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

Hello, everyone, and welcome to Canadian Apartment Properties REIT Fourth Quarter 2024 Results Conference Call. My name is Lydia, and I'll be your operator today. [Operator Instructions] I'll now hand you over to Nicole Dolan, Investor Relations, to begin. 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. I want to get started by highlighting the unprecedented level of transaction activity, which we completed during the past year. As you can see on Slide 4, in 2024, we sold $385 million of noncore apartments in Canada, $715 million in manufactured home community sites and $1.4 billion of properties in Europe and $138 million worth of equity in IRES. These noncore and ancillary divestments generated a combined $2.6 billion in gross proceeds. We used part of that capital to pay down $401 million in total credit facility debt, which strengthened our balance sheet. We also reinvested $670 million into the acquisition of strategically aligned purpose-built apartment properties in Canada and a further $327 million into our value-enhancing NCIB program. In the case of our property dispositions, we've been selling at prices that are at or above previously reported fair value, which we believe validates our reported net asset value. We have then been buying recently constructed rental buildings at strong pricing per square foot that is significantly below replacement cost, while also investing in our own high-quality platform and business through trust unit buybacks at prices that represent steep discounts to NAV. We're very pleased with this progress, especially in an environment that continues to face uncertainty and ever-changing financial and capital market conditions. If you turn to Slide 5, you will see the significant ground we've covered on divesting from fragmented business segments and reinvesting into our core residential portfolio in Canada. As we entered 2024, approximately 15% of our consolidated portfolio comprised investments that are ancillary to our main business as a provider of Canadian rental apartment properties. We are proud to have reduced that to only 6% as of year-end. We have also identified a minority portion of our apartment portfolio in Canada that we consider noncore based on a variety of risk return factors driving relative underperformance. We're reducing this exposure and continuing to target the disciplined sale of these older legacy properties. In turn, we're increasing our allocation towards recently constructed rental properties that will enhance the diversification of our portfolio and strengthen our long-term earnings profile. Being able to purchase these newer buildings at significant discounts to replacement cost means that the development is still prohibitive. And moving forward, we'll be pursuing the ongoing execution of our proven repositioning strategy. Regarding the rest of our rental apartments in Canada, these remain core to our business. We have a unique pan-Canadian portfolio of primarily regulated properties that typically have lower turnover and higher mark-to-market increases, combined with a smaller allocation toward more recently constructed, generally unregulated apartments, which tend to have the inverse in turnover and rental uplift trends. These diversified components together provide an optimal runway of long-term growth and stability in returns, which positions us well to withstand short-term swings in market dynamics. I will now turn it over to Julian to further expand on our capital allocation program.

Thanks, Mark. Slide 7 shows you the significant progress we've made on our portfolio repositioning efforts, not just in 2024, but over the course of the past couple of years. As of December 31, 2024, we had 15% of our total portfolio represented by recently constructed rental properties, and this is up from only 5% just 5 years ago. Over the same period, we reduced our exposure to ancillary segments to 6%, as Mark mentioned, down from 17% as of December 31, 2019. Slide 8 contains the $385 million worth of our noncore legacy dispositions completed in Canada in 2024. These older properties have relatively higher CapEx burdens and operating costs, along with a host of other attributes that ultimately made them candidates for disposition. Importantly, this past year, we were pleased to have transferred $124 million of our rental apartments to the hands of several nonprofit organizations that are focused on maintaining the affordability of these homes in perpetuity. In addition, we just announced the closing of our 717-suite portfolio sale to the City of Montréal's affordable housing initiative for $103.8 million. Contributing to the alleviation of Canada's housing crisis is a key priority for us, and transferring more of our well-maintained quality buildings to organizations and programs established to preserve safe, affordable and enjoyable residential housing for Canadians is one of the ways in which we can help with the solution. We are equally as pleased to be supporting the Canadian housing ecosystem through the investment of our capital into newer purpose-built rental properties. Slide 9 showcases how much of that we did in 2024. Constructed over the course of the last few years by reputable developers, these on-strategy apartment buildings are situated in the hearts of our highest-performing Canadian regions that boast the most robust long-term fundamentals. These properties were largely stabilized upon acquisition at relatively affordable rent levels and optimal mark-to-market potential, and they come with a diverse and sophisticated resident base, superior energy efficiency and low capital investment requirements. If you turn to Slide 10, we've provided a snapshot of our latest capital reallocation activity. We just announced the acquisition of these 2 recently constructed rental apartment properties in Western Canada for an aggregate $97.6 million, alongside 2 noncore dispositions for $96.8 million in combined gross proceeds. These mid-market rental properties fit perfectly into our target portfolio positioning, and we're acquiring them at an age where they provide an ideal balance of embedded value and growth potential with affordable rents averaging in the high $2 per square foot range. These transactions demonstrate that we're continuing to sell our noncore legacy properties at prices that are at or above previously reported fair values, while also being able to purchase well-located, high-quality buildings at meaningful discounts to replacement cost. Our capital allocation plan works, and we're looking forward to further upgrading the quality of our platform in Canada in 2025. As much as we've been reiterating the merits of our strategy as well as substantiating the value of our trust through our noncore dispositions which we're completing at premium pricing, we're further demonstrating our conviction through accretively investing in our own portfolio via our NCIB program. Summarized on Slide 11, we spent approximately $300 million in trust unit buybacks in the fourth quarter alone from mid-November onward at prices that were, on average, 20% below our year-end NAV of approximately $56. Despite all the macroeconomic, political and capital market uncertainties impacting the sector, we believe this speaks to the confidence which we have in our business, our strategy and the long-term fundamentals of the multi-residential industry in Canada. With that, I will now turn the call back over to Mark.

Thanks, Julian. Turning to Slide 13, you will see that our average monthly rent was up, reaching $1,636 on December 31, 2024, across all occupied apartments in Canada. This represents 8% growth over prior year, reflecting increases in renewals and robust uplifts on turnover. That evidence the meaningful mark-to-market value we have contained throughout our portfolio. Our Canadian residential occupancies were slightly down to 97.5% as of year-end. This is related to temporary softening in the market, which recently entered a phase of higher vacancy, reduced uplifts on turnover and increased use of leasing incentives. This trend is resulting from a variety of factors including, but not limited to, reduced demand from nonpermanent residents and international students, a temporary increase in purpose-built rental supply and legislative changes, shifting short-term rentals into the long-term market. That said, at CAPREIT, we have always maintained a strategic focus on vacancy mitigation even throughout the pandemic, and this current cycle will be no different, with the majority of our residential apartments in Canada represented by regulated legacy properties that contain significant embedded value along with the many tried-and-tested management strategies that we have in place to maintain high occupancy and optimize revenue. We are well positioned to continue achieving steady rental growth during this transitory period. I will now turn the call over to Stephen to further expand on our financial results.

Thanks, Mark. Turning to Slide 14, let's run through our fourth quarter performance. Despite the recent uptick in vacancies, operating revenues were up by 1.5%. This reflects the robust increases in monthly rents on turnovers and renewals that we're continuing to realize. On the expense side, property operating costs were up for several reasons, specific details of which we have outlined in our financial report. These include certain situational higher-than-normal repairs and maintenance costs incurred during Q4, primarily in Québec and the GTA. In addition, we have elevated bad debt across most Canadian regions due to factors such as rising cost of living and, to a lesser extent, certain nonpermanent residents leaving Canada without settling their debts. We're also spending more on advertising and legal fees as part of our strategy to combat this temporary market-driven increase in vacancy and to collect our overdue rents. As a result, our NOI margin for the total portfolio was 64.4% for the 3 months ended December 31, 2024, down from 64.9% in the comparative quarter. However, we're pleased to have grown FFO by 2.1%, while our diluted FFO per unit was up even higher by 3.3% to $0.622 for the fourth quarter, having been supplemented by accretive NCIB repurchases and cancellations. Our FFO payout ratio was 59.8% for the current period, which decreased from 60.4% in the prior year period, inclusive of the 3% bump in our distribution to $1.50 per unit annualized. Results for the full year are shown on Slide 15. On the Canadian same-property portfolio, we saw a similar dip in occupancies to 97.5% at period end, with growth in AMR remaining robust at 6% across occupied suites. In line with that, our current -- our same-property NOI grew by 6% for the year ended December 31, 2024. However, we expect that to moderate to within our more normalized long-term range in the upcoming year. Our same-property and total portfolio margins were up 20 basis points and 70 basis points, respectively, though we do anticipate our margins to remain relatively stable in 2025. This organic growth contributed to the 5.8% increase in our diluted FFO per unit to $2.53, with our payout ratio improving to 57.9% for 2024. I will now briefly run through our financial position. Referring to Slide 17, we paid down a considerable amount of debt in 2024 at the end -- at year-end. We had $500 million in available capacity on our acquisition and operating facility, along with $65 million available on our greenhouse gas reduction facility. We secured this in the past year to finance at favorable interest rates, a portion of our costs relating to proposed sustainable energy efficiency projects to reduce GHG emissions at certain legacy properties. We remain proactive in managing our mortgages in Canada, which have one of the longest weighted average terms to maturity in our peer universe at 5 years as of December 31, 2024. We also fixed 100% of our Canadian interest rate -- interest cost, sorry, currently at weighted average interest rate at 3.2% as of December 31, 2024. On Slide 18, you can see that we continue to methodically stagger our mortgage maturities to minimize renewal risk, and we have no more than 13% of our Canadian mortgages reaching maturity in any single year. Turning to Slide 19. We lowered our leverage in 2024 with a total debt-to-gross book value of 38.4% as of current year-end, down from 41.6% as of December 31, 2023. On the same-property portfolio at current valuations, we expect this ratio to hold at around this level throughout 2025. However, it is subject to change with any significant transactions or portfolio revaluations. Our coverage ratios also remain conservative, and this flexible financial structure ensures we are able to execute on our strategy and maximize unitholder value. Finally, on Slide 20, we summarize the impact of our capital reallocation strategy on the operational side. We're focused on growing our cash returns, and with the ability to realize consistently robust top line rental growth in recent years, we have been strategically scaling back on total expenditures in order to further enhance our cash flow. In short, we're spending less and earning more. In 2024, our spend on common area and in-suite capital improvements, which are capitalized on the balance sheet, was down 21%. We've reallocated a portion of that into incremental repairs and maintenance costs, which negatively impacts our margins. Accordingly, other property operating costs increased 5% for the year ended December 31, 2024, with R&M comprising the majority of this. Overall, however, we are spending less money. Combining these 2 categories, we reduced total expenditures by 6% for the year ended December 31, 2024, as compared to the previous year. In absolute terms, this is equivalent to approximately $20 million in reduced net spending in 2024 after already saving approximately $20 million in 2023, despite the cost inflationary environment in which these reductions have been achieved. We are also enhancing our free cash flow through our portfolio repositioning efforts as our newer acquisitions have a significantly lower CapEx profile than our legacy assets. In total, between our cash reallocation and portfolio recycling initiatives, capital improvements in Canada decreased by 14% in 2024 as compared to 2023. That said, given recent softening in certain CAPREIT rental markets, additional discretionary capital may be opportunistically deployed in the short term to manage vacancies through this temporary cycle. However, on the whole, we are well on our way to a future for CAPREIT in which we are generating self-sustaining free cash flow, and all our objectives are currently in place are aligned with that objective. On that note, I will turn the call back to Mark to wrap up.

Thanks, Stephen. Looking back on the year, it's been nothing short of transformational for CAPREIT, and we are pleased with the strong progress we have made on our vision of becoming a better quality business. As we move forward in 2025 with an affordable weighted average rent per square foot of approximately $2 across our total Canadian residential portfolio as of year-end, we are well positioned to withstand what we consider to be a temporary short-term reset in supply/demand dynamics. We are returning to a more balanced market, and long-term fundamentals remain robust for the residential rental industry in Canada. CAPREIT is one of the most geographically diversified housing providers with a coast-to-coast presence and a unique mixture of primarily older legacy properties, combined with a limited exposure to recently built apartments, all of which creates a buffer against the effects of localized rental market swings that are not new to this industry. Apartments are historically countercyclical. And ultimately, we anticipate ongoing steady demand for our professionally managed, high-quality rental properties. Regardless of what lies ahead, we will stay focused on the execution of our strategy, while also regularly reevaluating that strategy as our operating environment inevitably changes. We are proud of our all-round performance this past year, and we would like to thank all of our stakeholders for their ongoing support. To underscore that, yesterday, we announced an additional 3% increase in our distribution to $1.55 per trust unit annualized, effective for our next distribution declaration, which we believe demonstrates our ongoing confidence in the future. We have never had a better team in place, and we are excited to continue building a better business for our residents, our people and our unitholders for many years to come. With that, thank you for your time this morning, and we would now be pleased to take your questions.

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

First question, just on the occupancy, 97.5% is fairly low for you guys. Can you maybe outline some of the strategies? I think Stephen talked a little bit about increasing capital spend. Are you doing incentives? Like what are you doing to sort of push that back up north of 98%? And how are those strategies going?

Well, that's -- thanks for the question, Jonathan. In an attempt to rent maximize, we were getting into really the idea of holding units to maximize rent. And as we bumped up against, I'll say, seasonality factors and other sort of geopolitical things that are happening in Canada with permanent residency, we eased off on that strategy and absolutely have found the market going forward. Like what we're discovering is we bumped up against the height of affordability, which is not unexpected. But the rental market remains very much alive, and that's why we're so confident of what we see going into the new year.

Okay. So fair to say that we should see an increase in occupancy in Q1?

Yes. It's a matter of striking the right balance with affordability. And with that, obviously, the Canadian housing market remains in crisis, and it could be easily regulated with pricing.

Okay. So then it would be fair to assume, I guess, that the 13.5% you did on uplifts in Q4 probably comes down a little bit as you fill up the units?

Yes. And we are hopeful in starting to see initial signs of making up part of that ground with increased turnover. So obviously, exposing the portfolio to more churn, even at lower levels, can yield a, hopefully, even better result.

Okay. And then switching gears here on dispositions. You guys noted a $400 million target for 2025. Does that include the $200 million -- the roughly $200 million that's already closed?

Thanks, Jonathan. Yes, consistent with the last couple of years, we're targeting $400 million. It does include the ones that have happened so far in the year. We're cognizant of striking a balance between advancing the capital allocation strategy and not flooding the market striking that right balance.

Okay. Fair enough. And would you expect to match the sales with acquisitions? Or you think acquisitions can be a little bit higher depending on what happens with ERES over the balance of the year?

Yes. We didn't guide on that, so I'm going to be a little bit careful with that. But generally speaking, with proceeds that come in through dispositions or other sources that we've mentioned, we're always evaluating between debt repayment and acquisitions and NCIB, and it's a dynamic process. So there's a reason we didn't guide for it. And as the money is coming in, we'll make the best decision for the company at that time based on the opportunities.

I would just build on that. We promised to remain disciplined and opportunistic on the buy-side as well as the sell-side. But it's hard -- it is difficult to predict. We know what the typical run rate has been, but we will remain disciplined in our decision-making.

Our next question comes from Brad Sturges with Raymond James.

Just to go back on the occupancy discussion for a bit. Given that you have been increasing the weighting towards new builds that does tend to have a bit higher turnover, does that change your thinking around what target occupancy should look like for the entire portfolio if you kind of blend legacy and sort of the increasing exposure to new build?

Well, Brad, thank you for that observation because yes, we know that in the new construction assets, there really is not the same dynamic going on with turnover. We're seeing 40% to 45% churn, which we would expect. And when you're churning that kind of volume and maintaining market rents, it's -- you've got briefer windows of period of time. So that is all built into the pro formas when we do an acquisition. And that increase in vacancy would have definitely been modeled. So you are seeing a bit of that effect. But not part of your question, but I can't help myself but throw it in. These new buildings, I want to go to the cash flow discussion when we're talking about these new construction assets because despite the higher churn and despite maybe minor upticks in vacancy, we just don't have the capital expenditure that we used to talk about all the time, and CAPREIT is really experiencing true improved cash flow. And we have to keep reiterating this to investors that we are focused on living on retained earnings. And we see a path where we can do even beyond that if we keep this quality story going. So yes, there's a bit of a trade-off with new construction assets with more slightly elevated vacancy that was budgeted for that does ultimately bleed into the overall portfolio, but that's what we want because we're focused on cash flow.

Okay. That makes sense. And obviously, you kind of highlighted the drivers in terms of why demand is maybe a little bit reduced in the short term. Just how do you think market rents evolve or trend more specifically, I guess, over the next few quarters? Like do we get to -- into the spring and summer and see kind of more of a return to growth? Or how do you think about that right now?

I think all multifamily providers out there are navigating a couple of factors that happened in Q4. The shock of nonpermanent residents abruptly having to leave and international students and seasonality, the threat of tariffs, people aren't even like moving because they just don't know what the future holds. I think we've seen a [ cease ] and a bit of an unexpected slowdown in Q4. But it's all about bumping up against affordability. There is a housing crisis in Canada. And when we find the right level of affordability for folks, we absolutely have the demand for our product. All of the multifamily people do, quite frankly. But it's a matter of, at this point, being extremely nimble by the number of visits, lease conversions, really a day by day and finding the right balance of affordability. And when you do that, we lease up quite quickly. We've seen extremely strong response in January, which is traditionally the slowest month in the year. And we have found that when we price dynamically and appropriately, there is incredible demand in the marketplace. We still are seeing rents rising in Canada. We don't have regression on rents. We just have slightly less on uplift. And that's a message to the market that I think really needs to be understood. Our revenues are rising.

Next, we have Kyle Stanley with Desjardins.

Mark, you commented that offsetting the lower new leasing spread could be higher turnover, and I know you've touched on this in the past. We did see that pick up for 2024, which was great to see. But how much of that, in your view, would have been just given the portfolio skewed towards new build product versus an actual shift in turnover for your core assets? And then how do you maybe see that trending in the year ahead?

That's another great question. And it is so appropriate. We may have to provide more feedback to the market on this because the dynamics in new construction are definitely different than the dynamics in value add. But our goal is I continue to state is cash flow improvements that we're actually producing. What we can expect, Kyle, is market-specific dynamics. So for example, in places like Toronto, as more condos come online, that will just add to the supply and no doubt, as we've seen rents are falling in condo product, you'll see a loosening up of people holding their leases. And it would be logical and historically reflective for us to say that will result in an increase in turnover. We just don't know until it happens. The spring is when real decisions get made. So we'll -- it's -- we don't see [ ceasing ] anymore and a slowdown in people giving up their leases and turning over. What we are seeing is obviously more competition in the market, which is healthy for the turnover dynamic. They just don't work lockstep. They're not like exactly correlated, one's lagging the other. But if we see rent sort of moderating on uplift, traditionally, historically, you've always seen an increase in turnover that follows, I'll call it, a quarter thereafter.

Okay. No, that makes sense and it's helpful. Just the last question for me. You've already touched on kind of capital allocation focuses and hit on acquisition activity. Obviously, you were very active on the buyback in the fourth quarter. Quarter-to-date, that looks like it slowed a little bit. Just wondering how are you thinking about the NCIB as capital deployment target in the year ahead?

Well, the NCIB has been an incredibly effective tool, as we've all discussed. But what we're seeing is opportunity on the horizon and delevering and staying -- keeping the balance sheet strong to act on those opportunities is, I think, our prediction here. There is this talk of tariffs and the uncertainty in Canada sort of coast-to-coast and I'll say the Toronto condo market, all of these things for us are spelling the groundwork for opportunity. So keeping our balance sheet strong and making sure we're delevered and ready to act is something that we also very much value.

Next, we have Matt Kornack with National Bank Financial.

Just with regards to your comments around optimizing rents, it was noticeable that some of the markets that you've seen the occupancy erosion and arguably, I mean, Nova Scotia is one of them. That's a pretty strong market. Was that just a question of maybe getting ahead of what you were trying to achieve on some of those spreads and mispricing? Or how should we think of it? Because I assume that, that market, you'd see some increase in occupancy going forward.

Yes. Every portfolio has slightly different dynamics. We're a downtown core Halifax portfolio, which has a heavy tilt to students. And then anticipating any sort of change on the international student front, we want to make sure we're on strong footing. We're feeling exceptionally confident about how we've managed ourselves through the -- not just the fourth quarter, but going into the first quarter. And it's, again, only a matter of finding the market. So our portfolio tends to have a little bit more lean towards students because of the downtown nature, but we're doing exceptionally well on that lease-up front.

And just on the turnover...

The only other thing, Matt, that I -- the only other thing I would kind of point -- sorry to interrupt there, is that Halifax in particular, we'd absolutely reached peak rents. If you look back historically at what had happened in Halifax, we were like -- the results were quite astonishing actually. So it's not surprising. We've had to moderate to find the market.

Yes. And I guess on the same vein to a market, Ontario is one that everybody has been pointing to, but your occupancy there has held up relatively well, but you haven't been able to get rent growth because of the allowable rent increase. Presumably, that's a place where you've got locked in kind of mark-to-market potential, and you'd like to get a bit turnover, but maybe there in BC to some extent. But interested in your thoughts on kind of the ability to get at some of this embedded rent growth in the value-add portfolio or the legacy portfolio.

Well, I'm really glad that you made reference to Ontario, especially our GTA portfolio, because we're constantly fielding questions about headline in the news of condo rents. And our portfolio is very different than, I'll say, the condo rent market. We have a lot of core legacy, highly affordable property in the GTA. It's widespread. It's -- you'll see in Toronto with the condo deliveries, there'll be sort of acute deliveries in the downtown core. And our portfolio is actually quite suburban. And because it's embedded legacy, then it's a very, very different market for us, and we are quite protected from the onslaught of sort of a condo impact, not to mention our larger units. If you just look at the nature of the unit sizes, CAPREIT has primarily a 2- and 3-bedroom apartment portfolio in the GTA and really through Ontario. So what we hope and what we're seeing is that with these new supply deliveries, that people in the suburbs will start to look for alternatives. Maybe there'll be home buyers if prices reach the right point, and that will sort of free up some of that deeply embedded value in our Ontario portfolio.

Fair enough. I think there was some discussion on capital allocation with regards to how you're thinking about development potential within the portfolio as well as kind of whether or not the focus is going to be on purchasing new assets exclusively or if you would potentially look at some value-add older product. I don't know if you have -- if your views have evolved there? Or is it pretty similar to where you've been in the past?

I'm really glad this is coming up. Our development program is something that we've been talking about for a long time, and really, our focus is around entitling our lands. And I want to clarify, development doesn't make sense right now. It doesn't make sense for anybody. But for us to have those entitled lands ready to have optionality in the future to maybe build out a pipeline of our own in the future, we're talking years down the track is something that's important for CAPREIT. We may choose to do other things. We recently, with the guidance of our Board, looked at our opportunities, and we're pursuing an asset-by-asset strategy when it comes to development. We're just laying the groundwork for the future. Not 2025, like the future, call it, 5 to 10 years out. Why are we doing that? Well, we continue to buy assets that we think are 30% below replacement cost. So why would we even remotely consider development when we're able to buy high-quality apartments with no development risk, with tenants in place at 30% below replacement cost? And this is the crisis that Canada is going to face. So CAPREIT, just to be absolutely clear, does not have development ambitions in the now, but we are getting ready for the future. And that's great optionality as a pipeline of growth in the years to come.

Makes sense. Maybe two...

On the value add, Matt -- I'm sorry, I lost my train of thought there. There's -- we had some feedback on this. And again, I'm very glad that you're asking the question. When I was asked where the opportunities are in the marketplace right now, I made reference to the fact that a lot of institutions are focusing on new construction only. And that has created for some private operators an opportunity in value add. So we're seeing CAPREIT's rise is in value add. So that's an observation on the market. CAPREIT has not signaled a change in strategy at all. CAPREIT is being reaffirming our strategy of everything we just talked about in the last hour here now. We are focused on new construction assets. We are focused on cash flow at CAPREIT. We are focused on living on retained earnings for the very first time at CAPREIT, and we are going to deliver value for our unitholders at CAPREIT.

Makes sense. I appreciate the clarification there. Last one for me, just in terms of the transaction market. I mean I think something that's been lost in kind of the trading in the public markets is the fact that you do have access to CMHC-insured financing. The spreads are exceptionally tight. They don't move very much in bad economic times. But are you seeing capital start to come back and compete against you in some of these transactions? Or how should we think about the flow of capital back now that -- I mean, for you and most of your peers, you're actually probably limited, if any, headwind on the interest rate front now, and you can get a bit of a spread in the market from a CAPREIT standpoint.

Yes. Well, this is another great point, and thank you, Matt, for bringing attention to it. Like CMHC guarantees our renewals. And that is something I don't think even U.S. investors fully appreciate. Like we are never out looking for capital on mortgage renewal. We have that guarantee. We have very low spreads. That is why our leverage in Canada is slightly higher in multifamily than our U.S. peers. We have the guarantee of mortgage renewal. That being said, CAPREIT has positioned the balance sheet for growth, for opportunity, and we have one of the lowest leverage balance sheets now in the country. So not only do we have CMHC, we've got lots of capacity here should the right opportunities show up. So we're -- in the competition front, a lot of the institutions, I'm going to call it, have got other problems with other asset classes. And while they're sort of -- the activity that they are doing is around new construction assets, but it's somewhat limited. And that is why we're still able to find opportunities in that part of the market. There is extremely low trading volumes on value-add property, and it's not institutions at all where it traditionally was. It's private. And so the nature of the capital is very, very different today than it once was. The private kind of buyers are focused on value add, the institutional-type buyers are focused on new construction, and CAPREIT has a focus on both.

Our next question comes from Jimmy Shan with RBC Capital Markets.

In terms of the nonpermanent resident leaving your apartments, are you starting to track that? Do you have a sense of kind of what the direct impact is of that, of the NPRs leaving your portfolio and how that might unfold over the course of the year?

Jimmy, we are heavily reliant on anecdotal. For privacy reasons, we're really not allowed to track a lot of these things. We do track like our peers track, reasons why people are moving to try to figure out ways to address problems, if any, in a property. And what we have seen is a coast-to-coast effect of nonpermanent residents suddenly giving notice and leaving. And Stephen made mention of it, even walking away in some cases from receivables. And that would be a jolt effect of sort of the changes. But like I think I may have said it on the last call, I've never witnessed this before in my time in this business where you have nonpermanent residents abruptly leaving the country. So the jolt effect, we believe, has, for the most part, passed in that regard. But again, we've got those population growth slides in our investor deck that are just quite -- they're almost impossible to understand the policy of what government was actually doing at the time. But it's dramatically up and dramatically down, and that creates shocks. And for us, that shock revealed itself, albeit in a very minor way in the fourth quarter.

Okay. And you think that "jolt," is that -- that's over? Or you're not seeing as much as you can gauge that it's accelerating, that pace of departure? Your sense is that, that's not the case?

So we -- I'll show you how quick it is. It really started showing up in November. And we started getting the feedback on [indiscernible] that it was nonpermanent residents abruptly leaving. And that effect continued into December. And that was -- and then the feedback in January and the beginning of February has been a moderation of that effect. So I don't know that it's over. Government has to -- I don't know the effects of immigration, quite frankly, and how the instruments are used to get people to leave the country. I don't think we have enforcement in the country where people are being rounded up. I think you've got the first wave of people that have had their permanent visas revoked, and they have chosen to respect that and leave. Now the ability for government to have those that have been asked to leave that aren't, I don't know, I can't speak to that. I don't really know enough about it. It's a strange dynamic that we've never faced before. But I can express moderation in this effect of like abrupt up and leaving of nonpermanent residents.

Okay. And then last question for me would be just sort of given everything you've talked about in terms of occupancy, lease spreads and R&M expense, what would be your same-property NOI growth expectation for '25?

So Jimmy, I think in terms of same-property NOI growth, I mean, I think I kind of spoke about it, kind of our long-term average in terms of what we expect. But there are a lot of uncertainties around the revenue side, higher vacancy, tariffs, pulp impact probably, there's tenant incentives, et cetera, and market rents. So there's a little bit of uncertainty. I can't really pinpoint it, but I would just say, generally, the long-term average is where we're very comfortable with.

I would say this, Jimmy. I'll use this opportunity. Stephen used that word, tariff. You've heard it come up on the call a couple of times here now. We are not directly impacted by tariffs. We are on the cost side when it comes to things like appliances or U.S. imported inputs, but it's very, very minor. And in fact, we're not -- nobody is going to celebrate shocks to the Canadian economy. But because apartments are countercyclical, we're very well positioned to actually benefit from any sort of dramatic changes in unemployment. Again, it's something we're not celebrating. But history tells us that when things are uncertain, rentals do very, very well. And so when I look in balance on the effects of what we've got going on here because we're not in development, we don't intend to be in development, our cost inputs in terms of tariffs are really, really not highly impacted. So I don't know that if the market has yet sorted out, tariff-protected investments are not. But we view CAPREIT as not being frontline impacted by tariffs and in fact, a potential beneficiary of a very unfortunate situation.

The next question comes from Mike Markidis with BMO Capital Markets.

Just on the -- I just don't know if you have them off the top of your head, but do you happen to have your January leasing stats handy, just in terms of where your spread has come in for the first month of the year?

We -- I'm not sure if we even guide on that. I can tell you we have confidence in our ability to find that affordability ceiling. And when we hit that ceiling, there is a very, very strong market. So on the occupancy front, we are extremely, extremely comfortable that the market -- Canadian market is still in crisis and homes are desperately needed. On the uplift numbers, we'd have to -- we can't really speak to it.

Okay. I think, Stephen, you mentioned, I think, if I heard you correctly, that you expect the margin to be relatively stable on a same-property basis next year. Is that correct?

Yes. That's correct.

Are you able to talk about what sort of range...

Sorry, sorry -- just sorry, Mike, just -- sorry to interrupt you there. But I do want to speak to like OpEx growth is a big component of those utilities, and we've seen a colder winter relative to last year. So that would influence where OpEx growth is. But I would say, generally, where we see margins, it's going to be relatively flat.

So just taking the expectations you're seeing on the utility side, and I know it's a bit of a wild factor, but what sort of broad bucket for total OpEx would you expect inflation to range in for 2025?

I would say it would be generally mid-single digits. But as Mark kind of alluded to it at the beginning of the call, when we look at total capital expenditure spend, we look at CapEx as well. And we have really done a fantastic job in reducing the total capital expenditure spend with the combination of -- if you combine R&M with the in-suite and common area cost CapEx. So cash flow has really improved over time. And that's what our focus is, especially in operations, we really focus on the dollars of dollar and don't worry about the accounting treatment. It's really that cash flow return that we're focused on.

Really, I call it negative inflation. At the end of the day, Mike, negative inflation of costs. When you look at our total expenditures, they're way down. And when we're focusing on that accounting line of R&M, yes. Stephen is guiding correctly on that, obviously. But it's all about cash flow for CAPREIT.

Got it. And the $327 million, just to clarify, that's the Canadian resi portfolio only of CapEx for 2024 -- or sorry, CapEx plus OpEx?

Yes. Sorry, that's total. That's total. That's total. That's consolidated, including...

Got it. That's total.

Yes.

Got it. And it's not same property, okay. So I mean, obviously, then tough to -- I think, yes, it would be very useful to see sort of what the Canadian portfolio is, I guess. And then yes, I guess we would just continue that. Would you expect the same sort of trajectory down in 2025 when you look at those 2 components?

Well, we're finding real efficiency, but the goal is cash flow and expenditures are down at CAPREIT. So we will continue to make overall expenditures go down at CAPREIT, whether it be on the R&M CapEx side, we are committed to efficiency and a dollar is a dollar. We are not focused on accounting, we are focused on unitholder value.

Yes, absolutely. Makes sense. Okay. And then just last one. Stephen, do you have [ to nag ] off the top of your head what the annualized carbon tax expense is just in the event that, that was something to be...

Yes. Yes. We looked at it. It's, I would say, the last 12 months, it would have been approximately $6.5 million to $7 million is how much we paid in carbon tax.

Okay. Let's hope that goes away.

Yes. Sorry, with HST, I don't know if you were asking that, too.

With the HST, got you. Okay.

Our next question comes from Mario Saric with Scotiabank.

I wanted to just circle back on the -- I wanted to circle back on the distribution increase. So I hear you in terms of the part of the motivation, it seems to be that you want to signal confidence in the market regarding your operational outlook given all the flux and the negative sentiment broadly speaking on the multifamily space today. And that said, I don't think we've seen 2 increases within 6 months since 1998, if I'm correct. You have some incremental capital to deploy in dealing with near-term vacancy and you've been active on the share buyback, the focus on retained earnings. So I was just wondering if you can maybe flesh out a bit more the decision to boost the distribution here?

Yes. We also had a couple of years where we didn't do any distribution increase. And things were in transition during those periods of time. Unitholders value their distribution increases. And we were in that, those periods of transition and uncertainty during COVID, where we did for years, no distribution increase. And that was a change for CAPREIT. We are absolutely affirmed on our cash flow. Our payout ratio has never been more healthy. We have confidence in the Canadian market, and we have extreme confidence in our strategy. And it is absolutely in the bandwidth to give unitholders what unitholders are asking for, which is a moderate increase in distribution. So we're managing ourselves through that strategy. You can look back, and we had some conversations when we first started talking about our strategy, especially in the U.S., where we were told you cannot do a high-grading strategy without dilution. And they said they've never heard of that before, and we said watch us do it. And so we went through the process of doing a high-grading strategy like with billions of dollars of capital recycling, and we are extremely comfortable with where we're landing. It's not without its peril. So the entire focus for us is to create unitholder value. We have gone through our major sort of transformation in 2024. We have extreme confidence on the outlook. Our payout ratio has never been more healthy. We're sitting on cash, and we feel really, really good about what's coming up in 2025. And I'm not excited about sort of effects to the Canadian economy. But like I said, apartments are countercyclical. And we've been through these cycles, I've been through these cycles, and we know what to do.

Okay. That's pretty clear. And so just coming back to the operations and incentives, I know it's really very building specific or regionally specific. But if we sit back, and I think there's this notion that incentives are being offered everywhere by everyone. If we step back, do you have a sense of like what percent of your buildings or your portfolio would be seeing incentives being offered at, say, like a 5% to 10% clip today or in Q4?

Yes. That is -- it's building specific, Mario, and it's targeted incentives where there's, I would say, higher vacancy or temporary higher vacancy. So it's hard to tell. It's -- we don't provide that disclosure, but that's something that we're working on. We have a ton of marketing strategies. We're focused on ensuring that we're retaining our tenants where there is -- they're paying, you could say, high market rents. So we have various strategies that we're deploying, as Mark has alluded to earlier. So yes, it's really tenant or you can say, building specific, not specific to any region.

Okay. And then my last question, just, Mark, coming back to the comment that rents are going up and people are feeling to recognize that because you are capturing a pretty solid mark-to-market above historical average. I'd imagine that double digits still. Market is very focused on asking rents, as you may know. What is your sense in terms of the asking rent trajectory in the broader market over the next 3, 4 months, given the fact that, as you mentioned, we're in an affordability crisis? The cost of owning versus renting is still well above average, that spread is well above historical average. So like what do you think in terms of downside protection to asking rents falling further?

Well, thanks for the question, Mario, and the observation. We've got to do a better job of explaining that we're seeing asking rent pressure, definitely not revenue pressure. Our rents are rising on turnover. Our renewals are rising, and we're in a really, really good place. I think that I'm cautious only because I can't remember a quarter when so many different things came to be. Like it's not every day Canada has 25% tariffs against its biggest trading partner come upon us. And nonpermanent residents packing up and leaving, and a winter season that we haven't seen in a while, people are just -- it's uncertainty right now. But what we absolutely know is that CMHC made that call that we need 3.5 million additional homes by 2030. That's 5 years from now. Canada is in massive, massive housing crisis. And yet there's all these confusing factors. Like in the short term, we're looking at Toronto condo deliveries. That's great. But what's happening out there to development? So we've gone across the country, and it depends down on pro formas from coast-to-coast and building. Now that has effects. So I'm getting off slightly on the tangent here, but the dynamics of the market are great. What we found is -- and this was really only in January we discovered this, is that incentives aren't always effective. People want the guarantee of that rent. So you actually get a better result in terms of occupancy management when you just let people know what the rent is going to be. Most renters are planning to just stay for a year, so if you deduct the cost, that's trickery in my mind, in many cases. And people just want certainty, especially when it comes to renting. So I, for one, have really been challenging internally here, our use of incentives. And I'd rather find the right affordability rent levels to maximize occupancy, to maximize revenues, knowing that our rents are going up.

And our next question is from Dean Wilkinson with CIBC.

Mark, this might be a continuation of that same question for Mario. A lot of the common narrative seems to treat rent as a generic commodity. And when I look at particularly, say, your GTA assets at $1,782 a month, depending on the source, and there's a lot of sources, that's probably some 30% below where condo rents are, and that's where the pressure is. Do you have a sense of what that historical spread has been? And is this just a case of the condo rents really got ahead of themselves? And the purpose built, I think the market seems to be losing track of, say, Slide 13 in your investor deck.

Okay. So the first thing I'd say, when I go to the grocery store, apples cost different prices than bananas because apples and bananas are 2 different things. They're both fruits, but they're different. When you look at condo rent and you're looking at a 500 square foot condo in downtown Toronto and comparing that to a 3-bedroom apartment somewhere on the Yonge Street corridor, you are not looking at the same thing. And when the market goes and looks at these rental.ca numbers and say," Look, rents are down for 500 square foot condos." And 500 square foot condos are coming to the market in unprecedented numbers and the pressure is there, it doesn't mean the 3-bedroom family is thinking about renting a 500 square foot condo. It just doesn't mean that. So I understand the need to kind of look at market dynamics, but you've got to dig, dig, dig deeper to understand what is actually really happening. So what we are seeing at CAPREIT is rents are going up. Now yes, we will breach affordability at some point, and there's only so many roommates you can put in an apartment to get absolute high rents in 3-bedroom apartments, and we may have hit that ceiling. But we remain extremely comfortable with the mix of our portfolio with those legacy assets and new construction.

Yes. Just it seems that there's this sort of overarching narrative that you're right, it is apples and bananas. Just on the issue of the nonpermanent residents moving out and whatnot, and again, it's anecdotal. I'm assuming that you are backfilling that space at significantly higher rents. So the absence of them is not necessarily a bad thing.

No. I would -- like we're not celebrating people leaving the country. But when you have apartment churn, it allows us to access potentially higher rents. So obviously, depends on lease term. But yes, look, we're -- it's very hard in January and February, the call kind of apartment churn because of our climate here in Canada. But the dynamic seems to be setting itself up for increased churn. And for our legacy portfolio, that's very, very good news, very good news.

We have no further questions in the queue. So I'll turn the call back over to Mark Kenney for any closing comments.

Yes. 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. Thank you again, and have a great day.

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