InterRent Real Estate Investment Trust

Good morning, ladies and gentlemen, and welcome to the Intervent Q3 2023 earnings call. At this time, all lines are in a 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 zero for the operator. This call is being recorded on Wednesday, November 1, 2023. I would now like to turn the conference over to Renee Wei. Please go ahead.

Welcome, everyone, and thank you for joining InterRay Reads Q3 2023 earnings call. My name is Renee Wei, Director of Investor Relations and Sustainability. You can find the presentation to accompany today's call on 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, CEO, on the line today. 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 on forward-looking information in the REIT's news release and MD&A dated November 1, 2023. During the call, management will also refer to certain non-IFRS measures Although the REIT believes these measures provide useful supplemental information about its financial performance, they are not recognized measures and do not have standardized meanings under our IFRS. Please see the REIT's MD&A for additional information regarding the non-IFRS financial measures, including reconciliations to the nearest IFRS measures. Brad, over to you.

Thanks, Renee, and good afternoon, everyone. Let's get started with an overview of our operational performance in slide 5. As you can see, a track record of growing average monthly rent continues positive momentum during the quarter. For a total portfolio, AMR increased by 7.8% year-over-year and 7.3% on the same property basis. This robust AMR growth was underpinned by strong increases consistently observed across all markets. While we did experience a marginal dip in occupancy by 40 basis points compared to the previous year for both total and same property portfolios, our occupancy rate remained at a steady 95.2%, in line with our historical performance and strategic approach. We're pleased to see strong lease and momentum in our Montreal portfolio, which accounts for about a quarter of our total portfolio. Vacancy in the greater Montreal region decreased by 380 basis points year over year. driven by sustained recovery in downtown and urban locations. The uptick in the portfolio-wide vacancy was primarily concentrated within specific sub-markets of our portfolio where our price discovery programs did not adjust quickly enough when seasonal demand started to shift. Notably, these markets, Greater Toronto and Hamilton Area, Greater Vancouver Area, and Other Ontario, took the lead in AMR growth for the quarter, with each one achieving growth rates of 8% or higher. Encouragingly, we are witnessing robust leasing activities in the first half of Q4, and we are confident that the auxiliary levels will revert to their historical norms as we move into 2024. Dave will provide more details on this later in the call. Over to slide 7 for an overview of our financial performance. We are happy to report, yet again, double-digit same-property NOI growth at 10.5%. Our operating margins increased by a healthy 140 basis points year-over-year to 67.6%, the highest level since Q3 2019, and firmly returned to our pre-pandemic levels. This was driven by consistent revenue expansion coupled with our disciplined management of operating expenses. Despite the persistent new reality of higher financing costs, our top-line improvements have been able to slow down to enhance bottom-line performance, as seen on the chart on the right-hand side. FFO increased 4.9% to 21.3 million, and on a per-unit basis is up 4.3% to 14.6%, representing our third consecutive quarter of FFO growth. AFFO increased 6.3% to 18.9 million, a 4.9% increase to 12.9% on a per-unit basis. Taking a closer look at our balance sheet, we are in a solid financial position. Our debt-to-grills book value at 38.6% is favorably positioned at the lower end within the industry. We have a comfortable level of $268 million of available liquidity as of October 25th. With stable available liquidity and a significantly enhanced debt profile, we are in a robust position to pursue our strategic initiatives. even in the face of market fluctuations and challenges. Dave, over to you to take us through some of the operating highlights.

Thanks, Brad. As Brad previously mentioned, vacancy in September, while in line with our strategic approach, experienced a slight uptick. This was mainly isolated to specific suburban markets within our GTHA and other Ontario portfolios. Our proactive approach where we deploy revenue maximization programs to explore price elasticity across our diverse regions has enabled us to consistently deliver outside rent growth. However, our pricing strategy is flexible as we continuously evaluate and adapt. In this case, we have implemented targeted adjustments on a sub-market specific level. It's important to emphasize that we continue to strategically accept slightly higher vacancy to position ourselves for optimal revenue growth, particularly considering the industry-wide trend of reduced turnover. Encouragingly, we've been seeing positive developments pointing to robust leasing activities for the remainder of the year. In September, we observed a substantial increase in the number of leads across all regions. and the number of tours has seen a significant growth in areas with greater availability. In the GTHA and other Ontario regions, tours have nearly doubled compared to the previous year. Early trends indicate that vacancy will be absorbed, and we are well on course to end the year with over 96% occupancy without compromising our average monthly rental growth. Slide 11 shows a breakdown of our operating expenses, which came in at $19.3 million for the quarter. Operating expenses for the quarter are up 4% year over year, while operating revenue grew by 8.6%. On a per suite basis, our operating expenses came in at $1,515, an increase of 3.8% compared to the third quarter last year. This improvement was driven by reduced utility costs, which were $0.1 million lower year over year, or a 60 basis point reduction as a percentage of revenue. During the quarter, we achieved 14% savings on natural gas costs due to a combination of lower gas prices and decreased usage, thanks to our effective energy efficiency programs. Electricity costs are also down slightly over last year despite the larger portfolio under ownership. We continue to manage electricity costs through our hydro-submetering initiative, which reduced electricity costs by 37.9% for the quarter. property taxes for the quarter increased by point three million dollars year-over-year to six point three million dollars as a result of our expanding suite count and minor annual rate increases we are constantly reviewing property tax assessments and making individual property tax appeals when necessary turning to slide 12 we maintain a highly strategic approach to our capital expenditures year-to-date we've directed 11% of our capital expenditure to maintenance capex and ensuring our communities remain clean, safe, and well-managed, offering our residents a sense of pride in their homes. Over the course of this year, 89% of our capital expenditures have been allocated to value-add opportunities, consistent with our historical norms. Our repositioned suites, as demonstrated at the right-hand side of this slide, continue to deliver substantial benefits in terms of both occupancy and NOI margins. compared to non-repositioned suites. As of September 30th, 2,598 suites consisting of 20% of our portfolio are at various stages in their repositioning programs, representing significant future potential for rental growth. Turning to slide 13, a quick update on the slate, our first office conversion project. During the quarter, we completed all interior renovations, including all amenities on the rooftop and the lounge area, and have now made them available to our residents. Leasing activities are progressing well despite ongoing construction on Bronson Street by the City of Ottawa. Lease rate has already surpassed 84% as of the end of October, and we are confident in our trajectory towards stabilization, which we expect to achieve before the year's end. With its central location just steps to the Parliament Hill and close to two LRT stations, the Slate remains a desirable destination for students and young professionals. With that, I'll hand it over to Kurt to discuss our balance sheet and sustainability efforts.

Thanks, Dave. As expected, and based on our quarterly review with our external appraisers, we have witnessed upward adjustments in cap rates during the quarter. Our weighted average is currently at 4.22%, an increase of 15 basis points from the last quarter, driven by moderate cap rate expansion across all regions. The Bank of Canada 10-year bond yield has increased more than 80 basis points since the year's outset, including a 50 basis point increase in September alone. As a result, the transaction market is experiencing minimal activity. Despite subdued transaction activities, we've adjusted our cap rates in anticipation that rates are not set to revert in the near term. We will continue to monitor market dynamics and collaborate with our external appraisers to adjust our cap rates accordingly. Since the fourth quarter of 2022, when removing the impact of the Ottawa property sold in the quarter, we have adjusted cap rates by 19 basis points through the first three quarters of this year. Slide 16 shows the staggered maturity profile of our mortgages. We continue to pursue this strategy to enhance our flexibility and mitigate our exposure to renewal rates. No more than 14% of our mortgage debt is coming due in the next four years. For the remainder of this year, we have 61.3 million of mortgages maturing, with an average interest rate of 5.19%. Our 2024 maturities carry a weighted average interest rate of 5.33%, And as such, we anticipate our 2024 mortgages being renewed at or below this rate, which will significantly reduce the headwind we have been facing over the last year. Our floating rate exposure continues to move in the right direction, finishing the quarter at 5.7%, including our line of credit debt, a moderate decrease from the same period last year, which was at 7.9%. By continuing to fix our interest rate costs, we're actively mitigating our exposure to market volatility and proactively managing our interest rate expense. We are excited to highlight some remarkable sustainability milestones from the quarter. In September, our annual Mike McCann Charity Golf Tournament took place, bringing together hundreds of supportive partners from various organizations. This event successfully raised an incredible $1.67 million, bringing our cumulative total to $8.2 million since the inception of the tournament. All proceeds from this event will be directed to support various charities within our communities, including the Boys and Girls Club, Habitat for Humanity, and Shepherds of Good Hope, just to name a few. To all those who joined us at the event, we once again extend our heartfelt gratitude for your support and generosity. We're also making significant headway in our building certification efforts. In October, we announced a successful certification of our initial six communities through the Canadian Rental Building Program. During this process, we've also met the requirements for corporate-level documentation and employee training, paving the way for further certifications in the near future. This achievement is a well-deserved testament to the excellence of our buildings and the dedication of our on-site teams. We've committed to expanding our CRB program and anticipate more announcements and more certifications in the months ahead. Earlier this month, we also received our 2023 GRESB results, where we successfully improved our score from the previous year and maintained the green two-star designation. We've also earned an A rating on the GRESB public disclosure survey, outperforming the global average in our comparison group average. I'll turn things back to Brad to walk through our capital allocation.

Thanks, Kurt. Turning to slide 20. We're pleased to provide an updated on our recent strategic moves. Last quarter, we shared news about the successful sale of a 54-suite property in Ottawa, bringing in total proceeds of $11.5 million. This transaction was finalized on August 30th. Approximately $2 million of the proceeds were allocated from our NCIB program, allowing us to acquire a total of 157,200 units at a weighted average price per unit of $12.71. As disclosed in Q2, we had identified various assets that aligned with our strategic disposition criteria. However, the investment community overall sentiment has been cautious, resulting in muted deal volumes. Additionally, the recent fluctuation in the bond market have influenced the prospects for dispositions in the immediate term. Despite these factors, we remain committed to maintaining a disciplined approach when evaluating capital recycling opportunities. Moving to slide 21, we announced last quarter a commitment to purchase 25% in the second office conversion project in Ottawa. And we're delighted to share light on this exciting new project added to our development pipeline. 360 Laurier is our second office conversion in downtown Ottawa. It will add 139 residential homes to addresses that ongoing shortage for rental units. Currently, the adaptive reuse project is in the site plan process, having already secured approval for mine appearances from the City of Ottawa in October. We anticipate full site plan approval in Q4 this year, with preliminary investigative demolition in progress. Full demolition is scheduled for Q1 next year, followed by the reconstruction starting in Q2. We're taking on this project with pride and confidence, alongside a trusted partner, CLB Group, and a respected institutional partner. Building on the valuable experiences and lessons learned from the slate, we were well prepared to make the new project a success. We're encouraged to see the commitment of the federal government to exempt GST on new rental building construction, and multiple provinces announcing their intention to remove the provincial portion of the HST. 360 Laurier, as an office converted project, will see substantial benefit with savings expected to be close to 8%. Our development pipeline is important to us, and we remain committed to contribute to the solution for Canada's housing shortage by introducing much-needed housing suites to the market. Nevertheless, we are truly aware of the persistent challenges we face, including rising hard and soft costs, along with constraints on financing. We are proactively examining a range of financing alternatives, including MLI Select and RCFI. We will continue to exercise prudence in our development opportunities, aligning them with our broader capital allocation strategy. Turning to slide 23. As we approach the conclusion of our presentation, I'd like to draw to your attention to the inherent strength of the resilience ingrained in the fundamentals of the multi-family residential industry. Despite recent interest rate fluctuations and economic uncertainties, we are confident that the strong fundamentals that underpin our robust operational performance will continue to serve as tailwinds in the foreseeable future. We're seeing housing affordability being further magnified by rising interest rates and an increased shift away from home ownership that is especially pronounced among young professionals and empty nesters. When coupled with the systemic and historic nature of housing supply constraints, these trends will continue to drive sustained rental demand in our portfolio. While multi-family has always been a strong asset class Across varying economic conditions, it has historically shown unique resilience to macroeconomic volatility, with demand remaining relatively strong and rents recovering faster than many other property types. As you can see in this chart, going back to the 1990s, during the past three recessions in Canada, the increase in multi-family bank rates has never exceeded 90 basis points in any given year. Furthermore, the sector has also demonstrated strong performance during the recovery, assessively expansion period following recessions. Finally, I'd like to conclude by saying that we're very pleased with our strong Q3 results and our conviction about continued strong NOI and FFO growth in the future is backed by three compelling reasons. One, the fundamentals in the Canadian rental market remain solid and will continue to support operational outperformance. Two, our operating platform and best-in-class team continue to build on a strong track record of generating organic growth while reining in costs. Three, we are on solid financial footing with a conservative and flexible balance sheet that empowers us to confidently pursue our strategic goals. And finally, as previously disclosed, we are working hard to develop a fresh new brand identity for InterEd that better aligns with who we are and our vision for growth. We're happy to report significant progress and are eager to share our new branding with you in the coming weeks.

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

Thank you.

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star, followed by the number one on your touchstone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please lift your handset before pressing any keys. Our first question comes from the line of Fred Blondeau from Laurentian Bank Securities.

Please go ahead. Thank you and good afternoon. Just looking at the fair value adjustments, I was wondering if you could give us your views on cap rates from here. Is it fair to say that we reached somewhat of a plateau here in terms of cap rate increases, or will you see a bit more volatility entering in the new year?

Good afternoon, Fred, and thanks for the question. Kurt Miller here.

We haven't seen a lot of market transactions, so a lot of this is based on very slim market, but in discussion with appraisers and sort of what's been coming to market and what we've been seeing, that's why we took the lift in the cap rates. If interest rates sort of stay where they are and people believe they're not going to come down anytime soon, I think there might be a little more pressure. How much that is, I don't know at this point. That'd be another five or 10 basis points, maybe even 15 potentially. If things start to turn and we see interest rates plateau and we start to get a belief that they're going to come down again, then this might be the top end of it. But it's really hard to say at this point unless you get a real firm view on what's going to happen to interest rates in the next 12 to 18 months.

Hey, Chris. It's Brad. And just to add to that, the investment market really is – frozen as well as development. Everybody has Pennstown on all sides right now. I don't think we've really seen this kind of increase in the long end of the curve. I think you've got to go back to the early 90s and not to mention the volatility. At any given day, there's been points where we've seen that the long end of the curve, or I should say the medium to the long end, like the 10-year move as much as anywhere between 10 to almost as much as 20 basis points a day in the trading section. And we've seen that occurrence more than once. So that volatility is really playing havoc with a lot of people's Short-term outlook, so everybody's really put their pen down on anything when it comes to trying to project out a level of financing. So not only is the investment market quite frozen, you're hearing a lot of developers out there that might otherwise have been gone with their projects on hold.

Oh, that's helpful. Thank you. And then just looking in terms of your – occupancy objectives looks like you're trying to be a bit more proactive on that front. How should we view the CapEx budgeting for 2024? Do you feel any particular pressures here, especially given the current rental rate levels?

I'll try to unpack that. I think we have two questions. in the one there. I'll ask the last one first about the cap tax. The good news is I think everybody's pretty aware that InterEd has spent a lot on the capital expenditure programs through the years and we've always believed you should always be maintaining and bringing your communities to a certain level and we've always done that. It's typically led to probably above average capital expenditure when the when you look across the industry. That said, I think we've done a lot of the work that has needed to be done, and I would look out without any external opportunities brought on. I think you could picture a scenario where you'll see that CapEx coming in. Obviously, from a capital allocation perspective on repositioning, some of our best returns are really... related to the repositioning and whatnot. And it's kind of linked to the natural cadence of our turnover. But that said, I think a lot of the heavy lifting within our portfolio as far as capital going to building improvements and whatnot has been dealt with. So I think under that scenario, under the status quo scenario, you can start to see that line item come in. I don't know, Kurt, if you want to add anything to that. I think you covered it. And then to answer the first part of your question, Fred, just with regards to vacancy, we have a little higher vacancy at this point in the quarter than historically and versus last year. Some of that's just at the start. It's actually not by design, but it's the cause of management. I wouldn't look into it as an indicator or try to take away from that to do with the market. That's really inherent in this price discovery process and trying to see where the maximization of where we can take some of those rents. We might have gone a little too hard in some regions and have since made some adjustments And we are quite happy with what we have seen post-quarter and where we are at today relative to where we would be, call it, at this point in previous years.

That's great. Thank you so much. And then maybe one last quick one from me. I was wondering if you're starting to come across any distrust opportunities on your acquisition radar and even maybe distrust development projects.

There's no question there's a lot of opportunities out there, and I think in this kind of environment, we're going to continue to see more opportunities. Unfortunately, until we kind of see some visibility as to where our cost of capital stabilizes out, we'll be very selective on what we choose to participate in those opportunities, Fred, because I think the cost of capital equation Today is changing daily, and we have to take that into consideration when we look at our own capital allocation. So I think there's going to be a lot of great opportunities. I think you're going to have to get creative if you want to participate in some of those opportunities. And we are, as a group, okay with watching the opportunities and participating. making sure that we're educating ourselves on what's happening in the market and what's out there, but also very mindful of the fact that there's a lot of volatility right now on both sides of it, on the cost of equity and cost of debt, and we're very mindful of that. So we're also very happy with the organic growth and the runway that we believe we have in our portfolio just harvesting our internal growth. Okay.

That's great.

That's helpful. Thank you so much. I'll leave it here.

Your next question comes from the line of Mike Markaitis from BMO Capital. Please go ahead.

Hey, Mike.

Markaitis, your line is now live. Please go ahead.

Hi, Mike. Sorry, guys.

This conversion from Android to Apple still befuddles me every once in a while. But thanks very much for taking my questions. Just two for me. Maybe just the first one with respect to the price discovery you alluded to and obviously a very dynamic market. Is your sense that the... that the market rent growth trajectory has slowed to some degree over the past several months? I mean, obviously, I recognize it's not linear, or do you think that we still have momentum here as we enter 2024? Sorry, just to clarify, I don't mean your AMR, I mean market rent levels in particular.

Oh, no, and I took it as such. Thanks for the clarification, though, Mike. I'll give Dave an opportunity to also give his views. My view is I don't think they necessarily slowed. Now, at some point, market rents on the year-over-year gets tougher and tougher, right, because your year-over-year comparison is high to begin with. So just simple math. At some point, you're going to have to start to see it come in. That said, I don't necessarily think it has slowed. I think it was more a question of, of us on the price discovery, where could we actually take them? Meaning the rate of change, maybe we went a little too aggressive on that. If that helps.

I don't know, Dave, if you... I agree. I think obviously the volume of fees is similar to pre-COVID. I think that it's been extremely busy in all the markets. I think, one, just to further is probably just to make sure that we're cautious and protecting the growth and being with the market.

Okay. Thanks. And then just the last one for me, again, kind of a high level question here, but you know, it seems like the tone has shifted a little bit, just building on Fred's line of questioning with respect to potential, I don't know if distress is the right word, but interesting opportunities that might be forming over the, maybe the course of the next year or so. Is that a notable shift? I guess what I'm trying to get at is how do you view what you're seeing there versus where you think values are for the existing assets? And then lastly, just kind of to tie it all together, if given what you're seeing means the NCIB would effectively be on hold in the foreseeable future.

Yeah, I'm not sure if you're taking the tone as a negative shift or a positive shift, Mike, but I don't think my view of the world has changed from a quarter over quarter perspective other than the fact that earlier this year we saw some stabilization coming in the rates and you had a much more willingness on opportunities on both sides from a from a vendor perspective and from a bid perspective. I think given the recent run up and the speed of that run up in the yield curve has caused a lot of people to pause. And I think from an opportunity perspective, I think that just will create even further opportunities. So if anything, I think my tone is going to be more positive in the sense that I do think when your financing costs increase as much as it has and there's been some development that's happened, there's going to be some work to work through. per se. Now, that said, the good news about in our space is, and you're seeing it in the operational and you're seeing it through double-digit NOI growth, is there's a lot of visibility on our cash flow side, right? But there's a lot of people that are developing new supply or were about to develop new supply, and their pro forma has changed. given where the takeout financing might be, given the construction financing has increased, and where do cap rates settle out at? I think, in Kurt's remark, while you saw that we did increase our cap rate assumptions, we've got to reiterate, there's not a lot of transactions. This is us being somewhat proactive. realizing that there is a correlation between the bond yield and cap rates, but a lot of times on these appraisals, it's backward-looking. So we're trying to take a conservative and proactive approach on this, but there's not 100 data points where you're going to hold the hat and say transactions and cap rates have moved 25 basis points, and therefore, hey, if you're looking at a new opportunity, on an IRR basis, your terminal cap rate has moved by X, right? So one of the reasons why I think the market is paused is because there is no real conviction where things maybe will shake out at the end of it. So with all that said and done, I think it does create an environment, depending on how you are capitalized, I think there's going to be some real opportunities. for people that do have a well-capitalized balance sheet. Now, if my tone seems a little more neutral on capital activity going through the year, it's because I think we need to see as a group where our financing feels like it's going to shake out, right? And I don't think anybody has a real good picture on that today.

That's useful commentary, as always, thanks.

Your next question comes from the line of Jonathan Kelcher from TD Callen. Please go ahead.

Thanks. Good afternoon. Just sticking with Mike's line of questioning and your answers there, Brad, you guys on the development side, looks like you took out your expected yields and pushed out some dates. I think you talked about being pencils down. What How do you guys look at sort of go or no-go decisions with sort of targeted returns, or how do you really think about that when you're looking at starting a new project?

Well, I think you've got to look at your IRRs, Jonathan, and your use of capital across the board in the different buckets, and then look at what your corporate IRR is. and then see what gives you the best outstrip return relative to your corporate IRR. I think that's a starting point, and I think that you can rank it, kind of your use of capital from there and then prioritize. A go or no-go decision, I think, on something like a development on a greenfield, I think you want to go out and make sure that you've got – some kind of certainty on your pricing, and then some kind of comfort on your ability to finance that development and that construction and see where the returns perform at that point. The fact that we took out the yields on the development page and you nailed it, one of the reasons why we did take that out is because of the financing is all over the map. It could be 7% financing on the line of credit, or it could be sub-4% financing if you're lucky enough to obtain a CFI, right, finance with CMHC. So that materially changes the outlook of the pro forma and economics of the development. Before, I think you'd go in the ground. You really would want to have certainty on the cost to complete and have a better comfort on how you're able to finance the development before you would break ground.

Okay, that's helpful. And on 360 Laurier, I might have, when you were talking about that in your prepared remarks, I heard 8%. What was that? I'm not sure what that was related to. I missed that.

or did I miss the whole thing? Sorry, can you repeat that, Jonathan?

I think when you were talking about 360 Laurier in your prepared remarks, you did say, I thought I heard the word 8% in there. I can take that offline after.

And my second question is... Well, Jonathan, that's just talking about the savings on the...

Okay, fair enough.

No problem.

Secondly, it sounds like you remain committed to doing some dispositions, some capital recycling, but the market slowed down. What do you expect to happen with that over the next, say, two, three quarters?

Like, do you expect to sell anything in Q4? I think, to be quite honest, I think it would be quite challenging.

I think if you asked me last quarter if I thought Q4, I'd still say it would be quite challenging. And one of the reasons being is CMHC is really understaffed right now, given the level of activity coming at it. So there's just still a logjam at CMHC right around, and it's just taken a lot longer. So on the disposition front, anybody on the disposition front will typically need a financing condition, and under that scenario, the best they're going to be able to probably get through, and once again, it's not me blaming CMHC. It's just a reality. It's probably six months. And in this kind of marketplace, when you're seeing the volatility that you're seeing in the yield curve, that really does present deal risk to your disposition. So will we continue? And are we at different stages of negotiations? Yes. Can I say with confidence that we can be in a position to announce something anytime soon? No.

Okay, that's helpful.

I'll turn it back. Thanks.

Your next question comes from the line of Kyle Stanley from Desjardins. Please go ahead.

Thanks. Afternoon, everyone. Just going back to your price discovery discussion for a second. I mean, thanks for the market rent growth commentary and your view going forward. I'm just wondering – Do you think you've started to hit maybe an affordability threshold in some markets or is this really just you guys kind of feeling out where market rents are going at this point?

It's us feeling where market rents are going. The fact that we've seen stronger leasing activity than we normally would at this time of year. suggests that all the markets are still extremely tight and you wouldn't generate that kind of leads because somebody somebody acquiring knows what the price they're acquiring about kyle so typically that's a pretty good indication of the level of interest out there so i would say it's more the latter okay fair enough that that makes sense um another more i guess high level question but

You know, there's been a lot of talk in the last little bit about tuitions increasing in Quebec. I'm just wondering, you know, for English language schools, I'm wondering, have you had any discussions with some of the university leaders in the province of Quebec? And do you have any indication on, you know, the potential impacts that may have?

Well, I hope I don't embarrass Jonathan Kelch on this call, but both Jonathan and I are or alumni of one of those three schools that got a lot of mention in the press being bishops. This kind of announcement, unfortunately, could really hurt a bishop, but a bishop, if you've got to put it in perspective, is only, call it, 2,500 students. The bigger issue, obviously, I mean, we don't have any homes in Sherbrooke, but the bigger question is how does it impact McGill? And how does it impact Concordia? I don't think it does any favors on the overall outlook for enticing people to Quebec that don't want to deal with politics. But I think the reality is, I don't think, given how tight things are across the board in our focus markets and in Montreal, I don't think this announcement, it might change the composition of the domestic students, but at the end of the day, it's still probably cheaper to go to university in McGill or Concordia than it is at University of Ottawa or Western just on house affordability alone, okay? And I think that's the bigger consideration. I think when a student goes to study somewhere, they'll look at the all-in costs I still don't think that even with the change, it will be that significant of a change in your all-in cost. And then from a foreign student's ability, I mean, the jury's out, but on foreign students, I still very much believe that the price points, when you look at a Canadian reputable university relative to a university in the U.S. of similar quality, the difference already is in the level of cost of the tuition relative to the value of tuition you get is still substantial here in Quebec. So obviously, it's not a policy that we love and that we'll get behind. But in the same token, I don't want to over exaggerate it and the impact it might have. And lastly, I'll just say the level of increase in international students in Takana over the last three years relative to call it maybe the norm 10 years ago is significant, okay? Like we're talking greater than 20%. And even at that point previously, they had a pretty strong impact on the overall. So long-winded answer, short answer to this, I don't think it's going to have an impact.

Okay, fair enough. Just two quick housekeeping items. So just the capitalized interest picked up this quarter. I was wondering if you could elaborate on that a little bit, just trying to understand, you know, have you fully decapitalized the interest related to Slate and maybe what's driving that movement and, you know, where does it trend?

Yeah, thanks, Headset Kurt here.

I'll do my best to walk you through it as much as I can or get you as much clarity as I can. There was still a little bit of interest capitalization to slate in the quarter, but that's definitely come down. There was also a little bit of an increase, pretty minor, related to 360 Laurier that we announced in the quarter. The bigger variance is just with the way we do this, the way we interpret the rules around this, I know people use different mechanisms. Some people use their weighted average interest rate to determine the capitalization of interest expense. We tend to use what's been drawn either on our line of credit or if we're not into our line of credit on our most recent financing. So given where our line of credit was throughout the second quarter versus where it was throughout the third quarter, and when we funded certain large CMHC mortgages such as the slate itself, which funded in Q3, It can vary. It can make that vary quite a bit, introduce a bit of volatility, just based on what capital source you're tapping into for the quarter. So it's mainly coming from prior quarter being more tapped into CMHC-level financing rates for the amount we were capitalizing versus this quarter being more into our credit facility and capitalizing at that rate.

Okay. I think that... That's clear. And just the last one. So, GNA was down a bit sequentially. Just wondering, you know, would the third quarter number be a good run rate or best to look at kind of the year to date and take a number like that?

Yeah, I think, you know, what you've been telling people is four and a quarter to four and a half. I think we still stay in that instance. There's a few things that may happen in Q4 when you get pushed into next year, but I think if you're in that range, you're still bang on. And I maintain that for next year. I still think we need the four and a quarter to four and a half per Q going into next year also.

Okay, great. Thanks for all the color. I will turn it back. Thank you. Appreciate it. Thanks, y'all.

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

Hey, guys. Just to go back to the asset disposition program commentary, just to reconcile from the last quarter, is the plan of the program or the target of the program still to be net sellers of $75 million through that program? once you're able to do so and the opportunity allows to do so, or has that program changed in any way?

No, I think the assets that we've earmarked are assets that have below target IRRs over the next five years relative to our corporate IRR. That hasn't changed, Brad. There's still quite good cash flow, and quite honestly, there's still a pretty good growth profile. It just doesn't meet our overall growth profile, so it makes sense to recycle that capital. But I want to be clear, there's nothing in our portfolio, given the strength of our balance sheet and what's coming at us, that we need to dispose of anything, okay? So We are not sellers because we have to be sellers of anything. If we get the appropriate price and it's a strong offer and it meets our threshold and we think we can recycle that capital and recycle that capital at a better return than what our overall corporate return is, then we're going to do it. But by no means are we in a position where we have to do A, B, and C in order to do And I really want to make that clear. So it's a nice position to be in, and that's the position we are in. But we have earmarked what we feel is $75 million of proceeds. But I will caveat that with the fact that there's a lot of volatility in the long end of the curve, and I don't think a lot's going to get done on anybody's side until there's a stabilization of that. That's not to say things won't get done if the long end of the curve stays here, but it has to stay here for a while to be comfortable, and there might be a reset if it stays here. To Kurt's point, if it comes down a little, then maybe we've seen the majority of the reset behind us.

Yeah, that's great commentary. That's quite helpful. And just on the, I guess my other question would be just on the expected financing and refinancing activity that you have at your mark for the end of the year. It looks like the timeline got pushed out a bit. Is that just because of the backlog with CMHC or is there anything else that's driving the timing of that towards, I guess, the late Q4 and the Q1, early Q1?

Yeah, I think it's just more the time when we were, you know, we talked about that Vancouver portfolio before, and that's one of the bigger portfolios. We have other assets that are in the CMHC also. That's one of the bigger portfolios. We were really hoping we could get that through there in Q3 and sometime in Q4, have the financing done by early Q4. A few of the properties have been picked up, so we're glad to see that and really hoping that I'll finish getting through everything, but at this point, given where we are in the year, I doubt very much, we're going to push and try our best, but I doubt very much it'll actually end up getting funded in Q4. To me, it probably drags into early to mid-January type of timeframes. It's probably our best case scenario at this point.

And at this point, you're not rate locked on that. That's still... You still have some flexibility around rate at this point, depending on where benchmark yields go.

Correct. We're not rate locked on yet, so let's all keep our fingers crossed that these come down.

Okay. Thanks a lot. Appreciate it. I'll turn it back.

My pleasure.

Thank you, Fred. Your next question comes from the line of Jimmy Shen from RBC Capital. Please go ahead.

Thanks, you guys. I think, Kurt, you mentioned when you were determining the capital assumption, you've taken clues from brokers bringing products to the market. I was wondering if you could provide some color on what that pipeline of products look like, deal size, type of assets, pricing indication, that sort of thing.

I can give you a little bit, Jimmy, because, like I said, there's not a lot of deals that have actually closed, and we've We've chatted a lot about that internally here. I'll give you sort of another data point to think about also before I answer that, is that if you go back and look at the CBRE cap rate reports from the last, call it five years, from the lows of about 2019, 2020 to where they are in Q3 reports, if you look across the major markets where we're in, The delta has been somewhere between 30 and 60 basis points. So increase of between a low end of 30, a high end of 60 basis points across those markets. And if you look at sort of our low point, when you factor out the most of the asset, we'd have been at about a 3.83 and now we're at a 4.22. So we've had about a 40 basis point increase on average from our low to where we are today, which kind of lines up pretty well with, with those CPI reports for the overall market of the last couple of years. So just wanted to give you sort of that as a data point to think about also, if you will. From a deal perspective, I mean, there's only been one sort of notable transaction that we would compare in the GTHA in the last queue that's closed.

And that was like at over 600,000 a door, Jimmy. There's one in Montreal. A smaller size, that was just about $200 a door. Just about $200 a door, but it wasn't on urban core. And then there's one in the Greater Vancouver area just shy of $500,000 a door. One comment I would add to this is really any deal of size is completely off the table. right now, right? Because all your institutional-like players really do want to see stabilization in your financing, okay? So if there are deals getting done that tend to be on the smaller side and probably a little less institutional and probably not as much of a fair reflection of value of the publicly listed and I'll throw in my peers as well, of the publicly listed REITs versus some of these smaller transactions that are closing. But even that said, even that has come right in. They were taking up the majority of the deals that were getting done, were these smaller-sized deals. But even now, in the last, call it, four REITs, even though they're becoming farther and fewer between. And I know there's not a lot of color there for HDMI, but that's just the reality of the world we're living in right now. It's very much at a stalemate. It really just pens down on all sides.

Okay. No, that's fair. Then my last question is just on the distribution increase, and I know you guys have a track record maybe you don't want to break. and it's not a big amount, but I wondered how you guys as a board have thought about increasing the distribution versus things like paying down debt, buying back stock, or even financing some of your developments.

No, for sure. I think you hit it.

It's not a big amount, Jimmy, and we want to send the right signal to the market, and I'm hoping we've communicated this through the disclosure documents in this call today, we're very bullish on where we sit today from an operational standpoint. And I think since we do have such a strong track record of increasing our distribution conservatively and being very mindful when we make those increases, we want to make sure that the market understands that our distribution policy is... aligns itself with how we see the future within our operations. And we continue to believe there's very robust growth in our operating operations in the near term. And I mean the near term, not just the next four quarters. I mean the next three years. So you're right. You could have a higher cost of debt that you might be able to pay down. I don't think it's a, a big number, Jimmy, and that cost of debt will fluctuate. But you can be self-assured that we are managing that and are very conscious of our debt levels, of where our variable rate exposure is, and the cost of what our line costs. And we'll take every opportunity to manage that prudently. I hope that answers. Because, I mean, the comment you made could be a five-hour call if you really want to go through it.

Yeah, I think when you look at the quantum, Jimmy, as you touched on, based on that increase, you're talking about a total impact of $2.7, $2.8 million and a cash impact of about $1.6, $1.7, given the amount of people that participate in there. It's not a big number, but as you know, and you follow us for years, you know that we watch every penny that goes out the door very closely.

Okay. Great. Thank you.

Our last question, we have Matt Cornett of National Bank Financial. Please go ahead.

Hey, guys. I'll try to be quick. Just with regards to 360, Laurie, can you give any sense on the cadence in the total outlay at your ownership interest in terms of spend for that project?

Well, like on the total ownership interest, it's 25%. That's our total ownership interest. At this point, we're still working through the plan with the partners. We're still working through the plan for the design, all the different pieces that go into it, getting pricing and looking at the financing options. So it's a little early to get metrics on it. I think as we sort of get through this, Our anticipation is that it will be even more accretive than Slate, just given the design of the building has actually designed itself even slightly better. But there's a lot of things to work through over the next few months before I think we're comfortable putting the number out there.

I was going to answer that in the exact same way. Currently, we're not trying to be cute and cheeky, but we feel... We feel quite confident that this is going to be, from an economic standpoint, even that much greater than Slate. And we met our targets on Slate, so take what you want from that. But you can rest assured we're really excited about the 360, and so far the Slate has really been a great addition to our overall portfolio.

Sure. That makes sense. And you can do these pretty quickly based on your target completion date and where you are in the process. So that's plus. And then just on Montreal, you did deliver, I think, 36 new suites in formerly common area space. Was that the impact on vacancy in the quarter? But it also looked like you pushed rate quite a bit in the market. So any color there? And also just with regards to additional potential units, any disclosure over the next 12 months as to what else you may be adding to the portfolio in suites and common areas.

Yeah, the first part of your question, though, that didn't impact Lacey, and you kind of answered it with your own commentary on that. But that said, we're extremely happy with where we sit right now in Montreal. And then the last part of your question was what, Matt? Sorry.

Just like in addition to the 36 that you delivered, are there any others kind of in the near term that you'd expect to add to the portfolio in common areas, new suites?

Well, the number is greater than 36. I wouldn't say more than 30 necessarily in Montreal, but as we mentioned before, across our portfolio, our ops team does a really good job of visualizing debt space or recreating space by kind of merchant by taking existing space and working with it. So we're at different levels of planning throughout our portfolio on that. So nothing concrete to add. I think it's just a thing, but it's as much as a small high rise.

Right. Yeah, fair enough. Okay, thanks for that, guys. We're at two, so I won't take any more of your time.

Thanks, Matt. Thanks for the questions.

Okay, I think that's all the questions. I'd just like to thank everybody for taking the time, for listening in, and for the questions. We had a good quarter, but I'm really excited to be quite honest about the future and what the outlook looks like for us in the remainder of 2023 and 2024. And the team's working really hard to make sure that we deliver on what we can control. And that's our organic portfolio. And we will continue to monitor the externals that we can control, like things like the... the bond yield and the volatility within it. So once again, thanks a lot, and we look forward to talking to you soon.

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.