InterRent Real Estate Investment Trust (REIT) (IIP.UN) delivered strong financial and operational results in its first quarter of 2024, as revealed in the recent earnings call. The company reported a steady occupancy rate of 96.8% and a notable rental growth of 7.8% across its total portfolio.
With a focus on enhancing property value and optimizing operations, InterRent REIT has seen a growth in net operating income (NOI) of 11.7% for the same property portfolio, alongside an increase in NOI margins to 65.2%. The funds from operations (FFO) and adjusted funds from operations (AFFO) also saw an increase, reflecting the company's successful refinancing strategy and its commitment to reducing variable rate debt to under 1%.
Moreover, the REIT has plans to divest non-core assets and is actively exploring joint ventures to expand its portfolio, all while contributing to the solution for Canada's affordable housing challenge.
Key Takeaways
- InterRent REIT's occupancy rate remained strong at 96.8%.
- Rental growth was 7.8% for the total portfolio and 7.1% for the same property portfolio.
- NOI for the same property portfolio grew by 11.7%, with NOI margins increasing to 65.2%.
- FFO rose to $21.1 million, and AFFO increased to $18.5 million.
- The company successfully reduced variable rate debt to less than 1%.
- Plans to sell non-core properties are underway, with the disposition program aiming to exceed $75 million in net proceeds.
- Development projects and sustainability initiatives continue to be a focus.
- Interest in joint ventures highlighted as a strategic approach to capital allocation.
Company Outlook
- InterRent REIT remains committed to its value-add strategy and stakeholder satisfaction.
- The company is poised to play a significant role in addressing the housing supply gap in Canada, with an emphasis on affordable housing solutions.
- Development of AAA sites, including the 360 Laurier project, is anticipated as the cost of capital improves.
Bearish Highlights
- The company acknowledges the challenges in attracting capital in the current market.
- Operating expenses have seen a slight increase of 1.2%.
Bullish Highlights
- The REIT has a large pipeline of opportunities and is well-positioned to capitalize on them without needing to come to market.
- The disposition program is on track to surpass its net proceeds target, indicating strong asset management capabilities.
Misses
- No significant misses were discussed during the earnings call.
Q&A Highlights
- Executives discussed the unchanged demand for student-focused buildings in Ottawa and Montreal.
- The company's preference for joint venture structures was reiterated as a strategic capital allocation method.
- InterRent's role in providing affordable housing in Canada was recognized and remains a priority.
The discussion during the earnings call shed light on InterRent REIT's strategic direction, financial health, and operational achievements. The company's focus on maintaining a robust balance sheet, its prudent refinancing strategy, and its active role in addressing Canada's housing challenges underscore its commitment to long-term value creation for stakeholders. With a clear plan for asset dispositions and development projects, InterRent REIT is navigating the current market with discipline and foresight.
Full transcript - None (IIPZF) Q1 2024:
Operator: Good morning, ladies and gentlemen, and welcome to the InterRent First Quarter 2024 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, May 9, 2024. I would now like to turn the conference over to Renee Wei. Please go ahead.
Renee Wei: Welcome, everyone. Thank you for joining InterRent REIT’s Q1 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 Cutsey, President and CEO; Curt Millar, CFO; and Dave Nevins, COO, on the line today. As usual, the team will present some prepared remarks, and then we’ll open up to questions. Before we begin, I want to remind listeners that certain statements about future events made on this conference call are forward-looking in nature. Any such information is subject to risks, 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 REIT’s news release and MD&A dated May 9, 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 reconciliation to the nearest IFRS measures. Brad, over to you.
Brad Cutsey: Thanks, Renee, and welcome, everyone. Multifamily residential fundamentals in our markets and across Canada have remained robust, underpinning our strong financial and operational results in the first quarter. Occupancy rates remained steady at 96.8% for the total and same property portfolios and are in line with our strategic target for optimal occupancy levels. Rental growth has stayed healthy with a 7.8% increase for the total portfolio and 7.1% for the same property portfolio. Dave will give some details about regional rent and occupancy trends later in the call. Strong rent growth continue to drive positive results. We saw a 7.8% increase in same-property portfolio revenue over the same quarter last year, while operating expenses expanded slightly by 1.2%. This resulted in 11.7% growth in NOI for the same property portfolio and a further increase in NOI margins by 230 basis points to reach 65.2%. Total portfolio revenues increased 7.6%, accompanied by a solid 11.2% growth in NOI. Our strong NOI effectively offset the increase in interest costs and drove consistent bottom-line growth. Our FFO in Q1 increased by 11.7% to reach $21.1 million, representing a 10.8% increase on a per unit basis, reaching $0.144. We delivered $18.5 million in AFFO, marking a 12.8% increase overall, and an 11.5% increase on a per unit basis reaching $0.126. During the quarter, we successfully executed our refinancing strategy and through a disciplined capital allocation process, we have significantly further strengthened our balance sheet. Our key debt metrics are included on this slide, and Curt will provide further details on our balance sheet later in the call. But first, Dave will take us through some of the operating highlights.
Dave Nevins: Thanks Brad. We’re pleased to have started the year on a positive note. Average rent increase for the total portfolio was 7.8%, driven by the execution of 461 new leases during the quarter, capturing significant gain on lease of 20.3%. Turnover rates remained consistent with last year with trailing 12-month turnover remaining at 24.8%. We estimate that the average rental market gap on total portfolio remains approximately at 30%, representing a substantial embedded value. We’ve seen strong occupancy across all regional markets, alongside robust average market rent growth. Vacancy levels in Vancouver are trending back to historical norms. As discussed in last quarter’s call, Vancouver experienced a temporary uptick in December vacancy due to a number of suites that we got back that required full turnovers. These suites have since been successfully rented out. However, we anticipate the need to take more suite back offline for renovations as they become available in the coming weeks. We consistently take a strategic approach to balancing the short-term vacancy and long-term rent growth, taking into account the distinct characteristics, location and supply-demand trends of each community. This approach, alongside our careful leasing execution, has proven to drive outsized top line growth. As we gear up for crucial summer leasing season, we are focused on diligently executing this strategy. Our operating expenses came in at $21.7 million for the quarter, up 1.3% year-over-year, while operating revenues grew by 7.6%. Operating expenses as a percentage of revenues was 35%, a decrease of 210 basis points compared to the first quarter of last year. This was primarily driven by a 9% reduction in natural gas usage, coupled with a 20% drop in natural gas rates. As a result, cost of natural gas reduced by 28.6% over 2023 on a per suite basis. These improvements are largely attributed to proactive energy efficiency initiatives, while also benefiting from fewer heating degree-days due to a mild winter. Property taxes for the three months increased by 3.7% to $6.8 million, accounting for a 10.9% of revenue, an increase of 10 basis points as a percentage of operating revenues compared to the same period last year. This increase was due to a combination of increased rates and change in assessed property values. We continue to invest in our portfolio to drive growth and deliver sustainable returns. So far, in 2024, our maintenance CapEx came in at under $1,000 per suite on an annualized basis, slightly down from 2023 levels and consistent with our pre-pandemic averages. As shown on the right-hand side of the slide, our value-add program, which remains at the core of our business strategy, has been a significant driver of value creation for us. Through cost-effective capital investments, suites in our repositioned portfolio, on an average, have a 100 basis point higher occupancy rate, along with 170 basis point higher NOI margins, when compared to those in our non-repositioned portfolio. As of March 31, 14% of our portfolio are at various stages in its repositioning program, representing significant potential for growth. With that, Curt, over to you.
Curt Millar: Thanks, Dave. Slide 14 illustrates adjustments to the cap rates used to determine our IFRS fair value. In consultation with our external appraisers, cap rates for total investment properties stayed flat compared to Q4. The reduction of four basis points compared to December 2023 relates to the removal of the Montreal properties that were sold in the quarter as well as the removal of the Aylmer property in Gatineau that was moved to assets held for sale. We continue to closely monitor market conditions to determine if further adjustments to cap rates are necessary.The $8.4 million in FMV gain during the quarter was driven by continued strong NOI growth. We’re pleased to have further strengthened our financial position through the successful execution of refinancing activities during the quarter. We up-financed four CMHC insured mortgages and converted 16 conventional and variable rate mortgages to CMHC insured financings and thereby increased our CMHC exposure to 90%. Leveraging proceeds from our financing activity and our recent disposition, we prioritized repaying our more expensive variable rate debt, and were able to reduce our exposure to less than 1% at the end of Q1. The reduction in variable rate debt has resulted in our weighted-average cost of mortgage debt being reduced to 3.37% from 3.5% and our debt-to-GBV further reduced by 60 basis points compared to 37.5% as compared to Q4. Moving to Slide 17, we remain focused on enhancing our sustainability initiatives. This quarter, we invested approximately $460,000 in energy projects like high-efficiency boilers, LED lighting and building automation systems, with the aim to improve our natural gas and electricity usage and reduce our carbon footprint. We also conducted energy-training sessions for our operations, construction and asset management teams. These sessions helped to raise awareness and empower our teams to contribute to energy conservation efforts as each one of us has an important role to play. Lastly, we are finalizing our 2023 sustainability report and look forward to sharing our progress with all stakeholders. We anticipate our report to be published in the weeks to come. Please stay tuned. I'll turn things back to Brad to walk through our capital allocation.
Brad Cutsey: Thanks Curt. We continue to make significant progress with our strategic dispositions, which are a key component of our broader capital allocation strategy. During the quarter, we committed to sell 497 suites of non-core properties located in the city of Gatineau, within the National Capital Region. Total sale price was $92 million, or about $185,000 per suite, slightly exceeding these assets' IFRS values. The transaction is expected to close in the second quarter. The combined net proceeds for these dispositions, along with the Côte-Saint-Luc disposition in the Greater Montreal area, which closed in February, expected to exceed our anticipated near-term proceeds from dispositions, originally projected at $75 million and mentioned back in August 2023. With variable rate debt exposure already reduced to below 1%, we are now well positioned to pursue growth opportunities. We have been carefully assessing attractive external opportunities and refining our estimates for organic growth prospects. We will be considering both along with our NCIB and will prudently execute our capital allocation strategy to continue to drive long-term NAV accretion for our stakeholders, and made steady progress on our value-creating development pipeline. Our second office convergence project 360 Laurier has completed investigative demolition and full demolition started in February. We have received the full site plan agreement and the building permit is anticipated to be issued in the second quarter. In our Richmond & Churchill development in Ottawa, we have conducted a feasibility study to include a geothermal heating and cooling system and are investigating the impact of this on the overall design and cost of the projects. This strategic move not only positions us to qualify for potential government incentives and attractive financing opportunities, but also allows us to minimize long-term operating costs and reduce greenhouse gas emissions. Collectively, these [indiscernible] projects total over 4,000 suites and have the potential to significantly increase both their suite count and the overall scale of our portfolio. We take pride in our role in addressing the critical need for housing supply through our development pipeline, by carefully watching development costs and managing the pace of each project. Turning to Slide 22, following announcements of the cap on foreign students, the federal government recently signaled its attention to decrease the proportion of temporary works in Canada from 6.5% to 5% by 2027. By these measures, if materialized, may moderate Canada's record population growth in the coming years because consensus indicates that a significant supply-demand gap in the housing market will likely persist. Slide 21 shows housing gap projections for the PBO and CMHC for the year 2030 under various scenarios. Since most of us are already familiar with the CMHC's projection of a 3.5 million housing gap, let's focus on the PBO projection instead. This report published in April, taking into account the government's most recent immigration plan forecasts that the household formation will continue to outpace net housing completion on an annual basis. As a result, the PBO anticipates a projected supply gap of 1.3 million units by 2030, just to returning the vacancy rates to the long-term average. It's worth noting that CMHC approach targets a more favorable condition of restoring housing affordability. The PPO projects that to address the housing gap annual completion will need to reach 436,000, where CMHC's completion requirements are higher at 639,000 units per year. This is in stark contrast to the high this number of units ever completed annually, which stands at 242,000. At its core, Canada's housing imbalance was driven by many supply and demand drivers, ranging from structural to cyclical and from long-term to short-term dynamics. The solution will be many and complex as well. Boosting supply at a time when construction is limited and building costs are high possess a significant challenge and there is no easy fix. Meanwhile, these factors will continue to support the resilient fundamentals in the multifamily residential space. We've been talking about positioning ourselves for a future where supply and demand are more balanced for a while now. Unlike in the past decade, where some may have relied on acquiring communities and letting the market do the rest, we've always taken a more hands-on approach and when it comes to maximizing returns. This approach has consistently yielded significant returns, enabling us to fully capitalize on emerging opportunities. We've always taken a pride in being recognized as a value-add player. Looking forward, we are unwavering in our commitment to this strategy as a best-in-class value-add operator. Our value-add strategy is built on four pillars. Firstly, we continue to focus on enhancing property value through repositioning with a proven track record. We've successfully created significant value through renovations, upgrades and strategic positioning in the market, driving outsized revenue and NOI growth in the past decade. Secondly, value-add extends to optimizing and improving operational processes across all aspects from how we market and lease in our communities to how we handle design, procurement and property management. We are always looking for ways to streamline and optimize. Through persistence and creativity, we are able to uncover value in all types of our communities, whether they're brand-new developments or vintage properties. This approach allows us to enhance the profile and thereby drive sustained revenue growth. Thirdly, value-add is a way of life for our teams. We understand the importance of investing in the team and empower them to foster a culture of innovation, collaboration and ongoing improvement. Finally, value-add is about creating positive experiences and outcome from all stakeholders, including investors, residents and our communities. These outcomes go hand-in-hand. We have transformed neighborhoods, introduced amenities and developed programming. We're proud to enrich the lives of our residents and foster vibrant, thriving communities. With that, let's open in up for Q&A
Operator: Thank you. [Operator Instructions] And your first question comes from the line of Kyle Stanley from Desjardins. Please go ahead.
Kyle Stanley: Thanks. Good morning, guys.
Brad Cutsey: Good morning, Kyle.
Curt Millar: Good morning.
Kyle Stanley: So you've made great progress on the disposition front so far this year. Just curious to know what's changed over the last several months that maybe drove you to ramp up this program?
Brad Cutsey: Yes. I don't think anything's changed, Kyle. I think we just want to set realistic expectations as part of the disposition program. As you know, we announced that program, I believe it was Q2 last year, and we gave ourselves 18 months for the program. I think we just wanted to be realistic, given the fact that we realized the biggest part of the buyer pool or interest would likely come from private investors, and with that comes the expectation that they need financing conditions. And at different points throughout the year, CMHC has had backlog, which, I think, is well documented. So it's just providing enough time to work through the interested parties financing conditions. So, nothing's really changed. And here we are today in a situation where we have a firm bill, but has not closed. So, I'm not going to be able to provide, unfortunate for you guys, too much color, more than what we've disclosed already.
Kyle Stanley: Okay, fair enough. Just to clarify, so you mentioned obviously exceeding the $75 million net proceed target probably by about, I don't know what that is, $13 million or $14 million. Just wondering, is that due to better pricing or did you sell an additional asset that maybe you didn't originally plan to? Just, I guess, looking for how the pricing really has compared to the [Indiscernible]?
Brad Cutsey: No, we have a different pool in our disposition program, and we'll kind of lay out as we see and we get comfort on some of the negotiations within that pool, and then we'll just start to release some more as we continue to go. I think what we've highlighted to the marketplace was a realistic goal. Let's not forget the volatility that's been in the capital markets throughout the year, and let's not forget how much – there's been a lot of fake stops and goes within the market. So I think we just really wanted to give a realistic number for the investment community to be able to model and for us to be able to achieve that. Now, that said, do we have more behind pipe? The answer is yes. I think at this point, we're probably comfortable saying that we think we can do another $50 million, when we look out and we look in our portfolio what we think we kind of have maximized relative to some of the opportunities that we're currently looking at. So, I think it's fair to say you could probably model another $50 million and the closing of that could be staggered throughout the next 18 months.
Kyle Stanley: Okay. Thank you for the colour. And maybe just one last one. Dave, you mentioned obviously gaining back some of the vacancy in Vancouver this quarter, but then went on to mention that maybe some additional suites coming offline in the coming weeks for some value-add work. Just curious, what's your expectation for occupancy after kind of dealing with some of this movement in Vancouver?
Dave Nevins: Well, it's closing in really well. I think we're doing well in Vancouver right now. So traffic has really picked up and we've been able to close the gap. So things are looking good going forward.
Kyle Stanley: Okay. Okay. Thank you very much. I'll turn it back.
Operator: Thank you. And your next question comes from the line of Mike Markidis from BMO.
Mike Markidis: Thank you. Congrats on the Gatineau sale. It was a pretty big transaction for, I guess, you could argue a smaller market. But anyways, just with respect to your execution and the thought that maybe you can do a little bit more on the disposition side. I think in past conversations, while you don't give guidance, you've mentioned that you're comfortable with where consensus is. Is there a risk perhaps now recognizing the value-add longer term that potentially year-to-year this year could be impacted slightly by some dilution as you continue to sell these assets and redeploy?
Brad Cutsey: Well, it depends on what people have modeled into the consensus, Mike, like I don't have the luxury of sitting in and seeing each one of your models, but we'll do the best to our ability to mitigate any timing dilution impact. Obviously, our approach to opportunities are a total return approach, and it's always been the driving factor for us is value creation. And really, that comes down to, "Can we accretively add to the intrinsic value of our organization?" which really kind of translates into, "Is there NAV per unit growth?" So from a cash flow perspective, typically we have been busier and being lucky enough to be executing on opportunities, it does means a short-term cash flow impacts. So, I don't think there's anything different. I don't think Internet has changed its approach to the way we evaluate opportunities. As you know, we're not somebody that still doesn't buy cash flow streams. So there could be some near-term timing dilution, but you have to offset that with our track record of being able to create NAV per unit growth, right? So – and you can best bet that we're not as significant owners of the REIT. We're not going to do something that we believe that will dilute that NAV per unit track record. So you have to believe that we're efficient in allocating the capital and that when it take, yes, there's going to be some dilution from an income perspective from Aylmer, but hopefully be able to redeploy that into an opportunity that we believe that adds significant value to the REIT.
Mike Markidis: Okay.
Brad Cutsey: And as you know too, opportunities can be worked on for various time periods and typically, they're quite long time periods. And the timing of when you can actually close on an opportunity when you have cost of capital that makes sense to do that, don't always line up. But we are in a really good position in the sense that we have less than 1% of our debt is variable. So we're in a prime position right now to be able to try to mitigate any timing impacts with maybe short-term instruments that are getting close to 5% and hopefully will be able to redeploy that in a timely manner.
Mike Markidis: Yes, that's – can't forget about the 5% you can earn on cash today. Okay. Thanks for that. I think on Côte-Saint-Luc, the thesis if I remember correctly, was, push rents as far as you could, wood frame construction budding up against new supply. How would you describe the disposition thesis on Gatineau0?
Curt Millar: The disposition piece on Gatineau in relation to what we've talked about for dispositions being market rents, walk-ups, wood frames, I think in that market it's a good market but it's a market that does have a fair amount of new product that gets delivered. And what we look at in that market is where do we concentrate our team, where do we concentrate our staff? It's the only set of properties we had in the Gatineau market compared to what we have sort of in downtown core Ottawa. And when we analyze all those different pieces and our go-forward yield versus our corporate yield, we just felt that it was one of the right assets and one of the right timings to look at disposal.
Brad Cutsey: Yes. And Curt [ph], just on the backdrop of this, I don't want to get too much on this discussion, given the fact we have the close.
Mike Markidis: Okay, I'll move on.
Brad Cutsey: Sorry, yes.
Mike Markidis: I'll move on. High-level question. How would you guys, when you look back over the past seven, eight years, Brad, that you've been at InterRent, how would you describe the acquisition? I mean, I know capital is a limit and capital availability is much different. But how would you describe the investment opportunity set today versus historical time periods that you've been there?
Brad Cutsey: Well, I think it's classic, right? I think real estate is interest rate sensitive asset class. And it's one of those things where capital becomes tougher. There's a lot of capital earmarked on the sidelines. So, it's not that there's not capital. It's just not moving. It's on the sidelines. But what that does do is create for anybody that is over extended per se, that they've got to re-optimize the portfolio. So from that perspective, I think there's a lot of different opportunities in the marketplace for well-capitalized buyers to be able to take advantage of. And I think we're actually entering an era that's pretty unique because things got so dead and so tight that it was really, really competitive when it came to pricing. Now, I think there's enough opportunities out there for well capitalized buyers. I actually think we're quite optimistic about the future of the opportunities. Now that said, we've got to remain disciplined because we only have so much capital. Yes, I've just been saying, we're in a great position from a balance sheet perspective. And we paid down a variable rate debt, but we only have so much. So I think as far as InterRent in concerned we'll continue to explore these opportunities with joint venture partners so that we can spread our capital across more opportunities. Now with that said, our pipeline is so big, right? So, do we wish our cost capital was a lot higher and closer to intrinsic value? Yes, I think there'd be a great opportunity to really scale the portfolio. But we are not there and I want to make this clear, we have no intentions of coming to market. I think my comments were misconstrued last time I said that we thought we were heading into a very optimistic investment environment. I still believe we are, but we'll remain disciplined as ever. So we'll work within the confines of the cash that we do have to redeploy. But there are interesting opportunities presented themselves as we currently speak.
Mike Markidis: Okay. That's helpful colour. Thanks for [indiscernible].
Operator: Thank you. And your next question comes from the line of Sairam Srinivas from Cormark Securities. Please go ahead.
Sairam Srinivas: Thank you, operator. Good morning guys.
Brad Cutsey: Good morning.
Sairam Srinivas: Just looking at dispositions done so far and probably the assets, which might be in the pipeline ahead, are there certain kind of assets that you guys are looking to sell or is it more opportunity based?
Brad Cutsey: Yes. For us, it really comes down to, where do we think we can continue to push the rents at a pace that meets our overall portfolio. So we look at it in the context of a portfolio-wide view. So if it's our five-year outlook on an IRR basis, if we can exceed the overall portfolio IRR, is the first screen. Then you look at that, okay, so where is it falling down? Is there a lot of capital to be invested in? Not typically the case for us. It typically comes down to the top line growth and it typically comes down to the fact that the top line on the potential disposition doesn't meet the overall portfolio growth and kind of leads to lagging IRR, and that's how we approach it. Now, we approach it also by looking at, is that a cyclical or is this structural in nature? Why the top line growth doesn't match or exceed the portfolio-wide. And in most cases, it's structural. Most cases, it's either the demographic base in and around where the input levels are or it's with the fact that new supply has been delivered and we believe it's going to eventually cannibalize our existing community.
Sairam Srinivas: That makes sense, and it's probably going to be a cheeky question. But are there certain markets in the portfolio where you see that growth kind of tapering?
Brad Cutsey: Market-wise, I think its more node wise to be honest. Real estate is extremely local. So, I would not point to any one market where the overall market dynamics is attributing to this. It's more at the local level call it, within two kilometers.
Sairam Srinivas: That's fair, Brad. And just really looking at your disclosure on the non-core asset sales, I know we're not going to get into any specific dispositions, but generally, can you elaborate on the operating priorities and accretive growth opportunities, which you refer to?
Brad Cutsey: I didn't hear the last part of that broke-up about the...
Sairam Srinivas: Yes. So, I mean, just maybe, it's just a question around capital allocation of dispositions. In terms of the opportunity, you're seeing out there, I know you refer to the opportunity you're seeing in the market, if you could just elaborate on that?
Dave Nevins: Yes. So I think if I understand, looking forward with some of the opportunities where we’re – what could those be and how would we allocate? As you know, we take a bottom-up approach. Its very opportunities specific. And then we weigh it against risk-adjusted returns on each opportunity against each of them. But that said, they come in many different forms. It could be a vintage property that we believe meets our investment criteria from the different attributes that were well documented with to, could be a new build that we think with some tweaks to the designs, we can do better with on the pro forma. It could be a scenario where it could be in between, could be somewhere where it’s something that’s been developed but not yet leased and we can then leverage our marketing and operating platform to do the lease up and create value for the unitholders while taking out the delivery – taking out the development risk of the delivery of the product. So it really can come in many facets and then it can also be taking a look at the NCIB. So, we really will weigh each one against itself and then adjust it for risk and take the best risk-adjusted return approach. So, we’re quite happy in the four markets that we’re concentrated in.
Sairam Srinivas: That makes sense. Thanks guys. I'll turn it back.
Brad Cutsey: Great. Thanks.
Dave Nevins: Thanks.
Operator: Thank you. And your next question comes from the line of Jonathan Kelcher from TD Cowen. Please go ahead.
Jonathan Kelcher: Thanks. Good morning. Just on the CapEx, your Q1 CapEx was down 25% or so versus last year, is that a function of seasonality? Or is it just that you guys have done less acquisitions the last few years and you’re slowing down your repositioning CapEx?
Curt Millar: Sometimes it’s a combination of both, Jonathan, but its comparing year-over-year, like Q1 over Q1, I would take out the seasonality part. But it really sometimes will depend on how much you’re able to get completed before you go into the winter months. Q1 – Q4 and Q1 typically are the lower CapEx. So there is seasonality within CapEx given weather related. But yes, we have done a good job of investing in our communities over the past, and as the portfolio continues to mature, there’s less CapEx required.
Jonathan Kelcher: Okay. So, should we think about CapEx being down year-over-year, assuming you don’t – there’s no big acquisitions, sort of anything this year?
Curt Millar: It should be down. I’m reluctant to say it’d be down by 25%, Jonathan.
Jonathan Kelcher: Fair enough. That’s it for me. I’ll turn it back. Thanks.
Operator: Thank you. And your next question comes from the line of Brad Sturges from Raymond James. Please go ahead.
Brad Cutsey: Good morning, Brad.
Bradley Sturges: Hey there. Just looking at your Slide 9 here, just on the gain to lease realized. I was curious to know the composition of the new leases signed. Would that be a little bit more weighted towards the repositioning portfolio relative to the stabilized portfolio or would that be consistent with, I guess, the broader mix of the portfolio?
Brad Cutsey: It’s more consistent with the broader mix of the portfolio. We haven’t seen – we look at if we’re seeing trend and differences quarter-over-quarter, year-over-year in regards to that mix, and it’s actually been staying very consistent over the last few years.
Bradley Sturges: Okay. And your expectations, at least in the near term, would be that depending on what suites are rolling over that you would – you could continue to be in that sort of low 20% range on a realized gain to lease.
Dave Nevins: Yes. Given the mark-to-market and given the turnover we’re seeing, we’re still sort of in that mid-20% range to mid-to-low 20% range. So if that sort of stays there, and we think we’ll stay in that 20% range. The question has always been for the last couple of years is, what happens to market rents if turnover comes down because you get less churn, you get push on market rents and where does the push/pull of the two equal out? But at this point, holding it where it is. We see that sort of staying around this level.
Bradley Sturges: In terms of the – I guess, we’re entering into the, I guess, the busier leasing season. What would be our expectations for – particularly for some of the more student-focused buildings in Ottawa and Montreal?
Brad Cutsey: From what? From a...
Bradley Sturges: I guess from a demand perspective or any impact from the recent government announcements?
Brad Cutsey: Well, listen, as you can see in – at this stage of where we are, we’re very close to our optimal position in those two regions, which are heavier allocated to students, being the NCR (NYSE:VYX) and Montreal. We’ve always said it’s a little early to start predicting, specifically Montreal on the student because this typically has been a market where foreigners come in August and start looking for the residents for the year in August, taking occupancy for September. But that said, as of today, and Dave and Curt, feel free to join the conversation. That’s said, there is nothing from our leasing traffic, an indication that we won’t have a normalized student leasing activity throughout the upcoming all-important Q3.
Curt Millar: Yes. No, agree with you 100% on that. Like, there is no indication of anything different from year-over-year for sure.
Dave Nevins: And on the student side, we’ve talked about this a lot on some of the marketing we’ve been doing over the winter. And really, with the two-year sort of program that was put in place, when you look back to four-year program typically for university, if you look back and sort of go back three years ago, four years ago, the number that I’m burning off, from a student perspective, that would be coming out of the program is actually lower than the cap. So the cap is lower than what we’ve seen in the last two years. But if you go back into that cycle, it’s actually higher than what it was. So, not expecting a big impact from that, but the last two years from now, they extended further.
Bradley Sturges: Right. That makes sense. Thanks a lot. I’ll turn it back.
Operator: Thank you. [Operator Instructions] Your next question comes from the line of Matt Kornack [National Bank Financial]. Please go ahead.
Matt Kornack: Hi guys. As you look for – at capital allocation going forward, is the Brampton deal that you did where you put in a bit of capital with a joint venture party, got compensated for the platform, and then have the ability to scale your position in the asset. Is that the most favored kind of structure to be buying in at this point or do you want to own the assets outright 100%?
Brad Cutsey: No, I would say more of the joint venture structure at this point.
Matt Kornack: And then, I mean, we had an announcement. One of your peers forwarded it to us, but I think it impacts all of you beneficially that the government has realized that apartment REITs are an important part of providing affordable housing to the Canadian population and can be part of the solution. How do you think about kind of that aspect and growing kind of your newer asset component and adding to new supply? I know you’re not going to build it, but you do have some developments underway and you’re doing conversions. Is that part of the mandate? I know its total return based, but do you focus on it more given the need?
Brad Cutsey: For sure. And first off, I’d like to applaud the current government for realizing that we are part of the solution, right? And there’s been a lot of work done by InterRent and our peers behind the scenes and spending a lot of time trying to educate the different stakeholders involved within this housing issue. And we all are, I think, very well documented. The supply is undersupplied relative to the demand. And we need everybody at the table to be able to kind of bring a solution that’s sustainable and puts Canada in the right place, because I don’t think any of us wants to see Canada back off with the population growth, but we just want to do it in a smarter way. And the government is listening. They want to be educated, and I think were steps in the right direction. Just there’s a lot of work left to be done for sure. It’s not going to happen overnight. I think the whole gap is well documented, and I think people understand and unfortunately, there’s going to be pressures within the rental market for quite some time. And now that the narrative changed from supply, it’s going to be about how do we attract the capital in order to deliver that and how do we attract the human capital to help build that supply. So those are the kind of the next two big phases that now have to – we have to solve the puzzle for. Now that said, InterRent does have some great sites that we believe are AAA sites and some of the best sites within the markets that we operate in that make themselves premier sites to develop. As our cost of capital improves, we’ll play a bigger role in helping deliver some of that new supply. In the meantime, though, there are things where we feel comfortable that we can go ahead with today, and we’ve budgeted internally that we think we – isn't [ph] an opportunity that can be quite accretive to that value at creation, even at today’s level of where our cost of capital stands. One of them being were a partnership, 25% interest in 360 Laurier, and we feel quite confident and comfortable in that project, and we’re going to continue to develop that project though, and we remain really excited about it. So with the developments, it’s just long term in nature, and we got to smooth it out through the cycles. But we’re mindful of our balance sheet, and we’re not going to do anything to jeopardize the strength of our balance sheet. So we make any development decisions in the context of where our balance sheet is.
Matt Kornack: That absolutely makes sense. On Laurier, was there anything that you learned in the process of building the slate out, that you’ve been kind of changed the way you went about the Laurier project? Not that you have to give away your competitive edge, but are you finding this...
Brad Cutsey: Yes, I’m not – the mix is, because, I mean, that’s – that knowledge kind of stays and it’s one of the value creation attributes for us as an organization. But, yes, almost any project, we continue to be curious and look for new ways to enhance what we’ve done in the past. And I think the slate was a very successful project. We executed on it. We love the finished product, and we love where it’s performing. And I think with that, though, I think we’ve learned a couple of things that we can easily transport over to 360 Laurier, which I think will put us even on a better footing when it comes to that project. So, long-winded answer to what should have been a short answer, yes.
Matt Kornack: No, makes sense. Appreciate the color, guys.
Brad Cutsey: Thanks, Matt.
Operator: Thank you. And there are no further questions at this time. I’d now like to hand the conference back over to Renee Wei for closing remarks. Please go ahead.
Renee Wei: Thank you, everyone, for your time. If you have any additional questions, please don’t hesitate to reach out to our investor relations team. Have a great day.
Operator: Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.
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