Canadian Apartment Properties Real Estate Investment Trust

TSX:CAR.UN

Earnings Call Analysis

CAPREIT Reports Strong Q3 Performance

Canadian Apartment Properties (CAPREIT) delivered another robust quarter with nearly 99% occupancy, reflecting the tight Canadian rental market and driving a 6.5% rise in operating revenues. Net operating income (NOI) increased by 7.1%, expanding total portfolio margins to 66.5%. Despite this, the diluted Net Asset Value (NAV) per unit fell to $54.36, primarily due to a fair value loss from increased cap rates. Year-to-date, revenues and NOI grew by 5.7% and 6.2%, with margins rising to 65.1%. FFO per unit is up 2.7% for the nine months, and CAPREIT retained a conservative payout ratio of 60.5%. The company's modernization program is in full swing, acquiring new properties and disposing of non-core ones, adding high-quality suites to the portfolio. Financially, CAPREIT maintains a solid liquidity position with a long-term, low-interest rate mortgage portfolio and active debt management.

Solid Operational Results Amid Growth and Low Vacancies

Investors should find comfort in the company's resilient performance, marked by noteworthy rent growth and operational efficiencies. Despite a more condensed portfolio, the company has achieved a 6.5% increase in operating revenues and a 7.1% rise in Net Operating Income (NOI). Low vacancies are a testament to robust demand with nearly 99% occupancy rate in their Canadian residences. Additionally, the company's strategy to elevate the quality of its portfolio seems to have had a positive impact on earnings, highlighted by a 4.6% growth in diluted Funds from Operations (FFO) per unit, indicating that the strategic sell-off of non-core assets is paying dividends. However, there is a note of caution with the Diluted Net Asset Value (NAV) per unit witnessing a decline owing to a fair value loss and an uptick in the weighted average cap rate.

Margin Expansion and Strategic Capital Allocation

Sustained margin expansion underscores the company's adept handling of operational costs amidst inflationary pressures. Operating revenues and NOI have respectively grown by 5.7% and 6.2% over the nine months ending September 2023, leading to an increase in total portfolio margin to 65.1%. This reveals the company's ability to agilely navigate the inflationary environment with strategic allocation of capital towards necessary maintenance over discretionary value-enhancing expenditures. Meanwhile, diluted FFO per unit improved by 2.7%, factoring in the combined effects of operational growth, share repurchases under the company's Normal Course Issuer Bid (NCIB), and increased interest costs.

Portfolio Modernization and Asset Recycling

The company's strategic focus on modernizing its portfolio continues unabated. Key efforts include acquiring new rental properties in burgeoning Canadian locations, disposing of older buildings, and aiding in the mitigation of Canada's housing supply crunch. Notably, the company has disposed of $450 million worth of non-core properties in 2023, buying back $208 million in new rental buildings - transforming its portfolio to include 11% new builds, a significant jump from just 1% a few years ago. The company maintains a robust development pipeline and an 'asset-light' development model, identifying and entitling excess land for potential sales to developers, thus realizing value while bearing no development risk.

Conservative Debt Management

The company exhibits prudence in debt management with a staggered mortgage profile and a long industry-leading average term to maturity. Their mortgage portfolio has a low weighted average effective interest rate of 2.9%, with over 99% of the interest rates being fixed, thereby curtailing volatility risks. They have also continued to amass 'top up' mortgage financing, with an anticipated additional $200 million by year-end, further fortifying their financial flexibility amid strategic initiatives. However, a moderate elevation in the debt to gross book value ratio to 41.4% was observed, primarily due to fair value loss on properties, aligning with the company's intent to focus on quality over size. Importantly, despite this uptick, the company's financial metrics stay well within covenant boundaries.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, everyone, and thank you for standing by. Welcome to the Canadian Apartment Properties Third Quarter 2023 Results conference call. My name is [indiscernible] and I'll be coordinating today's call. [Operator Instructions] I'd now like to turn the call over to Nicole Dolan, Investor Relations. Please go ahead.

[Nicole Dolan, executive]

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.

[Mark Kenney, executive]

Thanks, Nicole, and good morning, everyone. Joining me this morning is Stephen Co, our Chief Financial Officer, and Julian Schonfeldt, our Chief Investment Officer.Let's begin on Slide 4. We're pleased to be reporting another quarter of robust operational performance. Vacancies remain stable at all-time lows with nearly 99% of our Canadian residential suites occupied at period end. This reflects the tight rental conditions that we're operating in today, driven by the increasingly undersupplied Canadian housing market. As a result, our occupied AMR on the total Canadian residential portfolio has grown to $1,490 a month as of September 30, 2023.We summarize our financial results for the third quarter on Slide 5. Operating revenues were up by 6.5% which reflects our solid rent growth, especially in the context of a smaller portfolio. Net operating income was up even higher growing by 7.1% with lower operating costs as a percentage of revenues. As a result, our margin on the total portfolio expanded to 66.5%.In part, this highlights the effectiveness of our strategy and the strong earnings that come from our new construction rental properties as compared to the non-core buildings that we're selling. It demonstrates that by upgrading the quality of our portfolio, we're also upgrading the quality of our earnings.Diluted FFO per unit increased by 4.6% to [ $0.638 ] for the quarter, primarily due to this operational growth as well as attractive purchases previously made under our NCIB program. This decreased the weighted average number of units outstanding by 2.8%. Our diluted NAV per unit was down to $54.36 as of September 30, 2023, mainly a result of the fair value loss recognized on our portfolio. This is due to an increase in the weighted average cap rate.Slide 6 highlights some key performance metrics year-to-date. Operating revenues and NOI grew by 5.7% and 6.2% respectively, driving the expansion of our total portfolio margin to 65.1% for the 9 months ended September 30, 2023. This is up from 64.8% in the comparative period.Our same property margin also grew by 30 basis points to 65.4%. This reflects the fact that our rent growth was strong enough to offset higher property operating costs, which resulted from inflationary pressures and increased repairs and maintenance expenses. However, we are strategically incurring these higher repairs and maintenance costs as we've intentionally scaled back on our discretionary value-enhancing capital expenditure, which flows through our balance sheet.Instead, we're allocating that capital to repairs and maintenance work which impacts our margins. This strategic pivot was taken in response to the tight rental markets we're experiencing across Canada. Our consolidated operating costs, which include ERES, were also inflated by [ movement ] in exchange rates.However, the similarities increased our foreign exchange operating revenues upon translation. Diluted FFO per unit was up by 2.7%. Again, this was a result of our operational growth and NCIB repurchases, partially offset by higher interest costs. Our payout ratio remained conservative at 60.5% for the current 9-month period.We're continuing to make solid progress on our strategic initiatives as displayed on Slide 7. Our portfolio modernization program is front and center. I briefly mentioned some benefits of the program that we're seeing come through in our financial results. But the strategy really does pursue an upgrading of the portfolio in every capacity.We're purchasing newly built rental properties located in strong forming, quickly growing Canadian geographies that have higher returns and lower risk. We're funding purchases through the disposition of our older buildings that are no longer core to our strategy.Considering our competencies and objective, it is important to us this recycling also contributes to the remediation of the Canadian housing crisis. We've established a robust development program that additionally helps with the solution to the housing problem without us having to deviate from our bread-and-butter business.We're working hard on this front to entitle our excess land and crystallize the significant underrealized value embedded throughout the portfolio. In doing so, we're opening the door to the vital development of new homes in Canada. The NCIB constitutes another value creation tool at our disposal, which we can leverage whenever that presents itself as the best use of capital.Our proactive debt financing program is also a critical component of our strategy. As Stephen will discuss, it provides us with the financial flexibility we need to execute on all our strategic objectives and brings everything together to collectively form the CAPREIT 2.0 strategy.I will now turn things over to Julian to provide a more detailed update on our capital recycling.

[Julian Schonfeldt, executive]

Thanks, Mark. Slide 9 shows the extent to which we've been focused on repositioning our Canadian portfolio in recent years, and we've continued to make good progress on this initiative in the past few months. Since the second quarter, we've executed on the disposition of $122 million worth of our older non-core properties in Canada and sale price is representing a premium to IFRS fair value.This includes 2 transactions closing this month with combined gross proceeds of $62.5 million. That brings our total Canadian disposition volume to $450 million so far in 2023 which represents the sale of over 2,500 suites insights. We acquired $208 million worth of newly built rental properties this year comprising approximately 500 high quality suites located in growing regions with strong long-term fundamentals. This has increased our portfolio allocation to 11% new build today, up from only just 1% a few years ago.Slide 10 showcases some of our latest strategic transactions. We have featured our most recent acquisition of The Lincoln property in Langley, BC. This highly amenitized building was purchased for $51 million, excluding transaction costs and other adjustments. It was constructed in 2022 and contains 92 spacious suites with modern appliances and high-end finishes.You can also see that we benefit from operational economies of scale as it's located adjacent to point at The Meridian properties which we purchased just a few years ago. Compare this to the older nonstrategic properties that we're selling, a sample of which you can see on the top of the slide.We're looking forward to making continued progress on our asset recycling program and enhancing the diversification of our portfolio with these high-quality and well-located properties. As Mark mentioned, our asset-light development model remains another priority for us, as outlined on Slide 11.Throughout the past 26 years, we've accumulated one of the largest rental apartment portfolios in Canada, which advanced from coast to coast. That came with substantial excess land, which now has significant underrealized value that we're working on surfacing. As a reminder, we've identified over 6 million square feet of possible GFA across potential development sites in just the GTA. And you can see that we've already submitted planning applications for over 2.5 million square feet, with more to come.By first undertaking the lengthy and cumbersome entitlement process, we're able to sell our underutilized land to developers shovel-ready. This makes it a win-win opportunity as it directly contributes to the development of new homes for Canadians, while at the same time we can crystallize significant value upfront without having to take on any development, financing or leasing risk.With that, I will thank you for your time this morning. and I will now turn things over to Stephen for his financial review.

[Stephen Co, executive]

Thanks, Julian, and good morning, everyone. You can see on Slide 13 that we maintain a solid liquidity position. As of September 30, 2023, we had $258 million in available capacity on our Canadian credit facility, which had -- was incurring a weighted average interest rate of 6.5%. Since then, we have repaid a significant portion of that, and today have approximately $340 million in available borrowing capacity, in addition to the $1.7 billion worth of properties that remain unencumbered at period end.Our staggered mortgage portfolio in Canada carries one of the longest terms of maturity in the industry at 5.4 years. We also have over 99% of our mortgage interest fixed at low weighted average effective interest rate of 2.9%. This mitigates our volatility risk and enables us to proactively manage our debt, which forms an integral part of our larger business strategy.To that end, we've continued to build upon our balance and secured mortgage portfolio and are expecting to have completed net top up mortgage financing of approximately $200 million by end of this year.Slide 14 displays a long-term composition of our mortgage maturities. You can see that these are staggered so that we have no more than 14% of our total Canadian mortgage coming through in any given year. This minimizes our renewal risk and we have been benefiting from this conservative debt strategy in the high interest rate environment of recent years.Turning to Slide 15. Our debt to gross book value ratio ticked up slightly since the prior quarter to 41.4% at period end. This is driven by the decrease in gross book value due to the fair value loss recognized on investment properties this quarter, and also, because we're shrinking the size of our portfolio as we work on getting better and not bigger.Although this metric remains conservative, we aim to keep it on the lower flip side subject to our other creative opportunities for capital deployment. Importantly, all our metrics remain safely within the limits of our covenants, including our debt service and interest coverage ratio.I will now turn things back over to Mark.

[Mark Kenney, executive]

Thanks, Stephen. We've talked a lot today about our strategy, as we normally do, and that's because we're very excited about its merits and the progress that we've been making. By consistently executing on our strategic objectives quarter-after-quarter, we've been creating meaningful value for our unit holders, and that's been our primary goal. We're not just optimizing our portfolio to achieve this.Referring to Slide 17. We're optimizing on live, work and invest, that affects every corner of our organization and every stakeholder in our organization. At CAPREIT 2.0, we're enhancing our portfolio along with our communities, our contribution to the housing solution, and ultimately returns for our unit holders.To accomplish this, we've also been enhancing our people and teams to adapt and ensure alignment with this re-envision strategy for success now and in the future. Looking ahead, we remain extremely focused on generating as much value as possible through as many means as possible. We have ongoing opportunities with previous usage of funds across our various strategic programs. And we will continue to actively exercise levers in tandem to keep maximizing value for our unit holders.With that, I would like to thank you for your time this morning, and we would now be pleased to take your questions.

[Operator]

[Operator Instructions] Our first question today comes from Frederic Blondeau from Laurentian Bank.

[Frederic Blondeau, analyst]

3 quick questions from me. First, just looking at the fair value adjustments, I was wondering how you feel about cap rates so far in Q4 and for 2024? I mean, do you feel we reach a certain plateau or you could see a bit more volatility from here? And I realize it's a bit of an unfair question, but I just wanted your view [ on ] that.

[Mark Kenney, executive]

I don't think it's unfair at all. What we're seeing is a little bit of a relaxation on the long end of bond yields and that speaks very well for future acquisitions. I think that most would agree that the tightening cycle is at least plateauing at this point and not expected to get much worse. With that in mind, we see a real strong recovery in values. Perhaps, Julian could add his thoughts to that. Fred, just give him a second here.

[Julian Schonfeldt, executive]

Yes. So you saw our cap rates widen a little bit over the quarter and that was a direct result of the interest rates which have increased. We've had a little bit of relief I'd say over the last week, and to Mark's point with the forward curve showing a little bit of relief in the future, I do think the cap rate expansion is probably at --potentially at its peak. But looking forward, you still have some exceptional rent growth going forward. So hopefully that does support some value of us in the future.

[Frederic Blondeau, analyst]

It's a good segue to my next question, looking at your current target acquisitions. Are you starting to see a change in the buyer pool or -- given where we are in the rate cycle, or it's still a bit early?

[Julian Schonfeldt, executive]

Yes. So in terms of the acquisition we're looking at, we're still finding it's not anywhere near as competitive of a market as it was before, just with the bond yields still being fairly high and cap pretty scarce, it's not as competitive as it was before, but it still has remained a good market for [ buyers ].

[Mark Kenney, executive]

Fred, we remain in a bit of an upside down world here where there's good energy in the -- obviously the lower end product or the less expensive price for [indiscernible] product, and the opposite in the institutionally held market that was the most frothy going back 2, 3 years ago. That end of the market is highly sensitive to long money rates. And again, I think you're going to see a real tick up probably Q2, Q3 of next year of the institutions getting back into the trading as such.

[Frederic Blondeau, analyst]

And then maybe last one in terms of current rental rates. Are there any markets where you're starting to see a certain plateau, or were you starting to see a growing risk given the macro headwinds or things remain pretty stable here?

[Mark Kenney, executive]

No, it's quite stable. You can see there's a slight uptick on our mark-to-market rents and a dramatic downtick in the number of units that we can access. The strongest market in Canada is clearly Ontario and Ontario is clearly the market where it's difficult to extract the value because of low turnover. But again, it's a bit of an upside down world. Like the [ Quebec ] Province to be on a fundamental point of view, just Ontario, and it's all a function of the housing affordability crisis where people have nowhere to go, you see low churn and that's what we're looking at in Ontario for now, but the value in the mark-to-market rents is just incredible in this province of Ontario.

[Operator]

Next question on the line is from Jonathan Kelcher with TD Cowen.

[Jonathan Kelcher, analyst]

First just like sort of following up on Fred's question on acquisition market. We're starting to see more headlines of some distressed developments. Are you guys seeing any opportunities there yet? Or is it too early? I guess secondly, on that how would you -- like how soon would you take over a project?

[Stephen Co, executive]

Yes, I'll take that one. So we are starting to see that. I haven't seen too drastic of a wave, but we're definitely starting to see the merchant developers being under a little bit of pressure to pay out variable rates at higher cost debt. So that coincides with what Mark said earlier, where there's just a little bit less of an institutional fit for them.So there are some interesting opportunities. We are able to act quick. That's one of the very strong advantages that we have here because of our size and scale. And the capital recycling that we've done, having sold over [ $400 million ] has given us some firepower to be able to take advantage of that. So we do -- we're being cautious with deploying capital, but we are looking forward to taking advantage of some of those opportunities going forward.

[Mark Kenney, executive]

I would only add, Jonathan, our reputation should not be underestimated in this environment. CAPREIT has a very long history of doing what we say we're going to do, and that carries tremendous weight in a market where merchant developers are looking to close quickly. Julian has had a wonderful response from the brokerage community knowing that CAPREIT's there, and that definitely gives us business pricing advantage, and that's 26 years of reputation at work.

[Stephen Co, executive]

Yes. Another point I'll layer on there too is with the CMHC financing delays, like, you're looking at 0.5 years to get that. For a lot of folks, they do rely on that to make their IRRs and their targets work. For us, we have such a huge balance sheet and unencumbered assets that we can kind of synthetically put debt on a property right away. And so that's a bit of a somewhat unique advantage that we have that can carry a lot of weight when negotiating with vendors.

[Mark Kenney, executive]

It just happens to coincide perfectly with our strategy of recycling assets. The opportunity in the market is there, and that is bringing the scope of our strategy.

[Jonathan Kelcher, analyst]

Do you think you'll be more active on the acquisition front in 2024 versus 2023?

[Mark Kenney, executive]

We'll remain opportunistic. It's hard to have a crystal ball. I can describe the environment as having those opportunities right now. We don't expect these opportunities will be there for the long-term, but they're definitely in the marketplace now. We'll be restrained, we'll be disciplined and we will stay completely on strategy. But the -- so far, the strategy is working exceptionally well.

[Jonathan Kelcher, analyst]

And then my second question is just on the -- on your operations on the expense growth, and you did a good job of laying it out versus CapEx spend. But have you sort of got to the level where you want to be on that such that we can sort of look at this quarter's CapEx and kind of push that through to next year and similar on the expense side?

[Mark Kenney, executive]

Yes. The whole team is quite proud of treating a dollar as a dollar and focusing our efforts on just being efficient, not where the accounts decide it's going to land, capital or repairs and maintenance. So we're just going to stay strong on that. I feel very confident -- when you look at our capital spend, you're seeing a dramatic change in discretionary items, but a somewhat increased commitment to carbon emission investments, GHG reduction investments in energy.So overall, CapEx number is a little bit confusing. When you look at our ESG investment commitment, it's fully in place and accelerating. And when you look at our discretionary CapEx, it's definitely being pulled back. And it's that category that's having somewhat of an effect albeit not profound on the repairs and maintenance. The overall effect, like I said, is the dollar as a dollar, and we're going to continue to run the business that way.

[Jonathan Kelcher, analyst]

But if we think about modeling for next year, how should we think about R&M expense growth?

[Stephen Co, executive]

So I think just in terms of R&M expense growth, I mean, as Mark pointed out, we're continuing to shift our dollars to more of the R&M side as opposed to CapEx side. That didn't really start until like, I would say, early -- maybe late Q1 of this year. And so therefore, there will still be some overall effect on the 2024 numbers, if you're modeling for next year. But we're continuing to focus on that. So I think using this year is obviously a little too high if you're modeling that. But I would say it's going to definitely be lower next year.

[Operator]

The next question is from Kyle Stanley from Desjardins.

[Kyle Stanley, analyst]

Just going back to your leasing commentary -- or the leasing spread commentary, Mark. Last quarter, you had mentioned that turnover spreads were still benefiting from the after effects of COVID. And that as a result may be the upward trajectory of the turnover spreads were somewhat more limited. As you highlighted, we did see the spread tick up again this quarter. So just curious on the expectation moving forward, how much further can spreads continue to expand? And what is the runway for spreads maybe staying at these elevated levels?

[Mark Kenney, executive]

2 numbers that are so co-related is the turnover churn numbers and then the leasing spread. And when your churn turnover numbers dip below 10% in provinces like Ontario, you can pretty much count on those leasing spreads to stay where they are, because we're a sample of the market. There's nothing unique going on with sales and we have a great revenue team at CAPREIT.So at the end of the day, it's the housing crisis we can now use as the culprit to these limits. And I don't expect to see very historical new heights that I've never seen in my 35-plus year career here. I don't expect that you're going to see an upward trajectory, but we're in, as I said, historical levels right now. At this point, not seeing any relief though on the apartment churn. There's nowhere for folks to go.

[Stephen Co, executive]

[indiscernible] supporting that too -- just touching on the comment I said earlier about the merchant developers slowing down and feeling the financial pressures of the variable -- high-cost variable rate debt. So you have that happening. At the same time the government has been increasing immigration consistently. It continues to outline really strong trajectory for the apartment fundamentals in the future.

[Kyle Stanley, analyst]

You mentioned just turnover remaining low. Some of your peers this quarter have noted maybe a little bit higher turnover in the third quarter specifically than they had expected. Is that something that you might have witnessed this quarter? Or has your outlook for turnover, I guess, as we go into 2024, shifted at all? Or is it still kind of trending in that maybe lower teen level?

[Mark Kenney, executive]

No, listen, we've got great peers, but we -- CAPREIT has done such an exceptional job of our locations that our churn is right in the heart of the housing crisis. So our churn will always stay a bit lower due to the -- I would call, the superiority of the market locations that we have. And again, it's a complete correlation between churn and leasing spreads.So when you want to talk quality of portfolio in terms of where the hot action is, look at CAPREIT, lowest churn, highest mark-to-market rents, superior rental locations in the sense that we're urban-centered heavy Ontario, heavy, large Canadian city. So it's just a little bit of a difference. If [Technical Difficulty] market and you see those uptick churns, you just got less of a housing crisis going on.

[Kyle Stanley, analyst]

And just last one. You hit your disposition target of $400 million to $500 million for this year. Just wondering what kind of incremental disposition activity we might see next year?

[Stephen Co, executive]

Yes. We haven't provided guidance for that, and probably not going to do that on the call, but we remain committed to our capital recycling strategy. It is going to be dependent on the market, but we don't have any plans of stopping the momentum that we've had this year and that we've achieved. And so it will really just be opportunistic and market-driven.

[Operator]

The next question is from Mike Markidis from BMO.

[Michael Markidis, analyst]

You guys have obviously been very successful in your strategy to upgrade the portfolio. And I guess most of that's been done through buying assets outright. But as the world evolves, are you guys seeing any opportunities to get involved in projects sort of midstream through, let's say, like a mezzanine loan type structure?

[Mark Kenney, executive]

Julian as such and the investment team have done such a great job of keeping a pulse on the market, we wouldn't have to go there to find great value today. We've got a great pipeline of opportunity that match it with discipline on the dispo side. But we know that there's condo distress in the market. We're reading the newspapers. We can see what's coming.But if you're asked to the investment group today about the opportunities, it's -- there's a big long list that we could go shopping with before we have to go there. I think that's the later inning opportunity of 2024 for us. Again, everything will be driven on our ability to properly recycle cash.

[Stephen Co, executive]

Right. Mike, I'll just layer on. Like the acquisitions we've been doing and that we're looking at are all below replacement costs, right? So given that we have those, no development risk, no lease-up risk, and we're able to buy them cheaper than if we were funding through mezzanine or other development alternatives.It just remains to us far more attractive to get it below replacement cost and already done. Now in the future market, as Mark said, where things change, we remain open to doing whatever is [ set ] for shareholder value. But for now, this is the clear answer.

[Michael Markidis, analyst]

And then just last question from me. Just on the -- your effort to expand the amount of entitlements that you guys have. When you look at the entire opportunity set, is it easy to [ separate ] land parcels like you were able to do on Cavendish? Or do most of your opportunities require demolition and replacement of existing units?

[Mark Kenney, executive]

I'll let Julian answer this, obviously, but I can't help myself. The environment couldn't be better for this part of our strategy as well. Obviously, as we've found ourselves in Canada in the deep dark depths of the housing crisis, we have less nimbyism and we have far more -- obviously, you read the newspaper, governments are turning their eyes to how can we help versus anything else. So I'll let Julian kind of describe the opportunity, but I can't help but try to give the market a bit of a peak here. Obviously, the environment has changed for entitlement.

[Julian Schonfeldt, executive]

Yes. So when we're looking at how we prioritize and rank them, it's largely based on the most value we can service, which is in a lot of cases going to involve high rise. Sometimes it's going to be until -- like the 2 Davisville sites. Sometimes there's going to be some demolition and rental replacement required. But most of the ones, particularly where there's high value, there's a large enough parcel for it to be severed and sold.And we've discussed this before, but when you look in Toronto, the value of condos versus brand-new apartments, the spread is still quite large. So they are still oriented more towards condo development. But to answer your question, for the most part, they're easily enough [ separable ].

[Michael Markidis, analyst]

And just following up on that, how far away are we do you think from that becoming a bigger part of your disposition program in terms of selling entitled land?

[Mark Kenney, executive]

We've learned our lessons with giving the universe an even a path. So we're trying to be extremely restrained. Julian's group is very, very hard at work, getting ready to announce new projects at advanced stage. But in terms of the market, I think you should really keep focused on what we've announced as being in process because even these in process deals do take time. You only have to drive by our assets and to understand, my goodness, there is more years than anywhere, but really focus on what Julian's laying out in his slides on the development front. We've got in action.

[Julian Schonfeldt, executive]

Yes. I'll just touch on those very quickly. Like the Davisville ones -- I mean, you're obviously at the mercy of the city, but we do expect to get those entitled early in 2024, so fairly imminently. When that actually becomes a disposition, we're not committed to having to do it right away. We're committed to getting the most value for shareholders. So at the time, we'll make an assessment if the market supports an optimal value and see what we can do there. But those would be the more imminent ones, and as Mark said, you might see more kind of added to the list, teams working hard, and yes, we'll continue to push through.

[Operator]

The next question is from Jimmy Shan from RBC Capital Markets.

[Jimmy Shan, analyst]

So just on the strategy of spending less on value-add CapEx. I was wondering if you could put some numbers around the cost benefit analysis? Like is it that you're spending $25,000, you'll get $300 a month in rent extra, or you're now spending $1,000, you get [ $50 ], what's the calculus there? And then, I guess, also in that, are you thinking about cost of the spend in terms of like how you're financing it and higher rates have gone up. So it's incrementally not worth it even from an IRR perspective. Maybe you can give us some thoughts there?

[Unknown Executive]

Yes. I think as we go forward here, we're going to give more color. Like the portfolio is now reached 10% in construction. But it starts with a variety of considerations. It starts actually on the dispo front, looking forward to CapEx, growth, total return. Investment group does a phenomenal job with that. And then we balance that against higher margin, lower inflationary impact assets on the income side. So when we're buying these new construction assets, they're fully submetered in most cases. The rents are higher. The margins as a result are much higher.So the ongoing effect of inflation, we can't gauge that right now. But we know when you're in a high-margin asset, you obviously have less inflationary pressure. Then it's just the life cycle of CapEx. So when you're buying a brand-new construction asset, you have perfect planning on the CapEx front, where the non-core portfolio or value-add portfolio has historically been at various stages of life cycle reinvestment from the time we buy it to how long we've owned it.So all of that has a staggering math when staggering is being -- like different stages of investments that are required, Jimmy. We can and we will give better insights on the merits to these new construction assets and how they play out on the long-term. But really, it starts with the dispo front and moves over to the pro forma on new construction. I don't know, Julian, if you would add anything to that?

[Julian Schonfeldt, executive]

No. I mean, just more specifically, I guess, to Jimmy your point in terms of the CapEx that you spend, I mean, the model has changed now. And so when rents are becoming quite high and unaffordable for folks, the amount of extra money that you'll get from doing a full renovation or doing a [ whole ] -- keeping the [indiscernible] to the highest standards and everything, it's not like it was before.And frankly, it makes the units even more unaffordable for Canadians. So from our perspective, the IRRs on that incremental CapEx aren't where they used to be and it also helps kind of keep the units a little bit more affordable. That said, with respect to the life and safety, the green CapEx, all of that stuff, I mean, that's just ingrained and we spend on that just because that's our model and we want to have nice, safe and efficient homes for all Canadians. But in terms of the incremental spend, as we mentioned, the IRRs aren't as strong anymore given the high demand and well supply.

[Mark Kenney, executive]

[indiscernible] Yes, Jimmy, just to finish off. The value add -- again, we couldn't have predicted in a pro forma this slowdown in churn. So even the predictability of your income stream in some of the older assets, the value is far more embedded. You look at the market rents and they are truly unbelievable, but extracting that value can be choppy. And so we just don't find that in the new construction asset. If you're at market rents, it's less difficult to mine the value. You tend to have more flexibility on the renewals. It's just a whole variety of things that are just difficult to pro forma and quantify.

[Jimmy Shan, analyst]

Yes, I was trying to get at the -- sort of the decision, not necessarily against new builds, but just -- I think you addressed it, Julian. The other question I had was on the real cost that you incurred. So can you provide some color on sort of what your initiative was within the organization?

[Mark Kenney, executive]

Yes, as we know, Julian mentioned in the presentation, we sold over 2,500 suites. Stephen has continuously talked about the better versus bigger companies getting higher quality, but we are -- the strategy changes. We're not a company built for growth of unit count anymore. And we were very much focused on the growth of unit count for decades at CAPREIT. And so it's a lot of -- there's a lot of very senior and long-term employees that we unfortunately had to look at harder in terms of what's going to happen here over the next 2 to 3 years, and that's what that restructuring is about.

[Operator]

The next question we have is from Matt Kornack from National Life Financial.

[Matt Kornack, analyst]

Just a quick follow-up to Jimmy's last question there. In [ net ] of the restructuring costs, is that kind of what we should think of G&A on a run rate going forward? Or is it -- it looked a little low relative to where it was historically, that -- may be the net effect?

[Mark Kenney, executive]

Well, I'll let Stephen maybe pass comments. What we're talking about here is mitigation of cost increased in 2024. G&A as a percentage of revenue will be going down, but the overall cost of G&A in the model when you factor in increases and some other things that we're doing to restructure for the new cap, there will be new jobs added as we go forward.

[Stephen Co, executive]

So Matt, I would say, if you're doing for modeling purposes for Q4, I think year-to-date numbers, excluding the nonrecurring severance costs and termination costs, that's a good run rate for Q4. When we look into 2024, as kind of Mark already pointed out, there is going to be general increases across the Board. There's promotions, there are new hires and replacements. And those ones, I would say, just on a run rate basis, I think 2023 is a good run rate to go forward to 2024.

[Matt Kornack, analyst]

And then just with regards to the fair value adjustment that you took in the quarter, it seems to be almost entirely concentrated in the GTA. And I get the turnover is lower, cap rates on that portfolio were low. But how should we think of kind of the flip side being that land value is probably the highest in the GTA and you've got these redevelopment opportunities? I assume that's not in your fair value number. But just interest in the methodology as to why that, Mark, in particular had a write-down this quarter?

[Mark Kenney, executive]

Well, I think it's a great conversation. Again, if anything, we get criticized for being very conservative here. It's got evidence of trades. Like the institutions were driving cap rates to the lowest in Canada in the GTA pre-pandemic. And in our new interest rate environment, there's a pause. So there's very few trades to look at, okay?But when you look at the embedded value in the market rents, it is incredibly profound. And as Julian said, the condo land value opportunity in our portfolio is unparalleled, okay? So we have absolutely -- we have 2 vaults of value in CAPREIT land. It's the severed land in Toronto, and it's the redevelopment land in Vancouver, so both in the heart of Canadian housing crisis.So I think that you can see -- I'm going to predict probably in the middle of next year when interest rates moderate and there's at least clarity on where things are going. This will rock it back, there's no question. But with the evidence of trades, it's the right thing to do to give proper clarity to investors. So that's why we've taken that step.

[Stephen Co, executive]

We have the lowest cap rates in the GTA in our portfolio with what happens with interest rates in the quarter. Obviously, that impacts IRRs and models. But I think more importantly, when you've got lower cap rates, your DSCR has become an issue. And so for buyers with the higher interest rates, they can't get as much debt financing. So not only does that impact their IRRs, but it impacts the amount that they need upfront.And so it's just a little bit more sensitive in that market to the interest rate increases. And as Mark said, there's a low amount of trade. So there's a bit of a guessing game in there, but we -- our priority with our IFRS values is always first and foremost to just be accurate with it. And that was our best kind of view on direction today.

[Julian Schonfeldt, executive]

And it gives investors a better take a loan to value. When you're super conservative, as we are with this, the loan-to-value numbers, I think here what are most important to people more than cap rates, and it gives -- again, that conservatively translates into LTV, which we're holding together at a very, very good number.

[Matt Kornack, analyst]

And the market is pricing another sort of 70 basis points higher than where you're marking the portfolio. So it still seems like a very good buy, and we'll see how the cap rates trend as rates hopefully come lower. But I appreciate the commentary guys.

[Operator]

The next question is from Mario Saric from Scotiabank.

[Mario Saric, analyst]

Just a couple of clarification questions on my end. Coming back to the G&A cost of $4.2 million or so this quarter, like how would you break that down between corporate G&A and like R&M, or operating costs in terms of the savings going forward?

[Mark Kenney, executive]

Now, it's all corporate. And it's really something in the neighborhood of 30 people.

[Stephen Co, executive]

Just under 4% of our workforce, but all at the corporate level.

[Mario Saric, analyst]

And then more of a -- it's more of a theoretical question. Mark, coming back to this notion of like massive value being locked into the buildings, given the mark-to-market and very low turnover. If turnover remains low, just -- it gets extended out in terms of realizing that value, does the strategy -- like we'll just try to be different in a private setting versus a public company in terms of extracting that value over time? What I mean is that in the public markets, like the focus is on quarterly results whereas in the private market, generally, there's a longer duration in terms of view. So does that change how you think about the value creation potential there over time?

[Mark Kenney, executive]

It's all in the detail. I remember the -- one of the first things I learned in this business was the value always stays in the buildings. And I'm very, very mindful of the fact that the value is stored in our assets and our value vault is bigger than anybody's. When you look at this mark-to-market number, that's a peak of what's inside the doors, and it is incredible.That being said, we are absolutely open to trading some of that value to move into our new construction approach because we think there's a different form of value stored in below replacement cost assets. So to answer your question, like theoretically, we're going to be hyper-selective. We will keep what we deem to be the CAPREIT crown jewels for the type of structure that we are and will trade at high-value opportunities in exchange for what we believe to be even better value opportunities for REIT unitholders.And that's the entire thinking between -- with CAPREIT 2.0 is it's being a highly laser-focused on where we can trade in, what's incredible value and just look at our mark-to-market rent. So it's theoretical. It's there and moving it into low inflationary exposed all-market rents, highly CapEx, well-planned assets for the future, low investment in CapEx, but real flexibility in planning. CAPREIT 2.0 keeps moving. You watch the CapEx program is going to vaporize to very, very low numbers. And the inflationary pressure in the operating results will be highly mitigated.

[Mario Saric, analyst]

I don't have the presentation in front of me. You made in this presentation, but I know you've had in the past where you've kind of had a pie chart and you've highlighted the percentage of the portfolio that's value-add versus new construction. I think it went up like 10% in terms of new construction over the past 10 years or so. When you think about that 10 years out, like how that 10% look? Like are there levers that you can pull to really accelerate the shift in composition? Or do we think about the 10% becoming 20% in 10 years from now?

[Mark Kenney, executive]

Well, I'd like to pick a number, but we have -- I won't. We have these crown jewel value-add [ on ] assets like we have in like locations that are just irreplaceable. And we want that value stored for generations to come, okay? At the same time, I'd love to advance the strategy, but not at the expense of giving up value. We will just not give up value at CAPREIT. And the investment team has again done a remarkable job. That growth from 1% to 11% represents unbelievable restraint. A far less disciplined company could have added a 30 by now and given away all kinds of value. We won't do that.We have an exceptionally high-quality portfolio that we think we've seen the opportunity to make it even better. So to break it down, we will be providing a little more clarity on where we're going in 2024. We're just not prepared to do that right now. But as Julian said, the strategy is intact. The team is in full action, and we've never been more excited.

[Mario Saric, analyst]

My last question just pertains to the tenant turnover. I'm not sure if you have this information, but as you mentioned, it's kind of sub-10% in Ontario. Are you at all able to break down the tenant turnover by lease duration? Like for example, what the turnover might look like for tenants that have been in the buildings for longer than 5 years or build in the suite for longer than 5 years versus tenants that have been there for less than 2 kind of a…?

[Mark Kenney, executive]

I can't. But anecdotally, I'll tell you that those 30% mark-to-market rents include short duration leases. So we've got some short duration leases where there's virtually no mark-to-market in the rent and then we have others where there's significant mark-to-market rents. So to me, that is a less interesting metric, Mario, but what you might want to see is the correlation between the churn and the most affordable buildings and the churn in the buildings that are less affordable.It's not a huge band. But our most affordable buildings is it's vaporized, like people just are not moving. And so the value store in those buildings are the highest. So the private market will highly [ covet ] those buildings and the buildings tend to be less affordable. The churn is much higher. But we can take that comment back and try to give some more color. It's an interesting question.

[Operator]

We have no further questions in the question queue. So I'd now like to hand back to Mark Kenney to conclude.

[Mark Kenney, executive]

Well, I'd like to thank everybody for your time today. And if you have any further questions, please do not hesitate to contact us at any time. Thank you, again, and have a great day.

[Operator]

Thank you, everyone, for joining the Canadian Apartment Properties Third Quarter 2023 Results conference call. You may now disconnect your lines, and enjoy the rest of your day.