Dream Residential Real Estate Investment Trust

Good morning, ladies and gentlemen. Welcome to the Dream Residential REIT First Quarter Conference Call for Thursday, May 4, 2023. During this call, management of Dream Residential REIT may make statements containing forward-looking information within the meaning of applicable securities legislation. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties many of which are beyond DREAM residential REITs control that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. Additional information about these assumptions and risks and uncertainties is contained in DREAM residential REITs filings with securities regulators, including its latest annual information form and MDNA. These filings are also available on DREAM residential REITs website at www.dreamresidentialREIT.ca. Later in the presentation, we will have a question and answer session and to queue up for a question, please press star one one on your telephone keypad. Your host for today will be Ms. Jane Gavin, CEO of Dream Residential REIT. Ms. Gavin, please go ahead.

Thank you, operator. Good morning, everybody. Thank you for joining us for our first quarter conference call. It has been quite the roller coaster ride since we started discussing the idea of a dream residential REIT in the autumn of 2021. From both micro and macro perspectives, the world looks quite different than it did only 18 months ago. From the lack of availability of growth capital to the increase in the cost of debt to questions around the pace of rental growth and broader questions around the economy. No one foresaw the rapid negative change in sentiment. But through all that disruption, DRR's assets have proven steady and resilient. The business is well positioned to grow when the opportunity is right. In the meantime, we continue to deliver stable distributions with a safe balance sheet. Our biggest goal after launching DRR was to deliver the IPO forecast in the prospectus and to build confidence in the platform. Rounding the corner on the first anniversary of the formation of Dream Residential, Management is very pleased that the business is doing what it said and delivering the results forecast 18 months ago. Our value-add program is proving to be a very valuable growth engine in a period where growth by accretive acquisitions is challenging, and we have lots of inventory to continue that program. Against that solid backdrop, I am very pleased that Brian Pauls will be taking on the role of CEO of Dream Residential going forward into the next phase of its evolution. Brian is ideally suited to take over the helm. Well-known and respected in the capital markets and the U.S. multi-residential industry, he's very familiar with our business, the platform, and of course, the management team. For my part, I will continue focusing on growing DREAM's asset management platform and supporting this management team from the board. I'm going to hand the call over now to Scott and Derek to give you more color on the operating environment and our results. Scott, Derek, over to you.

Thank you, Jane. Before getting into more detail about the quarter, I would like to recognize Jane's leadership as CEO of Dream Residential. We have been in business for a year come this Saturday, but the genesis of DRR began 18 to 20 months ago. Dream and Paul's needed a unique leader to steer this private to public transition. Someone with exceptional real estate proficiency, connected capital markets wisdom, and top shelf executive aptitude. We are grateful she accepted this challenge and privileged to have her navigate the IPO and this subsequent black swan capital market of a year that has transpired around the globe. It has been an honor to work with and report to Jane. I am thankful that you remain at the helm of DRR with the Board of Trustees and I know you are invested and I know your investment matters. Thank you, Jane. DRR is delighted to open 2023 with solid first quarter performance. Net operating income over $6 million topped last quarter by 6% and beat IPO forecasts by 3%. Slightly stronger revenue growth and modest expense savings resulted in a 51.9% NOI margin that was 100 basis points better than planned and $181,000 ahead of forecast. Revenue of $11.6 million increased 2.4% over last quarter, driven by the REIT's 19.9% new lease trade-outs on renovated suites and 8.8% spread on renewals across the portfolio. Operating expenses, excluding the impact of IFRIC, held flat at $5.6 million as a result of deliberate cost controls combined with passive savings by virtue of increasing the suite count drafted into the renovation program leading into spring. Expenses will be impacted next quarter by rising insurance premiums. While increases have been budgeted, market conditions are pointing to further escalation that will not be finalized until renewal later in Q2. Collectively, through three full quarters of operations, DRR NOI is in line with the original IPO forecast and on track to achieve the full IPO forecast ending in Q2. Across the United States, national trends have included decreasing occupancy, decelerated but narrowly positive rent growth, and climbing costs. The apartment list national vacancy index escalated to 6.6% and national monthly rent growth indices edged on an average 20 basis points positive after five consecutive months of negative reversion. By comparison, dream residential rate ended Q1 at 94.0% occupancy approximately 60 basis points higher than the index, while still sustaining 1% to 2% of the portfolio suites offline under construction in our value-add program. Likewise, DRR rents increased approximately 50 basis points per month during Q1, better than double the national trend. Blended lease tradeouts of 7.9% pushed Q1 in-place rent up 1.5% during the quarter to $1,095 per month, sustaining double-digit year-over-year rent growth of 11.2% compared with March 31st, 2022. Our Cincinnati communities led renewal trade-out growth at 9.2% and the Dallas assets spurred by the value-add program led all regions with plus 8.9% new lease trade-outs. DRR's Oklahoma region increased rent 1.7% in the first quarter and led the entire portfolio with plus 11.8% year over year rent growth from March 31st, 2022. Cincinnati and Oklahoma both list nationally in the top 10 of fastest metro level rent growth over the past 12 months. DRR continues to create value in diverse markets where efficiently concentrated assets allow our own vertically integrated management and construction teams to grow income and provide safe, consistent cash flow. Over the past several quarters, we have described the seasonal nature of U.S. multi-residential operations and how it influences lease and investment activity. Rent control is not present in DRR markets, and our sophisticated revenue management software helps to optimize seasonal cycles common across our resident base. In the same way, our in-house construction teams forecast in-suite renovations to best time with the spring and summer leasing seasons. In the winter Q4 of 2022, 85 suites were completed. Starting this year in Q1, 94 suites completed construction, weighted toward the latter half of the quarter as we open spring. Next quarter, nearly 130 suites are planned starts for the summer. DRR projects to invest $7 to $7.5 million to value add 400 suites over the course of 2023. Of the 94 suites completed during Q1, 54 were in DFW and 40 in our Oklahoma City region. In fact, on March 31st this past quarter, over 2% of the 1,049 suites in our Dallas market were in the renovation phase preparing for spring leasing. Last summer, we were earning about 15 percentage point premiums on renovations compared to the same property classic trade-outs. In Q1, value-add renovations resulted in lease-to-lease growth of $216 per month per suite, a full 19 percentage points higher than same-property classic finished lease tradeouts. So it seems thus far that while market-wide organic growth has decelerated, the 19 percentage point premium across our value-add renovations points to an increasing benefit over time compared to same-property classics. With double-digit returns on capital, the value-add program continues to be one of the most attractive ways to reinvest in our business and to enhance the quality of our portfolio and generate returns for our investors. The larger economic environment ahead remains murky. As a result, first quarter multi-residential trading volume slumped roughly 70% off of last year, on balance with the pandemic quarter of quarter two 2020. Transactions in Q2 and Q3 this year may tick up in historical fashion, but brokerages see an overall down year compared with last and are not expecting a pointed bounce in deal volume. It is reasonable to conclude values will be difficult to pin down over the course of this calendar year. Rents nationally seem to be stable, leveling in the low to mid single-digit growth band. It has been speculated for months that the proverbial spring leasing season is would be a truth teller of economic direction. However, the early Q2 data leads to our house view that we may experience more of the same, meaning no trauma or downward counter cycle, but also perhaps a muted spring leasing season. More of the same could be mid single digit rent growth for DRR over 2023 on the heels of continued value add momentum. That is a range that beats pre-pandemic national index norms and positions DRR management to remain confident of our 2023 NOI forecast band from the upper $23 million range into the mid $24 million range. Acquisitions. That remains a near-term question mark. The bid-ask spread continues to be quite wide with today's cost of capital, though we have toured and underwritten a number of potential opportunities in each of our markets during Q1. Distress has appeared on a limited basis across older vintage, lower quality, highly levered assets, but bridge debt and recapitalization activities seem available to most. Economists speak to near-term headwinds in terms of both uncertainty and volatility, and that tells us there will be growth windows for which we continue to scour the markets with discipline and patience. Over the midterm and long term, The fundamentals for attainable middle-income apartments are why we are committed to this business. Housing shortfalls and unaffordability persist and could become more aggravated because of the pipeline-altering economic conditions which are delaying and degrading new supply. DRR's communities are in demand, and our operations and value creation continue to prove out. We are positioned to not only endure, but to thrive now and to grow when conditions make sense. Now I am pleased to turn things over to Derek Lau, our Chief Financial Officer.

Thank you, Scott, and good morning. Overall financial results for the first quarter of 2023 were solid. For the quarter ended March 31st, 2023, diluted funds from operation was 18 cents per unit and a penny ahead of our IPO forecast. Net operating income and NOI margin were $6 million and 51.9% respectively. This compared to the IPO forecast of $5.9 million and 50.9%. Operating revenue of $11.6 million was approximately $122,000 higher than forecast. Operating expenses, excluding the impact of IFRIC 21, were $5.6 million and compared favorably to the IPO forecast of $5.7 million. G&A was $795,000 and slightly over IPO forecast. This is largely due to higher professional fees and personnel costs. Interest and other income of $80,000 was driven by higher interest rates on cash balances. IFRS NAV at March 31st, 2023 is $14.73 per unit compared to $14.50 in the prior quarter. The IFRS value of our properties is $422.6 million or a 1% increase from the prior quarter and reflects $2.3 million of building improvements and $2.1 million of fair value gains. Net debt to net total assets was 30% and it includes the refinancing of Oak Place. As at March 31st, 2023, all of our debt remains fixed rate with an weighted average term of six years and at a weighted average contracted interest rate of 4%. At the end of the quarter, we had approximately $83 million in liquidity comprising $13 million of cash on hand and full availability of our credit facility. Since commencing our NCIB in January, we have purchased and canceled over 73,000 units, or roughly 8% of the total allowable under our NCIB at an average price of $8.24. At current trading levels, we will continue to use the NCIB opportunistically in addition to allocating capital towards our value-add program. We are continuing to forecast 2023 FFO per unit to be in the high $0.60 to $0.70 range, excluding acquisitions and our current total unit count. Before turning back, I want to also thank Jane for her leadership in starting the REIT and her continued mentorship. I'm excited to be working together with Brian to achieve our strategic initiatives going forward. Thanks very much and back to you, Jane.

Thank you, Scott and Derek. Operator, I think we'll open the call to questions, please.

Thank you. We will now begin the question and answer session. If you have a question, please press star 1-1 on your telephone keypad. If you wish to be removed from the queue, please press star 1-1. There will be a delay before the first question is announced. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star 1-1 on your telephone keypad. And it seems we have our first question from Jonathan Kelcher with TD Cowan. Please stand by while I open your line.

Your line is now open.

Thanks. Good morning. First question just on um the the cost side scott you talked about rising insurance costs being um a headwind um can you maybe give us an idea the magnitude of that on maybe a year-over-year basis and how much insurance makes up uh like what sort of percentage of revenue it is good morning jonathan insurance makes up about eight percent of our operating expenses

combined together with property taxes that equates to about one-third of our operating expenses. Our renewal for insurance is later in quarter two. I don't have a good sense of where that is going to come in, but we have generally budgeted about a 10% increase in property taxes and insurance this calendar year.

Okay. That helps. And then secondly, you talked about touring properties in the quarter and looking to maybe deploy some funds. Did you guys make any bids this quarter?

DRR did not submit any formal letters of intent or bids this quarter. There's quite a bit of dialogue on different things, but in the end, we're not comfortable with, or maybe a better way to say it is, we're not yet willing to pay what is being asked on these communities.

Okay. And have those communities traded? I'm just trying to get a sense of what you guys are underwriting versus what stuff might ultimately be trading for.

The assets that we have toured and looked at very closely during Q1 have not traded yet. They've not closed. Some of them are under contract. Some of them are still being negotiated. And there just really is not a whole lot of transaction volume that serves as good data points in Q1.

Okay, fair enough. I'll turn it back. Thanks.

Thank you. We have our next question from Siram Srinivas with Cornmark Securities. Please stand by while I open your line for you. The line is now open.

Good morning, everyone. My first question is primarily on the gain-to-lease. I see there's a bit of a slowdown on the trend of that gain-to-lease number. Would you say it's more to do with seasonality or is there more of a macro read on that as well?

Good morning, Cy. Yes, the gain to lease went from 6.8% to 5.8% quarter over quarter, and that change is predominantly due to exactly what you say, the seasonality. Quarter one is traditionally a historically slower leasing quarter. I would expect to see that gain to lease pick up a little bit, but where things are, we're pretty comfortable with that sort of upper 5% to 7% range. I think you'll see it in that range continuing throughout the year.

Thanks for that, Scott. And just really digging down on that, I know Oklahoma's been one of the historically higher gate release markets. How are you guys thinking about the strategies there in terms of, you know, are you thinking of being more aggressive on rents there and generate growth on that side?

Yes, you highlighted that we have trended to push rents more so in Oklahoma. over the past 12 months. Oklahoma, as I pointed out in the remarks, has been the strongest year-over-year growth. It's in the top 10 nationally through the end of March. We experienced, I think, about 11.8% year-over-year growth in Oklahoma. And so part of that market rent that gained a lease spread has been a result of us continuing to grow rents there with the addition of the value-add program. We are seeing that seasonally decelerate right now. And I think a lot of that is just a function of you're not going to hold those high numbers sustained for longer periods of time. We've been terribly excited about our enduring growth in Oklahoma. The value-add program is continuing to pencil out very nicely there. And while it's decelerating compared to being, you know, top 10 over the past year, I think it's going to continue to perform for us.

That makes sense. And my last question is primarily on your point on affordability and just to kind of dry down the point of your competitive advantage relative to your peers as well as other supply in the market. Can you comment on the delta between where DRR's rents are versus a Class A property and maybe a new build to kind of just reflect what that rent differential looks like in the current market? Sure.

Sure, I'll just sort of describe generically across all of our three markets where we fall out. So we're cemented in the middle of the middle. So we are about $600 to $800 on average below the rental rate of a Class A property, probably $800 over a new lease-up property. Across the nation and in our markets, particularly in Dallas, we're seeing new supply hit. There was negative absorption in Q1. meaning that the supply exceeded demand. But that's a short-term phenomenon, and that puts a little pressure on the newer assets or the Class A assets. For us, that really hasn't impacted things. Our occupancy is really driven by our drafting of renovation suites. We could be at 96.5 if we wanted to, but we're prioritizing our renovation program right now and continuing to draft for that. So I feel very good about where we are. We still see that delta between our communities and the new pipeline. And frankly, the economic conditions right now are putting a lot of pressure on the future pipeline. So that bodes well for our apartment demand going forward. And I think that I hope that answers your question, Sai.

Definitely, Scott. And thanks for the color. Probably just taking back on that comment, you know, as you mentioned, you know, places like Dallas have seen a negative absorption in new demand. In that context, how's that gap rate differential looking like between, let's say, a Class A versus, you know, the middle of the middle kind of properties? And do you think that might actually make acquiring newer assets more attractive at some point in time?

Could you help me – Could you clarify that question a little bit? I couldn't quite hear you.

Yeah, so basically, going back to your point on new developments, there being negative absorption on new builds coming in and there being pressure on that side of the market, do you see a point wherein the valuation of those kind of newer assets would probably be at a more attractive range versus what you're seeing for more value-add properties? And would that entice you at some point in time to actually switch maybe to, you know, buy some newer assets which might maybe entail lesser CAPEX and lesser repairs maintenance?

Well, we see right now, and we have experience value-adding properties from our current vintage late 80s all the way up into the 2016 range. We are renovating properties or we have a track record of renovating and value adding properties across that range. So our value add program is not limited to just the 80s or 90s communities. I think I agree with you that I think there is potential to look at new properties, particularly from merchant builders that maybe have some difficult or unpalatable Construction debt in place or mezzanine loans that are not attractive for them. So we are actively looking in that space I would just say that we are committed to the suburban garden style product type You're not going to likely see us in mid-rise urban environments where there's rent control threats and I think the urban environment is still You know at least a question mark in our country right now you know across the US because of some of the demographic trends that we've seen in the urban environment and So we like suburban garden style. We're going to stay there. We'll certainly look to improve our – we'll look for new opportunities from the pipeline coming forward.

That's amazing, Carter. Thanks, Dave, and I'll come back.

Thank you. Our next question is from Himanshu Gupta with Scotiabank. Please stand by while I open your line for you. And please go ahead.

So just on the potential acquisitions, the stuff that you're underwriting, are they in your existing markets or are you exploring new markets as well?

Good morning, Kamanshu. We are, the assets that I have, that our team has toured this quarter and specifically underwritten have been in our current markets. I would say that we are actively still underwriting, though, in additional markets. So our search pattern has not changed. We like our target markets. We like our existing markets. But we're more focused today on our existing markets.

Got it. And, Scott, are you still looking for older, class B products? Or are you even looking at the new builds, which is underneath those kind of properties as well?

Just maybe a good way to respond to that would be answering your question with something very specific. I've looked at 1991 to 2012 assets in the past three months.

Okay. Okay. That's enough to ask. Thank you. And then just turning on your operations, portfolio occupancy at 94%. So as you continue to roll out the value-add program, would Q2 occupancy look very similar to Q1? and then we should expect some pickup in Q3. Is it fair to say that?

No, I would not expect occupancy to pick up in Q3. Last Q3 in 2022, I think we were in the mid to high 93% range. I think we'll see ourselves in that range in Q2 and Q3 because our surge of value-add suites is occurring during Q2 and Q3. It's not mathematically possible for us to get too high on occupancy because they're in construction right now. So we're going to hang out about what you see right now, maybe a little bit, maybe 25 to 50 basis points left, less than that in the 93.5 to 94 range as we draft those suites in. That'll be through Q2 and Q3, and that's our strong season. We're going to continue to push that.

Okay, thanks for the call. Also, kind of consistent occupancy. And then, Scott, in your prepared remarks, I think you mentioned about a muted spring leasing season. So which of three markets are you seeing the most deceleration or expecting the most deceleration in the next three months or in this season right now?

Thank you, Manju. That muted may have been not the best word choice on my part. I would just say it's more of the same. So we saw January, February, and March were, frankly, pretty exciting for us to see, and I think we're seeing more of the same of that in the spring. So instead of seeing a more seasonal decrease in January, February, and March, we saw it pretty consistent and level in that mid-teen range, or the mid-single-digit range. I think we're seeing more of the same right now. In terms of, I think your question about The spring leasing season in markets is an important one. I'll start by just broadly saying what the United States is experiencing. If you draw a line through Dallas, Texas, and you look to the west of there, out to the coast, most of those markets have a lower, potentially even decreasing month-over-month rent trend. If you go east of that line, generally speaking, notwithstanding New York City, most of those markets are experiencing a positive spring leasing season. And I would say our markets are similar. We've got Oklahoma City and Dallas, Texas that are together more of the same right now is what we're seeing. And I would say, I would add to that, that our Cincinnati market is experiencing one of the most robust spring leasing seasons that I've seen in recent years. So it's very, very strong. There I was in town in New in that region about three weeks ago. And I mean, it was almost noticeable on the phone calls coming in. It was very, very exciting to see. And that's what we're experiencing in that market.

Thank you. And the markets which are seeing lower month-on-month rents versus the markets which are seeing higher month-on-month rent, the differentiation is the new supply or is it the migration? You know, the markets which are seeing new supply are seeing negative or The markets which are seeing positive migration are seeing positive. Any correlation there?

There could be a little speculation that it's a short-term supply function. That might be the case in Texas markets, but I would see that as a short-term blip on the radar. I think it's more a factor of just in the Sun Belt, they've experienced tremendous growth over the past, call it 24 months. And I think it's just moderated. It's just decelerated a little bit. It's still very good. In fact, our rent growth right now is call it twofold better than the norm pre-pandemic. So we're very excited about that compared to last year. Maybe it's a little bit less, but compared to before the pandemic, it's very, very strong. So I think it's just a function of balancing out over time.

Fair enough. My last question is for Derek here. So I think you guys did debt refinancing this quarter for Oklahoma property. Did you get an appraisal done as well when you did the refinance and any color in terms of how values have moved since IPO on that property?

Oh, sure. Yeah. So the refinancing that you're talking about, Matthew, is Oak Place. We did refinance that property. And we did an appraisal on that. It was largely consistent with our Q4 valuation, which we coincidentally did a separate appraisal on. So really consistent with what we saw in Q4 and slightly higher than the IPO forecast, but not materially.

Thank you. And maybe one follow-up. I mean, I think it was done in mid-February, the transaction. a bit below the regional bank crisis headlines, so to speak. Has anything changed since then, I mean, in terms of debt availability in your asset class or in your region?

Sure. Maybe I'll give some context on that. The availability from agency lenders is still there. We may see, you know, given recent bank, I guess, what's happened with the banks, less lending on their side. However, with agency, we're still seeing... strong supply. And I would say that while the supply is there, the rates have increased. So maybe for comparative purposes, we locked in at 4.88% then. What we see today is probably maybe 30 to 35 bits higher. So availability is still there, but we could see that spread widen going forward.

Got it. Thank you for the call, and I'll turn it back. Thank you, guys. Thank you.

We have our next question from Matt Kornack with NBF. Please stand by while I open your line for you. Your line is now open.

Hi, guys. Just with regards to the move in occupancy, you carried pretty high occupancy as of December 31st into presumably January. But what you've given here is end of quarter, I believe, in terms of the pullback. So Would most of Q1 you have been sitting at that higher occupancy level and hence the beat to your forecast? I'm just trying to understand kind of the dynamics in the quarter itself.

Thank you, Matt. To your point, I mean, occupancy, average day occupancy is not linear necessarily, but I would agree with you that our occupancy was pretty stable through January in line with where December finished. And then as we ramped up construction, we saw that occupancy intentionally withdraw down to where it finished the quarter out. I don't know that that was materially contributed to the quarter's NOI. It certainly influenced it, but I don't think it materially changed it from what we expected.

Okay. That makes sense. And then with regards to margins in the quarter versus – for the full year? I mean, it sounds like you're maintaining your view on NOI for the most part for the year. So should we expect the margins will come down a bit? Obviously, you mentioned insurance, but is there anything else we should be looking at there?

I think that's a fair estimate. The margins, we would anticipate coming down a bit, partially non-materially due to insurance, more so just a function of seasonality. In Q1, sometimes you can see less spending uh you know for example when your renewal rates are high and turnover is low then your make ready and other maintenance costs are typically going to be lesser as well as landscaping we're always somewhat conservative when we when we budget that because you don't know what the weather is going to be like but in the case of this past quarter both the landscaping costs and the make-ready costs were less. In addition, when we ramp up that value-add program, those are passive savings because you're not spending money on a make-ready for that particular suite. You're investing in the value-add program.

Okay. No, sure. That absolutely makes sense. The last one for me with regards to the value-add program, it seems like It's still a great place to be deploying capital. You're seeing demand for these better quality suites. Can you give us a sense in past cycles? I mean, the employment market still is quite strong in the U.S., but let's say if there is a deterioration, do you typically see the value-add segment not see demand or slowing demand or just general thoughts there as to how sustainable ultimately that investment is if there's an economic downturn?

Well, that's a highly speculative question, Matt. I think what I would say is this, is we aren't seeing a change in demand. The demand remains strong for our renovated suites. The markets we're in, in large part, they're insulated from the job losses that you're reading about in the newspaper. We're not in super high tech markets. We're in fundamental economic contributing markets. where the job situation tends to remain strong and stable. That's why we selected those markets. They're going to be more insulated from those cyclical changes, and we just don't expect high-magnitude differences in demand or in the jobs in our markets.

And presumably from an affordability standpoint, the rent to income even after you do these renovations is probably still quite reasonable relative to what we're used to here in Toronto and other coastal markets.

Your descriptive phrase of quite reasonable is exactly how we would phrase it.

Okay. Thanks, guys.

Thank you. We have our next question from Jimmy King-Shan with RBCCM. Please stand by. Your line is now open.

Thanks. So, Scott, I'm just curious, what are you sending out in terms of renewal rate increase for the next couple of months? Would they be in line with the 9% in Q1? Good morning, Jimmy.

I think we're going to see the renewal rate, the renewal spread decrease off of that 9%, but I think it's still going to be in the upper 20%. Single-digit range. Okay. Early indications would point to that.

And then just on the acquisition, you talked about seeing a lot of assets in the last month or so. What level of cap rate or IRR or however you want to frame it, sort of gets you to pull the trigger on an asset today, just given all the uncertainties and your cost of capital. What is it that you need to see in terms of a number to get you there?

Let me clarify a little bit. There are not a lot of assets on the market to see. We have toured what we are interested in, and there are communities that meet our acquisition criteria in terms of the vintage and the quality and with our value-add program intent. But there are not a lot of assets to look at today. In terms of cap rates, I mean, it's all across the board, more opportunistic. But I would say over a stabilized timeframe, we're looking in the six and a half to seven range on a cap rate in year two or year three. That's our criteria. That's not the first year going in. That's our stabilized cap rate.

Right. But given that rent growth has decelerated a bit, going in would be just a tiny bit less than that versus maybe a year ago when people were underwriting quite a bit of it, quite high double-digit rent growth. Is that fair?

That is absolutely fair to say, and that's where the disconnect is right now is is the sellers in general are not accounting for that, and we as a prospective buyer are going to demand that. Okay. Okay, great. Thank you.

Thank you. As a reminder, if you have a question, please press star 1-1. And our next question is from George Hong with Raymond James.

Please stand by. And your line is open.

Good morning, guys, and thanks for taking the question. Just keying off the recent shelf filing, can you talk about incremental capital raising, especially as it relates to convertible debt, given your low leverage at this point, if the right acquisition was to come along?

Hi, George. We filed a base shelf as largely as a housekeeping kind of item. We do want to be ready for when the markets do cooperate. Whether we look at, given our current cost of capital, our equity raises are probably not in the – wouldn't happen right now. I mean, we look at all sources of capital. I think, you know, convertible debentures, equity. Having said that, you know, we're still – it's important to find the right investment opportunity to allocate our capital towards. So when we find that opportunity, we will – We have our base shelf, and we will be in a position to either raise capital or converts, as you mentioned. But like I said, Scott has mentioned transaction activity is slow. We are continually monitoring it, and we'll be ready, willing, and able to execute when that opportunity and timing arises.

Fantastic. That's all from me today.

Thanks, Rich. And thank you. And we have no further calls at this time. I will now turn the call over to Jane Gavin for closing remarks.

Thank you so much. Dream Residential finishes its inaugural year in very good shape with an absolutely excellent management team and a solid foundation to do great things. I can't thank Scott, Derek, and their teams for all their dedication and hard work to get us where we are today. It's been my sincere pleasure to be part of this journey, and I'm going to look forward to watching DRR's growth and evolution. And with that, I will conclude our call.

Thanks very much. And thank you. And thank you, ladies and gentlemen. This concludes our conference. We thank you for your participation. You may now disconnect.