect. The more we've been able to dialogue with the federal government, there's a real understanding now that it's not corporate landlords that are raising rents, it's a supply and demand problem that we have in the country. So that is reassuring. The provinces are doing their absolute best, quite frankly. Provinces like Ontario and BC are really kicking into high gear and doing their very, very best. But like I keep saying the #1 influence is at the municipal level and it's coordinating and incenting those municipalities to free up density and to build capacity, quite frankly, to take on more density. So we're doing our very, very best to kind of explain the dynamic. Now all of this is under incredible pressure with population growth and quite frankly, financing costs and just general supply chain costs and labor costs. So there's lots of inflationary pressure out there that are making pro formas wonky and land values are going to stay high until we increase capacity in the country. So again, it's a slow process. And Canada has an exceptional challenge because of the 3 level of governments that really need to get coordinated that all have sort of competing ideals.

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

Just to follow on Kyle's last question there. Just on -- based on the recent cabinet and shuffle, you got a new housing minister. As you highlighted, you've been in discussion with the government for a little while here. But do you see this change in the cabinet extending or changing timelines in terms of where or when we might see some initial announcement by the federal government? Like could we see anything by the full economic update or could this delay things a bit?

I think that for our industry, having Sean Fraser as the Housing Infrastructure Minister is highly productive. He comes with a very strong immigration understanding. And that is, as we've said, primary thing that we're looking for on the resume. So he gets it. And I'm quite optimistic. It's very clear now, I think, that the federal government is really under a lot of pressure here to help move the file along and I think that we're in a good shape. So yes, the fall economic statement, I hope to be indicative. These are new ministers, fresh in the job. Hopefully, they're up-to-date on the files. But I think I would call that the general environment is turning more positive in terms of understanding the real issues affecting supply and demand in Canada.

And would you think that like one of the key or one of the new initiatives still could be like an affordability fund at the federal level as one of the kind of maybe the first initiatives they could announce or one of the first?

This is kicking a lot of excitement at all levels of government. You've got the cities in the game now. Province is talking better in the Feds. The reality is that there has been almost a neglect in the investment of social housing so long that they need to catch up, and there's only one way to catch up, and that is to buy existing assets. So the lack of social housing, the need for social housing and quite frankly, the inflationary pressure that's been put on income-constrained Canadians is just driving the housing crisis into overdrive. So quick action will need to be taken and these acquisition funds are a quick way to help ease the crisis. So that's logical in my mind. Now let's just hope that there's funding at various government levels and the sensibility really makes it into policy.

Last question for me. Just going back to your opening comments on the development applications, the entitlement process. It sounded like, and correct me if I'm wrong, there's more applications that could start. I guess I'm curious to know if you were to go through all of these potential projects or sites today, what's the total opportunity set in the portfolio in terms of net suite? Is that still -- go ahead.

Well, I'm just going to say the CAPREIT to them is revving up, right? And I can tell you, it's one of the most exciting meetings that I'm able to kind of tuck my nose into. The investment team and development team is doing an exceptional job, being laser-focused in figuring out how we can do this. I'll just tell you, Brad, it is so much work on a site-by-site basis, but the enthusiasm and the excitement about helping Canada bring more land entitlement into the fold at a time that we need more housing is really exciting for the team from a broader point of view. And obviously, it's unleashing value that you just -- your eyes pop out. So I don't want to be too macro big in terms of the scale here, but we're going site by site, and it's very, very exciting.

I guess historically, CAPREIT talked about like net 10,000 suites. It sounds like maybe you might not want to give a number today, but is that still ballpark where we could be?

We have the best team we've ever had, and the team is -- it pushes me on being cautious because it does take so much time to get a real clear picture on what it is. And I would say that wait for updated guidance on that front. All I can tell you is the initiative and effort and competency that we currently have at CAPREIT is the best it's ever been. We're getting at it.

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

So just on that 10% of the portfolio that's new build, I was wondering if you're seeing any difference in revenue growth or any other metrics that are in that bucket versus the rest?

Well, Jimmy, it's again why this investment is not that difficult to -- it's kind of a no-brainer because we are seeing uplifts in the new construction assets that are just as impressive as the value add. Again, the market is really, really looking for quality. And when we're looking -- we're moving assets from developer ownership into professional management, there's definitely yield spread there that can be had. So Julian, I don't know if you would add any more color on some of the examples or experiences we've had through the underwriting process.

Yes. Perfect. Thanks. So good examples of the property we picked up in Ottawa earlier in the year, we've underwritten those single-digit revenue increases, but we're managing to exceed that by significant amounts, not just on turnover, but on renewals as well just given the difference in regulatory treatment for those types of properties. So it's been pretty strong on that front.

So if you were sort of -- it would be fair to say that if you were to bracket that portfolio and look at the sort of pace of revenue growth, even though some of those assets are new and presumably the rents are closer to the market. Because of your ability to drive everything to market, the revenue growth in that bucket would be today slightly better than the rest and presumably it's going to be consistently better than the rest. Is that…

Well, it's fast, so it follows the market far more quickly. Like the runway on the value-add portfolio is decades deep because it takes time. The new construction assets too, it's a matter of speed. You can get there very fast. But the runway is not exactly the same. And it's more volatile to down-market changes that we don't see on the horizon at this stage. So it's just a matter of adjusting to market more quickly.

And then on the turnover rate, do you have a sense of sort of what's the range of turnover churn rates based on geographies or type of assets? Are there any -- I mean, intuitively, I would think kind of your best location, older assets with a lot of below-market rent or the deeper it is, the longer -- the lower the turnover rate. But I wondered if you had any observation on any kind of big ranges or specific pockets that stand out to you in terms of turnover rate being high or low?

Well, Ontario is where we're seeing the greatest amount of lease holding, I'm going to say, where turnover has really gone down significantly. Canada is starting to look a lot more like Europe in terms of churn rates. And quite frankly, we don't really see that changing anytime soon just because there's a lack of optionality out there. But I think the trend is basically to just slow down everywhere. Again, at CAPREIT, we made the decision during the pandemic because we didn't know exactly when the pandemic was going to end. We're not scientists here but we made the choice to manage our occupancy. And so we're not -- we don't have to catch-up that others may have right now but everyone is going to be experiencing the same kind of churn rates going forward into 2024. I think it's an across-the-country all-market segment phenomenon. We see slightly more turnover, obviously, in the new construction assets because they are at market and easier to walk -- give up a lease. But the value-add portfolio for all markets, I think it's going to be very stable in the low double digits.

Our next question comes from the line of Gaurav Mathur of iA Capital Markets.

Just on your disposition strategy, could you provide some color on what the buyer pool looks like now and how have bid-ask spreads been when compared to the beginning of the year?

Julian, why don't you provide some dialogue there?

Thanks, Gaurav. What we've been seeing in the dispositions, we've been doing, it has been predominantly private investors. In most cases, it's folks that we haven't had interactions with in the past before. It makes it a little bit trickier to navigate just given the lack of track record and kind of lack of reputation but there's a lot of creative and willing folks still out there. And in terms of the bid-ask spread, it really depends on the property and the investor. It just takes a little bit more time working with the brokerage community or working with context we have and finding the right buyer. Once you find the right buyer that's been and are creative in the way you go with the deal, we're able to tighten that bid-ask spread and get prices that we need. We're -- and we've said this before but we're not in any desperate mode to sell. So everything we've done so far has been at or above our IFRS NAV values and we'll continue with that strategy.

And then, Mark, you did mention earlier on the call that there is a preference to pay down the revolver. And when you're thinking through the active debt management strategy, just what's -- how are you thinking through repayments versus refinancing here?

Yes. Well, again, it's always -- our source of equity today is disposition and opportunities in the marketplace or the challenge to paying down debt in general. So our thinking is, depending on the amount of liquidity that we gained to-date, first preference up to almost well, 300 -- almost $400 million would be to attack that 6.5% revolver debt. And there will be ongoing competition internally based on the opportunity to acquire existing buildings. And it's kind of just it's not simple. Like if we were loaded with equity, we would then consider after paying down the revolver debt and having no acquisitions to buy to stay out of the debt market on refi and to think about our CapEx funding for next year. So we've got lots and lots of use of proceeds.

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

Just on that last point with regards to the source of funding, I mean you do have the ability to up-finance existing mortgages and I understand some of that goes to CapEx. But would a portion of that not also bring down here your facility draws at this point?

Absolutely. And again, that's why it is fluid. Stephen, you can explain the thinking there in terms of your debt strategy.

Yes, absolutely. I mean kind of what Mark said, I mean wherever we can get top of financing, if it's not paying our CapEx program, it's definitely going to pay down the debt. And just to touch on like on the 2024, we do expect to finance around $500 million to $600 million of debt. So I think included in that is the top of financing. So we will be looking at opportunities to pay down that very expensive debt.

I would only add that -- I would just sort of give color here in the thinking. As Julian said, and rightfully so, we are in no desperate mode in terms of selling our assets. We want premium valuation to IFRS. And the buyer pool for a variety of reasons, that the deals are not as fluid and certain as they once were. So we're patient with time. So because of that, the timing of use of proceeds does move around a little bit because we're not going to rush to sell under any circumstance. And we have this wonderful flexibility of our balance sheet where we can use multiple sources of capital. So if we're not -- if we're going to -- we may refinance, we may use equity from a large sale. All of these factors are difficult to pro forma because our rigor around staying convicted in the long vision is there.

With regards to allowable or guideline rent increases, I think you highlighted that based on Ontario's inflation number, it should be around 6%. I think Quebec has been somewhat rational. You can push through 3% to 5% on renewal spreads. But is there anyone in the government that's kind of hearing that maybe it's better to get landlords some money so they can maintain their assets as opposed to getting all of your rent increases on turnover?

Well, I can only tell you that the frustrating narrative is despite policy decisions, not all renters are seeing them constrained. And we believe very firmly that those that can afford to pay should carry their fair share. So policy that only surround the most income-distressed part of the population is not healthy for a housing crisis. So this sounds really common sense and straightforward, but it's a matter of the politics of making change. So it should all be united in our voice to government if we care about the Canadian housing crisis to really change the reality of not all renters are income distressed.

Yes. No, that's fair. And then inflation is 6% and you have costs as the landlord and you're large and can afford them, but not everybody can. So just as a tangent to that geography-wise and in terms of where you put capital on the acquisition front, if you are buying new assets, are there specific locations that make more sense at this point? I know you've been in kind of suburban and secondary/student-oriented markets, but is there anything else that you look at to justify kind of getting at the rent growth on a new asset?

Well, my favorite geography is opportunity, but I'll turn it over to Julian to provide some additional color.

I like Mark's answer. I think I've heard you make the analogy that it's not like a grocery store where you can just kind of pick whatever you want off the shelf. So it really is opportunity driven. But factors that we'll consider will be what's the supply of housing in the area, what's the rental stock, how affordable are the alternatives, what operational synergies do we have, where do we expect the future market rent growth to be, the population growth? What types of cap rates can we get on the acquisitions in there? And so it's really a whole host of factors that boil into our total return expectations as well as the risk of attaining those returns. So, yes.

Nope, fair enough. We'll continue to watch and see where you deploy your capital and it has to that -- been to that effect so far in terms of what you've targeted. So thanks for the color.

Our next question comes from the line of Mario Saric of Scotiabank.

So just a couple on my end. First one, just a clarification on the OpEx question, the 4% to 5% guidance before. Stephen, are you saying essentially if you're pegging us to the Q2 number, essentially the 4% to 5% becomes closer to 5% to 5.5% for the full year? Is that a fair way to look at it?

Yes. Yes, that's a fair way to look at it.

And then maybe a question for Julian. On this density pipeline, the 2.5 million square feet of GFA that you've submitted, what's your best sense today of what the value per buildable square foot could be on that once it gets approved?

We don't really provide guidance on that. I mean the things we factor in is these are going to be coming online at various stages over the coming years. Some are going to be a little bit more muted but I mean the youngest deal, the Tangreen is 3 years out. So there's a lot of factors that go into those values. So it's just not something we want to provide guidance on at this point.

And then maybe 2 more kind of philosophical questions, perhaps. Mark, you've talked about CAPREIT 2.0 which includes more focus on per-unit growth and let's say that's less focused on overall suite growth. So I'm not sure if you can answer the question, but I'll give it a shot. So look, if you look out over the next 3, 5, 10, 20 years, you can pick whatever timeframe you'd like and if we just assume interest costs, let's take them out of the equation, so let's say they're flat. Is there a target FFO per unit or AFFO per unit growth rate that you think CAP 2.0 can deliver over whatever timeframe you want to choose?

That's the question on the minds of all investors, no doubt and it's certainly a question that we talk about it and try to address every single day. And again, it's the sphere of expectations and guidance. All I can tell you is we have an approach now to our assets that we look at returns, and we try to achieve premium pricing on dispositions and we will do that in every possible opportunity where our criteria has circled those opportunities. Period. We will take that capital and we will deploy it into the highest and best use of net proceeds. And as you heard, Mario, the trick is I'm not trying to be cagey. Today, it's the revolver. But even today, that revolver debt may be pushed to side for an incredible opportunity on the acquisition front. But regardless, we are going to be unrelentless in pruning and working on growing earnings per share. Everything else is ego and investors don't invest in ego. So we're not interested in that. We are laser-focused on growing earnings per share, the rigor around evaluating our assets and evaluating highest and best use of funds is one that you'll see from CAPREIT going forward into the future, and that's what we're excited about. So I'm not answering your question directly. I think track record is a pretty good measure of looking but we hope to accelerate that track record. Again, the potential of increasing value to the balance sheet through the development group's initiatives and unlocking land value is not fully baked in or realized into our track record at this point but we are very focused on that for the reasons I talked about. It's providing land to help ease the Canadian housing crisis and most importantly, to bring value to CAPREIT unitholders. So a lot of different factors here, but nothing is slowing down. The engine is revving up and you can expect incredible things from CAPREIT going forward here now. We are coming out of post-COVID. We are making all the right moves, and I'm incredibly excited about what I'm looking at going down the pipe. We've got a great team.

Speaking about revving the engine, Mark, what is your sense on market rent growth kind of quarter-over-quarter these days? Have you seen any slowdown in that growth perhaps due to affordability question marks or is it continuing at the same pace of let's say, 2%, 3% per quarter like it has been over the past year?

Well, yes, I think we're just going to see it moderating here because, again, the leases that move out are always the most recent leases when you look at churn, okay? So we're getting some post-COVID effect here. As I talked about earlier, it's moderating. But truly, it's -- we've got to do a better job of expressing to the market how incredibly affordable these new rents are. So they're sure they're accelerated post-COVID. But we're talking about affordability option in the marketplace that just doesn't exist anywhere else. Like we heard about $4,400 condos. This is a real affordability option for people. So we shouldn't be as focused on those mark-to-market rents. They will ease into the range we talked about but they're still highly, highly affordable. So the runway is long on this now, very long. The housing crisis that was building 5 years ago, we did nothing about it and the population growth pressures have been exaggerated to never before seeing Canadian level. So I don't see an easing at all on the demand side and I don't see a lot of movement on the supply.

The question was more, not so much on your turnover spread, but let's say, for example, your typical building charge is $1,000. Next quarter in 2020, the market rents are $1,025. But you got that $25 per quarter is the pace of that given the demand, the lack of supply. Is that essentially continuing?

Yes, but it'll not accelerate, but yes, continue.

Last one for me. Just it seems like there's a significant opportunity to buy new build in the market and perhaps what's constraining your ability to do so is the financing delays in terms of being able to sell some of your older assets. You're trading at a 12% discount to your IFRS NAV. You've talked a lot about buying back shares. What are your thoughts on if the private market in terms of sales is challenging, what are your thoughts about actually raising equity, call it, a 4% to 4.5% cap implied to buy new assets at a mid-4 cap? Does that make sense?

I just fundamentally don't believe in issuing equity below what we think is a very conservative NAV, very conservative NAV. Like again, we're on a broken record here, and we've got to get the results out on the street. But our development land potential alone is not fully baked into that NAV. And I just don't -- I don't believe in it. Like we're patient. We're here to serve the investors of CAPREIT and I don't want to dilute anybody because I think there's an opportunity. We will find sources but we will remain disciplined. As Julian said, we're in no rush to sell at all. But where we can find those IFRS opportunities, we've become very, very good at it. And we'll continue on the pace that we can when we raise equity, finding the best place for that equity to sit on the balance sheet, and that will be the discipline. I don't feel -- when you -- when CAPREIT, my market cap is more than half the Canadian apartment REIT market. We've got a big balance sheet here. We've got lots of flexibility and we're in no rush. So I'm not afraid of losing opportunities because we're very good at finding them, and we're very good at implementing that opportunity into the balance sheet.

We now have a follow-up question from Mike Markidis of BMO Capital Markets.

I'll be quick here just than try and delay the call too much more but just given the strategy and the increase in the new build assets, one thing that kind of sticks out is that your same-property margin is higher than your total portfolio, and that seems kind of intuitive to me. Maybe if you could just address that, that'd be great.

No, you've touched on another feature of the new construction portfolio, which is they do enjoy higher margins, and that is good for inflationary cost pressure control going into the future. With those higher margins, we don't have as much exposure to inflation and it does have an effect. So it's another hidden attribute of the strategy that Julian and his team are putting to work. And yes, I don't know if that answers the question directly. Mike?

Yes. No, I hear you on the higher margin on the new assets. So shouldn't the total portfolio NOI margin be higher in same property?

Yes. It should -- yes depending on the quantum. Like absolutely, if we -- once you enter a high enough quantum of new construction, it will obviously start to move the overall margins. It's just a small percentage that's crept in slowly over time. We didn't add the 10% new construction assets last week. It's over time that margin will generally get pushed up. And then…

And in part, Mike, there's a lot of…

Yes. Go ahead, Stephen.

So yes. So, Mike, it's just -- it's also some of the costs that you could say, are on disposed properties that are included in your total NOI. And we did get rid of several properties that were you could say the culprits of our septic tank issues. So you see a lot of those costs that are hitting the margin on a total NOI margin basis, which is lower than your same-store.

As there are no additional questions at this time, I'd like to hand the conference back over to CEO, Mark Kenney, for closing remarks.

Thank you so much. I'd like to thank everybody for your time today. And if you have any further questions, please do not hesitate to contact us at any time. Thanks again, and have a great day.

Ladies and gentlemen, this concludes today's Canadian Apartment Properties REIT's second quarter 2023 results conference call. Thank you for joining. You may now disconnect your lines.