InterRent Real Estate Investment Trust

TSX:IIP.UN

Earnings Call Analysis

Strategic Moves Amid Market Adjustments

During the first three quarters, the company adjusted capitalization rates by 19 basis points and is positioned to renew mortgages in 2024 at rates that are less than or equal to the current weighted average, expected to alleviate financial pressures experienced over the past year. Their approach to mitigating interest rate exposure and market volatility shows proactive financial management. The company also celebrated sustainability milestones, raising $1.67 million for charity at a golf event. They are progressing in building certifications and anticipate more in the near future. Despite some market deal volume declines and cautious investment sentiments, the company is pursuing strategic asset dispositions and embracing development projects, including a transformative office conversion project slated to begin construction in Q2 next year, which will benefit from tax savings. The company is mindful of the challenges such as rising costs and financing constraints but remains optimistic about the multi-family residential sector's resilience and their solid financial position to support growth initiatives.

Operational and Portfolio Performance

This quarter, we continue to see the company's average monthly rent (AMR) rise robustly, marking a 7.8% year-over-year increase and a 7.3% rise on a same-property basis, showcasing a persistent upward trend across all markets. Despite a marginal occupancy dip across the portfolio, the rate has been steady at 95.2%, with particularly strong leasing momentum in the Montreal portfolio. A reduction in the Greater Montreal region's vacancy rate by 380 basis points over the last year reflects the successful recovery in downtown and urban locations. The company is adjusting its price discovery program to address vacancy upticks in certain submarkets but remains optimistic about reverting to historical occupancy norms in 2024.

Financial Growth and Resilience

Impressively, same-property net operating income (NOI) saw double-digit growth of 10.5%, with the operating margin reaching 67.6%, the highest since Q3 2019. The significant expansion in revenue alongside disciplined expense management contributed to a 4.9% increase in funds from operations (FFO) to $21.3 million. This quarter marked the company's third consecutive quarter of FFO growth, showcasing a strong bottom line despite higher financing costs.

Balance Sheet and Liquidity

The company's debt-to-gross book value stands at a competitive 38.6%, situated favorably within the industry. This is complemented by a substantial liquidity position, evidenced by $268 million worth of available resources as of October 25.

Operational Cost Management

The company effectively managed its operating expenses, achieving considerable savings on natural gas costs by 14% due to lower prices and decreased usage through efficient energy programs. Furthermore, electricity costs have decreased slightly, and the company continues to actively manage these costs with its hydro sub-metering program, which delivered significant reductions of 37.9% for the quarter. Property taxes saw a moderate increase due to expanding suite counts and minor rate hikes, yet the company relentlessly pursues assessments and appeals as necessary.

Property Upgrades and Strategic Investments

Strategic capital expenditures continue, focusing largely on value-add upgrades that augment occupancy and NOI margins, especially for repositioned suites. The comprehensive completion of interior renovations, including amenities, showcases the company's commitment to enhancing resident experiences and property value.

Changing Market Conditions and Cap Rate Adjustments

The company observed cap rate adjustments, with a notable 19-basis-point adjustment through the year's first three quarters, influenced by changes in the Bank of Canada's 10-year bond yield. This situation, alongside a transaction market experiencing minimal activity, corroborates the company's cautious, yet nimble, approach to navigating market dynamics.

Mortgage Management and Sustainability Efforts

A staggered mortgage maturity profile has been pursued, to increase flexibility and mitigate exposure to interest rate movements. With no more than 14% of mortgage debt maturing in the next four years, and expectations of upcoming renewals to be at or below current rates, the company is proactively balancing its interest rate exposure. The quarter also brought remarkable sustainability milestones including successful fundraising initiatives and building certifications, indicating a commitment to community and environmental stewardship.

Strategic Capital Allocation

The company continually evaluates capital recycling opportunities, recently finalizing the sale of a 54-suite property in Ottawa for $11.5 million. This reflects an ongoing strategic pursuit of asset optimization. Additionally, recent commitments to office conversion projects demonstrate a forward-thinking stance towards addressing housing shortages and contributing to urban renewal, with anticipated savings from new tax policies adding to the financial appeal of these ventures.

Outlook and Market Fundamentals

Amid rising interest rates and a shift away from home ownership, particularly among young professionals and empty nesters, the company expects sustained rental demand. The multi-family segment, historically resilient amidst economic fluctuations, has promising future prospects thanks to solid fundamental drivers. The company projects robust NOI and FFO growth, supported by a solid operational platform, cost control measures, and a conservative balance sheet. It is also preparing to unveil a new brand identity, in line with its growth vision, showcasing adaptive strength and market responsiveness.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the InterRent Q3 2023 Earnings Call. [Operator Instructions] This call is being recorded on Wednesday, November 1, 2023.I would now like to turn the conference over to Renee Wei. Please go ahead.

[Renee Wei, executive]

Welcome, everyone, and thank you for joining InterRent REIT's Q3 2023 Earnings Call. My name is Renee Wei, Director of Investor Relations & Sustainability. You can find the presentation to accompany today's call on Investor Relations section of our website under Events & Presentations. We're pleased to have Brad Cutsey, President and CEO; Curt Millar, CFO; and Dave Nevins, COO on the line today. 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 forward-looking information in the recent news release and MD&A dated November 1, 2023.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 the non-IFRS financial measures, including reconciliations to the nearest IFRS measures.Brad, over to you.

[Bradley Cutsey, executive]

Thanks, Renee, and good afternoon, everyone. Let's get started with an overview of our operational performance on Slide 5. As you can see, a track record of growing average monthly rent continuing its positive momentum during the quarter. For our total portfolio, AMR increased by 7.8% year-over-year and 7.3% on the same-property basis. This robust AMR growth was underpinned by strong increases consistently observed across all markets.While we did experience a marginal dip in occupancy by 40 basis points compared to the previous year for both total and same property portfolios. Our occupancy rate remained at a steady 95.2%, in line with our historical performance of strategic approach. We're pleased to see strong lease-up momentum in the Montreal portfolio, which accounts for about 1/4 of our total portfolio. Vacancy in the Greater Montreal region decreased by 380 basis points year-over-year, driven by sustained recovery in downtown and urban locations.The uptick in the portfolio-wide vacancy was primarily concentrated with the specific submarkets of our portfolio, where our price discovery program did not adjust quickly enough when seasonal demand started to ship. Notably, these markets Greater Toronto & Hamilton Area, Greater Vancouver Area and Other Ontario take the lead in the AMR growth for the quarter, with each one achieving growth rates of 8% or higher. Encouragingly, we are witnessing robust leasing activities in the first half of Q4, and we are confident that the occupy levels will revert to the historical norms as we move into 2024. Dave will provide more details on this later in the call.Over to Slide 7, for an overview of our financial performance. We are happy to report yet again double-digit same property NOI growth at 10.5%. Our operating margins increased by a healthy 140 basis points year-over-year to 67.6%, the highest level since Q3 2019 and firmly returned to our pre-pandemic levels. This was driven by consistent revenue expansion, coupled with our disciplined management of operating expenses.Despite the persistent new reality of higher financing costs, their top line improvements have been able to flow down to enhance bottom line performance as seen in the chart on the right-hand side. FFO increased 4.9% to $21.3 million, and on a per unit basis is up 4.3% to $0.146, representing our third consecutive quarter of FFO growth. AFFO increased 6.3% to $18.9 million, a 4.9% increase to $0.129 on a per unit basis.Taking a closer look at our balance sheet, we're in a solid financial position. Our debt-to-gross book value at 38.6% is favorably positioned at the lower end within the industry. We have a comfortable level of $268 million of available liquidity as of October 25, with stable available liquidity and a significantly enhanced debt profile, we're in a robust position to pursue a strategic initiatives even in the face of market fluctuations and challenges.Dave, over to you to take us through some of the operating highlights.

[Dave Nevins, executive]

Thanks, Brad. As Brad previously mentioned, vacancy in September, while in line with our strategic approach, experienced a slight uptick. This was mainly isolated to specific suburban markets within our GTHA and other Ontario portfolios. Our proactive approach where we deploy revenue maximization program to explore price elasticity across our diverse regions has enabled us to consistently deliver outside rent growth. However, our pricing strategy is flexible, as we continuously evaluate and adapt. In this case, we have implemented targeted adjustments on a submarket specific level.It's important to emphasize that we continue to strategically accept slightly higher vacancy to position ourselves for optimal revenue growth, particularly considering the industry-wide trend of reduced turnover. Encouragingly, we've been seeing positive developments point to robust leasing activities for the remainder of the year. In September, we observed a substantial increase in the number of leads across all regions, and the number of tours has seen a significant growth in areas with greater availability.In the GTHA and other Ontario regions, tours have nearly doubled compared to the previous year. Early trends indicate that vacancy will be absorbed, and we are well on course to end the year with over 96% occupancy without compromising our average monthly rental growth.Slide 11 shows a breakdown of our operating expenses, which came in at $19.3 million for the quarter. Operating expenses for the quarter are up 4% year-over-year, while operating revenue grew by 8.6%. On a per suite basis, our operating expenses came in at $1,515, an increase of 3.8% compared to the third quarter last year. This improvement was driven by reduced utility costs, which were $0.1 million lower year-over-year, or a 60 basis point reduction as a percentage of revenue.During the quarter, we achieved 14% savings on natural gas costs due to a combination of lower gas prices and decreased usage. Thanks to our effective energy efficiency programs. Electricity costs are also down slightly over last year, despite the larger portfolio under ownership. We continue to manage electricity costs through our hydro sub-metering initiative, which reduced electricity costs by 37.9% for the quarter. Property taxes for the quarter increased by $0.3 million year-over-year to $6.3 million as a result of our expanding suite count and minor annual rate increases. We are constantly reviewing property tax assessments and making individual property tax appeals when necessary.Turning to Slide 12. We maintain a highly strategic approach to our capital expenditures. Year-to-date, we've directed 11% of our capital expenditures to maintenance CapEx, ensuring our communities remain clean, safe and well managed, offering residents a sense of pride in their homes. Over the course of this year, 89% of our capital expenditures have been allocated to value-add opportunities, consistent with our historical norms. Our repositioned suites, as demonstrated at the right-hand side of the slide, continue to deliver substantial benefits in terms of both occupancy and NOI margin, compared to non-repositioned suites. As of September 30, 2,598 suites consisting of 20% of our portfolio are at various stages in the repositioning programs, representing significant future potential for rental growth.Turning to Slide 13, a quick update on The Slayte. Our first office conversion project. During the quarter, we completed all interior renovations, including all amenities on the rooftop and the lounge area, and have now made them available to our residents. Leasing activities are progressing well despite ongoing construction on Bronson Street by the city of Ottawa.Lease rate has already surpassed 84% as of the end of October, and we are confident that our trajectory towards stabilization, which we expect to achieve before the year's end. With its central location just steps to the Parliament Hill and close to 2 LRT stations, The Slayte remains a desirable destination for students and young professionals.With that, I'll hand it over to Curt to discuss our balance sheet and sustainability efforts.

[Curt Millar, executive]

Thanks, Dave. As expected and based on our quarterly review with our external appraisers, we have witnessed upward adjustments in cap rates during the quarter. Our weighted average is currently at 4.22%, an increase of 15 basis points from the last quarter, driven by moderate cap rate expansion across all regions.The Bank of Canada 10 year bond yield has increased more than 80 basis points since the year's outset, including a 50 basis point increase in September alone. As a result, the transaction market is experiencing minimal activity. Despite subdued transaction activities, we've adjusted our cap rates in anticipation that rates are not set to revert in the near-term. We will continue to monitor market dynamics and collaborate with our external appraisers to adjust our cap rates accordingly. Since the fourth quarter of 2022, when removing the impact of the Ottawa properties sold in the quarter, we have adjusted cap rates by 19 basis points through the first 3 quarters of this year.Slide 16 shows the staggered maturity profile of our mortgages. We continue to pursue this strategy to enhance our flexibility and mitigate our exposure to renewal rates. No more than 14% of our mortgage debt is coming due in the next 4 years. For the remainder of this year, we had $61.3 million of mortgages maturing with an average interest rate of 5.19%. Our 2024 maturities carry a weighted average interest rate of 5.33%. And as such, we anticipate our 2024 mortgages being renewed at or below this rate, which will significantly reduce the headwind we have been facing over the last year.Our floating rate exposure continues to move in the right direction, finishing the quarter at 5.7%, including our line of credit debt, a moderate decrease from the same period last year, which was up 7.9%. By continuing to fix our interest rate costs, we're actively mitigating our exposure to market volatility and proactively managing our interest rate expense.We are excited to highlight some remarkable sustainability milestones from the quarter. In September, our annual Mike McCann Charity Golf Tournament took place, bringing together hundreds of support of partners from various organizations. This event successfully raised an incredible $1.67 million, bringing our cumulative total to $8.2 million since the inception of the tournament. All proceeds from this event will be directed to support various charities within our communities, including the Boys & Girls Club, Habitat for Humanity and Shepherd's of Good Hope, just to name a few.For all of those who joined us at the event, we once again extend our heartfelt gratitude for your support and generosity. We're also making significant headway in our building certification efforts. In October, we announced a successful certification of our initial 6 communities through the Canadian rental building program. During this process, we've also met the requirements for corporate level documentation and employee training, paving the way for further certifications in the near future. This achievement is a well-deserved testament to the excellence of our buildings and the dedication of our on-site teams. We've committed to expanding our CRB program and anticipate more announcements and more certifications in the months ahead.Earlier this month, we also received our 2023 GRESB results, where we successfully improved our score from the previous year and maintained the Green Two Star designation. We've also earned an A rating on the GRESB public disclosure survey, outperforming the global average in our comparison group average.I'll turn things back to Brad to walk through our capital allocation.

[Bradley Cutsey, executive]

Thanks, Curt. Turning to Slide 20. We're pleased to provide an update on our recent strategic moves. Last quarter, we shared news about the successful sale of the 54 suite property in Ottawa, bringing in total proceeds of $11.5 million. This transaction was finalized on August 30. Approximately $2 million of the proceeds were allocated from our NCIB program, allowing us to acquire a total of 157,200 units at a weighted average price per unit of $12.71.As disclosed in Q2, we had identified various assets that align with our strategic disposition criteria. However, the investment community overall settlement has been cautious resulted in muted deal volumes. Additionally, the recent fluctuation in the bottom market have influenced the prospect for dispositions in the immediate term. Despite these factors, we remain committed to maintaining a disciplined approach to an evaluating capital recycling opportunities.Moving to Slide 21. We announced last quarter a commitment to purchase 25% in the second office conversion project in Ottawa. And we're delighted to share a light on this exciting new project added to a development pipeline. 360 Laurier is our second office conversion in downtown Ottawa, it will add 139 residential homes to address that ongoing shortage for rental units.Currently, the adaptive reuse project is in the site plan for control process, having already secured approval for minor variances from the city of Ottawa in October. We anticipate full site plan approval in Q4 this year with preliminary investigative demolition in progress. Full demolition is scheduled for Q1 next year, followed by the reconstruction starting in Q2. We're taking on this project with pride and confidence alongside a trusted partner, CLV Group and a respected institutional partner.Building on the valuable experiences and lessons learned from The Slayte, we were well prepared to make the new project a success. We're encouraged to see the commitment of the Federal Government to exempt GST on new rental building construction and multiple provinces announcing their intention to remove the provincial portion of the HST.360 Laurier, as an office converted project we'll see substantial benefit with savings expected to be close to 8%. Our development pipeline is important to us, and we remain committed to contribute to the solution for Canada's housing shortage by introducing much needed housing suites to the market. Nevertheless, we are truly aware of the persistent challenges we face, including rising hard and soft costs, along with constraints in financing. We are proactively examining a range of financing alternatives, including MLI Select and RCFI. We will continue to exercise prudence in our development opportunities RMM with their broader capital allocation strategy.Turning to Slide 23. As we approach the conclusion of our presentation, I'd like to draw to your attention to the inherent strength of the resilience and green in the fundamentals of the multi-family residential industry. Despite recent interest rate fluctuations and economic uncertainties, we are confident that the strong fundamentals that underpin our robust operational performance will continue to serve as tailwinds in the foreseeable future.We're seeing housing affordability being further magnified by rising interest rates and an increased shift away from home ownership that is especially pronounced among young professionals and empty nesters. When coupled with systemic and historic nature of housing supply constraints, these trends will continue to drive sustained rental demand in our portfolio. While multi-family has always been a strong after-class across varying economic conditions, it has historically shown unique resilience to macroeconomic volatility, with demand remaining relatively strong and rents recovering faster than many other property types.As you can see in this chart going back to 1990s during the past 3 recessions in Canada, the increase in multi-family vacancy rates have never exceeded 90 basis points in any given year. Furthermore, the sector has also demonstrated strong performance during the recovery, a subset expansion period following recessions.Finally, I'd like to conclude with saying that we're very pleased with our strong Q3 results and our conviction about continued strong NOI and FFO growth that featured backed by 3 compelling reasons. One, the fundamentals in the Canadian rental market remains solid and will continue to support operational outperformance. Two, our operating platform and best-in-class team continue to build a strong track record of generating organic growth, while raining-in cost. Three, we are on solid financial footing with a conservative and flexible balance sheet that empowers us to confidently pursue our strategic goals.And finally, as previously disclosed, we are working hard to develop a fresh new brand identity for InterRent that better aligns with who we are and our vision for growth. We're happy to report significant progress and are eager to share a new branding with you in the coming weeks.With that, let's open it up for Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Fred Blondeau from Laurentian Bank Securities.

[Frederic Blondeau, analyst]

Just looking at the fair value adjustments, I was wondering if you could give us your views on cap rates from here. I mean do you feel -- is it fair to say that we reached somewhat of a plateau here in terms of cap rate increases? Or will you see a bit more volatility entering in the new year?

[Curt Millar, executive]

Fred, Curt Millar here. We've seen -- we haven't seen a lot of market transactions. So a lot of this is based on very slim market, but in discussion with appraisers and sort of what's been coming to market and what we've seen, that's what we took the lifting to cap rates. If interest rates sort of stay where they are and people believe they're not going to come down anytime soon. I think there might be a little more pressure, how much that is, I don't know at this point, that'd be another 5 basis points or 10 basis points, maybe even 15 basis points potentially.If things start to turn and we see interest rates plateau, we start to get a belief that they're going to come down again, then this might be the top end of it. But it's really hard to say at this point unless you get a real firm view on what's going to happen to interest rates in the next 12 to 18 months.

[Bradley Cutsey, executive]

Fred, it's Brad. Just to add that the investment merit really is frozen as well as development, like everybody has [Indiscernible] down on all sides right now. I don't think we've really have seen this kind of increase in the long end of the curve. I think you got to go back to the early '90s. So -- and not to mention the volatility. At any given day, there's been points where we've seen the long end of the curve or I should say, the medium to the long end, like the 10 year move as much as anywhere between 10 basis points to almost as much as 20 basis points a day in the trading section, and we've seen that occurrence more than once.So that volatility is really paying habit with a lot of people's short-term outlook. So everybody has really put their pen down on anything when it comes to trying to project out a level of financing. So not only is the best, it's quite frozen. You're hearing a lot of developers out there that might otherwise have been going with the projects on hold.

[Frederic Blondeau, analyst]

No, that's helpful. And then just looking in terms of your occupancy objectives, it looks like you are trying to be a bit more proactive on that front. How should we view the CapEx budgeting for 2024? I mean do you feel any particular pressures here, especially, I guess, especially given the current rental rate levels?

[Bradley Cutsey, executive]

Yes. I'll answer, kind of -- I'll try to unpack that. I think you kind of have 2 questions in the one there. I'll answer the last one first about the CapEx. I think everybody is pretty aware that, that InterRent has spent a lot on the capital expenditure programs through the years, and we've always believed you should always be maintaining and bring in new communities to a certain level, and we've always done that. It's typically have led to probably above average capital expenditure when you look across the industry.That said, I think we've done a lot of the work that has needed to be done. And I would look out without any external opportunities brought on, I think you could picture a scenario where you'll see that CapEx coming in. Obviously, from a capital allocation perspective on repositioning some of our best returns are really related to the repositioning and whatnot, and is kind of linked to the natural cadence of our turnover.But that said, I think a lot of the heavy lifting within our portfolio as far as capital going to building improvements and whatnot has been dealt with. So I think under that scenario, on the status quo scenario you can start to see that line item come in. I don't know, Curt, if you want to add anything to that.

[Curt Millar, executive]

No, I think you covered it.

[Bradley Cutsey, executive]

And then to answer the first part of your question, Fred, just with regards to vacancy, we have a little higher vacancy at this point in the quarter than we had historically and versus last year. Some of that's just at the -- it's actually not by design, but it's caused management. I wouldn't look into it as an indicator or try to take away from that to do with the market. So that's really InterRent in its price discovery process and trying to see where the maximization of where we can take some of those rents.And we might have gone a little too hard in some regions and [ anticipate ] some adjustments. And we are quite happy with what we have seen post quarter and where we are at today relative to where we would be, call it, at this point in previous years.

[Frederic Blondeau, analyst]

That's great. And then maybe one last quick one for me. I was wondering if you could -- if you're starting to come across any industry opportunities on your acquisition radar and even maybe distress development projects.

[Bradley Cutsey, executive]

There's no question there. There's a lot of opportunities out there. And I think in this kind of environment, we're going to continue to see more opportunities. Unfortunately, until we kind of see some visibility as to where our cost of capital stabilizes out. We'll be very selective of what we choose to participate in those opportunities, Fred, because I think the capital equation today is changing daily, and we have to take that into consideration when we look at our own capital allocation.So I think there's going to be a lot of great opportunities. I think you're going to have to get creative, if you want to participate in some of those opportunities. And we are, as a group, okay, with watching opportunities and making sure that we're educating ourselves on what's happening in the market and what's out there. But also very mindful of the fact that there's a lot of volatility right now on both sides of it on the cost of equity and cost of debt, and we're very mindful of that. So we're also very happy with the organic growth and the runway that we believe we have in our portfolio just harvesting our internal growth.

[Operator]

Your next question comes from the line of Mike Markidis from BMO Capital.

[Michael Markidis, analyst]

Just 2 for me. Then maybe just the first one with respect to the price discovery you alluded to and obviously a very dynamic market. Is your sense that the market rent growth trajectory has slowed to some degree over the past several months? I mean, obviously, I recognize it's not linear. Or do you think that we still have momentum here as we enter 2024? And I'm sorry -- sorry, just to clarify, I don't mean your AMR, I mean, market rent levels in particular.

[Bradley Cutsey, executive]

No. And I took it as such. Thanks for the clarification. I'll give Dave an opportunity to also give his views. But my view is, I don't think they necessarily have slowed. Mike -- now at some point, market rents on a year-over-year gets tougher and tougher, right, because your year-over-year comparison is high to begin with. So just simple math, at some point, you're going to have to start to see it come in. That said, I don't necessarily think it has slowed. I think it was more a question of us on the price discovery, where could we actually take them? And meaning the rate of change, maybe we went a little too aggressive on that. If that helps. I don't know, Dave, if you...

[Dave Nevins, executive]

I agree, I think obviously the volume of the [Technical Difficulty] I think that it's been extremely good in all the markets. I think just to -- further it's probably just to make sure that we're cautious in protecting the growth and being with the -- some of the market [ were things ] turn over.

[Michael Markidis, analyst]

And then just the last one for me, again, kind of a high-level question here. But it seems like the time has shifted a little bit, just building on Fred's line of questioning with respect to potential. I don't know if the stress is the right word, but interesting opportunities that might be forming over the -- maybe the course of the next year or so. Is that a notable shift? I guess, what I'm trying to get at is, how do you view what you're seeing there versus where you think values are for the existing assets? And then lastly, just kind of to tie it all together, if given what you're seeing means the NCIB would effectively be on hold in the foreseeable future.

[Bradley Cutsey, executive]

Yes. I'm not sure if you're taking the tone as a negative shift or a positive shift, Mike, but I don't think my view of the world has changed from a quarter-over-quarter perspective other than the fact that earlier this year, we saw some stabilization coming on the rates, and you had a much more willingness on -- opportunities on both sides from a vendor perspective and from a bid perspective. I think given the recent run-up and the speed of that run up in the yield curve has caused a lot of people to pause.And I think from an opportunity perspective, I think that just will create even further opportunities. So if anything, I think my tone is going to be more positive in the sense that I do think when your financing cost increase as much as it has and there's been some development that happen. There's going to be some work to work through per se. Now that said, the good news about in our space is, and you've seen it in an operation, you've seen it through double-digit NOI growth is a lot of visibility on our cash flow side, right?But there's a lot of people that are developing new supply or we're about to develop new supply and their pro forma has changed, given where the takeout financing might be, given the constructive financing has increased, and where do cap rates settle out at. I think in Curt's remarks, while you saw that we did increase our cap rate assumptions. We've got to reiterate, there's not a lot of transactions. This is us being somewhat proactive, realizing that there is a correlation between the bond yield and cap rates. But a lot of times on these appraisals is backward looking.So we're trying to take a conservative and proactive approach on this, but there's not 100 data points where you're going to hold the hardness of transactions and cap rates have moved 25 basis points. And therefore, hey, if you're looking at a new opportunity on an IRR basis, the terminal cap rate has moved by x, right? So one of the reasons why I think the market is pause, is because there is no real conviction where things maybe -- will shake out at the end of it.So with all that said and done, I think it does create an environment, depending on how you are capitalized, I think there is going to be some real opportunities for people that do have a well-capitalized balance sheet. Now if my tone seems a little more neutral on capital activity going through the year, it's because I think we need to see as a group where our financing feels like it's going to shake out, right? And I don't think anybody has a real good picture on that today.

[Operator]

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

[Jonathan Kelcher, analyst]

Just sticking with sort of Mike's line of questioning and your answers there, Brad. You guys -- on the development side, it looks like you took out your expected yields and pushed out some dates and I think you talked about being pencils down. What -- how do you guys look at sort of go or no-go decisions? What sort of targeted returns? Or how do you really think about that when you're looking at starting a new project?

[Bradley Cutsey, executive]

Well, I think you've got to look at your IRRs, Jonathan and the use of capital across the board in the different buckets, and then look at what your corporate IRR is, and then see what gives you the best outstrip return relative to your corporate IRR? I'd say that's a starting point. And I think that you can rank it kind of your use of capital from there and then prototypes. It's a go or no-go decision, I think, on something like a development on a greenfield. I think you want to go out and make sure that you've got some kind of certainty on your pricing and then some kind of comfort on your ability to finance that development and that construction, and see where the returns pro forma at that point.As the fact that we took out the yields on the development page and now did, one of the reasons why we did take that out is because of the financing all over the map. It could be 7% financing underlying of credit or it can be sub-4% financing, if you're lucky enough to obtain our CFI, right, financial CMHC. So that materially changes the outlook of the pro forma and economics of the development. So before I think you'd go in the ground, you really would want to have certainty on the cost to complete and have a better comfort on how you're able to finance the development before you would break ground.

[Jonathan Kelcher, analyst]

Okay. That's helpful. And on 360 Laurier, I might have -- when you were talking about that in your prepared remarks, I heard 8%. And what was that -- like I'm not sure what that was related to. I missed that -- or did I miss the whole thing?

[Bradley Cutsey, executive]

Can you repeat that, Jonathan?

[Jonathan Kelcher, analyst]

I think when you were talking about 360 Laurier in your prepared remarks, you did say -- I thought I heard the word 8% in there, I can take that offline after. And my second question...

[Bradley Cutsey, executive]

Jonathan, I was just talking about the savings on the [Technical Difficulty]

[Jonathan Kelcher, analyst]

Okay. Fair enough.

[Bradley Cutsey, executive]

[Indiscernible]

[Jonathan Kelcher, analyst]

No problem. And then secondly, just on -- it sounds like you remain committed to doing some dispositions, some capital recycling, but the market slowed down. I think what do you expect to happen with that over the next, say, 2, 3 quarters? Like do you expect to sell in Q4?

[Bradley Cutsey, executive]

I think, to be quite honest, I think it would be quite challenging. I think if you asked me last quarter, if I thought Q4, I'd still say it'd be quite challenging. And one of the reasons being is CMHC is really understocked right now, given the level of activity coming at it. So there's just still a long jam at CMHC right around, and it's just taken a lot longer. So on the disposition front, anybody on the disposition front will typically need a financing condition. And under that scenario, the best they're going to be able to probably get through.And once again, this is not me blaming CMHC, it's just a reality, it's probably 6 months. And this kind of marketplace when you're seeing the volatility that you see in the yield curve, that really does that deal risk to disposition. So will we continue? And are we at different stages of negotiations. Yes. Can I say we're confident that we can be in a position to announce something anytime soon? No.

[Operator]

Your next question comes from the line of Kyle Stanley from Desjardins.

[Kyle Stanley, analyst]

Just going back to your price discovery discussion for a second. I mean, thanks for the market rent growth commentary and your view going forward. I'm just wondering -- do you think you've started to hit maybe an affordability threshold in some markets? Or is this really just you guys kind of feeling out where market rents are going at this point?

[Bradley Cutsey, executive]

It's not where market rents are going. The fact that we've seen strong release and activity than we normally would at this time of the year, suggests that all the markets are still extremely tight. And you wouldn't generate that kind of leads, because somebody acquiring knows what the price they're acquiring about Kyle. So typically, that's a pretty good indication of the level of interest out there. So I would say it's more the latter.

[Kyle Stanley, analyst]

Okay. Fair enough. That makes sense. Another more, I guess, high level question, but there's been a lot of talk in the last little bit about tuitions increasing in Quebec. I'm just wondering for English language schools, I'm wondering, have you had any discussions with some of the university leaders in the province of Quebec? And do you have any indication on the potential impacts that may have?

[Bradley Cutsey, executive]

Well, I hope [Indiscernible] Jonathan Kelcher this call, but both Jonathan and I are alumni of 1 of those 3 schools, I've got a lot of mention in the press being Bishops. This kind of announcement, unfortunately, could really hurt Bishops, but a bishop -- if you've got to put it in perspective, there's only, call it, 2,500 stewards. The bigger issue, obviously, I mean, we don't have any homes in Sherbrooke. But the bigger question is how does it impact McGill, and how does it impact Concordia? I don't think it does any favors on the overall outlook for enticing people to Quebec, but don't want to deal with politics. But I think the reality is I don't think given how tight things are across the board in our focus markets.And in Montreal, I don't think this announcement. It might change the composition of the domestic students. But then the day is still probably cheaper to go to university in McGill or Concordia than it is at University of Ottawa or Weston, just on house affordability alone, okay? And I think that's the bigger consideration. I think when a student goes to study somewhere they'll look at the all-in cost, and I still don't think that even with the change, it will be that significant of a change in your all-in cost.And then from a foreign student stability, I mean, the jury is out, but on foreign students, I still very much believe that the price points when you look at Canadian retro university relative to a university in the U.S., the similar quality. The difference already in the level of cost of the tuition relative to the value tuition you get is still substantial here in Quebec. So obviously, it's not a policy that we love and that we'll get behind. But in the same token, I don't want to overexaggerate it and impact it might have.And lastly, I'll just say, the level of the increase in international students into Canada over the last 3 years relative to, call it, maybe the norm 10 years ago is significant, okay. Like we're talking greater than 20%. And even at that point, previously, they had a pretty strong impact on the overall. So long-winded answer, short answer to it is, I don't think it's going to happen in times.

[Kyle Stanley, analyst]

Okay. Fair enough. Just 2 quick housekeeping items. So just the capitalized interest picked up this quarter, I was wondering if you could elaborate on that a little bit. Just trying to understand, have you fully decapitalized the interest related to Slayte and maybe what's driving that movement? And where does it trend?

[Curt Millar, executive]

Yes. It's Curt here. It would be my best to walk you through as much as I can -- much clear as I can. There was still a little bit of interest capitalization to Slayte in the quarter, but that's definitely come down. There was also a little bit of an increase -- pretty minor related to 360 Laurier that we announced in the quarter. The bigger variance is just with the way we do this, the way we interpret the rules around this, I know people use different mechanisms, some people use their weighted average interest rate to determine the capitalization of interest expense. We tend to use what's been drawn either on our line of credit or we're not into our line of credit on our most recent financing.So given where our line of credit was throughout the quarter -- second quarter versus [Indiscernible] with the third quarter and when we funded certain large CMHC mortgages, such as The Slayte itself, which funded in Q3, it can vary -- it can make that vary quite a bit. We introduce a bit of volatility just based on what capital source we're tapping into for the quarter. So it's mainly coming from prior quarter to be more tapped into CMHC level financing rates for the amount we were capitalizing versus this quarter being more into our credit facility and capitalizing at that rate.

[Kyle Stanley, analyst]

Okay. No, I think that's clear. And just the last one. So G&A was down a bit sequentially. Just wondering would the third quarter number be a good run rate or best to look at kind of the year-to-date and take a number like that?

[Curt Millar, executive]

Yes. I think what we've been telling people is 4.25 to 4.5. I think we still stay inside that range. There's a few things that may happen in Q4, we get pushed into next year. But I think if you're in that range, you're still paying on. And I maintain that for next year. I still think we've 4.5 to -- 4.25 to 4.5 per going into next year also.

[Operator]

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

[Bradley Sturges, analyst]

Just on the -- just to go back to the asset disposition program commentary, just to reconcile from the last quarter, is the plan of the program or the target of the program still to be net sellers of $75 million through that program once you're able to do so and the opportunity allow us to do so? Or has that program changed in any way?

[Bradley Cutsey, executive]

No. I think the assets that -- we've earmarked our assets that have below IRR -- target IRRs over the next 5 years relative to our corporate IRR. That hasn't changed, Brad. There's still quite good cash flow. And quite honestly, they're still a pretty good profile. It just doesn't meet our overall growth profile. So it makes sense to recycle that capital. But I want to be clear, there's nothing in our portfolio given the strength of our balance sheet and what's coming at us that we need to dispose of anything, okay?So we are not sellers, because we have to be sellers of anything. If we get the appropriate price and it's a strong offer, and it meets our threshold and we think we can recycle that capital and recycle that capital at a better return than what our overall corporate return is, then we're going to do it. But, by no means are we in a position where we have to do A, B and C in order to do [Indiscernible]And I really want to make that clear. So it's a nice position to be in, and that's the position we are in, but we have earmarked what we feel is $75 million of proceeds. But I will caveat that with the fact that there's a lot of volatility in the long end of the curve. And I don't think a lot can get done on anybody's side until there's a stabilization of that. That's not to say things won't get done if the long on the curve stays here, but it has to stay here for a while to be comfortable, and there might be a reset if it stays here. To Curt's point, if it comes down a little, then maybe we've seen the majority of the reset is behind us.

[Bradley Sturges, analyst]

That's great commentary. That's quite helpful. And just on the -- I guess my other question would be just on the expected financing, refinancing activity that you have earmarked for the end of the year. It looks like the time line got pushed out a bit. Is that just because of the backlog with CMHC, or is there anything else that's driving the timing of that towards, I guess, the late Q4 into Q1 -- early Q1?

[Bradley Cutsey, executive]

Yes. I think it's just more of the timing we were -- we talked about that Vancouver portfolio before. And it's -- that's one of the bigger portfolios we have other assets that are in the CMHC also that's one of the bigger portfolios. We were really hoping we could get that through there in Q3 and sometime in Q4 have the financing done by early Q4. A few of the properties have been picked up. So we're glad to see that and really hoping that they'll finish getting through everything. But at this point, given where we are in the year, I doubt very much we're going to portion try our best, but I don't very much it will actually end up getting funded in Q4. To me it probably drags into early to mid-January take a time frame, it's probably our best case scenario at this point.

[Bradley Sturges, analyst]

And at this point, you're not rate locked on that. That's still you still have some flexibility around rate at this point, depending on where benchmark yields go.

[Bradley Cutsey, executive]

Correct. We're not really locked on it yet. Let's all keep our figures cross that would least come down.

[Operator]

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

[Khing Shan, analyst]

I think, Curt, you mentioned when you were determining the capital assumption you've taken clues from brokers bringing products to the market. I was wondering if you could provide some color on what that pipeline of products look like deal size, type of assets, pricing indication, that sort of thing?

[Curt Millar, executive]

I can give you a little bit, Jimmy, because like I said, there's not a lot of deals that have actually closed, and we've chatted a lot about that internally here. I'll give you a sort of another data point to think about, also before I answer that, is if you go back and look at the CBRE cap rate reports from the last, call it, 5 years, from the lows of about 2019, 2020 to where they are in Q3 reports, if you look across the major markets where we're in. The delta has been somewhere between 30 basis points and 60 basis points.So increasing between the low-end of 30 basis points to high-end of 60 basis points across those markets. And if you look at sort of our low point, when you factor [ The Slayte ] asset, we had been at about 3.83%, and now we're at 4.22%.So we've had about a 40 basis point increase on average from our low to where we are today, which kind of lines up pretty well with those CBRE reports for the overall market over the last couple of years. So I just wanted to give you sort of that as a data point to think about also, if you will. From a deal perspective, I mean, there's been -- there's only been one sort of notable transaction that we would compare the GTHA in the last Q that's closed.

[Bradley Cutsey, executive]

And that was like at over [ 600,000 ] door, Jimmy. There's one in Montreal, a smaller size that was about [ 200 ] door. It was an urban, then there is a one in the Greater Vancouver area, just shy of [ 500,000 ] a door. The one comment I would add to this is really any deal of size is completely off the table right now, right? Because it's all your institutional like players really do want to see stabilization in your financing, okay? So if there are deals getting done, that tend to be on the smaller side, they are probably a little less institutional and probably not as much of a fair reflection of value of the publicly listed and I'll throw in my peers as well of the publicly listed REITs versus some of these smaller transactions that are closing.But even that said, even that has come right at -- they were taking up the majority of the deals that were getting done, where the smaller-sized deals. But even now in the last, call it, kind of 4 weeks, even though they're becoming further appear between. And I know there's not a lot of color there for you to give me, but that's just the reality of the world we're living in right now. It's very much out of stalemate, right? It really is pens down on all sides.

[Khing Shan, analyst]

Okay. No, that's fair. Then my last question is just on the distribution increase, and I know you guys have a track record, maybe you don't want to break and it's not a big amount. But I wondered if -- how you guys, as a Board have thought about increase in distribution versus things like paying down debt, buying back stock or financing some of your developments?

[Bradley Cutsey, executive]

No, for sure. I think you hit it. It's not a big amount Jimmy. And we want to send the rate signal to the market. And I'm hoping we've communicated this through the disclosure documents in this call today. We're very bullish on where we sit today from an operational standpoint. And I think since we do have such a strong track record of increasing the distribution conservatively in mind -- and being very mindful when we make those increases. We want to make sure that the market understands that our distribution policy is -- aligns itself with how we see the future within our operations.And we continue to believe there's very robust growth in our operations in the near-term. And I mean the near-term, not just the next four quarters, I mean, the next three years. So you're right, you could have higher cost of debt that you might be able to pay down. I don't think it's a big number, Jimmy, and that cost of debt will fluctuate, but you can be self-assured that we are managing that and are very positive of our debt levels of where variable rate exposure is and the cost of -- what our line cost, and we'll take every opportunity to manage that prudently. I hope that answers, because I mean the comment you made could be a 5 hour call to really want to go through it.

[Curt Millar, executive]

Yes. I think when you look at the quantum, Jimmy, as you touched on, based on that increase, you're talking about a total impact of $2.7 million, $2.8 million and a cash impact of about $1.6 million, $1.7 million, given the amount of people that participate in that plan. So -- it's not a big number. But as you know, you follow us for years, you know that we watch every penny that goes out the door very closely.

[Operator]

For our last question, we have Matt Kornack of National Bank Financial.

[Matt Kornack, analyst]

I'll try to be quick. Just with regards to 360 Laurier, can you give any sense on the cadence and the total outlay of your ownership interest in terms of spend for that project?

[Curt Millar, executive]

Look, on the total ownership interest, it's 25%. That's our total ownership interest. At this point, we're still working through the plan to partners and be able to work it through the plant on the design, looking a piece of that going to it, getting pricing and looking at the financing options. So it's a little early to get metrics on it. I think as we sort of get through this, our anticipation is that it will be even more accretive than Slayte, just given the design of the building is actually in itself even slightly better. But there's a lot of things to work through over the next few months before I think we're comfortable putting a number out there.

[Bradley Cutsey, executive]

But I was going to answer in a touching way. Currently, we're not trying to be acute or cheeky, but we feel quite confident that this is going to be from an economic standpoint, even that much greater than Slayte. And we met our targets on Slayte. So take what you want from that. But you can rest assure we're really excited about the 360 and so far the Slayte has really been a great addition to our overall portfolio.

[Matt Kornack, analyst]

Sure. That makes sense. And you can do these pretty quickly based on your target completion date and where you are in the process. So that's plus. And then just on Montreal, you did deliver, I think, 36 new suites in formerly common area space. Was that the impact on vacancy in the quarter? But it also looked like you pushed rate quite a bit in the market. So any color there? And also just with regards to additional potential units, any disclosure over the next 12 months as to what else you may be adding to the portfolio in suites and common areas?

[Bradley Cutsey, executive]

Yes. The first part of your question, though, that didn't impact [Indiscernible] and you kind of answered it with your own commentary on that. But that said, we're extremely happy with where we sit right now in Montreal. And then the last part of your question was what, Matt? Sorry.

[Matt Kornack, analyst]

Just like in addition to the 36 that you delivered, are there any others kind of in the near-term that you'd expect to add to the portfolio in common areas, new suites?

[Bradley Cutsey, executive]

Well, the number is greater than 36. I wouldn't say more than 30 necessary in Montreal. But as we mentioned before, across our portfolio, our ops team does a really good job of visualizing debt space or recreating space by kind of merchant -- quite taking existing space and working with it. So we're at different levels of planning throughout our portfolio on that. So nothing concrete to add. I think it's this thing, but it's as much as a small high rise.Okay. I think that's all the questions. I'd just like to thank everybody for taking the time for listening in and for the questions. And we had a good quarter, but I'm really excited to be quite honest about the future and what the outlook looks like for us in the remainder of 2023 and 2024. And the team is working really hard to make sure that we deliver on what we can control, and that's our organic portfolio. And we will continue to monitor the externals that we can't control, things like the bond yield and the volatility within it. So once again, thanks a lot, and we look forward to talking to you soon.

[Operator]

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.