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Canadian Apartment Properties Real Estate Investment Trust
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Hello and welcome to the Canadian Apartment Properties REIT First Quarter 2023 Results Conference Call. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions]
I would now like to hand over to Nicole Dolan, Investor Relations. The floor is yours. 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. Good day and good morning, everyone. Joining me this morning is Stephen Co, our Chief Financial Officer; and Julian Schonfeldt, our Chief Investment Officer.
Let's get started with an overview of our operational performance on Slide 4. We continue to see strong rent growth across our Canadian apartments, which account for approximately 80% of our total portfolio value. We've been maintaining this track record, while also keeping near full occupancies with 98.6% occupancy at March 31. On a same-property basis Occupied AMR for our Canadian Residential portfolio was up by 5% compared to Q1 of 2022.
Moving to Slide 5, this rent growth has been the main driver of the increase in our NOI margins, up by 0.7% versus the prior period. On a same-property basis, our margin was up by 0.6%. Diluted FFO per unit increased by 2.2% despite headwinds in interest-accelerated CMHC amortization, septic system maintenance costs, and elevated G&A, mainly from wage inflation. Our active NCIB program contributed to the increase.
FAS did a non-refundable deposits received on a property disposition that did not close. We are proud to maintain a constant distribution rate and a conservative FFO payout ratio, which was 63.6% for the quarter. Diluted NAV per unit at March 31 was $57.47. This decreased slightly compared to Q4 due to the fair value loss on our European portfolio, partially offset by NCIB repurchases. We also continue to make good progress on our CAPREIT 2.0 strategy, which is summarized on Slide 6.
On the Canadian Apartment front, we're improving the quality of our portfolio by disposing its non-core properties and acquiring new construction assets in attractive markets. We are also working on entitling and selling our excess land. This generates additional funding for us to allocate towards CAPREIT's core competencies, but more importantly, it helps to bring housing to the Canadian marketplace.
Right now, we have incredible capital deployment opportunities. In addition to our focus on new purpose-built rental apartments, we are also allocating funds towards our value-enhancing NCIB program, which Julian will expand on shortly, together with our active debt management program that Stephen will then speak to.
I will now turn things over to Julian to provide an update on our capital recycling and strategic repositioning.
Thanks, Mark.
Turning to Slide 8, you can see that we have been gaining traction on the strategic repositioning of our portfolio over the past couple of years and we continue to make solid progress in 2023. So far this year, we have already executed on $178 million worth of dispositions and have acquired $84 million in targeted new construction rental assets, that brings our portfolio allocation to 9% new build today versus only 1% just over five years.
Slide 9 provides a great snapshot of some of the strategic recycling we've done in the first quarter of 2023 and displays the type of assets which we're purchasing versus selling. In January, we disposed of our non-managing interest in three older non-core properties at a mid-3% cap rate. We paid down higher interest rate debt, and then in February we reallocated some of that capital back into Ottawa through the purchase of this newly built Eagle Pointe asset. It has strong growth profile, low CapEx needs, and we were able to acquire it at a mid-4% cap rate at a price that is below replacement.
In March, you will see on Slide 10 that we completed our first disposition of entitled land as part of our re-envision development program. The underutilized parking lot site is located next to a property we own in Montreal and we undertook the end-to-end entitlement process to obtain building permits for approximately 280,000 square feet of gross floor area.
We then sold the site to an experienced local developer to do what they do best and received cash proceeds of just over $17 million, which works out to a strong sales price of $62 per buildable square foot. Not only will this soon give rise to residential accommodation needed in that growing neighborhood, but we were also able to effectively monetize the majority of the perspective development profit upfront without having to take on the development risk. It's a win-win for our community and for our unitholders.
Looking ahead, we've identified over 6 million square feet of possible GFA across potential development sites in the GTA alone. In partnership with development managers, we have submitted several planning applications for new residential buildings which together provide for the construction of 2 million to 3 million square feet of new residential GFA. Subject to municipal approvals these will help to address the increased demand for high-rise residential intensification in high growth and major transit station areas across the city.
Net disposition proceeds from our development and repositioning programs are then in part funneled into our NCIB as summarized on Slide 11. We've been very active on this front, given that it provides a strong and ongoing source of accretion and to date we have made over $338 million worth of repurchases at significant discounts to NAV. In the first quarter of 2023, we purchased and canceled 2 million trust units at an attractive weighted average price of approximately $46 per trust unit, generating meaningful value for our unitholders.
With that, I will thank you for your time this morning and I will now turn things over to Stephen for his financial review.
Thanks, Julian, and good morning, everyone.
Our NCIB strategy goes hand in hand with our active debt management program and both also depend on the timing of our acquisitions and disposition.
Referring to Slide 13, you can see that we've got $266 million in accessible liquidity at March 31 from cash and available credit on our Canadian facility. This balance fluctuates as we allocate excess proceeds from our strategic recycling to pay down this higher interest rate debt while also using the facility as temporary funding in between disposition dates.
We're expecting the latter to incur elevated interest costs in the near term in anticipation of top-up financing in the latter part of the year, including disposition proceeds. We also proactively manage our mortgage refinancings and top-ups and are expecting to up finance between $250 million and $300 million in 2023.
Our mortgage portfolio is almost fully fixed and currently carries a low weighted average interest rate of 2.6% with a weighted average term to maturity of just over five years.
Not only that, but you can see on Slide 14 that no more than 30% of our Canadian mortgages come due in any given year, which reduces renewal risk and gives us flexibility in this volatile interest rate environment.
And finally, Slide 15 shows how we've consistently grown our asset base, while also strengthening the balance sheet. We've got one of the lowest leverages in our peer group with a debt-to-gross book value ratio currently at 40%, while our coverage ratios remain conservatively high.
I will now turn things back over to Mark.
Thanks, Stephen.
As we reflect on CAPREIT's first quarter of 2023, I just wanted to take a step back to look at the extraordinary conditions that are affecting Canada's housing market. It's impossible to deny that housing affordability crisis in Canada is directly correlated to demand for homes in Canada. This demand is primarily driven by population growth.
From Statistics Canada, we've taken a look back at population growth since the year 2000, and as you can see on Slide 17, fundamentals support our view that the affordability crisis in Canada started to show its first signs in 2015. However, COVID changed the trajectory of apartment affordability population growth, tapering off household consolidated.
This temporarily masked the increasing shortfall in housing supply, which then caught up dramatically as the pandemic eased. We believe these fundamentals form the root cause of the affordability crisis. As one of Canada's largest providers of residential housing, we are critically responding and have been prioritizing our contribution to the solution. Along with our fellow Canadian REITS, we actively doing everything we can to bring things back into balance.
For reference, you will see on Slide 18 that Canada has had the highest population growth rate in the G7 and ranked seventh in the G20, and we have the fewest homes per capita in the G7 despite having the most of buildable land and the lowest population density. It is therefore no wonder that we have the most expensive housing market in the G7.
On Slide 19, combining this extreme population growth with a persistent lack of housing supply. The result is a steady decline in housing affordability and this is driving demand for rental accommodation. In 2022 Canada's purpose-built rental apartment vacancy rate fell to 1.9%, which is its lowest level since 2001, reflecting the widespread tightening across all of Canada's rental market. According to CMHC, it is projected that additional 3.5 million new housing units are needed by 2030 to restore affordability in Canada.
On Slide 20, you can see the gravity of this gap. For context, this represents approximately $2 trillion worth of new construction. This is over and above the 2.3 million new homes estimated to be built by 2030, which assumes the current rates of construction continue, but construction costs are rising rapidly.
In 2022, the cost of constructing a residential building rose by nearly 20%, a double-digit increase for the second consecutive year according to Statistics Canada. CMHC also just recently predicted that housing starts will decline significantly in 2023 due to elevated construction and financing costs, as well as the labor shortage, making the situation even more difficult.
Slide 21 points to where the problem is concentrated. CMHC estimates the supply gap to be the greatest in the largest most in-demand markets, which are the most unaffordable, and as a provider of housing that's exactly where you will find CAPREIT, 80% of our residential suites in Canada are located where supply shortfalls are the greatest and that's in the top five most unaffordable cities.
With the vast majority of our portfolio located in the most unaffordable markets, you can understand how these two crises, the housing supply crisis and the affordability crisis, are coming together to drive up demand and therefore mark-to-market rents on turnover.
That said, when we look at our portfolio as a whole, as shown on Slide 22, you can see the uplifts on turnover affect only a minority of our suites. Most of our portfolio receives an average sub 2% rent increase on renewal, entirely in line with regulatory rent caps and guidelines that apply to almost all of our Canadian suites.
Looking at our most recent full year, we renewed 90% of our leases across, which the average increase was only 1.4%, including both turnover and renewals, our Canadian weighted average uplift on the Canadian residential portfolio was 3.4%, and 3.7% in this most recent first quarter. This graph highlights another trend, as demand for rental accommodation drives up market rents, CAPREIT's in-place residents are experiencing rent that has fallen well below market value.
You can see the steady decline in our turnover rate over the past decade, with only 2.6% of our suites turning over in this most recent quarter, which would be just 10% turnover on an annualized basis compared that to the 35% turnover that we saw back in 2010.
Slide 23 demonstrates that we are providing affordable accommodation in increasingly unaffordable cities. In fact, nearly half of our suites are designated as affordable according to the CMHC measure of affordability.
In our largest markets, which are the least affordable markets, our average rent income ratio is significantly less than that of the market and that is required for home ownership, which brings me to our final Slide 24, as one of the largest providers of residential housing in Canada, we acknowledge the impact we can make in helping to resolve the housing crisis, and we are now sitting on - and we are not sitting, I should say on the sidelines.
We also prioritize the primary duty that we have to our residents and the communities that they live in, we aim to continue setting the precedent when it comes to responsible and accountable property management. Importantly, we are working to achieve all of our ambitions, while also seeking the strongest returns for our valued unit holders. Our objectives are not mutually exclusive, and we intend to continue making progress on all fronts as we move forward in 2023.
Thank you for your time this morning and we would now be pleased to take your questions.
[Operator Instructions] First question comes from Jonathan Kelcher with TD Cowen. Your line is open.
Thanks, good morning.
Good morning, Jonathan.
First question, just following up on the turnover at 2.6% which I think is probably the lowest you guys have ever recorded, Q1 is normally a slower period, but how do you think that plays out the rest of this year, what do you think the year ends up at?
I think you'll see a normal curve with respect to seasonality but just lower overall churn. So I think we're comfortable that we'll probably see in the Canadian Apartment portfolio, 12% maybe 13% churn for the year. That's a guess, obviously, but based on what's happening the seasonal curve will stay and the trend will probably also follow.
Okay. Is there any like I'm assuming Toronto would be among the lowest with your turnover or are there any markets that stand out like either low or high relative to your average?
No, it's pretty much settled-in in terms of an issue from coast to coast. I wouldn't say that some of the newer construction assets that we've been purchasing are experiencing slightly higher churn because the market rents are closer to market. That being said, we are seeing very strong increases on those assets as well, but no particular geography is standing out.
Okay. And then secondly just on the mid-20% increases that you've got again this quarter, is that something we could expect to see carry through in over the next couple of quarters, and what markets were the strongest in that regard if any?
Yes, we're going to see a flattening. We're getting the COVID impact here clearly. CAPREIT was very cautious with rent setting during COVID, and so as we come out of COVID, we're obviously seeing some of those rents that were at least closer to market come to bear, so I wouldn't say it's an ever-increasing trend, we might see a flattening now. And sorry, the second part of your question, which markets?
Any markets? Yes.
Toronto absolutely stands as being a market of incredible potential, in particular Southwestern Ontario and you certainly can't ignore what's happening in Calgary and Vancouver.
So almost all except Montreal?
Montreal, we're seeing - new construction portfolio for CAPREIT, we had the struggles with lease up there during the worst possible time, but no, we're seeing - we're seeing oxygen back in that marketplace in terms of occupancy.
We are not seeing Toronto level rents, but we're going to be seeing double digits in that strong end here pretty soon in the quarters to come. Again, all the trench of revenue - Quebec really does come middle of summer, June, July, so we're looking forward to seeing some full recovery by that period of time.
Thanks. I'll turn it back.
Our next question comes from Kyle Stanley with Desjardins. Your line is open.
Thanks. Good morning, everyone.
Good morning.
Julian, just on your outlook for additional capital recycling for the year, I mean, you've now done close to $180 million I think on the year, would that imply another kind of $300 million to $350 million, I think kind of based on your previous guidance that was kind of in the range, but I'm just wondering if your outlook has changed at all.
Yes, thanks for the question, Kyle. We had initially said we were targeting $500 million and we're still on track for that. This is always subject to markets and demand and, as we discussed earlier, a lot of these transactions are with private buyers, so there is a bit higher execution risk, but we feel confident we'll be able to get past the $500 million mark for the year.
Okay, great. I guess just to your comment there, there hasn't really been a shift in the potential buyer pool, it still is primarily some of the smaller private investors at this point.
No, I'd say it's largely the smaller private buyers. We think as interest rates stabilize, rent growth goes up, inflation stabilizes, you might start to see some of the institutions coming back in, but it is still predominantly the private buyers.
Okay. I think last quarter you mentioned, sorry...
Sorry, just to build on that, in terms of the volume of transactions, we've now entered the period of the lowest amount of apartment transactions Canada have seen in about 15 to 20 years, so again, I think the market is readjusting, as Julian said, we've got institutions on the sidelines that has kind of been waiting for a clear path and the private sort of anxiously clambering to get to the table, so it's just not shown up yet. It's really important to note that the volume of transactions is incredibly low, but that doesn't necessarily mean it's going to stay there. We view that as just a signal, but it's about to pick up again.
Okay, great, thank you for that additional color. I'm just wondering, so last quarter you mentioned on the same property OpEx line, looking for kind of 4% to 5% annual growth and maybe hitting the lower end of that I think we saw that this quarter, I'm just confirming that that's still the expectation.
Hi, Kyle. Yes, I think when we're the tracking forecast, I think I'm still within the 4%, 5%, again it all depends on timing of R&M costs and whatnot, and utilities which can fluctuate, but I am still guiding 4%, 5%, as rates continue to be low, and the weather it's continued to be mild, then I would say will be on the lower end of the range.
Okay, perfect. Thanks for that. I will turn it back.
Our next question comes from Mike Markidis with BMO Capital Markets. Your line is open.
Thank you, operator. Good morning, CAPREIT team. Mark, I don't know if you're willing to talk about this, but maybe if you could just touch on how your government engagement has evolved since the budget has been released?
Yes, I think along the lines of what I said probably in last call, maybe the one before, it's definitely been a journey of education and we have had tremendous interest in learning more than federal government. The - I would describe the environment now just as one of better understanding. There are a couple of housing committees that are underway in Ottawa, and the voice of the industry is definitely being heard at those committee meetings.
One just cannot deny that because of affordability now is clearly in the direction of population growth and building starts that we talked a bit in the presentation. There was definitely a period of time when frustrations were forcing people to fight boogeyman and the boogeyman is definitely population growth and the inability to kind of match housing needs with that population growth.
So, as we spread that word, and I would encourage all of Canadians to spread that word. We have a struggle in front of us with the population growth ambitions that the country has started to undertake and has in its view without more housing, we are going to stay in this very, very sad affordability crisis.
Okay, thanks for that. And then just following up on that line of topic is, is the focus mainly with the current governing party or is it just given, I mean it seems like it's far away, but 2025 will be here before you know it, is there any effort on the opposition side as well?
No, we've taken an approach of all parties that are needing this education. Political parties come and go and housing falls when that hits at least at a federal level, never really been sort of top priority, as we had housing affordability in Canada for so long, with all-party communication.
In fact, we're putting an exorbitant amount of effort into the parties are the most skeptical and the parties that you would expect to be the most understanding, just maybe the latest conversations, quite frankly. So yes, we're definitely not stopping and the battle continues at the provincial level because premiers are all struggling with the same voter pushback at housing affordability. So keeping the final active at the provincial level something that we also want.
Okay, great, thanks. Last question for me before I turn it back. Just with respect to your capital deployment opportunities, get the focus on the NCIB and debt repayment, historically CAP's been a dividend aristocrat, I'm just curious if you could give any thoughts about where your head is on the distribution these days?
Yes, listen, cash is king right now. As our payout ratio drops, you certainly have a more comfortable retention of earnings situation and that is something that we're seeking. The team constantly talks internally here that the lowest cost of capital being the winning real estate company and all of our attention return to how we can best use low-cost capital and that is the mission. So just really happy to see the growth of earnings in the entity. This is a trend that's going to continue to reveal itself more as we go through 2023 and what we do with those earnings, it's going to be really, really important for the future.
Appreciate your comments. Thank you very much.
We now turn to Jimmy Shan with RBC Capital Markets. Your line is open.
Thanks. So on this $6 million of additional density that you mentioned, have you penciled-in some sort of timeline on when you expect to get these done? And then, how you're approaching the rezoning work again? I think you had mentioned you're partnering with developers and they're going through the process, maybe if you could just give us some color on that would be great.
Yes, thanks, Jimmy. So right now we have 10 green sites, which we submitted an application for in March for just over 2 million square feet of density and then we've got two sites in Midtown, Yonge and Davisville about 300,000 each. We're expecting approvals maybe later this year or early next year on one - another one later in next year and then another one, maybe the year or two after that, I mean these take time. We've got a few other sites.
We've looked at and mapped everything in the GTA and have a good grip on the potential here and we're going to put a few other ones into that process as well, and hopefully, we'll have stuff to announce over the near to mid-term, but the approach that we've been taking with that is, and especially on those sites where there is a bit more complication like rental replacement, multiple phasings, we've been working with large best-in-class developers here in Toronto, who have just been partnering with us helping consult through the entitlement process. Going forward depending on the site we may do that or we may do it internally if it's very simple kind of infill development, but we maintain the flexibility on our end to do as we see best fit.
Okay. And then at some point once you've gone through the rezoning process, the goal is to somehow monetize or finding another partner to come in along with the developers that you have working on those projects is that how...
It's likely to be a monetization, Jimmy. Here in Toronto, the vast majority of development is condo development. We're not condo developers. It's not our business, it's the primary business of those other entities, and so for our end, It would be just to monetize it and redeploy it back into our bread and butter business being acquisitions of new builds and share buyback, debt repayments, and those types of things. Whether it's the developers that are consulting with us or others, we also have that flexibility.
Okay, great. Last question, just in your discussion with the government and sort of the recognition of the demand-supply mismatch, do you get the sense at all that they may change or lower their immigration targets, is that been part of the discussion?
No, I think, Canada has been built on a foundation of immigration, that immigration is loved deeply by all Canadians. It resonates with voters and that is something that at the federal level where immigration is controlled, politicians have to be mindful I guess. At the provincial level, it's definitely understood.
We even have premieres on the left side of the spectrum calling for more supply across Canada, which is encouraging. I said to Stephen and Julian, Julian in particular, we've got the wind in our sails now on the intensification of our CAPREIT lands, the decision to hold off for the consequence is not being fully organized and then will turn it to be a very valuable one for CAPREIT because the monetization of our land will be I think just jaw-dropping, given the current environment and municipal appetite to grant density, it wasn't so long ago that not in my backyard with kind of a local saying and I think Canadians are waking up to the fact that we have a supply crisis that this is for sure.
I'm not quite sure they've linked population growth with that yet, but we're going to win on the intensification side and sadly we'll benefit by disproportionate population growth attributes. The country just really needs to get building, and in particular, building on lands that just require municipal services to be rebuilt to give us the density we need.
We have lots of land in Canada. We can solve this problem. Quite frankly, the problem was held at the municipal level where the capacity for municipal services itself is also going to determine how much houses they can get built. So there's - it's not the most difficult problems in the world to solve. It's the competing ambitions of three levels of government that we have to work with.
Okay, thanks, guys.
We now turn to Matt Kornack with National Bank Financial. Your line is open.
Hi, guys, just wanted to quickly talk on the capital recycling as well as mortgage up-financing front. You have a line of credit still drawn that 6% interest rates right now, should we expect that some of the use proceeds on future dispositions or on up financing will be used to reduce outstanding balances?
Hi, Matt. Yes, absolutely, I think I'm going to have daily conversations with both Mark and Julian, when those dispositions do occur and those funds just come in, it's really the allocation between new build construction assets where we buy them or NCIB or paying down debt, and right now our appetite is really to pay down debt. I kind of alluded in prior calls, I like the long-term LTV view, it's around 35% to 40%. We're currently just above 40% and I want to get that leverage ratio down to under 40%.
That's an interesting conversation, Stephen - just want to point out what we're thinking. The most accretive use of dispo cash today is paying down our revolver and the best long-term use of dispo cash is buying 4.5 CAP New construction apartment assets. So NCIB is right in the middle, also I would call that a mid-long strategy, but to have an actual portfolio of income-producing properties, we need the right properties in the mix. So we've got to resist the temptation of just paying down debt because if interest rates fall that will turn out to be not the best use of equity. So, we need this equity optionality.
That absolutely makes sense. And then I guess with regards to the ERES credit facility, there is the added benefit of having euro-denominated debt against the euro vehicle, so it's fair that you continue to kind of carry that debt in euros, even though the interest rate increase there?
I mean, yes, we have some swaps within the, you can say, our Euro investments that are very favorable, but I mean it all depends on what we do with those assets and whatnot, so I mean we will try to pay down as much debt as we can, especially with our top-up financing on our Canadian line as much as possible to convert that like can get CMHC mortgage right now at 3.7%, 3.8% and pay down to 6% in line with as much as we can, so we're actively monitoring that.
Good, that makes sense. And then, you have I guess 1.5 million of unencumbered assets as well, is that to maintain flexibility on those properties or would that also be a potential source of financing from a CMHC standpoint?
Well, actually, I mean the majority of that is unencumbered assets relating to our MHC portfolio, which currently there is no CMHC program in place, but it is - it is a source of capital if we ever needed it and allows us to tap into it if we need flexibility. But right now, I mean there are some assets that are unencumbered simply because we - for Julian purposes, we want to have it discharged, so we can sell the asset free and clear. So, yes, that balance may increase over time, and therefore that makes another like we might have to draw on our facility as we discharge those assets that we identified our property disposition.
Okay, great, thanks for the color.
Our next question comes from David Chrystal with Echelon Capital Markets. Your line is open.
Thanks, good morning, guys. Maybe just building on Matt's question there, CMHC debt now about 100 basis points lower than European mortgage debt, is there any opportunity to leverage your Canadian portfolio to provide ERES with a cheaper source of debt on refinancing either through promissory notes or another vehicle?
Yes, so I mean, we've - there's different strategies within those markets, and the mortgages within the European side versus the Canadian side, we have to manage it kind of separately, but there is no intention at this current stage to do any type of promissory notes or one-off to reduce that debt level.
I would point though, David, this is really getting in the weeds here, but one thing again that Stephen is doing is when Julian has spotted an ideal disposition candidate building and we don't want to enter into refinancing that asset, it means we have to let things go on the revolver for a period of time, which is a great investment at the end of the day, even though the interest is more expensive. Julian has been able to realize higher than IFRS valuation on the sale of those assets, so it's managing this debt situation.
Now, we could - in the early days affect the overall leverage of CAP refinancing having a higher levered ERES when things were positive, but we can't really do it the other way around. Our strategy for managing debt here is really around the highest and best use, which is today paying down that revolver with some equity.
Okay, thanks. That's great. And then, maybe turning to the cost side, you pointed out you've hedged 85 plus percent of your natural gas for '23, how do those hedge rates compare to spot, and for '24 what amount is hedged, and what kind of savings should we be looking at?
So, I'll have to get back to you on the kind of the 2024 numbers, but definitely 2023, our rates are below the spot rate. Last year was definitely - we are in the money of in excess of $2 million in terms of our hedges, but this year it's going to be a lot less because natural gas rates have come down, but we are still in the positive spread in terms of the mark-to-mark on those contracts. If we look at - yes, if we look at the future, I would probably have to take that offline with you, David.
And David, I would just add that we are not commodity experts here. We follow the same conservative strategy of hedging our utility costs as we do our mortgage portfolio and pushing it long. So, we always follow the strategy in terms of trying to protect gyrations in the market.
Okay, that makes sense. And maybe last one on the cost side. I think the septic issues at the MHC have been several quarters running now and you mentioned that one of the assets that's challenged was sold in the quarter, on the kind of, call it $1 million of extra cost, how much will be burning off in the second quarter and what's the timeline on resolving the second site?
Yes, we - let me give a - Julian, give a little bit of an update on our approach here.
Yes, so there were two properties that were causing quite a bit of pain on that front and one of them was disposed and we have one left. So you'll have a bit of drop off from having - had sold one of the bigger vendors. That said, there is a bit of a counter in the spring, it's just a lot more infiltration that occurs with the snow melting, so may not get as much relief immediately, and you might have that same kind of run rate that we saw in the first quarter happen in Q2 just because of that effect. We continue to work on the back on mitigating measures that we can implement and we hope to get that lower, but I wouldn't expect a huge release in Q2, just given the weather in the spring.
Okay, that makes sense. Thanks. I'll turn it back.
Now turn to Mario [indiscernible] with Deutsche Bank. Your line is open.
Well, that was interesting. Okay. Mark, just on capital deployment, I'm just curious if you could square your comments, I think at the onset of the call, where you identified incredible capital deployment opportunities in an environment where as you noted transaction volumes are the lowest they've been in 15 years.
Yes, so between our revolver and our mortgages that are coming due this year, that is all money that could be utilized - equity can be utilized to differ. I think we would be well served by avoiding what we see as the declining interest rate environment over the next three years. We're going to lay a bet that rates will be lower three years from now which I think I would make that bet. It's best not to be entering into mortgages. So that's the mortgage front. On the acquisition market, Julian has got at least half a dozen emerging opportunities of new construction assets across the country.
We can see that number probably go up as condo developers get in trouble, there could be assets available for rental. There's lots of talk in the province of Alberta, a bit office conversion opportunity and we just don't see the acquiring side of our strategy to be a problem. We are very committed to this new construction approach.
The NCIB has been wonderful. We can't buy enough stock at this level. It's one of the joys to see your stock trading so dramatically under NAV. It's waking up, knowing you bought and canceled some shares, that is good, and the list goes on, so we're very excited to recycle some of the assets that we have in the portfolio to more accretive and more sustainable income-producing properties.
Okay. So it's not - it wasn't in the comment bearing a notable uptick in potential acquisition opportunities, whether it's on the new build or on portfolios for example, let's say, it's a combination of all of the previously discussed opportunities in terms of deploying capital.
Yes, not to beat this thing to death, but we're predicting, I think on a conservative basis $500 million of dispo, we could easily put that money to work tomorrow with $600 million to $700 million of acquisition if there's deals that are absolutely available out there. So even though transactions are low, there's this in between stage with a lot of properties in development that we think we could bring into the mix if we had the capital and pricing was correct.
Got it, okay. And then, just in terms of those low transaction volumes, there could be several factors that are driving it whether it'd be interest rates expectations for maybe cap rates coming up regulatory like how - what would you characterize the primary drivers behind why institutions have stepped aside?
Well, in short, Canadian Apartments have become a yield spread gain over the last 20 years, and the institutional interest in apartments has really been if this 150 basis points of yield spread between cap rates and long-term money. So clearly the yield spread has gone to zero, if not negative, but clearly also the institutions are smart and they have their own portfolios and they can all see what's happening with rents. So it doesn't take a terribly sophisticated analyst to forecast what's going to happen and the delta between yield spreads and rent growth is now getting very interesting, especially in an interest rate environment that's showing not short-term kind of mid-long-term stability.
Okay. So your expectation is that the institutional interest is going to start to accelerate at some point this year?
Yes, I'm quite confident, we're going to see activity in the quarters to come, quite confident.
Okay, that's it for me. Thank you.
Our next question comes from Gaurav Mathur with iA Capital Markets. Your line is open.
Thank you and good morning, everyone. When we're thinking about turnover rates and where they are currently, how should we think about the CapEx spend for the year ahead?
Well, I can tell you that our - there has been a focus on reducing in suite spend and clearly the market is now the market, so the need to compete that we saw in COVID is definitely being replaced with a more frugal program, especially when the revolver is costing us with the revolver is costing us, where traditionally we will put our CapEx dollars. Julian and the investment team are doing a really good job at repositioning us into new construction, which will also have benefits in the years to come.
So I think as you see CAPREIT glide through the other side of a value add strategy into a new construction high service, high quality strategy, you'll see CapEx become less and less of a question on these conference calls.
Okay, great. And just lastly, when we are talking about high-grading the portfolio going ahead and what sort of assets are you coming to the market, is that a specific vendor pool that's putting up assets on the market for sale?
Yes, so far we've been seeing on our end. This has been largely merchant developers. A lot of them - and the increase in interest dynamics, a lot of them locked in cost in the years past, so had lower cost flowing in and are feeling the pressures of the higher interest rate environment. A lot of them finance with variable rate costs.
So we have seen some interesting dynamics to pickup new stuff and we view to be attractive pricing and particularly with a lot of the institutional money being on the sidelines. So it's been pretty interesting, it's been, like I said merchant developers with purpose-built rentals, mostly not have a huge scale, but we have been seeing some of the larger scale too for those developers that are looking to pay down variable rate debt.
Okay. And just as a follow-up on that, any signs of distress in the market that you could potentially capitalize on and add to the portfolio?
Not actually, I mean there's the odd case here and there, but it's not something that's widespread throughout the market.
Okay, great. Thank you for the color, gentlemen, I'll turn it back to the operator.
Our next question comes from Brad Sturges with Raymond James. Your line is open.
Hi, there, just to clarify on the $500 million in dispo this year potentially, does that include any assumptions around contributing affordable buildings into the various new funds that are being contemplated by the government agencies or would that be incremental to that potential activity?
We're exploring all avenues and there are discussions that we've been having, but the $500 million is not dependent on any of those.
Our invitation to government -
And how would you...
Sorry, Brad. I was just saying, our invitation to government - yes.
And how would you characterize the discussions right now relative to I guess the last call, has there been any, I guess further progress on those types of discussions?
Sadly, no. BC had announced $500 million funds. We're very excited to hear that at the table with buildings to offer repeatedly putting phone calls and haven't seen too much there. We've got one, maybe situation on a small asset. We continue to work. Montreal, for example, also has a bit of a program. Julian has been trying there. It's slowed.
So the opportunity for CAPREIT remains I think a great one because you can see that even with - there's a marketed process, I don't know how governments can react to a marketed process but when there is a willing party at the table, we continue to keep the offer open. We continue to make ongoing offers into both the provinces and the federal government and we remain hopeful. Everybody seems to be very excited and very enthusiastic, very well received, and at this stage nothing to report.
Okay, thanks for that. I'll turn it back.
We have no further questions. I'll now hand back to Mark Kenney, CEO, for any final remarks.
I'd like to thank everybody for your time today and if you have any further questions, please don't hesitate to contact us at any time. Thanks again. Have a great day.
Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.