Canadian Apartment Properties Real Estate Investment Trust

TSX:CAR.UN

Earnings Call Analysis

CAPREIT Strategizes on Portfolio Quality

In 2023, CAPREIT focused on modernizing and improving its portfolio's quality through strategic acquisitions like the Lancaster for $22.5 million and Hub Place for $68 million, and dispositions totaling over $700 million. These transactions aimed to replace older, non-core assets with high-quality properties, enhancing geographic exposure and portfolio quality. Financially, CAPREIT strengthened their liquidity, with $340 million available on Canadian credit facilities and a conservative debt management approach. Their debt to gross book value ratio was marginally above target at 41.6%, but within covenants. The company's strategy now emphasizes quality over expansion, enhancing stakeholder value, improving ESG performance, and participating in initiatives to address housing affordability in Canada.

Noteworthy Performance Amid Portfolio Optimization

The company's strategy transformation merits recognition. Despite a shrinking portfolio size due to the purposeful disposition of over 2,000 suites and sites, they've seen a robust 99% occupancy rate and an 8.2% increase in average monthly rent compared to the previous year. Their meticulous approach to repositioning allows for older, noncore assets to be replaced with strategically chosen new builds in prime Canadian markets. A disciplined investment approach ensured value was maximized during these transactions, with sales often meeting or exceeding IFRS values and purchases made accretively.

Revenue and Margins Ascend as Costs Are Kept in Check

In the face of a smaller portfolio, revenue growth stood strong, buoyed by a 5.9% uptick that fed into a 7.4% increase in net operating income (NOI). This growth can be attributed to robust rent increases and diligent cost control measures, which together pushed up the NOI margin to 64.9% in Q4, a substantial 90 basis point improvement. For the full year, operational revenue growth was 5.8%, with NOI margins for both total and same property portfolio increasing by 40 and 30 basis points, respectively, reaching around 65%.

Enhanced Financial Standing and Strategic Flexibility

Moving beyond the asset management realm, the company's financial durability remains evident with a firm liquidity position. They maintained $340 million in available capacity on their Canadian credit facility by year-end 2023, while holding $1.5 billion in unencumbered investment properties. This, paired with a conservative debt strategy that fixed interest costs, secures a strong cash position for future strategic movements.

Ambitious Aspirations for the Development Program

The development initiative has already seen success with the sale of significant buildable square footage in Montreal. This inventive model not only monetizes land value but also aids in reallocating capital towards other strategic ventures, contributing to new residential home construction. These measures reflect an embrace of value creation via modernization and capital recycling, laying the groundwork for further progress.

Forward-Looking Financial Prospects

Looking ahead, Funds From Operations (FFO) have increased, with FFO per diluted unit up 3.8% to $0.602 for Q4, driven by both organic growth and strategic repurchases under the company’s buyback program. Annual FFO payout ratio settled at a modest 60.5% for 2023, reflecting a balance in distributing earnings and reinvesting in growth. The positive impact on Net Asset Value (NAV) per unit from share buybacks is affirmed to have been encouraging, shaping a promising forecast for 2024.

Projections and Goals for 2024

The company has set its sights high for the upcoming year with plans to dispose of another $400 million in noncore assets. Allocations from these sales will be judiciously divided between debt repayment, acquisitions, and the share buyback program. This strategically composed triangulation underpins a forecasted FFO growth of 3% to 5% year-over-year, as acquisition activity likely to closely mirror the disposition initiatives while aiming towards value accretive targets.

Market Conditions and Operational Challenges

Addressing operational costs, the company anticipates a slight elevation in operating expenses (OpEx) for 2024, as seen from year-over-year reductions in discretionary CapEx. Property taxes are expected to increase across the portfolio, prompting continued efforts to mitigate these potential impacts. Strategic asset management and procurement enhancements are predicted to improve cost bases over the long term, fortifying the company's financial health against market volatility and inflationary pressures.

Sustained Market Strength and Resilience

The company leverages the robust momentum in the Canadian rental market, anticipating turnover spreads to remain strong into the traditionally more vibrant spring and summer leasing months of 2024. This bodes well for future growth and reinforces the company's confidence in sustaining its market-leading position.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, and welcome to the Canadian Apartment Properties REIT Fourth Quarter 2023 Results Conference Call. My name is Alex. I'll call be coordinating the call today. [Operator Instructions]I'll now hand over to your host, 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; andJulian Schonfeldt, our Chief Investment Officer.Let's start with a quick overview of our operational performance. On Slide 4, you can see that our occupancies held high all year, with 99% of our suites in Canada occupied on December 31, 2023, and 2022. Across our Canadian residential portfolio, occupied AMR was $1,516 as of year-end, which represents an increase of 8.2% since 2022. This market-driven growth reflects the increasingly tight rental fundamentals that we're continuing to experience across Canada. This past year, demand for affordable rental accommodation grew higher again as our population expands further and the housing gap widens. Later, I'll speak more on the work that CAPREIT has been doing to help turn around the trajectory of this crisis.Turning to Slide 5. I'll take a moment to go through our financial results for the fourth quarter. Our strong rent growth throughout 2023 drove the 5.9% increase in operating revenues, while our NOI was up by 7.4% as compared to Q4 of 2022. This was achieved despite the size of our portfolio, having a net decrease of over 2,000 suites and sites during the year, a result of our repositioning initiatives that Julian will expand on shortly. Combined with our prudent cost control measures, which remain a top priority for us, we are pleased to report a 90 basis point increase in our NOI margin to 64.9% for the fourth quarter. I'd like to remind everyone that this includes higher repairs and maintenance costs associated with our capital allocation strategy.This year, we started scaling back on in-suite and common area capital expenditures, and we reallocated a part of that into additional repairs and maintenance work. This was a strategic initiative that we implemented in response to the tight rental market that we're now operating in. This capital redeployment increases our property operating costs as compared to 2022, which negatively affects our margins. However, it lowers our overall capital expenditure, and this positively impacts our long-term cash returns. We're looking forward to seeing the merits of this property management strategy show in our future financial results.FFO increased by 2.2% compared to Q4 of 2022 due to our organic growth as well as lower trust expenses, partially offset by higher interest rate costs. Along with accretive purchases made on our NCIB program in early 2023, our FFO per diluted unit was up by 3.8% to $0.602 for the fourth quarter of 2023.Referring to Slide 6, we've included some key financial metrics for year ended December 31, 2023, which I'll briefly highlight. Strong rent growth increased operating revenues by 5.8% and combined with cost mitigating measures, net operating income grew by 6.5%. The NOI margin for the total and same property portfolio increased by 40 basis points and 30 basis points, respectively, to 65% and 65.3% for 2023. Again, organic growth, lower trust expenses and accretive NCIB repurchases all positively contributed to growth in our FFO per diluted unit, which was partially offset by interest rate increases. The result was a 2.9% increase in FFO per diluted unit to $2.396 for year ended December 31, 2023. We maintained our annual rate of distribution steady at $1.45 per unit and our FFO payout ratio was 60.5% for 2023.On Slide 7, we summarized our current strategy, and we're very proud of the progress that we've made on that in 2023. CAPREIT strategy has always been centered on the creation of value for our unitholders. However, our operating environment has changed in recent years, and we've established a new and improved addition of our strategy to align with that. Today, our objectives revolve around the modernization of our portfolio and the recycling of capital in order to create value. I'll let Julian and Stephen expand on these initiatives, but an overview, we've been very focused on optimizing our portfolio and operational efficiencies. That means we're disposing off our older, noncore properties, and we're reinvesting the net proceeds into strategically aligned new build rental apartment properties in Canada. We've also been investing in our NCIB program, depending on the capital market conditions and the other opportunities available for capital redeployment, such as paying down higher interest debt.In 2023, we invested $101 million in our NCIB program to repurchase and cancel approximately 2.2 million trust units at significant discounts to NAV. Our development program is another increasingly important component of our strategy. We've been working on the identification, entitlement and sale of our excess land to developers, which not only generates incremental funding that we can then reinvest in our core business, but it also helps to contribute to the supply of new homes for Canadians.I'll now turn things over to Julian to provide a more detailed update on our strategic progress.

[Julian Schonfeldt, executive]

Thanks, Mark.Turning to Slide 9. We're very excited to have achieved our annual target in 2023 with the sale of over $400 million in noncore properties, primarily located in regulated lower-growth Canadian markets. We've disposed off these older properties at prices that are at or above their IFRS fair value, and we've reinvested approximately $300 million of the net proceeds into new purpose-built rental apartments located in Canada's most attractive, highest density markets where long-term fundamentals are strongest. We're buying these high-quality recently constructed assets at a discount to what it would cost to build today, and they produce higher returns that are effectively unrestricted by rent control. They also have lower capital investment requirements, superior energy efficiency and overall, they strengthen the risk return profile of our portfolio.Through this repositioning program, we're diversifying our tenant base and upgrading the average age, geographic exposure and quality of our properties. In turn, we are enhancing the quality of our long-term earnings potential. We're happy to see that these on-strategy assets now represent 12% of our Canadian Apartment portfolio, up from 9% this time last year, and we're excited to continue increasing that allocation in the years ahead.On Slide 10, we showcased the 7 on-strategy properties that we acquired this past year for an aggregate purchase price of $304 million, excluding transaction costs and other accounting adjustments. Most recently, in the fourth quarter, we completed 2 acquisitions of newly built rental properties located in highly coveted communities in British Columbia. First, in November, we closed the purchase of the Lancaster for $22.5 million. This 48-suite property was built in 2022 and has Ocean views from its location in the metropolitan Victoria area of Southwestern BC.In December, we acquired Hub Place, a brand-new 12-storey concrete, purpose-built rental apartment containing 114 high-quality residential suites and over 5,000 square feet of commercial retail at grade. The building is located beside one of the most important transit hubs in Vancouver, and we use net disposition proceeds to purchase this premium property following lease-up for $68 million. Acquiring a newly constructed concrete prime located building at this attractive price significantly below replacement cost and without having to incur any of the development or lease-up risk, perfectly demonstrates our strategy in action.Slide 11 displays a sample of noncore dispositions completed throughout 2023, and you can really see the type of assets that we're selling here versus the high-quality properties that we're buying as shown on the previous slide. In the fourth quarter alone, we closed on the sale of an aggregate 362 suites for a combined $54.2 million in gross disposition proceeds. Combined with the Lancaster and Hub Place deals, this brings our total transaction volume to over $700 million worth of strategic acquisitions and dispositions in 2023. Our purchases and sales together have the objective of modernizing our portfolio and improving its quality and geographic exposure. These dispositions all represent older properties, which we've identified as noncore due to their low financial return, geographical activities or operational challenges. Looking ahead into 2024, we're again aiming to dispose of over $400 million worth of our off-strategy properties that will further upgrade the quality of our Canadian portfolio and enhance its long run returns.I will lastly expand on our asset-light development program, which we've highlighted on Slide 12. After many years of liquidative growth, CAPREIT accumulated one of the largest portfolios of residential accommodation in Canada, and that came with a sizable amount of excess density potential, particularly given the substantial present CAPREIT has in Ontario and B.C. markets. This year, we've been actively combing through our portfolio to identify, entitle and monetize our high-value underutilized plan. In March of 2023, we celebrated the program's first disposition of approximately 280,000 square feet of buildable GFA in Montreal, which we sold for $17.25 million. We were able to redeploy those proceeds shortly thereafter, with the purchase of our new build property in Dartmouth, demonstrating the benefits of this development program in the context of our overall capital allocation strategy.This represents the essence of the model. We're servicing the land value embedded through our portfolio and effectively crystallizing the potential development profit upfront without having to take on any development financing or lease-up risk. We can then reallocate the capital into our core strategic initiatives while enabling our development partners in the construction of new residential homes for Canadians. We're pleased to be able to contribute to the supply solution in this way and help with the intensification of the communities in which we're invested.We're excited to announce that our 2 [ data fill site ] applications were recently unanimously approved at Community Council and City Council in Toronto, and we're looking forward to finalizing those applications soon.I will now turn things over to Stephen for his financial review.

[Stephen Co, executive]

Thanks, Julian, and good morning, everyone.Our liquidity position remained robust throughout 2023, as you can see on Slide 14. We got $340 million in available capacity on our Canadian credit facility at year-end, which was incurring a weighted average interest rate of 6.5%. We also have $1.5 billion worth of unencumbered investment properties that provides additional access to liquidity should we need it. Our ladder mortgage profile in Canada carries one of the longest terms of maturity in our peer universe with a weighted average term to maturity of 5.4 years as of December 31, 2023. This conservative approach to financing is also evidenced by the fact that we've fixed 100% of our interest costs on our Canadian mortgage profile, which carried a weighted average effective interest rate of 2.95% at year-end. Next year, we've got $397 million in Canadian mortgage maturities, which will provide incremental top-up financing upon renewal.Our liquidity and active debt management remains a key component of our overarching strategy and supports our ability to execute on our strategic endeavors. To that end, we're excited to have launched our At-The-Market or ATM program yesterday, which will allow CAPREIT to cost effectively raise capital from time to time when favorable market conditions exist. This provides us with another tool that adds to our capital-raising capabilities and further enhances our financial flexibility as we execute on our capital allocation strategy.Slide 15 displays our well-staggered Canadian mortgage maturity profile. And here, you can see that we have no more than 13% of our total mortgage debt coming due in any given year. Going forward, we'll continue to prudently manage our mortgage financing in order to minimize volatility and renewal risk as we've done to date.Turning to Slide 16. Our debt metrics all remain safely within the limits of our covenants. Our debt to gross book value ratio was marginally elevated at 41.6% as of December 31, 2023, which is slightly above our target range. However, it still remains conservative, and we are actively managing our leverage as part of our overall strategy.I will now turn things back over to Mark to wrap up.

[Mark Kenney, executive]

Thanks, Stephen.Our new addition of the CAPREIT strategy revolves around getting better instead of getting bigger, and we did just that in 2023. We accomplished a lot, and we're becoming a better place to live, work and invest. At CAPREIT, we're focused on upgrading the quality of our portfolio, enhancing the living experience of our residents, improving the communities in which we operate and ultimately increasing returns for our unitholders. Internally, we've also been optimizing our people, technology and organizational structure to ensure alignment with our renewed strategy for success now and in the future. Going forward, we will continue to focus on executing on our refined strategy and our vision for value creation for our residents, our people and our unitholders.We also recognize the role we play as a core provider of high-quality, safe and affordable rental housing in Canada, and we're prioritizing our commitment to helping with the solution to the housing affordability and supply prices. On that front, we've been continuing to work with our peers through the Canadian rental housing providers for affordable housing initiative and its website foraffordable.ca, where you can learn more about all the ways in which we're advocating for changes in government policies and programs to address these important issues.This year, our environmental, social and governance performance has also remained a focus for us. We plan to release our 2023 ESG report this upcoming June and we encourage you to review that to learn more about the meaningful strides we're making on our ESG priorities.In summary, we're very pleased with the progress we've made this year on the execution of our strategy, and we want to thank all of our stakeholders for their ongoing support. Moving ahead, we're excited to continue optimizing on all 3 pillars of our business to be the best place to live, the best place to work and the best place to invest.With that, I would like to thank you for your time this morning, and we would now be pleased to take your questions.

[Operator]

Thank you. [Operator Instructions] Our first question for today comes from Frank Liu of BMO Capital Markets.

[Frank Liu, analyst]

Just want to touch on the acquisition side. Has done several deals in the B.C. this year and looking at how in 2024, is there any specific market you see more opportunities than others?

[Mark Kenney, executive]

I pass it to Julian, but we're always opportunistic. We've got full scan on the market coast-to-coast. We don't particularly pick a market and go hunting. We tend to pick the entire country and analyze, but I'll let Julian talk about where he sees the opportunities today.

[Julian Schonfeldt, executive]

Yes. Mark got it right on. The market continues to be favorable, if you're an acquirer. The competition is nowhere near the level that it used to be in the hotter market. So we are scanning coast to coast. Everyone knows that we are an active buyer, and we're seeing everything and underwriting everything. And it will be a matter of what hits our return thresholds and which properties we find attractive.

[Frank Liu, analyst]

Got it. And then on this type of newly constructed assets, do you think the pricing of this type of product will become more attractive in 2024 versus what you have done in 2023?

[Julian Schonfeldt, executive]

Well, we think that the opportunity is not a permanent one. Most of the buildings that the investment team is focused on were probably conceptual, has been launched 7 years ago in some cases, so the market has obviously cooled during this interest rate period, but that's where we remain opportunistic and disciplined in terms of our mind. To be fair, we've never known what the future help in terms of acquisition from day 1. You can only analyze what's in the market and stay disciplined with your criteria. So I think it really stays true for the new-build acquisitions. There's really not too much deviation from that.

[Mark Kenney, executive]

Yes. All the acquisitions that we've done, and we've been looking at candidly have been at discounts to replacement costs, and they've been in the face of a higher interest rate environment. So for now, we're still seeing at the buyer's market. But if we were to see interest rates go lower, just given where the replacement costs are. And what we do is attractive opportunities. There is potential for them to go up, and that is our expectation. But for now, it still remains a buyer's market.

[Frank Liu, analyst]

Got it. That's fair. Just want to switching gears to the G&A side. If I didn't ask correctly this quarter, G&A net of the restructuring costs came in around like $11 million this quarter. It looks a bit low relatively to last Q and the prior year. Is this got a run rate for 2024?

[Stephen Co, executive]

Yes. I think I would say actually use the full year as a run rate. I mean, we've been making a lot of adjustments and optimizing teams, factoring in salary increases whatnot, I think 2023 is a pretty good run rate for 2024.

[Mark Kenney, executive]

We remain very optimistic and focused on improvements in this area and look forward to more positive announcements on that front as we go through 2024.

[Frank Liu, analyst]

I see. Yes. So I guess, $15 million-ish will be... Sorry...

[Mark Kenney, executive]

Yes, sorry, I keep cutting you off there. Just to understand it, it goes to the strategy of being better, not bigger. The company was built for growth. And as we've said in the past, we were serial issuers of new capital. That is not our focus now. Our focus is on better, not bigger. And I'll use that opportunity, and I'll say it as many times as I can on the call today. I'm so incredibly proud of our results because we are high-grading this portfolio at a pace never seen before in an accretive way and growing earnings, which I think is a rare event. Like I know it's been relatively small in bite-size announcements. But when we look back on what the investment teams accomplished this year and what the company is going through in terms of its transformation, we are getting better and the results are also getting better. And I don't think that can be understated enough. So how does that relate to G&A, I get them using it as an excuse. But to talk about it, I'm very proud of it. But the team that we're focused on for the new strategy is it's going to be different.

[Frank Liu, analyst]

That's great comments. Just lastly on the property tax side, we got heard from our peers that property tax is going higher degree in 2024. Do you have a roughly like a preliminary just like things on property tax inflation across your portfolio in 2024?

[Mark Kenney, executive]

Yes, I would say generally, we're expecting property taxes to increase across the portfolio. We are working with our realty tax advisers to mitigate some of those cost increases. But it is expected, I would say, general comments that you're getting to the peers are exactly the same.

[Operator]

Our next question comes from Jonathan Kelcher of TD Cowen.

[Jonathan Kelcher, analyst]

Just to clarify before I start here, just to clarify on the G&A, that would be 2023 ex the onetime charges looking at it.

[Stephen Co, executive]

That's correct.

[Mark Kenney, executive]

Yes. That's correct.

[Stephen Co, executive]

Sorry, Jonathan, Just to add on what Mark just said, there continue to be opportunities for us to refine that G&A going forward in 2024. But I would say, just use that as a model for your 2024... I

[Mark Kenney, executive]

T goes without saying that some of the improvements happened throughout 2023. So you've got the full year run rate improvement for 2024. And we did, to be fair, have a heavier lift on changes in the back line of the year, call it, last Q3, Q4.

[Jonathan Kelcher, analyst]

Okay. On the property management strategy, are you most of the way through that? And I guess, what I'm really asking here is your expectations for operating expense growth in 2024 and your total CapEx expectations?

[Mark Kenney, executive]

Well, we spent a little bit of time in the slide deck on this because we're seeing kind of 2 things at the same time. Number one, we've got changes in general scope going on with respect to common area capital investment and in-suite upgrade investment when the market is as hot as it is and the turnover is as low as it is, and you just don't get a return, then those investments fall off, but what replaces those investments to a certain degree, is an impact and you still have to maintain the common areas and you still have to do minor repair work on turnover. So that investment program of high improvement has been replaced with a more traditional property management approach. And that has an impact on our cost base. Despite that, we're really proud that the team is holding up and revenues are outpacing those costs, but that's part 1, okay? The second part of this is just an enhanced procurement department, policies, processes, tendering, just a whole different approach there. We're seeing some improvements on that front. So the core run rate for the future is going to be fantastic. We've got this adjustment period where we're walking away from our value investment strategy of putting large amounts of capital into repositioning our assets for rent maximization to a market that delivers it without us. So that's great news for the long term, and that's what we're trying to get to in the presentation, but it is a little bit difficult to understand because I don't think all of our peers are doing this. To be fair, our peers are not experiencing the low turnover rates that CAPREIT is. So our markets and where we're positioned, we think the best locations in Canada have obviously been under the most pressure for affordability and people to start moving it in the numbers they used to.

[Jonathan Kelcher, analyst]

Okay. So I can take from that, that OpEx will probably still be a little elevated for 2024.

[Mark Kenney, executive]

I would say, Jonathan [indiscernible] we really started this program in like Q2 of last year. So if you wanted to, you have a base effect on Q3, Q4, that will have more of an inflationary...

[Jonathan Kelcher, analyst]

Yes. And same, I guess, on the overall CapEx, right? I think you were just $300 million.

[Stephen Co, executive]

Yes. You can see like year-over-year, we've already reduced our total discretionary CapEx for the Canadian side. Excluding energy and conservation initiatives, we've reduced it by around $30 million. So we're very happy.

[Mark Kenney, executive]

We're very happy with that. And again, you don't want to start fully projecting this yet, but it goes without saying our new strategy of new construction assets are going to be CapEx light, and that will also start revealing itself as the percentage of the portfolio gets larger in that category. So we are very, very excited about the attributes of the strategy, but that's something else that will really be running in our favor.

[Jonathan Kelcher, analyst]

Okay. Well, a good segue to my next question. On that, you talked about selling another $400 million in 2024. Do you have a target on the acquisition side?

[Julian Schonfeldt, executive]

So for us, it's really been a matter of raising capital through the dispositions and then allocating that between debt repayment, acquisitions and the share buyback. And it's a dynamic decision that we make. But last year, there was a bit of NCIB. I think this year, we probably target a little bit more on the acquisition side, given the discounts to NAV has tightened a bit, and we continue to see some pretty compelling acquisition opportunities. So I think it will more closely track the disposition activity that we see.

[Mark Kenney, executive]

And I would only add that targets are really only realized through the discipline of selling and the discipline of buying. The team is very disciplined in making sure that we realize at a minimum IFRS value or more and extremely disciplined on the buy side that it's accretive. And so that makes, how you forecast that out is anybody's guess, quite frankly, but you can look at the volumes and kind of draw your own conclusions. And I'm not saying that we know when we're not telling it. It's just something in the marketplace that if the market was to change and loosen up on the valuation of the sale properties and tightening up on the valuation on the buy side, then the targets were to move quite a bit.

[Julian Schonfeldt, executive]

Yes. I mean one point that Mark kind of mentioned earlier, but everything that we continue to see now is that cap rate on the disposition side and the acquisition side is that similar cap rates. So as Mark mentioned, going through this, we're able to high grade and improve the overall quality of the portfolio without suffering any dilution, which I think is fairly unique and pretty impressive results of the investment team's very disciplined approach.

[Mark Kenney, executive]

We talked about the attribute of reduce CapEx. I think we've talked in the past about the fact that these assets will offer geographical diversification, but also deregulation. We also have talked about a variety of other attributes like a lot of these new construction buildings have been built with CMHD financing it has an affordable component. So we're not abandoning our mission in serving the affordability space in Canada. We're actually enhancing it with every acquisition because the opportunity to the financing. We're very proud of that. But we keep going back and we're really celebrating here in the office, the strong results that are coming along with the recycling of the portfolio.

[Operator]

Our next question comes from Kyle Stanley of Desjardins.

[Kyle Stanley, analyst]

So it's great to see the mark-to-market opportunity or the gain to lease continuing to expand during what is traditionally a seasonally weaker quarter in the fourth quarter. Where do you see the turnover spreads trending as we approach the stronger kind of spring, summer leasing months in 2024?

[Mark Kenney, executive]

In many of the properties, we're reaching the top of affordability. So I don't expect the mark-to-market rents to change too much. We're hopeful that it releases some units in our turnover, which will help release revenue gains. But at this point, I'm not getting any sort of vibration from the field that rents are continuing to go up. I think we've hit a spot here that's quite flat. And you may see things like move somewhere in the range of 25% to 30%. But it's now the turnover that is really the key metric that we should all be focused on at CAPREIT, not the mark-to-market rent, that's almost just now built in. So that would be my first comment.In terms of turnover, the housing situation is just so profound now. Never in my career have I seen a situation where people have nowhere to go. And so therefore, we are at structural low turnover, albeit this is the season where things should pick up a little bit. But I wouldn't be expecting anything to surprise me for the next couple of quarters.

[Kyle Stanley, analyst]

Fair enough. And I think you've said in the past, turnover probably in the low teens, maybe 10% to 12%, you're still comfortable with that outlook?

[Mark Kenney, executive]

Yes. I do remain optimistic though, going back to our new strategy of the market buildings, new construction, those are still turning over traditional numbers because they're market rents. But at the same time, the team is capturing higher rents on those turnovers than definitely pro forma, but it's just more productive in the marketplace. So it's a way of feeling at the market on turnover, but still having a latitude for most of them to adjusting renewals to market. So this is another part of the strategy that worked so well in the current environment that we're in. And quite frankly, we don't see a change to this environment. People have been asking, is this a 5-year event, is this is a 10-year event? From where I sit, I don't see any impetus of change over the next decade at a minimum. I think it's going to take longer than that to bring balance back into the market. So with that in mind, we feel incredibly comfortable with the strategy of new construction assets as being a great way to tap into the changes in the ever improving housing market.

[Kyle Stanley, analyst]

Right. Okay. Maybe just shifting over to the asset-light development program. Obviously, it looks like good progress on the Davisville development approvals thus far in the quarter. Can you just comment on the current market for density land values in the GTA and maybe what your expectations are with regards to monetization as we progress through the year?

[Julian Schonfeldt, executive]

Yes, I think, Kyle, we seem really proud of getting those 2 properties over the line. That's about 600,000 square feet within meters of the Yonge & Davisville subway stations, it's just really [ primo ] infill development opportunity. And so really glad, really proud of the team for getting that done. I think right now, the market for land and land values are a bit softer. I mean these are AAA locations and just amazing opportunities, but the land values are definitely a bit softer now. The beauty of our program is we didn't really spend a material amount doing this. We don't have an acquisition facility that's bearing interest and putting pressure on us to do anything. So from our point of view, as Mark mentioned at the beginning of the call, we're focused on value maximization. And so we're open to selling them now, but we're not compelled or in a rush to and just given the dynamics we may fit and pause on those until there's a better market. Just given the nature of the assets and not wanting to sell them for too little of a soft market.

[Mark Kenney, executive]

It's another opportune moment for liquidity when we need it. So as Stephen talked, we've got a great debt ladder. But if we choose not to get into the refi market, we have optionality there. And the mood in the office, the CAPREIT is to hold property until we feel that we've maximized value. So just because they become entitled, I don't think is an indicator of a liquidity event at all.

[Kyle Stanley, analyst]

Okay. That makes sense. And just one last one for me. As part of your kind of government relations initiatives, improving the current state of the housing market, has there ever been a discussion of adopting a capital gain deferral mechanism kind of like what we see in the U.S. with the 1031 exchange. Has that come up at all? Or do you believe that would be beneficial to helping the situation?

[Mark Kenney, executive]

I think it's a fantastic idea. Look, it has been discussed. We've been taking the policies that work worldwide to Ottawa and sharing that with the federal government. And this is really in their corner. But it's an incredible idea. We've got all kinds of creative ideas. And quite frankly, even if it was to roll over to nonprofits at some sort of advantage, that could free up assets that can roll into nonprofits and give them an advantage, and we're happy to see that advantage in the right hand. So there's all kinds of interesting things there, Kyle. So I urge you to write it online and share your views and tell your neighbors and spread the word. It's a great idea.

[Operator]

Our next question comes from Brad Sturges of Raymond James.

[Bradley Sturges, analyst]

Just to go back to the question around the development entitlement process and application. Just curious, you've got 3 outstanding today, you've made obviously, good progress on the Davisville site. Just are there any other sites in the near term that we could see in terms of applications being submitted?

[Mark Kenney, executive]

Yes. So if you look through the materials, we've said that we've identified about 6 million square feet just in the Toronto alone of potential density there. So the team is working in the background, our internal policy or view on this is we only publish if we've got an application that we've put in progress. So stay tuned.

[Bradley Sturges, analyst]

Okay. Makes sense. And to go back to your comment on the acquisition market and being more of a buyer's market today. Just can you give, I guess, a general comment on the acquisition competition you're seeing or just kind of the composition of the buyer pool for new build assets in sort of the areas that you're kind of seeking to be active in. Has there been much change in the composition of other buyers out there for those particular assets today versus, let's say, what you were seeing throughout 2023?

[Mark Kenney, executive]

I'll let Julian comment with more detail, but this is where reputation matters and our long track record of not being price adjusters and closing and doing the handshake of what the LOI says. It's really played into our favor. So we can give examples of that. The other thing is there has been the increase of premium CMHC quite a backlog. And that has put out some buyers on hold. We've been in a fortunate position of not having to do that. But Julian, can you provide some additional color?

[Julian Schonfeldt, executive]

Yes. So I'll say that as I look at the acquisitions we did, other than Hub Place which was an auction, they're all off market. And most of these deals are pretty much just one-on-one negotiation, and it's not so much competing with other buyers, but more just whether we can fix the bid-ask spread between the buyer and the seller. So the Hub Place was unique just given it was in a really, really core Vancouver location concrete asset just so desirable. But otherwise, it continues to just be off market. I think the larger check side, in a lot of cases, slightly lower leverage that was able to be achieved mix for big equity checks. And just given the scarcity of capital, it's resulted in just having a much lower amount of buyers on the market. And a lot of folks know our reputation, our access to liquidity and our ability to act quickly and friendly on acquisition side, and that should really, really helped us. And so I think going forward, not indefinitely good in the shorts in the near term, we're going to continue to be in that dynamic where it's really just us negotiating one-on-one with the seller. I do know that historically, it was obviously question very, very different. And I have no doubt that at some point in the future when rates are lower, that the more competitive environment will return. But for now, there's a pretty good window to acquire amazing assets in great locations at good prices below replacement cost.

[Mark Kenney, executive]

And the strategy remains intact. We're not any nervous about the strategy. We continue to push through with the strategy and feel like the pipeline of opportunity is steady as she goes right now.

[Bradley Sturges, analyst]

That's great. One last question for me. Just to go back to the, I guess, some of the organizational restructuring you did. Would you say most of the heavy lifting has been done beyond, I guess, some of the ongoing improvement that you always seek to do I guess from a G&A perspective, a lot of the onetime items that we've seen, a lot of that's been kind of put through. We won't see as much going forward.

[Mark Kenney, executive]

No. A lot of the big work has been done. It's the run rate that needs maybe a little bit more clarity because a lot of the changes have again happened through the year or towards the end of the year. And we do think that the focus on balancing the asset base here having better, not bigger will have impacts as we move deeper into the strategy. I think I said on conference calls before, it is not our strategy anymore or ambition, I should say, to be the biggest in Canada in terms of unit count, we are absolutely focused on being the best and to grow earnings per share. So gone are the days of wanting to just boast of the size of the units we had.

[Operator]

Our next question comes from Mario Saric of Scotiabank.

[Mario Saric, analyst]

Mark, I wanted to start off with clarifying a comment that you made that rents has hit a flat spot. So I just wanted to understand on what you're referring to. Like if I look at your in-place Canadian occupied AMR, it was 15%, 16% a month. So if we just gross that up by 30%, which coincides with your newly spread this quarter, it implies a market rental, let's say, $1,970 a suite. So are you saying in $1,970 a suite, i.e. the market rent isn't expected to rise going forward into the strong spring season because of affordability side?

[Mark Kenney, executive]

No. It's a tricky, tricky question. The turnover rate increases are plateauing for the value-add properties, okay? So what I was meaning by that comment, and we're now getting into a little bit of tricky math here, Mario, because the composition of the portfolio is changing. We are seeing the mark-to-market rates at this sort of 30% level because the value-add portfolio is obviously producing the most dramatic increases. However, the average rent of the portfolio is accelerating because of the new construction assets that we're buying. Obviously, when you're buying assets with $2,400 a month average rents for an entire rent roll, that's going to start tilting average rent. So I would be cautious about focusing on the metric of average monthly rent. It's really now more of understanding the difference between the core portfolio mark-to-market and the increases that we're generating on turnover. That's why I keep guiding the market a little bit as much as I can to turnover being the most critical issue. To me, mark-to-market is kind of table stakes now and not really changing, it's plateaued, not going down, it's plateaued. It's turnover that's going to release that 30% that is really for CAPREIT a big differentiator compared to our peers.

[Mario Saric, analyst]

Okay. I guess where I'm going is, whether it's a new construct building or a value-add building, are you continuing to see market rents in your geographies move higher? So like, for example, if you're asking for $5 a square foot in December, are you expecting past for $5.25 or $5.50 a square foot in April, May because broader market rents are still going higher.

[Julian Schonfeldt, executive]

Yes, Mario, so the short answer is yes. I mean we're in a bit of a seasonal slower period, just given where the winter and there's a little bit less activity. But the imbalance of supply and demand continues to get where as population growth continues to outpace housing completions. And so as a result, you naturally would expect market rent growth to exceed inflation growth, right?

[Mark Kenney, executive]

We could take it offline there. We're watching it really carefully because remember, even within the value-add buildings, the churn is going to generally come from the market rent units. And the real encouraging thing is the mark-to-market rents are holding somewhere between 25% and 30% on a quarterly basis, but that becomes a bigger stretch as market rents in the value-added portfolio turnover because you're going to out see as much of a profound impact. So we're not seeing that yet. So I would say if you want to see market rents or the overall market rents are rising, you're seeing it in just our ability to hold that mark-to-market rent level.

[Mario Saric, analyst]

I understand that. Okay. That's helpful. And then switching gears, just a quick question on the expected usage of the $400 million ATM. [ Caps start ] today trading at a 7% discount to your IFRS NAV. I appreciate that executing on the ATM will depend on the attractiveness of the opportunities that you kind of laid out during the call. That said, does IFRS NAV kind of provide a benchmark for where you're comfortable issuing or participating in the ATM? Or would you want to see cap trading closer to your IFRS NAV in order to do so?

[Stephen Co, executive]

Yes. We're going to apply the same discipline that we do with our NCIB. There has to be a wide enough discount, obviously for us to use NCIB. And I think I've said it before, I don't believe in issuing capital below IFRS NAV. So I think that statement hasn't changed or that point of view has not changed. I think that as our peers have matched up valuation because of mark-to-market rents and as we realize that some of these development land opportunities, I think it's fair to say you'll see our NAV not to continue to see the same degradation that we've put in it over the last 8 quarters or so.

[Mark Kenney, executive]

So Mario, I wouldn't read anything into the topic. Our view was to just give ourselves more optionality for the future and just have it in place should the dynamics change, but the intention is not to be using it now.

[Stephen Co, executive]

It's another tool in the tool box.

[Mark Kenney, executive]

It's another tool in the tool box.

[Mario Saric, analyst]

Got it. Yes, the question that emanates from the notion that, let's say you're trading at a mid-4 implied cap. Is it a reasonable trade to trade them paper at the mid-4 for the existing portfolio, if you get mid-4 caps on the new construct that you're targeting. So I'm not sure if you can get mid-4s on that new construct, but does that rate makes sense to you?

[Julian Schonfeldt, executive]

Yes. So far, what we're looking at and actually, what we saw last year was we acquired at higher cap rates than we sold. The current market I think the dynamic with the properties we're looking to sell now is that the cap rates are approximately the same as what we're buying now. So it continues to be a very good trade in the sense that we're improving the quality without suffering any dilution, which again is something that's fairly unique, usually companies that go through these repositionings and improving the portfolio have a little bit of a lower negative impact on earnings in the interim. For us, it's either neutral or even positive last year.

[Mario Saric, analyst]

Got it. And Julian, maybe just a follow-up for you. Like how would you characterize required thresholds, return thresholds on the new construct? How do you think about that?

[Julian Schonfeldt, executive]

So we don't give those numbers. It puts us in a competitive disadvantage as the counterparties know where our thresholds are at. But what I will say is that we are buying is going to be at higher IRRs. So the cap rates are similar, but the IRRs are higher. And the reason being is, one, we view the acquisitions that we brought in really good geographies and new regulators as having good growth potentials. But then also, as Mark mentioned, the CapEx is significantly lighter. And not only is it significantly lighter on a dollar per suite basis, but the suite tends to be valued at 3x or 4x higher. So when you look at it as a percentage of suite value or NOI, the CapEx is almost nothing. So you've got a similar NOI yield, but a lower CapEx profile, and in many cases, even a higher growth one. So we end up with higher IRRs and total returns than what we're selling.

[Mario Saric, analyst]

Okay. That makes sense. My last one is just maybe a follow-up for Stephen, just on the property taxes. I think you mentioned you expect them to be higher. I wasn't sure if higher meant just up year-over-year or above the 4% same property that you saw in '23?

[Stephen Co, executive]

Yes, I think we're looking at inflationary increases. I mean you hear municipalities are increasing their taxes to cover their budgets. So I would say follow that, you could say, dynamic, and that will be the right projection for realty taxes.

[Mario Saric, analyst]

Okay. So inflationary, not much more than that.

[Stephen Co, executive]

Yes.

[Operator]

Our next question comes from Jimmy Shan of RBC Capital Markets.

[Khing Shan, analyst]

Maybe just a couple of follow-up on the ATM program. I guess given that you are targeting $400 million in asset sales, and I think you mentioned a few times now better, not bigger. Is the ATM really just optionality? Or how do we read that? Is it that you're not sure that you'll be able to achieve the asset sale to fund your acquisitions or that maybe you have a bigger pipeline of opportunities? How do we read that? And then secondly, does that also mean that at the current price, the unit buyback is sort of off the table at this stage?

[Mark Kenney, executive]

Well, I think we want to call it another option available to us. We are so excited about the investments that are coming in. We don't want to be fully reliant as we go forward on disposition. That market could change, and we don't want to give up value. So by having both the NCIB and the ATM, we've got opportunity on either side of the capital market valuation of the company. So I wouldn't read too much into the $400 million. I would just really focus on the fact that CAPREIT in the past has always done the best on the individual asset purchases. So we have portfolio announcements of the past. We don't really see that being the path forward in acquiring new construction portfolios. But we are most comfortable when we're writing hard discipline around individual sales. And the ATM matches that profile well. Like if there's smaller amounts of equity coming in at a more steady pace, we like steady. We're not looking for big announcements of acquisition for the sake of saying we've done it. We like discipline and buy things well, selling things well and having that optionality of capital should we need it.

[Khing Shan, analyst]

Right. But I guess if the priority in terms of funding source, would still be asset sales at this stage? That's your comment?

[Julian Schonfeldt, executive]

Yes. I mean, let me layer on to that. But we didn't put this in at the current time because we had a plan to use it. We put it in to have optionality to be opportunistic. And if you ask me right now that we plan on using it? Probably not. The current dynamics exist that we're funding our acquisitions with dispositions that we're doing. So we're selling them all at or above our IFRS NAV. So we're effectively already able to raise equity above our IFRS NAV while also improving the portfolio. So that's us is the primary way of raising sourcing capital. But that said, things change. Market dynamics can change. And these types of tools, which are pretty broadly adopted in the U.S. REIT space and more so in the Canadian space. take time to put in place. And so we thought it was prudent for us to have it in there and be ready and be able to be opportunistic in a similar way to how we have the NCIB in place. I mean the dynamics for APM are obviously different. But I mean, I've heard some people locally call it, reverse NCIB. And so again, it's another arrow in the quiver or tool in the toolbox for us to have.

[Khing Shan, analyst]

Okay. And then I missed it, but did you mention what your total CapEx budget would be for 2024.

[Stephen Co, executive]

No, Jimmy, we didn't include that disclosure just because of the recycling program that we're undertaking in the capital allocation strategy, it's hard for us to point to a good number for investors. But I would say if you're looking at the total CapEx number, given our strategic allocation and the tight rental market, you can expect that to come down.

[Mark Kenney, executive]

The only area of enthusiasm for spending capital dollars is on our ESG investments for energy, and those all have very high returns. So again, it's watching the behavior of the categories to see, but I always tell the team there's unlimited capital for 30% energy investment. So we'll stick to that.

[Operator]

Our next question comes from Matt Kornack of National Bank Financial.

[Matt Kornack, analyst]

Just a quick follow-up on Jimmy's question there. Year-over-year for the total year CapEx was down, I think, 10% across the board, but Q4 it was down quite a bit. Are you seeing kind of a trend towards spending less in the more recent quarters? Or was there an anomaly in Q4?

[Mark Kenney, executive]

There's a little bit of seasonal adjustment with CapEx because the big stuff is obviously getting into structural has to be done in the summer months. But I'll let Stephen expand.

[Stephen Co, executive]

Yes. I mean that's to the point what Mark was just saying, there's seasonality. I would say, as I mentioned to Jimmy, like the CapEx, especially with our disposition program, as Julian has pointed out, some of the attributes of the dispositions are they're CapEx heavy, right? So you're going to expect nondiscretionary CapEx to come down as we progress with our strategy. And then on the discretionary side, especially in-suite and common area, really rationalizing that. So that should come down over time. And as Mark has pointed out, really, the energy and conservation investments are something that we continue to focus on. And that provides a very high return for us. So overall CapEx, I would say, will come down. Again, I haven't provided a number, but you could expect that to come down over time.

[Mark Kenney, executive]

The only other thing, Matt, that I would add that we never got right with the market another REIT struggling as well. When you're doing a value-add acquisition program, the choppiness in investing CapEx is pretty severe. Like we used to get very excited when there was major CapEx to spend on a new acquisition because it meant opportunity. Now that's changing because we're not focusing on those assets on the acquisition front as anymore. So the past was always moving dependent on the opportunity. The market would get spooked when CapEx went up, and we would be having a party saying, thank goodness we did that acquisition. So that is just going to stabilize things. So I think you can expect, again, with the new strategy, just an ever declining spend on CapEx, this is going to become less and less and less of a conversation for CAPREIT as we burrow into the strategy deeper.

[Matt Kornack, analyst]

Fair enough. That is helpful. Stephen, this may be an unfair question, and I don't know if you have the numbers in front of you, but is it possible to quantify what the allocation would have been from kind of maintenance capital into the expense line? And I'm just your numbers are a little off the peers at this point because of this allocation. And I think the guys that have reported that have seen actually expense declines on a same property basis. So trying to figure out what the delta to get back to kind of a more comparable than what it would be.

[Mark Kenney, executive]

It's not an unfair question, but it's a question that Stephen can't really fully answer because it's not a direct correlation, okay? Well, sorry, it's not a, I don't know what you call it, mathematically tied equation. They're cousins, we use that analogy all the time. When you're not doing the major CapEx and you have to do repairs and maintenance, obviously, there's a cause and effect, but you can't actually quantify one for one that relationship. It's just a byproduct of not doing big capital projects, you're back in traditional property management. So that's about as fuzzy answer as I can give you because there is no actual number Stephen could provide.

[Stephen Co, executive]

Yes, Matt. Yes, I would just say it's difficult for me to answer. I mean we can take it offline, but it's not as one-for-one as Mark has pointed out.

[Matt Kornack, analyst]

Yes. I think we've gravitated to looking at the same property revenue number as a better proxy for relative performance. You guys are performing well there. A very last one for me. Just in terms of, I mean we saw building permits actually decline while population growth has accelerated. When do you think capital starts to get invested given the government is trying to incent it in building new products? I understand the capital markets have to be there. But do you start to see some more purpose-built rental get developed in the near term? Or are we in a waiting game at this point?

[Mark Kenney, executive]

Well, I'll start off and then the more views to get shared here the better, but it's quite sad what's happening because what you're seeing with the decline of obviously building permits is the crisis is getting worse, okay? And it's not a weekend event where they prop up new supply and everybody's got a home to be in. So that's a bad forward indicator. It is, however, a strong indicator for what we were talking about earlier. Like we're happy to sit on our development lands and wait because when things get turned on, again, things become viable, there will be a rush for zone property, a major rush for zone property because most developers don't want to sit on the capital for too long, not knowing when there's a real stability. So we could sit on the land as Julian said, and wait for that window of opportunity in the market. I'll ask Julian to build on that a little bit more, Matt. It could be just that simple.

[Julian Schonfeldt, executive]

Matt, it's not that surprising that you're seeing the building permits go down. And so we tell the acquisitions that we did, all of them below replacement cost. So when you go into developing a purpose-built rental, particularly as a merchant builder, what you're trying to do is recover all your costs plus make a reasonable return on cost. So you should be selling or projecting to sell that higher than it cost you to build. When I go and buy stuff right now at a 15%, 20% and 25% cost of what it takes to build without any development or lease-up risk, who's going to build into that environment, right? When they're doing their pro forma, the end value of the apartment is less than what it cost to build. Frankly obviously needs to be on the other side to justify the risk. So part of it is going to be interest rates going down to lower their cost. Part of it is hopefully, some moderation on the construction cost side. And then the other part is just going to need to see more capital coming in to be an end buyer on the other end. There's a whole host of other issues on the construction side like shortages of labor and all the other things that could bind off. But there's a lot of things that kind of need to change, I think, for that to really ramp up. And as Mark mentioned, even when it does start ramping up, you can't build the apartment buildings in a day, right? So it'll take time for those conditions to potentially fix. And even from there, it's going to be a long lead time until you see those projects actually get delivered.

[Operator]

Our next question comes from Dean Wilkinson of CIBC.

[Dean Wilkinson, analyst]

Mark, one question and it could have us on the phone for another hour, philosophical one. You're arguably the largest owner of affordable housing in the country. You can't turn a paper or flip on a TV today with just hearing, it's everywhere. Has any level of the government reached out to CAPREIT and asked you for your input other than you going to them? And what would you tell them?

[Mark Kenney, executive]

Well, we have the foraffordable site, that's what we're trying to tell them. We're trying to do it as an industry. The reality is that I think I talked about education in the housing file. And it's a tough one. So we're going through this period of educating government and the opportunities that are there. CAPREIT made progress years ago with the rent geared to income approach to provincial governments and even municipal in some cases. And that message was heard. The good news is, I think now we've got more active listening at all 3 levels of government than ever before. but it's a slow machine. There's no one person that's making a decision, and it's coordinating the spider's web of 3 levels of government. This is the #1 problem, and their interests are not necessarily aligned from a political standpoint. It's this whole, am I a municipal politician that worries about [ nimbyism ] or am I a provincial politician that worries about the state of the market in my province or am I a federal politician that is worried about balancing immigration with housing supply, which is a file they never really had, quite frankly, other than the good work that CMHC does. So it's difficult, but I do believe there's a willingness. I do believe there's signs of progress. I think what we're seeing right now is there are some provinces that are really standing out. At the end of the day, when you track progress, I would look to the provinces that are doing the best work and coordinating the pressure on the municipalities and bridge building with the feds. So I'm giving you a bit of a fuzzy answer because I don't know that an hour is enough. I think you need like a couple of years here for this conversation, but there's a lot of willingness, I'm going to say, at all 3 levels of government. We've come a long way in our campaign of discussion from 2 years ago. We are being turned to for our views, not necessarily having them all implemented. But that's why I touched on the foraffordable site in the slide deck because we tried to distill our ideas there.

[Dean Wilkinson, analyst]

Is it fair to say that those provinces that are a little more receptive to this, also coincidentally are the ones without rent controls?

[Mark Kenney, executive]

There is a historic connection to that. Like you can look for examples around the planet Earth is what I like to say of where there's deregulated markets and you'll find balanced supply. You can look around the world and find regulated markets where there's not balanced supplies. So I keep looking for this example of where regulation builds more apartments, so nobody can spot it for me. So that kind of goes without saying, but that doesn't necessarily solve somebody's affordability issues in the now and today. So this is the push and pull. But yes, everywhere there is rental in the world, there's this direct correlation between no regulation and balanced pricing.

[Operator]

Thank you. At this time, we currently have no further questions. So I'll hand back to Mark Kenney for any further remarks.

[Mark Kenney, executive]

Yes. I would 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. Have a great day.

[Operator]

Thank you for joining today's call. You may now disconnect your lines.