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

Hello, everyone, and welcome to Canadian Apartment Properties REIT's First Quarter 2025 Results Conference Call. My name is Lydiya, 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. Let's start on Slide 4, where we summarized some of the key performance highlights year-to-date. You will see that we've completed $265 million in noncore Canadian dispositions, and we closed on an additional $135 million of property sales in Europe so far in 2025, at prices that are at or above previously reported IFRS fair values at the time of negotiation. We've reinvested $137 million of net sales proceeds into the acquisition of recently constructed mid-market rental properties at prices that are meaningfully below replacement costs. We've also spent a further $88 million on our value-enhancing NCIB program to buy back CAPREIT's trust units at a weighted average purchase price of approximately $42 per unit. This represents an average 25% discount to our NAV of $56 per diluted unit as of March 31, 2025, which we continue to prove by selling our off-strategy properties at premium pricing. This is all just to underscore the ongoing strength in [ Sanama ] in the execution of our capital allocation strategy, which Julian will expand on shortly. Operationally, our Canadian same-property residential occupancy improved since year-end, increasing to 97.9% as of March 31, 2025, while our occupied AMR grew by 5.7% since March 31, 2024, reflecting the sizable mark-to-market built into our long-standing diversified portfolio. On the expense side, property operating costs were up due to elevated R&M and utilities with higher weather-related expenses owing to a colder winter in certain regions. We also had an increased bad debt and advertising costs associated with changes in the rental marketplace, which we've been proactively addressing. The net impact was a decrease in our same-property NOI margin to 62.3% for the 3 months ended March 31, 2025. And I'll let Stephen elaborate more on that soon. One of our key priorities has been the reinforcement of our financial position. And today, we're proud to have one of the strongest balance sheets in our peer universe. We've been delevering by paying down Canadian credit facility debt and we have significantly lowered our total debt to gross book value ratio to 37.7% as the current period end. This low leverage means that we have significant room to lever up should additional funding be needed. And at the same time, we strategically retained cash on hand, which we were able to opportunistically deploy into our share buyback program. With that overview of the first quarter, I'll now turn the call over to Julian to further expand on our capital allocation programs.

Thanks, Mark. If you turn to Slide 6, I will just briefly talk to the diversification of CAPREIT's portfolio. Today, we have 16% represented by recently constructed properties, which provide access to market rents alongside the benefits of very low CapEx requirements. We have 67% comprised of our core legacy rental apartments, which contain significant embedded value that supports the stability in our long-run rent growth profile. We also have 5% of our consolidated portfolio in Europe. Of that, we recently announced that we've entered into an agreement to sell over $500 million with closing expected in the third quarter of 2025, which will bring this allocation down to less than 3%, all else equal. With this divestment and our plans to launch a process for the sale of the remainder of the portfolio in Europe, we're excited to be making meaningful strides towards our objective of returning to our roots as a pure play Canadian Apartment REIT. On Slide 7, we showcased our portfolio transformation over the past couple of years. We've been diligently upgrading the quality and earnings performance of our portfolio through enhancing exposure to high-quality recently constructed properties. As Mark mentioned, we've been acquiring these over the years at substantial discount to replacement costs. However, the window of opportunity to purchase at these prices is limited. Going forward, we will continue to underwrite potential strategic acquisitions for as long as that opportunity exists, and it remains financially attractive, and we have a very strong and liquid financial position to support our ability to execute. At the same time, we've been selling our underperforming noncore and ancillary assets. Looking ahead, we're always going to be monitoring the composition, quality and performance of our portfolio and seeking to continuously improve upon it year-over-year. On Slide 8, you will find a more detailed overview of our Q1 acquisition and disposition activity. We expanded our presence in Western Canada with the purchase of 2 recently constructed rental apartment properties for an aggregate $98 million. Built in 2015 and 2019, these two mid-market properties are perfectly positioned for our portfolio with affordable rents averaging around $3 per square foot. On the right side of the slide, you will see what we've sold, $231 million worth of older properties that no longer meet our performance criteria. Included in this, we were pleased to have transferred a 717-suite portfolio for $104 million to the City of Montreal's affordable housing initiative and we look forward to working with more nonprofit organizations in the future as a way for us to contribute to the provision of affordable housing in Canada. With that, I will now turn the call over to Stephen to expand further on our operational and financial results.

Thanks, Julian. On Slide 10, you can see that we've improved occupancy since the previous quarter. Our Canadian total portfolio and same-property residential occupancy was up to 97.9% as of March 31, 2025. This demonstrates the success of our vacancy mitigation strategies, which we adjusted in response to recent shifts in market dynamics, including refining and enhancing our various marketing incentive and retention initiatives. Our average monthly rent was up, reaching $1,677 on March 31, 2025, across all occupied apartments in Canada. This represents 8% growth since the prior year period, reflecting the mark-to-market embedded in our large legacy portfolio that protects our rent growth profile against the effects of short-term market swings. Turning to Slide 11 with a focus on maintaining high occupancy while optimizing rent growth, our same-property operating revenues were up by 4.3% for the current quarter. However, on the expense side, property operating costs increased by 7.2% on the same property portfolio. Reasons for this variance include elevated R&M costs largely arising from weather-related expenses incurred this past winter season, primarily in Ontario and Quebec and including higher snow removal costs. Colder weather also drove up electricity and natural gas costs due to increased consumption, which was compounded by an increased natural gas prices in these two provinces. In addition, the quarter experienced higher bad debt costs due to delays in regulatory processes in Ontario as well as other factors such as rising cost of living and increased past-due balances that were not cleared by prior tenants. We also spent more on advertising across most Canadian regions to successfully combat the market-driven increases in vacancy. One thing to highlight is that the savings from carbon tax on our utilities will have a positive effect in 2025 relative to 2024, effective April 1. The estimated savings for the rest of 2025 will be approximately $0.03 per unit. Taking everything into account, our same-property NOI margin was down to 62.3% for the 3 months ended March 31, 2025. Our diluted FFO per unit likewise decreased by 3.9% to $0.585 for the first quarter due to lower NOI predominantly from net disposition activity. This was partly offset by lower interest expense on credit facilities as a result of CAPREIT having repaid borrowings using proceeds from the significant disposition activity occurring in Q4, which lowered our leverage. It was also partly offset by reduced overhead costs, excluding organizational costs as well as accretive trust unit repurchases and cancellations under our NCIB program. It is important to note that we maintain -- if we maintain the same leverage and invested properties all else equal, our earnings would have been approximately flat as compared to Q1 2024. I will let Mark speak to our strategy in that regard in a minute. Just before I pass the call over, on Slide 12, I want to briefly remind everyone that our debt strategy is core to our capital allocation program. We proactively manage our mortgage financings in Canada, which carry a weighted average effective interest rate of 3.2% per annum. We have a weighted average mortgage term to maturity of 5 years with no more than 13% of our total mortgages coming due in any given year. We also have significant access to liquidity with nearly $200 million in available borrowing capacity on our acquisition and operating facility as of period end, plus $1.5 billion of unencumbered investment properties. This is in addition to our cash reserve of over $100 million in Canada as of quarter end, which we have opportunistically reinvested to buy back shares post period end. Our low debt to gross book value of 37.7% also allows us room to increase within our range as need be. This conservative and flexible balance sheet, which is one of the strongest in the REIT sphere, supports our primary goal of boosting cash flow generating and ultimately growing unitholder returns. On that note, I will turn the call back over to Mark to wrap up.

Thanks, Stephen. Referring to Slide 14, I want to take a moment to really look at everything that is going on at CAPREIT today and what that means for the future because the fact is there has been a lot of change recently, both internally and externally. We've been working hard to build a better platform for tomorrow and enhance the long-term performance of our portfolio and organization. But this means that we're currently in a period of transition, which comes with certain nuances that need to be navigated. We're managing through this 4 main initiatives. Firstly, as Stephen mentioned, we've strengthened the balance sheet by paying down significant amounts outstanding on our Canadian acquisition and operating facilities, and we've reduced our leverage to approximately 38% as of Q1 2025, down from 42% as of Q1 2024. Secondly, with the high volume of transaction activity achieved as of late and the net cash proceeds, which we've received, including the disposition of our entire MHC portfolio and a very large portion of our European portfolio, we've temporarily retained excess cash reserve, which we then opportunistically deployed into our NCIB program. Thirdly, we have increased exposure to recently constructed properties. As we highlighted earlier, these provide access to market rents, both in good times and in bad, which means that in periods of moderating rents, we will see a corresponding increase in turnover rates across this segment. However, these properties also come with the benefit of very minimal CapEx requirements, which ultimately means they're producing meaningfully higher economic cash flows. Last but not least, we've been managing our overhead while optimizing the CAPREIT team, organizational structure and culture to ensure that we're primed and ready for a new and upcoming chapter of steady growth in long-term returns for unitholders. Although this is all resulting in some short-term turbulence, as we undergo this transformation, the pillars of our business remain strong and the long-term fundamentals of the residential rental industry in Canada are robust. With this backdrop and these healthy fundamentals in view, we continue to work towards improving our operational and financial results through the remainder of 2025. To conclude on Slide 15, which we highlight time and time again, this is all in line with our commitment to continuously strive to be the best place to live, work and invest. With that, I would like to take -- 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 operations. The lifts on turnover were a little lower this quarter at 7%. Is that you guys just lowering rents a little bit to fill the suites? Maybe give us some color on that and the trend you expect over the balance of the year.

Yes. Thanks, Jonathan. It's important to actually kind of point out that the benefits of our newer construction portfolio and our legacy portfolio are working quite well to offset one another. Some of the issues that we saw in the quarter had to do with the legacy portfolio, which on the surface is surprising because there's such strong mark-to-market rents there. But really, when we took a deeper dive, what we're seeing is that those leases that were put out post-COVID where we were seeing 30% mark-to-market rents are the ones that are turning over now to more moderated market rents. So we view this as a relatively short runway of flushing out those exceptionally high post-COVID rents and allowing the legacy portfolio then to kind of give power and strength to the mark-to-market rents that are embedded there. But that's a very, I'll say, very short-term effect that we think will bleed out in the next quarter or 2.

Okay. And then start to grow again?

And absolutely, start to grow again.

Okay. And then...

Sorry to interrupt there. Part of the strategy as well is that in the fourth quarter, we did increase our incentive use. We did do everything we could to fill the portfolio because going into the spring season, we wanted to be occupancy strong so that we could torque rents with confidence. And that strategy is absolutely working. We're seeing good strength in that spring/summer market, and we feel extremely proud of how we've positioned ourselves going into it. By making our occupancy strong, we definitely are looking forward to excitement in Q2, Q3.

Okay. That's helpful. And secondly, just on capital allocation. You guys have lots of capital coming in through the ERES sales and selling some noncore assets that maybe need a little bit more CapEx. You are buying newer assets. Can you maybe talk about how this strategy fits with your operational focus, which has also shifted to spending less on overall CapEx, even if it kind of hits you on the R&M side.

Yes. Like we're talking about overall expense deflation at CAPREIT. I'm very focused on cash flow. We keep talking about cash flow. The capital allocation strategy of newer constructed assets is definitely getting us there much more quickly. It may be showing up slightly on the operating side, but it's not showing up on the ongoing CapEx side. We've got expense deflation overall at CAPREIT. And that's a message that we're trying to get out there. Of course, that strategy will accelerate as we buy ourselves into the newer constructed market and we become more cash flow self-sufficient. I'll let Julian maybe add a little bit of color to that, but we're extremely excited about how the strategy is working.

Yes, it's worked out well so far. The market dynamics have allowed us to be buying at similar cap rates to what we've been selling, but with a fraction of the CapEx. So not only are we high-grading it and maintain ENI, but at the same time, we're lowering CapEx. It's been fortunate that it hasn't been a hypercompetitive environment on the acquisition side, which is allowing us to do something that would have in other times been impossible to do. So we're going to continue to take advantage of that while the window is there.

Julian has been also talking internally quite a bit about economic cap rates. So when we're looking at the assets that we're selling, we're trying to look out at the CapEx requirements of those assets and come up with a true economic cap rate, and we're comparing those economic cap rates to the new construction assets with a CapEx profile that is much, much more easy to look out and see. And when comparing those 2 economic cap rates, there is no question in our mind that this is a positive trade.

Okay. That was going to be my question. So Julian, when you're saying that you're buying and selling at the same cap rate, that's not -- like on an economic cap rate, you're buying better than you're selling, correct?

Yes, absolutely. That's on a nominal cap rate. But when you look at -- and of course, we're targeting buildings with heavier CapEx profile. When you're going from a nominal cap rate in the 4s to low 3s or even 2s, that compares to new construction properties that are nominal and economic cap rates that start with the 4. It's quite a bit more attractive from our perspective. But there's a whole bunch of other benefits that we layer on that I've talked ad nauseam, but it feels like a great way to improve the CAPREIT portfolio in this window.

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

Maybe just continuing on the economic cap rate discussion. Very clear in terms of what the trade-offs are there. But I'm just curious, given the dynamics that you see today, how do you view the NOI growth profiles over the next 5 years of the legacy versus the stuff that you've recently bought?

Well, I think we've got that perfect mix. Like we're in the short to midterm working towards this 20% composition of new construction. And again, we love the market exposure that those 20% newly constructed given us. And we also love the freedom of the regulatory environment and the access to market rents, like I said, in both good times, but sometimes in bad, but at the heartbeat of CAPREIT is the legacy portfolio, which have mark-to-market embedded of what we believe to be close to in the mid-20s, in the mid-20% range. And that will help propel CAPREIT as we go forward, giving us strength and steadiness and that long runway of growth that we've talked about. And we're really focused on expense deflation, which we are getting. Expense deflation is showing up in our total expenses, maybe not the operating expenses, but the total commitment of dollars out the door, and that's the cash flow story. And that story is working extremely, extremely well.

Okay. That's useful. Mark, you made some pretty strong comments about your confidence in Q2 and Q3 from a leasing perspective. I'm just curious, what you think is driving that, just given the changes that we've seen on the immigration side? Are you seeing any changes in terms of the composition of the type of tenant moving through? Supply is still pretty elevated in certain markets. So I'm just -- maybe you can give us a little bit more confidence. And maybe just give us a little bit more in terms of, I don't know if you have your preliminary May occupancy or what your rent spreads are looking like in Q2.

So thanks for the question, Mike. In Q4, we gave pause to try to figure out what was happening in the marketplace. We saw a notable slowdown across the portfolio in traffic of visitors to the site. And when we talk to peers, we talked significantly about weather and people just not moving because the weather was bad and who really wants to move on Christmas and all that business. But we also started hearing a lot about Trump tariffs. People were afraid to make a move with all the tariff discussions. And we were also in election mode in Canada. And I'm going to say the anxiety levels in December were certainly higher than they are today now that we have clarity. So what we did at CAPREIT was everything we could to make sure we were on strong footing going into the spring, and we utilized incentives, which have dropped off dramatically as of current month. And what we found ourselves in a position now of being extremely strong footing on the occupancy front, which allows us to torque rents. So what we're seeing is definitely the market has warmed up like the weather. We're getting a lot more traffic, and we're very, very confident about the outlook for the market in the short term. It feels like back to normal, and we're feeling quite good about that.

Okay. That's really -- that's good to hear. And then just lastly, curious your thoughts on the recent election and now that's been finalized. Do you see any implications at all from the outcome, positive or negative or pretty much status quo?

Well, in terms of party platforms alone, we are interpreting that the liberal government is very committed to growing Canada's population. And we believe that, that party will turn up the dial on immigration as soon as possible, as soon as there's positive signs. So that's good. We definitely are paying attention to the funding of nonprofits. There was a government program of close to $1 billion initially for acquiring -- for nonprofits to acquire affordable assets in income-distressed neighborhoods. That speaks extremely well to valuations, at least in the area of the portfolio that we're looking to maximize our values on. So those fundamentals alone are very, very positive. What we can also look to is actual starts and completion data and the outlook is very positive on a fundamental point of view for Canadian Apartment coast to coast. There's very little product that will be showing up in '26-'27. So the fundamentals across the board are looking very, very good for CAPREIT and perhaps not so great for the delivery of housing to Canada, but the government has aspirations of turning that around. So we'll see.

Our next question comes from Kyle Stanley with Desjardins.

Just going back to the capital allocation. I think it was mentioned earlier, obviously, a lot more capital coming in. How are you thinking about things? Is it safe for us to assume that the NCIB activity could ramp up? Like is there a concern over the dilution from selling and sitting with cash? Or is there a preference to being able to deploy capital into the opportunities as you see fit, meaning you kind of hold the cash for a bit longer?

Well, it's a great question, Kyle. We are opportunistic. We are absolutely reserved in our underwriting. We are not going to fall to the temptation of just buying, okay? And there is no doubt there is a limited number of deals that meet our criteria. I'll let Julian speak more about that. But the idea of buying these cash flow positive assets, new construction, no regulatory risk, less reputational risk. There's a whole host of reasons that we've talked about why we want in that market. That is the debate of what we do with our dollars. There's no question that the most accretive use of our money is the NCIB, and we're hearing investors on that. But we're trying to strike that balance for the long term buying high-quality, well-purchased assets that are going to help our cash flow journey that we are fully committed to. Let me -- I'll see if Julian has any further comments on that.

No, that's exactly right. And we find ourselves in a fortunate position in a tough market, having significant liquidity from our capital recycling journey. And working very hard to take advantage of strong acquisition opportunities with low CapEx profiles, but then also taking advantage of buying back into our new and improved portfolio at effectively at a [ 5 cap with no DB ], none of the typical transaction risk. So we're balancing between the two. Acquisitions are -- it's not as competitive of a market. But at the same time, we're negotiating or working against vendors that are -- have higher construction costs and are struggling to sell at current market prices, but we're staying active and we're staying in front of them. And between that and the NCIB, we've got great options in front of us.

We want to keep our capacity strong. At the end of the day, Stephen can speak a little bit illustratively. He mentioned it in our presentation about our capacity. But our interest of growth and our interest and our ability to have the capacity to do that under the right terms is 100% there. Stephen, do you want to talk about that?

I think -- so, from a debt capacity perspective, we do have an acquisition capacity. If we went up to -- even if we went up to 45% LTV, again, really good assets, we can go up -- we can borrow around $2 billion. Obviously, our credit facility is right now $200 million, but we also have an accordion of $400 million on that. So if you can go right up to $600 million, and that will be not a challenge for us to go to our banks to activate that accordion. So we do have a lot of debt capacity, also inclusive of our unencumbered assets of $1.5 billion. So I would say we do have a lot of dry powder if the opportunity arises.

We're fully committed to growth at CAPREIT, but underlying accretive growth. And that's what we continuously are saying to investors. And Julian just has in its desk today, I would say, close to $1 billion of acquisitions, of which we would probably do very little of it because they don't meet the terms that we want. So we are going to be good custodians of unitholder capital, and we will be restrained, but this is a company that is absolutely geared for growth but accretive growth.

Okay. That's very clear. I mean my next question, you kind of hit on it a little bit there in your answer, but just there's been a lot more emphasis, obviously, on the free cash flow generation and then potentially at some point becoming self-funding. Just curious at this point here, like how far ahead do we have to look before we can conceivably see CAPREITs being able to fund all CapEx distributions with internally generated cash flow based on kind of what you're doing today?

Well, thanks for the question, Kyle. And that's what we all live and breathe over here. So it's 100% a factor of selling and buying. Selling CapEx distressed assets and looking at getting rid of those lower economic cap rates and buying into newly construction assets with higher economic cap rates. And we would like that to be a short-term goal, but it is clearly a function of selling at top value and buying extremely well. So we see it as a short to midterm goal with aspirations of getting there as quickly as we possibly can, but we're close. We're close now.

The next question comes from Khing Shan with RBC Capital Markets.

Just two questions on the expense side. So on the carbon tax, I think it looks like you said for the next 3 quarters, it would be roughly about $5 million of savings. So what would it be if you were to include Q1?

Yes. I mean I can give you the last trailing 12 months, really maybe 2024. That was around $6 million -- $6 million to $6.5 million of carbon tax. So you can see that if you back into the numbers yourself there.

Yes. Okay. And then on the OpEx growth for the Canadian portfolio, like if you -- if I strip out the weather-related growth, it looks like it would have been somewhere in the range -- would be half of that, let's say, half of the 6% to 7% growth. So would that be your expectation for the balance of the year in terms of pace of expense growth on a year-over-year basis?

Yes. I mean I said that back in the Q4 conference call, I expect OpEx growth to be around 5% to 7%. Obviously, it's 7% if it was -- we continue to have really, really poor weather. But I do expect the expense growth to moderate into Q2 to up to Q4.

Okay. And then last on the promotions and incentives. Mark, you mentioned seeing a pretty dramatic falloff into the spring. How dramatic are we seeing? It was $4 million roughly for the quarter? Like are we seeing half of that amount? And maybe if you could quantify that for us a little bit?

Well, there is -- I wouldn't want to put a number on it at this point, Jimmy, but I can tell you that the opportunity to use incentives has been eliminated in the majority of our buildings. So there is still an ability to tap in to get deals done in buildings that are experiencing trouble, but we have very few properties now that are suffering from acute vacancy. So the use of incentives will be minimal at best.

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

Just wanted to delve into the 7% new leasing spread a bit more. And wondering, I think you guys said you have some color in terms of the components of that. But can you give us a sense as to maybe how much of that was negative marks on some of those pandemic rents versus kind of higher mark-to-markets on legacy leases? And what kind of component of the turnover each of those make up?

Well, I'd answer. I'm just looking for my glasses here, but I'm going to ask Julian to read the chart to give you some information.

Yes, Matt. So it is interesting to see about half of the turnover now is stuff that was signed in the last couple of years. And that was actually on average negative. So -- and what's notable is the turnover rate for the leases signed within the last couple of years is remarkably high, which makes sense because a lot of -- some of those lease now find themselves at or just above market. So it is a bit of a tale of 2 cities where you've got half of the turnover coming from the recent leases negative and then the other half of the turnover being the rest of the leases, which are strongly positive. And so it shows up, again, with the turnover increases in the high single digits. But as those shorter-term leases that are at or just above market get worked through, we expect it to revert to something a little bit more normal for a portfolio with a pretty significant mark-to-market -- embedded mark-to-market.

The good news here is that -- the good news, bad news story is that during COVID and since you've had remarkably low churn, so the number of leases that are exposed to those 30% plus mark-to-markets are very small in numbers.

On that point, do you have a sense of what is the remaining portion of the portfolio that would be at above market rents or near market rents? Because that is the key point to your story is that you've got really low turnover during those high rent periods?

Yes, exactly. I mean, look, if you look back, we were near 10% turnover for that, and it was a couple of years of -- it was a couple of years where that dynamic existed, right? So you can kind of do your own math on that, but it's not a huge amount. But of course, it's going to dominate the turnover story in the very short term because of those dynamics I explained.

The good news here is that the strategy of newly construction with legacy is working perfectly because those new constructed assets are doing what they're supposed to do with higher churn. So if we get 40-plus percent churn in new construction and rents are strong, that will help this issue. And then the underlying legacy portfolio, as we said, Matt, has mid-20% mark-to-market rents embedded in there. So this will work out. And then the combination of being able to access market rents on high volume -- higher volume turnover and the very high embedded mark-to-market rents in the legacy portfolio are very strong fundamentals.

Fair enough. Turning to margins. And I know there's been this kind of allocation between maintenance CapEx and operating margins. But can you also give us a sense, you've done a lot of portfolio repositioning. I mean, obviously, if you switch [ Ula ] new, that's margin accretive. But you've also sold ERES, which is fully consolidated and that was high margins. And I'm not sure where NHC was. So after all of kind of this portfolio churn, are you net neutral as to kind of the margin impact? Or should we see improved operating margins at some point once all of this is done?

Well, Matt, I mean, if we're looking at the same-property basis on the Canadian side, I mean, I kind of spoke about the OpEx growth being 5% to 7%. And if you work out your math on the revenue side, I believe you're going to see pretty flat margins for the year. Therefore, as we go through the next couple of years, definitely, there will be margin expansion as we believe revenue is going to outpace the OpEx growth. I mean if you combine it on a total portfolio basis, we factor in the sale of ERES with higher margins and sale of the noncore legacy assets, which have lower margins, I believe we're going to be relatively flat there.

I think the mystery or the magic in the math, I should say, is on the MHC as an example, high margins, high 70s, low 80s, but the economic cap rates back to that are -- were not what we were looking for, for the long term for CAPREIT. So again, we're trading off economic cap rates. So we could do the margins and do a cap rate calculation on an MHC portfolio that we're potentially eating 50% of the NOI with CapEx expenditure or more. And I would say that is exactly what we're trying to avoid. Likewise, in the case of ERES, high-margin assets, but then there's a lot of other issues with repatriating that capital on an ongoing basis, and just Canadian pure-play focus that as we buy our way into high-margin new construction assets, that will have a bit of an engineered effect, I'm going to say. So yes, we're going to do it organically, but there will be a return to higher margins as we get deeper into the new construction market. But the real story, Matt, that I have to keep going to is economic cap rates. Again, we're trading out higher-margin buildings with a high burden of ongoing CapEx. What is the economic cap rate is a question that we've been asking ourselves, and we want the market to fully understand this is what we're focused on.

No, that absolutely makes sense. I appreciate that. The last one for me is just again on the changing portfolio, you've shrunk in size at this point, again, it may scale up over time. But how should we think about G&A in terms of kind of a quarterly run rate? Because I know you've done some restructuring along the way. So I'm not sure where that number ultimately will settle. But Stephen, I don't know if you've got a sense as to how we should model it this year.

Yes. I mean we've done a lot of work over the past couple of years in terms of optimizing our teams. There are some restructuring that occurred this year really to do with the European office that we had to close off and also some of the MHC-related type of G&A that we needed also to flow through in Q1. But aside from that, I think we're -- generally, we're -- I would say, generally, we have completed what we've done on a large scale. Obviously, there might be some things that come in through the year. But generally, I would say a lot of the large restructuring has been completed so far. The one thing I would say, if you're looking at G&A as a run rate, I typically look at it as a percentage of revenues. And I think it's -- we've been trending downwards, and that's what our expectation is. And relative to our peers, we've been probably the only ones who have been doing that, and I think that's something that we should be very proud of. So yes, I mean, if you look at the current run rate on a full year basis for 2024, our expectation is -- that's probably a good expectation with obviously excluding the severance and restructuring costs.

Yes. So just to put a maybe a more specific number on it, is that kind of 5% last year, I think we stripped out a whole knows what the [indiscernible] around 5% of...

Yes, that's right. And going down a little.

And our next question comes from Mario Saric with Scotiabank.

I wanted to maybe stick on the OpEx side and just kind of reconciling potential same-property NOI growth in '25 relative to perhaps expectations last quarter, which I think we talked about kind of 4% to 4.5% was kind of the expectation, i.e., in line with long-term average. The carbon tax maybe adds 100 basis points, give or take to that all else equal or the removal of the carbon tax. But I think Stephen the 5% to 7% you mentioned in terms of OpEx, I just want to clarify that assumes no carbon tax for the rest of the year.

That one was -- sorry, that 5% to 7% was -- sorry, Mario, that 5% to 7% was excluding the carbon tax benefit. With that carbon tax benefit, we'll see it come down. Now the one thing I would say is we're working really hard internally and we're looking at all our procurement strategy, sourcing to new vendors, really making it competitive for our existing vendors or even a competitive process in the procurement side. So we're hoping that we're going to be at the low end of the range. Obviously, that number was excluding the carbon tax benefit. So our expectation, hopefully, is that the OpEx will be much lower than what I've said.

We're 100% looking inside. And all I'm going to say, Mario, there's never been so much work done on this in our history, and we're already seeing the benefit. So we're -- on the OpEx expense side of the discussion, we're feeling quite optimistic.

Okay. So there's some puts and takes here. But if we just go back and think about that 4% to 4.5% target same-store NOI growth for '25, you did 2.6% this quarter. Is the 4% to 4.5% still a reasonable number to think about?

Yes, I think it is. We'd like to think that we can do better than that.

Perfect. Okay. That's helpful. And then just I want to clarify in terms of the accounting treatment for the incentives. So let's say you provided a $1,500 incentive this quarter, that gets amortized as a revenue credit over the next 12 months or the expected lease term if it's greater than 12 months. Is that accurate?

That is correct.

Got you. Okay. And the composition of the incentives, I think last quarter, Mark, you were talking about the high recovery ratio -- or sorry, the closing ratio by reducing asking rents as opposed to giving a 3-month rent or half month rent. Was that similar in Q1? Like are you focused more on reducing asking rents as opposed to giving free rent?

That strategy bled into Q1 and is not the strategy today. We're absolutely focused on optimizing, as I said earlier, that we've got the velocity is definitely showing up in the offices again and moderation of rents is not on the menu.

So I was just referring to Q1, whether it was a similar strategy in Q1 as it was in Q4?

It was a similar strategy in Q1.

Got it. Okay. My last one, just maybe back to you, Mark. When you're referring to accretive growth in terms of deploying the substantial amount of liquidity and cash that you may have, when you define accretive growth, are you referring to leverage neutral AFO per unit growth or something else?

Well, I'm just simply looking at the -- what the portfolio delivers and how we can grow on those averages by acquiring new assets. So it's always -- there's a tilt definitely on this economic cap rate, free cash flow thinking because we're trying to be realistic at the end of the day. If values do not change, which we expect they are going to improve, but we're going to baseline that they won't, we want economic cap rates on the table.

We have no further questions. So this concludes our Q&A session today. I'll now pass the call back to Mark Kenney for any closing comments.

Thank you, operator. 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.