InterRent Real Estate Investment Trust

morning ladies and gentlemen and welcome to the inter-rent q2 2023 earnings conference call at this time all lines are in listen-only mode following the presentation we will conduct a question-and-answer session if at any time during this call you require immediate assistance please press star 0 for the operator this call is being recorded today Wednesday, August the 2nd, 2023. I would now like to turn the conference over to Renee Wei. Please go ahead.

Welcome, everyone, and thank you for joining Intergrant Reef Q2 2023 Earnings Call. My name is Renee Wei, Director of Investor Relations and Sustainability. You can find a presentation to accompany today's call on the Investor Relations section of our website under Events and Presentations. We're pleased to have Brad Cutsey, President and CEO, Kurt Miller, CFO, and Dave Nevins, COO on the line today. As usual, the team will present some prepared remarks and then we'll open it up to questions. Before we begin, I want to remind listeners that certain statements about future events made on this conference call are forward-looking in nature. Any such information is subject to risks and certainties and assumptions that could cause actual results to differ materially. For more information, please refer to the cautionary statements of forward-looking information in the Reads News release and MDNA dated August 2, 2023. During the call, management may also refer to certain non-IFRS measures. Although the REIT believes these measures provide useful supplemental information about its financial performance, they're not recognized measures and do not have standardized meanings under IFRS. Please see the REIT's MD&A for additional information regarding non-IFRS financial measures, including reconciliations to the nearest IFRS measures. Brad, you're up.

Thanks, Renee. And good morning, everyone. Let's get started by reviewing our Q2 highlights. Same property and total portfolio occupancy came in at 95.4%. 30 basis points increased from June last year. Total occupancy was down 140 basis points, and same property occupancy was down 150 basis points compared to March this year. This decrease is due to the seasonality effect that typically results in a decline of anywhere between 50 and 200 basis points of occupancy from March to June, as is typical for residents' natural turn to occur during this period. When analyzing June occupancy rate for the last six years, it becomes evident that the occupancy has rebounded to pre-pandemic levels and is in line with long-term average. We achieved a 15% same property NOI growth and a 16.8% total portfolio NOI growth. As you can see on the right-hand side of the slide, our organic NOI growth and operating revenue have both returned to pre-pandemic levels. Furthermore, we have also delivered an impressive 300 basis point expansion in the NOI margin for same property and total portfolios. With our ability to contain operating costs paired with reduction of vacancy and rebates, this quarter top line growth flows through directly to improved NOI, demonstrating the efficiency and robustness of our operating platform and our extraordinary teams on the ground who continue to innovate and serve the communities our residents proudly call home. The fundamentals of our portfolio and industry continue to strengthen, as demonstrated by the consistent 6.8% growth in average monthly rent in June relative to a year ago. During the second quarter, rent growth for our non-repositioned portfolio has outpaced that of our repositioned portfolio. This is due to changes in our portfolio composition resulting from our acquisition strategy over the last few years that has focused on core urban markets, such as Toronto and Vancouver. that we believe we will continue to benefit from immigration and population growth. At the regional level, we continue to see a steady average monthly rent across all the core markets, with other Ontario, GTHA, and Vancouver leading the pack. Rental growth in Montreal is also steady, with a 4.6% year-over-year increase, and we believe there's a significant run rate still ahead for that market. FFO increased 3.7% to 19.6 million and on a per unit basis is up 2.3% to 13.4 cents. AFFO increased 3.8% to 16.9 million. We've achieved this growth despite the new normalization of higher financing costs during the quarter. We are focused on enhancing our debt portfolio and managing interest rate risks and have made incremental progress. The results of the team's efforts will become evident in the next few quarters. Kurt will provide further details into our balance sheet later in this call. With our debt to gross book value continuing to be at historically low levels, stable available liquidity of $282 million, we remain in a strong financial position to execute on a strategy amid heightened volatility in the debt markets.

Dave, over to you to take us through some of the operating highlights. Thanks, Brad. As Brad previously mentioned, our overall occupancy has increased marginally when compared to June of 2022 and has shown a decrease from March of this year. This can be explained by a rental market seasonality typical for Q2 as highlighted in this five-year chart. Encouragingly, we've seen strong demand and activities for the rest of the summer following the quarter, as our occupancy rate historically show a noteworthy bump from June to September. During the quarter, we've seen turnover remaining in the mid-20% range, However, due to the tight markets, we continue to expect turnover to decrease towards the low 20% range for the year. The vacancy rate differential between our reposition and non-reposition portfolios have widened to 200 basis points, demonstrating the effectiveness of our repositioning program and our ability to continue to capture additional revenues through it. We take pride in running a well-maintained portfolio on this slide. You can see our CapEx spend so far this year. Our maintenance capex came in at $5.2 million for the year-to-date, or $1,020 on an annualized per-suite basis, in line with historical levels. On the right-hand side, you see we consistently allocate anywhere between 86% to 92% of our capex spend on value-add investment as we continue to see excellent value creation in our repositioning programs. As of the end of June, we have 2,541 suites or 20% of our portfolio at various stages in our repositioning program. We have established a well-recognized track record of enhancing our resident experience and at the same time creating value with strategic investments in our communities through energy conservation programs, repair and upgrades to both the exterior and interior of our properties and in-suite renovations. As a result, our reposition suites experienced lower vacancy rates and greater NOI margins. During the second quarter, occupancy rates and NOI margins for reposition portfolios are 200 basis points and 160 basis points higher when compared to non-reposition portfolio. Before I turn things over to Kurt, I want to give a quick update on our first office conversion project, The Slate, which we transitioned from active development to income-producing properties during Q1. The construction inside the building is nearly complete and the lease rate has surpassed 60%, the site being surrounded by ongoing city construction. With its excellent location in downtown Ottawa, just steps away from two LRT lines and the Parliament, the building has attracted significant interest, especially from students and government workers. With the city construction outside the building nearing completion and the remaining work on the rooftop and menu space concluding, we're confident that strong momentum will continue throughout the busy leasing season. With that, I'll hand it over now to Kurt to discuss our balance sheet and sustainability efforts.

Thanks, Dave. Every quarter, we review the major assumptions around rent, turnover costs, and cap rates with our external appraisers. Based on this review and consistent with expectations, we have seen slight upward adjustments in cap rates in non-core markets and assets. We are currently sitting at a weighted average portfolio cap rate of 4.07%, up minimally from 4.04% in Q1. Even with this increase, we recorded a fair value gain of $7.4 million due to the robust rental demand. We had close to $1.7 billion in mortgages outstanding at the end of June, a marginal decrease from where we ended the previous quarter. Weighted average cost of mortgage debt increased marginally from March 2023 to 3.43%, and variable rate exposure ended the quarter at 5%, a substantial decrease when compared to the same period last year. 36% of our 2024 maturities as highlighted in this mortgage maturity schedule chart is related to our Vancouver portfolio which is in the process of being refinanced with CMHC insured mortgages for all of the assets with anticipated funding to happen in late Q3 or early Q4. We have continued to strategically smooth out our mortgage maturities with no more than 13% of our total maturities due in any given year over the next five years. Our average term to maturity has decreased by 0.2 years to 4.9 years. The majority of our 2023 and 2024 maturing mortgages are currently at various stages of the review and approval process with CMHC. We look forward to reporting the results of these initiatives as they materialize in the next few quarters. As you can see on slide 17, our proportionate debt to gross book value at 37.7% reflected a decrease of 30 basis points over Q1 and remains at historically low levels. Available liquidity was $282 million, also in line with the previous quarter. Our liquidity levels and prudent debt strategies have continued to provide us with the financial flexibility for future capital programs, development opportunities, and acquisitions. Moving to slide 19. During the quarter, we continued to make important progress on our sustainability objectives. On the consumption front, Through our various ongoing energy efficiency projects, we achieved a 12% year-over-year reduction in gas usage as compared to a 4% decrease in heating degree days. On the environmental front, we submitted our updated 2022 emission calculations, including our Scope 3 emissions data, to the Science-Based Targets Initiative, or SBTI. We are currently awaiting validation of our science-based emission reduction targets. On the governance front, with the election of our newest board member, Megan O'Hara-Fraser, at our 2023 AGM in June, we officially increased our female representation on the board to over 30%. We are also actively expanding our building certification program with six pilot buildings in the GTHA and National Capital Region on track to earn the Canadian Rental Building Certification in the coming weeks. I'll turn things back to Brad to walk us through our capital allocation strategy.

Thanks, Kurt. We have disclosed our agreement to sell a 54-suite property in Ottawa for proceeds of $11.5 million, which exceeded our IFRS value. We have been communicating to the market that we would direct some of the proceeds from our capital recycling programs towards our NCIB. During the quarter, we purchased 26,300 units at an average price of $12.47 per unit through NCIB, well below our IFRS value. Subsequent to the quarter, we remained active in purchasing additional units through the automatic unit purchase plan. We have identified various assets that meet our strategic disposition criteria that can potentially provide net proceeds of over $75 million over the next 12 months, which will help fund further growth opportunities, strengthen our balance sheet, and allow us to continue to be active in our NCIB. Taking a closer look at the development pipeline, a key part of our future and part of the solution to the current housing supply situation in Canada. We currently have three ongoing development projects in various stages of the development cycle that could provide close to 4,000 new homes. All these projects are in our core markets in the GTHA and in Ottawa, strategically located near mass transit hubs where there's a strong demand for housing supply among students and professionals alike. However, we remain cognizant of the headwinds from rising hard and soft costs, as well as financing constraints related to construction. We are exploring various programs such as MLI Select and the RCFI programs to achieve optimum financing terms. The decision to move forward on any of our development projects will be made after thoughtful consideration as part of our broader capital allocation strategy. Over to slide 24. I'd like to take this last moment in the presentation to highlight the conditions of Canada's housing market and what this means to our industry. It's an understatement to say that the housing market is far from a balanced state and that the core issues lies in the disparity between housing supply and demand. Last year, Canada's population grew by an unprecedented 1.1 million people, most of them permanent and temporary newcomers. During the first five months of this year alone, Canada welcomed over 200,000 international students. As of July 16th, Canada met the historic milestone of reaching a population of 40 million. Meanwhile, housing completion in Canada has remained stagnant, resembling a flat line over the past 10 years. Our population growth per housing completion reached a staggering 3.2 ratio last year, compared to the already elevated historical average of 2. CMHC estimates that 5.8 million housing units are needed by 2030. We are currently on track to build less than half that needed amount. We remain steadfast in our commitment to be part of the solution to address the housing supply shortage. You've heard about our almost 4,000 suites in various stages of developments. Our peers are rallying to contribute too. But this chronic supply shortage does not have a quick fix. We expect to see extreme tight market conditions persist in the coming years, especially in our core markets, which are some of the most desirable destinations for newcomers, students, and tech work. In order to meet a strategic growth plan to stay ahead in the future, where housing supply and demand will eventually become more balanced, we focus on building resilience through investments in our platform and our teams. We have always stressed that our most valuable assets, and that's why we're giving them the best tools and technology to help them reach the next level. We have taken steps to invest in cutting-edge business intelligence and best-in-class cloud platforms and more to improve efficiencies so that our teams can find more time for higher value-add activities and deliver even better, more personalized service to our residents. Meeting our sustainability objectives is important to us. We have adopted creative solutions such as building automation systems and renewable energy technologies to ensure our communities are resilient in the face of climate changes. and that our operations continue to stand on a sustainable foundation. At the heart of our business lies our residents. We have carefully designed and woven technologies in every aspect of our residents' experience. This seamless integration allows us to better serve our residents and achieve incremental operational optimization in the process. We create an experience that is customizable and responsive, resulting in happier residents and safer, more vibrant communities. As part of our ongoing investment in our platform, we are also making important progress in enhancing our brand. We're in the early stages of launching our new branding, which aligns with who we are and our visions for the future. We can't wait to share more details with you later this year. Finally, I'd like to conclude by reiterating why we are so optimistic about continued strong NOI and FFO growth in the future, backed by three compelling reasons. The first being the fundamentals in the Canadian rental markets remain solid and will continue to support long-term top-line growth. Two, our operating platform and best-in-class team have a proven track record of delivering value. We will continue to empower them with cutting-edge technologies and investments in training as we scale and achieve our strategic growth plans. And lastly, number three, we are truly excited about our various development projects. where we bring in trusted partners with experience and expertise. These opportunities will not only contribute to Canada's housing supply, but also have the potential to elevate InRent and our portfolio to the next level.

With that, let's open it up to Q&A.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If your question has been answered and you would like to withdraw from the queue, please press star followed by the number two. And if you are using a speakerphone, please lift your handset before pressing any keys. One moment please for your first question. Your first question will go to Mike Markitis at BMO Capital Markets. Please go ahead.

Thanks, operator. Good morning, in-rent team. Congrats on a very strong operating quarter. A couple questions. I guess I'll start off just with the seasonal decline in occupancy. See the chart that you've got there. See it's in line with historical average. Maybe you could just unpack that a little bit more. I mean, I get that... I get that more people move just because it's a little bit warmer in the second quarter, but coinciding with that, I would have thought more people lease units as well. So maybe just a little bit more color as to why we typically see that decline.

Hi.

Thanks, Mike. It's Dave. So typically we do see this decline in that time of the year because we do have more people moving out and we're getting suites ready. But then again, you know, it picks up later in the summer with a strong rental demand. So I don't think it's any different than what we've normally seen in the past.

Okay.

It's just natural transient move, right? People don't want to move in or move out in the cold. So typically the summer... is you'll see a lot more movement. And to be even further detailed, the further you kind of get southwest of Ontario, that leasing season is stretched even further. But you'll typically see more move out and move in relative to colder climates such as Ottawa and Montreal and southwest of Ontario. You don't want to move in. You're not looking for an apartment until you're ready to, like, in the summer and vice versa.

Okay. And I guess as turnover increases naturally in Q2, you guys would have higher economic downtime just from doing more work on in-suites, I would think as well, right? Just given your business model. Yeah, correct. Okay. That's fair. Okay. Great trend line, the chart on the operating revenue. I guess I don't know how many quarters it's been now, but I guess we're at five or six in a row at kind of close to 10% on the REV line. If we think about, you know, maybe a year ago it was occupancy gains. Now it's less occupancy year over year and more AMR and augmented by your incentive reduction or the incentive amortization reduction. So just giving your comments on lower turnover throughout the rest of this year, how do you expect or how are you thinking about year over year options? operating revenue sort of as we move through the rest of this year and into next year? Like, is AMR going to... You're going to lose the incentive benefit. So I guess my question is, is AMR going to continue to march higher or market rents as turnover slows?

We believe so. I think the markets are so tight right now, Michael, that we don't see any pressure, I believe, off the AMR anytime soon. And unfortunately for... For renters out there, it's going to get just tighter given the amount of demand that's driven by immigration. So that AMR is going to continue to be under pressure. And you're right, going forward, top line growth will be primarily driven by that. Also, you're going to have what's augment that will be above guideline increases. But within our own portfolios, and I think we mentioned this on the last call, was finding, getting creative with our communities and adding new homes within those communities, finding space and kind of converting and adding to that. And one of those examples would be Ernst Cliff in Montreal. We have a community where we took Class C office space, which is quite an almost obsolete type office space and created 36 new homes right and we have a number of those uh opportunities that we have identified within a couple of so that should help augment uh that top line growth and as well that hasn't hit uh hit our top line as of yet we do have some commercial space that we've had uh made some inroads on as far as leasing up that should also help augment that top line with that AMR that you're talking about. So I think here we feel strong that we should be able to continue to produce above high single-digit top-line revenue growth in the foreseeable future.

Okay, that's great, Kelly. Last one for me before I turn it back, more of a high-level question. I guess we've had an announced change. at the ministerial level for Canada's cabinet. And maybe if you could just give us a quick update if that actually means anything or if it's, you know, the change at the top, so to speak, if that's stalled or impacted your continued GR relations effort for you and your peers.

I think, it's Kurt here, Mike. I think the, I'll speak for ourselves, and I think our peers will feel the same, that We're actually very encouraged with how the government's trying to work with private sector and all three levels of government to move things forward. There's a lot of moving parts with that, so it's not as fast as any of us would like, probably, but we're encouraged by the progress. The fact that the minister... that was with immigration and housing has moved over to the housing side. We think there'll be even a better tie in between the two and the need for housing supply to align with immigration policy, which is kind of what us and all of our peers have been advocating for. We think it's a positive, not a negative by any means, and it's just going to take more time to continue to work through the different levels.

Got it. Well said. Thanks very much, guys. I'll turn it back

Your next question will come from Jonathan Kelcher at TD Cowen. Please go ahead.

Thanks. Good morning. First question, just on the operating costs in the quarter, was that a pretty clean number or is there anything in there that for timing reasons may have gotten pushed to Q3 or Q4?

It's Kurt here, Jonathan. Good morning. Good morning. Um, no, it's fairly clean. I mean, there's always, there's always stuff that flows from one quarter to another, just from timing perspective, but nothing, nothing major that would cause that to be, you know, off significantly. Um, so from a, from a quarter run rate perspective, uh, I think it's, it's pretty clean.

Okay. And then how much, um, you're talking about lower turnover. Um, how should we think about that impacting operating costs?

It's an interesting question. I'm looking at David Brad also.

It's an interesting question. I mean, there's a couple of things that go with that, right? It should lower them a little bit from the point of view of move-ins, move-outs, and the extra operating costs that goes with that. But on a major turn, you're capexing that versus expensing it if you're doing in-suite repairs and upgrading the suite. You might see a little bit of a reduction, but I don't think you see a big reduction from that. A lot of your costs for cutting the grass, cleaning the properties clean, your utilities and all that other piece is not going to be affected by that. So I don't see a big decrease there.

I totally agree, Kurt, with the answer. I think The way to look at it is how many of your unit turns are you actually doing work to? And I think in today's environment, you'll take the opportunity to upgrade the suite. So to Kurt's point, those will be capitalized costs. So to the point that you're doing a back-to-back, you're right, Jonathan, you would see your M come in. But here at Interred, that's not a big part of our small students back-to-backs. We take every opportunity that we have to put money back in and enhance.

Okay, fair enough. And then just switching gears on the slate, when would you expect that? It sounds like the leasing velocity should pick up the back half of this year. When would you expect that to be stabilized?

Uh, thanks. It's a Dave here. So I'd like to say, first off, we're really happy with the, uh, the traction that we're getting on the rental teams doing a great job. Um, the construction from the city is kind of wrapping up outside. So it's just really going to be a, make a big difference, but we're looking to be in that 90% range before the end of the year.

Okay. And then that, that asset, um, That will not be subject to rent control, correct? Is it new or is it because there's a conversion?

Yeah, correct. It's not subject to rent controls.

And it's because the previous use was non-residential, so therefore it's counted as new.

Okay, thanks. Yep, thanks. I'll turn it back. Thanks, Jonathan.

Your next question will come from Kyle Stanley at Desjardins. Please go ahead.

Thanks. Morning, guys. So your international student commentary and your disclosures continue to be very positive. I'm just wondering, in your discussions with the universities and your markets, what's the outlook for demand from the student population as we approach the fall?

Hi, it's Dave here. Thanks. Yeah, the outlook is good. It's strong. It's normal. The student population is picking up. We see the trend going in the right direction. So we're anticipating it to be strong throughout the rest of the leasing season and into September.

Yeah, and I mean, that's anecdotal. And also to augment that, we're talking with our actual leasing teams on the ground. We're seeing we're back to pre-epidemic levels. But if you want something to kind of hang your hat on, I'm looking over at Renee and making sure I'm not misspeaking, but I'm pretty sure study permits are at an all-time high. And that's something that's out there and you can hang your hat on. So we're seeing it in discussions with their leasing traffic, with their teams, and with discussions with the different institutions that we try to partner up with. we're quite happy with what we're seeing on that front for sure, Kyle.

Okay, thanks. I guess, so with that in mind, would you see occupancy trending maybe back towards where we would have finished the year last year or kind of where we were in Q1 throughout the balance of the year?

Yeah, I do. August is an all-important month when it comes to that student population. Believe it or not, there's still a large number of of the student body that actually lands in Canada and will find short-term accommodations and then secure longer-term accommodations. And the other thing I would mention, I think we mentioned this previously on other calls, is we have a bigger uptake of leases expiring in September than we would have, and that was created by the pandemic. These next couple of months will be all in telling, but there's nothing to suggest of what we've seen to date that we won't be able to mirror the successes that we had towards the end of last year.

Okay. Just switching over to the disposition front, I mean, great to see the post-quarter disposition. Just wondering if we get a bit more detail on the process, the type of buyer process, you know, number of interested parties, just, I guess what's going on in the market now that, you know, you mentioned potentially 75 million of incremental proceeds and, you know, how do we get there over the next 12 months?

Yeah, I'm not, I'm not going to get too much of the details over that program, but for the first time we thought we try to help, uh, the analyst community with what kind of numbers that we could be, uh, potentially looking at as far as, uh, the proceeds, just to understand, uh, the whole recycling of our capital allocation and the different opportunities that we have in front of us. I would say, Kyle, it still does remain more of a smaller private buyer for the type of assets that we are disposing of. So the process is a much longer process than you might anticipate when it's an institutional buyer. The main reason being, and it's no shocker, is the conditions on financing. The private buyer will tend to finance at a higher leverage, and the process right now to get through CMHC is a lot longer than what it's historically been. That's been one of the challenges. We're not going to come out and say we have different communities at different parts of the process right now within that disposition program. So we are confident and believe that we should be able to achieve what we put out there, but only time will tell.

Perfect. And just one last one for me over to Kurt. You talk about using the early rate locks when appropriate for the debt refinancing. I'm just wondering, just given the higher in-place rates for the maturing debt in 2024, it sounds like you've already made progress on that. But just curious, how much of that has maybe been rate locked to date and where would that rate potentially be?

The variable rate debt that we have in 2024, none of that is locked at this point. We got to a point in the cycle where we can rate lock it, but we didn't like where things were at given what the 10-year money was like. So we're ready any point between now and the time it gets through CMHC. If we see anything like what happened with SBB and rates come back in, we're ready to do it and move forward with it. But at this point, that full amount is sitting at market rate.

Okay, fair enough. That's it for me. I'll turn it back. Thanks, guys. Thanks, Kyle.

Your next question will come from Brad Sturgis at Raymond James. Please go ahead.

Hi, good morning. Just to follow up on Kyle's question there on the financing you're looking to do at the end of the year? At this point, do you have a preferred term that you might look to execute on, and would there be incremental liquidity or proceeds that you would generate from that financing at this stage if you get it done by Q3 or Q4?

Yeah, I mean, one of the big ones we were working on this year was the takeout on Slate. which just closed yesterday, so that's in the bag now. We probably have another 10-ish million on equity takeout on the ones that are coming through the remainder of this year. And we've already started working on most of the front half of 2024 and basically the fall of 2024. Probably somewhere between another 70 and 80 million of equity takeout potential there. As far as

That'll get us through 2024, see where things are at.

And do you have a preference, sorry, on term at this point, given where rates are today? I mean, if you were to refinance, is there, you prefer to be longer or shorter?

I think what we've moved to, you know, we talked about this on the last few calls with what happened with variable rate exposure and everything around that. And what we've been communicating to the market for the last few quarters is that we really are trying to make sure that we don't take a bet on any given year and smooth out our mortgage ladder. So we'll continue to do that. Five-year money is more expensive than 10 right now. and you can always throw 10-year money on, and if the rates come back in, you can always look at doing the pari passu or top-up second type of mortgage on top of it three or four years out with the value creation and the lower rates, if it makes sense. So I think we'll probably trend to the longer side, and we'll continue to fill out the mortgage ladder.

And I would add, too, I think the team's done a really good job filling in that mortgage ladder and dealing with any of the near-term expiry. So with that said, I think time's on your side, given where we are with the recent rate hikes, right? I think, at least here in Canada, I'm not paid enough to call the fixed income market, but I would say it certainly feels like As far as rate hikes, we're pretty close to the top, if not at the top. So with that said, I think now time's on your side, where obviously rewind 12 to 18 months ago, you're racing against the clock.

Yeah. Okay. Just to go back to the capital recycling and the asset sales, I just want to clarify that $75 million, that was a net number, correct?

Yes.

And are those assets, is there any debt on those assets or is that a clean, like are those assets unencumbered?

No, there would be debt on those assets. How is that?

Just to be clear, sorry, that's 75 is net of the debt.

That's not asset value, that's net proceeds.

How would that leverage profile look compared to where you're running across the portfolio?

It would be similar to our portfolio average. I mean, it's going to depend a little bit from one queue to the other which one is hit because not all of them are exactly at that number. But you'd be in that range. So if you do the back math, which I think is what you're getting at, you're probably in around $200 million.

Okay, great. Thanks. I'll turn it back.

Your next question will come from Mario Sarek at Scotiabank. Please go ahead.

Hi, good morning.

Good morning. Just sticking to the asset sales, to the extent you can provide the detail, how thorough of a review of the portfolio would you say the REIT went through to get to that $200 million gross level and is there an upside to that number?

I think we've gone through a very thorough review.

I'm not really sure how to answer that, Meryl. Obviously, I'm looking at Kirk. Kirk wants to also comment, but obviously we will look at what we believe the potential is over the next five to seven years, and we'll look at different benchmarks such as IRRs and different things, and then what Other opportunities we have that we are currently looking at over the next 12 to 24 months, and we've got to weigh the two off of each other. And I think at the end of the day, I think we've shown in the past that we have disposed of assets that we believe we've taken as far as we can. Now, that doesn't necessarily mean a different buyer can't do something different with it. So it's all how it fits into somebody's portfolio. So it's very much no different than portfolio management with stocks and bonds. It's how do these different communities all fit within as well. So there's a lot of different variables I've taken into consideration. But there's obviously a very thorough financial review and what we believe the asset or the community can produce over the next couple of years? And then also looking at it, how does it fit within our own operating and strategic importance within our portfolio?

I think you've answered it. I think that's where I was going to go with it, is that we look at it every year. Every year is part of our budgeting, our planning process. We look at all of our properties. We look at the yields. We look at everything. In certain times when you're getting a lot of high turnover and big rent growth and declining cap rates and declining interest rates, you see a lot of upside potential in those properties and you want to hang on to them to capitalize on some of that. As you get into a market where interest rates are going up, turnover is going down, you got to look at the total asset management side of things and where you see the returns going and look at Culligan. That's something we've done over time at different points in any cycle. We did it with the C, we did it with Kingston, we did it with Sarnia. over the years.

Got it. Yeah, I was just curious in terms of whether these are assets that had specific non-solicited bids on it and things like that versus a more comprehensive review. No, it's more of a review from our side.

Got it. Okay. Sorry, go ahead, Mario.

Okay. Shifting gears to the operational side, I think, Brad, you mentioned an expectation for above-high single-digit top-line growth in the foreseeable future, given the strong demand you're seeing in the market. How sustainable is 0.6% in store expense growth year-over-year over the next couple of quarters?

On the expense growth side, the 0.6% in Q over Q?

I think it boils down to some of the costs just being related to salaries and reviews, and we do that on an annual basis. So that's, I think, partially why you saw Q1 sort of be a little higher, is that's when all those rolled through. So, you know, I think Q2, Q3, Q4 will continue around the lines where we are today. Q2 is a good run rate on that side. All that because I'm talking operating costs, not the utilities portion. of our overall operating expense, because that fluctuates for every quarter, as you know. So I think overall for the year, we've talked in the past about being around that 5% mark, and I think we'll still be around that when you look at an overall annualized basis.

We have talked in the past, Meryl, that we I think 2024 was going to be a year that we weren't going to see the same level of pressure on the operating costs, and we still believe that.

Okay.

And within our – on the supply side, but we're also seeing it on the labor side. Back to Kurt's point, we believe the majority of the wage pressures have already – being inherent in the numbers.

Okay.

And then just lastly, maybe kind of going back to occupancy, appreciate the commentary on the seasonality. Can you share with us where total portfolio occupancy stood at the end of July versus the 95.4 quarter end?

We haven't typically sort of gotten into off-quarter end disclosure around it. I can tell you that from a historical perspective, it usually, you know, June to July isn't a big improvement in the occupancy. It typically starts to get better in August and in September because you get that movement for August and September move-ins. So July wouldn't have seen the improvement over June.

um it really is the latter half of the queue where you see that ramp up happen okay but i was kind of mentioned before if we go back over sorry sorry mary just said different we are back into a pre-pandemic type leasing cycle there's nothing today that we look at that's abnormal from what we've seen prior to the pandemic so we're right back in other than the fact that there were more leases that were new leases in 2022 in late q4 that'd be the only difference than from previous cycles so we're quite encouraged and we remain quite bullish on the fundamentals of our business right now

Got it. Okay. So if we go back over time and we look at that chart that you included and you take an average Q2 or Q3 versus Q2 occupancy, we should see kind of a similar bump in relation to historical average. Yes. Okay. And then coming back to Mike's question on the seasonality, is that seasonality fairly similar across the markets? Like I know that Ottawa The change in occupancy was higher than what we saw in other markets, Q2 versus Q1. So is that all just weather-related, as you mentioned?

Was there something else going on there?

No, I don't think there's, like Brad commented earlier, that there is a bit of a change. It's a little bit different in southwestern Ontario versus Montreal versus Ottawa, and I'm looking over at Dave because Dave's a lot closer to this time, so maybe I'll just be quiet for a second.

I think you hit it, but even Vancouver has a longer leasing season, right? So Vancouver, southern Ontario is a lot different just because of weather related, right? It's so people move, but I think all regions, it looks very similar to a normal year.

Okay, last one for me.

Vacancy rebates as a percentage of revenue went up 60 basis points, quote, unquote, 4.8%. Is that also primarily kind of seasonality related, or did you increase incentive offering in any specific markets?

Sorry, Mario, it's hard to hear the beginning of that question. Can you just repeat it?

Oh, sure, sorry. So vacancy rebates as a percentage of revenue went up 60 basis points from Q1 to 4.8% of revenue. Is that uptick also primarily seasonality related or were there incentive offerings in specific markets or buildings during the quarter?

No, it wasn't related to the promos. That was pretty much flat. It was related to just the normal uptick in the vacancy side or the downtick in the occupancy.

Okay. That's good. Thanks, Mario. Thanks, Mario.

Your next question will come from Dean Wilkinson at CIBC. Please go ahead.

Thanks, and good morning. Brad, you guys are one of the few who have been able to actually successfully do an office conversion. When you look at Slate at around $520 a door, how would that compare to, say, ground-up new construction?

It all depends where you're at. But I mean, that's still at a discount. It's not much of a discount, to be fair. So you don't go into this particularly looking at this, that it's going to be a lot cheaper from going to ground up. And certainly from a From an ability to get things done, it does take a lot of expertise and skills and time because you're dealing with the unknowns. But I think that's something, and you just highlighted, I think that's something that really highlights about this team and our partners with these office convergence. But you're really doing it for the reason that you believe, one, A, it's really well located. And two, there's a sustainability aspect of it, right? So you reduce carbon footprint by about... The carbon savings are roughly, call it, 55% when you're looking at this. So when you look at the fact that you can make and meet your economic returns, right, your threshold, and then you look at that you are converting obsolete space in the downtown... and be able to do it by reducing what would normally be the new bill by 55%. There's a lot of different stakeholders that are winning, right? Our stakeholders are winning from a sustainability standpoint. Our citizens in Ottawa are winning because we delivered much needed homes. And we're still making and meeting our return requirements. But I wouldn't say the main motivation is from a cost perspective. And it's quite the opposite. And really, we're working with governments at all levels of governments to help explain, yes, office convergence can be a part of the housing supply issue and a solution to it. But it will need to take a lot of collaborations with municipalities, with the provincial governments, And even at the federal government, I know, Kurt, you've had some discussions with CMHC and how they can get involved.

Yeah, and we continue to work with CMHC on that front. They're quite interested. They've had a lot of senior people as a tour of the asset. We're working with the City of Ottawa with our development partners in the City of Ottawa to look at different potential around it. So there's a lot of encouraging there and nothing to really report it, but a lot of movement and a lot of interest. The other thing that I would add is that time to market. You probably shave off anywhere from a year, correct me if I'm wrong, but a year to a year and a half in your time to market with a conversion because your superstructure is already done.

I guess that does actually create a significant cost savings just vis-a-vis the carry on the construction financing, right? Because that's 6%, 7% money. So was that the... Was that the same view on the post-quarter acquisition for the 25% stake in the next office conversion project? Can you talk a little more to that, or is that something we can look forward to in the coming months and quarters?

I think it's something we can look forward to in the coming months, but we really love the location. What I can tell you is we really love the location. And we actually like the footprint of this structure even more so than Slate. So we've learned a lot from Slate. We're extremely happy with the progress and what we've seen at Slate. And I think it's been, like I said, it's been a win-win on a lot of different fronts to Slate. So we're really excited when this opportunity came up that we thought that we can mirror something similar to the Slate.

Okay, we'll stay tuned on that. And then, Kurt, you mentioned that the slate takeout financing was completed. Are you guys able to provide where that sort of appraised out for the financing, or is it just going to say hire and that's it?

Yeah, look, I'm not going to get into the appraisal because a third-party appraisal, our internal number, and what CMHC uses for their valuation on a financing can all be a little bit different. What I can tell you is that the amount we raised on this, we were able to actually take advantage of a dip in the market and lock the rate in a little while back on it. So we were able to lock it in at basically an all-in rate of about 3.9%, and we were able to pull out just a little north of $60 million on it.

Okay, great. That kind of backs me into the number. That's it. Thanks, guys. No problem.

Thanks, James. Your next question will come from Gaurav Mather at IA Capital Markets. Please go ahead.

Thank you, and good morning, everyone. Congrats on strong operating performance. Just very quickly, when I look at your maintenance capex number and notice a slight uptick, it would be great if you could provide some color on what's driving that and how we should think about it over the next couple of quarters.

I think if you look at it compared to last year, if you annualize the sort of first half of the year compared to last year, it's actually down a little bit. If you go back and look at it over several years, it's up, but it's not really up by much more than inflation, if you will. And I think when you look at the – I always worry when we show this number, to be honest, is that when you're showing a couple of months and you're annualizing the number, that can be tricky because there's a lot of timing issues that can hit maintenance capex, right? So to just take two quarters and annualize it, it's a little bit tricky. We do it to try and give people a sense. But when you sort of take the history of where we've been tracking over the last five years and you look at a normal CPI type inflationary rate on that, it feels right in line with where we have been.

Okay, great. And then just switching gears to the capital recycling program and the sites that you've identified for dispositions, could you provide some color on what the buyer pool looks like and what bid-ask spreads are across different markets?

Yeah, I'm not going to get too much detail with the disposition program because we're at various stages, so we really don't want to be self-dealing with my disposition program. So I'm going to start with that commentary. And I hope everybody can appreciate that on the call and whatnot, right? So we typically don't provide this information, but we felt that, quite honestly, we were hurt for not providing it, okay? So we're giving you what we believe is a realistic number that we can meet over the next 12 to 18 months as far as what necroses that we believe we can take out. I can tell you that the portfolio and the different communities we're looking at selling, there's different reasons for it. Going back to Mario's question, there's being a full, thorough review and analysis from a financial standpoint and also from an operating standpoint and a portfolio optimization standpoint. I hope you can appreciate that commentary.

I do, and I appreciate the comment.

But I would say, I'll reiterate, because we have maintained this and we've said this for a bit, the buyer pool for some of the communities that we're looking to dispose of are more typically private buyers, which makes a lot of sense because the majority of the rental stock is owned by the private landlord or owner.

Right, right. Okay, great. Thanks for the call, gentlemen. I'll turn it back to the operator. Thanks, sir.

Your next question will come from Matt Kornack at National Bank. Please go ahead.

Hey, guys. Maybe just taking the opposite side of that discussion from a capital allocation standpoint at this point. I know you did a bit on the NCIB, but... Where do you see the most attractive place to deploy funds at this point between kind of development, stabilized assets, buying back your stock, or repaying debt?

Well, I'll start off with NCIB. We've always been on record as saying that we believe in buying back units when it's trading below a Cypress value. We all understand that, but we're also being on record saying we're not going to leave her up her balance sheet to do it. You saw that we were active. We did go firm, unconditional, on one of our communities, and we felt comfortable enough that this should close, and we went into the market behind where our units are trading. Obviously, we were very frustrated as a management group that our units are trading where they are because when you look at the type of organic growth and organic growth that we feel that we see over the next two years, we're trading at well below our replacement value, call it over 50%, when you have an asset that can generate double-digit organic growth. There's a major disconnect, and we're having, to be quite honest, we're quite frustrated with it. So for sure, buying back our units will make sense, but there's also other capital allocation decisions that make a lot of sense, too. When your line of credit is expensive as it is, up close to 7%, it makes a lot of sense to use some proceeds to pay down your line of credit as one. And then we also have longer-term costs. growth generating initiatives such as office conversions and their developments that will make a lot of sense of adding value on an NAB basis over the longer term, right? So we have to, as a group, balance the short-term value creation initiatives with some of those longer terms. And I quite honestly think you're going to see a mix. One of the easiest things to do is obviously in the short term, pay down your LOC and buy back some of your units, but you want to be mindful of your development program and your balance sheet to make sure that you've got enough conservatism and flexibility in your balance sheet to be able to execute on those longer-term growth initiatives.

Okay. No, that makes sense. And then it's tough because the public market's or I would say much more yield-focused than basis at this point. But how do you think about the interplay between those two? Because obviously you have assets that are well below replacement costs, but at the current point they may not be yielding as much. So when you make investment decisions, what is the primary driver of your decision-making?

Yeah, that's really actually an easy one because My network is tied up in this thing, and the majority of this management team is as well. So we're not waking up every day looking at the unit price. Why we're frustrated? Because it dictates where our cost of capital is today and will govern how we allocate capital and how many opportunities we can participate in. We wake up every day going five years out, 10 years out, 15 years out. What does this entity look like? How much value have we created? And how much have we strengthened the operating platforms? And I can tell you the operating platform is the nucleus of this and we will continue to invest in our people and we'll continue to invest in technology to make sure that we are industry leading and in the position to be able to continue to provide above average industry growth. And over the longer term, Matt, I think that is where you'll eventually realize and I think the market will eventually pay you for that.

That absolutely makes sense. And I guess that last question for me, but it's a tangent off of that. With regards to expenses and margins, we did see some expansion. But is some of that expense kind of benefit to your investment in the platform in the form of prop tech or maybe doing more with less in terms of employees, et cetera? And is that margin expansion kind of sustainable going forward given more investments in that type of direction?

I'm going to give you the shortest grad custody answer ever. Yes.

I'll take that for now. It's been a long call.

All right. We're happy with our PropTech investments. And like a lot of investments, when you're first putting the capital to work in them, it's a bit of a drag because you're changing processes, you're changing systems, you're fixing things, you're correcting things, whatever. So it starts out as actually being an addition to your cost the first couple of quarters as you're pushing through these things. But I think we're seeing the benefit of it now. We've worked out a lot of pieces that we needed to work through. And for us, we've built a solid foundation with those different PropTech investments that we've done. And we see ourselves being able to continue to build on them and actually find more efficiencies as we go forward. So we're very happy with the work we've done around that. Our investment in our CRM system, our investment in SweetSpot, which helps our operations team substantially, and our investment in OneBallet, all of them have really

voted well, and we're very happy with all three. Okay, that's great, Collar. Thanks, guys. Thanks, Matt.

There are no further questions on the phone line, so I will turn the conference back to Renee Way for any closing remarks.

Well, that concludes the call today. Thank you, everyone, for your time. If you have any further questions, please don't hesitate to reach out anytime, and have a great day.

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating.