InterRent Real Estate Investment Trust

TSX:IIP.UN

Earnings Call Analysis

InterRent Delivers Strong Q2 Financial Results

InterRent REIT reported a robust performance in Q2 2024, with occupancy rates rising to 96.2%, and rental rates for the total portfolio up by 8.4%. Same property revenue grew by 7.6%, while operating expenses saw a modest increase of 3.3%, resulting in an NOI margin expansion to 67.7%. FFO increased by 17.9% to CAD 23.1 million and AFFO grew by 19% to CAD 0.138 per unit. The company executed 640 new leases with an average gain of 16.1%, contributing CAD 2 million in annual revenue. Strong execution of refinancing strategies reduced the weighted average interest rate by 6 basis points to 3.37%.

Strong Performance Marked by Elevated Demand

In the second quarter of 2024, InterRent REIT demonstrated robust financial and operational performance, capitalizing on strong demand for quality communities. The occupancy rate for both the same property and total portfolios reached an impressive 96.2%, aligning perfectly within the optimal range of 96% to 97%. Furthermore, rental rates exhibited considerable growth, increasing by 8.4% for the total portfolio and 6.8% for the same properties, indicating a favorable market environment. The revenue from the total portfolio grew by 4.8%, with a more pronounced 7.6% increase seen in the same property portfolio, underscoring operational strength despite property dispositions during the quarter.

Impressive Growth in Key Financial Metrics

InterRent's financial results were encouraging, with the same property net operating income (NOI) for Q2 rising by 9.7% to CAD 40.6 million. A significant driver of this growth was a 130 basis point expansion in NOI margin, elevating it to 67.7%. Funds from operations (FFO) surged by 17.9%, totaling CAD 23.1 million, while on a per unit basis, it grew to CAD 0.157. Adjusted funds from operations (AFFO) also saw notable growth, reaching CAD 20.4 million or CAD 0.138 per unit, thanks to increased NOI and reduced financing costs. However, it’s worth noting that property dispositions during the quarter slightly impacted growth, accounting for a negative contribution to FFO per unit.

Enhanced Operational Efficiency and Financial Position

The company effectively managed its financing strategy, bringing variable rate exposure, including credit facilities, down to below 1%, a significant decrease from 8.4% in the previous year. The weighted average interest rate for financing also diminished by 6 basis points to 3.37%, enhancing overall financial flexibility. The growing liquidity, supported by proceeds from asset dispositions and unencumbered assets, positions InterRent well for future capital allocation and acquisitions, paving the way for expansion initiatives.

Sustained Revenue Growth and Cost Management

The rental landscape appears favorable, with InterRent achieving a 16.1% average gain on lease across 640 new leases executed during Q2, contributing an incremental revenue growth of CAD 2 million, which translates to about 0.8% of annualized Q2 revenue. Despite a minor dip in turnover rates to 24.3%, the overall performance per suite remained strong, aided by a flexible pricing strategy to navigate market dynamics over the busy summer leasing season. With total operating expenses as a percentage of revenue declining to 32.5%, down 120 basis points year-over-year, InterRent is optimizing costs alongside maximizing revenue.

Strategic Outlook and Growth Initiatives

Looking ahead, InterRent forecasts robust organic growth, projecting an annualized revenue growth target between 6% to 8%, though recent shifts suggest it could come in slightly lower at around 5% to 7%. With market conditions favoring continued demand, the management maintains confidence in achieving high single-digit to low double-digit NOI growth. They expect ongoing market pressures will support rental rate increases, ensuring a solid foundation for future earnings growth despite constraints from rising market rents. The strong fundamentals observed suggest demand will persist, fueling operational expansion.

Active Capital Recycling and Sustainability Commitment

The management reported a successful capital recycling program, with the company having disposed of non-core assets and utilizing net proceeds to buy back units under their normal course issuer bid (NCIB) program, demonstrating confidence in their share value. With CAD 5 million worth of units bought back at an average price of CAD 12.33 each, this reflects a strategic move to enhance overall shareholder value. Concurrently, InterRent is advancing sustainability initiatives, having invested CAD 3.7 million in energy efficiency measures, which have already resulted in significant emissions reductions, reinforcing their commitment to sustainable growth.

Conclusion: A Positive Investment Outlook

Overall, InterRent REIT's strong quarterly performance showcases not only its operational proficiency but also its strategic foresight in navigating challenges. With an optimistic financial outlook and sound capital management practices in place, combined with ambitious growth strategies, InterRent stands out as a promising investment opportunity for those interested in the real estate investment trust sector. Balancing solid occupancy rates, healthy rent growth, and proactive sustainability efforts, the fundamentals appear strong as the company heads into the second half of 2024.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the InterRent REIT Second Quarter 2024 Earnings Conference Call and Webcast.

At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday, August 7, 2024.

I would now like to turn the conference over to Renee Wei. Please go ahead.

[Renee Wei, executive]

Good morning, everyone. Thank you for joining InterRent REIT's Q2 2024 earnings call. My name is Renee Wei, Director of Investor Relations and Sustainability.

You can find the presentation to accompany today's call on Investor Relations section of our website under events and presentations.

We're pleased to have Brad Cutsey, President and CEO Curt Millar, CFO, and Dave Nevins, COO on the line today. As usual, the team will present some prepared remarks and then we'll open it up to questions.

Before we begin, I want to remind listeners that certain statements about future events made on this conference call are forward-looking in nature. Any such information is subject to risks, uncertainties, and assumptions that could cause actual results to differ materially. For more information, please refer to the cautionary statements on the forward-looking information in the REIT's news release and MD&A dated August 6, 2024.

During the call, management will also refer to certain non-IFRS measures. Although, the REIT believes these measures provide useful supplemental information about its financial performance, they are not recognized measures and do not have standardized meanings under IFRS. Please see the REIT's MD&A for additional information regarding non-IFRS financial measures, including reconciliations to the nearest IFRS measures.

Brad, over to you.

[Bradley Cutsey, executive]

Thanks, Renee and welcome everyone.

We are pleased to build on our momentum and deliver another quarter of strong financial and operating results. Demand for quality communities remained elevated across our markets with occupancy rates increasing year-over-year to 96.2% for both same property and total portfolios, right in InterRent's optimal range of 96% to 97%. Rental rates continue to show strong growth this quarter with an 8.4% increase for the total portfolio and 6.8% for the same property portfolio. We're seeing solid performance in both AMR and occupancy across all regions. David will provide more detailed regional insights later in the call.

Over to Slide 6. Strong AMR increase and high occupancy rates drove solid top-line growth. Total portfolio revenue growth for Q2 was 4.8%, which was impacted by dispositions during the quarter. For the same property portfolio revenue increased by 7.6% while operating expenses rose by a more moderate 3.3%, leading to a 130 basis point expansion in NOI margin over the same period last year, reaching 67.7%. Same property NOI for Q2 was CAD 40.6 million, marking an increase of 9.7%. As highlighted on the right hand of the slide, we achieved outside FFO and AFFO growth both on a total and per unit basis. Our FFO in Q2 increased by 17.9% to CAD 23.1 million, representing a 17.2% increase to CAD 0.157 on a per unit basis. We delivered CAD 20.4 million in AFFO, or CAD 0.138 per unit, reflecting an increase of 20.9% and 19% respectively. This growth was driven primarily by increased NOI and reduced financing costs. This impressive growth was partially offset by dispositions having a negative impact of [CAD 0.003] for the three months ended June 30. On a trailing 12-month basis, year-to-date dispositions have had an FFO per unit contribution of CAD 0.035.

Over to Slide 7. We kept our variable rate exposure, including credit facilities at below 1% as compared to 8.4% at the same period last year. With the successful execution of our refinancing strategy, we're now seeing a tailwind with weighted average interest rates decreasing by 6 basis points year-over-year to 3.37%, benefiting our financing costs. Our balance sheet is solid and flexible with sufficient liquidity from disposition proceeds, credit facilities, and unencumbered assets. We are well-positioned to advance our capital allocation priorities, including external growth opportunities.

We will hear more details on that front later in the call, but first Dave will take us through some of the operating highlights.

[Dave Nevins, executive]

Thanks, Brad.

Slide 9 highlights our ability to consistently achieve additional gains on leases. Building on an already strong outgoing rental rates, we executed 640 new leases during Q2, generating an average gain on lease of 16.1%, which translates into an incremental annualized revenue growth of CAD 2 million, or 0.8% annualized Q2 revenue. Turnover rates remain close to last quarter's levels with trailing 12-month turnover at 24.3%. We've adopted a flexible pricing strategy to maximize both occupancy and revenue as we gear-up for the crucial summer leasing season. This puts us in a great position to make positive market adjustments in some of our communities. Rental market conditions remain resilient and we estimate that the average market rental gap across our portfolio remains just sigh of 30%.

Occupancy on average market rent growth has been strong across the board. Total portfolio and same property occupancy rates were at 96.2% in June, showing improvements of 80 basis points and 70 basis points respectively compared to the same period last year. Occupancies improved in all regional markets except the Greater Vancouver Area where we saw a small 60 basis point increase in vacancy year-over-year. As we explained on our last call, Vancouver is part of our non-repositioned portfolio, where suites may be turning over for the first time and thereby require more time to make the upgrade to help us achieve the higher market rental rates. During the quarter, Montreal continued to perform well, with occupancy improving by 260 basis points from a year ago to reach 97.3%. In the National Capital Region, when accounting for disposition of our communities in Ottawa and Aylmer, Quebec, our same property average market rent growth is 6.4%.

Turning to Slide 11, our revenue growth continue to outpace our expense growth. Property operating costs, property taxes, and utility costs have all been reduced as a percentage of revenue. Total operating expenses as a percentage of revenue were 32.5%, reflecting 120 basis point improvement from a year ago. We continue to benefit from lower utility costs this quarter, which totaled CAD 3.7 million or 6% of revenue. This represents a decrease of CAD 0.2 million or 60 basis points as a percentage of revenue. On a per suite basis, utility costs have decreased 2.3% compared to last year, the CAD 300 per suite. This was primarily driven by lower natural gas costs with a 10% decrease in usage coupled with 13% decrease in rate. Electricity and water usage were both in line with the same period from 2023, but average rates were up 7% and 9% respectively.

Moving to CapEx spends, as you can see on the left side of Slide 12, over the last three years we've been spending about CAD 1,000 per suite on maintenance CapEx. We continue to see excellent value creation and a repositioning program through cost-effective capital investments. Suites in a repositioned portfolio on average had a 50 basis point higher occupancy rate in June, along with 80 basis point higher NOI margins year-to-date when compared to those in our non-repositioned portfolio.

With that Curt, over to you.

[Curt Millar, executive]

Thanks, Dave.

From our discussions with our internal acquisition team and external appraisers, and taking into consideration the somewhat limited recent transactions, we've decided to adjust our cap rates in several of our regional markets. Slide 14 illustrates the quarter-over-quarter change in cap rates in our GTHA, NCR, and Montreal markets. The net result is an overall increase of 8 basis points, bringing our Q2 portfolio cap rate to 4.25%. The strong operational performance in the quarter was mitigated by the increase in cap rates, which has resulted in a fair value loss of CAD 34.6 million. As the cap rates remained unchanged, we would have seen a fair value gain of CAD 36.5 million. We are keeping a close eye on market conditions as transaction activity appears to be picking up.

Moving to Slide 15, InterRent continues to be in a healthy financial position. Our variable interest rate exposure, including our credit facilities remained below 1% and our CMHC insured mortgages remained at 90%. The successful execution of our refinancing strategy puts us in a unique position in our industry to benefit from a lower weighted average interest rate with expiring rates for the remainder of 2024 being a tailwind. With our current credit facilities undrawn, the liquidity from our dispositions and our unencumbered assets, we are well-positioned to capitalize on growth initiatives both within and outside the organization. Our debt to gross book value currently sits at a comfortable level of 37.8%. And as previously mentioned, we are open to moving it up to the low forties for the right opportunities. We have a proven track-record of value creation on acquisitions and we believe we would be able to organically bring it back below the 40% over-time.

Moving to Slide 17. We continue to look at sustainability as an important catalyst for value creation and long-term success. Our 2023 Sustainability Report was published in June and we invite you all to explore it on our sustainability website. Some of the highlights from the report include investing CAD 3.7 million in energy efficiency initiatives such as high-efficiency boilers, LED lights, and building automation systems. These investments have helped us cut total Scope 1 and Scope 2 greenhouse gas emissions by 5.6% in 2023, bringing us closer to meeting our sustainability goals while also lowering utility costs. Additionally, we have achieved a significant increase in building certifications across our portfolio and strengthened our governance by establishing a sustainability committee at the board level. These are just a few highlights of our accomplishments in 2023. So far this year, we have kept-up the momentum by continuing to test different GHG reduction initiatives and advancing on our building certification program. I want to thank our entire team for their dedication and hard work as we continue to push forward with our sustainability efforts.

And with that, I'd like to hand things back over to Brad to walk through our capital allocation.

[Bradley Cutsey, executive]

Thanks, Curt.

As you can see on Slide 19, our capital recycling program was very active in Q2. Last quarter we told you about the disposition of a non-core community located in Aylmer, Quebec. That transaction has been successfully closed for a sale price of CAD 92 million. Additionally, we sold 1 community with 27 suites in Ottawa for CAD 5.5 million, CAD 204,000 a door, also above its IFRS value. The net proceeds from these dispositions were partially used to buy back units under our NCIB program. After the quarter, we purchased 405,300 units for CAD 5 million for an average price of CAD 12.33 per unit. All units were purchased for cancellation. We continue to carefully assess attractive external opportunities in organic growth prospects. Meanwhile, liquidity from the remaining proceeds have contributed to an increase in interest income of CAD 300,000 near the later part of the quarter.

As Curt explained earlier, we're fortunate to be in a strong financial position that allows us to seize opportunities that can make a big difference in the scale of our portfolio and launch our next phase of growth. We are progressing well in our second office-to-residential conversion project in Ottawa at 360 Laurier. We have received full site plan approval in April and the building permit was issued in July. Full interior demolition is 90% complete and we are moving into the early stages of construction as we speak. Out of Richmond & Churchill development in Ottawa, demolition has started end of July and is anticipated to be completed in September. We continue to explore various types of heating and cooling technologies that not only position us to qualify for potential government incentives and attractive financing opportunities, but allow us to minimize long-term operating costs and reduce greenhouse gas emissions.

In conclusion, we've had a strong quarter and once again extended our track record of excellent NOI and FFO growth, thanks to the strength of our operating platform and the efforts of our team members in the communities. We are encouraged to see strong market fundamentals heading into the busy summer leasing season in Q3 and continue to believe the current demand, supply, and balance will remain well into the foreseeable future. Our effective disposition program has further fortified our financial flexibility and boosted our liquidity. This has not only enabled us to buy back units, but also positioned us well to capitalize opportunities that will drive long-term growth. We will continue to use joint venture partners to pursue external growth opportunities. Today, we have taken an ownership interest of anywhere between a minimum of 10%, up to 50% in these partnerships, allowing us to scale our operations by generating fees to reinvest and by stretching our available capital to participate in a greater number of growth initiatives.

I wanted to thank our team for their continued dedication which has brought us to this position. We're excited about the opportunities to come.

With that, let's open it up for Q&A.

[Operator]

Ladies and gentlemen, we will now begin the question-and-answer session [Operator Instructions] Your first question comes from the line of Kyle Stanley from Desjardins.

[Kyle Stanley, analyst]

Could you just elaborate a little bit on the flexible leasing strategy you discussed in your prepared remarks? I think maybe the first time I've heard this reference, so just curious on maybe what that entails.

[Bradley Cutsey, executive]

Well, obviously I think it's just for us to be able to look at what's going on in the different notes all over, just making sure that we're being dynamic with their pricing and that we're staying on top of hands and where we can go with our lifts on turn in each of the different regions.

[Kyle Stanley, analyst]

I guess on that note, historically it does seem like occupancy tends to gain on a sequential basis in the third quarter. So how are you thinking about that for this year especially, I guess in the context of the foreign student visa cap and that coming into effect later, already in effect this year, but really impacting the portfolio in Q3? Just curious on your thoughts there.

[Dave Nevins, executive]

I think we're feeling good about it. All indications are showing that it's going to be a typical year like all others. So everything seems to be shaping up in all regions similar to other Q3s in previous years.

[Bradley Cutsey, executive]

Yeah. Kyle, it's early to describe this. It's early days, right? August is all important month when you talk with those foreign students, especially in Montreal, but we haven't seen any indication to say it won't be similar to previous years.

[Kyle Stanley, analyst]

Okay, fair enough. Just looking at your turnover spread this quarter at 16%, obviously a little bit lower from last quarter. Just wondering what the driver there might be. Is it that maybe you're seeing more units that have recently turned kind of coming back and again, the lease is a bit smaller? Just curious on thoughts and how you expect that to maybe trend as we go forward.

[Bradley Cutsey, executive]

I think, you know, I think you hit it. It's driven mainly by areas like Ottawa, Montreal, where we have higher turnover. So, you know, and the turnover is higher because most of these buildings are closer to post-secondary institutions. And definitely, this has given us market-type lifts because they are turning over more often. But if you looked at, if you took out some of, maybe some of our newer constructed communities like say [indiscernible] or 236 Richmond, it gets us the 17.5% on our lifts this quarter. So yeah, I think definitely the more lifts in Ottawa, Montreal bring the overall average down just because of the nature of those communities.

[Dave Nevins, executive]

For whatever reason, we saw a little more turn in Ottawa than we have typically seen in the past and Ottawa, as you all know, is our most stabilized portfolio. So we have a higher percentage of resident base within that Ottawa portfolio closer to market.

[Operator]

Your next question comes from the line of Brad Sturges from Raymond James.

[Bradley Sturges, analyst]

Just to follow-on your question on the indicators heading into the August leasing season, I guess you talked about Montreal as it relates to the student demand that you're expecting. Has there been any indications of change for the student demand within Ottawa as well or is that kind of trending similar to historical patterns in the last few years?

[Bradley Cutsey, executive]

Yeah, I'd say definitely it's trending normal. Looking at the areas that we're close to, either [indiscernible], pretty much it's right on pace with the last year for sure, pre-pandemic years also.

[Dave Nevins, executive]

I don't know why, why it's like this either, Brad, but Ottawa tends to -- the students tend to come a tad sooner. I wouldn't say it's a lot earlier, but they do tend to see more leasing activity a little sooner in Ottawa for whatever reason. Montreal seems to be a very much land in August, and then search for your apartment. We have lease activity right in through September in Montreal typically wherein Ottawa you typically kind of know where you stand.

[Bradley Sturges, analyst]

But it sounds like you're pretty confident in the Montreal market that the demand for the buildings, particularly around the globe are still quite strong.

[Bradley Cutsey, executive]

Well, I think you've seen where occupancy level sits today. We're in good shape in Montreal. Like I said, guys, like we're only 5, what, 7 days into August, right? So, yeah, I mean, we've seen the nice pickup in activity in the communities in which are closely located to communities that typically house our students. So there's no reason for us not to believe that activity will continue, but we won't really know till the last. We got 3 weeks left to go. And like I said, sometimes the leasing goes into September, but so far we're seeing normalized type activity from the student market.

[Bradley Sturges, analyst]

Just I guess switching gears on the -- Curt, you had some commentary around, obviously, you made some cap rate changes, but you also highlighted that you're starting to see some acquisition or transaction activity starting to come back. Just wanted to get a sense of what you're seeing from your perspective. And is there an increasing opportunity to maybe to deploy capital through a JV strategy or how do you see the transaction market as it sits today?

[Curt Millar, executive]

I think Brad or Dave can hop in if they feel I'm going down the wrong path here on this. But we've seen products coming to market a little bit, we've seen a little more activity, but not a lot of deals have closed yet and appraisers tend to be backwards looking. They want to see what's happened retroactively in the last 6 months. So they're still being a little bit cautious in regards to adjustments and tweaking things too early. We look at multiple things. We look at is the market heating up a little bit. What deals are getting done at? We look at our own portfolio. So as we get things through our repositioning program, and we have less stuff in repositioning now, as we get through that program, your cap rates adjust a little bit because you're starting to achieve some of that market rent. So we'll tweak a little bit based on that. And in areas where we've done really, really well and our NOI per door leads to a high value per door, we monitor that against market transactions to make sure it's not getting out of whack because even if your cap rate is well within the market, buyers still have a sense of a price-per-door thought concept.

And if you start getting outside the market, then you start adjusting your cap rate to sort of bring it back in line. So we kind of look at all these factors. I think there'll be more transactions in Q3 and Q4 to give appraisers a lot more sort of firm ground to stand on, to suggest changes. And could we see more adjustments in the next 2 quarters? I think we could, but I don't know for sure, because on the flip side of that, we've seen interest rates come in pretty strong. You're now doing 5 year, you can get it 350 to 360. You can do 10-year for sub-4, well, sub-4 right now. If that keeps happening, could the levels stay where they are today? I think so. There's a lot of moving pieces still, and I think we're just trying to be conscious of staying within the market on our portfolio and not getting out of whack.

[Bradley Cutsey, executive]

Yeah. Like 1 thing I would add is there's been a lot of volatility in the equity and the fixed income market. And given the direct property, the nature of the direct property market, the liquidity of that type of an asset, volatility in the capital markets doesn't bodes well for an active transaction market in the private market. So you really do need to see things stabilize out or you really will start to see people willing to transact. So from what we've seen, I'm looking over outside, I'll give our side a chance to give his views. But from what we're seeing is distillery means a little bit of a, at least with institutions, maybe not as much with the private fire, but with the institution, it still remains a little bit of a gap between vendor expectations and where people are willing to purchase. I think some of that just comes down to the volatility that they see in the capital markets. But to Curt's point, I agree with Curt. I do think the recent 2 cuts, at least here in Canada, and the conversation around what the Fed might or likely do, I think the bodes wealth for the overall transaction market.

I don't know Curt, if you want to add.

[Curt Millar, executive]

Yeah. I would say the stability and bond yields at these levels should potentially spur activity down the road. The bid-ask spread still persists, but we could see that narrowing with the stability in the tenure. The deal flow is there and there's opportunities for everyone to look at. It's just a question of meeting of the minds between the buyer and the seller and arriving on pricing.

[Operator]

Next question comes from the line of Mark Rothschild from Canaccord.

[Mark Rothschild, analyst]

So we've seen some obviously substantial rent growth over the years. Can you just talk a little bit more about maybe the most recent trends you're seeing? If you're seeing some moderation in rent growth, and then maybe from what your perspective is with experience on if immigration slows, do you think that there still is going to be more demand, just keep driving rents higher or are we maybe at a place where and needs to moderate over the next year or 2?

[Bradley Cutsey, executive]

Yeah, it's a good question, Mark. I think there's been a lot of literature and different reports. According to maybe the second derivative of that rent growth, the pace of rent growth is starting to moderate and maybe a peak a couple of quarters ago. I think it is important to keep in mind that household formation still outstrips new supply being delivered by a wide margin, suggesting that we'll continue to see market pressure on market rents. It might not be at the double-digit clip that we've been accustomed to over the last, call it 8 quarters. So I would agree that the second derivative is starting to moderate. I feel quite confident and comfortable that market rates will continue to see, at best inflation, like the minimal inflation. I do think going back into more of a range of 5% to 7% is quite realistic and reasonable, and you kind of do see it when you're looking at the leads and whatnot. These are down to the industry across the board and I say that's really just a function of affordability. There's not as many people looking for an apartment to rent that are currently renting, because unless they have to move, they're likely not going to move given where rents are now. The good news in that is for us, of those 640 leases that we've signed, we've got to see in affordability, our rental income ratio actually improved. It's improved by a couple of 100 basis points to the low 30%. So for us, it's good news. Our ops team has been working hard and our credit underwriting has been working hard to make sure that we're putting the right residents in their portfolio. So we still feel quite comfortable in the mark to market is at 30%. We've seen leases being rented at the market so we feel comfortable. So it's really just for us. And as you know, we're willing to accept fake seats, specifically in a low turnover area, and wait for somebody to hit that market rent, meaning we will carry a more basic than maybe some of other owners would in anticipation of waiting for the right lender to come in, especially in a low turnover area. As you know, in higher turnover areas where we think we can get back at the suite pasture, we'll accept or have a higher occupancy level.

I hope that answers your question, Mark.

[Operator]

Your next question comes from the line of Jonathan Kelcher from TD Cowen. Please go ahead.

[Jonathan Kelcher, analyst]

Just I guess first on the external opportunities that you're talking about, how much acquisition firepower would you comfortably have on your balance sheet right now?

[Bradley Cutsey, executive]

Yeah, I think for the right, and we've said this in the past, Jonathan, I think for the right acquisition opportunity, external opportunities, I think we'd be willing to bring our debt to gross book value ratio up into the low-40s with the goal of through value creation and natural attrition, bring it back to below 40. So with that in mind, we have call it roughly around CAD 360 million of acquisition capacity and I think we will prefer to continue to do with joint ventures to stretch that out even further, which will allow us to kind of scale the operations and allow us to enhance overall returns by generating extra fees and it will allow us to replenish our non-repositioned bucket, which we all know too is another growth driver for our organic side for the future. So we're pretty optimistic looking over the kind of the next 18 months. We still do have a disposition program that we mentioned on our last call. So we are through our first target and we're kind of in the second phase of that disposition program, and we think we can generate a further CAD 50 million in that proceeds, which will recycle into these external developments and things like the 360 Office conversion that we're currently working on right now in Ottawa.

[Jonathan Kelcher, analyst]

I guess a couple of follow-ups there. Do you think you're more of a net buyer or seller over the back half of this year?

[Bradley Cutsey, executive]

We're more of a net buyer.

[Jonathan Kelcher, analyst]

Okay. And are you looking at any new markets?

[Bradley Cutsey, executive]

Not at this time, Jonathan. I think we'd like to see your cost of capital continue to come in before we would enter in a new market. That said, there is 1 and maybe 2 markets that we are currently not in, that we have kept an eye on over the years, and we will continue to stay educated on it. But we just feel there's enough opportunities in our core markets today and given the limited amount of capital, while I believe 360 with the right joint ventures still affords us the ability to do a lot over the next, call it 12 months to 24 months. I don't think we would want to enter a new market until we saw a significant improvement in our cost of capital.

[Operator]

Your next question comes from the line of Matt Kornack from National Bank Financial.

[Matt Kornack, analyst]

Hey guys, I just have a quick follow-up on that thought process around capital deployment. Would you look to joint venture, any of your existing portfolio in order to fund some of your acquisition activity or would it only be on new activity?

[Bradley Cutsey, executive]

No, we would look to monetize, search parts of a portfolio with the right partner if we felt that to use it as a source of funding for the right external non-reposition opportunity, absolutely.

[Matt Kornack, analyst]

Interesting. And then if I look at margins, I mean, it still sounds like if market rent growth is going to be 5% to 7%, you're kind of achieving in and around that number on AMR growth. So your mark to market will be sustained. But can you give us a sense, expense growth seems to have slowed down, so you get margin expansion. And then I guess from an earnings growth standpoint at this point, your weighted average in-place mortgage interest rate, it's kind of similar to market 5-year rates. So should we expect pretty substantial earnings growth going forward?

[Bradley Cutsey, executive]

Yeah, I'll start with the first and I'll pass over to Curt. But I do feel on the expense, and we've been up there saying this now probably for 4 quarters that we always thought 2024, even in 2022, 2023, and 2024 that we start to see our expense side start to ease, at least from the wage pressure. That's a big line item, and we are seeing that easing and we've been making a lot of investments in our platform for efficiencies from an operating side. So I do think, Matt, 3% to 4% expense growth going forward is very sustainable, and under that scenario, it should generate some margin expansion. I'm getting a little bit of feedback. Are you getting feedback?

[Matt Kornack, analyst]

You sound okay to me. It may be my end.

[Bradley Cutsey, executive]

Okay. And then just on the mortgage, over to you, Curt?

[Curt Millar, executive]

Yeah. I think like if you look at the rest of the 2024 stuff, there's definitely a bit of a tailwind still. With 5.04% on the expiring mortgages for '24, 2025 at [3.26%] is not too far off where the market's been heading as of late. So a lot of our 2025 mortgages are sort of more towards the back half than the front half of the year. Hoping we can sort of get those done pretty much flat or very close to it. So under that scenario, you definitely don't see what we saw last year, the year before, where a lot of the great work the Ops team was doing was getting chewed up by extra financing costs. And with our variable rate debt now below 1%, no plans to sort of bring it back up. I think we'll stay in a good position with the mortgage ladder and the financing costs now. With some of these mortgages coming at us late this year, next year, depending on how we decide to do the refinancing, you may see some one-time cost hit, if there's deferred financing write-offs, if you renew certificates and stuff, but that's not really affecting your cash flow and your overall mortgage rate. So, there could be some one-time hits here and there just related to write-off of deferred financing fees. We'll try to make sure we communicate that to you guys in advance of quarters where that might hit so you can see it well.

[Matt Kornack, analyst]

And then I guess as you look to the duration on debt, you mentioned there's a bit of daylight between the 5-year rate and the 10-year rate, at this point, would you be inclined to go shorter duration or a blend of 5 and 10, or maybe 10 just because you want to lock in the certainty?

[Curt Millar, executive]

Yeah, I think for us right now we're looking at our overall mortgage ladder and still trying to make sure we have a really well-balanced ladder. We've been working on that for the last year and a half or so. So the 2024 stuff is probably looking at 5-year at 2029 pocket for us has some room in 2030 and 2031. So kind of like to work with 5 to 7-year money right now and fill that out and have a really well-balanced mortgage ladder. And then as rates continue to come in, we'll continue to evaluate it and probably push stuff into 10 also. I don't see us going really anything shorter than 5 at this point.

[Operator]

Your next question comes from the line of Jimmy Shan from RBC Capital Markets.

[Khing Shan, analyst]

So just a quick follow-up on the CMHC debt. So at 3.5% to 3.6%, 50 to 60 basis points is the spread. I guess that's come in. I was surprised to hear how spreads are so tight today.

[Bradley Cutsey, executive]

Yeah, we're looking. I mean, and again, there's continues to be big volatility, right? We've got quotes on mortgages as of yesterday and early this morning in that range. Could it be up 10 basis points tomorrow? Yeah, we've seen a lot of volatility, but it's been pretty consistent below four for the last little while on the 10-year and sort of 3%, you know, below 3.85% on the 5-year and it'll just depend on how the markets move, but it definitely remove the micro day-to-day jumps you're seeing. The macro sort of trend line has been down and looks like that will continue.

[Khing Shan, analyst]

And then the other question is on the CapEx spend. For the first half of the year, it's still pretty materially lower than a year ago. And I think you guys talked about that last quarter. How do we think about the CapEx spend overall for the balance of the year?

[Bradley Cutsey, executive]

Yeah, I mean, some of it's a function of where you've seen some of the turn, right and what kind of lifts you can achieve. Jimmy, so like we said, we saw a higher number of turns over last year for this quarter in the Ottawa region, which majority of that portfolio is already kind of repositioned. So that speaks to some of the CapEx spend lower. So really it's a function of where we're getting some of that turn will be a pretty big turn. We've been lucky. A lot of our CapEx has been done over the last 4 to 5 years and we've been on the higher side of that. We've been communicating of late that you'll start to see the CapEx spend come in at that. It's not that we have changed our business model at all. As you know, we target 20% return on our investments. So we're going to continue to put capital out where we think we can meet those kind of returns. But will it be lower than by the year end? Will it be lower than 2023? Yeah, it will be.

[Curt Millar, executive]

Yeah. Especially when you think about it, Jimmy, if you look at the amount of repositioned suites in that portfolio compared to the past, our percentage of our portfolio that is under repositioning still has come in, and that often directly ties to that CapEx number coming in or growing in years where we've been very active.

[Bradley Cutsey, executive]

You all see an increase in our CapEx spend right after a very active year. And as you know, we've always said 3 to 5 years for us to stabilize. And you always see a pretty big spend following active years of acquisition, the following 3 years, you'll see a lot of CapEx out of the door. To be quite honest, I'm very hopeful that we'll get back to a point where we can deploy and recycle some of this capital from our disposition program and be able to bulk-up that non-reposition bucket again and perversely, you start to see CapEx go up a little, but that means we're doing what we do really well.

[Khing Shan, analyst]

Sorry, I just had 1 last. I haven't talked about the NCIB and you have been active post-quarter and for first time in a long time. It's kind of how you're thinking about the NCIB program going forward in terms of the opportunities.

[Bradley Cutsey, executive]

Nothing changed there, Jimmy. Like, obviously, our unit price went down into the low-12s. Obviously, for us, there's a lot of value to be had in those units. We've always said we won't -- we will do share buybacks on a lunge-neutral basis. We dispose-off community. We took some of those proceeds and bought back. But we've got a way to buy back with other opportunities and it comes down in timing and then comes down in ranking the different opportunities that sit in front of you and what that capital is earmarked for, but we tend to take a 5-year view when we looked out and we rank all of these different value add initiatives such as share buybacks versus development versus external against each other, and we will earmark that capital accordingly.

[Operator]

Next question comes from the line of Mike Markidis from BMO.

[Michael Markidis, analyst]

I think on the last couple of calls you had pretty good confidence on a 68% organic revenue trajectory over the next 2 to 3 years. And just given your comments on the slowing, albeit still healthy, market rent growth, and maybe your comments with respect to potentially seeing more turn at the shorter end of your in terms of shorter duration leases. Do you see any risk to that outlook or is that still sort of the outlook that you're looking forward?

[Bradley Cutsey, executive]

Listen, I mean, if it's 6% to 8%, 5% to 7%, I'm still pretty confident that it's high single-digit, low double-digit NOI growth. I think somewhat splitting hair when we look at the bigger picture, Mike, I still feel very confident that the demands and supply fundamentals remain extremely tight on the whole, where you got to get to sometimes is in the tensions and the details where is some of the supply coming on, right. So it's not like there's no new supply, right? Like Ottawa, as we know, has some supplies and I'm quite confident over-time Ottawa supply is going to get absorbed and it's going to continue to be a marketplace that should do quite well for population of the world, given the affordable nature of this marketplace.

Another example is London. London has close to call it 4.5% of new supply. So as and it's close to one of our communities. So as that supplies that's absorbed, obviously we're not going to have the same kind of lift on turns. But once it's absorbed, we're quite confident that things will normalize back to the lift-up turns that we've historically been accustomed to. So listen, I don't want to overblow the 16% versus 20% like these numbers are going to jump around depending on where the term comes from and depending on where supply is situated. But I can guarantee you won't find any of my colleagues, anyone that was going to say that this market's in equilibrium, that the supply is needing household formation, it's not, but there's going to be different pockets where things kind of get impacted differently. So I do remain comfortable that we'll be able to continue to kind of see that top revenue line growth of what we've communicated in the past.

[Michael Markidis, analyst]

And then, I don't know, I think I heard you correctly, but I think you said that your rent to income on the 640 leases this quarter came in at lower than 30%. Did I pick that up correctly?

[Bradley Cutsey, executive]

Not lower than 30%, but low-30s.

[Michael Markidis, analyst]

Low-30s. Got it. Okay. And I mean, that's the first time I've heard you reference that. Like, where has that been historically?

[Bradley Cutsey, executive]

Well, I think I'm referencing that to help give people on this call comfort that why we might sit with an in-place rent higher than market averages. We also pride ourselves on delivering a certain level of experience and we also pride ourselves on our operation teams and investing in the operating platform and those things that make the difference. We are able to attract a quality resident that is willing and chooses to rent at those levels.

[Curt Millar, executive]

Yeah. And I'd say if you look sort of over the last little while, that number hasn't gone up. If anything, it's actually come in marginally.

[Michael Markidis, analyst]

Okay, so it's down marginally. It's not like it was a massive change from what you've seen in the past.

[Curt Millar, executive]

No, it hasn't gone up as rents have gone up and it hasn't gone up.

[Bradley Cutsey, executive]

I think the point I'm trying to make, Mike, is turnovers are going to continue to come in as an industry as a whole and our portfolio is no different. We've been fortunate that we've been above average as a turnover rate, still kind of in that 24% range, but turnovers are going to continue to come in as market rents continue to increase, there's going to be less and less people willing to move and look for new apartment because they just won't be able to afford it. My comment with that data point is trying to help give you some comfort on the other side that, listen, like, yes, as a whole, affordability is coming in and there's going to be less turnover, but there are still very much a segment of the population that can afford the market rents in which we are listed at. And it goes back to my comment about mark-to-market that we're comfortable at 30% because we have tested those prices and we're leasing at those prices.

Now where we see the turn, depends. It just depends on the circumstances where you see turn or where you're seeing migration patterns and whatnot in the meantime. So that is going to fluctuate, but on the whole, I feel comfortable that we're going to be able to continue to maintain here on that 15% and 20% and we'll be able to chip away at the mark-to-market. Now, will the mark-to-market grow back? I don't know. That's my comment about the second derivative coming in a little. So we might start to see that gap close low. That mark-to-market might start to come in a little as the market rents aren't as grown as fast as they have been in the past. But let's not forget 30% mark-to-market is still a pretty good spot to be, especially at a 24% turn.

[Michael Markidis, analyst]

Yeah. No, absolutely. Okay. And this last one, I think, Brad, you mentioned your second phase of your disposition program. Can you refresh if there's any sort of metrics you put around that or what exactly that refer to?

[Bradley Cutsey, executive]

Well, we evaluate all the communities within our portfolio. We have an asset management profile for all of our communities. We kind of look out the 5-year IRRs and we take other factors into consideration, but we kind of look at where our corporate IR is relative to that. And for those communities that are significantly below where corporate is over the next 5 years, those are obviously earmarked for communities in which we believe we can maximize value. And then it's going to bring down our overall growth profile, so those are worthwhile and then we'll recycle those into opportunities that are significantly higher than our corporate IRR bringing up hopefully to overall our corporate IRR.

[Michael Markidis, analyst]

Have you set a target in terms of volume? I mean, I think it was about a year, a year and a half ago, and you've exceeded that target. So just wondering if you've refreshed targets on disposition volume.

[Bradley Cutsey, executive]

Sorry, Mike, maybe I just misunderstood your question. We came out last quarter and said that we felt pretty comfortable and gave another 12 to 18- month timeframe that we thought another CAD 50 million of net proceeds was reasonable.

[Michael Markidis, analyst]

That's a good reminder.

[Operator]

Your next question comes from the line of Mario Saric from Scotiabank.

[Mario Saric, analyst]

Just a couple of quick follow-ups. On the rent growth discussion, I just wanted to clarify the 5% to 7% that's being referenced, are you referring to the expected kind of target change in average, in-place rent for the portfolio or are you saying that do you expect still market rents to grow 5% to 7%? For example, if the average market rent in Canada is CAD 1,000, do you think it can make its way to CAD 1,050 to CAD 1,070?

[Bradley Cutsey, executive]

Yeah. I think the comment was more towards where we see our operating revenue or our AMR growing, not the overall market. I mean the overall market where if you look at the average CMHC producer, others were above it in many markets, right? As every market on average can be misleading because you got it all over the place but that comment was addressed towards where we see ours growing.

[Mario Saric, analyst]

Okay. I guess the rationale behind the question is just because you're seeing some reports out there talking about that market rent stabilizing or flattening if you will. So just curious, if you, given the expectation that demand should continue to exceed supply if the expectation is for the broader market for the rents to keep coming up a bit.

[Curt Millar, executive]

Yeah. I don't think anyone, from any data that anyone is looking at or publishing or that you could reasonably get to, I don't think anyone is seeing that supply is even coming close to demand at this point. It's just how are things shifting. People are doubling up, tripling up, whatever, and then sort of changes in that habit. So we're not saying that the market rents are going to grow at that 5% to 7%, we think our AMR will. And I think what Brad was getting to a while ago is if the market is growing at 2% or 3% and our AMR is growing at 5% to 7%, you could see our mark-to-market come in a little bit over-time.

Does that answer it?

[Mario Saric, analyst]

Understood. Yeah, that's perfect. And then just my next one, I don't know if you can answer this question, but you mentioned taking a 5-year view on capital deployment that included the NCIB activity that you did. You've talked about kind of minimum 20% ROI on CapEx spend. When you're looking at that 5-year outlook when you're buying back units, like what type of 5-year IRR do you think you're achieving?

[Bradley Cutsey, executive]

I'm not going to answer that, Mario. You can take comfort though that we are ranking our buyback relative to the other opportunity we're looking at.

[Operator]

Your next question comes from the line of Dean Wilkinson from CIBC.

[Dean Wilkinson, analyst]

Most of everything has been answered. Not sure if you can touch on this one or not, Brad. The conversion of the Class B units, is it fair to assume that that was perhaps a tax or an inclusion rate-driven decision?

[Dave Nevins, executive]

We had 2 different parties that had Class B units, and when everything got announced around the changes in capital gain rates coming at us, they both reached out and said, they'd like to convert, so we worked with them to make sure it was done before the deadline.

[Dean Wilkinson, analyst]

Got it. And those would be freely trading now. Correct?

[Dave Nevins, executive]

Yes. Once the conversion is done. Yes.

[Dean Wilkinson, analyst]

Once it's done.

[Dave Nevins, executive]

Yeah.

[Operator]

[Operator Instructions] Your next question comes from the line of Fred Blondeau from Green Street.

[Frederic Blondeau, analyst]

Just going back to the turnover discussion, I was wondering if there are any way you could give us a bit more color on how much turnover is attributable to student tenants versus the rest of tenants.

[Bradley Cutsey, executive]

Sorry. The question is how much of the turnover is student versus overall?

[Frederic Blondeau, analyst]

Yeah.

[Bradley Cutsey, executive]

Yeah. So, I mean, we don't break-out a turnover by region, Fred. So I don't think we're in a position that we're going to even break it all further. But you can assume for most students, at best, the maximum lease, that they're going to stay maybe 2 years but for most people, it'd be 12 months, so.

[Frederic Blondeau, analyst]

And then just looking at the realized gain on lease, it looks like it's been trending down from the 23.8% that you guys reported for Q2 '23. I was wondering, notwithstanding seasonality here, what should we be expecting for the second half of 2024 on that?

[Bradley Cutsey, executive]

So are you asking what we're looking at for the rest of the year on our gain on lease?

[Frederic Blondeau, analyst]

Yeah. Realized gain on lease.

[Bradley Cutsey, executive]

Fred, it really will be a function of what turns coming up. So it could be anywhere from, call it the 15% to the 22% that we've seen. We don't provide forward guidance. In the past, we've told you we feel comfortable with the range of 6% to 8% on the top-line growth. We're kind of within there. It could come in by towards the end of the year, closer to 6%, I'm not sure, but we feel comfortable with what we've been out there already with.

[Dave Nevins, executive]

It can vary a lot. You don't control who comes to market when, so it can vary a lot Q-to-Q, quite frankly, and I think we take comfort in the fact that our turnover, given the regions we've decided to grow in over the last 5, 6, 7 years, our turnover is still higher than average in the market and it's a function of what we've chosen, and we kind of control that a little bit by where we choose to buy as best we can. But who decides to turn? You can't always control it, right.

[Frederic Blondeau, analyst]

Of course. Got it. And then maybe 1 last for you, Curt, on the debt to EBITDA ratio, I was wondering if you had a specific target for the end of 2024 or maybe longer term on that front.

[Curt Millar, executive]

I think what we've communicated to the market is longer term, we would like to get that down definitely below double digits and into that 9%-ish, 8%-ish range even. I think it's just a function, again, of our repositioning versus our non-repositioning. We provide that breakout on the presentation. If you look at just our repositioned portfolio, we're already sub-10%. And we said no more repositioning activity, we'd definitely bring the whole portfolio well below that. Quite frankly, I hope it doesn't because that means we've been active on our repositioning program. We've been able to get more repositioning opportunities into our portfolio, and I think we have a proven track record of providing exceptional growth when we've been able to do that. So part of me hopes it doesn't go below because it means we've had a good run on the repositioning side.

[Operator]

There are no further questions at this time, so I'll hand the call over to Renee Wei for closing remarks. Ma'am, please go ahead.

[Renee Wei, executive]

Thank you everyone for the call. And as always, if you have any questions or comments, please don't hesitate to reach out. Have a great day.

[Operator]

Ladies and gentlemen, this concludes today's conference. Thank you very much for your participation. You may now disconnect.