InterRent Real Estate Investment Trust

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, August 7th, 2024. I would now like to turn the conference over to Renee Wei. Please go ahead.

Good morning, everyone. Thank you for joining Interim Reads Q2 2024 earnings call. My name is Renee Wei, Director of Investor Relations and Sustainability. You can find the presentation to accompany today's call on the investor relations section of our website under events and presentations. We're pleased to have Brad Cutzee, President and CEO, Kurt Miller, CFO, and David Nivens, 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 risk, uncertainties, 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 Reeds News Release and MD&A dated August 6, 2024. 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 IFRS. Please see the REIT's MD&A for additional information regarding non-IFRS financial measures, including reconciliations to the nearest IFRS measures. Brad, over to you.

Thanks, Renee, and welcome, everyone. We are pleased to build on our momentum and deliver another quarter of strong financial and operating results. Demand for a quality community has remained elevated across our markets, with occupancy rates increasing year-over-year to 96.2% for both same-property and total portfolios, right in Interent's optimal range of 96-97%. Rental rates continue to show strong growth this quarter, with an 8.4% increase for the total portfolio and 6.8% for the same-property portfolio. We're seeing solid performance in both AMR and occupancy across all regions. David will provide more detailed regional insights later in the call. Over to slide six. Strong AMR increase and high occupancy rates drove solid top line growth. Total portfolio revenue growth for Q2 was 4.8%, which was impacted by dispositions during the quarter. For the same property portfolio, revenue increased by 7.6% while operating expenses rose by a more moderate 3.3%, leading to 130 basis point expansion in NOI margin over the same period last year, reaching 67.7%. Same property on the line for Q2 was $40.6 million, marking an increase of 9.7%. As highlighted on the right hand of the slide, we achieved outside FFO and AFFO growth, both on a total and per unit basis. Our FFO on Q2 increased by 17.9% to $23.1 million, representing a 17.2% increase to $0.157 on a per unit basis. We delivered $20.4 million in AFSO, or $0.138 per unit, reflecting an increase of 20.9% and 19% respectively. This growth was driven primarily by increased NOI and reduced financing costs. This impressive growth was partially offset by dispositions having a negative impact of $0.03 for the three months ended June 30th. On a 12-month basis, year-to-date dispositions have had an FFO per unit contribution of 3.5 cents. Over to slide 7. We kept our variable rate exposure, including credit facilities, at low 1% as compared to 8.4% at the same period last year. With the successful execution of our refinancing strategy, we're now seeing a tailwind with weighted average interest rates decreasing by 6 basis points year-over-year to 3.37%, benefiting our financing costs. Our balance sheet is solid and flexible with sufficient liquidity from disposition proceeds, credit facilities, and unencumbered assets. We are well positioned to advance our capital allocation priorities, including external growth opportunities. You will hear more details on that front later in the call. But first, Dave will take us through some of the operating highlights.

Thanks, Brad. Slide 9 highlights our ability to consistently achieve additional gains on leases, building on an already strong outgoing rental rates. We executed 640 new leases during Q2, generating an average gain on lease of 16.1%, which translates into an incremental annualized revenue growth of $2 million, or 0.8% annualized Q2 revenue. Turnover rates remain close to last quarter's levels with trailing 12-month turnover at 24.3%. We've adopted a flexible pricing strategy to maximize both occupancy and revenue as we gear up for the crucial summer leasing season. This puts us in a great position to make positive market adjustments in some of our communities. Rental market conditions remain resilient and we estimate that the average market rental gap across our portfolio remains just shy of 30%. occupancy on average market rent growth has been strong across the board total portfolio and same property occupancy rates were at ninety six point two percent in june showing improvements of eighty basis points and seventy basis points respectively compared to the same period last year Occupancy has improved in all regional markets, except the Greater Vancouver area, where we saw a small 60 basis point increase in vacancy year over year. As we explained on our last call, Vancouver is part of our non-repositioned portfolio, where suites may be turning over for the first time and thereby require more time to make the upgrade to help us achieve the higher market rental rates. During the quarter, Montreal continued to perform well, with occupancy improving by 260 basis points from a year ago to reach 97.3%. In the National Capital Region, when accounting for disposition of our communities in Ottawa and Elmer, Quebec, our same property average market rent growth is 6.4%. Turning to slide 11, our revenue growth continued to outpace our expense growth. Property operating costs, property taxes, and utility costs have all been reduced as a percentage of revenue. Total operating expenses as a percentage of revenue were 32.5%, reflecting 120 basis point improvement from a year ago. We continue to benefit from lower utility costs this quarter, which totaled $3.7 million or 6% of revenue. This represents a decrease of $0.2 million or 60 basis points as a percentage of revenue. On a per suite basis, utility costs have decreased 2.3% compared to last year to $300 per suite. This was primarily driven by lower natural gas costs with a 10% decrease in usage coupled with 13% decrease in rate. Electricity and water uses were both in line with the same period from 2023, but average rates were up 7% and 9% respectively. Moving to capex spends, as you can see on the left side of slide 12, over the last three years, we've been spending about $1,000 per suite on maintenance capex. We continue to see excellent value creation in a repositioning program, Through cost-effective capital investments, suites in a repositioned portfolio on average had a 50 basis point higher occupancy rate in June, along with an 80 basis point higher NOI margins year-to-date when compared to those in a non-repositioned portfolio. With that, Kurt, over to you.

Thanks Dave. From our discussions with our internal acquisition team and external appraisers, and taking into consideration the somewhat limited recent transactions, we have decided to adjust our cap rates in several of our regional markets. Slide 14 illustrates the quarter-over-quarter change in cap rates in our GTHA, NCR and Montreal markets. The net result is an overall increase of 8 basis points, bringing our Q2 portfolio cap rate to 4.25%. The strong operational performance in the quarter was mitigated by the increase in cap rates, which has resulted in a fair value loss of $34.6 million. Had the cap rates remained unchanged, we would have seen a fair value gain of $36.5 million. We are keeping a close eye on market conditions as transaction activity appears to be picking up. Moving to slide 15, InterRank continues to be in a healthy financial position. Our variable interest rate exposure, including our credit facilities, remained below 1% and our CMHC insured mortgages remained at 90%. The successful execution of our refinancing strategy puts us in a unique position in our industry to benefit from a lower weighted average interest rate, with expiring rates for the remainder of 2024 being a tailwind. With our current credit facilities undrawn, the liquidity from our dispositions, and our unencumbered assets, we are well positioned to capitalize on growth initiatives both within and outside the organization. Our debt to gross book value currently sits at a comfortable level of 37.8%, and as previously mentioned, we are open to moving it up to the low 40s for the right opportunities. We have a proven track record of value creation on acquisitions, and we believe we would be able to organically bring it back below the 40% over time. Moving to slide 17, we continue to look at sustainability as an important catalyst for value creation and long-term success. Our 2023 sustainability report was published in June, and we invite you all to explore it on our sustainability website. Some of the highlights from the report include investing $3.7 million in energy efficiency initiatives such as high efficiency boilers, LED lights, and building automation systems. These investments have helped us cut total Scope 1 and Scope 2 greenhouse gas emissions by 5.6% in 2023, bringing us closer to meeting our sustainability goals while also lowering utility costs. Additionally, we have achieved a significant increase in building certifications across our portfolio and strengthened our governance by establishing a sustainability committee at the board level. These are just a few highlights of our accomplishments in 2023. So far this year, we have kept up the momentum by continuing to test different GHG reduction initiatives and advancing on our building certification program. I want to thank our entire team for their dedication and hard work as we continue to push forward with our sustainability efforts. And with that, I'd like to hand things back over to Brad to walk through our capital allocation.

Thanks, Kurt. As you can see on slide 19, our capital recycling program was very active in Q2. Last quarter, we told you about the disposition of a non-core community located in Alamo, Quebec. That transaction has been successfully closed for a sale price of $92 million. Additionally, we sold one community with 27 suites in Ottawa for $5.5 million, or $204,000 a door, also above its IFRS value. The net proceeds from these dispositions were partially used to buy back units under our NCIB program. After the quarter, we purchased 405,300 units for $5 million, or for an average price of $12.33 per unit. All units were purchased for cancellation. We continue to carefully assess attractive external opportunities in organic growth prospects. Meanwhile, liquidity from the remaining proceeds have contributed to an increase in interest income of $300,000 near the later part of the quarter. As Kurt explained earlier, we're fortunate to be in a strong financial position that allows us to seize opportunities that can make a big difference in the scale of our portfolio and launch our next phase of growth. We are progressing well in our second office to residential conversion project in Ottawa at 360 Laurier. We received full site plan approval in April and the building permit was issued in July. Full interior demolition is 90% complete and we are moving into the early stages of construction as we speak. Out of Richmond and Churchill development in Ottawa, demolition has started as of July and is anticipated to be completed in September. We continue to explore various types of heating and cooling technologies that not only position us to qualify for potential government incentives and attractive financing opportunities, but allow us to minimize long-term operating costs and reduce greenhouse gas emissions. In conclusion, we've had a strong quarter and once again extended our track record of excellent NOI and FFO growth, thanks to the strength of our operating platform and the efforts of our team members in the communities. We are encouraged to see strong market fundamentals heading into the busy summer leasing season in Q3 and continue to believe the current demand, supply, and balance will remain well into the foreseeable future. Our effective disposition program has further fortified their financial flexibility and boosted their liquidity. This has not only enabled us to buy back units, but also positioned us well to capitalize on opportunities that will drive long-term growth. We will continue to use joint venture partners to pursue external growth opportunities. To date, we have taken an ownership interest of anywhere between a minimum of 10% up to 50% in these partnerships, allowing us to scale our operation by generating fees to reinvest and by stretching our available capital to participate in a greater number of growth initiatives. I wanted to thank our team for the continued dedication which has brought us to this position. We're excited about the opportunities to come. 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 touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please make sure to lift the handset before pressing any keys. Your first question comes from the line of Kyle Stanley from Desjardins. Please go ahead.

Thanks. Morning, guys. Good morning. Could you just elaborate a little bit on the flexible leasing strategy you discussed in your prepared remarks? I think maybe the first time I've heard this reference, so just curious on maybe what that entails.

Well, you know, obviously, I think it's just for us to be able to look at what's going on in the different nodes all over, just making sure that we're being dynamic with our pricing and that we're staying on top of, you know, pants and or we can go with our lists on turn in each of the different regions.

Okay. That makes sense. I guess on that note, um, you know, historically, it does seem like occupancy tends to gain on a sequential basis in the third quarter. So how are you thinking about that for this year, especially, I guess, in the context of, you know, the foreign student visa cap and that coming into effect, you know, later, already in effect this year, but really impacting the portfolio in Q3? Just curious on your thoughts there.

I think we're feeling good about it. All indications are showing that's going to be a typical year like all others. So Everything seems to be shaping up in all regions similar to other Q3s in previous years.

Okay.

Kyle, it's early. It's Brad here. It's early days, right? August is all important month when you talk with those foreign students, especially in Montreal. But we haven't seen any indication to say it won't be similar to previous years.

Okay, fair enough. Just looking at your turnover spread this quarter at 16%, obviously a little bit lower from last quarter. Just wondering, you know, what the driver there might be. Is it that maybe you're seeing more units that have recently turned kind of coming back and that gain to lease is a bit smaller? I'm just curious on thoughts and, you know, how you expect that to maybe trend as we go forward.

I think, you know, I think you hit it. It's driven mainly by areas like Ottawa and Montreal where we have higher turnover. So, you know, and the turnover is higher because most of these buildings are closer to post-secondary institutions. And, you know, definitely this has given us market-type lifts because they are turning over more often. But if you looked at, if you took out maybe some of our newer constructed communities, like, say, Brassard or 236 Richmond, it gets us, you know, the 17.5% on our lifts this quarter. So, yeah, I think it definitely, the more lifts in Ottawa and Montreal bring the overall average down just because of the nature of those communities.

And for whatever reason, we saw a little more turn in Ottawa than we have typically seen in the past. And Ottawa, as you all know, is our most stabilized portfolio. So we have a higher percentage of our veteran mates within that Ottawa portfolio closer to market.

Okay. Okay. That's good color. I will turn it back. Thanks, guys. Let's go.

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

Hey, Brad. Hey, good morning. Just to follow on your question on the indicators heading into the August leasing season, I guess you talked about Montreal as it relates to the student demand that you're expecting. Has there been any indications of change for the student demand within Ottawa as well, or is that kind of trending similar to historical patterns in the last few years?

Yeah, I'd say definitely it's trending normal. Looking at, you know, the areas that we're close to, either, you know, Ottawa, you know, pretty much it's right on pace with the last, you know, last year for sure. And, you know, pre-pandemic years also.

I don't know why it's like this either, Brad, but Ottawa tends to... The students tend to come a tad sooner. I wouldn't say it's a lot earlier, but you do tend to see more leasing activity a little sooner in Ottawa for whatever reason. Montreal seems to be a very much land in August and then search for your apartment. We have leasing activity right in through September in Montreal typically, where in Ottawa you typically kind of know where you stand.

Okay. That makes sense, but it sounds like you're pretty confident in the Montreal market that the demand for the buildings, particularly around McGill, are still quite strong.

Well, I think you've seen where our occupancy level sits today. We're in good shape in Montreal. Like I said, guys, we're only five, what, seven days into August, right? So, yeah, I mean, we've seen a nice pickup in activity in the communities in which our – closely located to communities that typically have health or students. So there's no reason for us not to believe that activity will continue. But we won't really know until the last, we've got three weeks left to go. And like I said, sometimes the leasing goes into September. But so far we're seeing normalized type activities from the student markets.

Just, I guess, switching gears on the, Kurt, you had some commentary around, obviously you made some cap rate changes, but you also highlighted that you're starting to see some acquisition or transaction activity starting to come back. Just wanted to get a sense of what you're seeing from your perspective, and is there increasing opportunity to maybe to deploy capital through a JV strategy, or how do you see the transaction market as it sits today?

I think, and Brad or Asad can hop in if they feel I'm going down a wrong path here on this, but we've seen products coming to market a little bit. We've seen a little more activity, but not a lot of deals have closed yet. And appraisers tend to be backwards looking. They want to see what's happened retroactively in the last six months. So they're still being a little bit cautious in regards to adjustments and tweaking things too early. We look at multiple things. We look at, is the market heating up a little bit? What deals are getting done at? We look at our own portfolio. So as we get things through our repositioning program, and we have less stuff in repositioning now, as we get through that program, your cap rates adjust a little bit because you're starting to achieve some of that market rent. So we'll tweak a little bit based on that. And in areas where we've done really, really well and our NOI per door leads to a high value per door, we monitor that against market transactions to make sure it's not getting out of whack. Even if your cap rate is well within market, buyers still have a sense of a price per door thought concept. And if you start getting outside the market, then you start adjusting your cap rate to sort of bring it back in line. So we kind of look at all these factors. I think there'll be more transactions in Q3 and Q4 to give appraisers a lot more sort of firm ground to stand on to suggest changes and we could, we see more adjustments in the next two quarters. I think we could, but I don't know for sure because on the flip side of that, we've seen interest rates come in pretty strong. You're now doing, you know, five year, you can get it three 50 to three 60. Um, you can do 10 year for sub four, well, sub four right now. So if that keeps happening, could the level stay where they are today? I think so. I just, there's a lot of moving pieces still. And, uh, I think we're just trying to be conscious of staying within the market on our portfolio and not getting out of whack.

Yeah, like the only thing I would add is there's been a lot of volatility in the equity and the fixed income market. And given the direct property, the nature of the direct property market, the illiquidity of that type of an asset, volatility in the capital markets doesn't, for an active transaction market in the private market. So you really do need to see things stabilize out before you really will start to see people willing to transact. So from what we've seen, I'm looking over at that, I'll give Asad a chance to give his views, but from what we're seeing is there still remains a little bit of a, at least with institutions, maybe not as much with the private buyer, but with institutions, there still remains a little bit of a gap between vendor expectations and where people are willing to purchase. I think some of that just comes down to the volatility that they're seeing in the capital markets. But to Kurt's point, I agree with Kurt. I do think the recent two cuts, at least here in Canada and Canada, the conversations around what the Fed might or likely do, I think, boils well for the overall trend of action markets. I don't know, Saad, if you want to add.

Yeah, I would say the stability in bond yields at these levels should potentially spur activity down the road. The bid-ask spread still persists, but we could see that narrowing with the stability in the 10-year. The deal flow is there and there's opportunities for everyone to look at. It's just a question of meeting of the minds between the buyer and the seller and arriving on pricing.

Okay, that's quite helpful. I'll turn it back to you, Carlos.

Next question comes from the line of Mark Rothschild from Canaccord. Please go ahead.

Thanks, Sam. Good morning, guys. Good morning, Mark. Hey. So we've seen some, obviously, substantial rent growth over the years. Can you just talk a little bit more about maybe the most recent trends you're seeing, if you're seeing some moderation in rent growth, and then maybe from what your perspective is with experience on if immigration slows, do you think that there still is going to be more demand to just keep driving rents higher, or are we maybe at a place where it needs to moderate over the next year or two?

Yeah, it's a good question, Mark. I think there's been a lot of literature and different reports. According to maybe the second derivative of that rent growth, the pace of rent growth is starting to moderate at maybe a peak a couple of quarters ago. I think it is important to keep in mind that household formation still outstrips new supply being delivered by a wide margin, suggesting that we'll continue to see market pressure on market rates. It might not be at the double-digit clip that we've been accustomed to over the last, call it, eight quarters. So I would agree that the second derivative is starting to moderate. I feel quite confident and comfortable that market rates will continue to expand exceed, at best, inflation, like the minimal inflation. I do think going back into more of a range of 5% to 7% is quite realistic and reasonable. And you kind of do see it when you're looking at the leads and whatnot. Leads are down to the industry across the board, and I think that's really just a function of affordability, there's not as many people looking for an apartment to rent that are currently renting because unless they have to move, they're likely not going to move given where rent is off. Now, the good news in that is for us, of those 640 leases that we've signed, we've actually seen our affordability and rental income ratio actually improve. it's improved by a couple hundred basis points to the low 30%. So for us, it's good news. Our ops team has been working hard and our credit underwriting has been working hard to make sure that we're putting the right residents in their portfolio. So we still feel quite comfortable in the mark-to-market at 30%. We've seen We've seen leases being rented at markets where we feel comfortable. So it's really just for us, and as you know, we're willing to accept vacancies specifically in a low turnover area and wait for somebody to hit that market rent, meaning we will carry more vacancies than maybe some other owners would in anticipation of waiting for the right leases to come in, especially in a low turnover area. As you know, in higher turnover areas where we think we can get back at the sweet faster, we will accept or have a higher option level. I hope that answers your question, Mark.

Yeah, that's helpful. Thanks. I'll turn it back. Thanks so much.

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

Thanks. Good morning. Hey, Brad. I guess first on the external opportunities that you're talking about, how much acquisition firepower would you comfortably have on your balance sheet right now?

Yeah, I think for the right, and we've said this in the past, Jonathan, I think for the right acquisition opportunities, external opportunities, I think we'd be willing to to bring our debt-to-growth value ratio up into the low 40s with the goal of, through value creation and natural attrition, bring it back to the low 40. So with that in mind, we have, call it roughly around 360 million of acquisition capacity. And I think we will prefer to continue to do a joint venture to stretch that out even further. will allow us to kind of scale the operations and allow us to enhance overall returns by generating extra fees and it'll allow us to replenish uh our non-repositioned bucket which we all know too is another growth driver for our organic side for the future so We're pretty optimistic looking over the next 18 months. We still do have a disposition program that we mentioned on our last call. We're through our first target, and we're kind of in the second phase of that disposition program, and we think we can generate a further $50 million in that proceeds, which we'll recycle into these external developments. And things like the 360 office version that we're currently working on right now in Ottawa.

Okay. I guess a couple follow-ups there. Do you think you're more of a net buyer or seller over the back half of this year? We're more of a net buyer. Okay. And are you looking at any new markets?

Not at this time, Jonathan. I think we'd like to see our cost of capital continue to come in before we would enter in a new market. That said, there is one and maybe two markets that we are currently not in that we have kept an eye on over the years and we will continue to stay educated on it. but we just feel there's enough opportunities in our core markets today, and given the limited amount of capital, while I believe 360 with the right joint venture still affords us the ability to do a lot over the next, call it, 12 to 24 months, I don't think we would want to enter a new market until we saw a significant improvement in our cost of capital.

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

Your next question comes from the line of Matt Cornack from National Bank Financial. Please go ahead.

Hey, guys. Just a quick follow-up on that thought process around capital deployment. Would you look to joint venture any of your existing portfolio in order to fund some of your acquisition activity or would it only be on new activity?

No, we would. We would look to monetize... search parts of our portfolio with the right partner if we felt that to use it as a source of funding for the right external non-reposition opportunity. Absolutely.

Interesting. And then if I look at margins, I mean, it still sounds like if market rent growth is going to be 5% to 7%, you're kind of achieving... in and around that number on AMR growth, so your mark-to-market will be sustained. But can you give us an example? Expense growth seems to have slowed down, so you get margin expansion. And then I guess from an earnings growth standpoint, at this point, your weighted average in place mortgage interest rate is kind of similar to market five-year rates. So we should expect pretty substantial earnings growth going forward.

Yeah, I'll start with the first and I'll pass over to Kurt, but I do feel on the expense, and we've been out there saying this now probably for four quarters, that we always thought 2024, even in 2022, 2023, but 2024, that we start to see our expense side start to ease, at least from the wage pressure. That's a big line item, and we are seeing that easing, and we're making a lot of investments in our platform for efficiencies from an operating side. So I do think, Matt, 3% to 4% expense growth going forward is very sustainable. And under that scenario, it should generate some margin expansion. I'm getting a little bit of feedback. Are you getting feedback?

You sound okay to me. It may be my end. Okay. I'll mute. Okay. And then just on the mortgage, what would you, Kirk?

Yeah, I think like if you look at the rest of the 2024 stuff, there's definitely a bit of a tailwind still with 5.04% on the expiring mortgages for 24. 2025 at 326 is not too far off of where the market's been heading as of late. So a lot of our 2025 mortgages are sort of more towards the back half than the front half of the year. hoping we can sort of get those done pretty much flat or very close to it. So under that scenario, you definitely don't see what we saw last year, the year before, where a lot of the great work the ops team was doing was getting chewed up by extra financing costs. And with our variable rate debt now below 1%, no plans to sort of bring it back up. I think we'll stay in a good position with the mortgage ladder and the financing costs. Now, with some of these mortgages coming at us late this year, next year, depending on how we decide to do the refinancing, you may see some one-time costs hit if there's deferred financing write-offs, if you renew certificates and stuff. But that's not really affecting your cash flow and your overall mortgage rate. So there could be some one-time hits here and there just related to write-off of deferred financing fees. We'll try to make sure we communicate that to you guys in advance of quarters where that might hit so you can see it well.

Okay, that would be helpful. And then I guess as you look to duration on debt, you mentioned there's a bit of daylight between the five-year rate and the 10-year rate at this point. Would you be inclined to go shorter duration or a blend of five and 10 or maybe 10 just because you want to lock in the certainty?

Yeah, I think for us right now, we're looking at our overall mortgage ladder and still trying to make sure we have a really well-balanced ladder. We've been working on that for the last year and a half or so. So the 2024 stuff is probably looking at five years. That 2029 pocket for us has some room in 2030 and 2031. So kind of like to work with five to seven year money right now and fill that out and have a really well-balanced mortgage ladder. And then as rates continue to come in, we'll continue to evaluate it and probably pushing stuff into 10 also. I don't see us going really anything shorter than five at this point.

Makes sense.

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

Morning, Jimmy. Yeah, morning. So just a quick follow-up on the CMHC debt. So at 3.5 to 3.6, 50 to 60 basis points is the spread. I guess that's come in. I'm a little surprised to hear how spreads are so tight today.

Yeah, we're looking. I mean, and again, there continues to be big volatility, right? We've got quotes on mortgages as of yesterday and early this morning in that range. Could it be up 10 basis points tomorrow? Yeah, we've seen a lot of volatility, but it's been pretty consistent below four for the last little while on the 10 year and sort of three, you know, below 385 on the five year. And it'll just depend on how the markets move. But it's definitely removed the micro day-to-day jumps you're seeing. The macro sort of trend line has been down and looks like that'll continue.

Okay. Okay, thanks. And then the other question is on the capex spend. You know, for the first half of the year, it's still pretty materially lower than a year ago. And I think you guys talked about that last quarter. How do we think about the capex spend overall with the balance of the year?

Yeah, I mean, some of it's a function of

where you're seeing some of the turn, right? And what kind of lifts you can achieve, Jimmy. So like we said, we saw a higher number of turns over the last year for this quarter in the Ottawa region, which majority of that is already kind of repositioned. So that speaks to some of the capex spend lower. So really it's a function of Where are we getting? Some of that term will be a pretty big part. We've been lucky. A lot of our CapEx has been done over the last four to five years, and we've been on the higher side of that. We've been communicating of late that you'll start to see the CapEx Fed come in. It's not that we have changed our business model at all. As you know, we target 20% return on our investments. So we're going to continue to put capital out where we think we can meet those kind of returns. Will it be lower by the year end? Will it be lower than 2023? Yeah, it will be.

Okay. Okay. Yeah, especially when you think about it, Jimmy, if you look at the amount of repositioned suites in that portfolio compared to past, a percentage of our portfolio that is under repositioning still has come in. And that often directly ties to that CapEx number coming in or growing in years where we've been very active.

You always see... blip an increase in our capex spend right after a very active year and as you know we've always said three to five years for us to stabilize and you'll always see a pretty big spend following an active year of acquisition the following three years you'll see a lot of capex out the door and to be quite honest I'm very hopeful and that we'll get back to a point where we can deploy and recycle some of this capital from our disposition program and be able to bulk up that non-reposition bucket again. And perversely, you start seeing cappings go up a little, but that means we're doing what we do really well.

Yeah. Sorry, I just had one last. You haven't talked about the NCIB, and you have been active post-quarter and for the first time in a long time. Just kind of how you're thinking about the NCIB program going forward. in terms of the data opportunities.

Nothing's changed there, Jimmy. Obviously, our unit price went down into the low 12s. Obviously, for us, there's a lot of value to be had in those suites. We've always said we will do share buybacks on a lunch-neutral basis. We dispose of community. We took some of those proceeds and bought back. But we've got to weigh the buyback with the other opportunities. It comes down to timing and it comes down to ranking the different opportunities that sit in front of you and what that capital is earmarked for. But we tend to take a five-year view, and we look out, and we rank all of these different value-add initiatives, such as share buybacks versus development versus external, against each other, and we will earmark that capital accordingly.

Okay, thanks. Thanks, Jimmy. Thanks, Jimmy.

Next question comes from the line of Mike Markides from BMO. Please go ahead.

Hey, Mike. Thank you. Good morning, everybody. Brad, I think on the last couple of calls, you had pretty good confidence on a 68% organic revenue trajectory over the next two to three years. I'm just giving your comments on the slowing, albeit still healthy, market rent growth, and maybe your comments with respect to potentially seeing more turn at the shorter end of your, in terms of shorter duration leases. Pardon me. Do you see any risk to that outlook, or is that still sort of the outlook that you're looking for? looking forward?

Listen, I mean, in the 6-8, 5-7, I'm still pretty confident that it's high single-digit, low double-digit NY growth. I think somewhat splitting hairs when you look at the bigger picture, Mike. I still feel very confident that the demand and supply fundamentals remain extremely tight on the whole. We're where you've got to get to sometimes is in the tensions and the details, where is some of the supply coming on, right? So it's not like there's no new supply, right? Like Ottawa, as we know, has some supplies, and I'm quite confident over time Ottawa's supply is going to get absorbed, and it's going to continue to be a marketplace that should do quite well for the population as well, given the affordable nature of this marketplace. Another example is London. London has close to, call it 4.5%, a new supply. And it's close to one of our communities. So as that supply gets absorbed, obviously we're not going to have the same kind of lift on turns. But once it's absorbed, we're quite confident that things will normalize back to the lift on turns that we've historically been accustomed to. Listen, I don't want to overblow the 16% versus 20%. These numbers are going to jump around depending on where the term comes from and depending on where supply is situated. But I can guarantee you won't find any of my colleagues, anyone that was going to say that this market is an equilibrium, that the supply is meeting household formation. It's not. But there's going to be different pockets where things – kind of get impacted differently. So I do remain comfortable that we'll continue to kind of see that top revenue line growth, what we've communicated in the past.

That's helpful. Thanks. And then I don't know, I think I heard you correctly, but I think you said that your rent to income on the 640 lease of this quarter came in at lower than 30%. Did I pick that up correctly?

Low 30%. Not lower than 30%, but low 30%.

Low 30s. Got it. That's the first time I've heard you reference that. Where has that been historically?

I think I'm referencing that to help give people on this call comfort that while we might sit with an in-place rent higher than market averages, we also pride ourselves on delivering a certain level of experience, and we also pride ourselves on our operation teams and investing in the operating platform. And those things that make the difference, we are able to attract a quality resident that is willing and chooses to rent at those levels.

Yeah, and I'd say if you look sort of over the last little while, that number hasn't gone up. If anything, it's actually come in marginally.

Okay, so it's down marginally. It's not like it was a massive change from what you've seen in the past. No, it hasn't gone up.

As rents have gone up, it hasn't gone up.

I think the point I'm trying to make, Mike, is turnover is going to continue to come in as an industry, as a whole, and our portfolio is a little different. We've been fortunate that we've been above average as a turnover rate, still kind of in that 24% range. But turnover is going to continue to come in as market rents continue to increase. There's going to be less and less people willing to move and look for a new apartment because they just won't be able to afford it. My comment with that data point is trying to help give you some comfort on the other side that, listen, yes, as a whole, the affordability is coming in and there's going to be less turnover. There are still very much a segment of the population that can afford the market rents in which we are listed at and goes back to my comment about mark to market that we're comfortable up 30% because we have tested those prices and we're leasing at those prices. Now, where we see the turn Depends. It just depends on the circumstances, where you're seeing current and where you're seeing migration patterns and whatnot in the meantime. So that is going to fluctuate. But on the whole, I feel comfortable that we're going to be able to continue to maintain here kind of that 15 and 20, and we'll be able to chip away at the mark-to-market. Now, will the mark-to-market grow back? I don't know. That's my comment about the second derivative coming in a little. So we might start to see that gap close a little. That mark-to-market might start to come in a little as the market rates aren't as grown as fast as they have been in the past. But let's not forget, 30% mark-to-market is still a pretty good spot to be, especially at a 24% term. Yep.

No, absolutely. Okay, and this is the last one. I think, Brad, you mentioned your second phase of your disposition program. Can you refresh if there's any sort of metrics you put around that or what exactly that refers to?

Well, we evaluate all the communities within a portfolio. We have an asset management profile for all of those communities. We kind of look at the five-year IRRs, and we take other factors into consideration as I'll kind of look at where corporate IRR is relative to that. And for those communities that are specifically below where corporate is over the next five years, those are obviously earmarked for communities in which we I believe we're going to maximize the value, and then it's going to bring down our overall real-time costs, so those are worthwhile. And then we'll recycle those into opportunities that are significantly higher than our corporate IRR, bringing up, hopefully, overall our corporate IRR.

Okay. Thanks for that. Have you set a target in terms of volume? I mean, I think it was about a year, a year and a half ago, and you've exceeded that target. So I'm just wondering if you've refreshed targets on disposition volume.

Oh, sorry. Sorry, Mike. Maybe I just... Misunderstood your question. We came out last quarter and said that we felt pretty comfortable and gave another 12, 18-month time frame that we thought another $50 million of net proceeds was reasonable.

That's a good reminder. Thanks for that. Good for me. Great. Thanks, Frank.

Your next question comes from the line of Mario Saric from Scotiabank. Please go ahead.

Hi, guys. Just a couple of quick follow-ups. On the rent growth discussion, I just wanted to clarify, the 5% to 7% that's being referenced, are you referring to the expected kind of target change in average in-place rent for the portfolio, or are you saying that you expect still market rents to grow 5% to 7%, for example, with the average market rent in Canada is $1,000. Do you think it can be cut to either $1,050 to $1,070?

I think the comment was more towards where we see our operating revenue, our AMR growing, not the overall market. I mean, the overall market, if you look at the average CMHG producer, others were above it in many markets, right? So as every market and average can be misleading because you've got it all over the place, but That comment was addressed towards where we see ours growing.

Okay. I guess the rationale behind the question is just because you're seeing some reports out there talking about that market rent stabilizing or flattening, if you will. So just curious if you, given the expectation that demand should continue to exceed supply, if the expectation is for the broader market for the rents to keep coming up a bit more.

I don't think anyone from any data that anyone is looking at or publishing or that you could reasonably get to, I don't think anyone is seeing that supply is even coming close to demand at this point. It's just how are things shifting? People are doubling up, tripling up, whatever, and sort of changes in that habit. So we're not saying that the market rents are going to grow at that five to seven. We think our AMR will. And I think what Brad was getting to a while ago is if the market is growing at two or three and our AMR is growing at five to seven, you could see our mark to market, you know, come in a little bit over time. Does that answer it?

Understood. Yeah, that's perfect. Thanks, Kurt. And then just my next one, I don't know if you can answer this question, but you mentioned taking a five-year view on capital deployment that included the NCIB activity that you did. You've talked about kind of minimum 20% ROI on capex spend. When you're looking at that five-year outlook, when you're buying back units, what type of five-year IRR do you think you're achieving?

Yeah, honestly, I'm not going to answer that. I'm not going to answer that, Merrill. You can take comfort, though, that we are ranking our buyback relative to the opportunities we're looking at, for sure.

Okay. Thank you. Thanks, Eric.

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

Thanks. Morning, guys. Most of everything has been answered. Not sure if you can touch on this one or not, Brad. The conversion of the Class B units, is it fair to assume that that was perhaps a tax or an inclusion rate-driven decision?

You're a smart man.

Yeah, we had two different parties that had Class B units, and when everything got announced around the changes in capital gain rates coming at us, they both reached out and said they'd like to convert, so we worked with them to make sure it was done before the deadline.

Got it. And those would be freely trading now, correct?

Yes, once the conversion is done, yes.

Once it's done, yep. That's all I had. Thanks, guys. No problem.

Ladies and gentlemen, just a reminder, if you'd like to ask a question, please press star one on your touchstone phone. And if you are using a speakerphone, please lift the handset before pressing any keys. Your next question comes from the line of Fred Blondeau from Green Street. Please go ahead.

Thank you and good morning, Fred. Just going back to the turnover discussion, I was wondering if there are any way you could give us a a bit more color on how much turnover is attributable to student tenants versus the rest of tenants.

Sorry, the question is how much of the turnover is student versus overall? Yeah. Yeah, so, I mean, we don't break out a turnover by region threat, so I don't think we're in a position that we're going to even break it out further, but... You can assume for most students, at best, the maximum lease that they're going to stay is maybe two years. But most people, it'd be 12 months.

Okay, got it. Okay, and then just looking at the realized gain on lease, it looks like it's been trending down from the 23.8% that you guys reported for... I was wondering, notwithstanding seasonality here, what should we be expecting for the second half of 2024 on that?

Are you asking what we're looking at for the rest of the year on our gain on lease?

Yeah, realized gain on lease.

Fred, it really will be a function of what turns coming up. So it could be anywhere from, call it the 15 to the 22% that we've seen. We don't provide forward guidance. In the past, we've told you we feel comfortable with the range of 6% to 8% was on the top line growth. We're kind of within there. It could come in by towards the end of the year, close to the 6th. I'm not sure. But we feel comfortable with what we've been out there already with.

Got it.

Maybe.

It can vary a lot. You don't control who comes to market when, so it can vary a lot queue to queue, quite frankly. And I think we take comfort in the fact that our turnover given – The regions we've decided to grow in over the last five, six, seven years, our turnover is still higher than average in the market. And it's a function of what we've chosen. And we kind of control that a little bit by where we choose to buy as best we can. But who decides the turn? You can't always control it, right? Yeah, of course.

Got it. And then maybe one last for you, Kurt, on the debt to EBITDA ratio. I was wondering if you had a specific target for the end of 2024 or maybe longer term?

I think what we've communicated to the market is longer term. We would like to get that down definitely below double digits and into that nine-ish, eight-ish range even. I think it's just a function, again, of our repositioning versus our non-repositioning. We provide that breakout on the presentation. If you look at just our repositioned portfolio, we're already sub-10. And if we said no more repositioning activity, we'd definitely bring the whole portfolio well below that. Quite frankly, I hope it doesn't because that means we've been active on our repositioning program. We've been able to get more repositioning opportunities into our portfolio. And I think we have a proven track record of providing exceptional growth when we've been able to do that. So part of me hopes it doesn't go below because it means we've had a good run on the repositioning side. That's great.

Thank you, Olivier. Thanks, Fred.

There are no further questions at this time, so I'll hand the call over to Renee Wei for closing remarks. Ma'am, please go ahead.

Thank you, everyone, for the call. And as always, if you have any questions or comments, please don't hesitate to reach out. Have a great day.

Ladies and gentlemen, this concludes today's conference. Thank you very much for your participation. You may now disconnect.