Minto Apartment Real Estate Investment Trust (MIUN) Earnings Call Transcript & Summary

Good morning. My name is JoAnn, and I will be your conference coordinator today. At this time, I would like to welcome everyone to the Minto Apartment REIT 2022 Second Quarter Financial Results. [Operator Instructions] Before we begin, I want to remind listeners that certain statements about future events made on this conference call are forward-looking in nature. Any such information is subject to risks, uncertainties and assumptions that could cause actual results to differ materially. Please refer to the cautionary statements on forward-looking information in the REIT's news release and MD&A dated August 9, 2022 for more information. During the call, management will also reference certain non-GAAP financial measures. Although the REIT believes these measures provide useful supplemental information about its financial performance, do not recognized measures and do not have standardized meanings under GAAP. Please see the REIT's MD&A for additional information regarding non-GAAP financial measures, including reconciliations to the nearest GAAP measures. Thank you. Mr. Waters, you may begin your conference.

Thank you, JoAnn, and good morning, everyone. I'm Michael Waters, Chief Executive Officer of Minto Apartment REIT, and I'm joined on the call this morning by Julie Morin, our Chief Financial Officer, and Jonathan Li, our President and Chief Operating Officer. I'll begin the call first by discussing highlights from the second quarter as well as other corporate developments. Julie will review our financial results in detail, and then Jonathan will provide an overview of our operating performance and growth initiatives. I'll conclude with our business outlook, and then we'll be pleased to take your questions. Our financial performance continued to significantly improve in the second quarter as we capitalized on stronger urban rental market conditions. Market dynamics have substantially returned to pre-pandemic levels, and we delivered strong growth in our key financial metrics despite inflationary pressures. We signed 667 new leases in the quarter, achieving an average gain to lease of 12.1%. It was our single largest quarterly gain since Q1 of 2020 with solid gains across all of our markets. Average monthly rent for the same property portfolio increased 3.4% year-over-year to $1,695 at the end of Q2 2022, and average occupancy rose to 94.7% compared to 91.5% in Q2 of 2021, even as we continue to reduce the use of promotions. Again, these results reflect strengthening urban rental market conditions underpinned by net immigration, a widening housing affordability gap and a return to school, to name just a few. We also continue to advance our organic growth initiatives during the quarter. We completed the repositioning of 83 suites, generating an average annualized return on investment of 8.6%. These renovations improve asset quality, reduce future repair costs and drive strong growth in rental revenue. We also closed the acquisition of 2 premium downtown rental properties, Niagara West in Toronto and the International in Calgary, which combined, increased the REIT's gross sweet count by 753 suites. At the end of the quarter, we increased the total commitment of our revolving credit facility from $200 million to $300 million, providing us with enhanced financial flexibility as we continue to pursue opportunities to drive NAV growth during a period of reduced accessibility to equity capital markets. We had strong liquidity at quarter end of $193 million, representing a liquidity ratio of approximately 18%. You're also likely aware that on July 19, subsequent to the end of the quarter, we announced our intention to initiate a normal course issuer bid. The NCIB will be active until July 20, 2023, and enables us to acquire and cancel up to 10% of the REIT public float. The purchase of units at prices below the REIT's net asset value is an attractive use of funds. How we're constantly evaluating various capital allocation opportunities, and there's no guarantee that we will purchase and cancel any units under the NCIB. It will depend on market conditions, of prevailing unit price and other factors. Overall, we're very pleased with our current competitive positioning. We're capitalizing on improving market conditions to deliver strong financial performance while maintaining a very strong balance sheet. The outlook for our business remains highly positive. And while capital market conditions are currently challenging for the Canadian multiresidential sector, we're evaluating alternatives to efficiently raise capital in order to fund the attractive investment opportunities in front of us. I'll speak more about this later in the call. For now, I'd like to invite Julie to discuss our second quarter financial performance in greater detail.

Thank you, Michael. Turning to Slide 4, I'll begin with an overview of the key Q2 financial results. We reported same-property portfolio revenue of $32.9 million in Q2 2022, an increase of 10.1% compared to $29.9 million in Q2 last year. The increase was mainly due to higher occupancy and higher average rents. The total portfolio revenue was $35.5 million, a year-over-year increase of 18.8%, reflecting higher rents and occupancy as well as the acquisitions of La Hill Park, Niagara West and the International. Same property portfolio NOI in the second quarter was $20.2 million or 61.5% of revenue, an increase of 6.4% from $19 million or 63.6% of revenue in Q2 last year. Total NOI was $21.8 million or 61.5% of revenue, an increase of 14.8% from Q2 last year. Higher NOI in Q2 2022 mainly reflected increased revenue, partially offset by higher operating expenses. I will discuss the expenses in more detail shortly. In addition, I want to note that same-property NOI would have increased by 9.9% in Q2 2022, and Q2 2021 NOI margin would have been 61.6%, if a onetime property tax refund received in Q2 2021 is excluded from the calculation. The AFFO payout ratio was 65.2% compared to 64.8% in Q2 last year. Average monthly rent per unfurnished occupied suite in Q2 2022 was $1,695 for the same property portfolio and $1,690 for the total portfolio, representing increases of 3.4% and 3%, respectively, from Q2 last year. Average occupancy was 94.8% for the same property portfolio and 94.7% for the total portfolio. These represented significant improvements from 91.5% in Q2 2021. Turning to Slide 5. As I mentioned, higher operating expenses impacted NOI growth. You can see the increases in this chart. Like our sector peers, we are facing inflationary pressures, and we are working hard to manage controllable costs and improve operational efficiencies. Property operating costs in the quarter were impacted by higher labor costs, filling staffing vacancies, higher insurance costs and higher repairs and maintenance costs. The year-over-year increase in property taxes is mainly due to the onetime refund of approximately $600,000 received in Q2 last year that I previously mentioned. Excluding the refund, property taxes would have been flat year-over-year and total operating expense growth would have been approximately 11% instead of 16.7%. Higher utilities costs were due largely to significant increase in natural gas costs. This was due to both higher natural gas prices and cool spring weather, which resulted in greater usage during the quarter with a 9% increase in total heating degrees. I'll now turn it over to Jonathan to review our operating performance and growth initiatives. Jonathan?

Thank you, Julie. I'd like to start by reviewing occupancy on Slide 6. Average occupancy increased both sequentially in Q2 2022 and compared to the same period last year. This reflects the fact that as market conditions have improved, our move-ins have significantly outpaced move-outs. We had 585 move-ins during the second quarter compared to 492 move-outs, a net increase of 93. Over the last 4 quarters, we've had 2,024 move-ins compared to 1,753 move-outs, a net increase of 271. Move-ins have now exceeded move-outs in 4 of the last 5 quarters. Slide 7 shows our revenue analysis for Q2. The upper chart breaks down our realized gain to lease in the second quarter, while the lower one outlines our estimate of the gain-to-lease potential embedded in the portfolio at June 30. Beginning with the upper chart, we signed 667 new leases in the quarter, an increase of 25% compared to 534 new leases in Q2 last year. We continue to realize very solid gain-to-lease in all markets with double-digit growth in every market except Alberta, where we had high single-digit growth. The average rent on new leases increased by 12.1% from $1,645 to $1,844. This resulted in an annualized incremental revenue gain of approximately $1.3 million. During the quarter, as market conditions strengthened further, we continue to drive occupancy while simultaneously reducing the targeted use of discounts and promotions. We expect to reduce these even further in the months ahead as market conditions continue to improve. Turning to the embedded rent potential on the lower chart, we believe we can generate approximately $14 million of annualized incremental revenue by bringing rents in 7,753 suites to market levels. Turning to Slide 8. The upper chart tracks our gain to lease and average monthly rent growth on a quarterly basis. You can see how the quarterly gains to lease has improved over the last 4 quarters. The 12.1% quarterly gain in Q2 2022 was the strongest that we have achieved in more than 2 years and was roughly in line with pre-pandemic levels. We have also generated steady growth in average monthly rent despite the particularly negative impact of COVID-19 on urban rental markets, which we believe is now reversing. On the chart, we break out rents by geography. Our rental pricing continues to compare favorably to condos on a size and rental rate basis, making for a very attractive offering to renters. Now I'd like to review our furnished suite performance on Slide 9. As we have previously discussed, the pandemic has had an outsized negative impact on our furnished suites due primarily to the curtailment of business travel. However, rental rates and occupancy have trended steadily upward as market conditions have improved and business travel has recovered. Average monthly rent in the second quarter for furnished suites was $4,476 compared to $3,572 in Q2 last year, while average occupancy was 86.2% compared to 74.4% last year. We are continuing to trim the furnished suite inventory by converting furnished suites to unfurnished in our Roehampton property in Toronto, and once this is done, the furnished suite count will reach our steady-state target of approximately 185 suites. On Slide 10, you'll find a summary of our repositioning activities. We renovated and leased a total of 83 suites in the second quarter or 61 at the REIT's proportionate ownership share. The average monthly rental increase following repositioning was $370 per suite, which generated a simple return on investment of 8.6%, in line with our target. We have 2,172 remaining suites to reposition under our current program. We expect to reposition approximately 100 to 170 suites over the second half of the year, subject to turnover. We repositioned a total of 143 suites in the first half. Now I will review our intensification and development initiatives beginning on Slide 11. We currently have 8 projects in our pipeline, 6 of which are in active development. These projects have the potential to increase the suite count by 2,271 suites or 1,443 at our proportional ownership share, a 27% increase. Of note, over 82% of our growth pipeline by suite count is located in Vancouver, Victoria, and Toronto. You can see the current status of several of the properties in our development pipeline on the next 2 slides, beginning with Fifth and Bank on Slide 12. This mixed-use residential and retail property in Ottawa's lead neighborhood stabilized during Q2 2022. All of the 163 suites have been leased and are now occupied. Solid construction progress is being made at Lonsdale Square in North Vancouver. You can see in the updated photo that framing is well underway and construction has reached the fifth story. We continue to expect the property to stabilize at the end of 2023. Demolition is complete at 810 Kingsway in Vancouver and excavation commenced in June. This will be a 6-story mixed-use building comprising 108 suites and approximately 11,500 square feet of at-grade retail space, and we anticipate stabilization by the end of 2024. Turning to Beachwood and Ottawa on Slide 13. Demolition of the previous buildings on the site is complete and excavation is well underway. We are anticipating stabilization by the end of 2024. At Leslie York Mills in Toronto, site work continues and the existing parking structure has been demolished. We are transforming this site with 192 new townhomes, several new amenities and a new 2-level underground parking garage. Construction began late last year and stabilization is expected in late 2025. At our Richgrove project also in Toronto, shoring and excavation is well underway. We are building a new rental tower with 225 suites, including 100 affordable suites. We currently expect stabilization in the second quarter of 2026. Moving to Slide 14. As you know, we completed the acquisitions of Niagara West in Downtown Toronto and the International in Downtown Calgary during the second quarter. I am pleased to say that occupancy has remained strong at both properties, and there has been significant market rent growth since they were purchased by the REIT. In addition, we are executing on exciting initiatives to drive rent growth and maximize value at each party. For example, at Niagara West, we are working with a prospective investment-grade tenant to fill all of the remaining retail space, which amounts to about 12,000 square feet. I'll now turn it back to Julie to discuss our debt financing and liquidity.

Thank you, Jonathan. Turning to Slide 15. Since the REIT's inception, one of our key priorities has been to maintain a conservative leverage ratio and a balanced debt maturity schedule. As you can see on this chart, maturities are highly manageable through 2027. As of June 30, 2022, the weighted average term to maturity on our fixed rate debt was 4.74 years with a weighted average interest rate of 2.9%. Approximately 80% of our debt was fixed rate and 63% was CMHC insured. I want to note that we assumed approximately $108 million of floating rate loans during the second quarter on the acquisitions of Niagara West and the international. We are actively pursuing long-term fixed-rate CMHC insured financing to refinance these properties. Total liquidity was approximately $193 million at the end of June 2022 and debt to gross book value was 39.5%. As Michael mentioned earlier, we increased our revolving credit facility at the end of the second quarter from $200 million to $300 million, and this provides us with significantly enhanced financial flexibility. I'll now turn it back over to Michael to wrap up.

Thanks, Julie. I'll wrap up with our business outlook on Slide 16 before we take your questions. We're obviously very pleased with our strong financial performance in the second quarter, and we're confident that all of the fundamentals that have driven the market over the long term remain in place. These include our country's expansive immigration policies, the increasing housing affordability gap between owning and renting a home and the inelastic housing supply curve in Canada. These factors have gradually reasserted themselves after the Canadian rental market was severely disrupted by the pandemic. We also believe that we'll benefit from additional rental demand as the population continues to return to urban centers that went temporarily quiet due to COVID. Positive fundamentals driving our market aren't new, but we believe that they're becoming more pronounced. For example, I'd note that rising interest rates have significantly increased the cost of homeownership in recent months, which has further widened the affordability gap between owning and renting. We're confident that we're well positioned for long-term success and to achieve it will be focused on 5 key strategies. Firstly, growing NOI by maximizing revenue, optimizing occupancy, creating value from suite repositioning and minimizing OpEx. Strategic allocation of capital, which may include capital recycling opportunities, accretive investments, deleveraging and unit buybacks. Third, best-in-class execution of our existing intensification and development pipeline through our relationship with Minto Properties, third-party acquisition or development opportunities, although these may be challenging in the short term, given our current cost of capital. And lastly, prudent balance sheet and liquidity management. I want to spend a bit of time focusing on capital allocation before I wrap up as I expect you may have questions about that. The current capital market environment is challenging for the Canadian multi-res sector. Accordingly, in order to strengthen our portfolio and capitalize on attractive growth opportunities, we've initiated a capital recycling program. Under this program, we're exploring the potential sale of certain mature stabilized properties in our portfolio. The proceeds would be deployed to fund higher growth or value-add initiatives, which could include property development, property purchase options, convertible development loans, suite repositioning and potential opportunities under the NCIB program. The capital recycling program could also enable us to adjust our geographic diversification and reduce the average age of our portfolio. There's no guarantee that we'll sell any properties under this program, but we believe it's an appropriate strategy to seek to efficiently redeploy capital into better risk-adjusted and accretive investment opportunities. In addition, given our current cost of capital, pursuing third-party acquisitions and development opportunities is currently challenging. We're putting less of a priority on these initiatives in the short term. Fortunately, we already have a very strong pipeline of growth opportunities through our property intensification and CDL program. We're confident that by continuing to execute on our strategy, we'll deliver strong financial performance and strong returns to unitholders. This concludes our presentation this morning. Julie, Jonathan and I would now be pleased to answer any questions you may have. Operator, please open the line for questions.

[Operator Instructions] First question comes from Sairam Srinivas at Cormark Securities.

Michael Julie, Jonathan. Congratulations for a great quarter. My first question is probably just on the elephant in the room, and that's capital recycling. Michael, can you give us a little more color in terms of are there any such assets you're looking at? Or have you identified markets where you probably want to lighten or load [indiscernible] into the investment?

Well, as we mentioned, we lifted some properties in Edmonton earlier in the summer. Many of you are probably aware of that. We're very early stages on that one in terms of working with prospective interested parties. There's no guarantee anything will happen. But so we'll continue to work on that. We'll share an update on the next quarterly call. We are, every year, constantly for each asset, conducting a very rigorous asset management review, and from time to time, we do look at assets where, as we indicated earlier, maybe they're fully stabilized. The value creation curve is flattening and there may be an opportunity to harvest some value and redeploy it. Jon, I don't know if you'd add any color to that.

No, I think you covered it well, Michael.

Just probably shifting gears to occupancy, and thank you for the disclosure on the vacancy breakup this quarter. Just looking at that, so I guess you guys have probably close to 2% of the suite available right now for renting at some stage or the other. Considering where the markets are and considering underdevelopment slowing projects as well, do you see a lot of scope for rent growth?

So maybe, Jon, do you want to take a stab at that one?

Sure. So I mean look, absolutely, we see an opportunity for rent growth, especially in our markets, even through July, we've continued to see some nice rent growth in market rents in all of our key markets. In terms of the occupancy, yes, we added that disclosure. We thought it was helpful because look, we are repositioning a very large number of our suites over time, and that will help with our gain-to-lease, obviously. It also creates what I'll call some structural vacancy in our portfolio. So occupancy continues to tick up nicely. Don't forget that part of the in-place occupancy as well that you see, we know some of those people are moving out as well. So some of those people move out. We know when they're going to move out, and we're highly focused on turning suites extremely, extremely efficiently so that we can minimize any downtime and maximize folks in the suites and maximize our monthly rents.

And my last question is on broader policy and government initiatives. I know affordability has been a big topic of late as well. And there was some noise around vacancy decontrol as well, especially in Toronto. Is that something you guys are hearing? Or are there any policy level discussions you've been having?

Yes. So I mean, obviously, this is a big topic of late, particularly with housing affordability, both for purchase and for rent eroding, and it's obviously been a politically charged topic. Even going back to the federal election campaign last fall. And so looking at governments at multiple levels, federal, provincial, and municipal who are all under pressure by their constituencies to tackle this issue. And so we've been active both through groups like REALPAC, FOPO and others at that level, but also working very closely with our peers in the industry, both publicly traded REITs and other rental housing providers to develop, we think, policy alternatives that we think could really move the dial. And I think there's a growing consciousness at the policymaker level that supply is the issue. And I mean I think there's been many forecasts produced indicating both current state, the relative undersupply of housing in Canada, but further with our heightened population growth, how that deficit in-housing supply is likely to worsen materially over the next decade or more. And just given the cycle to redevelop urban sites in particular, but even in greenfield sites, cycle time to bring new rental housing online is measured in years, 5, 6, 7, 8 years in many cases. So we need to start that work now. I think that our challenge will be to continue to work with policymakers to educate, to provide our perspective. Obviously, we've been in business for 7 decades, and we've built over 100,000 homes. So we've got a lot of experience in this area, and certainly, our peers have much of that same experience. And so we do see policy alternatives that we think can help, and we also see areas where policies maybe have not been as effective. And certainly, eliminating vacancy decontrol or extra taxation would be areas that we would gently guide policymakers away and look at options, policy options like we've seen in some cities, Vancouver, for example, where we've seen density bonuses, the city of Toronto has programs in place to help with the development of affordable rental housing. We're leveraging that right now at our Richgrove property. And we've also seen policies that through agencies like CMHC, their RCFI program, their MLI select program, where we think we can introduce incentives to bring private capital to deliver much of the gap that we need to fill in terms of housing supply. So I think it's a complex issue. We could talk about it at length. But suffice it to say, we're working very closely with other players, trade groups and policymakers to see if we can make a difference.

Next question comes from Jonathan Kelcher at TD Securities.

Just going back to the occupancy, it looks like you're around 97% if you include the suite out for repositioning. Is that your suit spot in terms of where you're pushing rents versus keeping suites full?

Jon, maybe I'll start off and then maybe Jon Li can jump in. As we've talked about in the past, our yield management philosophy has never been one of full occupancy, but more, I'll say, revenue optimization. And that is partly investing in repositioning programs, but also a bit of a price discovery exercise with tenants and trying to drive rents. And so we typically would run a little bit more vacancy as we seek to drive that top line. And obviously, that goes to NAV growth. Jon, do you want to fill in the blanks on that?

Yes. Sure, Michael. Jonathan, given where we are now and what we've experienced over the last couple of months, we are already in a position where we can push rents and increase occupancy simultaneously. And I'd say that's across all of our geographies. I would say though, also in Montreal, we actually think that's a really good opportunity because currently, our occupancy is in the low 90s and given all of the suite turns that we anticipate are going to come down the pipe especially in 2 of our properties in Rockhill and both Le Hill-Park. Those are very well positioned in order for us to do both of what you just said in terms of pushing rents and pushing occupancy [ here a little higher ].

And then just that, I guess, leads into my next question. The mark-to-market and the market rents that you guys put out, that's a June 30 snapshot, correct?

Correct.

So how has Q3 been shaping up?

From a cap rate perspective, Jon?

No, not from a cap rate, from a demand and the ability to push rents or would you expect to see similar growth in market rents that we saw in Q2 and I guess, similar mark-to-market gains on new leasing? Like I know if I look back at just at your slide deck, Q3 '19 was very, very strong.

Yes. So seasonally, of course, Q2 and Q3 are the 2 strongest quarters from a leasing perspective in terms of demand. And I think that would certainly be our expectation that our Q3 numbers from a leasing and revenue perspective would be quite strong. I mean, Jon, do you want to provide a little bit of color on that?

Sure. So Jon, I'd say the trend has continued at least what we've witnessed in the early parts of Q3 quite nicely. I'd say in Montreal, in particular, if you talk about gain-to-lease, I think you can see that, that was actually our strongest gain-to-lease market. And that goes to what I said before about just there's a large percentage of these suites that we're turning, and we expect that to continue. So we see Montreal, we're cautiously optimistic about Montreal in terms of what we can do with our portfolio to improve the performance and increase occupancy and optimize revenue. Obviously, the return of the student, I think, is going to help for us on the margin as it just it lifts all boats in terms of the rental market, and we're experiencing that in all of our markets. So I don't know if that answers your question, Jonathan.

Yes. That is helpful.

Next question comes from Bradley Sturges at Raymond James.

Just to go back to the capital recycling discussion there. At this stage, besides the Edmonton properties, is there anything else you've got earmarked maybe to market for sale at the moment? Or are you sticking to just that [indiscernible]?

Nothing specific at this point. We continue to evaluate all properties across the entire portfolio, more or less on a regular basis, Brad. We look ahead for every asset in our asset management planning and look at the trajectory of value creation potential in every asset, and look for opportunities where... Are we optimizing the returns on the capital that we've got deployed in those assets on a risk-adjusted basis, and if there's an opportunity to harvest some value and redeploy it into something else, we would look at that. So our asset management team is very rigorous in that in an almost continuous basis. And obviously, you have to pick your moment, your market conditions ebb and flow and looking for opportunity like that, you have to be nimble. But at this point, I think it's a fairly broad effort.

If you were to do your analysis and believe the time [indiscernible] is that ideally through selling the entire ownership interest? Or would you consider partial interest sales and maintain an interest in the asset with the idea of managing for a third party?

Well, obviously, we've got very strong relationships with institutional capital that invest directly in real estate entities like CPPIB and HOOP and IG and others. And obviously, there are partners of long-standing and obviously present today in the REIT's operations. And so where those make sense, obviously, we'll continue to leverage those relationships, particularly where it allows the REIT maybe to defray what otherwise would be large checks and allow us to get managing interest in good assets over time. Certainly, you've seen that the recent investment in Victoria on the redevelopment of University Heights, shopping center is being done in conjunction with a leading Canadian pension funds. So that very much is a tool in the toolkit, Brad, that we would use and have used and are always looking at where those fit. They don't work in every case, obviously. And in some cases, it might be in the best interest for unitholders for us to dispose of an interest entirely. And so we look at each circumstance based on the facts at hand and make the judgment based on that. So where we think that there's long-term value creation potential using third-party capital with a trusted partner is a good option in other cases. Maybe we see that the future growth trajectories and potential is more limited, and so those are cases where maybe an outright disposition might make more sense.

Last question, just on [ bank stabilized ] now. I guess you have some time to make a decision on whether to exercise your option. But just could you walk through the factors that would go into that decision-making process, whether the REIT would acquire the assets? And then I'm assuming it wouldn't be much of a capital outlay just given the outstanding loan and probably the ability to fund the long-term debt.

Yes. So you're right. It's not a significant outlay because of the existing loan advance that the REIT has made to the redevelopment. There are a number of factors at play. I mean, Jon, do you want to provide a little color here on this one?

Sure. I mean, so look, no decision has been made at this time. It is full. But Minto, the private company is working on a couple of housekeeping items before it can offer it to the REIT. The purchase option expires at the end of November and the CDL expires at the end of December. And look, the REIT is going to evaluate the purchase relative to other capital allocation alternatives that we have at that time, and we're going to make a very balanced decision around taking into account access to capital, proforma leverage, our liquidity position at the time. It's an extremely attractive asset. We want to get it in the portfolio, but we're going to make smart decisions around where we're going to spend our incremental dollars that we have at our disposal.

Next question comes from Johann Rodrigues at Industrial Alliance.

I just wanted to first ask about cap rates. I noticed you guys took up your cap rates, the midpoint of auto was up 5, 6 basis points, and then Montreal was up close to 20%. I was just curious to know what the rationale was behind that, what your appraisers were telling you, especially given a couple of your peers that have portfolios in those markets didn't take them up by that degree.

Maybe, Julie, do you want to talk a little bit about the process we go through and some of the thinking around this.

Yes, for sure. So to your point, we only moved cap rates on a couple of our buildings, so the 2 downtown properties in Ottawa as well as our Montreal portfolio. And to be honest, it wasn't based on transactions per se that were happening in the market. It was more industry trends or sentiment that we're pushing us in that direction. Hindsight or you may think that's a little bit conservative and certainly would agree with that. But the other thing I think we look at or think about is cap rates are just one of the elements when we value our portfolio, and as you can see from our numbers this quarter, the NOI more than offset that cap rate expansion in those cities. So overall, still a good result.

I was just curious if you guys were being conservative or if you thought you might see another rise in cap rates next quarter. And then just on the developments, obviously, we know that cost inflation and labor shortages have changed [indiscernible] on developments, and you guys have a pretty large development pipeline compared to the apartment peers. I know you probably fixed the pricing or structure the contracts and some of your developments so that the move in input costs or labor haven't really changed the yields. But I'm just curious to know on some of the developments, you can talk about them as a group or we can single out Fifth and Bank since it's the closest to stabilization. If you were to underwrite or price out the cost of those developments today versus back when you underwrote it, what would the swing in the yield on cost be, give us a sense of that?

Yes. So it's an interesting one. It's inflation has been significant, and it's picked up, I'd say, particularly since Q4 last year on the construction cost side. And it's been labor and materials, both and particularly, let's say, in Toronto and Vancouver, where trade union negotiations yielded settlements that were, I think, materially higher. And I think holding the revenue side constant, I think that the inflation on construction costs would be very material to yield. I mean in some cases, might even push returns to well below kind of threshold levels of where you want to invest. That said, what we're seeing is that the revenue inflation, the inflation in rent is galloping ahead as well. And so in many cases, what we're seeing while construction costs deteriorate, we're seeing the revenue line and the stabilized value estimate moving along as fast or in some cases, even faster. So what we're seeing is that margin is not deteriorating to the extent that you might otherwise believe just by looking at construction costs. So that inflation is a double-edged sword on one hand, it cuts you on the construction costs, but then it saved you a little bit on the revenue side, and we're seeing that in multiple markets. So it's a challenging environment. I would just reiterate the point that you made early, which is that we don't commit to construction until we've tendered the vast majority of the bill of materials for a project. So we want to get assurance through tenders and contracts with our trades and suppliers before we commit to putting a shovel in the ground. And so the projects that you saw on Slide 11 were all a snapshot at the point in time when we committed. They all penciled quite nicely. If we were to undertake a new project now, a brand-new project, we'd have to look through it as the lens today with construction costs. And it's an issue, I mean it's a problem that's really affecting our housing supply. It's one of the main reasons our housing supply curve so an elastic is that it's not just commodity prices. It's the relative lack of availability of skilled trades to do the work, and obviously, we're competing not just with other residential developments, but also infrastructure and other projects are consuming scarce resources. So it contributes to that supply-demand imbalance in housing in Canada.

But if we take Fifth and Bank, for example, do you think that rent growth from the time you underwrote it to today, you think that was enough to fully offset the change in inputs and labor? Or are you thinking the spreads still would have shrunk.

Look, [indiscernible] start Fifth and Bank today, construction costs would be materially higher than what we committed to way back in 2019, but revenues will have moved materially as well. The leasing that we conducted for this building was higher than our underwritten proforma. That would be the new basis for that building as we were to underwrite redevelopment today. We forecast out 3 years from today. Our expectation is that rent growth would be quite significant over the next 3 years. Remember as well, this building delivered post November [ 20 ] is not subject to rent control. So we have a little bit more flexibility in our ability to capture market rent increases on an asset like that.

Next question comes from Matt Kornack at National Bank.

I don't know if you'll be able to provide or if you want to provide this information. But with regards to Fifth and Bank, can you give us a sense as to what the yield on cost would have been? And I know it's subject to be purchased, I think, on an average of an appraisal. But have you gone through the process of getting an appraisal yet on the building?

So we're not at a stage yet where we can exercise the option as Jon had indicated, NPI is doing a little bit of housekeeping to complete some of the open diligence items that the REIT would need before it would be in a position to exercise the option. Certainly, our view on value right now, I think we're like many looking for concrete indications of value. We're really looking for transactions contracted post REIT tightening in March, let's say, and there hasn't been a tremendous number of those. And so I think as we near that date when we are in a position to exercise the option, Matt, we would commission an appraisal or appraisal at that point in time to try and get a sense. Certainly, an asset like this brand new, not subject to rent control restrictions in a submarket with sub-1% vacancy loaded with all of the modern conveniences and PropTech, very high operating margin asset as well because of the features that around energy efficiency, building envelope, we expect would attract a premium valuation if exposed to the market, of course, the REIT as a right of first offer at a 5% discount to appraised value. So whatever way that looks, the REIT is going to do, I think, quite well out of this transaction when and if it should exercise the option.

On the financing side for, I guess, any new asset purchase, there's a mechanism to get the equivalent of some CMHC even if you don't have the operating track record, that's correct, right? But LTVs may be a little lower? Or can you get essentially something equivalent to what you could get with CMHC [indiscernible]?