Canadian Apartment Properties Real Estate Investment Trust

Good morning.

Thank you for attending today's Canadian Apartment Properties REIT second quarter 2022 results conference call. My name is Alexis and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, David Mills. You may proceed.

Hardly host, but thank you, operator. Before we begin, let me remind everyone that the following discussion may include comments that constitute forward-looking statements about expected future events and the financial and operating results of CAPREIT. Our actual results may differ materially from these forward-looking statements, as such statements are subject to certain risks and uncertainties. Discussions concerning these risk factors, the forward-looking statements, and the factors and assumptions on which their base can be found in CAPREIT's regulatory filings including our annual information form and MD&A, which can be attained at CDAR. I'll now turn things over to Mark Kenney, President and Chief Executive Officer.

Thanks, David. Good morning, everyone, and thank you for joining us. Stephen Cove, our Chief Financial Officer, is with me this morning, as is our new Chief Investment Officer, Julian Schoenfeld. We are very pleased to have Julian join our team. He brings a wealth of strategic capital market and property investment experience to Capri, and we welcome him to our first investor conference call. Welcome, Julian. Turning to slide four, despite some lingering issues related to the pandemic and inflationary pressure on our cost structure, we are pleased to see solid increases in our NOI and NFFO in the second quarter. NFFFO per unit was impacted by the 1.7% increase in the number of units outstanding in the quarter. Driving this improved performance was a 10% increase in revenues due to the contribution from our acquisitions, increased monthly rents and much stronger occupancy at 98.2% compared to 97.2% last year. In May, We began purchasing our trust units for cancellation under our approved normal course issuer bid. At the end of the second quarter, we have purchased approximately 1.4 million units, which has since increased to approximately 1.8 million units as of the end of July for an aggregate purchase price of $85 million. We believe, given that our units are trading at a significant discount to our net asset value, these purchases are another way we are enhancing long-term value for our unit holders. Turning to our six-month results in slide five, you can see all of our key performance benchmarks were up, including revenues, NOI, and the NFFO. Most importantly, market rent recovery is well underway. From an operations perspective, our ability to generate solid and resilient performance through all economic cycles is clearly demonstrated by the strong, consistent occupancies and growing revenues across our portfolio, as you can see on slide six. Occupancies approved again in the second quarter, while net average monthly rents continue to increase. Our same property NOI is being impacted by the increased costs we are experiencing, which are higher maintenance costs, increases in utilities, and higher realty taxes. We believe such inflationary cost pressures will impact our NOI over the next few quarters. In addition, CAPREIT has an experienced team that is exploring alternatives to minimize usage and exposure to operating expenditures, including hydro submetering. As of quarter end, approximately 64% of the 59,635 suites in Canada are submetered or direct metered. Additional suites and sites have submetering or direct metering in place that will be assumed by new tenants on turnover. CAPREIT will continue to evaluate implementing submetering in the remaining suites and sites Submetering lowers consumption, resulting in a smaller environmental impact, lower operating costs, and lower inflation exposure. Similarly, to protect against rising water and natural gas rates, our utility teams continue to evaluate effective alternatives to mitigate our risk to rising utility costs. Our leasing and marketing programs continue to generate increasing occupancies and average market rents, as you can see on slide seven. After two years operating under significant pandemic restrictions, our occupancy continues to strengthen, rising to 98.2% in the second quarter, up from Q1 and 97.2% in last year's second quarter. You can also see that rents for the total portfolio have risen 4.4% compared to the same time last year. Tenant incentives are continuing to decline to pre-pandemic levels, and we expect the majority of the amortization to be completed by the end of 2022. We experienced a solid and positive trend in rent increases on turnover each quarter since we bottomed out at the height of the pandemic in Q1 last year, as you can see on slide 8. While turnovers were impacted by the pandemic over the last few years, we are now starting to see solid increases as we move rents closer to market. A 10.6% increase on turnover in the Canadian portfolio is a solid result, and we expect to see this continue and grow through the balance of the year. Our term rate remains strong and are tracking at the historical trends of seasonal variations. Looking ahead, we are experiencing more in-person and online visits, and we expect we will start to see more higher mark-to-market increases in the quarters ahead, moving us toward the higher levels of increases we generated prior to the pandemic. I'll now turn things over to Julian to outline how we are repositioning and strengthening our property portfolio.

Thanks, Mark. Turning to slide 10. We continue to focus on increasing the quality of our portfolio through our active asset management program. Through 2021, our strong acquisitions team added 3,744 high-quality suites and sites to our portfolio, focusing on our key markets. Another 1,237 suites and sites have been acquired to date in 2022, with a further 300 suites subsequent to June 30th. Importantly, almost all of our acquisitions in 2022 represent new-build assets in our targeted geographies. These new additions to our portfolio are in line with CAPREIT's strategy of rejuvenating its asset composition and increasing our geographic diversification into desirable major markets in Canada. Additionally, we're happy to be contributing to stimulating the market for new-build multifamily assets, contributing to the increase of new supply in Canada. Looking ahead, our acquisition pipeline remains strong, and we intend on leveraging our best-in-class acquisitions and operations platforms to generate further accretive portfolio growth in the quarters and years ahead. In addition to acquisitions, Caprate is also using dispositions to advance its core capital allocation strategy. Caprate's $18 billion asset base is the result of 25 years of acquiring, operating, and enhancing multifamily properties. Some of our assets were bought decades ago with strategic criteria that no longer perfectly align with our current strategic objectives, making some of these assets non-core. Many of these non-core assets continue to attract premium pricing and generate bids that are above our IFRS NAV. As shown in slide 11, we've been selectively executing dispositions which have so far amounted to approximately $350 million in 2022. These strategic dispositions not only enhance the quality of our overall portfolio, but also results in disposition gains and introduce an incredibly attractive source of capital to fund our capital deployment priorities, which we've previously discussed being our new build acquisitions, MHC sites, and NCIB program. We're committed to increasing the quality of the portfolio and enhancing returns and unit holder value. As you can see on slide 12, We are making real progress in repositioning our portfolio to reduce our exposure to older value-add properties while increasing our presence in new-build properties and MHC sites in markets where Capri wants to increase exposure. Our strategy is enhancing our portfolio quality, diversifying our tenant base and geographical exposure, decreasing our operating expense and capital expenditure exposure, important in these inflationary times, and ultimately enhancing our risk-adjusted return profile. With that said, I'd like to thank you for your time this morning, and I will now turn things over to my partner and Capri's new full-time CFO, Stephen Cole, for his financial review.

Thanks, Julian, and good morning, everyone. As you can see on slide 14, our balance sheet and financial position remain strong and flexible at quarter end with a conservative debt-to-gross book value and continuing high liquidity. Our $1.2 billion in Canadian unencumbered properties, which includes the majority of our MHC properties, provides additional liquidity should it be needed. Looking at our financings in the second quarter, we locked in interest rates of 3.4% on our refinancings and extended our term to maturity. We expect to finance a total of $1.1 billion in mortgages and top-ups in 2022. Importantly, over 99% of our mortgage portfolio incurs a fixed interest rate, protecting us from potential future interest rate increases. In total, if we were to access all our available sources of debt capital, we would have approximately $1.4 billion available at quarter end. Slide 15 shows we are successfully managing our interest costs in Canada and extending the term to maturity. And in fact, Our strategy to leverage 10-year CMHC-insured mortgage debt has resulted in CAPREIT having one of the longest terms of maturity and lowest weighted average interest rate among our publicly traded peers. This provides us with strong protection against renewal risk, given where interest rates are at today. Additionally, another benefit of our disposition program is a lower reliance on debt. As I mentioned, over 99% of our mortgage portfolio incurs a low fixed interest rate, protecting us from expected future rate increases. As of today, we have lost approximately 72% of our 2022 maturing mortgages at a 3.15% interest rate. Further to our strong and flexible financial position, looking back over the last few years, you can see on slide 16, that we have met our goal of maintaining a very conservative debt and coverage ratios even through the pandemic. This conservative approach underpins the stability and resiliency of our business and the sustainability of our monthly cash distributions to unit holders. This focus on maintaining one of the strongest balance sheets in our business will continue going forward. Our mortgage portfolio remains well balanced, as shown on slide 17. As you can see, in any given year, no more than 14% of our total mortgages come due, thereby reducing risk in the rising interest rate environment. Looking ahead, our current ability to top up renewing mortgages through to 2036 will provide further significant liquidity in the future. As we expected, interest rates have risen after the Bank of Canada announced its four policy rate increases so far this year. In anticipation, we moved up the refinancing opportunities for our 2022 matured mortgages from the second half of the year by paying some hedge costs and prepayment penalties, and were able to achieve financing cost savings through closing or pre-locking rates for those five-year and 10-year mortgages. Their rates were 2.8% and 3.3% respectively, lower than the current five-year and 10-year estimated rates of approximately 3.6% and 3.7%. I'll now turn things back to Mark to wrap up.

Thanks, Stephen. Looking ahead, we continue to see a number of very positive value drivers that we are confident will generate strong and growing return for our unit holders over both the short and long term. We will continue to focus on our proven asset allocation strategy as detailed on slide 19. On the apartment front, we are targeting the acquisition of new-build, modern properties in well-located markets in Canada's strongest centres. Yields are attractive, growth is strong and stable, and capex is modest. We also see condo rental rates increasing significantly in major urban centres. increasing the appeal of our more affordable rental rates. With respect to our MHC focus, revenue and revenue growth are as robust as our apartment properties and have a very low risk profile. With residents owning their own homes, CAPEX needs are significantly reduced. Additionally, with home ownership costs rising significantly across the country, CAPREIT's large MHC portfolio provides an affordable alternative for families looking for quality residences at a truly affordable cost. Our third focus is on our NCIB program. While our unit price remains disconnected from the strong price that we are seeing in the private markets, we will continue to crystallize the value spread and execute instant value creation for our unit holders. Key to our growth in the coming months will be our ability to capitalize on a number of market trends. Demand for our quality properties is growing as immigration accelerates, with new Canadians seeking affordable homes in our largest urban markets. The return of international students is also contributing to the increased demand. The pandemic generated what we call household consolidation, as young students and young people return to home to save costs and seek safety. These young people are now moving back to rental accommodations as offices reopen and in-class learning returns. Demographics are also on our side as the growing seniors population looks to the rental market to meet their needs. We believe our quality and well-located properties offering more space on one floor at affordable rates will see increased demand by seniors looking to capitalize on the significant equity in their homes. We also see families looking to quality rental accommodation, including our MHC properties, as a highly affordable alternative to the increasing cost of home ownership. These are an excellent solution. Additionally, cash flows will increase as we prudently and responsibly increase rents. Our ongoing property investments, as outlined on slide 21, are reducing our costs and reducing our exposure to commodity prices through energy saving and other initiatives. Our technology solutions are increasing our operating efficiency, enhancing resident safety and making our properties more attractive, and helping us meet our ESG commitment to enhanced environmental performance. We issued our most recent ESG report on June 10. In it, you will see significant progress that we are making with our environmental, social and governance performance, as detailed on slide 22. On the environmental front, our investments in energy efficiency have generated an 11% reduction in consumption and a 10% reduction in greenhouse gas emissions since 2010. Not only are ESG programs improving our environmental footprint, they are also reducing costs. Looking ahead, we remain committed to our ESG programs and look forward to keeping you updated on our progress in the years ahead. To further strengthen our operating platform, we have added significant depth and experience to our senior management team over the last few months. The new members joining our team on slide 23 and other additions reinforce our ability to capitalize on opportunities in our markets, ensure continuing strong and resilient operating performance, and build on our track record of generating long-term value for our unit holders. In summary, we remain very excited about our future. Our strategy of acquiring new-built properties increases portfolio quality, diversifies our asset base, reinforces revenue growth, and reduces our capex exposure. Our focus on high-demand locations in strong major markets across Canada is responding to the strong population growth and is meeting the need for more housing space. We continue to leverage our best-in-class acquisitions and operation teams to create value throughout our portfolio. Our industry-leading balance sheet, leverage and liquidity position provide stability and the ability to grow going forward. And with demographic trends and increasing immigration, we are confident we will continue to drive value for our unit holders in the years ahead. Thank you for your time this morning. And we would now be pleased to take any questions that you may have.

If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you are using a speakerphone, please remember to pick The first question comes from the line of Jonathan Kilcher with TD Securities. You may proceed.

Thanks. Good morning. Good morning. First question, just on the mark-to-market turnover, the turnover uplifts that you're getting, it looks like they're sort of trending back to 2019 levels. Do you think you get there over the course of the next couple of quarters? And really, do you think the market might be stronger now than it was pre-pandemic?

I think our predictions are coming through. I think we called Q3 as the strong quarter. The evidence is clear. The ruler analogy that I've given in the past still holds true. And we're getting very, very quick uptake. And our pricing teams are obviously looking at inventory and adjusting pricing relative to inventory by the day. So we're very, very encouraged that it's feeling more like the first quarter of 2020. Okay.

That is helpful. And then just, I guess, the new slide that Julian spoke to, Just on the portfolio repositioning, do you have targets? Do you have set targets for value-add versus new build versus MHC?

No, we just remain opportunistic. At the end of the day, you can only buy what's in the market, and you can only buy what makes sense. We're extremely conservative, as you have heard us say in the past, Jonathan, with our underwriting practice. It's a matter of things penning out. We do not have ambitions of Capri to grow bigger. We have ambitions of Capri to become a higher quality portfolio with stronger earnings per share. And if we have to do that through recycling, we're going to do that.

Okay.

And where would development fit into that? Again, it's opportunistic by site because every site's a little bit different, but we're extremely open to still looking at development, providing it pens out, and we are very ambitious on growing our development team. Our development team has now grown to the largest size in CAPRE's history, but if extracting value through the sale of land or the sale of assets, once we can recognize and crystallize density, we'll do that as well. But it's on a property-by-property basis. I can tell you that we are a cautious organization, as we've always said, and the first few projects you see come to market for us will probably not be the biggest projects we'll do in Capri's history. We want to wade slowly. Very open to selling our land as much as we are building on it.

Okay.

Thanks for that. I'll turn it back.

Thank you, Mr. Kilcher. The next question comes from the line of Kyle Stanley with Desjardins. You may proceed.

Thanks. Morning, guys. Morning. You've made really strong headway on the capital recycling program year to date. I'm just wondering, do you believe there's still a decent amount of wood to chop on that front?

We'd like to chop that wood all day long. You know, we'll stay opportunistic with sales, and we're seeing very strong pricing in some of the value-add assets. The wonderful matching exercise of buying our stock on super sale is an easy one to pen out. So we really are embracing the notion of high-grading the portfolio through either acquiring new assets or buying back our own stock. know as stephen talked about we've got this tremendous debt ladder of low interest rate uh long debt and if i can buy that at uh significant discounts to nav it's it's what you call in real estate a complete no-brainer okay now fair enough and i mean you mentioned the various uh kind of strategic uses of capital you have including the the buyback and you know rotating into newer build assets i mean

How do you make those decisions? And, you know, has that criteria shifted at all? Obviously, I mean, you know, with the stock trading at a discount to book, obviously that pushes you more into the NCIB, but just wondering how you kind of balance those things.

Geographic diversification is one criteria. We do try to pen out return on assets five years out. We say 10, but really you can only count on five. So you take into account CapEx type investments. We look at the maturity of the asset, how long we've held it for. how optimal we think it is. And we look at fit. We sold a couple of one and a half caps last year to developers. It just wasn't in our wheelhouse of expertise. So again, if I can match a one and a half cap sale with buying that cap rate stock in the low to mid fours, I'm comfortable doing that. So there's just a variety of factors. You have to match the buyers with the ability to deploy the capital It'll be a real mixture. We've seen some very interesting new build assets that we'll have to really make the decision. Do we buy back our high grade stock or do we buy into high grade properties? Not a bad problem to have.

Yep. Couldn't agree more with that. Just one more. This is probably for Steven. I'm just wondering if you could provide some color on the sequential decline in the other OpEx line. Was this just seasonal or were there some other factors there?

Sorry, you're saying the sequential decline in OpEx? In the other OpEx line. In the other OpEx line. Yeah, they're basically seasonal decline. But if you look at the normalized NOI margin going forward, I mean, that would be a good run rate for you to project out for the future quarters.

Okay, perfect. That's it for me. I'll turn it back. Thanks, guys.

Thank you, Mr. Stanley. The next question comes from the line of Johan Rodriguez with Industrial Alliance. You may proceed.

Hi, everyone. Just further on the asset sales, are you listing those or are they unsolicited bids? And if you can maybe give a range of the cap rates of the stuff that you've sold in Toronto, East York, and Ottawa.

Well, it's always a mixture. They were listed, the deals that we did, to the buildings in Ottawa. We came to agreement with a joint venture partner to take those to market. We did that in a listed process. The same thing happened in Toronto. Cap rate wise, we targeted assets that we think, again, we've maximized value where we can recognize high two, low three cap rate type transactions. And we'll continue to kind of plod around at that pace.

That's okay.

A guiding principle, just Johan, on that is our IFRS values, as you heard Julian talk about. We also give consideration to what you guys made the book at. And when we can exceed those values and achieve all the other objectives, then we've got something that we'll consider.

That's okay.

And then just on the new build versus value add, what is the difference in IRs if you're buying today? Say you're buying a new build property right next to value add, what would be the difference in your IRs?

Well, just go to cap rate to start with. Value add assets are still selling in, again, the high twos, low threes. And if you're looking at low rise suburban new build, which is kind of what we kind of targeted ourselves around. You're talking low force. Low force, and again, another metric that we pay very close attention to is price per foot cost in these new builds. And what we've realized is that a lot of the new builds that have come to market are probably a good 20% below replacement cost. That's an unheard of number. to walk into a brand new asset with low replacement costs without the development risk, again, I think pretty smart real estate decisions.

Okay, thanks. I'll turn it back.

Thank you, Mr. Rodriguez. The next question comes from the line of Jimmy Shen with RBC Capital Markets. You may proceed.

Thanks. Good morning, guys. Just to follow up on Johan's question on the value-add versus the new build, and I guess when I think about value-add, I think about there's a lot of embedded mark-to-market rent that could come down the road. So I guess the question is kind of what makes it non-core, because yes, you may be selling at a low cap rate today, but maybe on a longer term IR, it actually looks the same or even higher than some of the new builds. Maybe you could talk about that, and then The second question is just in terms of what's the expectation for more asset sale for this year?

I would just say that, again, I go back to the starting point is kind of pure hour number, not broker number, hour number cap rate kind of calculations. And again, we shift our mind to looking at what's going on in Canada. What is going on with housing? What's going on with housing supply? And what we see is the tide is rising on rents in all asset classes. So it's not the old game of mark to marketing and repositioning and getting those increases. That is still there. But for an asset that we've held for 20 years or more, the reality is we've done a lot of heavy lifting. So then I look at other brand new assets in a backdrop macro environment where rents are going up. And in an environment where in many cases the regulatory environment is different to capture those market rents, even for renewals, we see opportunity. And this isn't a broad-based, large-sweeping change. We have to stay on this path and over time, I think, do a better job of geographical diversification and move the quality ladder in the portfolio higher. You know, we've got, we started with, You know, looking back a couple of years ago, I would have characterized Capri's portfolio as being one of the highest quality apartment portfolios in Canada to begin with. We're just going to the next level now.

Okay. And what will be your expectation for the rest of the year in terms of asset sales?

Again, it's opportunistic. If you ask me what's on our desk today in terms of deals that we're looking at, I'd have to check with Julian, but it's probably $600 to $700 million. A high likelihood we'll do zero of that. So we're always underwriting a pretty robust pipeline of opportunity. And I've never been confident saying exactly what we're going to do. I can only kind of describe the environment. But there's a lot of deals in the marketplace. A lot. Even with these higher interest rates, we do think that there will be the opportunity for yield spread.

Okay. Okay. Thanks, guys.

Thank you, Mr. Shan. The next question comes from the line of Matt Cornack with National Bank Financial. You may proceed.

Hey, guys. I guess it's a continuation of Jimmy's comments there, but I think from your answer, you're essentially saying that you can achieve similar type rent growth in the new assets as some of your existing assets given the rent control regimes with the lower capex. Is that a fair assumption? I guess it would be more economically sensitive in that it's that market today, but is that how we should think about the rent growth potential within these new properties?

I think that's fair. I would just add that when all your markets are at rent, if regulatory intervention does happen, you're in a good spot for maintaining value.

Fair enough. And then on land value within your existing portfolio and how to potentially get at that and provide new supply, is there an opportunity to sell the land to a partner that would develop and then buy back the asset or a portion of the asset on completion if you don't necessarily want to incur the development risk or dilution associated with that or is that something you're entertained at this point?

Hey Matt, it's Julian speaking. Um, you know, we're considering all, all options and all alternatives there. Um, specifically what you mentioned about entitling the land and then selling it there and recognizing the value. Like Mark said, it's case by case, but if I can get 90% of the value for 10% of the work and let the developer, you know, squeeze out the last 10% of value and do 90% of the work and, uh, and risk and take the dilution for a few years, you know, sure, we would consider that. But it really is case by case and parcel of land by parcel of land.

Especially in an environment where our stock's on super sale and we can instantly deploy that small amount of gain that we've given up into an even greater opportunity in buying cap rate stock.

Okay, no, that makes sense. And then I guess... Nothing in Canada is easy government-wise, but our tax system isn't entirely great in terms of capital recycling, but how should we think of the ability to manage tax in this process?

Yeah, so we're actually, if you're talking about the taxes that are associated to these sales, we're looking at how we're going to manage that for our unit holders, and that's something that we're going to take a keen look at and, you know, have something in place hopefully by the year end.

Okay. Thanks, guys.

Thank you, Mr. Cornack. The next question comes from the line of Mario Salic with Scotiabank. You may proceed.

Hey, good morning. Good morning. I wanted to start off focusing. I wanted to touch on the IFRS valuation. and kind of the 400, give or take, million-dollar decline. Can you break that down between cap rates and any underlying changes in forecast NOI?

I'm going to let Stephen take it, but before I do, I just want to reiterate, you know, we've had a very conservative approach at CAPREIT over the years in calculating our valuations. And when you do this by quarter, you have to really kind of assess what's happening in the quarter with trades and really talk on the street and how things are looking. And this is a process that does change quarter by quarter. But we felt it entirely appropriate to be as transparent and honest with our investors on being conservative on the valuation approach. I'll let Stephen kind of build on the actual NAV calculation process and how we look at that?

Yeah, so just in terms of how we look at it on a quarterly, quarter-to-quarter basis, our methodology hasn't changed. I mean, we have discussions, various discussions with brokers, with our evaluators, and we have extensive discussions internally around values. And as you already know, there's been volatility around interest rates, inflationary pressures, and also you could say there's limited buyers and sellers. But there are strong fundamentals. You see our stabilized NOI has increased. But in light of all that, when uncertainty does exist, we believe that conservatism is the right approach. So the adjustment really is more of a conservatism decision and you can think of when we usually think about values, valuators are usually plus or minus 10% in terms of difference in how they look at the asset. We're taking the more of the lower end of the range or more conservative range, point of the range actually. So that's how we looked at the values and as you've already pointed out, stabilized NOIs, fundamentals are strong. So you can see that in our stabilized NOI on those assets. If we were trying to dissect the cap rate increase, I would say part of that there was an adjustment for conservatism, and a little bit is also just to ensure that we don't bring up our values too significantly, so we've adjusted through the stabilized NOI component.

Mario, it's Julian. I'm just going to layer on there. As Stephen mentioned, our lower values, they're purely accounting conservatism, and they have nothing to do with actual transactional evidence in the market over what's been a relatively quiet summer. And more importantly, they have zero bearing on our price expectations for our disposition program. When I'm looking at our disposition program, I don't even consider our Q2 values. My starting point is the Q4s, and then we have comprehensive discussions with our acquisitions team that is always active in the market and really has their finger on the pulse.

Okay, so maybe just a couple of follow-ups. In terms of the breakdown of the $400 million between NOI and cap rates, what you're saying is 100% of the $400 million loss is related to higher cap rate and none related to any impact in terms of NOI?

Yeah, the majority of it. That's correct. I mean, there's some capex in there, but yes.

Okay, and secondly, on the 600 to 700 million of assets that you're looking at for sale, are you able to quantify how much of the 400 million would be attributable to those?

Sorry, repeat that? Of the 400, do you mean of the write-down?

Yeah, I'm just wondering if a disproportionate amount of the write-down would be attributable to the 600 to 700 million of sales that you're looking at.

I don't have the number in my hand, but I don't think it would be proportionate to the portfolio. I don't think there's anything to read there.

Okay. And then maybe just shifting gears on the operational side, there's a lot of R&M catch-up due to the pandemic. I think last quarter, Mark, you talked about that kind of being done from an expense perspective is Is that consistent in terms of the view today? Is the pandemic-related catch-up done in terms of operating cost pressure?

Yeah, at this point, the pandemic catch-up is done. If we're seeing the pressures in R&M at this point, it would be inflationary pressures. And again, part of the expectation for us is we have put together a very dynamic new procurement team that we didn't even talk about in the presentation that we hope offsets some of those inflationary pressures through better pricing. But yeah, we've got our own little signs now of inflation. Pandemic buildup and the volume talk that we were having in Q4 and Q1 is over.

And then in terms of the same store revenue growth, it's getting better. Do you have any sense today what the rent-to-income ratio looks like in the portfolio relative to where it was 12 months ago?

Extraordinarily low. The average renter at Capri is putting about 20% of their income into rent, which is just a jaw-dropping number. When you look at the markets that we're in and the whole topic of affordability, you know, we are Canada's affordable housing solution. And there are folks out there that are definitely struggling. But when you look at a portfolio average of 20% of income going towards rent, that is just a screaming sign of affordability in our view.

Got it. And just to be clear that the 20% is, reflective of CAPREIT's rent versus kind of disposable income in CAPREIT's portfolio or is it kind of broader market disposable income metrics?

We do it on broader market disposable income because we have to dispose of the data once we approve an application for privacy reasons. We have to eliminate that information. We can't hold it. So when I'm quoting those numbers, we're looking at average Canadian family income in the markets that we serve.

Do you think it would be materially higher or lower than 20% if we looked at cap freedom?

No, I think it's very indicative. Again, our portfolio is on the higher end of quality, so you would expect on that higher end of quality to be slightly higher income.

Thank you, Mr. Sariq. The next question comes from the line of Jenny Ma with BMO Capital Markets. You may proceed.

Thanks, good morning and congrats to Stephen and Julian on your appointments. I'm wondering for the six to 700 million of dispositions you're contemplating, could you comment on the geographies of these assets? Are they still very much concentrated in the GTA Is there opportunity to maybe peel off some assets in other lower cap rate jurisdictions like BC, for example?

The focus is definitely just in Ontario, call it. There's been some, like I said, a joint venture in Ottawa situation we continue to look at. A couple of assets where premium pricing is the most frothy is in the GTA. And so helping us diversify Ontario is great. We really believe in the market. By the way, Jenny, we don't see the new builds in Ontario being quite the same as some of the value adds in the GTA, for example. I would say, though, that what we are looking at is trying to take a long view on return. And I would say that if there was opportunities in places like BC, where pricing is still very, very strong, I can't ignore this screaming super buy that we get through our NCIB. So we would definitely have to weigh the future return horizon of assets with the unbelievable value that we're seeing in buying our own stock.

Okay, great. You kind of touched points that lead into my next question, is that when you look at capital recycling that you've done and some of the new acquisitions, it would appear that there's a bit of a shift in terms of your market weightings. I mean, it's not that much, but directionally it's trending that way. When you're thinking about buying new assets, is there any goal in terms of your geographic distribution or is this really just the result of the individual investment decisions that you're making?

It's always a consideration. but it remains opportunistic like i said when there's assets in the market um we we have to take a keen look like i think it's just in part if we want to comment on gta you know we're talking now construction costs 1300 a foot that makes you know buying rental in the gta concrete high-rise pretty pretty difficult you know when we're looking at brand new construction Markets like you know go back and you're talking three four hundred dollars a foot brand new construction. This is pretty compelling stuff so it's a multiple deep dive that we look at always be mindful of geographical focus But you know, this is not a like I said at the beginning not a wholesale change of asset composition We are moving in a high grading diversification direction that I think you'll see the trend that you're seeing continue.

So I guess there's no deliberate target in terms of reducing exposure to the GTA and increasing exposure to other markets. It's really just a function of the investment decisions that you're making them sort of on the margin.

Yeah, Jenny, just kind of later on to what Mark said. We do have views on certain markets, and our portfolio, which has taken over 25 years to amass, has some overweight positions and some underweight positions. I'd say when we're looking at either acquisitions or dispositions, if they do help us achieve our diversification goals, then we'll consider them very clearly. If they are a little bit off strategy in that regard, we'll still consider them, but I'd say just given they're slightly off strategy, we'll need a little bit better pricing to affect the transaction. So that's been our philosophy or our guiding principles with that.

Okay, great. And then going back to the 20% discount to replacement costs that you're mentioning, Mark, is that a fairly good number across different markets or is it a little bit different in the GTA say versus in Edmonton and in Quebec?

Well, we haven't seen much in the GTA, and I don't think we would find that phenomenon here. The new build that's really happening in Ontario is being held by those that are building. We haven't seen a lot of merchant building at all in Ontario. A little bit in Ottawa, but not so much in Toronto. The screaming value, in our view, For new construction our places like you just said like Alberta for example where projects were conceived five seven years ago takes time to build finally getting to market now and low-rise You're seeing incredible price per foot value in my mind for new construction there And and and likewise in Quebec again these projects don't show up You know two weeks after there's an idea to build an apartment building. So we're getting you know pricing really that was locked in I think three four years ago and and when you have a uh you know high velocity inflationary market like we have right now 20 is probably conservative okay great thank you very much i'll turn it back thank you jenny thank you miss mom there are currently no further questions registered at this time so i'll now pass the conference over to mr kinney for closing remarks Well, thank you very much for joining us here today. On behalf of the management team here at CAPRI, we thank you for your ongoing interest in our story. And if you have any additional questions, I would urge you to reach out to myself, Julian, or Stephen. Thanks again. Have a great day.

That concludes the Canadian Apartment Properties REIT second quarter 2022 results conference call. Thank you for your participation. You may now disconnect your line.