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Canadian Apartment Properties Real Estate Investment Trust
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Good morning, and welcome to the Canadian Apartment Properties REIT Second Quarter 2023 Results Conference Call. [Operator Instructions]
I would now like to hand conference call over to our host Nicole Dolan of Investor Relations. 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 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. As you can see, this slide demonstrates the increasingly tight rental market that we're experiencing across Canada. For Canadian residential portfolio, occupied AMR increased by 6.5% compared to the same period last year and 5.1% on a same-property basis. This was achieved alongside consistently high occupancies of nearly 99%.
Moving to Slide 5. Our robust rent growth drove increases in operating revenues and NOI, both up by approximately 5%. Our operating margin remained strong at 65.9% for the three months ended June 30, 2023. Margin expansion was held back slightly due to higher repairs and maintenance costs, which we incurred from a combination of general inflationary pressures and a reduction in discretionary capital expenditure spend. As the rental market in Canada tightens, we're instead allocating that capital into in-suite maintenance.
Diluted FFO per unit increased by 1.2%, primarily due to organic NOI growth and to a lesser extent, our accretive NCIB repurchases. This was partially offset by higher interest being incurred on our credit facilities. Our payout ratio remains strong at 61.5%, and our diluted NAV per unit decreased slightly to $57.08. This was mainly driven by the fair value loss on our European portfolio.
Operating results were strong for the six months ended June 30, 2023, as you can see on Slide 6. Operating revenues were up by 5.3% compared to the same period last year. This drove the increase in our margin to 64.3% on the total portfolio and 64.9% on the same-property portfolio, up by 20 and 50 basis points, respectively. Our diluted FFO per unit increased by 1.7%, again this was a result of our strong organic growth along with NCIB repurchases, partially offset by higher interest costs. Our payout ratio remained conservative at 62.5% for the current six-month period.
We continue to execute on our CAPREIT 2.0 strategy, as displayed on Slide 7, and I'm excited about the progress we've made to-date.
On the asset side, we're continuously improving the quality of our portfolio by selling our older, non-core properties and buying new purpose-built rental properties in Canada's fastest growing and highest density cities. Importantly, this allows us to support the supply of new construction rental housing where it's needed the most.
We're also contributing to the crisis through our entitlement program. We're using development as a tool to extract and maximize significant underlying land value in our portfolio, which in turn takes the way for the construction of new housing supply. This asset management program accompanies our debt and equity initiatives as well.
We've been investing in our NCIB to produce meaningful accretion for CAPREIT unitholders. And we also actively manage our debt strategy and mortgage portfolio. These programs are integrated with our broader capital allocation plan to ensure that we're putting net proceeds to the best use.
I'll now turn things over to Julian to provide a more detailed update on our capital recycling.
Thanks, Mark. Turning to slide 9. You can see the solid progress we've made since we started repositioning our portfolio. So far this year, we have sold $293 million worth of our non-strategic properties and have reinvested $208 million of net proceeds into newly built rental properties located in thriving regions throughout Canada. These high-quality modern buildings now represent 10% of our Canadian portfolio, and we will continue to increase that allocation moving forward.
Slide 10 presents an example of our asset refresh in the second quarter. On the left, we show a property that we sold containing 393 residential suites and two commercial units in the land neighborhood of Montreal, Quebec for $68.9 million, excluding disposition costs. The property was built in 1971 and was sold at a premium to IFRS fair value.
We reinvested net disposition proceeds into the growing city of Langley, British Columbia through the purchase of Parque on Park for $53.7 million, excluding transaction costs. The amenity rich property was built in 2022 and contains 93 suites that have an average size of over 1,000 square feet. It's located next to a park in a major transit station that provides direct access to Vancouver City Center, and it is also near several of CAPREIT's other newbuild assets in the area.
The energy-efficient building at CAPREIT 250 solar panels and all of its suites are individually mirrored which lowers utility consumption and costs. We're excited to continue improving the quality of our portfolio through strong transactions such as these.
On slide 11, you will find an update on our NCIB. We've invested $339 million in the program to-date, including $101 million in 2023 repurchasing our trust units at deep discounts to NAV and therefore, crystallizing this value for unitholders.
Moving on to slide 12. As Mark mentioned, our asset-light development model unlocks and maximizes land value across our portfolio. This not only generates proceeds for us to redeploy it back into our bread and butter business, but it also plays an important role in contributing to the construction of new housing supply in Canada.
Our development strategy is first focused in Ontario, and we've identified an excess of 6 million square feet of possible GFA across potential development sites in the GTA alone. We're currently working with several best-in-class development partners on the entitlement and subdivision or severance profit for over 2.5 million square feet of GFA as for the planning applications we've submitted. This would provide for over 3,500 new residential homes in key strategic growth areas and major transit station hubs across the city and we're actively working on several more projects in our entitlement pipeline.
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. Referring to slide 14, you can see that we have $265 million in available capacity on our Canadian credit facility at June 30. And we plan to hold this capacity to be relatively constant for the foreseeable quarters ahead even after taking into account reduced interest which we were able to arrange through our swap agreements.
Our Canadian credit facility is carrying a weighted average interest rate of 6.4%. As a result, with our elevated borrowing being stable for the short term, we expect to continue incurring higher interest costs.
On our mortgage portfolio, we're fixed over 99% of our interest and it currently carries a relatively low weighted average effective interest rate of 2.7%. By fixing our interest costs, we're mitigating our volatility risk and enabling ourselves to proactively manage our debt. Our mortgages have a weighted average term to maturity of just over five years at period end, and we're expecting to up finance between $250 million and $300 million by the end of 2023.
Slide 15 shows the staggered maturity profile of our mortgages, which provides us with flexibility and reduces our renewal risk as well. You can see that we have no more than 14% of our Canadian mortgage debt coming due in any given year. You can also see that we have only 5% of our Canadian mortgage that maturing in the remainder of this year and 8% in the total for 2024, which positions us well in the current environment.
Turning to slide 16. We continue to conservatively manage our debt metrics and ensure they remain safely within covenant thresholds. Our debt to gross book value was 40.4% at June 30, 2023, and our coverage ratios remain stable and high.
I will now turn things back over to Mark.
Thanks, Stephen. A key priority of CAPREIT is the continuous enhancement of our environmental, social and governance performance. I want to take a moment to feature our progress on that front. Following the release of our latest ESG report, which is now available on our website.
In 2022, we achieved a number of key ESG accomplishments as highlighted on slide 18. We invested almost $20 million in energy efficiency, including the acceleration of our sweet sub-metering program, which will lower consumption and improve our environmental footprint.
As of June 30, 2023, Canadian tenants who paid their electricity charges directly through the sub-metering or direct metering represent 68% of our total suites and sites in Canada. We are also proud to have been recognized by Equileap in their 2023 Gender Equality Global Report and Ranking, as the only Canadian company to have achieved gender balance across all levels. This includes our Board of Trustees, where we've exceeded our 30% target for female representation.
Importantly, we are actively developing our corporate approach to climate action. In 2022, we identified our key climate-related risks and opportunities and formed the GAAP assessment to determine our priorities in aligning with the task force on climate-related financial disclosure recommendations.
This climate action plan is being integrated with all three pillars of our strategy, as shown on Slide 19. We are proud to be taking that one step further with our enterprise-wide initiative to consolidate all of our many ESG-related commitments and actions.
Our trustees, senior executives and managers from across the country have worked together to formulate a robust and comprehensive ESG program, which is now being incorporated into our organizational objectives and overall business strategy. This strategic alignment contributes to our core mission of being the best place to work, live and invest.
As you can see on Slide 20, we are committed to generating enhanced returns for our unit- holders while also empowering our employees and making meaningful contributions to our communities. We are pleased, with how far we've come on meeting these objectives to date, and we're excited to keep making progress on our strategic goals going forward.
We continue to recycle our capital in the most productive ways possible, and we're actively and carefully allocating our resources to the highest yielding outlets. We're ultimately seeking to create real value for all our stakeholders, and this means that we're focusing on modernizing our portfolio and contributing to the solution to the Canadian housing crisis.
After many proud years of expanding and improving the value-add portfolio, we've entered a new CAPREIT era in which bigger is not necessarily better. We're thrilled to be optimizing our portfolio and growing earnings per share instead of our sweet count. However, as this shrinks the size of our portfolio, we're cognizant that we must similarly optimize our organization. We need to make sure that we have the right teams to provide the right level of service for the right business, both now and in the future. By prioritizing our operational efficiencies and overhead as we are doing today, we're ensuring that CAPREIT 2.0 is set up for sustainable success in the long run.
With that, I would like to thank you for your time this morning, and we would now be pleased to take any of your questions.
Thank you [Operator Instructions] Our first question comes from the line of Mark Rothschild of Canaccord. Your line is now open. Please go ahead.
Thanks, and good morning, everyone.
Good morning.
In regards to raising rents, whether it's on turnover on renewals, there's been some negative news as some have tried to push rents higher, even if they're not pushing it fully to market. Has this -- have you seen any of this in your portfolio? And is this impacting at all the way you're looking at managing your rental rates?
No. We're actually taking a very conservative, balanced market approach to the rent the -- the reality is that during COVID, we had a lot of competition with respect to apartment rental. We saw rents fall quite dramatically into single digits. And as time elapses here, we're now seeing those leases come to market. It's quite often the more recent leases that come to market. And I think we're just seeing the after effects of bid -- but I would say no, we're measured in our approach, and there's not a lot of opportunity, quite frankly, in the turnover, but I think we're doing a good job of finding that right balance.
And how much will you be able to push it on the turnover?
Like I think now we're in moderation phase. I wouldn't expect to continuously see the result. In fact, if anything, you're going to see a moderating, I think, of mark-to-market rents. It's not -- we're seeing post-COVID effects here now catching up like I just mentioned, and I wouldn't think you're going to see much more acceleration on that front.
Okay. Great. Thank you. And then just on the asset values and the asset sales, are there the cap rates that -- or maybe returns that you will look to increase the pace of selling interest rates have risen more and the cap rates still appear low. So I'm just curious how you guys look at that as you progress through this program.
Let me ask Julian to kind of give a market overview of what he's seeing and here is very active in the field. Julian?
Yes. Thanks, Mark. So with the rise in interest rates, it has become a little bit tougher. And certainly, the financing delays that in cost particularly with that increase in the fees that came in June and created a bit of a backlog. It has made the environment a little bit tougher, but we are still seeing good liquidity or decent liquidity in certain assets with private investors.
As you mentioned, the changing market dynamics can make some assets more attractive to sell. But again, in a tougher market -- we just have to do what we can with the existing liquidity.
Okay. Great. Thank you
Thank you. Our next question comes from the line of Mike Markidis of BMO Capital Markets. Your line is now open. Please go ahead.
Good morning. Happy Friday, everybody. Mike here. Maybe just a quickly follow-up on Mark Rothschild's [ph] question on the rents, Mark Kenny, the comment -- I just want to make sure I understood you correctly when you said you don't expect to see any more upward pressure. Was that a market rent comment, or was that more of a I'm trying to just relate that to your leasing spreads. And I guess, directly asking the question is, is mid-20 is sustainable in the near term?
And the short answer to that is, yes. I would -- it's going to cover anywhere from low 20s to mid. And that's the short-term. That's as far as we can kind of see out, which is really only 90 days in the marketplace. But yes, that is the range that we're seeing.
And again, I have to kind of be direct here. These rents are still incredibly highly affordable relative to the alternative rentals in the marketplace, especially the condo space. So despite the numbers, which seem quite high we are seeing that they're still incredibly affordable on an income ratio basis. And what it's really speaking to is that Canada really needs to get its supply story going. We're talking about it. We're acknowledging it finally and more supply is what's going to really help this pressure here.
No, absolutely anecdotally, my colleague on the research side was showing us a two-bedroom condo rent that was $4,400 yesterday, so I totally get your point on that. Just with respect to the comments on R&M and less discretionary CapEx and more capital being allocated to in-suite expenses, I guess, or R&M expense, maybe I'm missing something here, but I'm just kind of looking at your CapEx, both on the nondiscretionary and discretionary side. It's virtually flat year-over-year and you've got less units. So I'm just trying to circle the square with respect to what you guys are getting out there.
I'll let Stephen provide more color. But in short, we are not letting up on our energy climate-related investments. You'll see increases in that particular category and we are taking approach with all other categories that a dollar is a dollar and let's just spend it efficiently. And if that means doing maintenance versus capital work, so be it. So, I'm thrilled, quite frankly, to see the team move towards this model of just treating a dollar a dollar, especially in a higher cost of capital environment, that's also not fully baked in. But Steve, do you want to comment more on the CapEx spend?
Yes, yes, of course. So, we are also considering that inflation plays a part into that. We have -- as you pointed out, Mike, you've seen CapEx be relatively flat over last year. But one component of that has increased, as Mark had pointed our energy investment has increased considerably, and that will be for the remainder of the year. But you will see meaningful decreases in discretionary and nondiscretionary CapEx for the remainder of the year. So there -- we have taken a proactive approach around -- given that it’s a tight rental market, we are reallocating capital, and you will see a slightly higher maintenance costs going forward into Q3, Q4.
Okay. So the year-over-year increases on general OpEx will continue just because you see the pace of CapEx coming down.
Yes, exactly. Yes. Okay.
No. Great. Okay. Last one for Stephen. Just on the G&A, I think you came down not the numbers in front of me, but it came down pretty significantly quarter-over-quarter. Maybe you could just give us an update in terms of what you're expecting on the G&A line for the full year.
Yes. I would use the six months as a run rate for the remainder of the year and also just building some inflationary pressure. But otherwise, I think the six-month run rate have had a representation for the remainder of the year.
Okay. That's it for me. I'll turn it back. Thanks so much. Have a great long weekend.
Thanks.
Yes. Thanks, Mike.
Thank you. Our next question comes from the line of Jonathan Kelcher of TD Cowen. Your line is now open. Please go ahead.
Thanks. Good morning. Just on the asset sales, I guess you've done about $300 million this year. You're looking to do $400 million to $500 million. Have you -- the last 100 to 200, have you identified those assets yet?
Yes. I would turn it over to Julian, but I just wanted to make a little comment just on this from last time. Where Julian is focusing having quite good success is exactly in the category of assets that we're looking to move on, which would be the lowest quartile of the portfolio. Those buyers are still quite active. But Julian, why don't you provide Jonathan with some more color on our disposition program.
Yes. To answer your question, Jonathan, yes, we have identified those assets and they're at various stages in the disposition process.
Okay. And then in terms of the other side, you have bought assets this year, are you starting to see more opportunities from developers, or maybe some smaller owners that turn over their skis a little bit, and getting curbed by the higher interest cost?
Yeah, for sure. On the on the acquisition front for the new build assets, there's definitely good opportunities and for some of those merchant developers that have floating rate that they used to fund it. The current environment is painful, and that's coinciding with a lack of institutional buyers, so there's definitely good opportunities. We are being measured in our deployment of capital, just given we're trying to restrict it to the dispositions we're making. And with the higher interest rates and a little bit less certainty, we're trying to be prudent in deploying that capital, but there certainly are good opportunities out there.
Okay. And then just to round it all together, if you're looking at selling and you're looking at some of those opportunities, what's the delta and the cap rates between what you think you can sell your, I guess, Mark, call it, lowest quartile assets for and what you can buy brand-new stuff back?
It really depends on the region and specific assets, but it'll -- on the stuff we're selling, it will hover between just under 4%, and just above 4% cap rate. And on what we're buying, it will be low to mid-4s. So there's still a little bit of a spread in there. But what that doesn't factor in as well as the CapEx difference, right? Those cap rates are based on NOI and fair value we're selling will be significantly heavier on the CapEx front in 1960s or 1970s buildings typically and the new construction will have very late CapEx requirements.
Okay. And then just one quick one for Stephen. For 2024, on your mortgage renewals, what sort of up financing are you targeting at this point?
I'll probably have to get back to you on that. We're currently evaluating based on the values and we're working with our lenders. So I'll take that offline with you.
Okay. Thanks. I’ll turn it back.
Thank you. Our next question comes from the line of Kyle Stanley of Desjardins. Your line is now open. Please go ahead.
Thanks. Good morning, everyone. Just going back to Mike's question earlier, just on the capital spend, I'm just wondering how your commentary relates to the 4% to 5% OpEx inflation target you mentioned earlier, would that still be intact based on maybe more spend going towards the nondiscretionary?
Yeah. I think, seasonal changes taken into account, I think the inflation is built in the spend now, and you wouldn't expect to see anything more dramatic in terms of the allocation towards repairs and maintenance, we're kind of in a stable state there now. So using this quarter as an example, I would say that's a decent assumption.
Stephen, would you add color to that?
Yeah. No, I agree. I think if you use this quarter as a basis for OpEx growth for the remainder of the year, I think that's justified.
Okay. Thank you for that. Just one quick clarification, just on your $400 million to $500 million disposition target, is that incremental to what's already been sold, or is that inclusive?
That would be our target for 2023, which would -- you would count what we've sold to date in that $400 to $500 number.
Okay. Perfect. That's what I thought. And then, just another one, so on your -- just given with how the unit price has been trading, can you just talk about your capital allocation pecking order today and maybe how that's changed since we last spoke?
Yeah, it's a great question. It will continue to change, not because we're not convicted in strategy, but things do change. So Stephen, as Ben and team has done a remarkable job on the debt ladder. We did a remarkable job actually advancing mortgages at opportune times.
But it's really our revolver debt right now, which is the drag. And so today, with any form of we would definitely be focusing that cash on the revolver debt. It's a bit of a competition, quite frankly, because Julien, as he mentioned, is finding quite good opportunities in the market on the acquisition front.
But those two things have to be balanced out against one another. And my inclination today is to pay down that revolver debt, because the balance of our debt is incredibly stable and incredibly well managed. In fact, it's the longest dead ladder amongst peers. So we're in great shape, from a debt point of view. And if we can use that money for revolver debt, that would be opportunity. And…
Perfect. And just one last -- Oh, go ahead.
I was going to say, the NCIB program, as you can expect, has been put on par.
Yeah. Fair enough. That makes sense. And just the last one, Mark, a bit of a higher-level question, but you've obviously been very active on advancing the housing affordability file in Canada over the last year or two, ramping up government relations as part of the job -- so looking back on the now, could you walk us through your thoughts on maybe how the industry has progressed and maybe where you're still seeing some opportunities to improve?
I think that the -- as I said on the prior calls, the education has definitely taken effect. The more we've been able to dialogue with the federal government, there's a real understanding now that it's not corporate landlords that are raising rent, it's a supply and demand problem that we have in the country. So that is reassuring.
The provinces are doing their absolute bats quite frankly provinces like Ontario and B.C. are really kicking into high gear and doing their very, very best. I keep saying the number one influence is at the municipal level. And it's coordinating and incenting those municipalities to free up density and to build capacity, quite frankly, to take on more density.
So we're doing our very, very best to kind of explain the dynamic. Now all of this is under incredible pressure with population growth and quite frankly, financing costs and just general supply chain costs and labor costs.
So there's lots of inflationary pressure out there that are making pro formas wake and land values are going to stay high until we increase capacity in the country. So again, it's a slow process. And Canada has an exceptional challenge because of the three level of governments that really need to get coordinated at all have sort of competing ideals.
Right. Okay. Thank you for that. Very helpful. I'll turn it back.
Thank you. Our next question comes from the line of Brad Sturges of Raymond James. Your line is now open, please go ahead.
Hey good morning. Just to follow-on Kyle's last question there. Just on -- based on the recent cabinet shuffle, you've got a new Housing Minister, as you highlighted, you've been in discussion with the government for a little while here, but do you see this change in the cabinet extending or changing time lines in terms of where or when we might see some initiative announced by the federal government? Like could we see anything by the full economic update, or could this delay things a bit?
I think that for our industry, having Sean Fraser as the Housing Infrastructure Minister is highly productive. He comes with very strong integration understanding. And that is, as we've said, primary thing that we're looking for on the resume. So, he gets it. And I'm quite optimistic.
It's very clear now, I think, that the Federal government is really under a lot of pressure here to help move the filing and I think that we're in good shape. So yes, the full economic statement, I hope to be indicative. These are new ministers, fresh in the job, hopefully, they're up-to-date on the files. But I think I would call that the general environment is turning more positive in terms of understanding the real issues affecting supply and demand in Canada.
And would you think that -- like one of the key -- one of the new initiatives still could be like an affordability fund at the Federal level as one of the kind of maybe the first initiatives that they could announce or one of the first?
This is kicking a lot of excitement at all levels of government. You've got the cities in the game now. Province is talking better in the Fed. The reality is that there has been almost a neglect in the investment in social housing so long that they need to catch up and there's only one way to catch up and that is to buy existing assets.
So, the lack of social housing, the need for social housing and quite frankly, the inflationary pressure that's been flip on income-constrained Canadians is just driving the housing crisis into overdrive. So, quick action will need to be taken.
These acquisition funds are a quick way to help ease the crisis. So, that's logical in my mind. Now, let's just hope that there's funding at various government levels and the defensibility really makes it into policy.
Okay. Last question for me. Just going back to your opening comments on the development applications, the entitlement process. It sounded like -- and correct me if I'm wrong, if there's more applications that could start. I guess I'm curious to know if you were to go through all the potential products or sites say, what's the total opportunity set in the portfolio in terms of net, is that still--?
Well, I'm just going to say the [Indiscernible] is revving up. And I can tell you, it's one of the most exciting meetings, and I've been able to kind of tuck my nose into the investment teams and development team is doing an exceptional job being laser-focused and figuring out how we can do this. I'll just tell you, Brad, it is so much work on a site-by-site basis, but the enthusiasm and the excitement about helping Canada bring more land entitlement into the fold at a time that we need more housing. It's really exciting for the team from a broader point of view. And obviously, it's unleashing value that you just -- your eyes of ag. So I don't want to be too macro big in terms of the scale here, but we're going site by site, and it's very, very exciting.
I guess historically, CAPREIT, you talked about like net 10,000 suites. It sounds like maybe you might not want to give a number today, but is that still ballpark where we could be?
We have the best team we've ever had, and the team is -- pushes me on being cautious because it does take so much time to get a real clear picture of what it is. And I would say that, wait for updated guidance on that front. All I can tell you is the initiative and effort and confidence that we currently have at CAPREIT is the best it's ever been. We're getting ay it.
Yeah. I appreciate that, Mark. I'll turn it back.
Thanks, Brad.
Thank you. Our next question comes from the line of Jimmy Shan of RBC. Your line is now open. Please go ahead.
Yeah. Thank you. Just on that 10% of the portfolio that's new build. I was wondering if you're seeing any difference in revenue growth or any other metrics that are in that bucket versus the rest?
Well, Jimmy, it's again why this investment is not that difficult to -- it's kind of a no-brainer because we are seeing uplifts in the new construction assets that are just as impressive as the value add. Again, the market is really, really looking for quality and when we're looking -- we're moving assets from developer ownership into professional management, there's definitely yield spread there that can be had. So Julian, I don't know if you would add any more color on some of the examples or experiences we've had through the underwriting process.
Yeah, perfect. Thanks. So good examples of the property we picked up in Ottawa earlier in the year, we've underwritten low single-digit revenue increases. But we're managing to exceed that by significant amounts, not just on turnover, but on renewals as well just given the difference in regulatory treatment for those types of properties. So it's been pretty strong on that front.
Okay. So if you were sort of -- it would be fair to say that if you were to bracket that portfolio and look at the sort of piece of revenue growth, even though some of those assets are new and presumably the rents are closer to market, because of your ability to drive everything to market, the revenue growth in that bucket would be today, slightly better than the rest. And reasonably going to be consistently better than the rest. Is that…?
Well, -- it's fast or it follows the far more quickly. Like the runway on the value-add portfolio is decades deep because it takes time. The new construction assets to, it's a matter of speed. You can get there very fast because the run rate is not exactly the same. And it's more volatile to down market changes that we don't see on the horizon at this stage. So it's just a matter of adjusting to market more quickly.
Okay. And then on the turnover rate, do you have a sense sort of -- what's the range of turnover churn rates based on geographies or type of assets? Are there any I mean, intuitively, I would think kind of your best location older assets with a lot of below-market rent or the deeper it is, the longer – the lower the turnover rate. But I wondered if you had any observation on any kind of big ranges or specific pockets that stand out to you in terms of turnover would be high or low?
Well, Ontario is where we're seeing the greatest lease holding, I'm going to say, where turnover has really gone down significantly. Canada is starting to look a lot more like Europe in terms of churn rates. And quite frankly, we don't really see that changing anytime soon just because there's a lack of optionality out there. But I think the trend is basically just slow down everywhere.
Again, CAPREIT, we made the decision during the pandemic. We didn't know exactly when the pandemic was going to end. We're not tying this here. But -- we made the choice to manage our occupancy. And so we're not -- we don't have to catch-up that others may have right now, but everyone is going to be experiencing the same kind of churn rates going forward into 2024.
I think it's -- and across the country, all market segments phenomenon, see slightly more turnover, obviously, in the new construction assets because they are at market and easier to walk – give up a lease but the value-add portfolio for all markets, I think, is going to be very stable in the low double-digits.
Okay. Thank you.
Thank you. Our next question comes from the line of Gaurav Mathur of iA Capital Markets. Your line is now open. Please go ahead.
Thank you, and good morning, everyone.
Good morning.
Just on your disposition strategy. Could you provide some color on what the buyer pool looks like now? And how have bid-ask spreads been when compared to the beginning of the year?
Hey, Julian, why don't you provide some color there.
Thanks. Good morning, Gaurav. What we've been seeing in the dispositions we've been doing has been predominantly private investors. In most cases, it's folks that we haven't had interactions with in the past before. It makes it a little bit trickier to navigate, just given the lack of track record and kind of lack of reputation. But – but there's a lot of creative and willing folks still out there.
And in terms of the bid-ask spread, it really depends on the property and the investor -- it just takes a little bit more time working with the brokerage community and working with context we have and finding the right buyer. Once you find the right buyer and are creative in the way you go put the deal, we're able to – we're able to tighten that bid-ask spread and get prices that we need. We're -- we've said this before, but we're not in any desperate mode to sell. So everything we've done so far has been at or above our IFRS NAV values, and we'll continue with that strategy.
Okay. Great. And then, Mark, you did mention earlier on the call that there is a preference to pay down the revolver and when you're thinking through the active debt management strategy, just what's -- how are you thinking through repayments versus refinancing here?
Yes. Well, again, it's all our source of equity today is dispositioned, and opportunities in the marketplace or the challenge to paying down debt in general. So our thinking is, depending on the amount of liquidity that we gain today, first reference up to almost 3 -- almost well, 300 -- almost $400 million, would be to have that 6.5% revolver debt. And there will be ongoing competition internally based on the opportunity to acquire existing build. And it's kind of just -- it's that simple.
Okay.
If we were loaded with equity, we would then consider after paying down the revolver debt and having no acquisitions to buy to stay out of the debt market on refi and to think about our CapEx funding for next year. So we've got lots and lots of use of proceeds.
Okay. Fantastic. Thank you for the color gentlemen. I'll turn it back.
Thank you. Our next question comes from the line of Matt Kornack of National Bank Financial. Your line is now open. Please go ahead.
Hey guys. Just on that last point with regards to the source of funding. I mean you do have the ability to finance existing mortgages, and I understand some of that goes to CapEx. But would a portion of that not also bring down your facility draws at this point?
Absolutely. And again, that's why it is fluid. Stephen, you can explain the thinking there in terms of your debt strategy.
Yes, absolutely. I mean kind of what Mark said, I mean wherever we can get top-up financing, if it's not paying our CapEx program, it's definitely going to paydown the debt. And just to touch on like 2024, we do expect to finance around $500 million to $600 million of debt. So, I think included in that is the top of financing. So we will be looking at opportunities to paydown the very expensive debt.
Okay.
I would only add -- I would just sort of give color here in the thinking. As Julian said and rightfully so, we are in no desperate mode in terms of selling our assets. We want premium valuation to IFRS. And the buyer pool for a variety of reasons, that the deals are not as fluid and certain as they once were. So we're patient with time. So because of that, the timing of use of proceeds does move around a little bit, because we're not going to rush to sell under any circumstance. And we have this wonderful flexibility of our balance sheet where we can use multiple sources of capital. So if we're not -- we're going to -- we may refinance, we may use equity from a large sale. All of these factors are difficult to pro forma, because our rigor around staying convicted in the long vision is there.
Okay. No, that makes sense. Appreciate the color. With regards to allowable or guideline rent increases. I think you highlighted that based on Ontario inflation number it should be around 6%. I think Quebec has been somewhat rational. You can push through 3% to 5% on renewal spreads. But is there anyone in the government that's kind of hearing maybe it's better to get landlords some money, so they can maintain their assets as opposed to getting all of your rent increases on turnover?
Well, I can only tell you that the frustrating narrative is despite policy decisions, not all renters are unconstrained. And we believe very firmly that those that can afford to pay should carry their fair share. So, policy that only surround the most income distressed part of the population is not healthy for a housing crisis. So this down really common sense and straightforward, but it's a matter of the politics of making change. So it should all be united in our voice to government, if we care about the Canadian housing crisis to really chance the reality of not all renters are income distressed.
Yes. That's fair. And inflation is 6% and you have costs as the landlord and your large and can afford them, but not everybody can. So just as a tangent to that, geography-wise and in terms of where you put capital on the acquisition front, if you are buying new assets, are there specific locations that make more sense at this point? I know you've been kind of suburban and secondary/student oriented markets. But is there anything else that you look at to justify kind of getting at the rent growth on the new asset?
Well, my favorite geography is opportunity, but I'll turn it over to Julian to provide some additional color.
I'd like Mark to answer. I think I've heard you make the analogy that it's not like a grocery store or you can just kind of pick whatever you want off the shelf. So it really is opportunity driven, but factors that we'll consider will be what's the supply of housing in the area? What's the rental thought, how fordable are the alternatives, what operational synergies do we have? What do we expect future market rent growth to be population growth, what types of cap rates can we get on the acquisitions in there? And so it's really a whole host of factors that boil into our total return expectation as well as the -- well as the risk of timing those returns. So, yeah.
Fair enough. We'll continue to watch and see where you deploy your capital and it has that been to that effect so far in terms of what you've targeted. Thanks for the time.
Thanks, Matt.
Thank you. Our next question comes from the line of Mario Saric of Scotia Bank. Your line is now open. Please go ahead.
Good morning, guys.
Good morning.
So just a couple on my end. First one, just a clarification on the OpEx question, the 4% to 5% guidance before Steve, you're saying, essentially, if you're pegging up to the Q2 number, essentially the 4% to 5% becomes closer to 5% to 5.5% for the full year. Is that a fair way to look at it?
Yes. Yes, that's a fair way to look at it.
Okay. Okay. And then maybe a question for Julian. On this density pipeline, the 2.5 million square feet of GFA that you've submitted, what's your best sense today of what the value per buildable square foot could be on that once it gets approved?
We don't really provide guidance on that. I mean, we think factor in -- these are going to be coming online at various stages over the coming years. Some are going to be a little bit more in eminent. But I mean the young FPO general one is three years out. So there's a lot of factors that go into those values. So it's just not something we want to provide guidance on that at this point.
Okay. And then maybe two more kind of philosophical questions. Perhaps Mark, you've talked about CAPREIT 2.0., which includes more focus on per unit growth than, let's say, less focused on overall suite growth. So I'm not sure if you can answer the question, but I'll give it a shot. So look, if you look at the next 3, 5, 10, 20 years, you can take whatever time frame you like. And if we just assume interest costs, let's take them out of the equation, so let's say they're flat. Because is there a target FFO per unit or FFO growth rate that you think CAP 2.0 can deliver over whatever time frame you want to choose?
The question on the minds of all investors no doubt has been -- it's certainly a question that we talk about and try to address every single day. And again, it's the spear of expectations and guidance. All I can tell you is we have a -- an approach now to our assets that we look at returns, and we try to achieve premium pricing on dispositions, and we will do that in every possible opportunity where our criteria has circled those opportunities.
We will take that capital and we will deploy it into the highest and best use of net proceeds. And as you heard, Mario, the trick is I'm not trying to be cagey. Today, it's the revolver, but even today, that revolver debt may be pushed to side for an incredible opportunity on the acquisition front. But regardless, we are going to be unrelentless in pruning and working on growing earnings per share.
Everything else is [indiscernible], and investors don't invest in EGO. So we're not interested in that. We are laser-focused on growing earnings per share, the rigor around evaluating our assets and evaluating highest to best use of funds is one that you'll see from CAPREIT going forward into the future, and that's what we're excited about. So I'm not answering your question directly.
I think track record is a pretty good measure of looking, but we hope to accelerate that track record. Again the potential of increasing value to the balance sheet through the development groups initiatives and unlocking land value is not fully baked in or realized into our track record at this point, but we are very focused on that for the reasons I talked about.
It's providing land to help ease the Canadian housing crisis and most importantly, to bring value to CAPREIT unitholders. So a lot of different factors here, but nothing slowing down. The engine is revving up and you can expect incredible things from CAPREIT going forward here now. We are coming out of post COVID. We are making all the right moves, and I'm incredibly excited about what I'm looking at going down the pipe. We've got a great team.
Okay. Okay. That's fair. Speaking about revenue engine, Mark, what is your sense on market rent growth kind of quarter-over-quarter these days? Have you seen any slowdown is that growth perhaps due to affordability question marks, or is it continuing at the same pace, let's say, 2%, 3% per quarter like it has been over the past year?
Yes. I think we're going to see a moderating here because, again, the leases that move out are always the most recent leases. When you look at churn, okay? So we're getting some post-COVID effect here as I talked about earlier, it's moderating. But truly, it's -- we've got to do a better job of expressing to the market how incredibly affordable these new rents are.
So they're sure they're accelerated post-COVID. But we're talking about affordability option in the marketplace. It just doesn't exist anywhere else. Like we heard about 4,400 condos -- this is a real affordability option for people. So we shouldn't be as focused on those mark-to-market rents. They will it will ease into the range we talked about, but they're still highly, highly affordable. So the runway is long on is now very low.
The housing crisis was building five years ago. We did nothing about it and the population growth pressures have been exaggerated to never before seeing Canadian level. So I don't see an easing at all on the demand side, and I don't see a lot of movement on the supply.
The question was more, not so much on your turnover spread, but let's say, for example, your typical building charges, a thousand dollars next quarter in 2020, the market rent 2025 that $25 per quarter as the pace of that given the demand, the lack of supply is that eventually continue?
Yes, but not accelerate, but yes, continue.
Got it. Okay. Last one for me. Just it seems like there's significant opportunity to buy new build in the market? And perhaps what's constraining your ability to do so is the financing delays in terms of being able to sell some of your older assets? You're trading at a 12% discount to your IFRS, NAV. You've talked a lot about buying back shares. What are your thoughts on if the private market in terms of sales is challenging. What are your thoughts about actually raising equity, call it, a 4% to 4.5% cap implied to buy new assets at a mid 4% cap. Does that make sense?
I just fundamentally don't believe in issuing equity below what we think is a very conservative have, very conservative NAV. Like again, on a broken record here, and we've got to get the results in on the Street, but our development and potential loan is not fully baked into that math. And I just don't -- I don't believe in it.
Like we're patient. We're here to serve investors of CAPREIT, and I don't want to dilute anybody because I think there's an opportunity. We will find sources, but we will remain disciplined.
As Julian said, we're in no rush to sell at all. But where we can find those AR opportunities, we've become very, very good at it, and we'll continue on the pace that we can -- when we raise equity, finding the best place for that equity to sit on the balance sheet, and that will be the discipline. I don't feel -- we when CAPREIT by market cap is more than past the Canadian apartment REIT market. We've got a big balance sheet here. We've got lots of flexibility and we were in no rush. So I'm not afraid of losing opportunities because we're very good at finding them, and we're very good at implementing that opportunity into the balance sheet.
That's great color. Okay. Thanks Mark. Thanks guys.
Thanks.
Thank you. We now have a follow-up question from Mike Markidis of BMO Capital Markets. Your line is now open. Please go ahead.
Thanks. I’ll speak very clear, just not trying to delay the call too much more. But just given the strategy and the increase in the new build assets, one thing that kind of sticks out is that your same-property margin is higher than your total portfolio, and that seems kind of intuitive to me, maybe if you could just address that? That would be great.
You touched on another feature of the new construction portfolio, which is they do enjoy higher margins and that is good for inflationary cost pressure control going into the future. With those higher margins, we don't have as much exposure to inflation, and it does have an effect. So it's another hidden attribute of the strategy that Julian and his team are putting to work.
And, yeah, I don't know if that answers the question directly. Mike.
Yeah. No, I hear you on a higher margin on the new assets. So total portfolio NOI margin be higher in same property?
Yeah, depending on the -- absolutely, if we entered it -- once you enter a high enough quantum of new construction, it will obviously start to move the overall margins. It's just a small percentage that's creep in slowly over time. We didn't add 10% new construction assets last week. It's over time, that margin will generally get pushed up. Yeah, go ahead, Steve.
Mike, it's also some of the some of the costs that are -- you could say are on disposed properties that are included in your total NOI, and we did get rid of several properties that say, the culprits of our septic tank issues. So you see a lot of those costs that are hitting the margin on a total NOI margin basis, which is lower than your same-store.
Yeah. No, that makes sense. Okay. Thanks Steve. Appreciate that.
Thanks.
Thank you. As there are no additional questions at this time, I'd like to hand the conference back over to CEO, Mark Kenney, for closing remarks.
Thanks so much. I'd like to thank everybody for your time today. And if you have any further questions, please do not hesitate to contact us at any time. Thanks again, and have a great day.
Ladies and gentlemen, this concludes today's Canadian Apartment Properties REIT second quarter 2020 results conference call. Thank you for joining. You may now disconnect your lines.