Canadian Apartment Properties Real Estate Investment Trust

Hello everyone, thank you for joining us and welcome to the Canadian Apartment Properties Read second quarter 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Nicole Dolan, Investor Relations. Nicole, 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 Brad Cutsey, President and Chief Executive Officer.

Thanks, Nicole, and good morning, everyone. Joining me today is Stephen Co, our Chief Financial Officer. Before we begin, I'd like to say that it's been a privilege to be joining you today for my first earnings call as President and Chief Executive Officer of Capri. At this time, I'd also like to acknowledge my predecessor, Mark Kenney, for his many years of leadership and the significant contributions he's made to Capri. While I'm still in the early stages of my tenure, the past several weeks have given me the opportunity to spend time with our people and our portfolio, and I have already been encouraged by the high quality of the platform and the depth of expertise across the organization. Together, they've reinforced my confidence in the solid foundation upon which CAPRE is built, and I look forward to further building on that foundation in the years ahead. With that, let's turn to slide four and walk through some highlights from the year to date. From a capital allocation perspective, CAPREIT has completed approximately $66 million of acquisitions and dispositions in Canada, $145 million in property divestments in Europe, and the privatization of European residential REIT for $99 million, which provides us with the greater flexibility to manage the sale of the remaining European assets. We've also continued to invest in our NCIB program with $71 million deployed so far this year. Operationally, while markets conditions remained pressured across the multifamily sector, CAPREIT continued to demonstrate resilience. Physical Opacity per same property Canadian Portfolio was 97.5% on June 30th, which is meaningful above Yardie's latest quarterly average of 95.3% nationally. More recently, CAPREIT's Physical Opacity as of July 31st was down slightly to 97.3%, which is consistent with the typical seasonal trend observed between June and July. While maintaining healthy occupancy levels, we've also achieved 2.3% growth in our same-property occupied AMR year-over-year. Combined with effective cost initiatives, our Canadian same-property NOI margin remains strong at 64.2% for the six months ended June 30, 2026. Our balance sheet total debt represented 41.2% of real estate value as of June 30th, 2026, which is up modestly versus the previous year, mainly due to fair value losses recognized on investment properties. Overall, these results reflect the strength of the portfolio and the team in which it continues to be a challenging operating environment. That said, while market conditions remain competitive, we are beginning to see early signs that operating fundamentals may be stabilizing. In line with that, we will have several consecutive months of moderation in our loss to lease on turnovers, which we'll discuss in more detail later on in the call. I'd now like to spend a few minutes highlighting our capital allocation priorities. Turning to slide six, over the past several years, CAPREIT has significantly enhanced the quality of its portfolio. Today, approximately 68% of the portfolio consists of core legacy assets, of which 97% are located in rent-patrolled markets. This provides stability in our rent growth profile, even in the softer operating environment, given the significant embedded mark-to-market opportunity across these assets. A further 19% of the portfolio is comprised of recently constructed communities that are expected to benefit from lower capital requirements, greater operating efficiencies, and strong long-term earnings growth potential as market fundamentals normalize. The remaining 13% of the portfolio across Canada and Europe represents the source of continued capital recycling. With this, while we remain disciplined and optimistic, selectively monetizing low cash yield analysis where value has been maximized and redeploying that capital into investments accretive to FFO per unit in the near term. In addition to optimizing the portfolio through ongoing repositioning, we've been investing in the implementation of a new ERP system in order to enhance our leasing capabilities, improve data-driven decision-making, streamline processes, and support further optimization of our cost structures over time. More broadly, as I continue to assess the business over the coming quarters, I'll be evaluating the entire portfolio to ensure that every capital allocation and decision supports stronger FFO per unit growth and enhanced long-term cash flow position and the creation of sustainable value for our unit holders. With those objectives in mind, our NCIB program continues to represent compelling use of capital available to us in the current environment. You can see on slide 7 that since 2022, we deployed approximately $1 billion to repurchase nearly 24 million trust units at an average price of approximately $43 per unit. And as I mentioned earlier, during 2026, we invested approximately $71 million to buy back trust units at a weighted average price of $36 per unit. which represents a sizable discount to our June 30th diluted NAV of $54 per unit. We believe these accretive repurchases not only create immediate value today, but also positions unit holders to benefit more fully in the value created once rental housing market fundamentals return to balance. And that inflection is ultimately reflected in the capital markets. Going forward, we'll continue to evaluate the NCIB alongside every other capital allocation alternative. and deployed funds into the program where repurchases are accretive to FFO per unit and NAV per unit while remaining leverage neutral. With that, I'll turn the call over to Stephen to walk through our operational and financial results. Thanks, Brad.

Let's start with our operating performance on slide nine. While leasing conditions remain competitive across many parts of the Canadian rental market, our operating teams executed well throughout the quarter. maintaining a disciplined focus on managing occupancy, pricing, and resident retention. As a result, you can see on the slide that for each of our three largest regions, occupancy continues to compare favorably against broader industry benchmarks, supported by our strategic use of incentives given the current environment. In our largest market of Toronto, physical occupancy was 98.4% as of June 30th, notably higher than Yardi's reported quarterly average of 95.2%. At the same time, we grew occupied AMR in Toronto by 2.1% year-over-year to $1,867. This reflects the strength of our legacy portfolio alongside our ability to effectively balance occupancy and rental growth, even in today's more pressured operating environment. The same underlying themes are evident across a broader portfolio, with rent growth being driven by lease renewals and the substantial embedded mark-to-market opportunity that exists within our legacy portfolio, the vast majority of which is located in rent-controlled markets, as Brad mentioned. However, our turnover remains weighted towards shorter-tenured leases that are above current market rent and continuing to reset toward today's market levels. Turn to slide 10, I'll provide an update on how that turnover dynamic evolved during the second quarter. Approximately 51% of Canadian turnover during the quarter came from residents who had occupied their suites for less than two years. These leases experienced an average decrease in monthly rent of 7.1%, an improvement from a decline of 10.8% in the first quarter. The remaining 49% of turnover came from residents with lease tenures of two years or longer, where we continue to achieve positive rent growth of 5.4%. As a result, our blended change in monthly rent improved to negative 1.2%. This compares to negative 2.1% in the first quarter, reflecting some moderation in the negative rent spreads we're realizing on shorter term tenured leases. This trend continued into July, with the overall change in rent on turnover improving further to positive 0.2% for the month. Looking at the chart on the left of the slide, as of June 30th, approximately 31% of residents have lived in their home for less than two years, across which in-place average monthly rent is $2.53 per square foot. Within this segment, approximately 20% of the in-place rents remain more than 5% above our estimated market rents, indicating that there is still some additional normalization to work through. The remaining 69% of our residents have lived in their homes for more than two years. These longer tenured leases continue to generate positive average rent uplifts on turnover, even in the current operating environment. providing an important source of stability driving resilient overall rent growth until supply-demand fundamentals return to balance. Alongside that turnover dynamic, we continue to utilize incentives to support occupancy as you can see on slide 11. This strategy allows us to protect occupied AMR while remaining competitive against comparable offerings from our peers. In the second quarter of 2026, new residential inducements granted were $4.6 million, up from $2.6 million a year ago, but modestly lower than the $4.8 million recorded in the first quarter. While there will be some moderation in the level of new incentives granted throughout the second half of the year, we expect them to remain elevated as market conditions continue to warrant a competitive leasing approach. With that, I'll now briefly cover our overall second quarter financial results on slide 12. Same property Canadian operating revenues increased by 0.8% while operating costs grew by 0.7%, driving NOI growth of 0.9% and a stable NOI margin of 66.2%. Diluted FFO per unit was 65.4 cents compared to 66.1 cents in the second quarter of 2025, down 1.1% primarily due to the loss NOI from dispositions and higher financing costs partially offset by creative impact of trust unit repurchases under our NCIB. Looking at our year-to-date results on slide 13, same property, Canadian operating revenues increased by 1%. With operating costs flat, Our same property Canadian NOI margin was up by 0.3% to 64.2% for the six months ended June 30th, 2026. Diluted SFO per unit was $1.249 for the first six months of the year with SFO payout ratio of 62%. Finally, slide 14 summarizes our liquidity position and ladder mortgage maturity. As of June 30th, our mortgages had a weighted average interest rate of 3.4% and a weighted average term to maturity of 4.2 years. We also had $180 million of immediate available liquidity on our acquisition and operating facility. Moving ahead, we'll remain committed to reinforcing our prudent leverage profile while supporting stronger per unit earnings growth. With that, I'll turn the call back over to Brad to wrap up on slide 15.

Thanks, Stephen. Before we open the line for questions, I'd like to close on a few thoughts. While the near-term operating environment remains competitive, it's important to distinguish between today's market conditions and the long-term outlook for the business. The underlying fundamentals supporting Canadian rental housing remain robust, and CAPREIT is well positioned to benefit as those fundamentals reassert themselves over time. In the meantime, our focus is on disciplined execution in the areas we can control. That means continuing to direct capital towards its highest and best use on a risk-adjusted basis. Whether that's investing through our NCIB program, strengthening sustainable capital generation, or further reinforcing the balance sheet. Importantly, every capital allocation decision will be guided by the goal of driving stronger per unit growth than the FFO. As I've said throughout today's call, I continue to use it in the coming months to deepen my understanding of the platform. One thing has already become clear to me, Capri has an exceptional team and a high-quality portfolio. I look forward to working alongside our residents, team members, leadership team, and the Board of Trustees to deliver on the opportunities ahead and enhance earnings for unit holders. On a final note, I'd like to remind everyone that we have rescheduled our Investor Day in Montreal to November 19th, as communicated earlier this week. This additional time will allow us to deliver a more comprehensive program and provide a meaningful opportunity to discuss CAPRI's strategy and portfolio in more detail. We appreciate your understanding and hope to see you there. With that, operator, we'll be pleased to take your questions.

We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press Thanks. Good morning.

Good morning, Jonathan. First off, I guess the capital allocation focus looks like it's going to be mostly on the NCIB. First, how comfortable are you with where leverage is right now? Would you take it up a little bit to buy back shares?

I think we're comfortable with where the leverage is right now, Jonathan. Over time, we'd like to maybe turn that a little lower. But as far as NCIB goes, we're committed to NCIB, but on a leverage-neutral basis. Okay.

And then I guess that means you'd be selling assets to fund that. And if you look at the three buckets that you That's helpful. And then lastly, Stephen, you talked about the inducements. So maybe trend down over the back half of this year. I guess two things there. What are some of the inducements that you're offering? And if we look at a level, we should be thinking sort of 1% to 1.5% would be a good level for inducements.

Yeah, so incentive use has trended up over the past quarters, like more pronounced on the recent build than legacy. We are offering in certain locations, again, it's all dependent on competition within that building and its area, but usually it's about one month's rent. And again, it's very targeted buildings. There are some situations where we do offer two months, but a lot of it is just one month. and we try to first do non-cost bearing incentives first before we go into actually giving actual incentives. So while we knew residential incentives granted had declined slightly from Q1, we do expect them to remain elevated at levels, albeit, like I did say, moderating lower to the latter part of the last half of the year. We are constructive on the Ontario, particularly the GTA, which is our largest market, and we're hopeful we can actually, you know, we do have good visibility around incentives, and we have seen, you know, moderation in July and August so far.

Okay, that's it for me. I'll turn it back.

Your next question comes from the line of Jimmy Shan with RBC Capital Markets. Your line is open. Please go ahead.

Thanks. So my first question to Brad, I know you're still in assessment mode, but I was curious as to where are you seeing sort of the biggest opportunities to create, you know, per unit value, kind of what are the low hanging fruits, any color you can share from your initial assessment so far?

Good morning, Jimmy. It's still early days for me, but some of my initial observations point to opportunities probably in our leasing processes and streamline some of our other operating processes. The other thing I'd maybe mention on this is also we're in the middle of our multi-year ERP implementation, which I think is going to give us a much better platform to standardize and automate and some of those other processes that we can improve on.

Okay. And then John referred to NCIB as your priority from a capital allocation perspective. I don't know if you confirmed that. Is that really where you see the biggest bang for the buck today?

I think we'll continue Yeah, I think every dollar of capital will be allocated to the highest and best use on a risk-adjusted basis, Jimmy.

And where do you see that today?

Well, it obviously depends, but if we're sitting on cash and we can do it on a leverage-neutral basis, I think our units represent a compelling investment at today's level.

Okay, and then last, just on the turnover rank growth, the improvement you've seen from Q1 to Q2, I think minus 10 to minus 7%. Is that to do with market rent improving? Is that a tent mix? I'm trying to understand. had those same tenants turn in Q1 and Q2, would that spread be the same? Are we actually seeing some improvement in fundamental?

Well, I think there is just in terms of like, as the tenants have stayed there for the past two years and market rents have, I would say generally we have seen some stabilization in market rents that you will see when the lease comes over, Thank you. Thank you. I think that's a function of, you know, the market rents have become more stabilized. And then I think it's more of that than anything else.

Okay. Okay. Thank you.

Thanks, Jimmy.

Your next question comes from the line of Matt Cornack with National Bank of Canada Capital Markets. Your line is open. Please go ahead.

Good morning, Matt.

Hey, guys. Morning. Maybe starting with occupancy because there was a bit of a sequential increase. Can you give us a sense? Is that seasonal demand? How has it continued into kind of Q3? And obviously, I think we need to see occupancy before we see rent growth. But what is the trend there in terms of demand relative to your portfolio?

Yeah, I mean, Matt, I kind of mentioned on the call, we did use incentives strategically to increase occupancy. It was seasonality where the occupancy did increase, and we did show our July numbers occupancy have come down slightly, but that's more of a seasonal change between June and July. But overall, I would say at these levels, we're very comfortable with them.

and on the incentive side. Oh, sorry, go ahead.

No, I was just going to say too, we saw good leasing activity in Q2. Our conversion was a little down, which shows you how competitive the market is. But there is leasing activity. And depending on which markets, specifically the GTA, we're getting quite constructive on that, Matt. So as we kind of move through July, and August, I'd say we're going to be in a better spot. But if I had to look at the top three markets, I would say the GTA were quite constructive. I think Montreal is a little bit mixed. There's a little bit of new starts in rental there and it's more of an issue on the demand side. And I think Vancouver is still trying to work through the absorption of the supply that's been delivered. And it still remains about 4% under construction. So until demand really comes back, the net absorption is probably going to be pushed out in Vancouver, maybe closer to late 2027, early 2028, where we're hopeful the GTA. We think we might be approaching a more balanced market in the quarters ahead.

That's interesting and it makes sense. Maybe Stephen as well. Are the Turnover spreads that you provide, is that net of incentives? Because I know you had mentioned that incentives have picked up a bit, or are those kind of the face rates? No, they're not. They're gross. Okay. And is that why, I mean, one other trend I was trying to figure out, just because, and Brad, you wouldn't have the benefit of this, but you probably looked at it, but just going back The move has actually been bigger in the greater than two-year leases in terms of that spread would have been plus 30% in Q4-24, and it's down to five, although it does seem to be stabilizing at five, whereas there's been less of a move in the less than two-year. I'm just That's a little confounding to me in terms of those longer-duration leases. Is it that you're not renovating those suites when you're putting them back on the market? How should we think of that dynamic?

There are some leases that are now in the negative territory that are aging into the two- to three-year mark. and as market rents have softened, some of that segment is being exposed to the rent reset as well. So we have done more back to backs and I think that's what we're seeing as well. Fair enough. That's it for me. Thank you.

Thanks, Matt.

Your next question comes from the line of and Kyle Stanley with Day Should Ends. Your line is open. Please go ahead.

Morning, Kyle. Thanks. Morning, guys. Just looking at leasing demand, I'm wondering, are you seeing any differences or changes in demand across the two buckets in your portfolio, your legacy assets versus your more recent construction? I'm just wondering if You know, you're beginning to see a bit more strength in some of the more recently delivered product or if that hasn't changed much.

Yeah, it's a great question, Kyle. I think there's definitely more stabilization and stability in the legacy assets and the rent-controlled markets. We have seen it being a little more competitive in the new builds. That said, we strongly believe when the market does The fundamentals do tighten, and depending on which market we're talking about, some of it's more structured sooner than later. But we still feel quite good about the potential of those new bills. It's just got to work through some of the absorption. But really, that absorption is really going to be dependent on demand.

Okay, that makes sense. Just kind of sticking with leasing spreads, so with kind of turnover and renewals in mind, where do you see the blended spreads trending through the balance of the year? Obviously, you've provided some kind of guidance into July that the turnover spreads improved a bit, but just trying to think about how the blended spread trends through the balance of the year and maybe into the beginning of the 27th.

Yeah, I mean, for us, we think it's probably going to be modest. I mean, I think what you see, what we provide in July is probably a good indication of what Q3 is, but we're hopeful. We're hopeful that we see some stabilization in certain markets, as Brad has already indicated. But I don't want to jump the gun on that too early right now.

Okay, noted. Just on the kind of operating cost efficiency that you highlighted, obviously the kind of other OpEx line was down 1.5% year-over-year this quarter. Just wondering if you can talk through what some of those operating efficiencies actually were that drove that, and then Do you expect to be able to maintain a similar level of year-over-year OpEx inflation through the balance of the year, obviously taking in mind the kind of seasonal fluctuations that you expect into the winter months?

Yeah. So, I mean, you've seen some improvements in our other OpEx line. I mean, we've talked about it in prior calls. It's really just getting very good at tendering, inviting new vendors, and just having a very good tendering process where bids are blind and just having that competitive competition with your vendors. So all of that is just translating to better, I would say flat to slightly declining R&M costs within that line. And I think we can probably see that going for the balance of the year. Okay.

Okay, thank you for that. I will turn it back.

Your next question comes from the line of Brad Sturges with Raymond James. Your line is open. Please go ahead.

Good morning, Brad. Good morning. Just sticking to the slide 10 on the leasing spreads, just curious, obviously, you know, You've highlighted for a few quarters here the amount of current, I guess, in the newer short-duration leases. Is there any green shoes where the turnover in that segment is starting to moderate a bit, or is it simply the improvement that leasing spreads more of a function just on the market rent growth, as you suggested?

Yeah, I mean, I think we said this in terms of... We have seen moderation in terms of market rents. And as we go through that cohort of leases that are still negative, it will take us time. I think it will probably take us about 18 to 20 months. But I do think that the one-year lease is around just very close to market. And as we get through that, you know, The legacy portfolio, that large embedded market to market on the two plus years, you're going to really see that come through as we work through the rest of that 20% of those rents that are still above market.

The other thing I would like to add to Stephen's point is it also depends on where market rents are headed, obviously. and not all markets are treated equally. And like we've said, we're quite constructive on the Toronto, Ottawa, Edmonton, Victoria market. We're still a little mixed. The journey's still kind of out in Calgary and Halifax as far as there's a lot of supply that's been delivered in Calgary. We'll see how the infrastructure spending Thank you for joining us. Our biggest market being Toronto, we're getting quite constructive on. So the market could be moving.

Okay, so that's quite helpful. And as you're going through your assessment process and you're streamlining some processes, I think you touched on the operating expense side. How should we think about from a G&A perspective on the back half of the year? What would you guide for now? on G&A as a run rate.

Yeah, I mean, just in terms of G&A, you can see in our MD&A, I think we're running about excluding all the severance costs and whatnot to about 4%. I think it's going to be in and around that range. And we're comfortable with that for the balance of the year. Perfect.

And Brad, I apologize. I think I called you Kyle. I don't know how I got that name mixed up. I apologize, Brad.

You did. I'll give you a pass this time.

Thanks. I appreciate it. Thank you. It won't happen again.

Your next question comes from the line of Mario Sarek with Scotiabank. Your line is open. Please go ahead.

Good morning, Lara.

Thank you. Good morning. Just coming back to the revenue side of the equation, I think three months ago, We're looking at potentially kind of 26 seems to revenue in the 1% to 2% range. Q2 is a bit lighter than that. Do you have an updated forecast or updated thoughts in terms of where that may end in the back half of the year?

Yeah, I think we're probably going to see in terms of revenue relatively flat as compared to the first six months of the year, as you see in the MD&A.

Okay, so for the full year also, you're thinking that it could be kind of flottish, 1%?

Yeah, I mean, I think it's about 1%, yeah.

Okay, and then the commentary on the Toronto market starting to look pretty interesting. You know, you're overweight in the Toronto market, obviously. When do you think new lease spreads can approach inflationary levels? Do you think we need to wait until the spring leasing season in 27? Could it happen before that? Did it take longer than that? What are your thoughts there?

Yeah, I think it's definitely sometime in 2027. If the The last couple of months and what we're seeing today continues to hold, Mario. I'm hopeful that this is a first half 2027 event. Okay.

And then just maybe shifting to capital allocation, you're tying the NCIB activity dispositions. In the past, CAAP has put out kind of target annual dispositions. A lot of the heavy lifting has been done. Is that something you're considering doing today, or if not today, later on once you've had a chance to go through the entire portfolio? I'm just trying to get a sense of any visibility on the potential disposition side, which may impact the volume of the share buyback.

Sure. Yeah. No. Short answer is no, Merrill. We'll continue to evaluate dispositions opportunistically. Will it be driven by whether we believe value has been maximized on the asset? Okay.

And then just maybe the last one for you, Brad, looking at kind of the key priorities that were highlighted in the report. The unit holders, they look on the surface fairly consistent with what we've seen recently. Are there any kind of notable expected shifts in strategy on your end or points of emphasis kind of relative to what we've seen over the past couple of years that you'd like to highlight now or is it still too early to kind of go through that?

Let me caveat this with the point that I'm still fairly early on in the job and I'm still Exploratory Mode, Meryl. I'm trying to spend a lot of time meeting the team and going and seeing the assets, but I would like to say that I really do believe the team's done an excellent job over the past couple years, and there's been a lot of the heavy lifting with repositioning the portfolio, kind of enhancing the overall quality. I do think, as I mentioned earlier, There could be some low-hanging fruit, specifically when it comes to things like the leasing and some other streamlining of processes, which I do believe should help drive organic growth. So those are some earlier on things. But as far as major strategic shifts, as far as what I've seen today, I'm happy with what I've seen today. That makes sense.

Thank you.

Thanks, Merrill.

Your next question comes from the line of Dean Wilkinson with CIBC. Your line is open. Please go ahead.

Good morning, Dean. Thank you. Good morning, Brad. Welcome back.

Thank you. Happy to be back.

Go back. You and Kyle. Could you go back to your prior life? And obviously, different circumstances. but you sort of had a proclivity to let the vacancy build a little in a view of sort of capturing a higher growth rate going forward. Are you looking at that differently now or is maintaining the occupancy more a function of having some newer assets or just what are your thoughts around that and has your approach to that changed?

Yeah, I think if you're asking if this is Interest 2.0, the answer is no. And I think we'll have more to kind of disclose as far as the go forward on the strategy and how we're going to approach things. I think we're really excited to host you in Montreal in November, and I think we can get into more details on that.

Okay. Well, we look forward to November. Thanks, guys.

Great. Thanks, James.

We have reached the end of the Q&A session. I will now turn the call back to Brad Cutsey for closing remarks.

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

This concludes today's call. Thank you for attending. You may now disconnect.