Canadian Apartment Properties Real Estate Investment Trust

TSX:CAR.UN

Earnings Call Analysis

Strong rent growth and strategic asset sales boost CAPREIT's outlook.

In the third quarter of 2024, Canadian Apartment Properties REIT (CAPREIT) reported a 5.2% rise in operating revenues, driven by 6.4% rent growth and high occupancy rates of 98%. Notably, the net operating income (NOI) increased by 6.1%, expanding margins to 67.1%. CAPREIT is strategically repositioning its portfolio, with nearly $1 billion in transactions expected this year. The company aims for a conservative payout ratio of 57.3% and a diluted funds from operations (FFO) of $0.659 per unit. Dispositions are projected to generate significant capital for debt reduction and further acquisitions, reinforcing the focus on enhancing cash flow.

Strong Performance amid Strategic Transitions

In the third quarter of 2024, Canadian Apartment Properties REIT (CAPREIT) reported robust financial performance bolstered by high occupancy rates and strong rent growth. Occupancy remained impressively stable at 98%, while average rents climbed to $1,617, which helped drive a 5.2% increase in total portfolio operating revenues. Notably, the company's net operating income (NOI) rose by 6.1%, with margins improving by 60 basis points to 67.1%. The diluted funds from operations (FFO) per unit also demonstrated growth, increasing by 3.3% to $0.659.

Capital Recycling and Portfolio Realignment

The management highlighted an aggressive strategy of capital recycling, where CAPREIT transacted nearly $1 billion in Canadian apartment properties in 2024, alongside $219 million in European property sales. Future plans include over $1 billion in residential property sales in the Netherlands expected to complete by Q1 2025. In addition, a sale of the manufactured housing communities (MHC) portfolio for approximately $740 million is set for closure in the current quarter. Proceeds from these sales are earmarked for paying down debt, which will effectively lower leverage levels, further supporting long-term financial stability.

Acquisition Strategy Focused on Quality

CAPREIT successfully acquired $517 million in high-quality properties in 2024, among which recent purchases were made at meaningful discounts to replacement costs, enhancing the quality of its portfolio. The company intends to maintain this strategic acquisitions approach while being mindful of not taking excessive risks. They reported plans to sell non-core older properties, aiming to achieve a total sales goal of around $400 million in non-core Canadian apartment properties this year. This strategy not only enhances portfolio quality but also improves cash flow potential.

Navigating Repair and Maintenance Costs Prudently

During the earnings call, the management discussed the ongoing adjustments in capital expenditure strategies. They have reduced spending in several common area and in-suite capital expenditures by 7% year-over-year, redirecting more funds towards repairs and maintenance (R&M). While increased R&M expenses yielded a noticeable impact on margins, this prudent shift allowed the organization to maintain top line rental growth without a corresponding rise in capital spend.

Guidance on Future Revenue Growth and Margins

The management believes there is potential for growth in top-line revenue on a same-property basis of around 5%, as increased churn could provide opportunities to capitalize on more favorable market conditions. They anticipate some moderation in market rents, and as rental dynamics evolve, CAPREIT's robust portfolio positions it to benefit from changing market conditions. Overall, the outlook remains constructive as the long-term strategic focus on enhancing earnings per share and cash flow generation continues.

Commitment to Distributions Amid Transformation

Despite a busy year marked by various transformational activities, CAPREIT announced a 3.4% increase in its annualized distribution rate to $1.50 per unit, reflecting management's commitment to returning capital to unitholders. Such decisions come on the backdrop of CAPREIT's significant capital recycling activities, reinforcing the management's intention to optimize financial performance while nurturing investor confidence.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, and thank you for attending the Canadian Apartment Properties REIT Third Quarter 2024 Results Conference Call. My name is Elissa, and I will be your moderator today. [Operator Instructions] I would now like to pass the call to your host, Nicole Dolan, Investor Relations. Nicole?

[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.

Starting with Slide 4, you will see for our Canadian apartment properties, occupancy remained high at 98% across which our average rent was $1,617 per month.

Turning to Slide 5. Strong rent growth drove a 5.2% increase in total portfolio operating revenues for the third quarter. Combined with prudent cost control measures, NOI was up by 6.1% and our margin expanded by 60 basis points to 67.1%. This was achieved despite higher repairs and maintenance costs, which we've intentionally incurred as we scale back on certain discretionary capital expenditures, as Stephen will soon speak to. This healthy organic growth was partially offset by higher interest expense and our diluted FFO per unit increased by 3.3% to $0.659 for the current quarter end.

Results for the 9 months ended September 30 are shown on Slide 6. Again, strong rent growth of 6.4% and high occupancy of 98.1% positively contributed to 50 basis points in margin expansion on same-property portfolio. On the total portfolio, our margin grew by 100 basis points. Our 9-month diluted FFO per unit increased by 6.5% and our payout ratio remained conservative at 57.3% for the period.

Julian will soon elaborate on our capital recycling progress. But referring to Slide 7, I want to take a moment to highlight again our strategy of buying recently constructed high-quality Canadian apartment properties and selling our noncore older legacy and ancillary properties. We've covered a lot of ground on our repositioning objectives so far this year. We've transacted on nearly $1 billion in Canadian rental properties in 2024. We've also completed $219 million in European property sales and have announced over $1 billion in additional dispositions of residential properties in the Netherlands, which we expect to complete by no later than Q1 2025.

The previously announced sale of our MHC portfolio for approximately $740 million is also set for closing in the fourth quarter of 2024. These dispositions will generate significant incremental capital, which we plan to redeploy into paying down debt and lowering our leverage as well as for the purchase of more on-strategy rental properties in Canada. Importantly, these strategic sales also achieve a broader objective in the simplification of the CAPREIT business. We're looking forward to reallocating additional resources back into our core portfolio in Canada, where our competitive advantage are the greatest.

With that, I will now turn the call over to Julian.

[Julian Schonfeldt, executive]

Thanks, Mark.

On Slide 9, you can see the breakdown in our buying and selling activity as it relates to the Canadian apartment portfolio. We've completed $517 million in high-quality acquisitions in 2024, funded primarily through our disposition program, supplemented by our revolving credit facility, which we can temporarily draw upon to act on strategically aligned opportunities that come to market. In addition, so far this year, we've closed on the sale of $385 million worth of our older noncore Canadian apartment properties. We're continuing to complete these dispositions at prices that are at or above their previously reported carrying values. With an increasingly robust pipeline of disposition opportunity, we're well on track to meet or exceed our target of $400 million in noncore Canadian apartment property sales for the current year.

Slide 10 showcases the type of properties which we are selling, older buildings, which are no longer core to our business for a variety of strategic reasons. We're also proud to be working with nonprofit organizations along the way, having sold a total of $124 million to nonprofits in 2024. Through our disposition strategy, we hope to be able to further contribute to affordable housing initiatives going forward.

Compare these dispositions to the acquisitions, which you see displayed on Slide 11, we're purchasing these recently constructed properties at prices that represent meaningful discounts to replacement costs while significantly improving the quality of our portfolio in Canada and the quality of our earnings. We're excited to continue making strong progress on our repositioning in future quarters.

I will now pass the call over to Stephen for his financial review.

[Stephen Co, executive]

Thanks, Julian, and good morning, everyone.

Slide 13 summarizes our financial strength as of the end of the third quarter with nearly $300 million in available capacity on our Canadian credit facilities. Additionally, our mortgage payable in Canada carry a low weighted average effective interest rate of just over 3% and a weighted average term to maturity of 5.3 years.

Our mortgages also have a well-staggered renewal profile, as you can see on Slide 14, with no more than 13% of our total Canadian mortgages coming due in any given year.

Moving to Slide 15. Our total debt to gross book value ratio was 40.9% as of September 30, 2024, which is down from 41.6% as of prior year-end, and our coverage ratios have remained conservative. Moving ahead, we'll continue focusing on prudent and proactive financial management to ensure that we maintain this flexible financial structure, which supports our ability to execute on our strategy.

Finally, Slide 16 displays the impact of our strategic CapEx program. As Mark briefly mentioned, we're scaling back on certain common area and in-suite capital expenditures, which are capitalized to our balance sheet. We're instead reallocating part of that capital into R&M work, which has been reducing our margins as compared to previous periods. However, overall, we're spending less money. You can see we have reduced our total capital spend in these 2 categories by 7% as compared to the 9 months ended September 30, 2023. At the same time, we're achieving the same top line rental growth. So by spending less, we're growing our returns. In addition, it is worth mentioning that with our capital allocation strategy, the new build acquisitions have a significantly lower CapEx profile than the legacy properties, which further enhances our cash flow generation going forward.

On that note, I will turn the call back over to Mark to wrap up.

[Mark Kenney, executive]

Thanks, Stephen. As a testament to the strength of our capital management strategy, which Stephen and Julian have just presented, this past quarter, we announced a 3.4% increase in our rate of distribution to $1.50 per unit on an annualized basis, effective for our August distribution, which was paid in September 2024. With all the capital recycling activity ongoing at CAPREIT, we were pleased to have been able to also grow our distributions to unitholders. We're currently in the midst of one of the most transformational periods in CAPREIT's history, and we've had a very busy year to date. We're excited to continue optimizing and evolving into an even better place to live, work and invest. And we're looking forward to the next chapters of Canadian Apartment Properties Real Estate Investment Trust.

With that, thank you for your time this morning, and we would now be pleased to take your questions.

[Operator]

[Operator Instructions] The first question is from the line of Fred Blondeau with Green Street.

[Frederic Blondeau, analyst]

Two quick questions for me. Maybe the first one for Julian, I guess, the obvious question. And now that the units trade at a sizable discount to NAV again, how do you feel in terms of capital allocation, especially the NCIB?

[Julian Schonfeldt, executive]

Yes. So as we've mentioned before, typically, the use of proceeds for us has been debt repayment, NCIB and acquisitions. We constantly evaluate the pros and cons of each of them. And for the NCIB, one of them is really how much capital do we have or have coming in imminently and how is the discount to NAV and the implied cap rate relative to the others. And it's certainly more attractive now than it was several weeks ago, and we do have a decent amount of capital. So I can't speak to what we will or will not do, but it's definitely something that's on the table.

[Frederic Blondeau, analyst]

Fair enough. And second question, just looking at the SPNOI across the portfolio, it looks like Ottawa and Montreal are slightly underperforming. And GTA is still relatively strong, obviously, but again, slightly below the country average. So I was wondering, Mark, maybe you can remind us your scenario for these 3 markets, I guess, for the next 6 to 12 months in terms of new supply and rental rate growth.

[Mark Kenney, executive]

Yes. I think a little bit of the impact that we're seeing in NOI for those markets would show up in our repairs and maintenance expenses. And I hope to get into this more in the Q&A, Fred, but I'll start off now. We're really focused on cash flow now. As part of the new strategy, the CapEx profile of the new construction building is dramatically different than the core legacy portfolio. And the rapid and quite significant decline of our CapEx spend is really getting the entire organization focused on cash flow. So we will take the R&M hits as they happen in the pursuit of better cash flow returns.

And in terms of market dynamics, Ottawa remains a very strong market and as does Montreal. We do get a little bit of impact with the new construction assets that they're onboarded, but are very, very confident that they will properly stabilize, and we will see the benefits of the strategy play out in the quarters to come.

[Operator]

The next question is from the line of Dean Wilkinson with CIBC.

[Dean Wilkinson, analyst]

Mark, at the risk of politicizing it, which I don't want to do, and I probably just did. When you look at the business out over the next 1, 2 or 3 years, how are you looking at that in the context of the Canadian population, higher, lower, the same? And tangential to that, do you think that the supply of purpose-built housing is going to keep up with that view?

[Mark Kenney, executive]

Well, I think that we're going to get into population growth, [ no doubt ] on this call. I think that there is such a backup of -- Dean, of people that are co-living, whether they be at home or whether they be in our apartments, we have seen a rapid, rapid increase in the number of people that are roommating just to make ends meet, whether it be in homeownership or whether it be in the rental market. So my outlook on, I'll say, the core legacy part of the portfolio remains strong. There's high, high demand and a huge runway. I think CAPREIT of all the apartment REITs has the longest runway for mark-to-market rents. I feel good about that.

And the type of new construction product that we're buying generally is serving the mid-market, which I think will again remain strong. And with those rents being slightly higher, I think, again, the mid-market reality of less homes to buy and less options of places to live, we may see an easing in co-living, but will remain strong demand in that segment. I think I've never been more optimistic about the business fundamentals of the long run for CAPREIT in terms of what the product is that we have to offer the market. We're in the key markets.

So the short term will be interesting here. I think you could see a little bit of a slowdown in rental construction in places like Toronto as we have a big condo delivery year next year. But most of new products that are being talked about, new development projects, people are talking rental. They're not talking condo. So I think -- I don't know if that answers your question exactly, Dean, but that's kind of an overview of how we see the market.

[Dean Wilkinson, analyst]

Yes, it does. I mean I think the point there is maybe there's not enough focus on household formation and some other metrics that you rightly point out. Second question, maybe for Julian. With the change of the capital gains inclusion rate and sort of all of the stuff going around that, have you seen an increased interest from either individual assets or maybe portfolios where the vendors might be looking at doing something with taking back units and tax deferral mechanisms there? Or is it just -- it hasn't happened yet?

[Julian Schonfeldt, executive]

When the inclusion rate was going up, we saw an increase in activity. There's quite a bit of transactions that came in, in June to get ahead of it. And we saw some transactions where the time lines were accelerated. At the current time, look, when we're doing transactions, the Class B structure gets brought up a lot and consideration for deferring taxes. When it boils down to it, though, a lot of the times, folks just want to get the cash or we get into a discussion about what the price should be because we're not really issuers of equity below NAV. And with the share price being so divergent from NAV, I find it breaks down a little bit at that point. So it gets discussed a lot, but it hasn't been something that's been very actively used.

[Mark Kenney, executive]

I would also just build on that. Our strategy, Dean, of looking at new construction assets, the Class Bs really are more attractive to those with the core legacy product that have cost base issues they want to roll into. And because we're not as focused on that part of the market right now, the opportunity in new construction is less, but time will tell.

[Dean Wilkinson, analyst]

Cash is king.

[Operator]

The next question is from the line of Jonathan Kelcher with TD Cowen.

[Jonathan Kelcher, analyst]

Just on the -- your capital recycling, you got roughly 20% of the noncore left to sell, and that's maybe roughly $3 billion. How should we think about -- I guess, 2 questions here. How should we think about the cadence of that over the next few years? And then once you sort of get past that, you'll be left with -- likely left with a smaller portfolio. How do you think about that in terms of driving earnings and NAV growth versus what you have now?

[Mark Kenney, executive]

That's a great question. I'll tell you that my full commitment is growing earnings per share for unitholders. We hear this from investors loud and clear, and we will take all measures possible to grow that earnings per share and really provide a higher quality stream of income to unitholders over the long term and protect them, quite frankly, from gyrations and valuation change, which the new construction product really does when your rent roll is fully at market, you're less inclined to have impacts on valuation. So yes, that is our focus. It's around quality. It's around growing earnings per share. And yes, I would just maybe let Julian comment on the pace of which we could see that older product move.

[Julian Schonfeldt, executive]

Yes. I'll reiterate everything Mark said. I mean, we're really focused on increasing the cash flow and do the criteria on the noncore legacy that we're going to keep chipping away at is the lower growth or higher CapEx and all the stuff that Mark has been talking about. In terms of pace, we can't really guide to the future, but you'll note that we've been doing around $400 million for the last couple of years. I'm not committing to doing that going forward, but there's been a bit of a trend there.

[Mark Kenney, executive]

Jonathan, I'm going to put another explanation mark on this that we've seen strengthening in the market, which has allowed us to have the flexibility of pulling back on our CapEx spend to pursue better cash flow. But really, it's our strategy of newer construction assets that really builds in guaranteed improvements in cash flow. And we are absolutely committed to that. And I can't sort of underestimate the importance -- sorry, understate, I should say, the importance of our pursuit of this. Having our retained earnings fully fund our CapEx needs is a complete goal of the organization. And we're seeing progress show up in the strategy. I'm very, very proud of the cash flow improvements that we've seen in the company over the last few quarters, and it's lockstep with the strategy and should be a strong signal to the market of what we are actually trying to do here. And we absolutely are focused on earnings per share, but cash flow is right there alongside of it. And our advancements in cash flow improvements, I think, are quite profound.

[Jonathan Kelcher, analyst]

No, for sure, for sure, they are. And then just switching over to operations for a minute here. Like your renewal spreads are now above 4%. They've been trending higher. How do you see that going forward into 2025?

[Stephen Co, executive]

Yes. So Jonathan, I mean, just to comment, the first quarter, we had a majority of our renewals occur in Ontario because of the moratorium during COVID. So a lot of the renewals occurred on Jan 1. What I would say is I wouldn't take Q3 as kind of the run rate going forward. I think just take the average of the year. We do know that there is a slightly lower renewal rate in BC from 3.5% in 2024 and then 2025 is going to be 3%. But I would say you can use the full year average as a good basis and adjust for that on the BC side.

[Mark Kenney, executive]

I would just add, Jonathan, that on the market rent side, what we're watching really closely is that as we do see a moderation in the market rents, we're watching the increase in churn. And we know that historically, when churn increases, we obviously move more to the rent roll. That's just academic. But when you see these moderation of mark-to-market rents, you'll typically see additional churn. And I think the CAPREIT will definitely benefit from this. Our single biggest hurdle amongst even our peers has been our low turnover rate because of our ideal locations. And so we're looking forward to seeing an easing there. But watching the market closely.

[Jonathan Kelcher, analyst]

Okay. So if you put that all together and you assume occupancy stays sort of above 98%, is it reasonable to assume that you guys can solve for sort of 5% top line revenue growth on a same-property basis?

[Mark Kenney, executive]

Wouldn't want to point to a number, but absolutely, the combination of slower moderation in market rents, increased churn could work very much in our favor. It's just math, right? Look, if you look on historic times, when the mark-to-market rents were rocketing, but churn was grind to a halt, the math can actually play out better with more fluid turnover numbers of getting back to 30% one day, hopefully, with less pressure on rents, that can yield a better result for the organization.

[Operator]

The next question is from the line of Brad Sturges with Raymond James.

[Bradley Sturges, analyst]

Just following up on Jonathan's questions, but maybe ask from the buy side. Just in terms of the cadence of acquisitions, you've had a pretty good year and obviously, a couple of good years here in terms of acquisitions with maybe less competition in the market as rates are rising. How do you think about the cadence now if you start to see more buying competition going forward for new build assets?

[Julian Schonfeldt, executive]

Yes. Thanks, Brad. We are definitely seeing a little bit more. It's not anywhere -- I wouldn't say it's anywhere near as hot as what we would have seen in '21 or prior years. But we are starting to see a little bit more competition with the bond yields having decreased a couple of months ago, we start seeing capital flow back in the sector, bond deals bounced back up a little bit, but we still continue to see our peers deploying capital and a little bit more competition. We're still able to source acquisitions at metrics that make sense for us. So still feel confident about being able to execute going forward. But yes, it will be a little bit more competitive.

[Bradley Sturges, analyst]

But I guess you've already done some deals with, I assume, some pretty reputable developers that would have confidence in being able to close, I guess, with CAPREIT. Would that continue to be an advantage or an opportunity to do more deals?

[Julian Schonfeldt, executive]

Absolutely. Our reputation is something that really helps us. Our very strong investments in operations and legal teams as well allow us to act quickly. We're a very reputable party. We're very dependable. And particularly in this market, that's something that our counterparties remember. So we're a big fan of repeat business, and I like to think that our counterparties enjoy the experience working with us. So yes, we do think our reputation should help us going forward.

[Mark Kenney, executive]

Yes. Just building on that, we've said this on prior calls, our reputation of being straightforward closers is key. But what that does, and we've worked on this for years now, is the nature of brokerage is you only really get invited to an opportunity when you know about the opportunity, and that relies on broker outreach. And really because of that good reputation we have in the market, we get visibility on almost every deal there is in the centers that we're focused on in Canada.

And the investment team does a fantastic job of triaging those deals. I think we've shown in Investor Relations in the past, we do hundreds of deals of underwriting, and that is directly tied to our reputation. We have a great reputation for closing. We get invited to look at opportunities, and it's very important to us to maintain that reputation in the marketplace by closing and doing what we say we're going to do.

[Bradley Sturges, analyst]

And I guess last question, a lot of moving parts in terms of transactions right now. But how should we think about leverage at this point? And I assume it comes down over the next few quarters, but is there a time line in mind in terms of where you kind of get back to stabilized levels?

[Stephen Co, executive]

Yes. So Brad, I think there is some deleveraging occurring, obviously, with the MHC deal and the ERES transaction. The #1 thing that we're going to do right now is pay down debt and also defer any mortgages that are coming up. But if there are opportunities such as kind of Julian has spoken on the call already around NCIB and acquisitions, definitely. And if they meet our hurdle rate and return profile, absolutely, we'll deploy that. So I can't really speak to where leverage is going to go, but it's definitely going down. And with those type of transactions, likely will go back up.

[Mark Kenney, executive]

We definitely will not be using leverage to enhance returns. We are very excited about hitting a new low in CAPREIT's history of leverage and would like to stay there until we get really clear view of where the interest rate markets are going to go. We've seen what can happen to valuations when the markets change. So I personally love pushing leverage down, but we'll remain opportunistic. We're just not going to use leverage to move returns.

[Operator]

The next question is from the line of Jimmy Shan with RBC Capital Markets.

[Khing Shan, analyst]

So just on the R&M expense side, I understand the toggle between CapEx and R&M. But it is still tracking in that 8% to 9% year-over-year growth. I guess I'm just wondering, shouldn't we see that pace of growth start to decelerate as we lap easier comps? And so how do we think about that pace of growth going into '25?

[Stephen Co, executive]

Yes. I think you're going to definitely see that pace of growth decelerate even into Q4. I think there were some timing of R&M that occurred in Q3, some elevated R&M that were, I would say, unexpected. But otherwise, if we look into Q4 of this year and into 2025, I think you're going to see a lot more moderate growth on that side.

[Mark Kenney, executive]

And Jimmy, I would only add that for the organization, $1 is $1, and we really want business decisions being made around the best use of cash. And we're seeing that play out now in our cash flow results with reduced CapEx. And we are absolutely focused with the team on the value of the $1 and where it ends up in the balance sheet, it's really just not of any interest of the operation anymore. I want them focused 100% on being efficient and $1 is $1.

[Khing Shan, analyst]

And, no, I understand that. I was just trying to get a sense of -- I mean, ultimately, it does drive your NOI growth. I'm just trying to see from a modeling perspective, whether that number should be closer to a kind of mid-single-digit range. And it sounds like that's what you're saying.

[Stephen Co, executive]

Yes. Yes, that's what I'm saying.

[Khing Shan, analyst]

Okay. And then just it seems like a lot of the rent pressure is at the higher end of the market. Certainly, that's what the data shows or at least what everybody is saying. Do you have a sense of what percentage of your portfolio would be kind of most exposed to where we're seeing the highest amount of rent pressure? I guess I'm thinking more of the recent acquisitions you've done, would they be -- are they in those markets where you could see their rents actually go down?

[Mark Kenney, executive]

I'll answer. For Julian, let him add color here. But we underwrite very conservative rents when we're doing these acquisitions. We really keep a focus on the rent roll and validating the in-place rent roll to be a number that we work around. This comes up a lot now, obviously, with investors, and I keep moving them back to the fact that we do believe that CAPREIT has the largest mark-to-market of any peer group and our runway for that reason is quite long. So when we're seeing data in the market about condo rents, for example, moderating, we go back to the core legacy part of the portfolio and say the runway is really tremendous there.

And there's no sign of rents on turnover ever falling in any sort of future that I can immediately see at this point. It's more the pace of acceleration that is a blend of turnover and getting those mark-to-market. But it's the core legacy portfolio that's really going to do its job here as we go through potential changes. And Julian has done a great job. The investment team has done a wonderful job on underwriting mid-market deals for the most part and being cautious on the luxury deals. Julian, I don't know what you would add.

[Julian Schonfeldt, executive]

No, that's exactly it. And it's not uncommon for us with the acquisitions that we buy to still have a gap between in-place and market. Will it be the same as a value-add building from the 1960s in Toronto? No. But it's not uncommon that some of the acquisitions will have a 10% gap between in-place and our conservative underwriting of market. And so as Mark mentioned, what we're buying is usually not the 4 seasons of apartments with all sorts of services and rooftop pools and that type of thing where it will tend to be a little bit more mid-market and well-located, well-constructed new construction properties. And we think those will withstand rent pressures better than that ultra-high end, high service model.

[Operator]

The next question is from the line of Kyle Stanley with Desjardins.

[Kyle Stanley, analyst]

Just building on kind of the cost discussion you were just having. I think we got a good sense of expectations for R&M. But when we kind of pull together the other line items that go into same-property OpEx, it looks like it was up about, let's call it, 5% this quarter. Is that probably a fair assumption as we think about the year ahead?

[Stephen Co, executive]

Yes. I mean I think I've spoken to you about this, Kyle, in the past. I mean what we do expect is some elevated increase in realty taxes. And then I think just a big component of OpEx is also utility costs. I mean, this year, we had a very mild winter. The weather is even today, this month has been pretty good. So we're expecting a similar type of weather pattern next year. I think I tend to be a little more conservative reverting back to more of an average 5-year. So therefore, if you kind of build in insurance premiums and others, I think we can probably see -- if weather patterns stay pretty low, it's more of the 3% to 5%, maybe on the lower end. But if we revert back to a more normal winter, then you can see on more of the higher end.

[Kyle Stanley, analyst]

Okay. No, that makes sense. Just going back to the earlier comments about seeing an uptick in roommating over the last little while. Can you elaborate on how that trend maybe is different today versus a year or 2 ago? And then do you look at this as almost a similar opportunity as maybe rents soften a little bit for similar household formation that we saw kind of emerging from the COVID period?

[Mark Kenney, executive]

Yes. The difficult part is this is all anecdotal basis on what we're seeing in the portfolio with applications and people living in our buildings. There's not real data we can get to say how many people are roommating, how many people are still at home waiting to enter the market. So it is a little bit difficult to say. With the emergence of more product, then there's moderation of rents, that does facilitate the release of the roommating scenario and people really just don't prefer to roommate. They want a privacy of living on their own, but it became a reality of the cost of living in Canada. And again, what we're hopeful and what we're watching is that in CAPREIT's case, it will release some churn and just allow us to get at the market rents more readily. So difficult to say at this stage. We are watching it closely. But anecdotally, within the portfolio, it's extremely widespread now, almost without exception. Every building is experiencing a degree of roommating.

[Kyle Stanley, analyst]

Okay. That's helpful. Just a last one. You mentioned higher expected credit losses as something in the quarter. Can you just elaborate on maybe what contributed to that?

[Stephen Co, executive]

Yes. I mean we had -- referring to bad debt. I mean, we have seen a little bit. I mean, on a normalized basis for the year, it's been pretty average. I think we are at 50 basis points. So it has not -- nowhere has gone up to like -- you could say, the COVID levels of, I think, around 70 basis points, but we're continuing monitoring it. But I wouldn't say it's anything to be concerned about at this point.

[Mark Kenney, executive]

Yes. What we're not seeing -- just for clarity, we're not seeing changes in economic circumstance leading to greater bad debt. What we're seeing are the challenges of the tribunals by province expediting evictions. So it has a lot to do with how efficient the provinces are with allowing evictions to happen and less to do with the creditworthiness. So it doesn't really -- the result is still the result, but a bigger driver of a reduction in bad debt would probably be changes to how tribunals are addressing nonpayment issues.

[Operator]

The next question is from the line of Mario Saric with Scotiabank.

[Mario Saric, analyst]

Maybe just sticking to the bad debt discussion. Do you think there may be any impact to those figures, like likelihood of it going north of 1% on the government's immigration policy announcements in terms of like for the government to get to their target population deceleration, it would require a pretty substantial exodus of existing nonpermanent residents out of the country. So how do you think about that in terms of potential bad debt expense going forward?

[Mark Kenney, executive]

I don't see it having as much of a bad debt effect as it will have relieving the pressure on demand. And I think that what we're watching, obviously, really closely is where in the market that shows up. It is likely to show up in our more affordable portfolio in terms of weakness. But at the same time, in Toronto, we've got this big condo delivery year happening next year. So it's to be determined. Again, what we really take comfort in is we're coming -- we're in the lowest apartment churn period in the company's history and a moderation of rents will follow on with an acceleration of turnover as markets become more balanced. And the roommating issue out there is to be determined on how much that will prop up the market as a counter to any sort of slowdown in immigration. So to answer your question, Mario, I'm less concerned about bad debt impacts and more focused on how it will play out in demand with optimism in case of CAPREIT that it will hopefully help our churn.

[Mario Saric, analyst]

Got it. Okay. Maybe just on that point, Mark, on the churn potentially going up, your mark-to-market, your new lease spread was 19% in Q3, so still quite strong relative to Q2. Like it's still 19%, though. So like how much market rent erosion do you think needs to happen to see the turnover meaningfully higher? Like for example, like I'm just thinking if a tenant is still seeing a 15% uptick in rent by leaving, like is that sufficient for the tenant to leave and look for something else? How much pressure do you need to see for that turnover to move higher?

[Mark Kenney, executive]

This isn't answering your question directly. But obviously, if our churn was to double, our market rents could fall by 50% and you'd end up in the same place, okay? What I'm looking back at is the historical churn rate of a balanced market in Canada was 35%. We find ourselves in almost top single digits, low double digits here. It is early days, like we are not seeing any sort of profound weakness at this stage at all. What we are seeing is sort of some lease-up activity in our new construction assets happening and if anything, a moderation of rents in the high end of the market. So it's early innings yet. This is -- again, I'm sitting back waiting here to see how profound this roommating holdup will be to the marketplace in our case. I think it affects everybody, but it is the most profound...

[Mario Saric, analyst]

And just my last question. You mentioned the new condos or the uptick in condo deliveries in Toronto that are taking place this year and will kind of be elevated next year. Can you talk about any kind of asking rent pressure that you're seeing in your core legacy portfolio in some of those similar markets like Davisville or other parts of Toronto in response to the deliveries coming online?

[Mark Kenney, executive]

Yes. Core legacy is holding up pretty well. If anything, we're seeing some -- where we were achieving rents higher than condo rents in core legacy, we're seeing a moderation of those rents, and we'll continue to see a moderation of those rents as the condo deliveries happen in Toronto next year.

[Operator]

The next question is from the line of Matt Kornack with National Bank Financial.

[Matt Kornack, analyst]

Just continuing on the train of thought around the nonpermanent residents. I mean we didn't build enough housing supply to have the numbers that came in over the last couple of years. So is the thought process that maybe as some of these residents depart, like you just have deconsolidation of that roommating and instead of having 3 or 4 people in an apartment, maybe it goes down to 2 and you wouldn't necessarily see the turnover? How should we think about it? Because, again, we didn't have a huge increase in housing supply during this period of time.

[Mark Kenney, executive]

Yes. I think I wish I had a better answer on this. There's not a lot of data, like I said. And we keep going through these different changes in the market where we've kind of never seen it before. All I can say is that in my personal experience, the roommating phenomenon has never been like this before. And that's all -- and you are 100% right, Matt. The lack of construction, the lack of build is -- we're going to see. We're going to see. But so far, no signs of real impact.

[Matt Kornack, analyst]

Yes. Makes sense. And then you mentioned kind of a little bit more of a yield maximization and holding a bit higher vacancy. And it's notable that the vacancy that you're holding is in markets that have had kind of better rent growth. So how should we think about that? Is 98% occupancy the new kind of place you'd like to be? Or are you going to try to get back up to, call it, 99% essentially full?

[Mark Kenney, executive]

I think no big change from that. Like I would expect our historical kind of occupancy of, call it, 97% to 99% would be where we're headed. We're going to really, as always, at CAPREIT, monitor those market rents closely, address pricing issues in specific buildings. No profound change in thinking there.

[Matt Kornack, analyst]

Makes sense. And then just lastly, on the acquisition side, should we expect any portfolio purchases? Or will it be kind of one-off acquisitions? And then maybe along those lines, Julian, like what is kind of the max that you can do per quarter? Just trying to get a sense as to how quickly you can redeploy the proceeds that you're going to get from MHC plus the wind down of ERES.

[Julian Schonfeldt, executive]

Yes. So given the focus on new construction properties, by and large, it's been one-offs. We haven't really seen too many portfolios go to market. I mean part of that is, I think, the market or vendors recognizing that there hasn't been a portfolio premium and that they generally had more success with smaller transactions. So we -- I don't think we're in a market where there's a lot of folks that look to launch large portfolios. And also just the nature of -- for the new construction vendors tends to be a little bit more merchant vendors as well. So we also tend to sell once they have product available. As mentioned earlier, we've got a really strong investments team. We're capable of underwriting scale and size, and we do have capital. So we have the ability to do it. And I have no doubt that we are the preferred partner should anyone be looking to do that.

But we also have other good opportunities, as mentioned by Stephen earlier, debt repayment is something that can also be done relatively quickly. And we also have the option of the NCIB on the table. The share price is currently implying, I believe when looking at some of the analyst numbers implying a 5% cap rate with 3% debt on it, too, which is also something attractive. And given the high liquidity of the REIT, something that could be actioned relatively quickly should management choose to do so. So we do have work ahead of us on redeployment of that amount of capital, but we're also in a fortunate spot that we've got a lot of very attractive levers to pull on.

[Matt Kornack, analyst]

Okay. Makes sense. And would -- I mean, I don't know if you have enough debt necessarily to repay. You do have line of credit draws, but would you potentially put cash into a term deposit of some sort in the immediate short term? Or will it all go to some sort of debt repayment?

[Stephen Co, executive]

Yes. No, that's an option. Really, again, it depends on when the mortgages come up for renewal. There might be a gap in between. So therefore, that's an option that we're looking at as well.

[Operator]

The next question is from the line of Michael Markidis with BMO Capital Markets.

[Michael Markidis, analyst]

Mark, I might be reading into this a little too much, but I think in your opening comments, you talked about the disposition of the MHCs and sort of wind down of ERES and having a reallocation of resources into the Canadian legacy portfolio. Now were you just talking about sort of management time and effort? Or is there actually a component of maybe -- I guess I'm speaking more to ERES, but you've got an operating and asset management platform. Is there any component of bringing some of those resources back into Canada at this point?

[Mark Kenney, executive]

CAPREIT, as you know, has an asset management platform in Europe. It also has a property management platform in Europe. We're looking at the viability of the property management platform given the reduced size platform. The asset management function, the finance team, the investment work and really all the head office infrastructures are based here in Canada. No changes to that whatsoever. And we obviously are contemplating any acquisitions in ERES right now. So we're looking at viability of platform, but we'll keep the market updated on that.

[Michael Markidis, analyst]

Okay. That's helpful. I guess you talked about a lot of transformation and culture change, which has been at least evident from the outside looking in with respect to your $1 is $1. And you've also added a fairly significant amount of new assets, and that's something that's, for the lack of better term, new for CAPREIT. So have there been any growing pains or lessons learned on the integration and maybe just in terms of the differences in leasing of the recently completed property versus your legacy product?

[Mark Kenney, executive]

Well, the good news is that the majority of the new construction assets that we bought are in the mid-market. And the difference between those mid-market assets and I'll say the high-grade core legacy are not that big. On some of the ultra-high qualities, it is a different business, definitely and the leasing requirements there. We are learning how to be better there, but we've got a great team, both at the head office on our marketing side, on the pricing side and on just the general support side of the field. I'm pretty confident there.

I just can't help but use it, Mike, as another opportunity to focus on cash flow, though, just going back to the attribute of these new assets and the focus of the company. It's $1 is $1. But what we've learned in terms of learnings is that when you have a 20-year period of valuations ever rising and refi is easy and less costly on mortgage renewal, we've learned that the market can change. And so the focus on reducing CapEx and living on retained earnings and just an overall focus on cash flow at any cash flow being paramount, this is the focus of the company, and it's paying off. We're seeing it showing up in the results. I'm really excited about it. The team is really excited about it. And yes, we're not relying on top-up financing is a goal of what we're trying to do here.

[Michael Markidis, analyst]

Okay. Great. And then last question for me. I guess it was this dramatic change in rates that caused the window of opportunity -- I mean maybe it wasn't the catalyst, but it created a window of opportunity and a competitive advantage for CAPREIT to start acquiring in the new construction market. The rate cycle now, we're kind of going in the opposite direction. So I don't know if that window is getting harder or getting closer to closing. But if we are going to see -- and I recognize you're focused not on the ultra-high end, but on the mid-market, but if we are going to see a little bit of softness in rents and maybe a little bit of short-term turbulence, notwithstanding a long-term good story, do you think rather than just elevated rates being an issues for developers, there's a little bit more concern on lease-up risk. And does that extend the window, I guess, is part A. And part B, is CAPREIT willing to buy assets maybe on a vacant or very low occupancy basis and assume some of the lease-up risk going forward?

[Mark Kenney, executive]

Well, I'll let Julian finish the details, but I'll give you the big picture. A couple of things here. So number one, we think that the development that's happening out there is shifting to rental, okay? So while we may not be buying product at steep discounts like we saw during the distressed period, we think that there's a good pipeline of new rental for the company to look at in the years to come, okay? Buying it correctly will be obviously key, but we've got a great team to do that.

Secondly, to maintain the sort of our renewal approach, we have development lands. And those development lands aren't really easily tradable in the marketplace right now. And we're now thinking ahead to keeping the renewal of the company going by possibly building on our own lands, not something that you can expect us announcing in the short to midterm, but that's what we're readying the company for in the longer term. The runway will remain very, very strong.

In terms of our propensity to take lease-up risk, we love it. Like we'll do that. If we're less likely to find it because most of the distressed deals would have come to market maybe 2 years ago, and we're now seeing the properties that are more mature in nature. But let me just move it to Julian for a second to kind of give you the current market environment and what he thinks.

[Julian Schonfeldt, executive]

Yes. So echo everything that Mark said, for the second part of your question with the lease-up, we've got a really experienced team. We're in -- we're active in all the markets that we're looking to acquire in. So we've got a really good read of the market, and we're able to underwrite it. So we're happy to take lease-up on if needed.

With respect to development going forward, Mark mentioned it, the condo market is really suffering right now. So a lot of the developers have been talking about or moving towards rental. That said, with the point that you made, the optimism for developers to take that big risk on would have went up with the interest rates coming down. But at the same time, the population growth may cause a little bit more cautiousness going forward. So combined with the condo market that's failing and potentially a little bit of softness on the population growth remains yet to be seen, but I wouldn't be surprised if that impacted upcoming supply as well negatively.

[Michael Markidis, analyst]

Okay. And sorry, I promise the last one this time. But I guess you've talked about your asset-light development strategy. I'm not even sure if that slide was removed from the deck. I don't remember seeing it this time around, but it sounds like you're maybe prepping thinking about longer-term transitioning back to some on-balance sheet development. Did I pick up on that correctly or...

[Mark Kenney, executive]

Yes. I think the reality is that the market for land is, in this environment, become challenged. And the strategy that our Board is highly engaged in is highest and best use of that land going forward. And we really just want to keep the high grading of the portfolio moving and the focus on cash flow being paramount now to what we're doing. So we're giving a lot of thought. We've got some amazing land, and we don't want to be reliant on the development market to deliver us product in the future. But the investment team is doing a great job of finding those opportunities for now, and I don't see any slowdown in that in the short to midterm. So this is more of a long-term vision now for the portfolio. And why would we not give a deep thought to what are really irreplaceable locations?

[Michael Markidis, analyst]

Understood. Exciting times.

[Julian Schonfeldt, executive]

For now, Mike, I'll just reiterate though, and I think Mark was touching on this point, but like the acquisitions that we've been looking at right now have been at a discount to replacement cost and in some cases, pretty significant. So to just layer on to Mark's comments, I mean, that's maybe something for the deeper future. But for now, if we can buy something at 20% below the cost it takes to rebuild it without having any drag on FFO, without having any development risk, in most cases, without having to worry about lease-up or dealing with efficiencies immediately after, we view that as by far the most compelling path for us.

[Mark Kenney, executive]

And the one thing we don't talk -- we haven't talked a lot about, we've got a very strong Board with development experience and that are helping us think through the longer-term strategy. But expect no announcements from CAPREIT in the near and midterm. As Julian said, the team is doing such a great job of finding discounts or replacement cost deals in great locations that for now, we're staying on the path we're on.

[Operator]

Our last question today comes from the line of [ John Crosotti ], a private investor.

[Unknown Analyst]

Yes. I have a question. With all the sales that you've done, is there any guidance on the -- if there'll be a special tax distribution? And will be there any cash component this year to help pay the tax for unitholders that have it in nonregistered accounts?

[Stephen Co, executive]

Yes. So in the past couple of years, we have made significant dispositions. And again, those are older assets. So you can expect there will be a special distribution. As -- and recognizing in Q4 and there are some transactions, I think there was also on the ERES call yesterday, there are some timing of transactions that are uncertain around the ERES disposition, whether it happens in Q4 or Q1. So we're working through those numbers right now. As for whether there is a cash or a component, we're still evaluating that, and that's something we're giving consideration to.

[Operator]

This will conclude our question-and-answer session for today. I would now like to pass the call back to Mark for closing remarks.

[Mark Kenney, executive]

Thank you, operator. I'd like to thank everybody for your time today. 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]

This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.