Killam Apartment REIT
TSX:KMP.UN

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Killam Apartment REIT
TSX:KMP.UN
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Earnings Call Transcript

Earnings Call Transcript
2021-Q2

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Operator

Good morning, ladies and gentlemen, and welcome to the Killam Apartment Real Estate Investment Trust Second Quarter 2021 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, August 5, 2021.I'd now like to turn the conference over to Philip Fraser, President and CEO. Please go ahead.

P
Philip D. Fraser
President, CEO & Executive Trustee

Thank you. Good morning and thank you for joining Killam Apartment REIT's Q2 2021 conference call. I am here today with Robert Richardson, Executive Vice President; Dale Noseworthy, Chief Financial Officer; and Aaron Cleveland, Senior Vice President of Finance; and Nancy Alexander, Vice President of Investor Relations and Sustainability.Slides to accompany today's call are available on the Investor Relations section of our website under Events and Presentations. I will now ask Nancy to read our cautionary statement.

N
Nancy Alexander

Thank you, Phil. This presentation may contain forward-looking statements with respect to Killam Apartment REIT and its operations, strategies, financial performance, conditions or otherwise. The actual results and performance of Killam discussed here today could differ materially from those expressed or implied by such statements. Such statements are qualified in their entirety by the inherent risks and uncertainties surrounding forward-looking statements. For further information about the inherent risks and uncertainties in respect of forward-looking statements, please refer to Killam's most recent annual information form and other securities regulatory filings found online on SEDAR. Unless otherwise stated, all forward-looking statements made today speak only as of today's date. Unless otherwise stated, all forward-looking statements speak only as of the date of which this presentation refers and the parties have no obligation to update such statements.

P
Philip D. Fraser
President, CEO & Executive Trustee

Thank you, Nancy. We are very pleased with our strong financial and operating results for Q2 2021. We are hopeful that all nonvaccinated Canadians will continue to book appointments to receive their first or second dose and the provincial restrictions will be lifted by this fall. Nonetheless, we are seeing increased leasing activity throughout our portfolio and increased activity in our seasonal MHC in commercial businesses.Our 2021 targets are outlined on Slide 3, showing the year-to-date performance. We have made good progress in the first 6 months of 2021 with all of our targets. We produced positive same-property net operating income growth for the 29th consecutive quarter and increased our same-property NOI target to exceed 3.5%, up from our initial target of plus 2%. Dale will take us through Killam's second quarter financial results, followed by Robert, who will discuss our recent acquisitions. I will conclude with progress on both our newly completed developments and development pipeline.I will now hand it over to Dale.

D
Dale Noseworthy
Chief Financial Officer

Thanks, Phil. Highlights of Killam's solid Q2 financial results can be found on Slide 4. Strong fundamentals for the multifamily rental market is reflected in both same-property growth and $134 million in fair value gains on investment properties following cap rate compression in Ontario, Nova Scotia and Victoria BC.Overall, we achieved net income of $136.7 million, 3.8% FFO per unit growth and 4.5% AFFO per unit growth in the quarter. Killam's AFFO payout ratio decreased 400 basis points in Q2 to 75%.Please refer to Slide 5. Killam's same-property portfolio achieved 4.5% NOI growth in the quarter and a 20 basis point improvement in operating margin from the second quarter last year. Year-to-date, same-property NOI is up 3.6%. Killam's key revenue levers are charted on Page 6. Apartment leasing and occupancy have been trending up since the beginning of 2021 and we achieved 96.9% same-property occupancy in Q2. Rental rates were also higher in the quarter, up 3.1% from June 2020.Although we've seen an uptick in rental incentives in the last year, these incentive offerings remained limited to 0.7% of rental revenue and are currently focused primarily in Alberta and specific properties with occupancy challenges. In addition to top-line growth from our apartment portfolio, we have realized strong revenue growth from both our MHC and commercial portfolios. Revenue for our MHC portfolio was up 8.5%, driven primarily by our seasonal resorts, which realized revenue growth of 20% as we didn't face the same COVID related operating delays and capacity restrictions as last spring.For the commercial portfolio, same-property revenue was up 4.5%, following new leasing activity and a reduction in COVID-19 related tenant abatements versus Q2 2020. Killam's suite repositioning program is an important revenue driver that has remained resilient during the pandemic.Slide 7 shows that we are on track to meet our target of 550 repositionings for 2021. Of the 287 repositionings completed in the first half of the year, the average investment of $25,000 resulted in an average ROI of 13%. Killam only commences repositioning once its units become vacant. The capital investment on these repositions not only support rental growth and attractive returns, but can also improve the efficiency and modernization of the property.With unit repositioning, processes designs and trusted contractors in place, we are successfully completing and re-leasing most of these repositioned units in under a month.Turning to operating expenses on Slide 8. We realized a 3.3% increase in same-property expenses for the quarter as higher general operating expenses were modestly offset by lower overall property tax expenses. The operating expense increase was largely due to higher on-site staff salaries and higher repair and maintenance work versus the same period in 2020, in part due to COVID-19 related restrictions last year.Slide 9 highlights our debt maturity profile, including average apartment mortgage rates by year versus prevailing CMHC insured mortgage rates. We realized a 69 basis point reduction in interest rates on $14.9 million of maturing debt in the quarter. Based on current CMHC insured mortgage rates of between 1.8% and 2%, we expect to continue -- debt as a percentage of total assets was 44.5% at June 30th, below our target for the year of less than 47%. In addition, Killam finished the quarter with acquisition capacity of over $250 million.I will now turn the call over to Robert, who will provide color on our recent activities.

R
Robert G. Richardson
Executive VP & Trustee

Please refer to Slide 11. Killam continues to expand its portfolio coast-to-coast. And today, we own more than 18,000 apartment units, 5,800 MHC sites in 39 communities and approximately 1 million square feet of commercial premises. Some houses over 35,000 residents, and these residents are 700 employees, valued unitholders and broader stakeholders had kept top of mind when we execute Killam's long-term growth strategy, specifically, growing earnings from our existing portfolio, acquiring accretive properties as we diversify our portfolio geographically and developing high energy-efficient, high-quality properties in our core markets.Killam has made impressive gains with each of its 3 growth strategies year-to-date in 2021. Q2 2021 was a record quarter for acquisitions, led by a purchase in Ontario. Our core Ontario markets include Ottawa, the GTA, Kitchener Waterloo Cambridge and London. We anticipate acquisitions plus new developments will make 2021 a year of record growth for Killam's asset base.On June 30, 2021, we closed on a 785 unit portfolio in Kitchener-Waterloo, please refer to Slides 12 through 15 for acquisition details. The acquisition price was $191 million and represents a cap rate of approximately 3.5%, was completed with cash on hand, plus new first mortgage financings totaling $123 million, having a weighted average interest rate of 2.08%.We are very pleased to add this 11 building portfolio to our KWC asset base. These properties have been exceptionally well maintained, are in sought after neighborhoods and provide excellent opportunities for Killam's suite repositioning program. Recent leasing activity highlights the portfolio of strength and underlies the ability to move rents on turnover.Slide 12 shows the states, a 137 unit mid-rise concrete building in Kitchener that is currently 99% occupied with average in-place rents of $1.53 per square foot or $1,320 per month. Market rents on turnover are more in the $1.70 range.The next slide profiles Heritage Place, which consists of 2 mid-rise buildings totaling 160 units in Kitchener. It is fully occupied in Kitchener. It is 99% occupied with in-place average rents of $1.58 per square foot or $1,170 per month. We are generating releasing rental rates more in the $1.85 per square foot range. The KWC region is one of the fastest-growing regions in Ontario over the last several years with incomes that are ranked amongst the highest in Ontario.It has undergone major renovations and revitalizations in downtown residential and commercial buildings to house its growing technology and innovation sector that counts Google, Toyota and OpenText as some of its largest employers to name a few. The region was ranked fourth overall out of 20 locations in Canada as surveyed in CBRE's 2020 scoring Tech Talent Report, breaking its first place for quality of labor and talent quality to cost metrics.By the way, Halifax scored 8% overall on the same survey. KWC has a large university base, being home to the University of Waterloo and Wilfrid Laurier University. And both improved transportation infrastructure with its new light rail transit system, plus the all-day GO Transit rail service.Slide 16 shows a map of Kitchener Waterloo Cambridge. The green balloons represent assets that Killam is owned in this region prior to our recent $191 million acquisition. These highlighted properties include 440 and 4 apartment buildings in Cambridge, 2 of which were built in the last 6 years as well as Westmount place, a 300,000 square foot commercial property with its national grocer anchored retail Plaza and office tower. More importantly, this site has 2 acres of residential development opportunity, on which we plan to break ground in late 2021.Phase 1 will have 130 25% interest in Charlottetown Mall, taking Killam's total ownership now to 75%. As well, Killam added a 40 unit apartment building in St. John's, Newfoundland both are shown on Slide 17. Charlottetown mall has stabilized grocery-anchored enclosed mall located on 32 acres in Charlottetown adjacent to the University of Prince Edward Island campus.Killam's former joint venture partner, RioCan REIT sold their 50% interest on June 1st and Killam acquired its additional 25% interest for $10.1 million. The remaining 25% interest was sold to a local PEI real estate company, APM MacLean. This local partner is strategic as it brings a regional leasing perspective, further development expertise and community level involvement to assist in revitalizing the center. Still now manages the mall and is identifying opportunities to reduce the property's operating expenses and carbon footprint in the near term.The 4D unit, 4-story apartment in St. John's in Newfoundland is located beside an existing Killam property. Killam paid $4.2 million for 38 Pasadena at Crescent, which is fully occupied and its average monthly rent of $860. Before Philip concludes the formal part of this conference call with his development update, I want to reiterate Killam's commitment to the continued health and safety of its employees, residents, commercial tenants and communities. Killam's COVID-19 management has included policies and procedures to reduce the spread of the virus and this commitment is ongoing. We offer in our office, rapid COVID-19 testing and pleased to report very high rates of vaccinations amongst our staff. We greatly appreciate the excellent work and dedication of our committed employees across the country, especially these last 16 months.We'll now hand you back to Philip. Thank you.

P
Philip D. Fraser
President, CEO & Executive Trustee

Thank you, Robert. Leasing activity has been very strong for our 3 recently completed developments. As shown on Slide 19, we have all but 2 units of the 349 units leased today. All 3 had a short and successful lease period despite the COVID-19 environment. Impressively, they are contributing to FFO growth with 6 months, within 6 months of completion and during Q2 generated $0.3 million of FFO.Slide 20 shows the operating margins and annual NOI contribution of these assets. For the second half of 2021, the 3 properties are projected to produce $1.2 million of FFO and for the 2022, approximately $3 million of FFO. Our development pipeline provides us with an excellent opportunity to add high-quality real estate assets to our portfolio.Currently, we have 5 developments underway in the following cities: Halifax, Mississauga, Kitchener and 2 in Ottawa. Slide 21 shows the 497 units, which will add $240 million of new properties to our balance sheet over the next 18 months. The $240 million is total cost, not the IFRS value of these high-quality assets. Killam has invested $6 million of equity into these developments. And we expect to achieve approximately $0.07 to $0.08 of FFO per unit on a fully stabilized basis.We are pre-leasing the KE Mississauga and the Latitude and Ottawa and expect both to be open by Q1 2022.As shown on Slide 30, the first phase of Westmount in Waterloo is expected to commence construction in Q4 of 2021. This is a 139 unit development and will be located at the corner of Erb and Dietz Street and is next door to our existing Westmount Plaza. We are building in markets where the demand is strong and the market cap rate compression is still allowing for a healthy 50 to 150 basis point spread between construction yields and market cap rates.For reference, Slide 31 breaks down Killam's future development pipeline, totaling approximately 4,000 units or $1.3 billion in new project that is in various stages of development or predevelopment. I am pleased to report that yesterday, the Board of Trustees approved a $0.02 per unit increase in the distribution, bringing the annualized unitholder distribution to $0.70 per year and making it the fifth consecutive year of the distribution increase.To conclude, I want to thank our residents, employees and unitholders for their support and investment in Killam. I am very pleased with our ability to make meaningful progress in all of our priorities and create value for our unitholders.Thank you. I will now open up the call for questions.

Operator

[Operator Instructions] Your first question comes from Mark Rothschild with Canaccord.

M
Mark Rothschild
MD & Real Estate Analyst

In regards to the development portfolio, it's obviously leased up well. Can you just talk a little bit about how the rents were versus your pro-forma? And also, if there was any thought or impact on the rents that you were charging with considering that government rent controls have been getting stricter and perhaps could be stricter for longer?

P
Philip D. Fraser
President, CEO & Executive Trustee

The first part of that question, our pro-forma is what we started pre-leasing, we kept those throughout the whole sort of lease-up period once it was open on all three developments. And the second part, we're -- we believe that those rents are market rents today. And basically, one of the properties is in PEI that does have rent control. One is in Alberta. There's no signs of rent control. And we believe that rent control is not in the picture for Nova Scotia as well.

M
Mark Rothschild
MD & Real Estate Analyst

Okay. Great. And then, maybe this question might be for Dale, I'm not sure. But can you talk a little bit more about the process this quarter with arriving at the cap rate and fair value change? And to what extent do you believe that's really reflective of current markets? Obviously, it's a sizable move.

D
Dale Noseworthy
Chief Financial Officer

Yes. Sure. We would have looked at a lot of -- we know, there's been some sizable transactions in those markets where we took those gains. Certainly, we found a lot of competition when we -- with our acquisition in the Kitchener Waterloo region. But you've seen some of our peers buying in London and Victoria as well. So we felt there was looking at what cap rate both traded at. A lot of time spent digesting that, looking at which of our assets fall into those categories. So that was a big driver for it. So I think in those markets, based on the information that we have, we feel that the cap rates that we've picked are reasonable, but it's been pretty specific in those markets when we looked in the quarter. And then, in addition to that, you would have seen our revenue growth on the rents. So that's always a factor to that comes into play when we look at those fair value gains. So those increases of course are more across the portfolio as you would have seen reported. But those specific areas, they relate to the transaction activity we've been seeing.

Operator

Your next question comes from Jonathan Kelcher with TD.

J
Jonathan Kelcher
Analyst

First question is just on, Phil, you're talking about you've started pre-leasing at the K and Latitude. How is that going?

P
Philip D. Fraser
President, CEO & Executive Trustee

It's going as we expect. Basically, we have some already have signed up. But again, it's a little bit early. But we started these 2 properties earlier than we typically do. So we're very pleased of the interest in both properties.

J
Jonathan Kelcher
Analyst

Okay. And then, just switching gears. I guess on Kitchener, Rob you outlined very good uplifts there. Just does that include your repositioning program or is your -- would your repositioning program be on top of that?

R
Robert G. Richardson
Executive VP & Trustee

Yes. The repositioning program would be on top of that 100%. We didn't do any repositionings with those increases.

J
Jonathan Kelcher
Analyst

Okay. And what's the turnover like in those properties? How long will it take you to sort of realize those gains?

R
Robert G. Richardson
Executive VP & Trustee

We haven't had it long enough to really know the turnover at this time, Jonathan. We need a bit more time with the portfolio. We can answer that for you next quarter, maybe.

J
Jonathan Kelcher
Analyst

Okay. I'll make sure I ask it next quarter. And then, lastly, just Dale, I guess on the R&M was higher in the quarter. And obviously, that's due to a catch-up from COVID. What can we expect there for the balance of the year?

D
Dale Noseworthy
Chief Financial Officer

Sorry, in terms of what?

J
Jonathan Kelcher
Analyst

Well is R&M going to be -- is it going to --?

D
Dale Noseworthy
Chief Financial Officer

I think what you saw in Q2 is not representative of what you'll see the rest of the year. When we look at Q2 last year, we've had a lot of very extreme differences of what was happening in Q2. So I think you can expect much more moderate expense growth for the second half of the year.

J
Jonathan Kelcher
Analyst

Okay. That's it for me.

Operator

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

M
Matt Logan
Analyst

Would you guys be able to give us some color on how your leasing velocity is trending into the kind of fall leasing season? And maybe some color on where the committed occupancy for the portfolio is tracking for August and September?

D
Dale Noseworthy
Chief Financial Officer

Yes. I can say that we've -- the velocity has been -- it's been really strong on the leasing front. And when we look in terms of the fall numbers are looking strong and I'd say kind of more in-line with what we would have seen 2 years ago before COVID. We've even seen those students come back sooner than we would have. When we look at those student focused markets, we saw a big push in May and June kind of earlier than we would normally see. So we're feeling pretty bullish on the occupancy trending for the fall.And I can say, even when we look over the last number, or I guess the last 6 months, seven months, we've seen those occupancies improving every month. And Peninsula Halifax is one we've talked about on the call since this time last year when we started to see a little bit more of the vacancy kick in because of students staying home and we've seen that come back in a big way just as one example. But -- and St. John's is another one. We've made fantastic gains in the St. John's market. You would have seen that in our numbers this quarter and that trend is continuing as well. So overall, there's lots happening on the leasing front.

M
Matt Logan
Analyst

In terms of any of those differences by region, when you say there is more strength in some of those harder hit segments or is it fairly equal across the board in terms of demand?

D
Dale Noseworthy
Chief Financial Officer

I mean I say that St. John's is one that we've seen that is standing out compared to where it was. I don't think it's totally equal across. But I'd say that we are starting to see more movement in the downtown of Alberta than we had seen. I don't think it's quite what we're seeing in Halifax and some other regions, but it's definitely stronger. So not totally even, but I'd say improvement is pretty consistent across the board.

P
Philip D. Fraser
President, CEO & Executive Trustee

And Dale, you've mentioned, would be our 2 weakest in our complete portfolio, sort of the downtown Alberta cities and St. John's.

M
Matt Logan
Analyst

Appreciate that Phil. Maybe changing gears a little bit towards your same-property NOI target. Would you be able to give us some color on how your outbreaks down by segment for your apartment MHC and Commercial Portfolios?

D
Dale Noseworthy
Chief Financial Officer

Sure. So when we look at the apartments, I mean, I think that that one probably kind of 3% to 4% range when we look for the second half of the year. I think we're seeing those rent increases as we've seen already are going to continue and we have some occupancy gains to be made on that front. And as I already mentioned, we're not going to see the same expense pressure as we saw in the second quarter. I think on Commercial and MHC, those could have the potential to be higher than the apartments.On the MHCs, we were still as seasonal. You saw that big lift in this quarter on the seasonal assets. Q3 last year, we were still dealing with COVID. And we're still dealing with COVID of course. But on the seasonal too, we would have felt it more last Q3. In Commercial, we've had good lease-up on our Commercial Spaces. So I think all those things are going to come into play that those segments have the potential to perform the apartments in the second half.

M
Matt Logan
Analyst

I appreciate the commentary. I'll turn the call back. Thank you.

Operator

[Operator Instructions] Your next question comes from Joanne Chen with BMO Capital Markets.

J
J. Chen
Director of Equity Research

Just maybe on that, could you talk to some of the drivers that you're seeing that drove such a big improvement in St. John's and New Brunswick market? What are some of the trends that you're seeing there?

D
Dale Noseworthy
Chief Financial Officer

Students would be one. When we look at the St. John's market in particular, the students. We've also grown our team there from a leasing perspective. But I'd say that's one of the biggest factors in that market.

P
Philip D. Fraser
President, CEO & Executive Trustee

We're seeing some employment gains as well, especially in St. John's. The earnings are very busy and they've built a new office building and they're seeing an uptick in their employment for sure. So that's going on. I think forestry is doing well, relatively speaking and that's another contributor to what's going on in the marketplace. There's economically, all major 3 centers -- 3 major centers in New Brunswick are seeing good activity. But as Dale said, a big part of it is returning students is certainly helping the market.

J
J. Chen
Director of Equity Research

Good to hear. And I guess, more broadly, how should we think, I guess, right now, the mark-to-market opportunity for each of your major markets right now?

P
Philip D. Fraser
President, CEO & Executive Trustee

Overall, we have about a 15% mark-to-market. We'd say, kind of close to close on average. Some markets are better than others. The Halifax market continues to be strong. As mark-to-market, I think also Newfoundland is come back in a big way, St. John's is surprisingly strong. And so, I think there's an opportunity now as the market tightens up to see some gains there. And Toronto has been a big winner of last year, it really has been. And so, there's probably more opportunity there. Not so much in the West.

D
Dale Noseworthy
Chief Financial Officer

But certainly, those are -- when we look at the Kitchener Waterloo in Toronto and London is another one, I mean those Ontario markets, of course, we're seeing that as well. So it's always a question of where do those units turn and how long is it going to take to be able to?

J
J. Chen
Director of Equity Research

Right, right, for sure. And I guess if we were to move to the West side with Alberta, I guess there was a little bit of a pickup I guess with the rental incentives. But how has that trended since Q2? Are you seeing some improving conditions there in Q2?

R
Robert G. Richardson
Executive VP & Trustee

We are better leasing the downtown. And Downtown Calgary is made a good gain. We've had some staffing improvements and we're seeing the market get stronger.

P
Philip D. Fraser
President, CEO & Executive Trustee

Yes. I mean, as an indication, I mean, we started the year with our new development that we were part of the building of it, but buying the remaining part, the 1st of January. And we leased up 233 units in 6 months in that Suburban or the Northwest Calgary.

R
Robert G. Richardson
Executive VP & Trustee

And the wide in Downtown Edmonton also has done well. It's come on strong since the end of the quarter.

J
J. Chen
Director of Equity Research

Okay. That's helpful. And I guess maybe just switching gears, last one for me to the acquisition side of things. How are you thinking -- I mean, were you guys obviously have had a very busy Q2. But what do you think the pipeline is looking like for the remainder of the year given how competitive some of the pricing environment is right now?

P
Philip D. Fraser
President, CEO & Executive Trustee

I mean, there is good sort of supply in terms of what is being offered or is supposed to be offer right across the country. But as you also mentioned, it's very, very competitive. So we've got -- or basically our eyes on a couple of other opportunities in Ontario and in the West. And we're even looking here in Atlantic Canada again at a couple of opportunities.

Operator

Your next question comes from Matt Kornack with National Bank.

M
Matt Kornack
Analyst

Just a quick follow-up on the last question with regards to the pipeline. As it seems like you're saying there's still a fair bit of product on the market. But have you found that as the operating environment has gotten a little easier and who knows what happens with capital gains, but that some of the private sellers have shied away from selling or is it still the same sort of volume of acquisition opportunities that we saw?

P
Philip D. Fraser
President, CEO & Executive Trustee

The number of opportunities is probably greater, but it's not the sort of the mid-sized portfolio opportunities that were available between reporting first quarter and now. So those are all have sort of been digested and basically bought or under contract or closed. So when I talk about opportunities, you're back to looking at single asset opportunities in these markets.

M
Matt Kornack
Analyst

Okay. No, that's fair enough. And then, on the affordable housing focus, you noted, so you have 828 units, 5% of the portfolio, you want to grow it by 20% by 2025. Is that going to come in the form of acquisitions or would you potentially develop new product or even add affordable units to existing development projects? Just interested in how you scale the affordable housing competition?

P
Philip D. Fraser
President, CEO & Executive Trustee

I think it's going to be both. For instance, once we start our first phase of Westmount, that will have an affordable component attached to it. We're looking at opportunities that have affordable housing already there that you can buy from existing developers. And even on the drawing board, we've got a couple more that we'd be looking to see that we can make that affordable portion of it as well.

M
Matt Kornack
Analyst

Okay. And congrats on a solid quarter.

P
Philip D. Fraser
President, CEO & Executive Trustee

Thank you.

Y
Yashwant Sankpal
VP & Equity Research Analyst of REIT

Your next question comes from Yash Sankpal with Laurentian Bank. Just want to better understand your development projects. So those 3 projects that are fully leased now, what was your pro-forma leasing period?

P
Philip D. Fraser
President, CEO & Executive Trustee

What -- sorry, you'd asked, what was our pro-forma leasing period?

Y
Yashwant Sankpal
VP & Equity Research Analyst of REIT

Like what was -- yes, what were you modeling before?

P
Philip D. Fraser
President, CEO & Executive Trustee

You know what, I mean, we probably even from a budgeting point of view, 8 months in all of them.

Y
Yashwant Sankpal
VP & Equity Research Analyst of REIT

Okay. And given this leasing success, how much NAV impact do you think -- could you give us some numbers, like in terms of what you paid or your cost versus how much lift you expect from just the mark-to-market?

P
Philip D. Fraser
President, CEO & Executive Trustee

Sorry, you're talking about like the value?

Y
Yashwant Sankpal
VP & Equity Research Analyst of REIT

Those three projects, yes.

P
Philip D. Fraser
President, CEO & Executive Trustee

Well, we're still working on that. I mean, basically, I mean, what we have to do is get it stabilized. And again, like we haven't fully leased, but up and running, we got to get basically go through the -- at least the full cycle in terms of the operating expenses and some of them vary because they've got solar power on the roof and we're just trying to figure that out.But once we get that, I mean, we're expecting fairly good lifts from the cost yield versus what they're worth from an IFRS point of view.

Y
Yashwant Sankpal
VP & Equity Research Analyst of REIT

So would that be between 25% to 30%?

P
Philip D. Fraser
President, CEO & Executive Trustee

25% would be about 125 basis point difference in cap rates. I think that's kind of where it goes in.

D
Dale Noseworthy
Chief Financial Officer

And some of them we've already taken some lifts just to be clear. So when we're doing development, we would take some lift throughout the process. So some of those increases have already flowed through from the fair value. Once we hit certain -- we start developing. And we heard hit certain hurdles, we'll start taking some of those gains. So there is still some to be taken, but some of it has already flowed through. So with all of our developments, you'll see that come in throughout the piece. And then, we'll kind of wait for the final -- once we've had it for a year and see what those rents actually end up being, what the margins end up being that we -- yes.

Y
Yashwant Sankpal
VP & Equity Research Analyst of REIT

No, the accounting part I'm not too worried. I was trying to understand the region economic impact between the cost you paid and the value you will get after these projects are fully stabilized? Well, I think that we -- a lot of that information is disclosed when you look at our developments, what our actual yield is that we're expecting versus the cap rate leave us on the slides generally further developments that are down in the pipe. So those kind of spreads. Yes, we do include -- there that what happens. Those are expectations. I mean, this is actually happening.

P
Philip D. Fraser
President, CEO & Executive Trustee

So for the end of Q3, our reporting then, we will give exact sort of numbers of what we think we're going to be able to do on the sort of the increase in value of those 3 properties.

Y
Yashwant Sankpal
VP & Equity Research Analyst of REIT

Okay. And now given the success you have had with these projects, is your outlook about your development strategy change anyway? Like do you want to take on more projects or do you want to accelerate your existing pipeline? Any change in your view?

P
Philip D. Fraser
President, CEO & Executive Trustee

Well, I think we've been actually -- that thought basically occurred to us a number of years ago, which has translated into the 5 current ones that we're doing. So in terms of the dollar, the overall dollar amount of those 3 compared to the 5 that we have basically in the ground today and a number of them that are going to be finished within 12 months. As I said earlier, it's $240 million of cost and we will have $60 million of equity in the ground.And through the slide deck, I mean, you can sort of see what we're thinking in terms of sort of creative value just from those 5 projects. So our share is 500 units. And then, in behind that, from our pipeline, we've got the next 3 or 4 that we're working on now. So as we finish up this batch around of these developments, we'll have a number of new ones hopefully started in the next 12 to 18 months.

Y
Yashwant Sankpal
VP & Equity Research Analyst of REIT

And do you have any internal threshold that you don't want to cross in terms of how much investment you put in your development bucket?

P
Philip D. Fraser
President, CEO & Executive Trustee

Well, we've always lived by -- it's less than 4%, 5% of the balance sheet.

Operator

There are no further questions at this time. Please proceed.

P
Philip D. Fraser
President, CEO & Executive Trustee

I would like to thank everyone today for listening and participating on our second quarter call. And we look forward to reporting our results in November on the results of our third quarter. Thank you.

Operator

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 great day.