Canadian Apartment Properties Real Estate Investment Trust

Hello and welcome to the Canadian Apartment Properties REIT fourth quarter 2023 results conference call. My name is Alex, I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press star followed by one on your telephone keypad. And I'll hand it over to your host, Nicole Dolan, Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone. Before we begin, let me remind everyone that during our conference call this morning, we may include forward-looking statements about expected future events and the financial and operating results of CAPREIT, which are subject to certain risks and uncertainties. We direct your attention to slide two and our other regulatory filings for important information about these statements. I will now turn the call over to Mark Kenney, President and CEO.

Thanks, Nicole, and good morning, everyone. Joining me this morning is Stephen Koh, our Chief Financial Officer. and Julian Schoenfeldt, our Chief Investment Officer. Let's start with a quick overview of our operational performance. On slide four, you can see that our occupancies held high all year, with 99% of our suites in Canada occupied on December 31st, 2023 and 2022. Across our Canadian residential portfolio, occupied AMR was $1,516 as of year end, which represents an increase of 8.2% since 2022. This market-driven growth reflects the increasingly tight rental fundamentals that we're continuing to experience across Canada. This past year, demand for affordable rental accommodation grew higher again. As our population expands further, and the housing gap widens. Later, I'll speak more on the work that CAPREIT's been doing to help turn around the trajectory of this crisis. Turning to slide five, I'll take a moment to go through our financial results for the fourth quarter. Our strong rent growth throughout 2023 drove the 5.9% increase in operating revenues, while our NOI was up by 7.4% as compared to Q4 of 2022. This was achieved despite the size of our portfolio, having a net decrease of over 2,000 suites and sites during the year, a result of our repositioning initiatives that Julian will expand on shortly. Combined with our prudent cost control measures, which remain a top priority for us, we are pleased to report a 90 basis point increase in our NOI margin to 64.9% for the fourth quarter. I'd like to remind everyone that this includes higher repairs and maintenance costs associated with our capital allocation strategy. This year, we started scaling back on in-suite and common area capital expenditures, and we reallocated a part of that into additional repairs and maintenance work. This was a strategic initiative that we implemented in response to the tight rental market that we're now operating in. This capital redeployment increases our property operating costs as compared to 2022, which negatively affects our margins. However, it lowers our overall capital expenditure and this positively impacts our long-term cash returns. We're looking forward to seeing the merits of this property management strategy show in our future financial results. FFO increased by 2.2% compared to Q4 2022 due to our organic growth, as well as lower trust expenses, partially offset by higher interest rate costs. Along with accretive purchases made on our NCIB program in early 2023, our FFO for diluted unit was up by 3.8% to 60.2 cents for the fourth quarter of 2023. Referring to slide six, we've included some key financial metrics for the year ended December 31st, 2023, which I'll briefly highlight. Strong rent growth increased operating revenues by 5.8%, and combined with cost mitigating measures, net operating income grew by 6.5%. NOI margin for the total and same property portfolio increased by 40 and 30 basis points respectively to 65% and 65.3% for 2023. Again, organic growth, lower trust expenses, and accretive NCIB repurchases all positively contributed to growth in our FFO per diluted unit, which was partially offset by interest rate increases. The result was a 2.9% increase in FFO per diluted unit to $2.39.6 for year ended December 31, 2023. We maintained our annual rate of distribution steady at $1.45 per unit and our FFO payout ratio was 60.5% for 2023. On slide 7, we summarized our current strategy, and we're very proud of the progress that we've made on that in 2023. CAPREIT's strategy has always been centered on the creation of value for our unit holders. However, our operating environment has changed in recent years, and we've established a new and improved addition of our strategy to align with that. Today, our objectives revolve around the modernization of our portfolio and the recycling of capital in order to create value. I'll let Julian and Stephen expand on these initiatives, but an overview. We've been very focused on optimizing our portfolio and operational efficiencies. That means we're disposing of our older non-core properties and we're reinvesting the net proceeds into strategically aligned new build rental apartment properties in Canada. We've also been investing in our NCIB program, depending on the capital market conditions and the other opportunities available for capital redeployment, such as paying down higher interest debt. In 2023, we invested $101 million in our NCIB program to repurchase and cancel approximately 2.2 million trust units at significant discounts to NAV. Our development program is another increasingly important component of our strategy. We've been working on the identification, entitlement, and sale of our excess land to developers, which not only generates incremental funding that we can then reinvest in our core business, but it also helps to contribute to the supply of new homes for Canadians. I'll now turn things over to Julian to provide a more detailed update on our strategic progress.

Thanks, Mark. Turning to slide 9, we're very excited to have achieved our annual target in 2023 with the sale of over $400 million in non-core properties, primarily located in regulated, lower-growth Canadian markets. We've disposed of these older properties at prices that are at or above their IFRS fair value, and we've reinvested approximately $300 million of the net proceeds into new purpose-built rental apartments. located in Canada's most attractive, highest-density markets where long-term fundamentals are strongest. We're buying these high-quality, recently constructed assets at a discount to what it would cost to build today, and they produce higher returns that are effectively unrestricted by rent control. They also have lower capital investment requirements, superior energy efficiency, and overall, they strengthen the risk-return profile of our portfolios. Through this repositioning program, we're diversifying our tenant base and upgrading the average age geographic exposure and quality of our properties. In turn, we're enhancing the quality of our long-term earnings potential. We're happy to see that these on-strategy assets now represent 12% of our Canadian apartment portfolio, up from 9% this time last year, and we're excited to continue increasing that allocation in the years ahead. On slide 10, we showcase the seven on-strategy properties that we acquired this past year for an aggregate purchase price of $304 million, excluding transaction costs and other accounting adjustments. Most recently, in the fourth quarter, we completed two acquisitions of newly built rental properties located in highly coveted communities in British Columbia. First, in November, we closed the purchase of the Lancaster for $22.5 million, This 48-suite property was built in 2022 and has ocean views from its location in the metropolitan Victoria area of southwestern BC. In December, we acquired HubPlace, a brand-new 12-story concrete purpose-built rental apartment containing 114 high-quality residential suites and over 5,000 square feet of commercial retail at grade. The building is located beside one of the most important transit hubs in Vancouver, and we use net disposition proceeds to purchase this premium property following lease up for $68 million. Acquiring a newly constructed concrete prime located building at this attractive price significantly below replacement costs and without having to incur any of the development or lease up risk perfectly demonstrates our strategy in action. Slide 11 displays a sample of non-core dispositions completed throughout 2023. And you can really see the type of assets that we're selling here versus the high quality properties that we're buying as shown on the previous slide. In the fourth quarter alone, we closed on the sale of an aggregate 362 suites for a combined $64.2 million in gross disposition proceeds. Combined with the Lancaster and HubPlate deals, this brings our total transaction volume to over $700 million worth of strategic acquisitions and dispositions in 2023. Our purchases and sales together have the objective of modernizing our portfolio and improving its quality and geographic exposure. These dispositions all represent older properties which we've identified as non-core due to their low financial returns, geographical asymmetries, or operational challenges. Looking ahead into 2024, we're again aiming to dispose of over $400 million worth of our off-strategy properties. that will further upgrade the quality of our Canadian portfolio and enhance its long-run return. I will lastly expand on our asset-light development program, which we've highlighted on slide 12. After many years of acquisitive growth, CAPRI's accumulated one of the largest portfolios of residential accommodation in Canada, and that came with a sizable amount of excess density potential, particularly given the substantial presence CAPRI has in Ontario and BC markets. This year we've been actively combing through our portfolio to identify and title and monetize our high value underutilized land. In March of 2023, we celebrated the program's first disposition of approximately 280,000 square feet of buildable GFA in Montreal, which we sold for $17.25 million. We were able to redeploy those proceeds shortly thereafter with the purchase of our new-build property in Dartmouth, demonstrating the benefits of this development program in the context of our overall capital allocation strategy. This represents the essence of the model. We're surfacing the land value embedded through our portfolio and effectively crystallizing the potential development profit up front without having to take on any development, financing, or lease-up risk. We can then reallocate the capital into our core strategic initiatives while enabling our development partners in the construction of new residential homes for Canadians. We're pleased to be able to contribute to the supply solution in this way and help with the intensification of the communities in which we're invested. We're excited to announce that our two Davisville site applications were recently unanimously approved at Community Council and City Council in Toronto, and we're looking forward to finalizing those applications soon. I will now turn things over to Stephen for his financial review.

Thanks Julian, and good morning everyone. Our liquidity position remained robust throughout 2023, as you can see on slide 14. We got $340 million in available on our Canadian credit facility at year-end, which was incurring a weighted average interest rate of 6.5%. We also have $1.5 billion worth of unencumbered investment properties that provides additional access to liquidity should we need it. Our ladder mortgage profile in Canada carries one of the longest terms of maturity in our peer universe, with a weighted average term to maturity of 5.4 years as of December 31st, 2023. This conservative approach to financing is also evidenced by the fact that we fixed 100% of our interest costs on our Canadian mortgage profile, which carried a weighted average effective interest rate of 2.95% at year end. Next year, we've got $397 million in Canadian mortgage maturities, which will provide incremental top-up financing upon renewal. Our liquidity and active debt management remains a key component of our overarching strategy and supports our ability to execute on our strategic endeavors. To that end, we're excited to have launched our at the market or ATM program yesterday, which will allow Capri to cost effectively raise capital from time to time when favorable market conditions exist. This provides us with another tool that adds to our capital raising capabilities and further enhances our financial flexibility as we execute on our capital allocation strategy. Slide 15 displays our well-staggered Canadian mortgage maturity profile, and here you can see that we have no more than 13% of our total mortgage debt coming due in any given year. Going forward, we'll continue to prudently manage our mortgage financing in order to minimize volatility and renewal risk, as we've done to date. Turning to slide 16, our debt metrics all remain safely within the limits of our covenants. Our debt to gross book value ratio was marginally elevated at 41.6% as of December 31st, 2023, which is slightly above our target range. However, it still remains conservative and we are actively managing our leverage as part of our overall strategy. I will now turn things back over to Mark to wrap up.

Thanks, Stephen. Our new addition of the CAPREIT strategy revolves around getting better instead of getting bigger. And we did just that in 2023. We accomplished a lot and we're becoming a better place to live, work, and invest. At CAPRI, we're focused on upgrading the quality of our portfolio, enhancing the living experience of our residents, improving the communities in which we operate, and ultimately increasing returns for our unit holders. Internally, We've also been optimizing our people, technology, and organizational structure to ensure alignment with our renewed strategy for success now and in the future. Going forward, we will continue to focus on executing on our refined strategy and our vision for value creation for our residents, our people, and our unit holders. We also recognize the role we play as a core provider of high quality safe and affordable rental housing in Canada. And we're prioritizing our commitment to helping with the solution to the housing affordability and supply crisis. On that front, we've been continuing to work with our peers through the Canadian Rental Housing Providers for Affordable Housing Initiative and its website, foraffordable.ca, where you can learn more about all the ways in which we're advocating for changes in government policies and programs to address these important issues. This year, our environmental, social and governance performance has also remained a focus for us. We plan to release our 2023 ESG report this upcoming June, and we encourage you to review that to learn more about the meaningful strides we're making on our ESG priorities. In summary, We're very pleased with the progress we've made this year on the execution of our strategy, and we want to thank all of our stakeholders for their ongoing support. Moving ahead, we're excited to continue optimizing on all three pillars of our business, to be the best place to live, the best place to work, and the best place to invest. With that, I would like to thank you for your time this morning, and we would now be pleased to take your questions.

Thank you. As a reminder, if you'd like to ask a question, that's star 5 by 1 on your telephone keypad. Our first question for today comes from Frank Liu of BMO Capital Markets. Your line is now open. Please go ahead.

Thank you. Good morning, everyone. Thanks for taking my questions. I just want to touch on the acquisition side. That's down several deals in the BC this year and looking ahead in 2024. Is there any specific market you see more opportunities than others?

I'll just pass it to Julian, but we're always opportunistic. We've got full scan on the market, coast to coast. We don't particularly pick a market and go hunting. We tend to pick the entire country and analyze, but I'll let Julian talk about where he sees opportunity today.

Yeah, Mark brought it right on. The market continues to be favorable if you're an acquirer. The competition is nowhere near the level that it used to be in the auto market, so we are scanning coast to coast. Everyone knows that we are an active buyer, and we're seeing everything and underwriting everything, and it'll be a matter of what hits our return thresholds and which properties we find attractive.

Got it. And then on this type of newly constructed assets, do you think the pricing of this type of product will become more attractive in 2024 versus what you have down in 2023?

Well, we think that the opportunity is not a permanent one. Most of the buildings that the investment team is focused on were probably conceptualized and launched seven years ago in some cases. So the market has obviously cooled during this interest rate period, but that's where we remain opportunistic and disciplined in terms of our buying. To be fair, we've never known what the future held in terms of acquisitions from day one. You can only analyze what's in the market and stay disciplined with your criteria. So I think it really stays true for the new build acquisitions. There's really not too much deviation from that.

Yeah, you know, All the acquisitions that we've done and we've been looking at, candidly, have been at discounts to replacement costs. And they've been in the face of a higher interest rate environment. So for now, we're still seeing it's a buyer's market. But if we were to see interest rates go lower, just given where the replacement costs are and what we do is attractive opportunities, there is potential for them to go up. And that is our expectation. But for now, it still remains a buyer's market.

Got it. That's fair. Just want to switch gears to the GNA side. If I did the math correctly this quarter, GNA net of the restructuring costs came in around like $11 million this quarter. It looks a bit low relatively to last Q and prior year. Is this going to run rate for 2024?

Yeah, I think I would say actually use the full year as a run rate. I mean, we've been making a lot of adjustments and optimizing teams. You know, factoring in salary increases and whatnot, I think 2023 is a pretty good run rate for 2024.

We remain very optimistic and focused on improvements in this area and look forward to more positive announcements on that front as we go through 2024. I see.

Yeah, so I guess $15 million will be... Sorry, just to... Sorry, go ahead.

Yeah, sorry, I keep cutting you off there. Just to understand it, it goes to the strategy of being better, not bigger. The company was built for growth, and as we've said in the past, we We're serial issuers of new capital. That is not our focus now. Our focus is on better, not bigger. And I'll use that opportunity and I'll say it as many times as I can on the call today. I'm so incredibly proud of our results because we are high grading this portfolio at a pace never seen before in an accretive way and growing earnings, which I think is a rare event. Like I know it's been relatively... small in in bite-sized announcements but when we look back on what the investment team accomplished this year and what the company is going through in terms of its transformation we are getting better and the results are also getting better and i don't think that can be uh understated enough so how does that relate to gna i guess i'm using it as an excuse but to talk about it i'm very proud of it but the team that we're focused on for for the new strategy is going to be different.

Oh, that's great comments. Thank you for that. Just lastly, on the property tax side, we definitely heard from our peers that a part of tax is going higher, a higher degree in 2024. Do you have a roughly like a preliminary just like things on property tax inflation across your portfolio in 2024?

Yeah, I would say generally we're expecting property taxes to increase across the portfolio. We are working with our advisors, realty tax advisors, to mitigate some of those cost increases. But it is expected, I would say, general comments that you're getting from the peers are exactly the same.

Okay. Thanks, guys. I'll turn it back. Thank you very much. Have a great weekend, guys. You too. Thanks.

Thank you. Our next question comes from Jonathan Kelcher of TD Cohen. Your line is now open. Please go ahead.

Thanks. Good morning. Just to clarify before I start here, just to clarify on the G&A, that'd be 2023 X the one-time charges looking at that, right? That's correct.

Yeah. Okay. That's correct. Sorry, Jonathan, just to clarify, just to add, what Mark just said, you know, there are, you know, continue to be opportunities for us to refine that G&A going forward in 2024. But I would say just use that as a model for your 2024.

It goes without saying that some of the improvements happened throughout 2023. So you've got full year run rate improvement for 2024. And we did, to be fair, have a heavier lift on changes in the

back nine of the year call it last q3 q4 okay um on the the property management strategy um are you are you most of the way through that and and what i'm i guess what i'm really asking here is your your expectations for operating expense growth in in 2024 um and your your total capex expectations

We spent a little bit of time in the slide deck on this because we're seeing kind of two things at the same time. Number one, we've got changes in general scope going on with respect to common area capital investment and in-suite upgrade investment. When the market's as hot as it is and the turnover is as low as it is and you just don't get a return, then those investments fall off. But what replaces those investments to a certain degree is an impact on you still have to maintain the common areas and you still have to do minor repair work on turnover. So that investment program of high improvement has been replaced with a more traditional property management approach and that has an impact on our cost base. Despite that, we're really proud that the team is holding up and revenues are outpacing those costs, but that's part one, okay? The second part of this is just an enhanced procurement department, policies, processes, tendering, just a whole different approach there. We're seeing some improvements on that front. So the core run rate for the future is gonna be fantastic, but we've got this adjustment period where we're walking away from our value investment strategy of putting large amounts of capital into repositioning our assets for rent maximization to a market that delivers it without it. So that's great news for the long term and that's what we're trying to get to in the presentation, but it is a little bit difficult to understand because I don't think all of our peers are doing this. To be fair, our peers are not experiencing the low turnover rates that CAPRI did. So our markets and where we're positioned, we think the best locations in Canada, have obviously been under the most pressure for affordability and people to start moving in in the numbers they used to.

Okay, so I can take from that that OpEx will probably still be a little elevated for 2024?

I would say, Jonathan, we really started this program in like Q2 of last year. So you can kind of, you know, if you wanted to, you have a base effect on Q3, Q4 that will have more of an inflationary impact.

And same, I guess, on the overall CapEx, right? I think you were just talking about $300 million.

You can see, year over year, we've already reduced our total discretionary CAPEX for the Canadian side, excluding energy and conservation initiatives. We've reduced it by around $30 million, so we're very happy about that.

We're very happy about that, and again, you don't want to start fully projecting this yet, but it goes without saying, our new strategy of new construction assets are going to be CAPEX Life, And that will also start revealing itself as the percentage of the portfolio gets larger in that category. So we are very, very excited about the attributes of the strategy, but that's something else that will really be running in our favor.

Okay. Well, that's a good segue to my next question. On that, you talked about selling another $400 million in 2024. Do you have a target on the acquisition side?

Thanks, Jonathan. So for us, it's really been a matter of raising capital through the dispositions and then allocating that between debt repayment, acquisitions, and the share buyback. And it's a dynamic decision that we make. But, you know, last year it was, there was a bit of MCIG. I think this year we probably target a little bit more on the acquisition side. given the discount to NAV has tightened a bit and we continue to see some pretty compelling acquisition opportunities. So I think it will more closely track the disposition activity that we see.

You know, and I would only add that targets are really only realized through the discipline of selling and the discipline of buying. The team is very disciplined in making sure that we realize at a minimum IFRS value or more and extremely disciplined on the buy side that it's accretive. And so that makes, how you forecast that out is anybody's guess, quite frankly, but you can look at the volumes and kind of draw your own conclusions. And I'm not saying that we know and we're not telling it. It's just something in the marketplace that if the market doesn't, if the market was to change and loosen up on the valuation of the sale properties and tighten up on the valuation on the buy side, then the targets start to move quite a bit.

One point that Mark kind of mentioned earlier, but everything that we continue to see now is that cap rate on the disposition side and the acquisition side is that similar cap rate. As Mark mentioned, going through this, we're able to high-grade and improve the overall quality of the portfolio. without suffering any dilution, which I think is fairly unique and a pretty impressive result of the investment team's very disciplined approach.

We talked about the attribute of reduced capex. I think we've talked in the past about the fact that these assets will offer geographical diversification, but also deregulation. We also have talked about a variety of other attributes, like a lot of these new construction buildings have been built with CMHC financing that has an affordable component. So we're not abandoning our mission in serving the affordability space in Canada. We're actually enhancing it with every acquisition because of the attributes of the financing. We're very proud of that. But we keep going back and we're really celebrating here in the office the strong results that are coming along with the recycling of the portfolio.

Okay. That's very helpful. I'll turn it back next.

Thank you. Our next question comes from Kyle Stanley of Desjardins. Kyle, your line is now open. Please go ahead.

Thanks. Morning, guys.

Morning.

It's great to see the mark-to-market opportunity or the gain to lease continuing to expand during what is traditionally a seasonally weaker quarter in the fourth quarter. Where do you see the turnover spreads trending as we approach the stronger kind of spring-summer leasing months in 2024?

You know, in many of the properties, we're breaching the top of affordability. So I don't expect the mark-to-market rents to change. We're hopeful that it releases some units in our turnover, which will help release revenue gains. But at this point, I'm not getting any sort of vibration from the field that rents are continuing to go up. I think we've hit a spot here that's quite flat. You may see things move somewhere in the range of 25 to 30%, but it's now the turnover. that is really the key metric that we should all be focused on, a cap rate, not the mark-to-market rent that's almost just now built in. So that would be my first comment. In terms of turnover, the housing situation is just so profound now. You know, never in my career have I seen a situation where people have nowhere to go, and so therefore we are at structural, low turnover, albeit this is the season where things should pick up a little bit. But I wouldn't be expecting anything too surprising for the next couple of quarters.

Fair enough. And I think you've said in the past, you know, turnover probably in the low teens, maybe, you know, 10 to 12, you're still comfortable with that outlook?

Yeah. Yeah, I do remain optimistic, though. going back to our new strategy of the market buildings, new construction, those are still turning over at traditional numbers because they're market rents. But at the same time, the team is capturing higher rents on those turnovers than definitely pro forma, but it's just more productive in the marketplace. So it's a way of feeling out the market on turnover, but still having a latitude for most of them to adjusting renewals to market. So this is another part of the strategy that works so well in the current environment that we're in. And quite frankly, we don't see a change to this environment. People have been asking, is this a five-year event? Is this a 10-year event? From where I sit, I don't see any impetus of change over the next decade, at a minimum. I think it's going to take longer than that to bring balance back into the market. With that in mind, we feel incredibly comfortable with this strategy of new construction assets as being a great way to tap into the changes in the ever-improving housing market.

Right. Okay. Thank you for that. Maybe just shifting over to the asset light development program. Obviously, it looks like good progress on the Davisville development approvals thus far in the quarter. Can you just comment on the current market for density and land values in the GTA and maybe what your expectations are with regards to monetization as we progress through the year?

Yeah, thanks, Kyle. The team's really proud of getting those two properties over the line. That's about 600,000 square feet within meters of the Yonge and Davisville subway stations. So just really primo infill development opportunity. And so really proud of the team for getting that done. I think right now the land values, the market for land and the land values are a bit softer. I mean, these are AAA locations and just amazing opportunities, but the land values are definitely a bit softer now. The beauty of our program is we didn't really spend the material amount doing this. We don't have an acquisition facility that's bearing interest and putting pressure on us to do anything. So from our point of view, as Mark mentioned at the beginning of the call, we're focused on value maximization. And so we're open to selling them now, but we're not compelled or in a rush to. And just given the dynamics, we may sit and pause on those until there's a better market, just given the nature of the assets and not wanting to sell them for too little in a soft market.

It's another opportune moment for liquidity when we need it. So, you know, as Stephen talked, we've got a great debt ladder, but if we choose not to get into the refi market, we have optionality there. And the mood in the office at CapReit is to hold property until we feel that we've maximized value. So just because they've become entitled, I don't think it's an indicator of, you know, a liquidity event at all.

Okay, that makes sense. And just one last one for me. As part of your kind of government relations initiatives, improving the current state of the housing market, has there ever been a discussion of adopting a capital gains deferral mechanism, kind of like what we see in the U.S. with the 1031 exchange? Has that come up at all? Or do you believe that would be beneficial to helping the situation?

I think it's a fantastic idea. Like, it has been discussed. We've been taking the policies that work worldwide to Ottawa and sharing that with the federal government. And this is squarely in their corner. But it's an incredible idea. We've got all kinds of creative ideas. And quite frankly, even if it was to roll over to nonprofits at some sort of advantage, that could free up assets that could roll into nonprofits and give them an advantage. And we're happy to see that advantage in the right hand. So there's all kinds of interesting things there, Kyle. So I urge you to write to Ottawa and share your views and tell your neighbors and spread the word. It's a great idea.

Will do. All right. Thank you for that. We'll turn it back.

Thank you. Our next question comes from Brad Sturges of Raymond James.

the lines now open please go ahead hey guys good morning we're just on the go back to the the questioning around that the the development entitlement process and application just curious you've got three outstanding today you've made obviously good progress on the Davisville site just are there any other sites in the near term that we could see in terms of applications being submitted

Yeah, so if you look at some of the materials, we've said that we've identified about 6 million square feet just in Toronto alone of potential density there. So the team is working in the background. Our internal policy or view on this is we only publish if we've got an application that we've put in progress. So stay tuned. Okay.

Makes sense. And to go back to your comment on the acquisition market and being more of a buyer's market today, can you give, I guess, a general comment on the acquisition competition you're seeing or just the composition of the buyer pool for new build assets in the areas that you're seeking to be active in? Has there been much change in the composition of other buyers out there for those particular assets today versus, let's say, what you were seeing throughout 2023?

I'll let Julian comment with more detail, but this is where reputation matters, and our long track record of not being price adjusters and closing and doing the handshake of what the LOI says, it's really played into our favor. Julian can give an example to that. The other thing is there has been, with the increase of premium CMHC, quite a backlog, and that has put some buyers on hold. We've been in a fortunate position of not having to do that, but Julian, can you provide some additional color?

I'll say that, you know, as I look at the acquisitions we did, other than HubPlace, which was an auction, they're all off-market, and most of these deals, it's pretty much just one-on-one negotiation, and it's not so much competing with other buyers, but more just whether we can, you know, fix the bid-ask spread between the buyer and the seller. So, you know, the HubPlace was a bit unique, just given it was in a really, really core Vancouver location, you know, concrete asset, just so desirable, but... Otherwise, it continues to just be off market. I think the larger check size in a lot of cases, the slightly lower leverage that was able to be achieved makes for big equity checks and just given the scarcity of capital, it's resulted in just having a much lower amount of buyers on the market. A lot of folks know our reputation. Our access to liquidity and our ability to act quickly and friendly on acquisition side, and that's really, really helped us. And so I think going forward, not indefinitely, but in the short to near term, we're going to continue to be in that dynamic where it's really just us negotiating one-on-one with the seller. I do know that historically it was obviously very, very different and I have no doubt that at some point in the future when rates are lower, the more competitive environment will return. But for now, there's a pretty good window to acquire amazing assets in great locations at good prices, low replacement costs.

And the strategy remains intact. We're not getting nervous about the strategy. We continue to push through with the strategy and and feel like the pipeline of opportunity is steady as she goes right now.

That's great. One last question for me. Just to go back to the, I guess, some of the organizational restructuring you did, would you say most of the heavy lifting has been done beyond, I guess, some of the ongoing improvement that you always seek to do? I guess from a G&A perspective, a lot of the one-time items that we've seen, a lot of that's been kind of put through, we won't see as much going forward?

No. A lot of the big work that's been done, it's the run rate that needs maybe a little bit more clarity because a lot of the changes, again, happen either throughout the year or towards the end of the year. And we do think that the focus on balancing the asset base here, you know, having better, not bigger, will have impacts as we move deeper into the strategy. I think I said on conference calls before, it's not our strategy anymore, or ambition, I should say, to be the biggest in Canada in terms of unit count. We are absolutely focused on being the best and to grow earnings per share. So, gone are the days of, you know, wanting to just boast of the size of how many units we have.

Okay, that's helpful. I'll put it back to Claude.

Thank you. Our next question comes from Mario Saric of Scotiabank. Your line's now open. Please go ahead.

Hi, good morning, and thank you for taking the questions. Mark, I wanted to start off with clarifying a comment that you made that Brent's I've hit a flat spot. So I just wanted to understand what you're referring to. Like if I look at your in-place Canadian occupied AMR, it was 15, 16 a month. So if we just gross that up by 30%, which coincides with your newly spread this quarter, it implies a market rental, let's say 1970.

a suite so is are you saying the 1970 a suite i.e the market rent isn't expected to rise going forward into the strong spring season because of affordability uh no it's uh it's a tricky tricky question the turnover rate increases are plateauing for the value-add properties okay so what i what i was uh meaning by that comment And we're now getting into a little bit of tricky math here, Mary, because the composition of the portfolio is changing. We are seeing these mark-to-market rates at this sort of 30% level because the value-add portfolio is obviously producing the most dramatic increases. However, the average rent of the portfolio is accelerating because of the new construction assets that we're buying, obviously. when you're buying assets with $2,400 a month average rent for an entire rent roll, that's going to start tilting average rent. So I would be cautious about focusing on the metric of average monthly rent. It's really now more of an understanding, you know, the difference between the core portfolio mark to market and the increases that we're generating on turnover. That's why I keep guiding the market a little bit as much as I can to turnover being the most critical issue. To me, mark-to-market is kind of table stakes now and not really changing. It's plateaued. Not going down, it's plateaued. It's turnover that's going to release that 30% that is really, for Capri, a big differentiator compared to our peers.

I guess where I'm going is whether it's a new construct building or a value-add building, are you continuing to see market rents in your geographies move higher? So, for example, if you were asking for $5 a square foot in December, are you expecting to pass for $5.25 or $5.50 a square foot in April, May, because broader market rents are still going higher?

Yeah, Mario, so the short answer is yes. I mean, we're in a bit of a seasonal slower period just given we're in the winter and there's a little bit less activity. But, you know, the imbalance of supply and demand continues to get worse. Population growth continues to outpace housing completions. And so, you know, as a result, you naturally would expect market rent growth to exceed inflation growth, right?

Okay.

We could take it offline or we're watching it really carefully because remember, even within the value-add buildings, the churn is going to generally come from the market rent units. The real encouraging thing is the market-to-market rents are holding somewhere between 25 and 30 on a quarterly basis, but that becomes a bigger stretch as market rents in the value-add portfolio turn over. because you're not going to see as much of a profound impact. So we're not seeing that yet. So I would say if you want to see market rents or the overall market rents are rising, you're seeing it in just our ability to hold that market-to-market rent level.

I understand that. Okay, that's helpful. And then switching gears just to a quick question on the expected usage of the $400 million ETM. Cap started the day trading at a 7% discount to your IFRS NAV. I appreciate that executing on the ATM will depend on the attractiveness of the opportunities that you kind of laid out during the call. That said, does IFRS NAV kind of provide a benchmark for where you're comfortable issuing or participating in the ATM? Or would you want to see CAP trading closer to your IFRS NAV in order to do so?

Yeah, we're going to apply the same discipline that we do with our NCIV. There has to be a wide enough discount, obviously, for us to do these in CIB. And I think I've said it before, I don't believe in issuing capital below IFRS NAV. So I think that statement hasn't changed, or that point of view hasn't changed. I think that as our peers have nudged up valuation because of mark-to-market rents, and as we've realized that some of these development land opportunities I think it's fair to say you'll see our NAV not to continue to see the same degradation that we've put in it over the last eight quarters or so.

So, Mario, I wouldn't read anything into the timeline. Our view is to just give ourselves more optionality for the future and just have it in place should the dynamics change, but the intention is not to be using it now. It's another tool in the toolbox.

Got it. Yeah, the question really emanates from the notion that let's say you're trading at a mid-four implied cap. Is it a reasonable trade to trade some paper at a mid-four for the existing portfolio if you get mid-four caps on the new construct that you're targeting? So I'm not sure if you can get mid-fours on that new construct, but does that trade make sense to you?

Yeah, so far what we're looking at, and what we saw last year was we acquired at higher cap rates than we sold. The current market, or at least the dynamic with the properties we're looking to sell now, is that the cap rates are approximately the same as what we're buying now. So it continues to be a very good trade in the sense that we're improving the quality without suffering any dilution, which again is something that's fairly unique. Usually companies that go through these repositionings and improving the portfolio have a little bit of a lull or an impact, negative impact on earnings in the interim. For us, it's either neutral or even positive last year.

Julian, maybe just to follow up for you, how would you characterize required thresholds, return thresholds on the new construct? How do you think about that?

So we don't give those numbers, it puts us in competitive disadvantage if the counterparties know where our thresholds are at. But what I will say is that what we are buying is going to be at higher IRRs. So the cap rates are similar, but the IRRs are higher. And the reason being is one, we view the acquisitions that we've bought in really good geographies and deregulated as having good growth potentials, but then also, as Mark mentioned, the capex is significantly lighter. And not only is it significantly lighter on a dollar per suite basis, but the suites tend to be valued at three or four times higher. So when you look at it as a percentage of suite value or as NOI, the capex is almost nothing. So you've got a similar NOI yield, but a lower capex profile, and in many cases, even a higher growth one. So we end up with higher IRRs and total returns than what we're selling.

Okay, that makes sense. My last one is just maybe a follow up for Steve and just on the property taxes. I think you mentioned you expect them to be higher. I wasn't sure if higher meant just up year over year or above the same property that you saw in 23.

Yeah, I think we're looking at inflationary increases. I mean, you hear municipalities are increasing their taxes to cover their budgets. So I would say, you know, follow that, you could say, dynamic, and that would be the right projection for realty taxes.

Okay, so inflationary, not much more than that.

Yeah.

That's it for me. Thanks, Ed.

Thanks, Mario.

Thank you. Our next question comes from Jimmy Shan of RBC Capital Markets. Your line is now open. Please go ahead.

Thanks. Maybe just a couple of follow-up on the ATM program. I guess given that you are targeting $400 million in asset sale, and I think you mentioned a few times now, better not bigger, Is the ATM really just optionality, or how do we read that? Is it that you're not sure that you'd be able to achieve the asset sale to fund your acquisitions, or that maybe you have a bigger pipeline of opportunities? How do we read that? And then secondly, does that also mean that at the current price, the unit buyback is sort of off the table at this stage?

Well, I think we want to call it another option available to us. We are so excited about the investments that are coming in. We don't want to be fully reliant as we go forward on dispositions. That market could change and we don't want to give up value. So by having both the NCIB and the ATM, we've got opportunity on either side of the capital market, valuation of the company. So I wouldn't read too much into the, 400 million, I would just really focus on the fact that Capri, in the past, has always done the best on the individual asset purchases. We have portfolio announcements of the past. We don't really see that being the path forward in acquiring new construction portfolios, but we are most comfortable when we're writing hard discipline around individual sales. And the ATM matches that profile well. If there's smaller amounts of equity coming in at a more steady pace, we like steady. We're not looking for big announcements of acquisition for the sake of saying we've done it. We like discipline and buying things well, selling things well, and having that optionality of capital should we need it.

Right, but I guess the priority in terms of funding source would still be asset sales at this stage. Is that fair comment?

Yeah, let me layer on to that. We didn't put this in at the current time because we had a plan to use it. We put it in to have optionality to be opportunistic. If you ask me right now, do we plan on using it? Probably not. The current dynamic exists that we're funding our acquisitions with dispositions that we're doing. So we're selling them all at or above our IFRS NAV. So we're effectively already able to raise equity above our IFRS NAV while also improving the portfolio. So that to us is the primary way of raising sourcing capital. But that said, things change. Market dynamics can change. And these types of tools, which are pretty broadly adopted in the U.S. REIT space and more so in the Canadian space, take time to put in place. And so we thought it was prudent for us to have it in there and be ready and be able to be opportunistic in a similar way to how we have the NCIB in place. I mean, the dynamics for ATM are obviously different, but, I mean, I've heard some people colloquially call it reverse NCIB. And so, again, you know, it's another arrow in the quiver or tool in the toolbox for us to have.

Okay. Thank you. And then I might have missed it, but did you mention what your total CapEx budget would be for 2024?

No, Jimmy, we actually didn't include that disclosure. Just because of the recycling program that we're undertaking and the capital allocation strategy, it's hard for us to point to a good number for investors. But I would say if you're looking at the total CapEx number, Given our strategic allocation and the tight rental market, you can expect that to come down.

The only area of enthusiasm for spending capital dollars is on our ESG investments for energy, and those all have very high returns. So again, it's watching the behavior of the categories. But I always tell the team, you know, there's unlimited capital for 30% energy investment. So we'll stick to that.

All right. Okay. Thanks, guys.

Thank you. Our next question comes from Matt Cornack of National Bank Financial. Your line is now open. Please go ahead.

Hey guys, just a quick follow up on Jimmy's question there. Year over year for the total year, CapEx was down I think 10% across the board, but Q4 it was down quite a bit. Are you seeing kind of a trend towards spending less in the more recent quarters or was there an anomaly in Q4?

there's a little bit of seasonal adjustment with CapEx because the big stuff is obviously, when we're getting into structural, has to be done in the summer months.

But I'll let Stephen expand. Yeah, I mean, that's to the point what Mark was just saying. There's seasonality. I would say, you know, as I mentioned to Jimmy, like the CapEx, especially with our disposition program, as Julian has pointed out, they're one of the, Some of the attributes of the dispositions are they're capex heavy, right? So you're going to expect non-discretionary capex to come down as we progress with our strategy. And then on the discretionary side, especially in Sweden common area, really rationalizing that. So that should come down over time. And as Marcus pointed out, really the energy and conservation investments are something that we continue to focus on. And that provides a very high return for us. So overall CapEx, I would say, will come down. Again, I haven't provided a number, but you can expect that to come down over time.

The only other thing, Matt, that I would add, that we never got right with the market and other REITs struggle as well, when you're doing a value-add acquisition program, the choppiness of investing CapEx is pretty severe. Like we used to get very excited when there was major CapEx to spend on a new acquisition because it meant opportunity. Now that's changing because we're not focusing on those assets on the acquisition front anymore. So, you know, the past was always moving dependent on the opportunity. The market would get spooked when CapEx went up and we would be having a party saying, thank goodness we did that acquisition. So that is just going to stabilize things. So I think you can expect again with the new strategy, just an ever declining spend on CapEx. This is gonna be coming less and less and less of a conversation for CapRe as we grow into the strategy deeper.

Fair enough, that is helpful. Steven, this may be an unfair question and I don't know if you have the numbers in front of you, but is it possible to quantify what the allocation would have been from kind of maintenance capital into the expense line. Your numbers are a little off the peers at this point because of this allocation. And I think the guys that have reported state have seen actually expense declines on the same property basis. So trying to figure out what the delta to get back to kind of a more comparable would be.

It's not an unfair question, but it's a question that Stephen can't really fully answer because it's not a direct correlation. Okay? Well, sorry, it's not a, I don't know what you call it, mathematically tied equation. They're cousins, they're not siblings. I use that analogy all the time. When you're not doing the major topics and you have to do repairs and maintenance, then obviously there's a cause and effect. But you can't actually quantify one for one that relationship. It's just a byproduct of not doing big capital projects you're back in traditional property management. So that's about as, you know, fuzzy answer as I can give you, because there is no actual number Stephen can provide.

Yeah, Matt, I mean, yeah, I would just say it was a difficult, it's difficult for me to answer. I mean, we can take it offline, but it's not as one for one as Marcus pointed out.

Yeah, I think we've gravitated to looking at the same property revenue number as a better proxy for relative performance. You guys are performing well there. A very last one for me, just in terms of, I mean, we saw building permits actually decline while population growth has accelerated. When do you think capital starts to get invested, given the government is trying to incent it in building new products? I understand the capital markets have to be there, but do you

start to see some more purpose-built rental get developed in the near term or are we in a waiting game at this point well i'll start off and then and then the more views that get shared here the better but it's quite sad um what's happening because what you're seeing with the decline of obviously building permits is the crisis is getting worse okay and it's not a you know a weekend event where they prop up new supply and everybody's got a home to be in so that's really That's a bad forward indicator. It is, however, a strong indicator for what we were talking about earlier. We're happy to sit on our development lands and wait because when things get turned on again, things become viable, there will be a rush for zone property, a major rush for zone property. Most developers don't want to sit on the capital for too long. not knowing when there's a real stability. So we could sit on the land, as Julian said, and wait for that window of opportunity in the market. I'll ask Julian to build on that a little bit more, Matt.

It could be just that simple, but... You know, Matt, it's not that surprising that you're seeing the building terms go down. And so we count with the acquisitions that we did all of them below replacement costs. So when you go into developing a purpose-built rental, and particularly as a merchant builder, What you're trying to do is recover all your costs plus make a reasonable return on cost. So you should be selling or projecting to sell at higher than the cost of the bill. When I go and buy stuff right now at a 15, 20, 25% cost of what it takes to build without any development or lease-up risk, who's going to build into that environment, right? When they're doing their pro forma, the end value of the apartment is less than what it costs to build. It frankly obviously needs to be on the other side to justify the risk. Part of it's going to be interest rates going down to lower their costs. Part of it is hopefully some moderation on the construction cost side. And then the other part's just going to need to see more capital coming in to be an end buyer on the other end. You know, there's a whole host of other issues on the construction side, you know, shortages of labor and all the other things that could rhyme off. There's a lot of things that kind of need to change, I think, for that to really ramp up. As Mark mentioned, even when it does start ramping up, you know, you can't build a park and buildings in a day, right? So, you know, take time for those conditions to potentially fix. And even from there, it's going to be a long lead time until you see those projects actually get delivered.

That absolutely makes sense. Okay. Thanks, guys. Appreciate it.

Thanks.

Thank you. Our next question comes from Dean Wilkinson of CIBC. Your line is now open. Please go ahead.

Thanks. Good morning, guys. Mark, one question, and it could have us on the phone for another hour, a philosophical one. Oh, I like those. You're arguably the largest owner of affordable housing in the country. you can't turn a paper or flip on a TV today with just hearing, you know, it's everywhere. Has any level of the government reached out to CAPREIT and asked you for your input other than you going to them? And what would you tell them?

Well, we have the four affordable sites. That's what we're trying to tell them. We're trying to do it as an industry. The reality is that I think Think I've talked about education and the housing file and it's a tough one So we're going through this period of educating government and the opportunities that are that are there Capri made progress years ago with the rent geared to income approach to provincial governments and even municipal in some cases and that that message was heard and The good news is I think now we've got more active listening at all three levels of government than ever before, but it's a slow machine. There's no one person that's making a decision, and it's coordinating this spider's web of three levels of government. This is the number one problem, and their interests are not necessarily aligned from a political standpoint. It's this whole... Am I a municipal politician that worries about nimbyism, or am I a provincial politician that worries about the state of the market in my province, or am I a federal politician that is worried about balancing immigration with housing supply, which is a file they never really had, quite frankly, other than the good work that CMHC does. It's difficult, but I do believe there's a willingness. I do believe there's signs of progress. I think what we're seeing right now is there are some provinces that are really standing out. At the end of the day, when you track progress, I would look to the provinces that are doing the best work and coordinating the pressure on the municipalities and bridge building with the feds. I'm giving you a bit of a fuzzy answer because I don't know that an hour is enough. I think you need a couple of years here for this conversation, but there's a lot of willingness, I'm going to say, at all three levels of government. We've come a long way in our campaign of discussion from two years ago. We are being turned to for our views, not necessarily having them all implemented, but that's why I touched on the four affordable site in the slide deck because we've tried to distill our ideas there.

Is it fair to say that those provinces that are a little more receptive to this also coincidentally are the ones without rent controls?

There's a historic connection to that. You can look for examples around the planet Earth is what I like to say of where there's deregulated markets and you'll find balanced supply. You can look around the world and find regulated markets where there's not balance supplies. So, you know, a lot of, I keep looking for this example of where regulation builds more apartments and nobody can spot it for me. So, you know, that kind of goes without saying, but that doesn't necessarily solve, you know, somebody's affordability issues in the now and today. So this is the push and pull, but yeah, everywhere there is rental issues, in the world, there's this direct correlation between no regulation and balanced pricing.

Well, maybe we'll come back to that. That's all I have. Thanks, guys.

Thanks.

Thank you. At this time, we currently have no further questions, so I'll hand back to Mark McKinney for any further remarks.

I'd like to thank everybody for your time today. If you have any further questions, please do not hesitate to contact us at any time. Thank you again. Have a great day.

Thank you for joining today's call. You may now disconnect your lines.