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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by, and welcome to the Canadian Apartment Properties REIT Third Quarter 2020 Results Conference Call. [Operator Instructions] I would now like to turn the call over to David Mills. Please go ahead.
Good morning, and thank you, Denise.Before we begin, let me remind everyone that the following discussion may include comments that constitute forward-looking statements about expected future results and the financial and operating results of CAPREIT. Our actual results may differ materially from these forward-looking statements as such statements are subject to certain risks and uncertainties. Discussions concerning these risk factors, the forward-looking statements and the factors and assumptions on which they are based can be found in our regulatory filings, including our annual information form and MD&A, which can be obtained at sedar.com. I'll now turn things over to Mark Kenney, President and Chief Executive Officer.
Thanks, David. Good morning, everyone, and thank you for joining us. Scott Cryer, our Chief Financial Officer, is also with me this morning.We continue to generate very solid performance during the pandemic. And with the innovations implemented by our team and our continuing strong relationships with our residents, we are confident this growth and performance will continue. Our goals through this challenging time have been to preserve capital, maintain a strong and flexible financial position, mitigate risk and generate the best operating results possible. I believe we are meeting these objectives and will emerge from this period stronger than ever. Our growth over the last 12 months has had a positive impact on our third quarter results, as you can see on Slide 4. Revenues were up 11% over the same quarter last year, driven by positive contributions from our acquisitions, increased monthly rents and continuing high occupancies. NOI rose 12%, with NFFO up 13%, generated the strongest-ever NFFO payout ratio of 59%. Our growth also remains accretive to unitholders with NFFO per unit up 5.6%.Looking ahead, we remain confident that this solid quarterly performance will continue. As economies return slowly, we expect to see improved results as we build on our presence as the preferred housing provider in our chosen markets. Turning to Slide 5. You can see that our results for the first 9 months of 2020 have remained strong and stable with solid increases in revenues, NOI and NFFO. We are also pleased to see another period of strong 4.1% same-property NOI growth. We believe this continuing solid performance, despite the COVID-19 pandemic, is proof that we can generate strong and growing returns for our unitholders through both good and bad economic times. For more than 22 years, we have built the team, the asset base and the operating platform that can and will continue this track record of performance as the pandemic eases in the future.Our continuing strong performance is also a testament to the exceptional commitment and contribution our team is making. The experience and expertise at CAPREIT is truly demonstrated through these challenging times. As Slide 6 shows, we significantly enhance the size and scale of our property portfolio in 2019, acquiring 9,241 residential suites and MHC sites for approximately $1.4 billion. These acquisitions made a solid contribution to our results this year. In the first 9 months of 2020, we continued to grow with the purchase of another 2,233 suites for $574 million. We also sold certain noncore properties, including an underperforming asset in Calgary. Including the most recent buyout in October, we are also pleased to have completed the buyout of 12 of our 15 operating leases in the Greater Toronto Area over the last 12 months for a total of approximately $173 million. We acted on these buyouts earlier than scheduled, resulting in a 31% discount to the agreed-upon price for these properties. The transition to fee simple ownership for these properties adds material new financing capacity, meaningful new asset value accretion and unlocks the potential for future new development opportunities. From an operating perspective, we maintained our track record of solid performance in our stabilized portfolio, as you can see on Slide 7. Occupancies remained at effectively full levels in the residential portfolio of our business, while net average monthly rent rose, driven by increases on turnovers and renewals. Our track record of organic growth also continues with same-property NOI up 4.1% while maintaining a strong 65% NOI margin. Despite the constraints placed on us by the COVID-19 pandemic, we continue to generate solid increases in rents on turnover and renewal, as shown on Slide 8. Clearly, turnovers are being impacted by the ability of our residents to move or personally visit our properties. Still, almost 9% increases in the Canadian portfolio and over 8% in the Netherlands on turnover are solid results. We expect to return to our more traditionally higher increases once the pandemic eases. Renewals have been affected by the rent increase freeze we implemented on April 1 to help our residents work through these challenging times. As economies begin to open, we are now beginning to implement modest rent increases in certain markets in consultation with our residents. Looking back on the past few months, I am extremely proud of our team and how they've responded to the COVID-19 pandemic. Our continuing growth and solid performance is a testament to our resiliency and ability to quickly and effectively adapt to these challenges. I can't thank our team enough for their efforts, their professionalism and their dedication. I also want to thank our residents for working with us. These are unprecedented times for everyone, and we appreciate being able to openly consult with our residents and understand the issues they face. Since the pandemic began in March, we have responded with programs that are helping us to build on our relationships with our residents and with our employees. This employee and resident-centric approach is helping us meet our goals of preserving capital, maintaining a strong and flexible financial position and generating the best operating results. Turning to Slide 10 of our Compassionate Care Program continues across the country. Since March, we have been reaching out to our residents, checking in on them and discussing any rental payment issues they may face. On average, we are making 3,000 calls per month with approximately 50 people dedicated to the outreach of our highly -- and adding to our highly engaged on-site staff. Our on-site staff have worked tirelessly through this crisis. And for this, we are very grateful. With the start of the pandemic, we also implemented a rent payment program for certain residents facing severe economic hardship. By working with these residents and understanding their needs, we have approved payment plans for approximately 0.7% of our total resident base. This amounts to only about $570,000 of deferred rent as of September 30, with most in BC where the province has mandated deferral plans for all residents with payment arrears during the crisis between March and August. Looking at other issues in our business related to the pandemic, you can see on Slide 11 that we are managing our business optimally. We have seen very little bad debt. Our bad debt policy is any amount of rent outstanding over 30 days, every cent over 30 days. Clearly, the majority of our residents value their home and are paying the rent on time. Government intervention in our business has been a topic. And while mandating no rent increases has been a popular political move and one we support, the impact on our revenues is not major. For example, the Ontario government's mandated rent freeze for 2021 will only impact our revenues by about $2.5 million in the upcoming year. In the meantime, mark-to-market increases continue in 2020, averaging almost 9%, a very solid result year-to-date. To further build on our relationships with our residents, we started to roll out our Resident Portal earlier this year, as detailed on Slide 12. Today, almost 60% of our units are now signed up and accessing our portal. A key feature of this new technology is to encourage automatic payment of rents using our pre-authorized payment plans. Launched at the beginning of the third quarter, we are now seeing a very strong take-up to this convenient way of paying rent. We are also encouraged more online and electronic means of paying rent, including electronic fund transfers, credit and debit systems and others. Approximately 85% of our rent roll is now collected electronically, improving the timing of collections and our ability to react to individual resident issues. With face-to-face meetings difficult during the pandemic, we also launched our virtual property tours and online lease applications. Between March and September, when personal visits were all but impossible, we signed over 5,000 leases virtually. Moving to Slide 13. During the pandemic, we have characterized our business as back to basics. It's been a focus on receivables, apartment renting excellence and investigating all areas where we might find operating efficiencies. Our key focus has been on rent collection. And as you can see, we continue to collect the majority of our rents. As of October 31, we have collected over 99% of the monthly rents outstanding year-to-date. And while we continue to work with our residents facing economic hardship, we are taking steps to deal with those residents who will not be willing to engage with us. In this light, we are pleased that the rental tribunal boards are reopening in certain markets so that we can take a more serious approach to this small number of problem residents.As you can see on Slide 14, we have experienced very stable occupancies since the pandemic hit. We also believe our small vacancy rate is not a reflection of the state of the overall rental market, but rather the challenges of renting during a pandemic. As we emerge from these challenging times, we are confident occupancies will increase quickly to our historical near-full levels. We also believe that our properties offer a highly affordable place to live in these new uncertain times. As you can see on Slide 15, compared to condo rental and newbuild apartment properties, our apartments and townhomes rent for considerably less than these other rental alternatives at a very low average rent of approximately $1.60 per foot across the country. This compares to between $3 and $5 per foot for smaller condo rentals and newbuild apartment properties. On average, suite size is also larger at approximately 800 square feet. Well-located, well-maintained, our properties continue to offer Canadians the best value in the rental market. A key factor in our success over the last 22 years has been our focused asset allocation strategy, as detailed on Slide 16. On the apartment side, we are targeting primarily value-add properties in the mid-tier segment. These properties are being acquired at well under 50% of replacement cost. We know how to invest in them to increase value, and their stability is driven by their very affordable rental rates. On average, we are renting our apartments at around $1.60 per foot, affordable on the average $70,000 annual household income that the Canadians have, keeping occupancies high and rent collection stable during the pandemic. We also really like the MHC business, a highly stable, low-risk business with very strong potential to increase cash flows. More on this next. Our European presence has driven significant and growing dividend and fee income. Dividends to date from ERES and IRES totaled $26.7 million, while our fee income through the first 9 months of 2020 has risen 66% to $15.4 million. As the only professionally managed operating platform in Europe, the opportunities for further growth and enhanced value are significant. However, we will target our exposure to the European market at approximately 15% of value. Investors can always increase their own investment in units in these 2 quality REITs.As I mentioned, a key element of our asset allocation strategy is to increase our presence in the MHC business, as detailed on Slide 17. We really like this sector. Revenues are highly stable. And with residents owning their own homes, capital requirements and maintenance are significantly reduced. MHC properties provide another level of diversification within our portfolio, allowing us to enter more rural and smaller markets than our residential focus on large urban regions.We are also investigating the opportunity to increase cash flows by ramping up our program of selling manufactured homes or acting as a broker to generate commissions and fees to generate additional fees by sourcing mortgage financing for MHC residence is another option.We believe another reason for our success is our commitment to diversity, and I am very proud of the progress that we have made. As you can see on Slide 18, we hold an almost equal gender split between men and women. On average, women have represented over 47% of our hires annually since 2017. We also celebrate over 61 languages spoken among our employees, a reflection of the diverse makeup of the Canadian population and our resident communities. Additionally, we have a highly multigenerational workforce. The focus on diversity helps us to better interact and support the communities in which we live and work, enabling us to deliver innovative approaches and solutions both within and outside the organization. We are also very proud to be working with social housing agencies and programs leasing suites to them where we can and where needed. To date, almost 2,100 apartments are leased to these agencies for people in need. Later this month, we'll be announcing our GRESB results, an exciting milestone and strong signal of our commitment to ESG. I'll now turn things over to Scott.
Thanks, Mark. Turning to Slide 20, you can see that we are clearly in a strong financial position, the strongest in our history. At the end of the second quarter, we had a conservative debt to gross book value of 36% and increased total liquidity available of approximately $372 million. We also have $783 million in Canadian unencumbered properties available to generate funds, should it be needed.Looking at our financing to September 30, we have locked in a very low weighted average interest rate of 1.87% on $578 million in new financing, many of these with a long duration of 35-year amortization, locking in these savings for much longer. And we expect we will continue to benefit from the current low interest rate environment for some time. At quarter end, 99.2% of our Canadian mortgages incurred a fixed interest rate. We are also confident that debt markets and financing will remain highly available for our properties, given their stability and the strong fundamentals of the rental residential business. As of September 30, 98.5% of our properties hold CMHC-insured mortgages in Canada.Slide 21 outlines the various sources of liquidity from an alternative perspective available to us. Clearly, we have no intentions of accessing all of these sources at once. However, you can see that we are in a very strong and flexible financial position. In addition to our strong cash position and credit lines available, we also have the ability to generate $737 million by taking advantage of low interest rates to increase mortgage on low levered properties and the operating lease buyouts. As mentioned before, we have $783 million in unencumbered properties we can use to generate further capital. In total, if we were to access all these sources of capital, we have available liquidity of approximately $1.6 billion. And even if we did this, our leverage ratio would still remain a conservative 41%, a strong recipe for growth in the future. Turning to our balance sheet on Slide 22, you can see we continued to maintain a strong and flexible financial position at quarter end, conservative leverage, strengthened coverage ratios and historically low interest cost on our mortgage portfolio. We've obviously stressed tested these covenants, and we conclude there's significant room in this environment. Debt to GBV was a solid and conservative 36% at quarter end, even lower when you take the impact of ERES being consolidated on our books at 100%. This will provide the financial resources and flexibility to work these challenging times.Our mortgage portfolio remains well balanced, as shown on Slide 23. Looking ahead, our current ability to top-up renew mortgages through 2034 will provide further significant liquidity. As of September 30, we expect to raise approximately $1.2 billion in total CMHC mortgages, renewals and refinancings this year. It includes top-up from conversion of the 11 operating lease properties to fee simple ownership to date.You can also see on this graph, we have considerable opportunity to reduce our long-term interest cost in today's attractive interest rate environment. The current 5- and 10-year estimated rates of approximately 1.3% and 1.8% are well below expiry mortgage rates of between 2.5% and 3.7% over the next 3 or 4 years. Slide 24 shows that our portfolio is also well positioned surrounding Canada's major cities. One thing we have been noting to our investors is that while our strategy has been and will continue to be focused on the major Canadian cities, a large majority of our portfolio is centered in these cities' greater surrounding suburbs or nearby cities or towns with short commutes. We believe that the affordability of our rental units as well as this geographical allocation has been part of the resilience and growth of our portfolio during these unusual and changing times. A key reason for the prime focus of our capital allocation strategy on the Canadian residential rent sector is the attractive spread between cap rates and interest rates. As you can see on Slide 24 (sic) [ Slide 25 ], historically, there have been very strong spreads over the last 3 to 4 years, which had tightened at the end of Q4 2018. With forecast for interest rates to remain low for the foreseeable future, we are now seeing quite high overall spreads of between 200 and 250 basis points. Clearly, spreads are lower in key markets like Toronto and Vancouver, but there is still good accretive deal flow available to us. And we continue to evaluate and act on the opportunity to acquire value-add and brand-new properties in our target markets.I'll now turn things over to Mark to wrap up.
Thanks, Scott. In closing, we are confident that our long-term focus on making CAPREIT the best place to live, work and invest will take us through this challenging time and emerge stronger than ever. We remain committed to building strong relationships with our residents and providing them with a safe and affordable place to live. Again, I want to thank our residents for their support over the last few months. Our team continues to capitalize on our efficient and well-tuned operating platform to deliver the best possible results, and I especially want to thank everyone at CAPREIT for their hard work and commitment. And from an investment perspective, we believe the apartment industry remains a very defensive sector and one that has proven its ability to generate solid returns in both good times and in bad.At CAPREIT, we remain very optimistic about our future. We have a highly conservative balance sheet with low leverage, strong liquidity with numerous sources of capital, and our operating results remain strong and stable. Thank you for your attention this morning, and we would now be pleased to take any questions that you may have.
[Operator Instructions] Your first question comes from Mark Rothschild with Canaccord.
In regards to the apartments where you're applying for AGI, obviously, the number has increased, can you give a little more color on how that process is going now? How you see it evolving maybe over the next year? And do you expect that number just to remain elevated for some time just because of how things have changed?
Yes. I think that in Ontario, it's very possible that we could see a negotiation there of sorts with government. The idea of deferring the implementation of AGIs has been floated. And I don't think anything can be taken for granted right now. So I don't want to evade the question, Mark, but it's an uncertain environment. And until we get through the bulk of the second wave, I think it will be difficult to know exactly how the AGI issue will play out.
Okay. Great. I'll leave it on that question. Let's move on to something else. Overall, you had good operating numbers in the quarter, but one area where we're seeing some pressure just generally in the market is at the high end, in particular, on the condo units that are for rent. What are you seeing at the high end of your portfolio, some of your properties that might compete with some of those? I saw -- you have the slide showing your average rent is much lower, but you have some higher-end buildings. So are you seeing any softness notable there? And would you anticipate anything to trickle down to a larger part of the market?
Yes, it's -- there's 3 markets in rental today that are really kind of evolving: there's the high end, which is incredibly challenged; there's the mid-tier, which is, in my mind, the best place to be; and there's affordable where there's political pressure. Okay?At the high end, in Toronto, you're -- if it's new rental construction, you're probably talking $4 to $5 rents, which means you're probably talking about income earners of $120,000 to $150,000 and up. And those -- that's the market where people are working from home and commuting. That's the market that's being challenged with new condo supply and new Airbnb supply. So there's many, many headwinds in that new rental construction market.It's a very, very different story in the mid-tier market. When people are moving down into the $2 range, it's because they're possibly trading down from their $4 rents to $2 to $3 rents. And people are realizing that the quality of the locations are really what probably matters the most if you're going to live in the city. And it's for that reason that CAPREIT has seen like tremendous interest in our product. So I do think it's a tale of 3 very different markets. Rental is not just rental. And mid-tier is clearly the best place to be when you're entering a countercyclical environment.
Your next question comes from Fred Blondeau with IA Securities.
Two high-level questions for me. Just looking at your development pipeline with what could be a relatively strong pent-up demand for rental products, I mean -- and also in the context, as you know, I mean, new supply has been relatively limited in 2020. Would you consider becoming a bit more aggressive on the development side at this stage?
No, I'd say we're more cautious than anything else, so for the reasons that we just talked about with challenges in the high end of the market. But that's not to be confused at all with our enthusiasm in getting our properties entitled. Once the entitlement and density is approved and we are in a position to write out pro formas, we might find ourselves in a different position. Everything is still so incredibly uncertain with respect to the economy that we would be making no development decisions on the apartment side in the next few months, but would be having a look at what the environment look like in 2021. But I would say our enthusiasm to build has cooled, but our enthusiasm to get entitlement remains high.
No, that's totally fair. And second for me, how would you characterize your appetite for in the Netherlands today? How is your -- how big is your acquisition pipeline today?
Pipeline is robust. Not unlike Canada, we've seen an increase in potential deals coming to market. And we're -- we remain very bullish on the Netherlands and very bullish on Canada. The spread that Scott was talking about between cap rates and interest rates have actually widened more in Canada. So our conviction around Canada has definitely moved up the temperature scale. But our conviction to the value in the Netherlands is as strong as it was the day we went there. Just the opportunity in Canada is so appealing right now.
Any indication...
And I would just say the deal flow -- I was just going to say the deal flow is very strong, and the amount of deals that we've underwritten in the Netherlands is very substantial. And just to add to the spread discussion, something we love is that 90% of the portfolio had renewals at in excess of 2.5%. So the top line growth is very, very, very good on a global basis when you look at that year-over-year.
No, that's great. Any indications on potential execution on acquisition in the Netherlands? Any time line maybe?
Well, our conviction remains as strong as ever is all that I can really say in both markets.
[Operator Instructions] Your next question comes from Jonathan Kelcher.
With TD Securities. The vacancy slipped 30 basis points in October. Is that seasonal? And how do you expect that to -- vacancy to trend over the winter period?
The point that I was trying to make in the presentation is that Q2 and Q3, I would characterize it as logistical issues. It became very difficult for people to go and view apartments in Q2. And we don't confuse that at all with demand. We know that demand has fallen off slightly. Immigration's reignition will definitely change that quite quickly. But we're managing, Jonathan, very, very high occupancy levels. And CAPREIT, in particular, has always excelled at high occupancy with balancing rent increases.So I'm not calling a demand trend change here. I think what we have is a pandemic effect that will quickly readjust once people can go out and view apartments again and feel safe. But I can't stress enough the high occupancy that we went into this pandemic with and how that strategy has played well.
Okay. So you think that you can maintain your occupancy in and around the current level over the winter?
Yes, we think so. Like we know that Q4 is -- Q4, December and January are by far the slowest months of the year, January in particular. So to call the quarter is difficult, but we know that December and January are going to be very, very slow this year. But the renting is actually quite good right now. So we're already into Q4. I don't see a big trend change. It might be minor slippage, but it's very hard to call.
Okay. Fair enough. And then just switching gears, the mortgages that you guys look that you're going to be putting on the operating leases in Q4, is that in anticipation of being very active on acquisitions? Or do you really just want to lock in the low rates and just use the cash to pay down your operating lines?
I mean we're -- we will pay down our operating lines as one source. I mean the cost of our Canadian lines are more expensive than mortgage debt. So for sure, we're executing to create credit capacity. We think we could easily create $350 million of capacity on our lines by year-end. And again, locking in the interest rates is something we would try to do. They spiked up recently. Again, we're focused on doing 35-year AM and keeping as much debt outstanding for as long as possible. We've been doing 10- to 15-year mortgages at sub-2%. So definitely, it's a combination of the 2. But next year, 2021, we actually have unbelievable liquidity again coming out of our portfolio. So we do have -- we have a ton of room to be acquiring assets right now.
Okay. And on that...
I think we like -- yes, I was going to say, we just like the Canadian environment. Like this -- I can't say enough about this widening spread topic, and the growth is still there. So it's not just widening spreads with flat growth. It's widening spreads with an optimistic horizon when you're looking at mid-tier.
And are there lots of acquisition opportunities out there right now?
There is, but I wouldn't confuse -- there's a wave of opportunity that we haven't seen in quite some time. I predict that will settle in Q1. There seems to be a rush to get deals completed by year-end. And that is the theme that we're hearing from sellers. I don't think that will continue at the same pace in Q1. I think we have a temporary wave of sellers trying to execute transactions before the end of the year, followed by a return to kind of a normalized acquisition market.
Your next question comes from Neil Downey with RBC Capital Markets.
One question really relates to bad debt over the last several quarters. I believe the numbers in round terms were $700,000 in Q1, $2.4 million in Q2 and back to $700,000 in Q3; so 30 basis points, 110 basis points, 30 basis points. Can you just comment on how those bad debts were recorded? And what your expectation is looking to 2021?
It's a great question. The question -- the hyper focus on rents collected for the month, I think, has become a misleading one. Clearly, in the first few months of the pandemic, people wanted to understand the impact. But at this stage of the game, it's all about bad debt. And to CAPREIT, our debt -- bad debt policy is every $0.01 of rent that's outstanding over 30 days we provide for. So what that basically means is if people pay their balance that's been accrued for in bad debt over 30 days, that number comes down. So the money that moves around in terms of outstanding rent in the current month is not always a future indicator of what's going to be over 30 days. People just have circumstances that happen. So the under 30-day stuff is one issue. It's the over 30-day stuff that people should be back to looking at like we always have historically. And for CAPREIT, we're seeing numbers at around that 0.5 percentage point number. So it's quite strong.So looking forward into 2021, it can only be answered by how bad is the economy. And all I can refer to is early stages of my career in the early '90s, when I recall at CMHC, their underwriting for bad debt was somewhere in the neighborhood of 1% of revenues. So if you think we're headed to a highly damaged economy from a well-positioned, balanced, well-managed portfolio, I think that the risk could become as high as 1%. I could be wrong on that. We could have an economy far worse than we saw in the early '90s, but it's in that quantum, and we're seeing that that's playing out during this pandemic. And this is the reason that CAPREIT has had, from the very beginning, a focus obviously on apartments and mid-tier, is that we understood this resiliency by doing historical look-back. And if history tells us anything, it's that people pay the rent in Canada.
Your next question comes from Mike Markidis.
It is Desjardins Capital Markets where I'm employed. On the look in the MD&A, you guys -- it's not necessarily new disclosure, but the 20% mark-to-market disclosure, does that assume a normalization in the market? Or is that something where you think actually had -- given the softening in rents -- and I'd say softening with a modest softening that you've experienced over the past quarters?
We've challenged that one for sure. Obviously, with our turnover rates not being as high as that, we've actually disaggregated some of that data into the length of term of the lease. And the shorter 1- to 2-, 2- to 3-year leases that are there obviously have a lot lower mark-to-market on them, the 1 -- 4-plus years, we're seeing rents that are under market 25-plus percent. So what it is, it's an indicator that a lot of the same units are turning over. So we don't necessarily see 20% national turnover right now because it's a lot of the same units. But that is our best indication of current rates against what's in place.
Okay. Fair enough. And just I appreciate your comments, Mark, on thinking that the -- or the wave of opportunities you've seen right now maybe settles out next year. But in the event that we are seeing a bit of a sea change and acquisition volume remains robust, curious on your thoughts on the balance sheet and how much you guys would be willing to lean on your existing equity base and take leverage higher if the right opportunities were there. And that's it for me.
Another great question. It comes up with investors on a regular basis. It's not a matter for me of targeting leverage. Although there is a high point that I start to get nervous, not nervous, but I think is -- where CAPREIT should be, and I put that in the low 40s. But I'm not driven to go there at all unless the acquisition opportunities are accretive to the portfolio with a better than CAPREIT growth horizon.So clearly, in this interest rate environment, acquisitions can be helpful. But what the real question for me is, is what is the value proposition? Is it accretive on existing income? And does it have a better than CAPREIT growth profile? And is it in the market? So obviously, that we can add value in the most. And those are the real considerations.So if we can find those opportunities, then we have a responsibility to act on those opportunities. But to just set the target, I don't think is, from a leverage point of view, is in the best interest of CAPREIT unitholders. That being said, if you were to ask me a number, notwithstanding an incredible opportunity, I see no reason why low 40s is of concern to the safety of our investment.
Your next question comes from Jenny Ma with BMO Capital Markets.
Well, I wanted to dig a little bit into the composition of the turnover, and I think Scott sort of alluded to it in a previous question. But have you noticed any changes in the pattern of your turnover in terms of the vintage? Are there a lot more people who have signed leases more recently who are leaving either within or outside your portfolio? Or has it remained fairly consistent over the pandemic months?
It's consistent. The only difference -- the only exception to that is new rental construction where everybody's at the market. So otherwise, it's consistent. There's no trend change there. It's very good to understand how we arrive at what potential mark-to-market is, and Scott's 100% lease term has everything to do with that. But at the end of the day, it's ultimately generated by averages, and the averages haven't changed because the trend hasn't changed.
Okay. Great...
If you can imagine if you have 30% mark-to-market on your lease and it's 4 years old, you're not very incentivized to leave. So qualitatively, it makes sense that it's the new leases that are turning over. We're trying to get more data around that. But yes, for sure.
Okay. And Mark, you talked about the value proposition of the CAPREIT properties, and I think that's well known. But have you been offering any select incentives in buildings where you might need a little bit more push on occupancy or certain markets like in Western Canada?
Yes, we have. We have. Managing...
And can you quantify to any extent?
Yes. So managing occupancy, especially going into the fourth quarter and the first, is critical. And the reason for that, if you missed January, you've missed the market until spring. So it's essentially focused around buildings that have vacant units, and so the incentives aren't really a give. They're really just vacant units that we're trying to minimize and mitigate future vacancy expansion. So if we can get the high-quality residents into the units as we near the end of the year, we know that to be a sensible strategy because then you're not fighting from behind. So it's all about fighting from behind. Once your vacancy grows through 2, 3, 4, you get increasingly desperate to lower rent, and that increasingly desperate measure has longer-term rent roll effects. Whereas if you can do it -- and CAPREIT is not historically a believer in incentives. We are a believer in value proposition, but this is a very, very different market where the use of incentives I see being a very short-term measure.
So would it be structured as a certain payment or a month off a 12-month lease? Is that how you think about it?
We have a variety of incentives that range from a 0-cost incentive, which is basically you don't have to pay your LMR until your last month's rent, which is essentially a 0 give other than the -- that's a 0 give, but it makes renting easier. And I -- personally, that's my favorite one because you either rent an apartment or someone you think that's going to pay the rent or not. To move in early, so mid-month, we'll give away the balance of a month. And that really is just making moving on the building easier to what we would sometimes call 2 months, which is balance of the month is free, and then the following month is no cost. But those incentives then get amortized over the duration of the lease. So when you see the, obviously, see the impact, you're seeing a 1-year amortized incentive.
And what markets have you been offering some of these incentives in?
New construction is where it's the softest. And we've had some softness in the core where we do have some properties, and western Canada has been tough. But Western Canada is a difficult one to read, though, because Calgary is actually doing quite well. And Edmonton is a marketplace, for us, we're getting really hit because 2 of our properties are student-based, like one building is on the University of Alberta campus. So it's real trouble. And another one is -- also serves a student market. And the third one was a brand-new construction asset that we were doing lease-up in when the pandemic hit. So Edmonton is not really a true reflection of what's going on in Edmonton. Unfortunately, we're caught with the worst attributes of the pandemic there. But generally speaking, it's -- we're trying to manage the buildings that are most affected by the pandemic.
Okay. Great. And then my last question is on the renewals in the quarter. It looks like it was down quite a bit year-over-year at about 21% this year versus 29%. Can you just share a little bit on what was behind it? Was it pandemic-induced? Anything would be helpful.
Yes. We voluntarily halted rent increases in the CAPREIT portfolio in March. So we actually took effect April 1. And we just felt that coast-to-coast halting rent increases was the right thing to do. We've recently reignited some of those increases. But you've got no renewal increase for Ontario and it looks like for at least half the year in BC next year. So rent increases on renewals are not going to be a driver here.But what it really ultimately does, Jenny, is it just widens the mark-to-market for the future. So it's a give on cash flow. It's a headwind, for sure. It's not material when you look at our overall revenues, but it, if anything, shore up our future mark-to-market.
Okay. So it's really just converting month-to-month as opposed to locking in the tenant for another 12 months?
Yes, we're not able to give those increases, whether they stay monthly or whether they go on an annual basis. The way the legislation basically works across the country is once you've done your first year and you get a rent increase, it's basically at your option to stay on a monthly basis.
[Operator Instructions] Your next question comes from Matt Kornack with National Bank Financial.
Apologies if you already answered this because I missed the beginning of the call. But it seemed noticeable in terms of your trust expenses that they've come down, and it seems to be like -- it seems to be a trend. Can you speak to whether there's anything in that figure or if, in fact, expense savings both there and in op costs are a goal of yours?
Scott, do you want to?
Yes. I was just going to say, I mean, we have had massive savings in the trust expense category. I would like to say I hope that doesn't continue that we get back to traveling in conferences, and we definitely stopped rehiring positions during the pandemic. So I think that, that trend will continue for a while, but we actually hope it doesn't continue for much longer. We want -- we definitely want to reinvigorate a lot of the projects and get back to work. So for the foreseeable future, I think that is the trend, but that will reverse at one point.
Okay. So maybe keep sub-$10 million through -- well, obviously, Q4, there's some variability, but keep sub-$10 million maybe through the first half of next year and then expect some return to normal hopefully by, I think, the second half of 2021?
Yes, exactly. I mean I think we were, as of Q3, I think we were $5-plus million ahead of budget on our G&A. So we know we're not saying it will necessarily go back there, but we do definitely hope it ramps up again. I think that's a good estimate.
And then with regards to the committed and expected financing for the remainder of 2020, do you have discretion as to when that $720 million of up-financing would come in? And is that a factual thing, like you said thing? Or do you -- could you take less than that amount?
So what we do, our strategy is to get the CMHC certificate with lenders, making sure we're coming up to the renewal date. And that gives us a 6-month window with CMHC before we have to go back and get that certificate revised. So that's -- those are real numbers and those are applications. We're basically locked up for this year. We'll pay down our line of credit and use proceeds that way in the near term. But we have flexibility in the timing of when we can tap them. We also have the ability to pay down a bunch of our facilities. So -- but locking in those rates today is important to us. And showing real liquidity, I mean, I think we probably don't get credit for our liquidity because if it's not a line of credit or cash, people don't really think of that as liquidity if it's dependent upon future mortgages. So we think we have probably the highest, if not the second highest liquidity of all the REITs, but it probably doesn't show in the statistics.
Well, I mean you'd have $1 billion of cash on the balance sheet if you did nothing else other than like that...
Yes, we will not be doing that. We will not be doing that. We definitely have the flexibility to push it out. So that's not a concern for us.
Okay. No, that's fair. And what portion of the credit facility -- I mean some of that is in euros as a hedge against your European holdings. Is that fair? Or -- so what would you pay down?
To be honest, we're changing our strategy of how we deal with the euro. We were basically borrowing under Canadian or U.S. and swapping it out. We're replacing that facility with Canadian debt. So conceptually, we could actually pay it completely down now because we swap out and we have a euro liability on the back end through the swap. We actually think we can bring our interest rate down on these euros even considerably below where it is today. I think today, our average borrowing for euro is about 1.1%. And by doing this strategy, we think we can bring it closer to, I'll say, 0.5%. So there could be some decent interest rate savings on that kind of coming through 2021.
Your next question comes from Dean Wilkinson with CIBC.
Mark, as you look back over your long and storied career now, on the issue of spreads, I mean, you've kind of seen a cycle or 2, you've seen them come in, you've seen them come out. And where you look at it right now, simple question, should interest rates, borrowing rates be higher or cap rates be lower?
I think that cap rates should be lower than they are. Interest rates need to be where they are for a whole variety of reasons. There's a disconnect for the broader market on cap rates. So there's a limited number of people that know how to add value. They know how to put capital to work. But in the long game of apartments, the going-in spread is really important, okay? In the short term, it's about, obviously, the growth of the asset. And it's not just about spreads, it's about spreads and growth together. So Dean, you can come up with a new metric and tell us what that's called, but really, that is the most important thing. What's the spread? What's the expected growth? That is the high indicator of success.Now how far out do you go? If you just look at historic growth, then the most important thing is spread. Because if you go long term, it's all about the spread you go in with. And when I say spread, it's 10-year money and cap rate. And if those spreads are wide and you believe historic growth, then you've found the perfect place to enter the market.
No. No, it totally makes sense. I mean I look at your 2021 debt maturities and they're at a rate that is probably where a transaction could happen in the 3s. So it's just interesting, right? Okay. So...
Yes. But it takes a lot of conviction and it takes resilience. Like right today, we're talking about moments in market, and moments in market can cause anxiety. But clearly, when you take a long view like cap rate -- CAPREIT has and you look at the cap rates today, they're not where they should be. In certain markets, I would argue there are examples of cap rates in the 1s that may be more closely fully priced. But those deals are primarily driven around development opportunities. So it's, in the long game, it's about growth and what your conviction is around the growth in the market you're investing in. And you want that risk/reward between the cap rate and the cost of -- all-in cost of 10-year money.
I think it's important to note, we underwrite at 40% leverage. So the impact of interest rates to us is different than it might be to someone else who -- and we use 10-year money for our underwriting. So if you put in 5-year money and you can lever it to 70%, you've got a different return than how CAPREIT is going to underwrite it. So we're -- the cap rate is more -- is very important to us regardless of interest rates because we don't lever it the same way on a portfolio-wide basis. So we can...
You can only look at the cap rates and growth when you look at a really long view. We try to mitigate that long view with 10-year money. And 10-year money on our renewals is critical. And 5-year money, we're open to when it comes to repositioning because it really takes, in my mind, with low turnover, 5 years to reposition an asset properly. And you're looking at 1% money today, a 3.5% cap represents 250 basis points of spread. That's pretty incredible when you're buying assets at 50% of replacement costs.So there's a lot -- we're getting a whole -- into a whole tutorial here in how CAPREIT thinks about apartments. But I -- it's all about location because that's what real estate is all about. It's all about the growth, which is all about location. It's all about the spread and the growth rate. And for me, I love to focus on replacement costs because that's an indicator of future competition. How do you build apartments today at $1.60 a foot?
Well, you can't, right? That's where you're seeing the pressure at the high-end rents. Yes, it's just...
Mathematically impossible.
And there are no further questions queued up at this time. I'll turn the call back over to Mr. Kenney for closing remarks.
Well, I'd like to thank everybody again for their time and their attention today. And if you have any further questions, please do not hesitate to contact us at any time. Thanks. Have a great day. And everybody, stay safe.
This concludes today's conference call. You may now disconnect.