InterRent Real Estate Investment Trust

TSX:IIP.UN

Earnings Call Transcript 2021-Q3

[Operator]

Good morning. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the InterRent REIT Q3 Financial Results Conference Call. [Operator Instructions] Sandy Rose, Director of Investor Relations and Sustainability, you may begin your conference.

[Sandy Rose, Director of Investor Relations & Sustainability]

Welcome, everyone, and thank you for joining InterRent REIT's Q3 2021 Earnings Call. You can find the presentation to accompany today's call on the Investor Relations section of our website under Events and Presentations. We are pleased to have Mike McGahan, CEO; Brad Cutsey, President; 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. Please refer to the cautionary statements on forward-looking information in the REIT's news release and MD&A dated November 8, 2021, for more information. During the call, management will also refer to certain non-IFRS measures. Although the REIT believes these measures provide useful supplemental information about the 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. Mike, over to you.

[Michael Darryl McGahan, CEO & Trustee]

Thank you, Sandy. Again, it's nice to talk to everybody. I hope everybody is doing well, and things are getting back to normal for everybody. We are certainly getting back to normal here. We have everybody back in the offices in head office, regional offices, it has been that way for a while. I think it's a lot more productive and a lot more creative, and it really helps our culture. And especially the young people, the young people have really suffered in the last 1.5 years. So we're very happy to see it. And I think it's going to really help our -- what, the things that we can be able to do, and it will help our results, and it's going to just actually help everybody as we go forward in a lot of different ways and manners. And I also want to thank everybody in our -- at our site level, they work all the way through this COVID, which obviously I believe it's coming to an end and we're getting a lot more normalized. And along with a lot of us in the office environment have worked all the way through in the office in that. But it is nice to see a full complement of people back here. And as I guess kind of going to the meat of the matter, as we talked about at the start of the year in our last few calls, we were going to hold our rents, and we thought that was a good strategic decision. We still feel it is. I think it's kind of proving itself a little bit in the numbers, not to the extent that we would like. Admittedly, I'm not happy but some people say that I'm never happy. So maybe more unhappier than usual. But anyways -- and I think that's a result of just the immigration has not come in like we thought it would. I mean, obviously, the -- there's reports of the immigration being at decent levels right now, but we know most of that is really people that were already presently underground and it's getting Canadian status. The good thing is that we know that as we went through this last federal election, all the different parties, all were encouraging more immigration. And I think we're going to see historical high figures for the next 2, 3 years as we open up. And I think we're going to be -- it's going to be a big beneficiary to Canada and a big beneficiary to our end of the business. We also did not see the same amount of international students that we saw before. We kind of and it only feel it's like about 10% to 20% that we've seen in the past. I don't have hard figures, but that's just what I've got from our people on the ground, which I continually ask questions from. And so I think when you put those -- level of those 2 pieces in and just where our vacancy, as you can see, it keeps trending down. I think you're going to see like really big tailwinds and great results as we go forward over the next couple of years. So I'm pretty pretty encouraged by that, to say the least. So I do see a lot of positivity. And I do see that there's going to be -- I mean it was, I have to say, our leasing cycle this summer, started a little later than we had hoped. And again, that was like locked in towns and opening up and just the students approaching, coming back into campus a lot later. And even the young kids leaving their homes like we really did not get a push until we got it to September. We saw a good leasing activity in August but really in September, and all of our peers, I believe, will have the same kind of results depending on where they're -- if they're more urban or suburban portfolios. We got hurt in our urban side. You can even see that on the promos. So I think that kind of covers Slide 5 and then go over to Slide 7, if that's fine. I kind of talk to you about the occupancy. I do believe that we're going to get up to that 96% mark before the end of the year. And I think you'll see a continual improvement as we go into the probably end of the first quarter, probably early second quarter of 2022. Again, as you know, we will always try to be mindful of not of pushing our revenue numbers. So we will try to -- we basically go below 3%. We'll stay in that 3% to 4% range as we go forward into 2022, but I do feel that as things open up and immigration international students come back, it's going to be -- it will be very favorable for our business. The other kind of things I kind of wanted to point out is you can see that decent -- I guess, a little decent growth on some of our AFFO and FFO. We had some -- we've kept our leverage down. We have some CMHC mortgages right now. I have to say, like even though it shows we have 69%, we'll be pushing closer to 80%. We've got a bunch of CMHC mortgages in the pipe. And we've got lots of liquidity right now. So I think we're in a really good position. We are seeing a lot of different potential purchases, which we'll pursue. And I think it's still a very exciting time for our asset class. So I feel very favorable. Last thing I also wanted to kind of touch on too is I am excited that we've been adding some more bench strength to our team. So as we've grown, we were a pretty small little shop. And as we've grown, we've grown some pretty -- we've grown into being able to afford and also looking forward to some pretty talented people. So our bench strength of our team has improved tremendously well. I think you'll see that come into play over the next few years. So pretty excited about that. And I think that's -- I think I've touched on all the different matters. Thank you, everybody. Now I'd like to pass you over to Dave Nevins, our Chief Operating Officer.

[Dave Nevins, Chief Operating Officer]

Thanks, Mike, and let's turn to Slide #9. We showed this slide for the first time last quarter to give you a sense of our typical leasing seasonality and how that had been disrupted with the pandemic. We also wanted to highlight that our occupancy level tends to run higher for our repositioned properties, while our new acquisitions have higher vacancy by design as we look through our CapEx program. This quarter, we are pleased to show an occupancy improvement across all segments. Of note, we're seeing excellent leasing activity in our Vancouver portfolio, which has seen a quarter-over-quarter occupancy improvement of nearly 1,600 basis points. At this stage, we think it's safe to say we've seen the trough and that we're in good shape to finish the year close to our historical 95% to 96% occupancy level. Now turn to Slide #10. As you know, we decided early on during COVID to hold rents and we continue to believe that was the right decision. We posted 5% growth in average monthly rent in September and that growth is visible in both our reposition and non repositioned portfolios. We continue to see a gap to market in excess of 20% across our portfolio. On Slide 11, you can see that all regions have seen a nice progression in average monthly rent in September, and we again want to highlight the strong growth generated in Vancouver over the last 6 months. We are optimistic about future rental growth across the portfolio as immigration returns, and we continue to execute on our capital plans. So let me turn things over to Brad to walk through our capital spend. Thank you.

[Bradley Cutsey, President]

Thanks, Dave, and good morning, everyone. About 1/3 of our portfolio is at various stages in our repositioning program. Our approach to supply, our expertise to creating embedding, safe and quality communities for our residents to call home to extend the useful life of the building, thereby increasing the houses on stock and to create value for our unitholders. You can see by the differential in operating performance, why we see this as a driver for future NOI growth. Turning to Slide 14. We have been talking about the wall of capital interested in our sector all year. And if anything, it's only gone more frenzy going into the back half of the year. The volume of opportunities is incredible, and we're seeing record transactions, both in terms of cap rates and deal size. On our side, we are hunting for opportunities, but we're remaining disciplined in our approach and our underwriting assumptions. We closed on a 94-suite property in Mississauga in Q3, jointly with their partner, Crestpoint. This community is just down the road from our recent acquisitions on [ InfarHelse ], and we see a lot of value creation potential. We've also closed on several transactions post quarter, which we're quite excited about. We acquired 2 properties in core Toronto in October that are in excellent locations, and we closed on a small property in Montreal just last week that is a nice complement to our offering down the street. In Vancouver, we're delighted to close on the [indiscernible], which is a LEED Gold certified property that was completed in 2020. For each of these transactions, we see an opportunity to create value and drive synergies with our existing portfolio clusters. Turning to Slide 15. On the development side, we provided a few additional figures this quarter for our office to residential conversion in Ottawa. We are about 8 months into a 20-month project, and we're on track to deliver in Q4 next year with an attractive return profile. Turning to Slide 16. We have 3 other development projects in various stages of planning and all in prime locations. We've indicated the earlier start date for these projects just to give you a rough sense of time, but want to reinforce that we have flexibility on when to press go. And as we look to deliver into the best possible leasing environment. As we get closer to the breaking ground, we'll give you additional details about the financial metrics. Speaking of financial metrics, let's pass things over to Curt to go through the balance sheet.

[Curt Millar, Chief Financial Officer]

Thanks, Brad. On Slide 18, we begin providing some color regarding our weighted average cap rate by region for our investment properties. For the third quarter of 2021, we recorded a fair value gain of $85.5 million. Cap rate compression was a contributing factor, but the bigger driver of the gain this quarter was the improvement in the operational performance in our portfolio that Dave outlined previously. We currently sit at a weighted average cap rate for the portfolio of 3.93%, and given the current market environment and discussion with our external advisers, we believe there may be further cap rate compression in Q4. Moving to Slide 19. You can see that the REIT is in a healthy financial position. Our debt to GBV on the 30th of September was consistent with June 30 at 34.4%, owing to limited acquisition activity in the quarter. At the end of the Q, the REIT had mortgages of $1.3 billion at an average term to maturity of 4 years and a weighted average interest rate of 2.39%, reflecting a further 2 basis point reduction in the interest rate from last quarter. We are currently working through a number of CMHC applications that should bring the share of CMHC insured mortgages above 80% and increase our average term to maturity to nearly 6 years. We've seen rates move up recently, so we anticipate the impact of this financing to be an increase of 15 to 20 basis points on our overall weighted average interest rate depending on rate movements between now and the time of funding. Before I move things back over to Mike to wrap up, we wanted to highlight some of the work we've been doing on the ESG side of things, very much thanks to Sandy for pushing us along. We published our inaugural sustainability report today in which we share our philosophy around sustainability and how that thinking is integrated into our business strategy. As part of that report, we have provided an update on current initiatives as well as where we plan to go in the next few years. Today, we are also sharing our results for the 2021 GRESB real estate assessment, for which we achieved a 25% increase in our score and a Green Star rating, signaling strong ESG performance across the company. We've identified target improvement areas to keep the positive momentum going into 2022, and we look forward to engaging with you on our progress. Mike, I'll pass the floor back to you for a few closing words.

[Michael Darryl McGahan, CEO & Trustee]

Thank you, Curt. Again, we're seeing encouraging signs as we go forward, not -- again, not super happy with our Q, but we do see some really good light in the skies. And that's a nice change to be frank with you. And we do, we see some huge demand drivers as international students come back, we think that's going to be an immigration. I think we're just so well positioned. We're really happy that we held our rents. And we think that that's just the most strategic and the smartest move to do when we kind of build the rate here for the long term and over the next 5, 10 years. So we think that was a really prudent move, and we think we'll be rewarded for it over time. You also see that we have done some post-Q acquisitions, we're still seeing a lot. It is very competitive out there. We're very happy with the acquisitions we've done today. Again, I'll kind of go back to our even something like Vancouver, we're very extremely happy on that with this great timing, and we're beating our pro forma right now. So we think that was a good strategic move, and we'll continue to push into Vancouver and these core areas that we are currently in, I think there's some big benefits from being in there all technology-based communities, and we'll see some big benefits. And lastly, I guess you've seen that we've had, I guess, not lastly, but you've seen that we've had our distribution increase. I'm not sure how many years this is in a row. But again, we're very confident where we're going and we've got a low levered balance sheet. I think we're doing all the good things and going forward, I think you will see some good numbers coming out of us over the next few quarters. And I guess the last thing I want to say thank you to Sandy to put down a lot of the things that we've been doing for years on the sustainability report. A lot of it we've been doing it for years and years and just never really put it to -- reduce it to paper. And we know how important it is to everybody. And it's something that's important to us as we go forward and try to make ourselves a better company and in a lot of ways and better for our -- all our stakeholders and better in our community. I think that's about it. We are excited for the future, and we appreciate all the great work that our team has done. They've been -- again, this has been a long 1.5 years, and I have to say how much we appreciate everybody, and it's nice to see a lot of us, we've been getting -- It's nice to see everybody in person. And it's great. So I think that's about it. We'll open it up for the questions right now from the floor. Thank you.

[Operator]

[Operator Instructions] Your first question comes from the line of Mike Markidis with Equity Analyst Desjardins.

[Michael Markidis, Real Estate Analyst]

Just hoping to dig in a little bit more into property stats. Your economic vacancy for September, I think you showed meaningful gains went down to 5.1% versus 7.8% last quarter. But when we just sort of look at the average when you subtract vacancy and rebates in the same properties that's from gross revenue, that figure didn't move nearly as much. I think it was only down 60 basis points, and it's still quite elevated. So I was just wondering if you could give us a little bit more color between the interplay of the timing of the leasing gains that you saw this quarter versus promotional activity.

[Michael Darryl McGahan, CEO & Trustee]

Yes. The timing was much later, Mike. It really came in. And I think I said that on the call, it really came in a lot in September. A lot of that, again, is around the core students, the whole bed. And even, as I said, having the kids come back out of their parents' homes, including my own. And yes, so that really kind of hit September. There's -- I mean, we've had some good movement in October too, but it was -- yes, it was late in the quarter.

[Michael Markidis, Real Estate Analyst]

Okay. And then just following on to Dave's comments, I think you said 95% to 96% at the end of the year. Was that for the entire portfolio or just the same property portfolio?

[Michael Darryl McGahan, CEO & Trustee]

Yes. I think we're leaning more like again, that's more entire maybe I shouldn't speak for Dave.

[Dave Nevins, Chief Operating Officer]

I think you hit -- I think it is across the entire portfolio. So -- you hit it right.

[Michael Markidis, Real Estate Analyst]

Okay. Great. And then last one for me before I turn it back. Just on -- I know you haven't used a ton of promotional activity, but there is some in the portfolio. Would it be safe to say that from an aggregate dollar perspective, that's peaked? Or I guess it will probably peak in the fourth quarter, but are we at the peak now? You think in terms of...

[Michael Darryl McGahan, CEO & Trustee]

It's going to peak fourth and then you're going to have -- you still have obviously some in the Q1 of next year. It will start like it will be burning off as we go through. Yes, but it will peak in Q4.

[Dave Nevins, Chief Operating Officer]

I was going to say the only thing I'd add, Mike, is it will burn off throughout. And to Mike's point, it will really start to burn off in the second half of next year, but it will peak in Q4. And those -- and just to add a little more color to the promotions. They were in the urban core really where we select properties where we really felt the impact of the pandemic.

[Operator]

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

[Mario Saric, Analyst]

So I wasn't sure if you could hear me. But If -- maybe for Dave and for Mike in terms of operations and capital allocation. When you look at the 2022, what would you characterize as being your top 2 operational and capital allocation goal/targets as you see it today?

[Michael Darryl McGahan, CEO & Trustee]

Go first, Dave? Okay. I'll go first. And if I get the wrong answer, David will correct it. Really, like we're all about driving -- we're trying to drive growth and trying to get return. So we are -- as we're going forward, we're looking at everything and try to ascertain like where is the best revenue drivers. And I think if you went through our portfolio, and I know some of you have had the -- maybe not in the most recent past, but I've gone through our portfolio before. We're in pretty good shape. I'd say like structurally and building envelope and that we're in really good shape. So we are really just trying to drive different things where we think we can maybe drive some I guess, rental growth and really just make sure they're more sustainable over the long run, too, throwing that in for Sandy. Anything Dave, you'd like to add?

[Dave Nevins, Chief Operating Officer]

No, the only thing I was going to add is just looking for other areas where we can save on operational costs. But I think, as you said, most of the buildings are all are in good shape, and we're doing well on that side.

[Sandy Rose, Director of Investor Relations & Sustainability]

Yes. The only thing I would add to that to Dave and Mike's comment is just that we have been investing in technology. And we're finding ways and things that we can do to help offset some of the inflationary costs that we're seeing on the operating side through labor. It's not just us. I'm sure, as your fellow research analysts speak in the morning meetings and whatnot, it's across the board, the labor shortage that we're seeing in this country and globally. But nevertheless, that's really has helped accelerate our investment in technology and trying to find efficiencies within our portfolio to really reduce the pressure that we are seeing on the wage side of it.

[Mario Saric, Analyst]

Got it. And just maybe on the wage side, with the recent uptick in the minimum wage in Ontario, do you have any sense in terms of what the implication might be, your labor cost going forward as you -- how sensitive is the labor cost in relation to the minimum wage rate?

[Michael Darryl McGahan, CEO & Trustee]

Honestly, the minimum wage really does not come into play because we pay all of our people over minimum wage. So that's not even an issue. The bigger issue is, obviously, there's a little bit of a change in wage pressures. There's big changes, you know what I mean. So -- and I think we've got in front of it. We've really kind of locked down a lot of the key people in that. And going back to where Brad is saying, we're trying to make ourselves a little bit more efficient. We've pushed in through a bunch of different technology pieces that we think are going to help on the -- I guess, making us more efficient. So that's it. I really don't think the minimum wage has got anything to do so we don't -- there's nobody in our realm that we're paying minimum wage.

[Mario Saric, Analyst]

Got it. And in terms of the rent growth that you highlighted as a primary target, I think, Mike, earlier in the call, you mentioned 3% to 4%. I wasn't sure what that specifically related to? Was that like the expectation of 3% to 4% rent growth in '22 or in Q4? Or how should we think about that?

[Michael Darryl McGahan, CEO & Trustee]

No. I would think I was just calling, I think, for more on the vacancy side that we're going to get to 3%, 4%. And I'm saying in like into next year. I think that's -- I'm not talking to the first start of the next year, I think we'll be -- as we get going, it will be the latter part of next year. And being mindful like we always try to stay that's within our purview. We've always stated, we've always tried to be within that 3% to 4%. So we just think everything is going to be more normalized as we get into the, I guess, the second half of 2022.

[Mario Saric, Analyst]

Okay. And then in terms of capital allocation, you primarily stuck to existing markets so far in '21, including post-Q3 acquisitions. Is there -- when you think about capital allocation in 2022, are you looking to enter new markets? Or is there enough product, good valuations where you can expand the market colony?

[Michael Darryl McGahan, CEO & Trustee]

I think we're really -- we're -- again, we always look at it. We discuss everything. So it's -- I mean it's a continual path. But right now, we're very happy in the core markets that we're in. We like all of them greatly. We think we're going to do really well. And again, a lot of them, I think, are well positioned with technology being a big driver. And health care and things of that nature being big drivers here. So we like those markets. So I think that's really -- it's just going to be concentrating on that unless something comes out really compelling, but mean that's not where we're at today.

[Dave Nevins, Chief Operating Officer]

Just to add to that, Mario, to Mike's comment, the nice thing about being in Canada, there's not a lot of markets you have got to cover. It's not like the U.S. where there's a lot of submarkets that you really got to get your head around. So to Mike's point, we're really happy with the markets that we focus in. They've got good underlying economic activity that are linked to technology and life sciences and institution like education. However, that said, there's only a couple of markets that we earn in, in Canada, and we've been very well versed within those markets. So an opportunity of scale game, obviously, we would look at it, but we're not hunting. We like the markets we're around.

[Mario Saric, Analyst]

Got it. And my last question, just on -- I think on your conference call slide you mentioned the potential for core or core+ community acquisitions with the target IRRs on those types of acquisitions be a bit below kind of the high single digit that you're looking at for the value add? Or would it be somewhat similar?

[Dave Nevins, Chief Operating Officer]

Sorry, Mario, I think what you're asking the core versus value. I think what we have said in the past, if we see an opportunity that's strategic and that is close to an existing community, that we'd be willing to need a return threshold of high-levered single IRRs. But we're searching for double digits on the value add. And on development, we're searching for north of 15.

[Michael Darryl McGahan, CEO & Trustee]

And I think sometimes -- I won't say that it's always the case because sometimes the core is a good tuck-in and it gives you operational efficiency, Mario. But sometimes you find some, I guess, core assets are being marketed as core that maybe they've lost some of the potential rent that they should be getting. Maybe it is a value creation and you don't -- and people don't realize it all the time.

[Operator]

Your next question comes from the line of Jonathan Kelcher with TD Securities.

[Jonathan Kelcher, Analyst]

First question, just operating costs were a little higher in the quarter and I think the MD&A talked about leasing volumes and increased marketing costs. Can you maybe give a little bit more color on that and maybe some guidance on how to think about that for next year.

[Curt Millar, Chief Financial Officer]

It's Curt here, Jonathan. I think if you look at the year-to-date, they're pretty much in line. What we've seen is a little bit of pressure in Q3 that would normally have been spread between Q2 and Q3 from the point of view of the leasing. So if you look at the leasing activity that happened, and it was light in Q2, heavy in Q3, especially at the end, a lot of things get driven with that from salaries to commissions to advertising programs, online advertising programs and special events that got pushed later into the summer versus earlier, given the state of lockdown in the different markets. So there has been a little bit of pressure that Mike spoke to a lot of that has been seen and dealt with already. So those things will continue to exist. But I'd say the bulk of that differential is mainly due to the timing.

[Michael Darryl McGahan, CEO & Trustee]

I would say a little bit of timing, a little bit -- there's a little bit of things, timing, wage, technology investment was a big piece, which we'll be able to scale us for the future. Good thing that Curt touched on too is just we did do a lot of different activities to try to get our communities back to, I guess, as normal as we can. So we were doing a lot of stuff for that. So we think that's really important, and we try to look -- we really try to view these things not on a quarter-by-quarter basis, try to look at it more of a long run. So we think it's very, very important to get them engaged again.

[Jonathan Kelcher, Analyst]

Okay. And then I guess, switching gears, Curt, you talked a little bit about the financing in the opening remarks, but you do have couple of hundred million dollars of mortgages maturing in Q4. What sort of terms and rates are you looking at? And what do you think the up-financing potential is on that?

[Curt Millar, Chief Financial Officer]

The -- I'll start off with the financing potential. Based on what we have in this year and coming up early in 2022, we're looking at right now, there could be a total of north of $150 million and between $150 million and $200 million of up financing potential between sort of late this year and, call it, mid to late next year. So there's lots of availability. The timing, I'm sure if you've spoken to anyone who's been through or dealing with the CMHC process right now, it's just there's a lot of stuff going through there and the timing can be an issue. What used to take a month to 2 months is now taken anywhere from at the speediest end 3 months. And normally from what I'm seeing and hearing it's 5 months, plus or minus a month. So the timing is critical. The good thing is that the lenders all understand this, and they'll work with you to give you short extensions on existing mortgages if it's you need to bridge or anything else. So there's no issues on that front. In regards to rates, 5-year terms, we're seeing 2.2 to 2.4 right now and 10-year terms, we're seeing 2.5 to 2.7. So when you look at what's coming up, and I think we did speak to this in the presentation in the MD&A, you will see a little bit of pressure. I mean, we've been blessed with abnormally low rates for quite a few years, whether this will keep going, who knows. But I think if we do what we're planning on doing, we will lock in long-term financing mostly on the mortgages that are coming up, and we should be able to extend out our weighted average life to maturity once we're through these to be north of 6 years. Our CMHC insured will go up over 80% and the total impact on our weighted average interest rate, which is at 2.39 for the Q, probably ends up somewhere in the 2.5 to 2.6 range. So historically, by historical means, still very low and will give us a very long runway with a weighted average life to 6 years. And that will come with some deferred financing costs and some CMHC fees that will get amortized in. So as those start to sort of take hold in Q1 and Q2, we'll make sure to communicate that for you so everyone can model it well.

[Operator]

Your next question comes from the line of Mark Rothschild with Analyst Canaccord.

[Mark Rothschild, MD & Real Estate Analyst]

In regard to the improvement in occupancy, Mike, I think you said that it was mainly from students. Should I assume -- I understand that was entirely from students. And also going forward, with the guidance or the expectation that you will improve occupancy, maybe another 200 basis points over the next year. What is that predicated on? Is that assuming that integration picks up over the next few months? Or that the students entering university that they will be leasing more? I just want to understand the assumptions in there.

[Michael Darryl McGahan, CEO & Trustee]

Yes. First off, nice talking to you, Mark. Yes. No, it's not all university students. It's a combination of university students and a lot of the younger people that have graduated or got their first, second, these days, their fifth job within 3 years. And anyways, they -- so a lot of them just leaving their parents' home and all that. Actually, I was like based on -- to me, very muted international students showing up and immigration. I was like surprised when you kind of look at everything overall, like I think you're going to see pretty good headwinds -- sorry, tailwinds for us. And I think you're going to see -- like I think you'll see some pretty good results as of -- as we get into, I guess, more of the latter part of the second quarter of 2022. We do see that we're going to still get some occupancy improvements and all that. We just -- we're seeing where we're going right now over this winter and it looks relatively good. So it's not really predicated to a bunch of new people showing up or anything like that, Mark, it's just what we're seeing. We hope everybody shows up because it will be a whole different flavor of the call to be quite frank with you.

[Mark Rothschild, MD & Real Estate Analyst]

So based on an outlook of immigration really recovering with the -- should we expect that there could be a much more material improvement in occupancy?

[Michael Darryl McGahan, CEO & Trustee]

Yes. I think if we see immigration, we'll see a big material improvement.

[Dave Nevins, Chief Operating Officer]

Mark, and the way to look at it, too, on the students, was we saw the domestic student come back. But to Mike's point, we haven't seen international student come back anywhere near where it was. We were very hopeful on the backdrop of that, I think it would be fair to model and we don't provide guidance, but I think somewhere around 200 basis points improvement in total when you include big CM rebates.

[Mark Rothschild, MD & Real Estate Analyst]

Okay. Understood. And then in regards to the Toronto acquisition that just closed a couple of weeks ago, is there a value-add component of that, that maybe the going-in return would be even a little lower with greater potential? Or how should we understand that transaction?

[Michael Darryl McGahan, CEO & Trustee]

Yes. We think there's some good value-add potential. We're really -- we're very happy with the acquisition. We think there's some really good, I guess, some growth potential there.

[Mark Rothschild, MD & Real Estate Analyst]

And maybe just lastly, on that acquisition. So how much would -- should we expect you to invest in that property over the next year or 2?

[Michael Darryl McGahan, CEO & Trustee]

Well, we haven't usually typically given guidance on single investments to be quite frank with you. But look, we always model and you know we're looking for good returns, and we're looking at north of double digits here. So that's all I can tell you on return.

[Dave Nevins, Chief Operating Officer]

Yes. And there's no different, Mark, than typically, right? It's always been between 100 and 200 basis points that would try to improve the yield, and that yield calculations include any CapEx needed to get there, right? So this is no different. We're extremely happy with this purchase.

[Mark Rothschild, MD & Real Estate Analyst]

Maybe I'll just ask the question a little differently and maybe this thing you can't disclose either, but would the CapEx be built into the acquisition price that was announced?

[Michael Darryl McGahan, CEO & Trustee]

Yes. We -- no, when we look at it, it's not -- that's not built in when we look at our returns, we build it in.

[Operator]

Your next question comes from the line of Joanne Chen with BMO.

[J. Chen, Director of Equity Research]

Maybe just a quick one from me on that with respect to the acquisitions that were completed subsequent to quarter end, would you be able to kind of provide kind of what sort of cap rates that you're seeing in some of your target acquisitions right now?

[Dave Nevins, Chief Operating Officer]

Hi, Joanne, and it's not to be cute, but you know our investment philosophy, right, we always -- we won't sacrifice location. And then from there, we like things that have a little bit for lack of a better term here, where we can bring our vision and reposition. So the going-in yield a lot of times is irrelevant for us when we're looking on that acquisition. What really manage for us is where we think we can take that going in yield in year kind of 3 through 5 once we've given it enough time to kind of work our magic. So we really don't like disclosing the going in yield because it's not the way we look at the overall acquisition. But you can look at our track record, we wouldn't be investing in this if we didn't see a material improvement on what we thought we could take the underlying cash flows.

[J. Chen, Director of Equity Research]

Right. No, of course. No, that's still helpful. And I guess, given how tight pricing is right now in some of these core markets. What is your thinking perhaps on any potential for dispositions and capital recycling?

[Michael Darryl McGahan, CEO & Trustee]

Yes. We've talked about before. We'll probably -- some of our, we think, properties that we've kind of borne all the fruit out of them as much as we can or if they're maybe not help us operationally that we'll probably exit out of those. And I think you'll start hopefully seeing it over the next couple of quarters, a couple of them.

[J. Chen, Director of Equity Research]

Okay. Great. And I would imagine the acquisition pipeline for the remainder of the year into 2022 is still going to -- you guys are going to be keeping busy on that, right?

[Michael Darryl McGahan, CEO & Trustee]

I think it's really busy. There's a lot of -- seems a lot of intergenerational trades happening right now. There's a lot of I don't know. I guess we've seen some people of pit it in the media to intergenerational stuff. But there's a lot of stuff out there, both on market and off-market. So we're very hopeful.

[Dave Nevins, Chief Operating Officer]

The only thing I would add to, in today's world with where everything is as far as the taxes and policies and different things like that, you're seeing a lot of people that own these departments, they're in the private hand, but they own them in syndicates. And now there's questions with regards to different views of what the current environment is and you're starting to see a lot of people dissolve those partnerships because they can't come into the agreements with where their near-term outlook is.

[Operator]

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

[Bradley Sturges, MD & Equity Research Analyst]

I guess based on your comments that you're seeing still a pretty good pipeline of acquisition opportunities, like how would you compare the opportunity set today versus maybe earlier in the year in terms of investment size or opportunity?

[Dave Nevins, Chief Operating Officer]

Not a lot's changed, Brad, other than the fact that as the world gets back to a somewhat normal and by no means do I think we're back to a normal, and only when we start to really see the plug gates open with immigration. And we've -- let's throw it out there, Curt has the exact numbers, but we looked at it, right? And you're seeing record immigration numbers posted. But the reality is a lot of those immigrations are getting counted and posted in the media are really residents that were already in Canada have been given permanent resident status, which is great for us. That means they're not going to be leaving Canada and they're not leaving the rental pool, but we have to see the influx and the increase in the rental pool demand. And we truly believe we're going to see it. I think all 3 levels of government, and I think all 3 parties are very much supportive of an immigration policy. So I truly believe and we truly believe that the fundamentals, if anything, going to continue to tighten at least in the near term. So as you see that, you're going to continue to getting an environment where you're trying to underwrite the top line. And that's really where the magic will come in is really what your vision is for an asset and where you can take those rents. However, backdrop and offset against where turnover will go. So there's a lot of capital chasing the product and that has not changed. But there's a lot of increased deal velocity, which we kind of thought would be the case 1.5 years ago, and it's played out and it continues to play out. It just means we've got to be really disciplined. And when we underwrite an asset, we better really do a homework within the node and have a clear vision of where we can take that asset and those rents. And really -- so for us, nothing's really changed other than the fact that you might have to spend a little more time on the research.

[Bradley Sturges, MD & Equity Research Analyst]

Right. And with your expectations for further improvement on the occupancy side. Have you -- would your expectation be for, I guess, the next quarter or 2 for your net effective rent growth to kind of hold in at current levels before improving, call it, early to bid next year? Or how do you think about the trend on rent growth over the next few quarters?

[Michael Darryl McGahan, CEO & Trustee]

I think it's going to hold it, to be frank with you. I'm really looking forward to normal times. So when we get into the middle of next year, I think you're going to see -- I mean, all things -- all signs point to some pretty good times in our asset sector so.

[Bradley Sturges, MD & Equity Research Analyst]

All right. And just to go back to your earlier comment just on some of the cost inflation you're seeing, but also occupancy is improving. Margins have been stable for the year-to-date numbers that trend you expect to continue then as kind of stable margins for now?

[Michael Darryl McGahan, CEO & Trustee]

I believe so, they're pretty stable. I think we've got ahead of a lot of that stuff.

[Operator]

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

[Matt Kornack, Analyst]

Just wondering with the acquisitions and sort of core Toronto proper, is that market one that you see a material growth avenue in -- Or are these just asset-specific acquisitions?

[Dave Nevins, Chief Operating Officer]

We like it, Matt, obviously, but as you know, it's us, we like our 4 core areas or focus areas. We'll look at opportunities from a bottom-up scenario. This is 2 assets of portfolio sale that we thought we could do a lot with. So we were more than happy to get it. So we will continue to look. But we're not going to deviate from our core strategy of buying really well-located assets with upside potential, right? So nothing really changed on that front. Yes, it's probably the first core. But if we can be lucky enough to find other access to meet the same kind of investment criteria, we'd be very happy to do so.

[Matt Kornack, Analyst]

And are those carrying a little higher sort of vacancy than they would historically -- Or are they pretty well leased at this point?

[Michael Darryl McGahan, CEO & Trustee]

No, we -- to be frank with you, every time we get through a purchase rightly or only, we always ask them to stop leasing once we start negotiating because we'd rather have the -- to carry the vacancy and be able to do the work we'd like to do on the different apartments and kind of try to create some -- I guess, some value for us. So we always do that upfront.

[Matt Kornack, Analyst]

Okay. Fair enough. And then given the state of the market, you definitely seem optimistic, and I think the numbers are proving it out across the board. But have you been encouraged maybe to pursue some of the redevelopment or repositioning projects that maybe you would have put on hold and you may not have put this one on hold, but I'm thinking some of the Sherbrooke Street East assets that had significant potential upside. But presumably, I wouldn't have thought after you would have done renovations there and COVID, maybe you did. But those type of projects? And how should we think of that in terms of the potential CapEx spend going forward?

[Michael Darryl McGahan, CEO & Trustee]

Well, I think our CapEx is going to be pretty consistent from the years past. We need to be -- we see a lot of different potential we're really watching. It's a pretty fluid market to say the least of what's going on out there. So we are continually watching and looking for the opportunities. And sometimes the best opportunities you hit it right on the head matter are in our own portfolio. Some of the stuff that we did some repositioning even 7, 8 years ago, kind of look at it now and seeing what's happened in those neighborhoods, those nodes and the potential to -- maybe we should be going looking at them again. So that happens from time to time too.

[Dave Nevins, Chief Operating Officer]

The only thing I would add is the example you used, yes, we are in the middle reposition that asset.

[Matt Kornack, Analyst]

Okay. Fair enough. The trees in the lobby were interesting. Anyway, last one for me is...

[Michael Darryl McGahan, CEO & Trustee]

We unfortunately against our ESG thing, we did take that tree down, Matt.

[Matt Kornack, Analyst]

I hope you recycled it. The last one for me. Have you found -- I mean, I think young professionals have been fairly price sensitive. There's been some shopping around during the pandemic because they've had an opportunity for the first time in a while. But with students coming back, did you find that they were a little less price-sensitive? Or were you also finding them to be negotiating at this point?

[Michael Darryl McGahan, CEO & Trustee]

They're negotiating upfront, like depending on how -- I mean not everybody is aware of the situation. So I think some of them were -- the thing is that usually they'll stop at 2 or 3 places. So it depends where they stop first. But yes, so -- but I do believe that they got it, you know what I mean, and that was happening. And in the quarter, it was just -- it was competitive. Like everybody has gone through the same issues in the cores. I think we all feel very -- some very good things are going to happen in the core as we come back. And you can see it like if you just come and go around to the restaurants and things of that, people are coming back. And again, once we get the immigration push and international student push, those are 2 big, huge pushes. I really believe immigration is going to be -- I think we're going to hit like even higher potentially from what I've heard than what the government was stating at one point. So I think we're going to get some big pushes in those core markets.

[Dave Nevins, Chief Operating Officer]

Matt, I'll add to that because we mentioned -- and Mike touched on it again, is the immigration piece is that to put it into perspective, so of the 30,100 -- sorry, 31,000 new immigrants in August that was announced by the government, only 6,880 of those were net new people into the country. So we did not see that push in August that often comes around with school or at the start of the year. And -- It sounds like that's going to happen coming forward here, some of that we may see for January, at least in what we're seeing so far. But the immigration numbers at the end of August 222,000 into the country, only -- just under 77,000 of that was actually net new people into the country. So that's half of what it typically is less than half actually what it typically is. So I don't think we've seen that pressure yet. And I think when we do, it's going to make a big difference in a lot of these cities because a lot of them end up in those core markets.

[Matt Kornack, Analyst]

And do you know -- the student permit numbers actually looked okay, but was that something similar as well? Maybe they got a permit, but didn't necessarily come to the country? Or are those net new people to the country?

[Dave Nevins, Chief Operating Officer]

Yes. So far, from what we've seen, it's -- that one is harder to get concrete data on at least timely data. But from what we've seen so far, it appears that they've got the visas, but they didn't start getting rolled out until into the school year. So it's a matter of our people trickling in partway through, they're going to wait for January to start. And I think there'll be a mix of the both. So you won't see the same wave you often see.

[Michael Darryl McGahan, CEO & Trustee]

It may not -- I wouldn't count on it all coming in January. I wouldn't want you to do that. That's for sure. But I'll tell you there's -- and just -- I have my own kids in school. My one son is in second year at [indiscernible], he doesn't have any in-person classes. So you know what I mean. So that's -- and I think that's in a lot of different universities. So you know that gets reflected, obviously, in the number of people that are actually choosing to live outside their home. He has chosen to live outside his home anyways, probably for other reasons, anyways.

[Operator]

Your next question comes from the line of Matt Logan with RBC Capital Markets.

[Matt Logan, Analyst]

Just following up on some of your commentary in terms of your outlook for January. Can you talk about how the leasing demand has trended in October and November? And what your outlook is for the next couple of quarters?

[Michael Darryl McGahan, CEO & Trustee]

It's trended pretty well. It's actually been a little bit better than we've had previously. Do I think we're going to see outside demand in January. I wouldn't want you to model that in for January. I think it's going to be -- I mean, we don't know when the other pieces are going to open up. I really would say that I would -- we'll probably see 200 to 300 points between now and the end of probably mid-Q2. And then hopefully, we'll see an improvement or maybe the end of Q2. But I would say, unless something really changes and all the opening, I wouldn't want you to model anymore than that. I love that.

[Dave Nevins, Chief Operating Officer]

Yes. The only thing I'd add, I totally agree with my comments on anything I'd give you on a regional perspective. I think everything is at least at historical levels for this time, if not a little better, except for Montreal is a little slower than we normally see. I think that goes back to the whole international students that missing a big portion.

[Matt Logan, Analyst]

So I guess, really in line to slightly above seasonal trends with an outlook to improving maybe in mid-2022 as immigration comes back?

[Michael Darryl McGahan, CEO & Trustee]

Yes, I would say that, for sure.

[Matt Logan, Analyst]

And when you roll up your expectations for stable margins, the occupancy gains. Do you think that supports organic growth somewhere in the high single digit to potentially low double-digit range for 2022? And do you think that would moderate any in 2023?

[Dave Nevins, Chief Operating Officer]

If I was a near sea and I had a model and you got a lot of different variables at yet. I think the good news is the visibility is on the right track as far as the top line. So that's really good news. Unfortunately, there have been inflation pressures on things like insurance, waters and some utilities, and we mentioned the wages. Hopefully, some of the investments we've been making over the last, call it, 2 years on our technology front will prove to get a little more efficient. But I'd rather be on the conservative side and be flat, but we certainly won't be happy as the management group, Matt, at flat. But by setting your shoots there are just a lot of different variables, offsetting some of that top line.

[Matt Logan, Analyst]

Fair enough. And last question for me. Maybe just circling back to your mark-to-market potential. You had mentioned 20% earlier on the call. Is that something that you are achieving on lease trade-outs or more what you'd expect as quarters reopen?

[Curt Millar, Chief Financial Officer]

I think the mark-to-market that we're seeing is creeping back up. And I think once the immigration comes back in line, you'll see that get back north of that 25%. And today, we're playing in that 22%, 25%. So I think we'll get back north of that once the migration picks back up. And on the turn side, you get roughly in that area just depending as who's turning over? Is it someone who's been there for 4 years or someone who's been there for one. So on average, you get in that ballpark also.

[Matt Logan, Analyst]

And that 22-ish percent would include the benefit of renovations for the suites?

[Curt Millar, Chief Financial Officer]

For sure. Yes, it would. It includes everything. It's obviously higher on the non-repositioned assets typically because usually, they're fairly significantly below market. So it's usually a little bit higher on the non-repositioned but that is the average of all and includes the capital work to go with it.

[Operator]

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

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Mike, not to scare you, but when they finish university, they do come back home.

[Michael Darryl McGahan, CEO & Trustee]

Okay. That's good to know.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

The food bill goes up. Just given how tight the acquisition environment is, what's your guys' thoughts on expanding the use of co-ownerships and joint ventures in order to get a little more juice out of the returns? Or do you want to keep that growth on balance sheet given where your leverage is?

[Michael Darryl McGahan, CEO & Trustee]

It's something that we talk about a lot, to be frank with you. I think -- I mean, again, we're really happy with our current partnerships. We'll have to expand. It could for sure. There's no question about that, but it's something that we talk a lot about. So anyways, I would definitely say that the -- I wouldn't say no -- I mean that from the farthest part of it. I think there's probably more -- at this point, we're more positive and probably growing it.

[Bradley Cutsey, President]

The only thing I would add, Dean, is our partnerships have big chemicals in the real estate community. So not only are we sourcing deals ourselves and whatnot, but they're also a great source of deals as well. And us being a partner with them, as we benefit from that as well.

[Michael Darryl McGahan, CEO & Trustee]

Actually end up bumping into the lot. Good point, Brad.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Anyway, it's a small sandbox. Have you had conversations with them, just in terms of what that partner, is that more an acquisition partnership? Or do they have a stable asset component of that where you could potentially bend in some of your more mature repositions stabilized assets and sort of give them some exposure to that? Or is it more of a growth vehicle?

[Bradley Cutsey, President]

No, the way we look at it is on an opportunity-by-opportunity basis, but we're not in a position to kind of discuss their strategy on this call. So we're just back to Mike's point, we're just really happy with the partners that we have. And we -- I'm sure there will be different opportunities that will present themselves going forward in the future that we'll hopefully be able to transact on.

[Operator]

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

[Mario Saric, Analyst]

Two more quick ones for me. Just coming back to the mark-to-market, the disclosed number was flat quarter-to-quarter at 20%. Does that imply that you believe that market rents in your portfolio went up 2% quarter-over-quarter, similar to what your quarter-to-quarter average rent, or we talking rounding?

[Curt Millar, Chief Financial Officer]

Maybe I misspoke, but what I was trying to say is they're in the 20% to 25% range, not specifically 22%. And do I think there has been pressure and seeing them partially start to climb again in Q3. Yes, we've seen that pressure late in the Q, as Mike indicated earlier, with September really improving. But at this point, I wouldn't say a 22% number, but I think we're starting to climb again. And as immigration comes back, we'll see that once again get north of 25%.

[Mario Saric, Analyst]

Okay. I was kind of more thinking about the actual market rents is like competitive rents in your market quarter-over-quarter. Have you seen those troughs and start to [indiscernible] .

[Michael Darryl McGahan, CEO & Trustee]

We are seeing our competitors move there. And it really depends on the markets, but we have seen our competitors move too. I mean we all -- we all went through the same circumstances. So everybody -- and if you look at, quite frankly, everybody reacted a little bit differently depending on what their strategy was. But right now, I think you're seeing a lot more normalized across the board, especially in certain markets, for sure, you mean again, Brad kind of said like Montreal was a little bit harder. But we're seeing people push the rents.

[Mario Saric, Analyst]

Got it. Okay. And then just on tenant turnover, like as things begin to stabilize, you get into more of a normal environment. Do you foresee kind of turnover being similar to interest rates where they're lower for longer? Or do you envision turnover rate come back to historical average?

[Dave Nevins, Chief Operating Officer]

We -- listen, this is kind of like when you go to one of those real estate conferences and you have to talk about interest rates and everybody says, eventually, they got to go up. Curt and I and Mike have been saying now for 3 years and I hate saying it because it would sound like a broken record. Our historical turnover has been up closer in the low 30s range and that it has to come in. We still believe it has to come in. At some point, it's got to come in. I think we'll see that play out over the coming, call it, 12 months, just given where we think fundamentals will tighten too.

[Michael Darryl McGahan, CEO & Trustee]

I would do a little bit of modeling to come in if I or you, Mario, just to be conservitive. Just thinking about all the circumstances out there.

[Operator]

There are no further questions at this time. Mike, I turn the call back to you.

[Michael Darryl McGahan, CEO & Trustee]

Thank you very much. I just want to say I appreciate how much our team has worked over the last year, 1.5 years, and they've done some really, really great work in some pretty trying times. I do look forward to much better results and continually, I guess, more smiling and happy faces with the better results. And I want to say thank you also for all the -- for everybody following us. I really appreciate that too. So thank you, and hope everybody has a great day.

[Dave Nevins, Chief Operating Officer]

I'll just add in one thing. I'm very happy about our sustainability report going out this Q. So that's available on the website for those who want to see it. And if anyone is having problems locating it, they can contact Sandy, and we'll make sure to get to you a copy of it also.

[Michael Darryl McGahan, CEO & Trustee]

Good point, Curt, you have the sustainability report, I think, Sandy did an excellent job. So hopefully, everybody has a chance to take a look at it. Thank you, everybody.

[Operator]

This concludes today's conference call. You may now disconnect.