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

Hello, everyone. Thank you for joining us, and welcome to the Canadian Apartment Properties REIT Second Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Nicole Dolan, Investor Relations. Nicole, 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 Brad Cutsey, President and Chief Executive Officer.

Thanks, Nicole, and good morning, everyone. Joining me today is Stephen Co, our Chief Financial Officer. Before we begin, I'd like to say that it's been a privilege to be joining you today for my first earnings call as President and Chief Executive Officer of CAPREIT. At this time, I'd also like to acknowledge my predecessor, Mark Kenney, for his many years of leadership and the significant contributions he made to CAPREIT. While I'm still in the early stages of my tenure, the past several weeks have given me the opportunity to spend time with our people and our portfolio, and I have already been encouraged by the high quality of the platform and the depth of expertise across the organization. Together, they reinforce the confidence in the solid foundation upon which CAPREIT is built, and I look forward to further building on that foundation in the years ahead. With that, let's turn to Slide 4 and walk through some highlights from the year-to-date. From a capital allocation perspective, CAPREIT has completed approximately $66 million of acquisitions and dispositions in Canada, $145 million of property divestments in Europe and privatization of European residential REIT for $99 million, which provides us with the greater flexibility to manage the sale of the remaining European assets. We've also continued to invest in our NCIB program with $71 million deployed so far this year. Operationally, while market conditions remain pressured across the multifamily sector, CAPREIT continues to demonstrate resilience. Physical occupancy for our same-property Canadian portfolio was 97.5% on June 30, which is meaningful above Yardi's latest quarterly average of 95.3% nationally. More recently, CAPREIT's physical occupancy as of July 31 was down slightly to 97.3%, which is consistent with the typical seasonal trend observed between June and July. While maintaining healthy occupancy levels, we've also achieved 2.3% growth in our same-property occupied AMR year-over-year. Combined with effective cost initiatives, our Canadian same-property NOI margin remained strong at 64.2% for the 6 months ended June 30, 2026. Our balance sheet total debt represented 41.2% of gross book value as of June 30, 2026, which is up modestly versus the previous year, mainly due to fair value losses recognized on investment properties. Overall, these results reflect the strength of the portfolio and the team in which continues to be a challenging operating environment. That said, while market conditions remain competitive, we are beginning to see early signs that operating fundamentals may be stabilizing. In line with that, we have had several consecutive months of moderation in our loss to lease on turnover, which we'll discuss in more detail later on in the call. I'd now like to spend a few minutes highlighting our capital allocation priorities. Turning to Slide 6. Over the past several years, CAPREIT has significantly enhanced the quality of its portfolio. Today, approximately 68% of the portfolio consists of core legacy assets, of which 97% are located in rent-controlled markets. This provides stability in the rent growth profile even in the softer operating environment given the significant embedded mark-to-market opportunity across these assets. A further 19% of the portfolio is comprised of recently constructed communities that are expected to benefit from lower capital requirements, greater operating efficiencies and strong long-term earnings growth potential as market fundamentals normalize. The remaining 13% of the portfolio across Canada and Europe represents a source of continued capital recycling. With this, we'll remain disciplined and opportunistic, selectively monetizing low cash yielding assets where value has been maximized and redeploying that capital into investments accretive to FFO per unit in the near term. In addition to optimizing the portfolio through ongoing repositioning, we've been investing in the implementation of a new ERP system in order to enhance our leasing capabilities, improve data-driven decision-making, streamline processes and support further optimization of our cost structure over time. More broadly, as I continue to assess the business over the coming quarters, I'll be evaluating the entire portfolio to ensure that every capital allocation decision supports stronger FFO per unit growth and enhanced long-term cash flow position and the creation of sustainable value for our unitholders. With those objectives in mind, our NCIB program continues to represent a compelling use of capital available to us in the current environment. You can see on Slide 7 that since 2022, we deployed approximately $1 billion to repurchase nearly 24 million trust units at an average price of approximately $43 per unit. And as I mentioned earlier, during 2026, we invested approximately $71 million to buy back trust units at a weighted average price of $36 per unit, which represents a sizable discount to our June 30 diluted NAV of $54 per unit. We believe these accretive repurchases not only create immediate value today, but also positions unitholders to benefit more fully in the value created once rental housing market fundamentals return to balance, and that inflection is ultimately reflected in the capital markets. Going forward, we'll continue to evaluate the NCIB alongside any other capital allocation alternative and deploy funds into the program where repurchases are accretive to FFO per unit and NAV per unit while remaining leverage neutral. With that, I'll turn the call over to Stephen to walk through our operational and financial results.

Thanks, Brad. Let's start with our operating performance on Slide 9. While leasing conditions remain competitive across many parts of the Canadian rental market, our operating teams executed well throughout the quarter, maintaining a disciplined focus on managing occupancy, pricing and resident retention. As a result, you can see on the slide that for each of our 3 largest regions, occupancy continues to compare favorably against broader industry benchmarks, supported by our strategic use of incentives given the current environment. In our largest market of Toronto, physical occupancy was 98.4% as of June 30, notably higher than Yardi's reported quarterly average of 95.2%. At the same time, we grew occupied AMR in Toronto by 2.1% year-over-year to $1,867. This reflects the strength of our legacy portfolio alongside our ability to effectively balance occupancy and rental growth even in today's more pressured operating environment. The same underlying themes are evident across the broader portfolio with rent growth being driven by lease renewals and the substantial embedded mark-to-market opportunity that exists within our legacy portfolio, the vast majority of which is located in rent-controlled markets, as Brad mentioned. However, our turnover remains weighted towards shorter tenure leases that are above current market rents and continuing to reset towards today's market levels. Turning to Slide 10. I'll provide an update on how that turnover dynamic evolved during the second quarter. Approximately 51% of Canadian turnover during the quarter came from residents who had occupied the suites for less than 2 years. These leases experienced an average decrease in monthly rent of 7.1%, an improvement from a decline of 10.8% in the first quarter. The remaining 49% of turnover came from residents with lease tenures of 2 years or longer, where we continue to achieve positive rent growth of 5.4%. As a result, our blended change in monthly rent improved to negative 1.2%. This compares to negative 2.1% in the first quarter, reflecting some moderation in the negative rent spreads we're realizing on shorter-term tenure leases. This trend continued into July with the overall change in rent on turnover improving further to positive 0.2% for the month. Looking at the chart on the left of the slide, as of June 30, approximately 31% of residents have lived in their home for less than 2 years, across which in-place average monthly rent is $2.53 per square foot. Within this segment, approximately 20% of the in-place rents remain more than 5% above our estimated market rents, indicating that there is still some additional normalization to work through. The remaining 69% of our residents have lived in their homes for more than 2 years. These longer tenure leases continue to generate positive average rent uplifts on turnover even in the current operating environment, providing an important source of stability, driving resilient overall rent growth until supply-demand fundamentals return to balance. Alongside that turnover dynamic, we continue to utilize incentives to support occupancy, as you can see on Slide 11. This strategy allows us to protect occupied AMR, while remaining competitive against comparable offerings from our peers. In the second quarter of 2026, new residential inducements granted were $4.6 million, up from $2.6 million a year ago, but modestly lower than the $4.8 million recorded in the first quarter. While there will be some moderation in the level of new incentives granted throughout the second half of the year, we expect them to remain elevated as market conditions continue to warrant a competitive leasing approach. With that, I'll now briefly cover our overall second quarter financial results on Slide 12. Same property Canadian operating revenues increased by 0.8%, while operating costs grew by 0.7%, driving NOI growth of 0.9% and a stable NOI margin of 66.2%. Diluted FFO per unit was $0.654 compared to $0.661 in the second quarter of 2025, down 1.1%, primarily due to the loss NOI from dispositions and higher financing costs, partially offset by accretive impact of trust unit repurchases under our NCIB. Looking at our year-to-date results on Slide 13. Same-property Canadian operating revenues increased by 1%. With operating costs flat, our same-property Canadian NOI margin was up by 0.3% to 64.2% for the 6 months ended June 30, 2026. Diluted FFO per unit was $1.249 for the first 6 months of the year with FFO payout ratio of 62%. Finally, Slide 14 summarizes our liquidity position and laddered mortgage maturity profile. As of June 30, our mortgages had a weighted average interest rate of 3.4% and a weighted average term to maturity of 4.2 years. We also had $180 million of immediate available liquidity on our acquisition and operating facility. Moving ahead, we remain committed to reinforcing our prudent leverage profile, while supporting stronger per unit earnings growth. With that, I'll turn the call back over to Brad to wrap up on Slide 15.

Thanks, Stephen. Before we open the line for questions, I'd like to close with a few thoughts. While the near-term operating environment remains competitive, it's important to distinguish between today's market conditions and the long-term outlook for the business. The underlying fundamentals supporting Canadian rental housing remain robust, and CAPREIT is well positioned to benefit as those fundamentals reassert themselves over time. In the meantime, our focus is on disciplined execution in the areas we can control. That means continuing to direct capital towards its highest and best use on a risk-adjusted basis, whether that's investing through our NCIB program, strengthening sustainable cash flow generation or further reinforcing the balance sheet. Importantly, every capital allocation decision will be guided by the goal of driving stronger per unit growth and FFO. As I've said throughout today's call, I continue to use in the coming months to deepen my understanding of the platform. But one thing has already become clear to me, CAPREIT has an exceptional team and a high-quality portfolio. And I look forward to working alongside our residents, team members, leadership team and the Board of Trustees to deliver on the opportunities ahead and enhance earnings for unitholders. On a final note, I'd like to remind everyone that we have rescheduled our Investor Day in Montreal to November 19, as communicated earlier this week. This additional time will allow us to deliver a more comprehensive program and provide a meaningful opportunity to discuss CAPREIT's strategy and portfolio in more detail. We appreciate your understanding and hope to see you there. With that, operator, we'd be pleased to take your questions.

Your first question comes from the line of Jonathan Kelcher with TD Cowen.

First off, I guess the capital allocation focus looks like it's going to be mostly on the NCIB. I guess, first, how comfortable are you with where leverage is right now? And would you take it up a little bit for -- to buy back shares?

I think we're comfortable with where the leverage is right now, Jonathan. Over time, we'd like to maybe trend that a little lower. But with -- as far as NCIB goes, we are committed to NCIB, but on a leverage-neutral basis.

Okay. And then I guess, so that means you'd be selling assets to kind of fund that. And if you look at the 3 buckets that you have, would asset sales -- are they going to be strictly the noncore bucket? Or would you consider some of the either recent construction or core assets?

No, I think it will be the noncore, and we'll continue to evaluate our disposition opportunistically driven by whether we believe value has been maximized on the asset.

Okay. That's helpful. And then lastly, Stephen, you talked about the inducements to maybe trend down over the back half of this year. I guess 2 things there. Like what are some of the inducements that you're offering? And if we look at a level, should we be thinking sort of 1% to 1.5% would be a good level for inducements?

Yes. So incentive use has trended up over the past quarters, like more pronounced on the recent build than legacy. We are offering in certain locations, again, all dependent on competition within that building and its area. But usually, it's about 1 month's rent. And again, it's very targeted buildings. There are some situations where we do offer 2 months, but a lot of it is just 1 month. And we try to first do non-cost-bearing incentives first before we go into actually giving actual incentives. So while we -- new residential incentives rents have declined slightly from Q1, we do expect them to remain elevated at levels, albeit like I did say, like moderating lower to the latter part -- I mean the last half of the year. We are constructive on the Ontario, particularly the GTA, which is our largest market, and we're hopeful we can actually -- but we do have good visibility around incentives, and we have seen moderation in July and August so far.

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

So first question to Brad. I know you're still in assessment mode, but I was curious as to where are you seeing sort of the biggest opportunities to create per unit value? Kind of what are the low-hanging fruits? Any color you can share from your initial assessment so far?

Yes. It's still early days for me, but some of my initial observations point to opportunities probably in our leasing processes and streamline some of our other operating processes. The other thing I'd maybe mention on this is also we're in the middle of our multiyear ERP implementation, which I think is going to give us a much better platform to standardize and automate things like leasing and some of those other processes that we can improve on.

Okay. And then John referred to NCIB as your priority from a capital allocation perspective. I don't know, if you'd confirm that. Is that really where you see the biggest bang for the buck today?

I think we'll continue to -- yes, I think every dollar of capital will be allocated to the highest and best use on a risk-adjusted basis, Jimmy.

And where do you see that today? Yes.

Well, it obviously depends. But if we're sitting on cash and we can do it on a leverage-neutral basis, I think our units represent a compelling investment at today's level.

Okay. Okay. And then last, just on the turnover rent growth. The sort of improvement you've seen from Q1 to Q2, I think minus 10% to minus 7%. Is that to do with market rent improving? Is that a tenant mix? I'm trying to understand like how those same tenants turn in Q1 and Q2, would that spread be the same? Like are we actually seeing some improvement in fundamentals?

Well, I think there is -- just in terms of like as the tenants have stayed there for the past 2 years and market rents have -- I would say, generally, we have seen some stabilization in market rents that you will see when the lease comes over, when it turns over, that number will be just naturally lower. So we have seen that. Even when I look at the July numbers, the under 2 years, we talk about -- it came down to about -- like we saw the Q2 number being like 7.1% negative. And then July, it's improved as well. It's about 5.2% negative. So I think that's a function of the market rents have come -- become more stabilized. And then I think it's more bad than anything else.

Your next question comes from the line of Matt Kornack with National Bank of Canada Capital Markets.

Maybe starting with occupancy because there was a bit of a sequential increase. Can you give us a sense, is that seasonal demand? How has it continued into kind of Q3? And obviously, I think we need to see occupancy before we see rent growth, but what is the trend there in terms of demand relative to your portfolio?

Yes. I mean, Matt, we -- I mean, I kind of mentioned on the call, we did use incentives strategically to increase occupancy. It was seasonality where the occupancy did increase, and we did show our July numbers have -- occupancy has come down slightly, but that's more of a seasonal change between June and July. But overall, I would say at these levels, we're very comfortable with them.

And on --

On the incentive side -- sorry, go ahead.

No, I was just going to say too, we saw good leasing activity in Q2. Our conversion was a little down, which shows you how competitive the market is. But there is leasing activity. And depending on which market, specifically the GTA, we're getting quite constructive on that, Matt. So as we kind of move through July and August, I'd say we're going to be in a better spot. But if I had to look at the top 3 markets, I would say the GTA were quite constructive. I think Montreal is a little bit mixed. There's a little bit of new starts in rental there, and it's more of an issue on the demand side. And I think Vancouver is still trying to work through the absorption of the supply that's been delivered and it still remains about 4% under construction. So until demand really comes back, the net absorption is probably going to be pushed out in Vancouver, maybe closer to late 2027, early 2028, where we're hopeful with the GTA, we think we might be approaching a more balanced market in the quarters ahead.

Okay. That's interesting, and it makes sense. Maybe, Stephen as well, are the turnover spreads that you provided, is that net of incentives? Because I know you had mentioned that incentives have picked up a bit? Or are those kind of the base rates?

No, they're not. They're gross.

Okay. And is that why -- I mean, one other trend I was trying to figure out just because Brad, you wouldn't have the benefit of this, but you probably looked at it. But just going back, the move has actually been bigger in the greater than 2-year leases in terms of that spread would have been plus 30% in Q4 '24, and it's down to 5%, although it does seem to be stabilizing at 5%, whereas there's been less of a move in the less than 2 year. Is that -- I mean, I'm just -- that's a little confounding to me like in terms of those longer duration leases. Is it that you're not renovating those suites when you're putting them back on the market? Or how should we think of that dynamic?

Like so there are like -- there are some leases that are now in the negative territory that are aging into the 2- to 3-year mark. And as market rents have softened, some of that segment is being exposed to the rent reset as well. So we have done more back-to-back. And I think that's what we're seeing as well.

Your next question comes from the line of Kyle Stanley with Desjardins.

Just maybe looking at kind of leasing demand, I'm wondering, are you seeing any differences or changes in demand across the kind of 2 buckets in your portfolio, your kind of legacy assets versus your more recent construction? I'm just wondering if you're seeing -- beginning to see a bit more strength in some of the more recently delivered product or if that hasn't changed much?

Yes. It's a great question, Kyle. I think there's definitely more stabilization, stability in the legacy assets, which -- and the rent control markets. We have seen being a little more competitive in the new build. That said, we strongly believe when the market does -- the fundamentals do tighten and depending on which market we're talking about, some of it is more disrupted sooner than later. But we still feel quite good about the potential of those new builds. It's just got to work through some of the absorption. But really, that absorption is really going to be dependent on demand.