InterRent Real Estate Investment Trust

Ladies and gentlemen, and welcome to the inter-entery third quarter earnings conference call and webcast. 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. I would now like to turn the conference over to Renee Wei. Please go ahead.

Good morning, everyone. Thank you for joining Interim Reads Q3 2024 earnings call. My name is Renee Wei, Director of Investor Relations and Sustainability. You can find a presentation to accompany today's call on the investor section of our website under events and presentations. We're pleased to have Brad Cutsey, President and CEO, Kurt Miller, CFO, and Dave Nevins, COO on the line today. As usual, the team will present some prepared remarks and then we'll open it up to questions. Before we begin, I want to remind listeners that certain statements about future events made on this conference call are forward-looking in nature. Any such information is subject to 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 MDNA, dated November 4, 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 organized measures and do not have standardized meanings under IFRS. Please see the REIT's MDNA for additional information regarding non-IFRS financial measures, including reconciliations to the nearest IFRS measures. Brad, over to you.

Thanks Renee and thank you everyone for joining us today. We've had a great quarter with strong year-over-year increases in our key operating numbers, translating into solid top-line growth. By leveraging our strong operating platform, we've successfully converted that growth into meaningful bottom-line gains. Over the busy summer leasing season, the rental market conditions remained very tight as shown by our occupancy rate increasing by 120 basis points year-over-year and 20 basis points quarter-over-quarter, reaching 96.4% in September. We signed 1,279 new leases during the quarter, basically matching our Q3 2023 number, which was the highest Q3 in our history. This increase in occupancy rates is accompanied by steady growth in rental rates. Average monthly rent for our total portfolio reached 1,687 in September. showing a year-over-year growth of 7% and same-property AMR growth of 5.6%. This growth has moderated compared to last year and remained above our 10-year average of 5.5%. We've seen strong opportunity rate gains in AMR growth across all the regional markets, particularly in Montreal, where we saw same-property opportunity improved by 300 basis points to reach 96.3% by achieving an AMR growth of 6.4%. and is bringing strong demand for centrally located high-quality communities. Dave will share more regional details later in the call. Moving to the next slide, same property revenue increased by 7.9% June Q3. We are proud to have achieved a same property proportionate NOI margin of 68.2%, which is close to our historical all-time high. This marks an improvement of 40 base points year-over-year. We achieved this by focusing on what we can control, resulting in lower property operating costs and utility costs as a percentage of revenue. Proportion of NOI for the same portfolio increased by 8.7% to reach $41.5 million. As highlighted on the right-hand side of the slide, strong AMR growth combined with interest rate tailwind on a debt stock has translated into substantial FFO and AFFO growth, driven by a 6.4% new over-year reduction in financing costs. We focused on strategically using the proceeds from the capital recycling efforts and refinancing activities, which effectively reduced our outstanding mortgage balances and kept our barrel rate debt exposure at below 1%. With our weighted average interest rate at 3.3% compared to 3.48% last year, we were able to bring our financing costs down by 210 basis points to 22.7% of our revenue during the quarter. In Q3, we achieved a 9.7% increase in FFO, reaching $23.4 million and an 8.9% increase in FFO per unit, now standing at $0.159. delivered 20.9 million AFFO, or 14.2 cents per unit, an increase of 10.3% and 9.2%, respectively. Our solid financial position has continued to strengthen. Year-over-year, our debt-to-growth book value ratio has decreased by 10 base points to 38.5% as of September 30th. As of the end of Q3, our credit facilities of $225 million remain undrawn, and we had $193.4 million in unencumbered properties and approximately $295 million in available liquidity. Our strong balance sheet and financial flexibilities have enabled us to explore both internal and external opportunities that will set us up for sustainable long-term growth. One such opportunity has materialized with our acquisition of a new-build community in Montreal, which we'll discuss in more detail later. As we continue to carefully evaluate future opportunities, I want to reiterate our commitment to disciplined capital allocation. Our ongoing disposition program will allow us to recycle capital effectively. We have a strong track record of upholding the integrity of our balance sheet and it remains a top priority going forward. Now I'll let Dave take it from here for a look at some of our operating highlights.

Thanks, Brad. First off, I'd like to congratulate all of our team members for their hard work during a very busy summer leasing season. We continue to capture embedded rental upside with a healthy trailing 12-month turnover rate of 23.8%. Move-ins kept in pace with move-outs during the quarter. We executed 1,279 new leases during the three months just below our all-time Q3 record of 1,293 new leases set last year, and we were able to consistently achieve additional gains on those leases on top of already high outgoing rental rates, ending the period with a strong occupancy rate of 96.4%. Average gain on lease during the quarter was 11.4%, which translated into incremental annualized revenue gain of approximately $3 million, or 1.2%. While we see the same headlines as everyone else on market rent growth slowing down, our own market rent performance held up well in most of our regions, showing consistent and positive growth both year-over-year and quarter-over-quarter for total portfolio. We've seen notable strength in Ottawa and Montreal, and our communities in the GTHA are providing the most resilient and some of the aggregated data that has been reported. Going forward, we're keeping a close eye on market demand. We're expecting a more moderate pace of rental growth in certain markets, especially where there's a lot of new supply recently delivered and rents may have peaked. Our mark-to-market gap has come in slightly to approximately 27%, and the timeline for unlocking this embedded growth could be extended. However, we take comfort in the embedded value that we have, which provides a solid foundation for stable long-term rental growth. Occupancy and average monthly rent growth has been strong across the board. Same property occupancy was at 96.4% in September, showing improvements of 120 basis points year-over-year and 20 basis points sequentially. Occupancy rates remained steady in the national capital region at a high of 97.2% and improved in all other regional markets. Activity was particularly strong in Montreal, where we saw strong leasing activity pushing occupancy rates up by 290 basis points year-over-year to 96.3% in the region. There has been a lot of investor interest in student demand in Montreal after recent federal and provincial policy changes. From year-over-year international student enrollment data and what we have seen on the ground, the impact hasn't been as significant as many have anticipated. We continue to see that colleges of lesser-known institutions are feeling the pressure, while the major universities are capturing a bigger share of total student enrollments. This trend is also emerging in other regions. Our communities with the highest student concentrations are strategically located near established universities, which are more insulated from these fluctuations. We remain focused on managing controllable costs during the quarter. Our revenue growth continued to outpace expense growth, leading to a 40 basis point year-over-year expansion in same property NOI margin at 68.2%, just below our historical record high which was achieved in 2019. Overall, same property operating expense for the quarter increased by 6.3%, partially driven by timing of certain cost item allocations. Year-to-date operating expenses showed a more consistent 3.6% increase. Higher marketing expenses also contributed to higher property operating costs as we invested in digital marketing to support our brand recognition and strengthen our position in a more competitive marketplace. Property tax increased by 7.8% on a per suite basis, primarily due to the impact of dispositions in the portfolio, which had lower property taxes on a per suite basis compared to our more urban portfolio. Looking ahead, we anticipate property taxes increase in 2025 to be in the 5% range. Utility costs held steady at $3.1 million for the quarter, unchanged from the same period last year. On a per-suite basis, utility costs increased by 5.7%, which was due to an 8% increase in average rates and a 2% increase in usage. Our energy efficiency initiatives continue to lower our gas costs, with gas usage down by 7% year-over-year. Our hydro-submetering program has helped reduce our electricity costs by recapturing 39.3% of the costs, for a total savings of $0.7 million for the quarter. Taking a closer look at CapEx, we've kept maintenance CapEx for repositioned suites at below $1,000 per suite on an annualized basis, in line with previous years. We continue to prioritize value-enhancing investments, which is where we allocate the majority of our spending. We're proud of how well we've maintained all of our suites. This has allowed us the flexibility to adjust and dial back our CapEx spending as needed. As you can see on the right-hand side of the slide, we've been diligent in managing our spending, and so far this year we've been able to lower our per-suite CapEx. And now I'll turn it over to Kurt to provide an update on our balance sheet.

Thanks, Dave. As we do every quarter, we reviewed our internal cap rates and property values with our acquisitions team and our external appraisers. Near the quarter end and into Q4, we are starting to see more deals transact, which is providing more certainty around cap rate movements. Based on these transactions, industry reports available at the time of quarter end, and our external appraisers review, we have adjusted cap rates in four of our regional markets. Due to the adjustments in the GTHA, NCR, Montreal and other Ontario markets, average cap rates for total investment properties increased by 9 basis points quarter over quarter, bringing the weighted average cap rate for the entire portfolio to 4.34%. This adjustment has offset our strong operational performance, resulting in a fair value loss of $93.5 million on a proportionate basis. We continue to monitor the transactions market closely as a decrease in interest rates seems to have resulted in an increase in market activity, which will provide more support for future cap rate adjustments. Interint continues to be in a healthy financial position. We've strategically used proceeds from our capital recycling efforts and financing activities to lower our mortgage balances and keep our variable rate exposure to less than 1% throughout the entire quarter. These activities have led to a $0.9 million reduction in financing costs compared to the same quarter last year, allowing our strong performance to translate into significant FFO gains. Following the quarter, we drew on our credit facilities, increasing our total variable rate exposure to 2.3%. These funds were used for our Montreal acquisition, while more permanent MLI select financing is being processed by CMHC. As Brad mentioned earlier, we continue to be in a position of financial strength and flexibility. Our dispositions program will guide our capital recycling and will continue to be disciplined in our capital allocation decisions. Moving on to slide 17. Our long-standing efforts to advance sustainability initiatives continue to bear fruit. In October, Interrent was awarded a three green star designation for the 2024 GRESB Real Estate Assessment. We achieved a score of 81, an impressive 21% improvement from the previous year. This is our fourth straight year of improving our GRESB score since we started in 2021. We also announced earlier in October that our entire Montreal portfolio has achieved certification under the BOMA Best Sustainable Buildings Program. This milestone builds on our earlier achievement with the certification of our portfolios in Ontario and British Columbia under the Canadian Certified Rental Buildings Program that we did last year and earlier this year. With these efforts, we're proud to say that 100% of our multifamily communities now have building certification coverage. Last but not least, we're all very proud to share that this past September, we raised another record-breaking $1.8 million at the Mike McGann Charity Golf Tournament. Thanks to the support of our many amazing partners, all the proceeds from the event go straight to supporting the charities in our communities, making a real difference in many people's lives. To date, this event has raised nearly $10 million. We can't thank our partners enough for their support, and we're just getting started. Next year will be our 25th anniversary, so mark your calendars for September 25th, 2025. We can't wait to celebrate with you. On that note, I'll turn it over to Brad to discuss our recent strategic acquisition and provide any closing remarks.

Thanks, Kurt. As communicated during the Q2 call, we've been exploring some attractive opportunities, and I'm excited to share that one of them has materialized this quarter. We've deployed some proceeds from our successful capital recycling program to expand our Montreal portfolio with a newly built, centrally located community. This transaction was closed subsequent to the quarter in mid-October. This acquisition is a 50% joint venture with a trusted partner, and we're very happy to be able to seize the rare opportunity to acquire this high-quality asset at a discounted replacement cost in a prime, irreplaceable location in downtown Montreal. We've already begun the leasing process as we work towards reaching stabilized yield. The community features 248 residential suites and approximately 70,000 square feet of commercial space that is currently in the process of being leased to a financial institution and an established national retail brand. The building was newly constructed in 2023 with rich amenities, which will allow us to leverage our leasing and operating platforms to maximize value during the five-year exemption from the rent fixation process. We're also proud of the energy efficiency performance and accessibility standards within this community, which is also anticipated to help us obtain preferred financing through CMHC's MLI Select program. So far this year, we have generated net proceeds of $93.3 million from our dispositions after closing costs and discharge of mergers. This has provided short-term funding for the acquisition along with the temporary use of a credit facility while we wait for long-term financing to be finalized in the months to come. We're making steady progress with our development pipeline. Construction is now underway on our second office conversion project in downtown Ottawa. In September, it was confirmed that Libretto and Platz will soon be home to a new arena for the NHL Ottawa Senators. This is great news and we look forward to the upcoming development of infrastructure, transportation, and retail that will transform this downtown Ottawa area. These developments will add significant value to a number of our communities that are in close proximity to the site. The recent immigration plan has weighed on sentiment lately, with projections indicating that Canada's population experienced a slight decline over the next two years before growth resumes in 2027. Looking ahead, we may not see the significant market rent growth of recent years, but we're confident in what we have to offer. The quality of our communities, the care we put into our spaces, and the experience and dedication our team will allow us to compete in any market. We believe steady top-line growth is achievable over the next couple of years, albeit at a more moderate pace than previously guided. In this evolving market environment, we're cognizant of the importance of being prudent in our capital allocation decisions. Our recent acquisition of Montreal is an excellent example of our strategic approach. We capitalized on a unique opportunity to acquire an added discount to replacement costs in an irreplaceable location within a city we're very optimistic about. We believe this approach will help us navigate the market aligned with the long-term objectives of growing NAB and business semester for sustainable growth. 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 the star followed by the one on your touch-down phone. Questions will be taken in the order received. Should you wish to cancel your request, please press the star followed by the two. If you're using a speakerphone, please lift a handset before pressing any keys. Your first question is from Kyle Stanley from DataDing. Please ask your question.

Thanks. Morning, guys. Just going back to some of your commentary, you know, you did mention, you know, with the immigration policy changes, you do expect moderating rent growth in the next little bit. You know, as we think about where your leasing spreads trend over the next 12 to 24 months, you know, what are you thinking there and what does that imply for maybe your revenue growth outlook?

Hey, Kyle. Thanks for the question. I'm sure you could imagine we thought we'd get this question. I'm sure it's going to come up a bit. This is like unknown territory, right? The immigration changes being a pretty whipsaw announcement. It was a whipsaw kind of with the increase in the targets and then a whipsaw in that direction to decrease. So there's no question there's been significant shifts in the immigration policies. If all goes planned, the policy fish will result in negative population growth, a scenario that we haven't experienced since population records started back in World War II. So there's a lot of unknowns. The broader impact of this is going to create a level of unpredictability that many of us are going to have to navigate thoughtfully through. But I guess I'll try to answer it in two ways. There's a lot of unknowns. Will the government meet these ambitious targets? Can the targets be met on schedule? What happens if there's a change in government? even what's impacting the labor market, the capacity to build housing supplies, right? So all of a sudden, trades are decreased. And then there's also the whole 640,000 household formation of the potential unwinding of that that the PBO office talks about in their report. And that's essentially just a doubling up, tripling up, quadrupling up impact. How that all impacts the overall rental demand is yet to be seen, and those are kind of the things that we don't know and we're going to have to work our way through, and I think time will only tell. But the things that we do know and the things that we're betting on here at InRent is we have a great operating platform, right? So we've been investing in our technology and our people in order to continue to deliver outperformance. We believe that the resiliency of this platform will – that will be demonstrated throughout time as we work through the different quarters and whatnot as far as we see the impacts of what this negative population growth might be. And I think we've got to all appreciate we've never experienced in the country negative population growth. So it's not only going to be multifamily. There's going to be a lot of industries impacted. And it's going to go back to, we really don't know if the government will remain committed to it. And we don't know what pace that this change will happen. So thank goodness for InterRent that we've been continuing to invest in the platform through technology and through our people. I take a lot of comfort that there's going to be a lot of haves and have-nots within the industry. Now, a rag and tide folks saw boats, but it's not necessarily going the other way. Last but not least, I really think we've got to focus in on and the community's got to focus in on the quality of our portfolio and how well located it is and how well located it is to existing economic ecosystems. I think that's going to really serve us quite well going forward. I think also too is amount of money we've spent on a portfolio has been quite defensive on a relative basis. I think we're really well positioned. As you know, we've always talked about we'd like to see a bigger portion of our portfolio being non-repositioned because that's where a lot of the value-add initiatives come. But in the defensive time, we might be heading into, and again, just don't know what pace. We might continue at the robust pace that we've been at, but If that is not the case, the majority of our portfolio is being repositioned, so there's not a lot of capex dollars going forward. I would say last but not least is we have different levers to pull if we want to get more defensive. Up to now, we've always focused on maximizing our rents. We can shift and we can take more of an off-seat type methodology, especially if it's markets where we are experiencing some softness due to supply being delivered, not the same level of historical rental demand, we can always choose to increase their obsolete targets. So I know that's not going to answer you specifically, and it probably won't satisfy the majority of you on the call. But guys, we really don't know much more than that. So I mean, we can kind of keep answering around around it, but we're going to kind of go back to what we do know, and it's really going to be about the haves and the have-nots and having a really strong operating platform to be able to deliver and rely on that track record. There's a couple levers we can pull if the markets do get a little softer.

Okay, no, fair enough. I appreciate the uncertainty and the difficulty in forecasting, so thank you for that. Maybe just looking at the Montreal acquisition, you provided some disclosure there. Would you be able to comment on where maybe in-place occupancy is today? And, you know, you highlighted the fact that new build, it does have the five-year rent control holiday. You know, what kind of upside do you see in the rents? You know, was there maybe concessions or lower rents used to get initial lease up done? Just trying to think about maybe yield expansion opportunities as we look ahead.

First off, I think it's a great add-on to an existing lease. That's in class quality portfolio and really extremely well located. As you know, Kyle, we have a really concentrated portfolio in Montreal and the likely thing about our portfolio, there's not a lot of communities with 100 plus suites and all of our communities are in around that level, meaning they're very well amenitized. It's a three minute walk from from the UCAM, it's also a four-minute walk from the Chum Super Hospital, a five-minute walk from the Metro. So I can't say enough how well located this is. As far as where the lease up, there is lease up potential. We do have a partner in it, so I've got to be mindful of what I disclose, but this is a strategic acquisition for us. And we've always said in the past on things that are strategic acquisitions, The yield expansion, we look anywhere kind of between 50 to 75 basis points of the going in. There's no difference in on this. I think where the attractive level of financing, and Kurt can speak more to that, but given the MOI and the accessibility of this community, we're forecasting some pretty attractive financing on this. So from a levered IRR perspective, is certainly significantly higher than our overall threshold so we are we are pretty excited about it there were uh like typical and most lease ups of new developments there were incentives given uh of a of a month um we've underwritten that so for us we kind of look out to a two and a half to three year period where we kind of think we can stabilize that yield and i think we think we can be north of five on that front. And I think just given the amenities and given our level of our ability to deliver on programming, I think we feel pretty comfortable that we'll be able to do it. And then the last point I would make is I think there's a really small window right now for being able to buy at discounts replacing costs. And we just found ourselves in a position where this just really fitted really well in as a bolt-on to our existing portfolio. So we jumped at the opportunity.

Okay. No, I think that makes sense. Just because you mentioned it there, Kurt, I'm not sure if you're able to provide your expectations for where the MLI select rate might come in.

I mean, at this point, I expect to be probably around the 360 to 370 range, given when we're planning on financing it. I mean, could it be 375 or 80? It could be. It's hard to predict right now. We're still seeing crazy volatility in the market. So the good thing is with MLI Select, we expect this to get into level two. We're hoping to have this funded before year end. It could drift into early January, but we're pushing hard to try and get it this year. So we expect the financing on it will be somewhere between that $75 and $80 million.

Okay. Thank you for that. I'll turn it back. Thanks, guys. Thanks, Kyle.

Thank you. Your next question is from Mark Rothschild from Canaccord. Your line is now open.

Thanks. Hey, guys. Hey. So with the spread between in place and market really hasn't changed that much, but rental rates clearly have moderated somewhat and you're still getting good rent growth. Do you feel that it really is close remaining close to 30% based on the current market rates?

Yeah, I mean, I mean, I think you quoted 27, so.

We're quite confident in that and we're achieving that as of today. I think the numbers show it. I think coming in does show there's been some called stabilization in some of the nodes in which we operate. Hence why the market's dropping 30 to 27. We don't know what the future brings, meaning, hey, depending on how this population growth impacts, there could still be some softness in areas where further deliveries get, new supply gets delivered. That might come in. But that said, to your point, I think what you're making, Mark, still remains a pretty elevated and healthy market gap. So market rents really have to come by a lot in order for that cushion to evaporate.

Okay, great. Thanks. Maybe just one more. You made a comment in regards to the acquisition of Montreal. You mentioned a couple of times buying below replacement costs, and you said you believe that would be a very short window that you'll be able to buy below replacement costs. Maybe you could talk a little bit more about what gives you the confidence that it's going to be only a short window and that the values will be at or above replacement costs.

I just, well, I think if you're starting today, it's going to be developing your penicillin today will be penicillin before then. So, I think depending on location specific, it's going to be really hard to pencil out new starts. And on that front starts coming down, right? So I think as some of the condo developers slash multi-purpose developers work through the portfolios, there's just going to be less of these opportunities to actually convert and be in a position to sell, right? Like a lot of these buildings were started three, four years ago. And the reason why you're able to buy it at some basic cost is because they were started at land prices three to four years ago. Construction costs were a lot lower from a financing, from a soft cost perspective, and even from a actual hard cost perspective. So that will just slowly play out as some of this gets absorbed and transferred hands from the developers to the more permanent owner stock. And last but not least, I think as construction financing comes in, you might, for developers who have a mix of projects on the go, they might not find themselves in a position where they have to be optimized, let's call it, the portfolio.

Okay, great. Thank you very much. I'll turn it back.

Thank you. Thank you. Your next question is from Mario Tarik from Scotiabank. Your line is now open.

Hey, good morning, and thank you for taking my questions. You may hate me for it, but I'm just going to come back to the immigration commentary, and I'm not expecting specific numbers, but just essentially is what you're saying, Brad, that the prior kind of top-line growth of 5% to 7% that you were thinking, that could be lower now, but you just don't know how much lower it's going to be. Is that a fair comment? Yeah, I think that's a fair comment. Okay. In terms of the quarter, specifically, Montreal occupancy fell 100 basis points versus Q2, but at the same time, as you mentioned, saw the highest sequential average rent growth at 3.2%. I'm just wondering if you can kind of explain the seemingly opposing data points there.

Well, I think there's been a lot of discussion around students supporting students.

Montreal does have a lot of dominance from the companies to the students, so we did see a little slower of an August this year than we would have. But in the same token, we also saw demand coming from other sources that would justify the rent levels in which we were. So unfortunately, as we all know, we don't have the same visibility in August. What's coming out is until August. This really is a 30-day demand window. And that's what it was. And so, yeah, we saw a little bit of an increase. But I think the team did a really good job of trying to balance that off with the rent growth that we posted, where we were able to get it in the other segments within. But you just don't have the same level of demand in other segments that you normally would from the students on it. So that could smooth out a little bit as time goes on.

Right. So is it like, is it a function of the units that went vacant or lower rent units? Or is it a function of using quarter end rents versus the average throughout the quarter as well in terms of explaining the discrepancy?

Well, I think we have two regions, right?

We've got the urban and then we've got Cote St. Luke. And there was some pretty strong performance, but don't get into

Too many specifics coming in. Okay.

I just have two more. On the OPEX, the 6.3%, you kind of highlighted some one-time items in Q3 and pointed to the year-to-date of being 3.6. perhaps being a more normal run rate that's consistent with what was discussed on the Q2 panel. Is that still very common as you look out in 25? Notwithstanding property taxes expected to grow up 5%, is that 3% to 4% total OPEX growth a reasonable number to think of in 25?

Yeah, I think we had some one-time credits in Q3 last year that just made the year-over-year look a little off. Also, it's kind of an odd situation with Slate leasing up and with the conversion we did in Montreal with that commercial space to Resy. So your same store actually isn't 100% same store because we had filled out of units or units coming online on Slate. So when you factor in, it was 115K Q3 last year, that was a credit to the expense. And then when you factor in the difference in units in the two, We end up being at about, or a lot closer percentage for off-cost. We end up at about 4.8% on a per-suite basis, Q3 over Q3. So, at the higher end of what we expected, 4 to 5 for this year, but still in the range. For next year, initially I would say yes. I think that 3 to 4 would make sense, but The big question now on the immigration side is going to be how this may impact some of the workforce. When you think about maintenance, when you think about cleaning, you think about some of those roles, you could see some impact, you could see some pressure on wages there. So I think I would probably be looking at four to five for 2025 versus three to four at this point, given those. And again, we'll see as the year plays out how that tracks.

Okay, Kurt. Thanks. That makes a lot of sense. My last one, despite the $93 million fair value write-down, which I appreciate the color on the drivers behind it, I think your IFRS NAV is still around $17, give or take. Price is at $11. That equates to a 30% to 35% trading discount to NAV. Implied cap rate north of $5. How do you think about buying back units at an implied cap rate north of five versus buying new construction at a discounted replacement cost at a similar kind of stabilized cap rate two to three years out? And do you think that this acquisition can generate that mid-single-digit same-strand line growth structurally consistent with your existing portfolio?

Yeah, I mean, we can sit here and have a healthy discussion on this for the rest of the afternoon, but

I would definitely say with where the rates are, with where our unit price is today, buybacks are looking extremely attractive in that context, right? So all else equal, I think buybacks are looking really attractive right now relative to others. Allocation decisions, other allocation decisions are also made, though. This is a point in time. And you've got to look at what some of those other projects or capital allocation opportunities will bring over a period of time, right? Over three to five or seven. But please don't consider this as not looking or being active on buybacks at this level. So I think it's just a fine balance, Mario. A lot of it's going to continue to depend on our disposition program. And I think it caused a little bit of confusion in the last quarter when I talked about us being in that fire. And I think the context maybe came out that people thought or were extrapping from that comment that we were going to be significant buyers. And I think I meant it from the time before that I had visibility on things like M-70, Rennie-Livette. But when you put it in the context of what we've disposed, and that is how we have to look at this, is our capital is constrained to our disability program and maybe a little bit of additional leverage where we can take on attractive financing through ACLPs and MLIs select. So really, the way we will continue to look at our capital will remain thoughtful and will remain within the confines of that disposition program, but buybacks will definitely be a part of those capital allegations.

Got it. So the buyback activity is somewhat predicated on disposing as opposed to increasing leverage on the margin to buyback units here.

Is that a fit for me? Did you say disposing of properties versus leverage to go at it? Yes. Okay. So contingent upon asset dispositions.

And like Brad said, Mary, it's the overall timing that's up in the air, right? Like you're working on an acquisition can take months and months. Disposition can be the same. So we have visibility into these a little more than the market. So you may see some activity, but it'll be paired with with that kind of transaction and not as a standalone.

Perfect. Okay. That's very clear. Thanks, guys. Thanks, Mario.

Thank you. Your next question is from Syram Srinivas from Walmart Securities. Your line is now open.

Thank you, Abhiva. Good morning, guys. Hey, Syram. Brad, could you make a comment on the rent growth ahead? As we look at the vacancy numbers right now, I guess it's somewhat coming close to your stabilized 96% occupancy levels. When we combine that with the comment on rent growth being not as much as what we've seen so far, what's your comment on the broader organic growth outlook over the next 12 months? Do you think that kind of leads to growth to more of a single digit levels?

Yeah, I mean, sorry, are you talking portfolio-wide? Or I heard Vancouver. That's why I just paused for a second. I'm just looking at Kurt and Dave.

Was it portfolio-wide or Vancouver specifically you're asking?

Portfolio-wide.

Yeah, I mean, it's kind of back to that original comment, right? I'm not really going to put myself or the team out there. We've never seen population decrease in Canada, so I don't think it'd be responsible for us to comment on it. What I will say is really well-located portfolio that we've spent a lot of CapEx dollars on, and we got the majority of the portfolio repositioned. We've proven time and time again that we can perform above industry averages. And I think we will continue to outperform. And when I mean that, I mean it's a very fragmented business. I'm not taking comments out of competitors. I think they're great and they're professional managers. This industry still has a lot of room to go. And I think a rising tide floated a lot of boats. And I think the ones that have invested in their operating platforms will show you what those investments, I think those investments will pay off on a relative basis. But as far as column absolute level of rent growth, I just really can't go there because we're going to experience this together. This is going to be fun. I'm sure we're going to have these conversations over the next eight quarters. And at some point in between now and those eight quarters, we're going to get comfort that where we think how big the directional is. But I can tell you this, I'm quite confident in our team and under Dave's leadership that we're going to perform the best we can perform and outperform on a relative basis. I know that doesn't give you guys what you want to hear, but I really don't know how we can answer it any differently.

And maybe just, you know, going to segue into the repositioning, I know now it's about 15% of the portfolio out there. When you look at historical opportunities and returns that you're seeing on repositioning versus what's there ahead, how do you compare and contrast? Do they look equally attractive to invest capital there? Or maybe do you see that kind of tapering down? Can you give some color on that?

I think we still like the repositioning opportunities. We haven't said that we're going to focus just on new bills or anything like that. For us, it's about looking at everything that's available to us in the market, whether it's a new bill that's strategic and a bolt-on to our portfolio, whether it's a repositioning opportunity where we see great upside and we can use our track record of delivering on that. And like we said in the capital recycling comment earlier, whether that's into the NCIB, we look at all of these all the time. We don't just sort of pick a path and stay on it blindly. We're constantly looking at all of them and trying to figure out, given the long-term horizon, which is difficult, right? Like you mentioned earlier, you're taking months to negotiate a deal. The market can change a little bit. So we're going to keep doing what we think is the best investments for the long-term of the company. and it'll be dependent on what gets presented to us in the market. We're kind of agnostic. We're just looking for the best returns and the best NAV creation for our unit holders.

But if there is a strategic bolt-on close to existing portfolio where there's a lot of operating synergies and we have a lot of comfort that we can drive yields to where the implied cap rate is right now, hence that difference. Those existing... all else equal, better be really attractive. Because one thing we do know, and we know well, is our own communities and what they can generate. And that's really attractive, right? The other thing I would point out that might play out, and it's not all beans and blooms and arrow with this population, is turnover might start to increase. Now, what that means is For people who haven't spent money on their portfolios, that might not be great because it might mean they've got increased capital expenditures to come to be able to maintain in the rent environment that might be more stable. But there could be some opportunities with the higher turnover, right? This could create more movement. And the other thing, and I touched on it a little, I'm not sure how many people picked up on it, but there is the impact of the doubling, tripling, quadrupling up that has definitely happened. It's more anecdotal. There's not as much written. Yes, the PBO office has put out their number of 640,000 on that, but that unwinding could backfill a little too. But like I said, a lot of unknowns and how this plays out is yet to be seen. The professionally managed portfolios with a great operating team who spent money on the portfolios tend to, will stand to do well on a relative basis. And I think that's where we get a lot of hope. Now, we've built up a level of expertise to do the value add, and that's kind of the question where you're going. We feel quite confident if opportunities continue and our cost of capital right sizes and we have successful on our disposition program back to courage point we'll look at everything on our on a relative basis as we allocate that capital and we'll look out five years and we'll go with what provides us the best return but but with the price where it is right now it's a pretty attractive opportunity

That makes a lot of sense, guys. Thank you. Thank you.

Thank you. Your next question is from Jonathan Keltzer from TD County. Your line is now open.

Thanks. Good morning. Guys, first question, just on the slowdown in your gain to lease this quarter, it was lowest that we've seen in a while. Was that a function of which leases turned as much as anything? And would you expect that to sort of bounce around as we go forward?

Yeah, you're already at that discretion. As you've seen, it's not so much a fallback in the market rents or the capability in the market rents. It's more just we've seen more of a trend to turn over on people that have moved in more recently. So in other words, tenure is extending out a little bit. So that can change quarter to quarter. But at the end of the day, when you look at how much market rents have moved over the last few years, it makes sense that the mark-to-market gap stays. It makes sense that if you locked into a rent four or five years ago, you're probably going to stay a little longer. you can still acquire it through time, because life events happen, people move. However, the timing of when you're going to get it, that is, you know, we tend to doubt a little bit, and you're seeing that play out through the gain on lease. And I think, you know, one of the things to keep in mind is if you go back over time, and over the 14 years I've been here, we've outperformed consistently on rent growth, quarter after quarter after quarter. And over time, that becomes more challenging to do as you get closer. As your AMR grows compared to the marketplace, that gets harder and harder and that differential gets bigger and bigger. It's more of a matter of timing of when we can get to it, not a matter of it has disappeared.

I think the other thing to keep in mind too, Jonathan, is we do have the luxury because we do tend to operate at a little lower occupancy target, we do have the luxury if, and it's a big if, if things start to soften because demand comes in, we do have the luxury of leasing up to a higher target.

Right, and driving revenue that way. So that goes to my second question, which is, I guess Mario started on it, but if your target had been sort of 5% to 7% revenue growth and that's going to slow and you're talking OpEx of 4% to 5%, how should we think about, if we put that all together, how should we think about margins for next year, sort of flat to slightly up or flat to slightly down, or how should we think about that?

Yeah, I think you've got to run through where your assumptions are on the top line, because it's all going to come off the top line. So I'm going to let you guys, you guys are smarter than all of us, so we'll let you guys pick where you guys think your top line is. You can bet your bottom dollar that we are going to continue to find ways to drive efficiencies within our operating costs. And I would say really helpful in some areas in which we can do that, but they still take a little bit of tech spend, so they're not going to be as obvious through. We've already seen some reduction in some areas on headcount because of investment in technology, but I do share Kurt's concern that the labour pool is going to get a lot tighter in time. It's not going to happen tomorrow, but in time it's going to get a lot tighter. and there could be some weight pressures. So we've got it in the past, three to five. I think from a modeling perspective, you might want to be close to the five, but it won't come evening through the year. So it's probably going to take time for it to have an impact. So maybe it's the second half. So I'm not trying to be cheeky. It's just, listen, we're all going to be dealing with this together through, right? But you can bet your bottom dollar that we'll be batching down the hatches for sure when it comes to the operating costs.

So I'd be hopeful that we can maintain the margins or slight slippage. It really depends on what you assume is the top line.

Yep, for sure. And then lastly, just your non-stabilized portfolio is obviously decreasing. What do you expect for CapEx spend next year on the non-stabilized?

All right, and continue on the same kind of path where we are right now. We continue to see it come in. actually coming in and i think you can continue to watch it come in as the non-repositioning becomes less and less and that is the good news yep okay that's uh that's it for me i'll turn it back thanks great thanks johnson thank you your questions from mike martini's from bmo capital markets your line is that open

Thank you, Brad. I promise I won't try and goad you into giving me some NOI outlook or margin outlook for 2025, but I do have a couple of questions. First off, just on Richmond and Churchill, I know you guys are making progress. Demolition is complete. Does this change in immigration policy make you just want to put that on the shelf for the time being, or is there still an expectation that you might actually get in the ground in the foreseeable future?

Well, Richmond Churchill is such a conics We truly, and this is not just us talking up our own book, but we really do believe it's a generational site. While the demand forecast does cause some pause to see where things are going to go, the one side we do know, there is some supply in Ottawa elevated 2024 and there will continue to be some in 2025, 2026. At this point, there's only, I believe, one project. They don't want to be delivered into 2027 and that would be the time in which we would be delivering. The other comment I would make about Richmond Churchill, Ottawa doesn't have really a condo. market and while in Vancouver and Toronto we do have a condo market and it has played a variable in some of those condos that have not been sold converting to compete in the shadow supply of Reynolds Ottawa doesn't have that same level the only reason why I mentioned this is the original Churchill site would be geared towards empty nesters it's in the affluent area of Westville, and it's a market in which we think is pretty underserved. It's only up to the last little bit, but as somebody with equity and as an internist, you didn't really have an opportunity to kind of be selling your place and then going and renting. It's only of late, and with where Richland Churchill is located, we feel pretty good about it. We're still cautiously looking at that and still leaning towards going. But as we get the pricing back, and we believe we're actually right now with the trade, at least in Ottawa, there's an opportunity to really kind of sharpen and get to a point where we think we can develop to an IR and to a yield on cost that even where we are today makes sense. Now, we will constantly watch how things unfold, and we reserve the right not to change. But as we stand today, we need to continue to go with that.

And like Brad mentioned, due to the timing of that, you know, you're thinking into 2027, you're getting to the end of current government announcements on immigration targets. and sort of resuming normal immigration also, right? So timing could work well, depending on how it all plays out.

There's a lot out in the air right now. No, that's a great point, Kurt. Thanks for that. Okay, I know we're halfway through a quarter here, and I know that your move-outs are lower in Q4 and in Q1, but has there been any noticeable shift in terms of turnover rate in Q4 or move-outs at all to this juncture versus where you would have been last year?

No, not significantly.

Okay. And then I just wanted to sort of hone in on, you know, you mentioned a potential if, and I know it's a big if, to potentially shift to a higher occupancy target if conditions warrant. And I'm not suggesting that we are necessarily going back to a pandemic, but that would be a pretty stark contrast to what you guys would have done back in late 2020 and through a good part of 2021. So I'm just curious as to what the strategic thinking is. Again, I know a lot of balls in the air, but just what would it take for you to sort of move off of that strategy that you would have done in the past?

You know, I'm glad you asked it, Mike, because it's a great question. You're right. Back in COVID, we made a conscious effort not to buy oxygen, and we held our rates. I think between, call it Q... Q2 to Q4, we actually saw minimal. I think on average, we saw 40 basis point drops in our listing rates between that timeframe. And when we took on call an extra 400 basis points of Basie, it hurt, but we were all of the mindset that we had an idea of where supply was and that it was demand driven, right? So meaning all of a sudden the government completely shut down the rental demand pool. Everybody is locked in and not moving. We saw that as a temporary blip of a year. Now, granted, it lasted two years. We didn't see that. We got that wrong. We do know with the current immigration target levels, population is going by the way, for two years. Now granted, be it small, but nevertheless it is. Now keep in mind, over that same five-year period of when these targets are, we're kind of back to the overall average, so it seems though, but there are pockets where maybe new supply is coming on. And if we are in an area where new supply is getting delivered at the same time that we notice listings or needs are really coming in, we're going to take the opportunity and say, okay, maybe we will move off our rents a little. And that this could be in this scenario for one, two years, right? Versus before we really went into it, thought it was going to be one leasing cycle. It ended up being two and a half. And that almost impacted us. recycled with Montreal given when things open back up. So I think the difference is now you've got a little bit of different demand supply fundamentals where previously the government was still talking about 500,000 permanent residents, right? So it's a little bit of a different outlook.

And, like, I think it's an important point that Brad makes, too, just in regards to the overall long-term. If you look at sort of how many people have moved in in the last two years, you need to take zero for the next two or negative. on an average basis over many years. And the reason I say that and the big if that we caveat that with is, you know, one of the things is household formation. A lot of people are quoting numbers that are old. Anecdotally, and I think everyone intuitively knows that the number of people per household has gone up over the last two or three years. And the question will be is as you pull back on immigration, how much of that deferred household formation sort of goes back and trends back to a norm? and offsets the bit of the vacuum, if you will, created by the lack of immigration by people moving out where they double, triple, quadrupled up or are staying at home long. And I think that's where it'll be interesting to see what we'll be watching closely is how that plays out versus immigration. And depending on how that plays out, then those adjustments will come into play.

Okay, no, that makes sense. And I guess just Brad to To summarize what you're saying, I guess the difference today from where you sit would be the demand drought, if you want to call it that, could be more protracted than what you initially thought back in 2020. And the supply picture is worse than it would have been back in 2020. Is that fair?

Yeah, 100%. Okay. That's it for me. I'll turn it back. Thanks, guys. Thanks, Mike.

Thank you. Your next question is from Brad Sturges from Raymond James. Your line is now open.

Hey, Brad. Hey, guys. I'll keep it quick. Just a couple quick ones for me. Just to go back to potential transaction activity going forward, you talked about tying dispositions to acquisitions. Is there more capital rotation you would expect Heading in the next year within the portfolio in terms of rebalancing or are you taking a little bit more of a cautious?

Approach given maybe some of the visibility challenges in the market right now from a revenue perspective and and more pens down at the moment No, I think I think it just goes back to maybe the last college in there doing up job Maybe the answer was to start is really will why we kind of have our parameters where we're comfortable and with the leverage and it really will come to where the opportunities are on the disposition. If we can dispose of some assets that no longer meet our overall corporate thresholds and we can dispose of those and recycle them into a creative initiative like buybacks or a strong growth opportunity in which we think over time is a higher return than what we're disposing of, we'll do that. But it's going to be constrained to a big part to the success of the disposition program. And then at some point on that, there's only so much you do want to dispose of as well. But right now, we've said, last call, we thought we could do 50. The numbers probably could be a little higher, but We rather set the expectations that we feel comfortable that within the time frame that we mentioned on the last call, $15 million was realistic. We previously set something high. We, I think, did just shy of $100. And we've done them at higher for us to a greater. So we'll continue to work that. There's not a shortage of opportunities in the marketplace. more institutions are involved there was a larger number of deal size grew per se and depending on which market some markets saw some influence increase in transaction volume but the average deal size did grow which suggests that the institution has kind of come back I think there's The one good news right now in our space is the fact that fundamentals are so red hot and everybody's worried about the macro tape. The macro outside of, yes, the immigration policy, but from a fund flow perspective, has cap rates and interest rates. That's turning in our favor. I think as you talk to different private industry participants, there's a real level of comfort that interest rates have likely stabilized. Now, yes, it still remains volatile given the economy between the feds and what Bank of Canada is doing and whatnot. But I think there is a consensus that rates have probably stabilized, and it's allowing institutions to at least start underwriting and transact. And that's good news for all of our portfolios, right? Like, I can tell you, you cannot buy in the marketplace right now, new or vintage, at the applied cap rate that our stock is currently implying. So that would lead, believe that our stock has to reflect, right? if it's going to meet on the pricing. So I know that's a long-winded answer, Brad, but we're short on the answer. We're going to be extremely disciplined, right? And there are still things for us to be able to do work within the confines of that $100 million that we dispose of. If we are successful in disposing another $50 million, we'll work within that. will allocate as you see appropriate and that being buybacks that could be external and that could be continuing to develop out maybe on a mixed material and maybe and continue to go 360.

Okay and maybe just to summarize that then the if you do execute it would be more of a leverage neutral A strategy, I guess, when you're... We did say we'd bring up leverage a little.

We said on the last call and this call, there is a track of ACLP and MLI financing. So we would be willing to take that up into the low 40s, Brad, because it is attractive where it takes your cost of capital.

Okay, that's helpful. I'll turn it back.

Thank you. Your next question is from Rob Martin from Green Street. Your line is now open.

Thank you, and good morning, everyone. I'll keep it very quick. Brad, just on your last comment there, you're comfortable with leverage going up slightly, but is there a scenario under the current capital allocation plan where leverage starts to come in?

where leverage starts to come in, meaning leverage decreases? Yes.

Yeah, if we continue to dispose, we don't see any external opportunities in which we can allocate our capital to pay down leverage. But our variable rate is less than one, and where our share price is currently,

is a pretty attractive opportunity similar to the base right now. Okay, thank you for that. I'll turn back to the operator. Thanks, sir.

Thank you. Your next question is from Matt Cornack from National Bank Financial. Your line is now open.

Hey, guys. Just quickly, on the population side and the impacts that we're seeing, Obviously, we're kind of undoing the excesses of temporary or non-permanent residents. We're still seeing pretty good growth in permanent residents in the country. We know the student side of it, but on the kind of temporary foreign worker side, do you know if you have many of those in your existing portfolio? Obviously, we've seen unemployment increases. Some of those came into the country as well, so not maybe necessarily a huge economic impact if some of them depart if they didn't have jobs, but Just wanted to get a sense to the impact that maybe the temporary foreign workers would have in your portfolio.

Yeah, I mean, we don't disclose it. Matt, but there's another way you can skin that cat, right? I think depending where they sit on their status as temporary foreign workers, we're getting bad feedbacks. They're going to sit in different abilities on the affordability of rent, and depending where you are, it's going to probably dictate a larger exposure to the temporary residence than not. I think across the board, everybody will have exposure to the temporary residence. take a wait and kind of see the approach to what that actually means but i i know what i mean that's a hard one not to kind of give you a full type of uh disclosure on yeah you know that's fair enough and then i guess on on the student side um

With regards to kind of buying occupancy, is that an area that you're more willing to buy occupancy just because you know that they're going to be there for maybe three years maximum? And again, they would have been probably some of the turnover that you're experiencing that's shorter duration as well, so lower mark-to-market. So is that maybe some of what's driving this lower turnover spread that we're seeing right now?

Yeah, there's no question you're definitely skinning the cat in the

And one of the ways is obviously you're going to accept by an office where there's less left on turn, meaning if there's current residents or current places where you think you can get at that sweet pasture again, those make a lot of sense as you prioritize. But a lot of it's going to come back to It's a demand and supply type thing. The market has been tight enough up to the last little bit because of the demand of stripping the supply that we've been all of us, unfortunately, the tide keeps rising. Now that the tide is no longer necessarily rising, how many boats are out there, right? Meaning where there is supply on a locale close to a community and it's it's a significant community that's delivering a significant amount of units, that's going to impact you. So you might look at that and say, it's worth buying a little bit of oxygen here because a competing supply that's going to come on could really hurt until that gets absorbed. And if you think it's going to take a two-year lease up, it might be worthwhile that, hey, the fundamentals in that zone are going to be a little softer for two years there. Might be willing to say, hey, okay, yeah, if we put them in, they might stay here for five, but two of those years would have been soft anyways. So really now we're looking at tracking that equity once the market returns to normal. greater than equilibrium, then we might be trapping only three years of that lower rent, if that makes sense to you. It really is going to be coupled with where the new supply has been delivered. And that is very, very location specific.

Okay, it makes sense. A very, very quick last one. This recent acquisition in Montreal, you're clearly not straying from your strategy. You're locating near University of Montreal, Super Hospital, and UCAM. Still going after kind of higher propensity to turn individuals. I guess you still see, regardless of the immigration environment, over the next little while, that that's where you want to be in terms of tenant exposure.

Well, it's real estate, right? So we love that dirt. We'll bet on the operating platform all day long. Sure, it's more operating intensive when you have higher terms. But we will always bet on the team to be able to deliver the ultimate kind of experience. And we're going after renters by choice. And with the market having the super hospital right there and the University of Montreal, as you know, Matt, the University of Montreal is given where the province has headed with the whole language and studying within French, being able to get tuition there. a local cause, we think we could see a little bit, we're not banking on it, but we could think we could see a little bit of an influx of foreign students that are French speaking. And that community could benefit greatly from that. But that alone, the hospital is literally right behind it. And those make great employment basis for our community. So it's sticking with the strategy. This demand population, I'm pretty safe to say, like I said, there's a lot of unknowns. Canada can't exist on negative population growth for a significant period of time, right? And the ones that I would say about Montreal, Montreal kind of went through its elevated supply. Its elevated supply was previous, a couple of months. It was 2021, when it peaked, 2021, 2022. And that supply that's going to deliver now is slowly coming in. So from a supply aspect, we feel really comfortable. And then we also feel really comfortable from an affordability standpoint with the Montreal market.

So we're pretty happy with it. Makes sense. Thanks, guys. And yeah, the government hasn't necessarily been the greatest at meeting its own targets on immigration and population growth anyway. So we'll see.

Your words, not ours, Ben. No comment. But we appreciate you saying them. Thanks, Matt. Thanks, Matt.

Thank you. There are no further questions at this time. Please proceed.

Thank you. Yep. Thanks, everyone, for taking the time for the Q&A. And if there's any further questions, please reach out to Renee, Kurt, and myself.

Thank you.

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may disconnect your lines.