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InterRent Real Estate Investment Trust
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Good morning, and welcome to the InterRent REIT Fourth Quarter and Year-End 2020 Financial Results Conference Call and Webcast. [Operator Instructions] Please note that today's call is being recorded, Monday, March 15, 2021, at 10 a.m. Eastern Daylight Time.I'd now like to turn the call over to your host for today's call. Mike McGahan, Chief Executive Officer; Brad Cutsey, President; and Curt Millar, Chief Financial Officer.Mr. Millar, please go ahead.
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 March 15, 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 its financial performance, they are not recognized measures and do not have standardized meanings under IFRS. Please see the REIT's MD&A for additional information regarding non-IFRS financial measures, including reconciliations to the nearest IFRS measures.
Thank you. Welcome, everyone. I appreciate everybody taking their time out of their day. This is our first call that we've had. I've been the CEO for 11 years. I think this is maybe the 44th or the 45th Q. I couldn't think of a better time to have our first call. Obviously, it has been a challenging year, 2020, and I think this is just the appropriate time.So first off, again, I want to say I'm really proud of our whole team. Our whole team has done tremendous here in dealing with COVID and all the issues with it and making sure that our residents have been safe. They just -- they've been really up to the challenge.As we know and as you've looked at our results, again, it was a tough Q and have been a tough year. We've had a bit of a pause on demand. We know that all comes from the lack of students out there, foreign and the domestic. Immigration has also been hit, international students. And we've seen a little bit of acceleration, obviously, in homeownership with interest rates going down to record lows. This has all really made the amount of demand that we've had much tougher, but we -- what we decided to do is we wanted to hold our rents. We knew by holding our rents it'd be a better strategy in the long term, and it would provide a little bit of bumpiness in the short term. We think we should hopefully get through this by the end of the first half of the year, and we'll start hopefully with optimism with the vaccines coming out and that we'll be in a much stronger position for the second half of the year. And our strategy will be proved to be correct.As you also know, this -- our multifamily class has proven to be very resilient during these times. Our collections are at records that -- I guess, versus the other classes. We really haven't seen any bump in our bad debts to anything of any magnitude. And the bid for our class is very strong.Regarding deal flow, we have seen increased deal flow that I've never seen in my 35 years of being involved in real estate. We can attribute that to 2 factors, one of them being that the private owners are really, really tired with the whole COVID fatigue, and that gets attributed to the extra costs of PPE, all the extra cleaning, the online applications, some of them are not set up for online applications. And the second item is a big thing that's pending is taxation on capital gains, which is a real big concern that I think a lot of people are seeing as a big potential impediment to sell their properties in the future.We've also -- as we've gone forward here, we've still been working on our development deals, and I'm going to highlight 4 current developments that we have. And I want to say that there is a lot of product that we're seeing come out of the ground. It really comes down to location. And I would say our locations here are preeminent. So I think we're going to be in very, very good condition as we go forward.Our first joint venture, which we have with Brookfield is at the Burlington GO station. And at this point right now, we've applied for site application. We're expecting some comments coming back from the city from our latest submission. We should get it back by -- within a few weeks here. We're currently applying for 2,400 residential suites and approximately 40,000 square feet of commercial space.Our next joint venture partnership we have is at 900 Albert. And 900 Albert, we're continually working on our detailed design plans and working with our consultants and our partners to make sure that we have the best product that's going to stand the test of time. We have an approved site plan application right now for over 1,200 apartments and 400,000 square feet of office space and 80,000 square feet of retail space.Our third project is at 473 Albert Street in Ottawa. Here, we are going to be converting it to 158 residential suites. And we are anticipating by the end of Q1 2021 that we will have our building's permit hopefully in hand. We are expecting construction activities to begin in late spring 2021.And our fourth and final development site is at Richmond & Churchill, which is a fantastic location in Ottawa. It's in the heart of Westboro. And here, we've submitted our -- for zoning bylaw amendment and site plan application. We expect to have our subsequent submissions to the city by the end of the second quarter of 2021. This site is contemplating right now 184 residential suites and approximately 20,000 square feet of commercial space.So you can see on both levels that we've got some great development sites going, and we're still very much looking at some deal flow. We've had some -- done a lot of purchases in the last year, and we think we should be fairly active as we go through here, 2021, especially since we've built ourselves to have, what I would consider, one of the best balance sheets in the business.I'm going to pass over to Brad Cutsey, the President of the company right now.
Thanks, Mike. I'm just going to start off with a little bit of an operational update. But as you highlighted in your opening remarks, 2020 was a year like no other one. And I hope we don't ever have to repeat. That said, I believe the multifamily asset class has proved why it's so coveted, and we beared one of the best risk-adjusted returns amongst real estate asset classes.From an operational standpoint, we saw operating revenue for the quarter increased by $2.7 million to $41.9 million, an increase of 6.8% over Q4 2019. Operating revenue for the year ended 2020 increased by $14.7 million to $160 million. The increase was mainly due to the contribution from $227 million worth of property acquisitions completed in the year, which was comprised of a total of 880 suites.On a same-property portfolio basis, our operating revenue felt the effect of the second wave of the pandemic on the quarter and decreased by $0.5 million to $34.9 million, a decrease of 1.5% over Q4 2019. Operating revenue for the year ended 2020 increased by 3% year-over-year to -- or $4.2 million to $141 million. As of December 31, 2020, our same-property portfolio consisted of 8,953 suites, which represent 81% of our portfolio. The year-over-year increase in same-property operating revenues was due to a 5.3% increase in average rents to $1,354. Occupancy for the same-property portfolio at the end of the year was down 430 basis points to 92.4% from the comparable period last year.As Mike alluded to in his opening remarks, our effort to hold the rents has resulted in an increase of vacancy. This pandemic, from a real estate viewpoint, really has been the tale of 2 cities as evident in our operating results. Our Montréal same-store vacancy was up year-over-year by 610 basis point to 14.6%, and our Ottawa same-store vacancy was up year-over-year by 920 basis points to 11%.This comes as no surprise as the majority of our Montréal and Ottawa properties are located in the urban core, which we think is around 70%. We have felt the biggest impact of COVID in our urban core, where there's been a lot of rental demand due to the borders closing, universities and colleges switching their classes to online from in class. Young professionals moving back home with their parents, who are taking advantage, as Mike commented, of low interest rates and making their foray into homeownership. We believe the deterioration in rental demand is a temporary phenomenon and that the housing needs that existed pre-COVID will continue to outstrip housing supply.Same-property NOI for the quarter decreased by 6.3% or $1.5 million to $22.4 million compared to Q4 2019. Same-property NOI for the year ended December 31, 2020, was $91.3 million and an increase of $0.6 million or 0.7 percentage points compared to the same period last year. The NOI margin for the year ended was 64.7%, a decrease of 160 basis points compared to 2019. However, same-property NOI for the year included $1.6 million of COVID-19-related operating expenses. Excluding these COVID-related expenses and assuming a more normalized occupancy, something similar to 2019, our same-store NOI would have grown by 5.5% for the full year and an NOI margin of 66.6%.We have long been known in -- for our commitment to the reduction of energy consumption and supporting our broader communities both through charitable contributions and time -- and the time and energy of many of our team members. In 2020, we participated in the Global Real Estate Sustainability Benchmark creating. GRESB is a well-known global ESG benchmark for real estate assets, which measures performance against sustainability benchmarks. We are pleased with our initial submission. And based on the results, we have continued to make improvements around measuring and extending many of these measures we've had in place, but were not made public as well as pursuing improvements in areas that we had not yet covered internally. We anticipate sharing more information in regards to our initiatives on this front in the second half of 2021.Also in 2020, we completed a comprehensive employee engagement survey, measuring the engagement level of our team across all of our regions. The benchmark for comparison purposes was companies of similar size and included over 60,000 respondents and 101 companies across various industries. We were very pleased to have a participation rate of 80% across our organization. We are also very pleased not only with the responses overall and as compared to the benchmarks across many dimensions, such as safety, diversity and inclusion and work environment. But one of the most important aspects of the survey that has provided us with critical feedback that we can use to engage our team and work together in order to continue to improve and create value for all of our stakeholders.Last but not least, and Mike touched on some of this in his opening comments, is we truly believe we're embarking on a generational opportunity as we see a transformation in the ownership group of multifamily properties. Historically, this asset class has been highly fragmented and dominated by the private sector. We have started to see significant increase in deal velocity, and these groups struggle to come with terms of operating fatigue, potential changes to tax policies and a recent change in CMHC underwriting. We believe in the next couple of years, we'll continue to present numerous opportunities for the REIT to execute on its value-add strategy.This is probably an appropriate time to turn the call over to our CFO, Curt Millar, for a financial overview.
Thanks, Brad. Through 2020, we have continued to invest in our technology infrastructure with a focus on sharing and collaboration tools, which we were fortunate enough to have started pre-pandemic. We continued further automation of our leasing processes and virtual property tours and the second generation of both our BI and CRM platforms. We believe that these investments in technology will help us to continue improving the service we provide to our customers as well as provide even more scalability as we continue to grow.Our funds from operations, or FFO, for the quarter increased by $241,000 or 1.5% and for the year increased by $6.2 million or 10.9%. On a per weighted average unit diluted basis, FFO was down $0.014 for the quarter or 11.1% and for the year was down $0.017 or 3.5%.As Brad mentioned earlier, the increase in vacancy and rebates for the quarter and the year compared to 2019 impacted NOI and therefore, FFO. This impact was approximately $2.4 million for the quarter and $4.5 million for the year. COVID-related costs for the quarter and the year compared to 2019 impacted NOI and therefore, FFO by $164,000 in the quarter and $1.89 million for the year. The combined impact from vacancy and COVID on FFO per unit was $0.018 for the quarter and $0.047 for the year on a per weighted average unit diluted basis.Despite these impacts, for the 3 and 12 months ended December 31, 2020, adjusted cash flow from operations exceeded distributions declared by $8.8 million and $20.7 million, respectively. Distributions for 2020 were $0.31 per unit, which was an increase of 6.6% over 2019. Distributions declared were 67% of FFO and 76% of AFFO for 2020.Over the last few years, the InterRent team has worked diligently at not only growing, but also strengthening our balance sheet. We commenced 2020 with $2.7 billion in investment properties, acquired properties for approximately $230 million during the year, invested a further $55 million into our portfolio and recognized a fair market value gain of $70 million to end the year with a portfolio valued at $3.1 billion.Our debt to GBV at December 31 was 31.1%. The increase in value of our portfolio combined with the $230 million in net proceeds from an equity raise in June of 2020 has positioned the REIT well to be able to stick with its rent growth strategy, which should lead to strong NOI growth as we emerge from the pandemic.Real estate is a very capital-intensive industry, and the REIT works closely with its capital providers and planning for its future capital requirements. The REIT had $1 billion in mortgages at December 31 at a weighted average interest rate of 2.56% and an average life to maturity of 5.2 years. 81% of InterRent's mortgages are insured by CMHC, which provides for favorable interest rates given the reduction in refinancing risk for lenders.At the end of 2020, InterRent had $344 million of available liquidity. The REIT had a further $370 million in unencumbered assets at year-end, which remain unencumbered at this time.Thank you very much, and I will hand it back over to Mike.
Thanks, Curt and Brad. I appreciate your comments. Again, we are -- we know we've had a really -- it's been a trying year and a lot of different levels for a lot of people. I'm really -- again, going back, I'm very proud of our team, how they've reacted and taken care of our very valued residents and just to everybody, just pulling together as one consolidated group to achieve what we've achieved. I do believe with a lot of conviction that as we go forward, we've left ourselves in a great position. And I think it will bear the fruit, and we're hoping in the back half of 2021 and early 2022, we'll start seeing some good results.Thank you, everybody. I'm going to hand you back right now to the operator, and they'll be open for any questions that you may have.
[Operator Instructions] Mike Markidis with Desjardins.
And maybe just before I begin, I just want to commend you guys on moving to the conference call format. I think it's much appreciated, at least on our end. So thank you for that.Curt, they put you last. So I'm going to start with you first. The 2021 mortgage maturities that you have coming due, I think it's a pretty healthy number. How much capital do you think you can take out of that as you refi those mortgages this year?
Yes. The mortgages we have for 2021, quite a bit of those are on some of the newer properties that we bought and are in the repositioning phase. So there's some definite upside there. The loan-to-value on those is sitting in and around the low 40% range. So there is some value that can be extracted, whether we do it right now or as you know, typically, in our repositioning portfolio, we'll wait a year to 3 years depending on where it's at. So we could either pull the equity out of it this year or push it out 1 more year into next year depending on what's going on with the rates and what access to capital we need at the time.
Okay. And with the composition of the unencumbered pool, would it be similar, would it be more of the properties that were recently acquired and still in the repositioning phase?
No. There's actually a mix. There's a pretty healthy mix of both properties we've owned for a while that are fully repositioned, and some that are, I'd say -- off the top of my head, I can't give you a percentage of which, but it's a pretty healthy mix of both.
Okay. Great. Maybe just shifting over to 473 Albert, just given -- it looks like that's going to be the first thing that you guys start on. Could you remind us of your cost base with that property? And then what the expected spend will be to execute on the conversion and what type of returns you were targeting?
Yes. We haven't usually put that out in public, Michael, but I bought it around $20 million. It's something right up your alley, to be quite frank with you. It's like -- almost like a [indiscernible], for that matter. So we -- when we're kind of looking at it, it's going to be -- we'll have a double-digit IRR. And so we feel very positive about it.
Yes. Just to add to Mike's comment, I think you also asked about on the cost base. And I believe, if my memory serves me correctly, it's been around $24 million.
Okay. Cost today. Okay. Great. I just have one more before I'll turn it back. Just -- you guys do a great job showing economic vacancy for the quarter as opposed to just the percentage of suites occupied. So I really appreciate that disclosure.If we look at the increase in that figure over the past several quarters, I think the answer is -- I likely know the answer. I just want to get a sense from you guys. How much of that would be an actual increase in vacancy versus an increase in incentives? And just given that we would expect that, I guess, that would take 12 months to burn off in some instances. How we should think about the evolution of that line initially as we start to recover fundamentally?
Sorry. Michael, I just want to make sure I'm clear on the question. Are you talking about the vacancy and rebates and the percentage that would be rebates versus?
Yes.
We haven't typically broken that out. I think we could maybe take that away and look at breaking it out in the future. We just -- we haven't broken that out in this report or previous reports. So I think I'd have to come back to you on that one.
Okay. Okay. Maybe -- and I guess, just high level, would it be mostly direct vacancy as opposed to incentives. Would that be fair?
I think on a directional basis, that's correct, Michael. It's obviously on the -- vacancy has increased. And I mean, I'm sure we'll get into it with some other collections, but it's increased essentially in our course, right? And it's no different than what we've kind of recorded over the last couple of quarters, and we've continued to see that trend specifically in our urban core in Ottawa, which is roughly around 70%. And Montréal, believe it or not, it's roughly around 70% as well. That's urban core.Now the good news is, we're starting to see -- and as you saw in the disclosure documents, we're starting to see on a quarter-over-quarter basis some improvement in Montréal, and we're going to continue to be excited what we see, but still early days. But yes, it is more on the direct vacancy than on the setups.
Mario Saric with Scotiabank.
So my 2 questions. I just wanted to focus on operations and the second one, just on your IFRS for values and acquisition pipeline. Just on the operational side, how would you characterize the quarter relative to internal expectations, let's say, 3 to 4 months ago in terms of the same-property NOI and occupancy erosion? Were there any surprises either to the upside or downside relative to internal expectations?
We were a little bit more hopeful, Mario. Like we really kind of basically decided to stand to -- hold our ground here as far as our -- what we are doing as far as rentals in that. But I don't think it was anything drastic. I guess we were all hoping that would be a little bit further along the way and some of what's going on here.But again, we've been very -- we've got a lot of conviction of where we're going. We really believe that it's going to be a second half of this year's situation. We're really going to look at September as being a tell-tell point for us. And you'll -- hopefully, we'll see some good results here into next year. So we really -- we didn't want to give away just for now. We thought it's better to be ride it out a little bit. So are we happy with it? No. And I guess that's partly the reason why that we're having this conference call rather just take the calls, to be frank with you.
Yes. Got it. Okay. And then maybe just as a follow-up to that and consistent with Brad's comments on Montréal occupancy, I noted that as well, improving quarter-over-quarter this quarter. Did the leasing strategy in Montréal changed at all in Q4? And then when we -- broadly speaking, like what are the key kind of operating -- leading operating indicators that you look at internally in terms of what would explain why Montréal occupancy went up quarter-over-quarter, notwithstanding the schools remaining kind of online and immigration essentially frozen? How would you describe the improvement in Montréal?
We've actually just seen some good -- like good traffic flow in Montréal, and we were probably a little too hesitant in giving away incentives there. So we've started giving a little bit more in Montréal, and it's really in the core. But again, like -- we have some buildings that are right around Concordia and McGill, like there's a few there that are very close to the universities. They've been really the ones that have been hit the most.So we do believe with -- hopefully everything going back to normal. Again, we've seen a lot of positive announcements. McGill is going back full-time. We're seeing a lot of the schools at least announcing that they're going to be 30% to 50% in-person classes. So we're feeling much better right now where we're heading in September. So we think that what we've done here is proved to be the right strategy.
Got it. Okay. And then maybe a question for Curt. Your IFRS cap rate came down 7 basis points versus Q3, but you also noted the expectation of continued cap rate compression. It looks like most of your portfolio is externally appraised at year-end. How much further cap rate compression do you see in the portfolio based on the kind of extremely elevated transaction activity that you're seeing in the market today? And then how much of an impact on the quarter-over-quarter change in cap rate would have the Hamilton portfolio acquisition during the quarter ahead?
Yes. So good question, Mario. We do these at a point in time on December 31. We went with the info we had and the appraisers had in their books. The discussions have been that they have continued to compress during the beginning of the year. And we don't provide guidance on that, but from discussions it looks like it could be down to 4 or just sub-4 potentially as we go forward. And that will play out over Q1 and Q2, I believe, as these transactions firm up and the data is in the hands of our appraisers. So -- I mean, if you look at a 4 cap on our current portfolio, that's going to add about $120 million to $125 million to the FMV, which means you're in and around that $0.85 mark on a per unit basis.
Got it. And then the Hamilton acquisition impact during the quarter, did that have an impact on the 7 basis point decline quarter-over-quarter? Or is it negligible?
Yes. No, that was pretty negligible overall. It's just some of the markets where we've seen a lot of activity in some of the -- in the Hamilton and London markets and in and around there. So that definitely did have -- it definitely did come down. But when I look at the overall portfolio, it was more or less across-the-board between sort of the Eastern Ontario and the Hamilton, Niagra region, sort of leading the pack, if you will, but it was across-the-board.
Fred Blondeau with IA Capital Markets.
Looking again at occupancy, looks like you remain quite confident in terms of demand, but is there like a threshold in occupancy where you could be tempted to change your strategy?
We're watching it really carefully, Fred. I mean it really hasn't come off a lot from the Q3. We're kind of -- we believe we're in the trough from what we're seeing. We do feel that -- again, we're watching it really closely. We don't -- I think we're just going to stick to our guns and -- most of the way through here. But I don't see it really coming off a lot out of here. So -- and if we do see anything that looks like it's going to be a change -- what I mean as far as we have -- this gets prolonged, we will look at it at that point in time.
The only thing I would add to Mike's comments, Fred, is while we're not happy with the last couple of quarters where we've trended on the vacancy, we really do believe it's COVID related, and it's a timing blip. As far as when does the rental demand come back, for some of the reasons that we highlighted in our opening remarks, I think we've communicated over the last couple of quarters that we're really not going to have a good idea until through this leasing cycle where that demand is.And we're also very confident that immigration is not just going to come back right off the bat. While we know it's going to come back, it will have to get through applications. But on the flip side of that, we have what we believe is a double cohort and things like that adding to the rental demand. And we also believe any rental demand we lost to homeownership has abated. I think a lot of that's been stratified and pulled forward. So really, the way we're approaching this, September is going to be a big month for us to kind of see where we're at because we really do -- don't want to buy occupancy at this point, but we have that opportunity that lies ahead of us.
That's totally fair. And on that subject, I mean, it looks like you're sticking with seeing improvements in Q3, Q4 this year despite the talks of the third wave of the pandemic. Is that fair to say?
Yes. I think so, for sure. And I'll tell you, I'll use -- kind of going on with Brad's comments. I'll kind of even use my own family situation. I have 4 kids that are home right now that probably wouldn't be at home. And we love the fact that they're home. It's been fantastic. My wife is extremely happy. But all these kids -- they're already talking about they like to leave and get their own places, and they wouldn't be at home if it wasn't for this situation. So -- and I know, just talking to their friends, all these kids are really -- and it's not just the students, it's the young professionals. The young -- like a lot of the young professionals have come back home to live with their parents.So I mean, I just look at the whole multiplier effect of where this could go. And I just see that there's a lot of kids that will be leaving, getting their own apartments even if they're young professionals, you're going to have the domestic students coming back, you're going to have a double cohort of students effectively going to a lot of the kids that were supposedly going to university here at the start of this year have only taken part-time courses. They don't want to lose that experience. So you're going to see that domestically.Hopefully, we get to the point where it's international. Students come back in, probably it's going to be the 2022 item. And then immigration. So I just see that -- I mean there's a lot of things that we see as a really positive going forward. And we've built this thing for the long run, and we're all fairly significant shareholders. So we think this is the best course of action for all of our shareholders and stakeholders.
Jonathan Kelcher with TD Securities.
First question, just, I guess, to sort of continue on the vacancy. Are you seeing demand down -- like less showing, less inquiries, stuff like that? Or are you noticing that you're losing units to -- on a price basis?
I think it's been pretty consistent. I mean there's -- from what we've seen as far as demand. And actually, it's up a little bit from where it was. I mean, in this -- like in this Q, it seems like it's up a little bit, to be frank with you. And so we're seeing some good things. Again, we're really believing that there's a lot of people that are sitting in their parents' homes and for a variety of reasons that they're itching to get out. And I'm very lucky to have a good lens on that on a personal lens and seeing their own -- my own kids and their friends. So we've actually found demand a little bit stronger. So...
Okay. And when you say this, do you mean Q1 versus Q4? Like how is this trend...
Yes. Q1 versus Q4. Yes. Sorry, not compared to this time last year, Jonathan.
No. No. I know that. I know that. So Q4 is hopefully the trough on occupancy?
I think it's going to be probably fairly similar. That's just my take on it without seeing it. And again, I'm thinking it's going to be a little bit bumpy here in the first 2 quarters of this year. And hopefully, we'll see some good improvements in Q3. Again, we're really sticking to our strategy. Like we could easily rent up, Jonathan. That's just not what we want to do. We don't want to buy occupancy. We think that in the long run, that is not a good strategy.
Okay. That's helpful. And then, I guess, on acquisitions, you said it's the most you've seen in -- within your career. Do you think there's enough supply coming or enough supply out there that cap rates might drift a little higher or is demand that strong?
I think demand is hugely strong. There's a wall of capital out there, and there's a lot of -- like it's just -- I'm amazed at some of the players that I've seen at the table that I did not know had the capability of taking down deals. There is a wall of capital out there. I mean -- I think you've probably seen that even in the stock market. There's so many -- it's just -- I'm amazed, again, by how many players there are at the table.
Okay. And was the Vancouver deal that you guys announced that closes in April, was that a marketed deal?
Yes. It was.
Brad Sturges with Raymond James.
Maybe just to go back to the occupancy discussion a little bit, to start off with here. Just so I understand it correctly, it sounds like perhaps the move outs or the turnover rate that you're experiencing in Q1 so far, that's stabilized a little bit more compared to where you were at the back half of last year?
Yes, this -- as far as the turnover, it's been pretty consistent, to be quite frank with you. I mean, it's -- from year-over-year and even the quarters haven't changed really that much sequentially. As far as the demand, we're finding a little bit more demand this quarter.
Okay. And maybe just on the discussion on the development side, maybe you're not giving specifics on specific properties or projects, but do you have general target returns that you're looking to achieve on an unlevered yield perspective relative to what you can buy in the market today? And have you put more analysis or thought into what the total portfolio intensification potential could be over time?
First off, yes, we're very mindful of our returns that we're looking for. So we're obviously trying to beat by, I'd say, good 100, 150 basis points of what we can acquire out there. So we're definitely looking double-digit IRR returns.As far as the intensification, we know we have lots of capability. And we haven't put that to paper to anybody, but we've been working our way through it. I mean these are some of the projects that we've got. They're the early ones. And they're at various degrees of development, obviously, and getting through the entitlement process. We just wanted to feature those. Again, they're terrific locations. We really, really believe location always wins the day.Right now, if I look at our portfolio, and if I would have said, even on -- not even on the development, but on our assets, we have got great locations all the way through. Unfortunately, core has been hit, okay? But I think that's a temporary relocation. Truly 100% believe it. We all believe it.
Matt Kornack with National Bank Financial.
Sorry to beat a dead horse here. But just maybe on market-specific drivers, as we come out of this, would you anticipate that maybe Montréal would move faster than Ottawa because it's mostly student related? And then maybe if you could, on an asset-by-asset basis, and you don't have to go into granular detail, but are you seeing severely heightened vacancy in those McGill and Concordia assets, but something more normal sort of outside of the university realms?
Yes, for -- on the latter part of your question, 100%. It's more heightened in Ottawa, too. That's around our properties around the universities and college, Algonquin and Ottawa [indiscernible] Carleton. So that's -- yes, we've definitely been hit around the schools, for sure. And again, we really believe that with these schools opening up that we're going to see some good take-up as far as those vacant apartments are. So we feel pretty strong about it.
All right. And then just -- I guess, so then you don't expect a difference in the Ottawa versus Montréal repopulation?
Actually, to be -- one thing as -- we're really expecting Montréal is going to see a good flow. If you look at the -- once we get immigration opened up again, we really strongly believe Montréal is a bit of, I guess, a gem that people don't fully appreciate. I think Montréal is going to do extremely well.
Yes. Just a couple of comments I would just add to Mike's comments, Matt, is on Montréal, just given the number of institution -- post secondary institutions in Montréal. And going back to what we were talking about, I'd potentially call it, for a lack of a better term, a double cohort year. I think you're already seeing some of that excitement coming to the marketplace. And if you would talk to our marketing department, Montréalers do look for their apartments and want to secure sooner than later. So they will enter into something a little sooner than later.I would say in Ottawa, one of the differences in the sense that is a government employee-based town. I don't think there was the same level of anxiety as far as job security in this city. So that really lends itself well to anybody that thought that maybe they were going to purchase a home, call it, in the next 5 years. We really took advantage of the low interest rates, but we've already seen -- in both regions, but we're already seeing pretty strong housing pricing in Ottawa. And we really believe a lot of that has been pulled forward and since been stratified. But given that, it's probably -- Ottawa still is a little behind Montréal in the cohort.
And those -- I mean, those trends have been notable on house prices. I mean, you've seen 20% increases in both Ottawa and Montréal, I believe, for housing. Do you have a sense as to what portion of the turnover would have been related to people moving out? Or is the bigger component here ultimately sort of young professionals that moved in with their parents and the international student component?
Yes. It's really a combination, Matt. Like it really is -- even in our own shop, I saw some younger kids that reached out to buy a home. And they're probably -- they're pretty thankful that they did. I've had even people say to me that they've -- how much money they've made by buying their home in the start of 2020 and not like so -- anyway. So yes, it's been a real combination. There's been a variety of factors. I would say, by far, Ottawa has been for home ownership, just overall -- just because of the government town and the steadiness of the jobs and that. So that -- we've [indiscernible] more in Ottawa for homes versus Montréal on the other side.
Okay. Fair enough. It's all on paper until you sell it, though.
And Matt, I'd just add something to that because we keep talking about the double cohort piece, right? And it's important on several fronts because it's not -- it's both on the entry into the schooling, right? So people that were first year, September last year that ended up not moving out and people that are going to be first year this year. But it's also the double cohort of young professionals that graduated, right? The ones that graduated last year, the ones that are graduating this year. If you graduated last April, you probably weren't out looking for an apartment and anything. You were moving back home or doing whatever. So there's sort of multiple branches of that double cohort.And on the move-out piece, I agree 100% with Mike and Brad and what their comments were, but you think through what the fact, if you pull homeownership ahead a couple of years in someone's plans because of what's going on in the market, it takes a while to save up and buy that first home. And you pull that ahead, people stretch a little bit for a year or 2 years out. It leaves -- my expectation is that it will create a bit of a void coming in behind it because, a, those people didn't have enough time to save up. And b, as you alluded to yourself, the 15% to 20% increase in home prices we saw from end of 2019 to end of 2020.
Joanne Chen with BMO Capital Markets.
Maybe just shifting back on the leasing front. We're already pretty much done with Q1. Just wondering if you could provide some color on -- with respect to what you guys are seeing in terms of turnover and occupancy incentive use in terms of the trend so far in Q1?
Okay. I didn't hear it 100% clearly, but I think you're just asking about the trend Q4 versus Q1, if I'm right, Joanne?
Yes, exactly. Yes.
Yes. It's been -- again, it's been pretty consistent. We're seeing just more traffic though right now than what we've seen before. Do I think that we're going to see everything return to normal in -- for Q1? No. Do I think we'll see it in Q2? No. I think we'll be lucky. Again, we're looking at September of this year, and that's when we think we'll get back, hopefully, to normal. But we'll be watching very carefully, and a lot of it's going to come down to how is our government dealing with the vaccinations and giving people confidence to go back out and back to school and that. So we're going to have to watch it very carefully.
Yes. I'm sure we all have our opinions there. But maybe just switching gears, I guess, on -- you mentioned in terms of deal flow. Could you maybe talk more specifically with your recent expansion into Vancouver? What are you seeing on the ground now in terms of opportunities in that market?
We've seen a lot of different opportunities in Vancouver. Again, it's early stages for us, got to know a lot of people by being out there myself being on the ground with our team. We are very bullish on Vancouver. Again, we're building this, again, as we've said, for the long run, and we see there's going to be -- we think there's going to be a good amount of people that will be coming to Vancouver here as we get through this.And we also know there's a huge population of students that go to the variety of institutions there in Vancouver. And so -- and their vacancy rate over the years have been ultra low, like we're looking at 1% for a lot of years. So we really believe there's a lot of potential in Vancouver. And we -- and again, with the technology sector becoming more and more apparent and more jobs coming to Vancouver. So we just think there's a lot of great things about Vancouver. But we're early stages. I'm not going to say we're not putting all of our funds into Vancouver. We're watching it and being careful and mindful.
The one thing I would just add to Mike's comment, Joanne, is just -- it's a little different of an inventory. It's a little more mid rise. So typically, the -- you don't get the same size building in Vancouver. So when we have this opportunity to joint venture with Crestpoint, which we're super excited about as a capital partner, we saw the opportunity that we've got some scale, which is extremely hard to do in Vancouver. So it wouldn't have made sense from a one-off basis, but now we're going to be able to pick off and cherry-pick some smaller buildings in other markets we probably wouldn't have done, but it makes sense in this market because they're clustered together. While individually, they look small. But from an operating standpoint, they're clustered and they're around the corners from each other.
Okay. So was the acquisition done as the add-on in April, was that done with Crestpoint or...
These couple -- yes, we've taken down -- they're going -- well, they potentially will be with Crestpoint too. Again, these were off-market, where that's one of the things we've already started to build some relationships with people that we're getting to see some properties before they come to market. So we're excited about it. And we're really extremely -- we've got a great partner that knows that market very well in Crestpoint. So we're very happy about that partnership.
Matt Logan with RBC Capital Markets.
Just wanted to follow-up on Matt's question with regards to how concentrated the vacancy is in your portfolio. Could you give us a sense for, like, across the whole business, like how many buildings really have above-the-average vacancy that might be north of 10%? And like what percentage of the portfolio might be running more in the traditional 97-plus percent occupancy band?
It's really concentrated around our schools and in the course. I mean that's really where it is.
And as you know, 97% is not our typical operating -- or Mike -- sorry, Mike. It's not a typical operating model. We tend to kind of be a little lower than that. 97% would be on the high end of that range to begin with, right?
But suffice it to say, it's fairly concentrated in a handful of buildings in the core and around universities and...
Yes, 100%. That's why we feel we've got a great opportunity here as we go forward. We think we're -- actually, we're in a good position. We talked a lot about it. Obviously, a lot of it's going to be -- will unfold here as we get into September, but we feel pretty good about where we're going.
So I guess if we think about the demand profile, if you were to lower rents, would there be sufficient demand that you could fill units? Or are these buildings where there's simply no students on campus, and there's no demand no matter what the rate or incentives are?
It would be a combination. There'll be some demand. It would be definitely not a student demand per se, but there would be some demand. And again, it's -- that would be -- we just think it's counterintuitive to where we want to go. And so -- and again, it's fairly concentrated, again.
No. I totally appreciate that.
Matt, one thing I would just add to that. As you're quite aware, we like turnover, right? So in those areas, we want to keep it with the -- consistent with the tenant profile that we've been leasing to historically as well, right?
And in terms of turnover and perhaps the mark-to-market potential in the portfolio, would you say that's diminished relative to where that would have been in, say, November at roughly 15%?
Sorry, can you repeat that, Matt?
In terms of the mark-to-market opportunity for the portfolio, would you say that's diminished materially since November when you reported Q3 results?
I thought my microphone was on, and it wasn't. No. It hasn't changed significantly. We've been looking at it consistently across sort of -- on a property basis, on a city basis and on a regional basis, and it's been fairly consistent across-the-board.
And maybe last one for me before I turn it back. In terms of the NOI margins of the business this year, do you think we get back to the 65% range if we back out some of those COVID-related costs that we've seen in 2020?
I think we do. It's just a matter of whether we get there in sort of 2021 or 2022, just given the timing like Mike was talking about, when that comes back. I think if things track well with the rollout of the vaccines and students, I think we could see the later -- the latter half of this year, like Q3 and Q4 will be on -- in track or in line with previous years. And then -- but Q1 and Q2, I think we'll still see the impact of the increased vacancy.
Yes. Just the run rate would get back.
Yes.
Dean Wilkinson with CIBC.
Mike, there's been a lot of talk on this call about the occupancy, occupancy, but I'd like to talk just more on rates -- rental rates. I mean, you did acknowledge that the mark-to-market opportunity in the MD&A has kind of gone from 25% to 20% move. How does that 20% mark compare against what you realized on [indiscernible] for the calendar year of 2020? And do you track the duration of those tenant move outs? How long they've been there? Obviously, the longer they've been, the bigger that market. Are you seeing more of a shorter-term tenancy turn for a longer term? And just what should we be thinking in the 300 or 400 basis point backfill in terms of that mark-to-market capture on the re-leasing going into the back half of the year?
Again, it's been pretty consistent about our -- as far as our turnovers and that. We do believe, again, the back half of the year, we're going to see hopefully return to normal. And I think -- and hopefully, that our mark-to-market will move up a little bit on the back half of the year. We'll see how it goes.
What's 2020's lift on the turns? Can you remind me that, if you got that handy?
I don't think we've disclosed the lift on turnovers before, so I don't think we're going to do that...
That's why I'm asking.
I know.
You know what...
It reminds me [indiscernible] my second coffee, so I caught that one.
Yash Sankpal with Laurentian Bank.
Just wanted to understand the incentives being offered in your markets? And if you could provide color on your incentive policy?
We look at it case by case and building by building. We are probably -- should have maybe did a little bit more earlier on. We didn't do that. We are very hopeful that we would get through this a little quicker than we did. We are -- we're doing it now, but it's really case by case, building by building. It would be more elevated, whatever we're giving would be in core buildings.
Right. And what is -- how is the market in that area? Like, are your competitors offering a lot of incentives as compared to what you are offering? Like any color there.
Some of our competitors are offering more. We were very -- I guess we're watching being very mindful on that. But yes, some of our competitors are offering more than what we're doing. We're pretty -- I think we're being very specific and being very targeted on the buildings. We're also making sure that we don't change the profile of buildings. So we've been very, very careful and been very mindful of what we're doing.
How many months of free rent is being offered in general in your markets?
Again, it's been really targeted depending on there'll be more around the students. If that means if we can get our students right now, it could be 1 to 2 months. And then there's some that there's like you're getting 0. And we're pushing our rents. It's been in our portfolio. It's really -- it's -- everything is really a huge disparity going on right now. And in some of the properties that I'm shocked about, how -- where the demand is very strong, and we're pushing rents. So we're being very targeted.
Okay. That's good. And maybe you could tell us a little bit about your repositioning program. Has that program been affected by the pandemic or you continue to do what you were doing before?
It's continuing on. Nothing is changing. We're being mindful of what we're in. We are continuing on with that whole repositioning, I guess, and trying to high-grading the properties to an extent. So we're very -- we're continuing on. We're watching, again, the markets. We're going to be mindful of what we do. But again, we really believe this is the right course of action for all of our shareholders as we go through. So we think this is the right course of action. But being mindful that some of this stuff is out of our -- really, we can't really do too much about what goes on with the vaccine. But we are very hopeful. We've seen a lot of positive news. We think we're doing the right moves.
Fred Blondeau with IA Capital Markets.
I apologize, I didn't want -- didn't mean to overextend the call. I realize it's still relatively early, but I was wondering if you could give us a bit more color on how is the Vancouver portfolio performing so far. But more importantly, how should we be viewing the relative contribution of Vancouver this year and next?
Again, as far as the -- it's -- I mean, it's a smaller piece of our portfolio. It's something that, hopefully, over time, will balance out some different areas. We -- as far as contribution, it's really early. We're just going through the -- doing some renovations right now. We -- yes, we are really trying to do some -- a little bit of upgrading on that portfolio. So you're not going to see heavy rentals right now. We're expecting we're going to start seeing heavy -- like, I guess, more traffic. And actually, I'm kind of surprised because I'm hearing there is much more traffic than we thought there would be. But we think we'll really see some good rentals come this summer.
Mario Saric with Scotiabank.
Just a couple of quick other ones on my end, really focusing on your student exposure. Like across your entire portfolio, what's your best guess in terms of the percentage of the portfolio that's leased to students, both domestic and international?
I would say it's about 8% or so, 7%, 8%. But the problem, too, is when I -- when you look at it, it's also the young professionals too in the portfolio. That's really -- it's kind of a two-pronged effect. That's really where we're getting at. And those are people that usually want to be in the course. So you have kids that will graduate, they'll stay downtown because they want to be at the bars, the restaurants the whole bit.Now unfortunately, nobody -- first off, you can't get into many even depending on the zone you're living in. And then -- and if you are in an area where the bars and restaurants are open, like they're very hesitant. So like that whole experience is gone. We believe it will come back, actually. I think it's going to come back in a much higher velocity than even before, personally, once we get through it. I think everybody is reasonably tired of sitting at home, so -- especially the young ones, watching my own kids. So I'm feeling very bullish of where we're going to be at the end of this.
Just on that comment, Mike, even internally with some of our younger team members, when you engage with some of our younger future leaders, they're sitting there -- the young professionals and they -- some of them are just chomping up a bit to get out. And I've asked them, like, how are you and your friends looking at it because you're kind of in the cohort that really matters in our urban core. And consistently, I would just say, at least 75% are all saying, it's just a matter of time. We will be back. We all want to live in the core. It's just really when we have more visibility when can things get back to normal. So right now, they're looking at this as an opportunity to save a little cash and be able to fit-out their place a little nicer once they do move out.
Got it. And would you say that your exposure to the young working professional, for lack of a better description, is comparable to the 7% to 8% student exposure?
I would say, yes, for sure. Again, where we're getting hit is in the core. So that's basically -- I would say, definitely.
Got it. And then just maybe on the concentration, absolutely, it sounds like you're being hit in the core, you mentioned multiple times. One of your peers has noted that their vacancy in student-driven buildings is 30% to 40% in the portfolio. Are you seeing that type of concentrated vacancy in your student buildings in your portfolio, or is this much less than that?
Yes. In certain buildings, we are, yes. That would be very consistent. I think we'd all be fairly consistent.
Got it. And based on your experience in Montréal, what's -- you mentioned McGill announced expectations for in-person classes in September. Typically, when would international students arrive in your buildings for a fall school year that starts in September, and are they typically 12-month leases?
They would arrive in August typically, but I've seen some arrive later. I'll tell you though, I'm going to say, like, everything to me, this next year is like it's changed. I don't think there's anything I'm going to go rule by thumb. I'm going to go with rule by day, rule by the hour. Everything's changed. You got to look at your stuff consistently all the time, being mindful of what's happening out there.So will these students arrive in October, November and do their first part and online? Who knows, right? We -- it's going to be -- all I know is that the universities are going to -- there are -- a lot of them have some financial duress. We've seen that play out in one school in particular. I believe that they're really going to want to up their game as far as international students. I've been hearing the same from a couple of different sources. We'll see how it all plays out. But again, I wouldn't -- I don't think I would go rule by thumb on anything right now.
I would say the good news, Mario, to that of all the different education institutions that are kind of potential demand and feeder demand to us, over 50% of them have come out with some kind of intention of increasing their in-class exposure. So what that translates into, who knows? We'll have to take a wait and see, but that is definitely positive news and more visibility than we had 3 months ago. And each couple of weeks, more and more institutions are trying to come out with what their intentions are come in the fall program. And we've even seen some with the summer program. So directionally, it's going in the right way.
Great. And just on that point, Brad, McGill, I think, announced 3 weeks ago in terms of expectations for full in-person classes. Have you -- anecdotally, have you seen any impact on leads within your McGill...
Starting to see a little bit of -- yes, we're starting to see a little bit of impact there. But again, like usually, the kids would all like lease from May to April 30. I mean, I think that we're seeing that this may change a little bit. But yes, we are starting to see a little bit of impact. I'm very hopeful as we get through the spring here, we're going to see lots and lots of positive news.
There are no further questions at this time. I'd now like to turn the call back over to Mike McGahan for closing comments.
Thank you. I appreciate everybody joining us on our first call. Excellent questions from everybody. Again, this is obviously a very, very different times, very strange times, to say the least. We are feeling very bullish on our strategy. We think it's the right course of action. We think all of our shareholders will benefit from this in the long run. Again, have full belief in our team. Our team has done a tremendous job getting through this. Their engagement with our residents was unbelievable. Just checking on them for everything from to make sure that they had groceries, any pharmaceuticals they needed. So I really value our whole team members.And as a company, I think we're all going into a very good time. We've learned a lot about ourselves during this. I think we've all learned a lot about ourselves and -- on a business size and personally, but I feel very, very fortunate to be part of this great team. So we look forward to having some very good results as we get forward through at the end of this year and into 2022. And thank you, again. I appreciate all the analysts and their coverage. And I appreciate everybody joining us on this first call. Thank you very much.
This concludes the InterRent REIT fourth quarter and year-end 2020 financial results conference call and webcast. Thank you for calling. You may now disconnect.