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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and welcome to the InterRent REIT Q4 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a Question-And-Answer Session. [Operator Instructions] This call is being recorded on Tuesday, March 7th, 2023.
And I would like to turn the conference over to Craig Stewart, VP Finance. Please go ahead sir.
Good morning and welcome, everyone. Thank you for joining InterRent REIT's Q4 2022 Earnings Call. 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 it up to discussions.
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 March 7th, 2023. During the call, management will also refer to certain non-IFRS measures. Although the REIT believes these measures provide useful supplemental information about its financial performance, they are not recognized measures and do not have standardized meanings under IFRS.
Please see the REIT's MD&A for additional information regarding non-IFRS financial measures, including reconciliations to the nearest IFRS measures.
Now over to you Brad.
Thanks, Craig. Let's start by reviewing the highlights of our fourth quarter. I'm thrilled to announce that the positive occupancy commentary from the last call regarding the national capital region in the greater Montreal area is now reflected in their numbers. We have improved our overall occupancy by 120 basis points over both Q3 2022 and Q4 2021 and our same-store occupancy by 110 basis points by Q3 2022 and 80 basis points over Q4 2021.
These challenges also put us in a better position than last year as we entered to the harder to rent winter months of Q1 2023. That occupancy levels that we have not seen since well before the pandemic. Looking ahead, we anticipate to attain markets throughout 2023 due to various factors such as strong integration targets and limited rental supply.
We are confident that our team can continue to meet the opportunity of rising demand across all regions. We remain optimistic about the future and our ability to maintain our pre-pandemic occupancy levels. Thanks to the strong demand we’ve seen coupled with the tempered use of promotions throughout 2022 we are thrilled to report a $1.3 million reduction in base fee and rebates compared to Q4 of last year.
This translates to 310 basis points reduction in base fee and rebates as a percentage of growth from rental income for Q4 year-over-year. On a 12 month basis, our base fee and rebates have reduced by an impressive $4.8 million. This improvement supports our position of maintaining the face value of our rents during the pandemic.
Our past success story demonstrates that it typically takes 18 months to start to see the financial impact of a strong acquisition period. We understand the value of patience and perseverance in achieving long-term success. Thanks to the record-breaking acquisition numbers in 2021 and restrain targeted growth in 2022 and our strong occupancy figures we are pleased to share that our total operating revenues have increased by 13.1% to $26.9 million for the quarter and 16.9% to $216.4 million for the year ended 2022.
When viewed on the same-property basis, our operating revenues have increased by 8.7% to $49.2 million for the quarter and 9.4% to $189.9 million for the year. This continues to demonstrate our organic potential embedded in our portfolio. Our growth numbers are a testament to our team on the ground and their commitment to delivering unparalleled value to our clients and stakeholders.
Despite the challenging economic environment and environment, we have remained steadfast in our efforts to maintain a strong balance sheet while managing our interest rate risk. Curt will provide further insight into our balance sheet later in this call. But I like to take a moment to underscore our continued commitment to the subjective.
We’ve been able to maintain our liquidity levels, which in turn positions us well for continued executing on our business model with confidence. As you can see in the bottom right portion of this slide, our strong revenue and NOI prints were unfortunately offset by increased financing costs resulting from an interest rate headwinds as well as increased market debt compared to Q4 of 2021.
This led to a decrease in FFO and AFFO of both in total column and on a per unit basis when comparing Q4 of last year. Despite this challenging quarter, I am pleased to report that our FFO for the full year grew by 5.6% overall and 4.3% on a per unit basis and our AFFO for the full year grew by 3.8% overall and 2.4% on a per unit basis.
This demonstrates our ability to navigate the current economic deployment attractively by delivering value to our stakeholders.
In light of a robust same-property performance, this quarter and fiscal year, we’d like to highlight our same-property NOI trends. Our revenue growth has consistently surpassed expense growth except from the peak of COVID pandemic in 2020 when occupancy numbers were notably impacted.
Nevertheless, it’s worth noting and it’s quite visible that the current inflationary environment has impacted our operating expenses. Despite these challenges the 2022 financial figures continue to illustrate our ability to maintain positive NOI growth in spite of these headwinds. As shown, not all expenses have experienced the same level of inflationary pressures.
We continue to focus on investments in software and systems, improvement in our process, implementing robust team training programs and strategic capital expenditures. We remain confident that our proven track record of top-line growth will serve as a cushion against prevailing inflationary pressures and that we will be able to sustain the historical positive trends in NOI throughout 20223.
We are pleased to report that the fundamentals of our portfolio and sector continue to strengthen as evidenced by a 7.1% growth in average monthly rent in December compared to the previous year
It is important to note, however, that this figure is influenced by the changes in the mix of our portfolio, as we have increased our exposure to higher rent markets like Toronto and Vancouver. These changes in the mix are a significant factor to considering and interpreting the growth figures. We anticipate that a tight rental market currently predict that the 2023 will allow us to see continued strong AMR growth within our portfolio.
The significant year-over-year growth in average monthly rents across all regions in December is a positive indication that the strength and fundamentals are not limited to specific areas. This demonstrates the robustness of our portfolio and their affirmed their commitment to achieving growth and stability across all regions.
Dave, over to you to take us through some of the operating highlights.
Thanks, Brad. As Brad previously mentioned, our overall occupancy reached 96.8% at the end of the year, representing 120 basis point improvement compared to December 2021. This occupancy level marks the strongest going into a new year that we have experienced in over five years.
Turning our attention to our repositioned portfolio, we are pleased to report a 60 basis point year-over-year increase in occupancy for December 2022. This brings our occupancy to a level that is comparable to pre-pandemic levels at the end of 2022.
When these figures get taken into account with our reduced utilization of promotional incentives and are strong average month, rental growth in all regions, it is clear indication that we have successfully addressed the challenges faced in the national capital and greater Montreal regions during the summer and have established a firm foundation for growth and stability in the coming year.
As we review our 2022, CapEx spend, our maintenance CapEx for the year came in at $1,069 per suite, A figure consistent with our previously reported quarterly amounts, it is important to note that when you exclude our development cost, approximately, 90% of our capital spend goes towards, not only maintaining, but improving our communities.
On the right side of our slide, we are proud to showcase the excellent value creation from our ongoing repositioning program, which remains a key priority for us.
By strategically investing these suites, we can unlock value creation potential that will benefit our residents and our stakeholders for years to come as a responsible member of the housing community we remain committed to investing in our communities to create beautiful, safe and high quality living environments for our residents.
Our repositioning program has enabled us to maintain a well managed portfolio that not only extends lifespan of existing housing supply but also positions us favorably navigate any fluctuations in the market.
I'll hand it over now to Curt to discuss our balance sheet, and sustainability efforts.
Thanks, Dave. Consistent with last quarter, we conducted a review of key assumptions regarding rents, turnover, input costs and cap rates with our external appraisers. As in previous years, for Q4, we also have our external appraiser complete a portfolio-wide valuation. Resulting from this review we have made the decision to tweak some input costs and turtle buried assumptions, as well as selective cap rates for various properties and markets.
The cap rate change bringing our weighted average cap rate for the portfolio to 4.04% percent. The combination of these adjustments has resulted in an overall fair value loss for the year of $8.3 million. Of note, we have increased our cap rate like 18 basis points since the end of 20 21 and 22 basis points since Q1 of 2022. You can see that the rate continues to be in a financially healthy position.
As of December 31st, our debt to gross book value increased to 38.3% representing an increase of 90 basis points quarter-over-quarter. However it is important to also note that, despite this increase, we maintained a conservative balance sheet and our leverage levels remain historically low for the REIT providing the continued flexibility to navigate uncertain times and make strategic capital allocation decisions.
As for our mortgages, we had a total of $1.7 billion outstanding at the end of December, with an average term to maturity of 5.2 years. This represents an increase from the previous year end where the average term to maturity was 3.6 years are. Our weighted average interest rate also increased to 3.22% which is within the expected range that we had previously mentioned during our Q3 earnings call.
Our CMHC insured mortgages increased to 82% of our mortgage portfolio, providing added protection against liquidity risk in the market. The variable rate exposure was reduced to 5% at the end of the year, and we expect to continue to maintain it in this 4% to 6% range.
Going into 2023, we had $266.7 million of mortgages maturing, much of which mature in the second half of the year. We have already renewed a handful of 2023 maturities and continue working on the remaining balances as we smooth out our debt ladder and balance out the amount of debt we have maturing in any given year. 2022 was marked by an unprecedented level of volatility in the interest rate market and it appears that these fluctuations will continue through 2023 with currently the five and 10-year CMHC rates sitting in the low to mid 4 range, whereas three weeks ago, they were in the 3.65 to 3.85 range.
Turning now to Slide 16, this year, we continue to engage with several investor associations and also added external advisors to our discussions as we continue to make positive steps forward on our sustainability journey. We are proud of the insights that we have gained and the work we have done around climate change, climate disclosure and diversity in the workplace training, as well as the support we have provided for many community-focused organizations.
Dave touched on our capital reinvestment earlier in the call, but it is worth mentioning that from a sustainability standpoint, by reinvesting in our portfolio we extend the benefit of the embodied carbon in existing structures as we invest in extending their useful life and improving their energy efficiency. We know there is still much work to do and we look forward to sharing our 2020 to progress, as well as our commitments for the future with you as part of our 2022 sustainability report later this spring.
I'll turn things back to Brad to walk through our capital allocation.
Thanks Curt. We remain committed to addressing the ongoing housing affordability issues in Canada, firmly believe that increasing the housing supply is one of the key solutions. To that end, we are proud to play an active role in bringing new supply to the market with over 3,500 new units of rental housing, in various stages of development.
Despite projects in Ottawa, our first office conversion project is nearing completion and we have received occupancy permits up to the 11th floor of the property. Despite the challenging seasonal conditions of a lease up during winter, we have successfully marketed the property and we are delighted to welcome rather than starting in October of 2022.
The anticipated substantial completion of the project to occur in late Q1 2023. This project creates capacity while demonstrating our commitment to sustainability. As the slate nears completion our focus and development has grown and will remain a key part of the REIT’s future. We are proud to collaborate with exceptional Partners to bring this much needed supply to market and eagerly anticipate sharing further details, as we move closer to breaking ground on each of our exciting projects.
It is important to note that fluctuating interest rates through 2022 and so far in 2023 have affected our expected yield ranges for these projects. While we continue to refine our estimates as we monitor the ongoing rate and economic situations, we want to be transparent and communicate our current expectations.
Turning to Slide 21. Demand in late 2022 was abnormally strong for the time of the year and we saw many trends continuing around and return to office return of foreign students and the percent of the new immigrants that are net new in country returning to historical norms. No one has been immune to inflationary pressures, but we are keeping a close eye on both our operating and D&A costs
We are continuing to be extremely vigilant edging our markets louder and are pleased with the progress. we have made in the second half of the year. I’d like to thank all of you for your continued support and we look forward to seeing you in person in the near future.
Let’s open it up for Q&A.
[Operator Instructions] And your first question will be from Fred Blondeau at Laurentian Bank Securities. Please go ahead.
Thank you and good morning. Just one quick question for me, looking at the GME market. I was wondering if you can please see or expect continuing improvements in 2023 and more specifically in terms of Brossard, do you currently, what do you currently see on the ground over there? And do you have a like carve out strategy for Brossard or we should view this market in the context of your overall GME strategy? Thank you.
Good morning, Fred. Thanks for the question. Yeah, we are happy to see that pretty robust growth in the GME market. As we alluded to on the previous conference call, we talked, we like the traffic that we were seeing and then continue to now you are seeing that prove out in the results. We are very happy with the so sure purchase on Brossard. Quite honestly, I think the market will continue to strengthen Montreal, I think it’s still – it lagged the recovery of some of our other regions, but I can say it’s kind of caught up. So this upcoming kind of leasing cycle will be very telling when it comes to the fortuners if they continue to recurring at the same pace. And there is nothing to believe that that won’t be the case, Fred. So, as you are very well aware, the foreign student is one of the bigger drivers of incremental demand on the margins in Montreal. So, we are very hopeful that we are continuing to capture our share. That specifically in the urban regions in Montreal which makes up about 70% of our portfolio, but for Brossard, specifically, I think we’ll carry on with the way we looked at it to we were underwriting and there will be more young professionals, I think that’s driving our demand there.
Now that makes sense. But I guess, my real question is whether you see growth opportunities in Brossard itself or you just see Brossard as part of your overall GME strategy?
I think the very nature, yes, sorry.
There is a lot happening in Brossard, that’s why I am asking.
Yes, no, fair enough. I think, to be quite honest, Fred with the immigration targets where they are federally, I think Montreal, as a whole we’ve been continuing to benefit from the supply equilibrium in all of our markets. So, I think Montreal will be beneficiary given the fact that tend to be little more supply being delivered in that marketplace. So, I think from a macro top down, I think Brossard will do just fine. Are we specifically just carving Brossard? Not necessarily. I think when it comes to the Greater Montreal area, we are looking any opportunities from the ground up. The very nature that our portfolio is so urban and that we’ve been consolidate and bring our exposure to that market up to where it is has allowed us to look out into other notes with Montreal like Brossard. And like I said, we are quite happy with what we’ve seen so far with Brossard. So, yes, we would look at if the right opportunity presented itself. But we are not just – we are not just zeroing in on Brossard. I hope that answers your question.
Yes, now 100% that makes sense. Thanks so much. That’s it for me.
Thank you. Next question will be from Mark Rothschild at Canaccord. Please go ahead.
Thanks. Good morning. Hey guys. Maybe with regard to the cap rate moves on for IFRS. Can you talk just a little bit about, it this based on the value facing assets trade or is it’s just appraisers where they think the market is or should be and how do you look at that, versus what you are seeing in the market?
Yes, thanks, Mark and good morning. It’s Curt Millar here. So, we had a lot of discussions around this, because as you know there hasn’t been a lot of trades in the market. We are starting to see more product come and we believe that the next quarter or two we’ll see more trading that you can point to, to really sort of re-benchmark cap rates across the board. However in discussion with our external appraisers and looking at the portfolios, looking at the data we had around prices per door and different things, we just felt that that was the right amount to bring it down selectively on certain assets.
And we’ve talked about this institutional investors over the last few months that you are seeing a – you will see a reversion to different markets meaning your secondary tertiary markets are going to have a little more expansion than your core and within those individual markets your Class A was going to have a little less expansion than your Class B or your Class C. So, we believe that will revert, because those things compressed a lot in the pricing cycle and sort of chasing deal and people have so.
I am sorry, I am trying to get ahead of it. Looking at the cost, looking at the turnover, all those things combined, into what we presented in Q4. So if you look at that overall for the year from Q1 which was our low on cap rates, it is not our cap rates up 22 basis points over the course of the year. So we feel we are fairly well aligned with the market at this point.
Okay. Great. Thanks and maybe just following up on your earlier comments in regard to different markets performing differently and some markets recovering. Are you seeing any trends or differences in the rate of turnover and how that moving with the rent growth in the market?
And Dave, correct me if I am misspeaking here. So I’ll see that you could jump in if I say anything wrong, but I think what we are seeing is, like you’ve seen from peers, like you’ve seen in the CMHC data that we published and when we say that our trends are dissimilar we do have more turnover in all of them versus what has been reporting with – what the quantum of difference between is fairly similar meaning certain markets where we are very core like Ottawa, Montreal where we are very, very core having this schools in downtown. We get a little more turnover versus markets where we maybe a little more suburban. And I think that that matches up fairly well with the CMHC data when you look at sort of different markets.
Okay. Great. Thanks so much.
No, problem. Thanks, Mark.
Thank you. The next question will be from Brad Sturges from Raymond James. Please go ahead.
Hi, good morning. Just on the IFRS discussion there for a second, you obviously alluded to also the changes in internal rate assumptions. I guess, I am curious as to get a little more color in terms of what your expectations are for 2023 and how that compared to what you realized in 2022?
Yes, thanks, Brad. So, we typically, we had previously maybe in the 30% or not maybe we had in the 30% overall of our portfolio. We brought that in over the last year in a bit to the sort of the mid 20s. What we model is a little more conservative just to be on the safe side. So we typically will model in the very low 20s for our turnover in our pricing model and – model.
But you expect it could be - maybe better or not given your conservatism in your assumptions?
It’s hard to say. We hope we will be. It’s hard to say it’s come in a lot in the last year and a half, but we’ve seen in our portfolio. We’ve seen it from what can I see, some that we’ve seen it from our peers for that. Like I said, we do tend to have more turnover just the nature of our repositioning and what that is as a percentage of our portfolio. And also just the nature of being there in the core and in certain markets but I don’t want to – I don’t want to promise anyone that we are going to be in 25%, 26% turnover at this point, it’s really an unknown. Ask me in September, I’ll give you a pretty good idea for the year.
Yeah, and it’s Brad Cutsey here. Just to follow up on Curt commentary, I mean, I think we ourselves are in a period to get this question asked a lot and it is – while Curt will give you a little more methodic such as – and a new business model, reinvesting back into communities and bring on those communities back to life. The one issue is, we’ve been saying for a while the market is taking up and that’s due to a lack of supply and I know ourselves and a lot of other industry participants are trying really hard to deliver new supply to be part of that issue. That said, there is the wildcard and Curt and I and the management team has been saying that turnover will come in. It’s farming has started to come in, granted it’s not as maybe as much seeing its seed. So, we are doing a little better than the CHMC and we are not doing – you don’t have as much turnover as we did historically. It’s not to the low of that, we are using their fair value model like Curt said, we rather be conservative and we just feel that such a supply demand just equilibrium that turnover is going to continue to come in.
Yeah, that makes sense. Thanks for that. Just on the development program as you are trying to continue to allocate capital there on Richmond and Churchill what’s the timing on that right now? Would that be early 2024 in terms of breaking ground or where would you be in that process?
Yes, it’s really going to come down, Brad just getting the drawings to a point where we can get more cost certainly and tender it back it before we will break ground. We are getting, we are definitely getting closer. Rents are continuing to go the right way. Costs are obviously up relative to three to four years ago when you would be looking at this project. But the flip side to that is rents have also increased the pace to offset. So you're essentially still able to achieve the yields that you wanted. So for really, for us to kind of go forward on this and break ground, we want to get more cost earning to make sure when we do break ground, we know what we're dealing with.
And so that could be close to that mid 2024 scenario.
Do you have a rough budget for the project at this stage or you're still doing the analysis on that?
Brad, I don't think we've disclosed that yet. But obviously we have a pretty good idea internally, but I don't think we have disclosed that yet.
I think until we get cost certainty we get the tender packages back sort of at that 95% cost certainty, we're going to hold and make sure we got everything buckled in.
Okay. Last question, just on the mortgage maturities for this year Curt. Just, I guess you talked about, you know, fairing the debt look and filling in some of the gaps there you know, so that leaning towards a little bit more shorter term debt on refi right now and what type of rate would you expect?
Yeah, I think we're looking at sort of filling in the ladder in there. As you can see, there's a couple of spots where we don't have a lot of maturity in 2024, 2026 and two of them. So there may be a little bit where there's properties that are still going through repositioning where we might drop them into those buckets.
Anything that's further along the cycle then we'll just look to extend out. There's other years down in the ladder that are also light that you just don't see that you close five years in there. So we made pop some into some six or seven years old. So just a sort of ladder it out a little more evenly than we have in the past.
As you know, over the last 12 years, we've used very much a barbell approach and with our short term debt and our repositioning properties in long term as we've gotten through the reposition basis. So I think right now the strategy is just to balance out, so that we don't have any huge maturities in any given year or any year but there's none.
Right now, if you want to do one year, one year money is more expensive right now. So not drastically. So, but you got a weigh that off. The CMHC numbers, the CMHC debt has come back in a little bit. If you look at the last couple of months it's been as low as about 365 per five year money. It's been as high as about over 30 or 35.
Right now, we're thinking in that round that 420. So, we'll just see where it ends up. Most of our - chunk of our debt, is sort of at the beginning of this year was January. And then the sort of roughly probably, 40-ish percent of our 2022 maturities and then the rest of it is sort of June July, August late, June, July August. So, the next few months will be sort of having to see what happens here with interest rates.
Okay, great. I'll turn it back. Thanks.
Thank you. Next question will be from Mike Markidis at BMO Capital markets.
Hi, everybody. Good morning Kurt. Just wanted to clarify it. I heard you correctly on that, was it 40% of this year's mortgages were January maturities?
Yeah, about - in that ballpark yeah.
In that ballpark, okay, great. Just focusing on the CapEx I guess you guys pick a period before reserve, I got off $100 per effective suite this year. And then, I guess from non-development CapEx was $90 million this year. So I guess two questions. Where you thinking on the forward reserve heading into 2023 and then from a total CapEx excluding development where you think that $90 million Trends in 2023?
Yeah, on the maintenance CapEx, I think that my we might see that trend out slightly to be, to be fair, Michael. I mean, there was, there was a lot of inflation, some supply chain issues. So we might be able to see that come down a little. I don't think it can come down drastically, but I do think on that for we might be able to see that coming a little bit.
And then as far as the remaining CapEx for modeling purposes, I would do something similar to the 90 that you saw in 2022.
Okay. And then, in doing something similar that just slightly lower turnover and continued cost inflation is that kind of how to think about it or?
There is some of that. I do think we've dealt with a lot of the inflationary pressure to the CapEx which is why there might be some inflationary pressures of some of the line items. Some of it has been offset by the actual inputs of some of the materials, Michael. So I've some of that would due to to maybe a little bit of the lowered curve, but the overall repositioning, non-repositioning of the portfolio has been pretty stable and we're still executing through those detailed CapEx programs.
Okay. Last one for me before I turn it back. Curt was there anything abnormal in the interest expense line this quarter?
It wasn't anything crazy as far as any changes or whatever. There would have been a small write-off on some of the amortization - advertised deferred financing related to one of the properties that we redid. So, they're going about 140k into that. That have been the only thing that was sort of really sort of everyday activity.
Okay. Perhaps after the call we could follow up online, because I think it's probably missing something but it just seemed higher than what we would expect based on your ear end disclosures.
Yeah, happy to touch base with you after, Mike.
Thank you.
Thank you. Next question, will be from Kyle Stanley at Desjardins. Please go ahead.
Thanks, morning guys. A - Curt Millar
Good morning.
Good morning.
So it was great to see this kind of big pick up in occupancy especially in Montreal in the fourth quarter. Just wondering, how you are seeing leasing demand trend as we kind of approach almost the end of the first quarter here. Has that persisted, you know, with the expectations be that maybe full occupancy around these levels through the year.
Yes. Thanks, Kyle. We're really happy with the trend on the leasing traffic across the portfolio not just Montreal. So, it's been, it's been quite strong in all of our four core regions, for sure. As you know, on this full year, we kind of go for that 94.5% to 95%. Sorry 90% - 95% to 96.5% as far as for occupancy on an average for the year. Typically, you will see us in Q4 if the leasing market and activity cooperates with us, you'll see us end go into the winter months at a high. And I think this is no difference. So I think it's any indication of the call it the last four months of leasing activity, if any indication of 2023 I think we are back to pre-pandemic levels, and more normalized pattern.
The one thing I would say, just to add a little color to is coming into 2022, we were carrying an abnormally high amount of vacancies in those winter months coming into 2023. So it will take a while to get our leasing back to a ladder of where they will expire into the prime. And that's just the nature of the natural cadence of turnover. So, we will be working hard over the next couple of years to make sure some of the 12-month leases that were signed at the end of last year gets ruled out and expires into maybe the strong leasing activity, but, but it's fair to say we're back, Kyle to pre-pandemic level.
Well, I don't know, Dave if you want to add a little or is that enough?
Yeah, no, I think, I think that is really it will start to see going strong in all the occupancy markets and it looks like it’s going to continue that way. That’s a while we get more turn. The month of summer months of that. I think it’s going to see us close the year.
Okay. Thanks, that's a good color, especially on the kind of the cadence of the least maturities. That makes sense. In the MD&A you mentioned mild winter weather, lower natural gas pricing as you know, potential OpEx tailwinds, early in the year. Can you provide some high-level thoughts on what the outlook for OpEx inflation might be in 2023?
Yeah, I'll pass over to Curt. I mean, obviously, we're being very thankful for this mild weather. Now not so much me personally I am a ski family, so I actually kind of like the cold weather, the snow, but it has been an abnormally warm at Q1 Q4 was just actually Q4 on a year-over-year basis was absolutely colder, but Q1 and kind of switch. So, so far trend in the right direction. But I'll pass it over you Curt, if you want to add anything to that.
What, I think it's more just on the utility side. I think on property operating costs and taxes we’re not expecting things to stay flatter and go backwards, but given what's happened with natural gas pricing and given the mild Q1. At this point, we could actually see utility cost been sort of continuing the trend they are now.
We could actually see utility costs in line or slightly lower in 2023 than we had for 2022. That could be given current modeling, it's only two months since for the year given current modeling that could be in 20-ish basis points. It's hard to say how, you know, what happens with natural gas prices over the next ten months. And what happens with the weather this summer, is a crazy, crazy hot or electricity. They see is a crazy cold fall, but that's kind of where we are there.
On the property tax side we're looking at that sort of 3%, 4% range, given the work we've done with our outside advisors on it, and then, on property operating cost per se, Brad and I have been talking with this with people for a while. It's probably in that 4% to 6% range and I think that's probably reasonable, probably more towards the higher end and the lower end of that. But in that range I think it’s still fairly reasonable.
Okay, great. That's very helpful one. Just one last one for me, a number of the apartment peers have identified disposition programs as a goal for 2023. I think demand for value-add type assets has been fairly strong at least according to what they're saying. Could you just talk about opportunities you may be seeing on the disposition side, if any?
Yeah. I mean, our commentary has not changed much. I think from our previous commentary. We've always engaged in disposing of non-core assets. We've had a pretty good track record, I think over the last 10 years of kind of disposing some of the assets in which in our view, we've been able to kind of maximize value, at least from our vision for the asset. There is definitely interest of this asset class. The abscess that we would be looking to dispose of are typically a little on the smaller side and what not.
So they tend to be more desirable for a private buyer which at this point, given where, as the private environment, we all know tends to employ little more leverage. So, for them to arrange financing is being a little bit more, a little trickier. So it's not that there is an interest for these levels. It's just essentially some of these private buyers being able to arrange financing that's conducive to their own economic situation.
So, as we continue to evaluate our disposition program and if we go firm on disposition, we will, we will announce it.
Okay, great. That's it for me. I'll turn it back. Thanks, guys.
Thanks Kyle.
Next question will be from Jonathan Kelcher - TD Cowen. Please go ahead.
Thanks, good morning. First, just turning back to the mortgages. You said you did 40% of the year in January. How much did you get in top-ups and how much do you expect to get top-ups over the balance of the year?
So the this is the stuff in the earlier part of the year, big chunk of it was related to that Vancouver portfolio, which is sort of shorter term, as we sort of move start to move some of those properties into CMHC insured, which we started to do end of last year, beginning of this year. So on those, we're not actually looking for top-ups. We're just rolling them into CMHC, patter around what's currently sitting on them.
On the other properties, we've done. There's about $10 million of our financing in the first couple of months, not a ton there. We weren't really looking for those to be a major source of capital. Some of that will come sort of later in the year and will be the second half of the Year, where there's some properties in there that are sort of more in earmarked to topping up and pulling capital out of them.
Okay. And how and roughly, how much do you think you can cut if you're just looking at it today?
We're probably looking at somewhere between $75 million and $100 million.
Okay and then, secondly just turning to market rent and your expectation. You noted a 30% mark-to-market we're you see market rents going this year. How much higher do you think they go?
Well it says we had 2022 is million dollar question of Jonathan. I think they're going to go higher, that's for sure. I mean, we have pretty ambitious immigration targets which I think most of Canada truly believe in our immigration policy. So, the other side of that is housing policy. So we've got to find out ways to deliver that supply faster, so that we can relieve little bit of the pressure on the rents.
But I mean, you saw the CMHC report some of the strongest growth that I've seen out of that report ever. And I don't see that dating, so, I mean, your guesstimate is as good mine. You've been studying the market as long as I have, but I could say this much with a lot of confidence, I'm pretty sure rents going to grow at a faster pace than where inflation is right now. That I am pretty confidence in.
Okay. That's good color I’ll turn it back. Thanks.
Thanks Jonathan.
Next question will be from Mario Saric at Scotia Bank. Please go ahead.
Hi, thank you. Good morning. Maybe starting off on the operational side. I think Brad you mentioned, in your prepared remarks that you expect a historical positive trend in NOI in 2023. Can you clarify what you're referring to?
Positive trend in NOI why, I think our top lines are going to continue to grow at rates that you are accustomed to seeing over these last 12 months. And under that kind of scenario, we don't see, we don't see the same kind of pressures on the operating cost that we did in 2021 2022. We still see that there is pressures on that line item. So, if you kind of extrapolate from there, I believe that high single-digit NOI growth is reasonable and is possible.
Got it. Okay. So, high-single-digit same-store NOI growth including margin expansion in 2023.
Yes, correct.
Okay, just regionally, I noticed when I, when I looked at the Q4 rents and occupancy versus Q3 to quarter-to-quarter as opposed to year-over-year, it seemed like the GTHA was the softest of the region for occupancy Q4 versus Q3. And then the rent growth decelerated a little bit to 24%. And is there some seasonality involved I think there's no seasonality in some regions and others that I don't know. But is there you can comment on what you're seeing in that region and why some of those numbers may have been a bit softer than the other region.
Well, I think they're all pretty strong to begin with Mario, I think that market has seen solid, like it's hard when you look at quarter-over-quarter like looking over year-over-year I think it’s similar and in line with other regions. I think it's just experience ever since the recovery one of the fastest come out of recovery. So it's been posting really strong growth all the way through. So, I wouldn't I wouldn't read too much into that to be honest. And the other factor too is that the GTHA at the end of Q3 had very strong occupancy. So, there wasn't a lot of turnover necessarily in Q3 or a lot of empty units going into Q for starting from that portfolio, right?
Got it. Okay. And then, just may be associated with that, how should we think about your Ontario lease renewal rates for 23? Like, should we see most of those increases come in Q1or will they be more spread out over the year relative to what we saw in ‘22?
I mean there's an effect on the because of what happened with the pause that the government has placed a couple years ago, around the guideline increase. So, for sitting rent that sort of all got reset to the earlier the year. So you do see that for the ones that don't have turnover. But in regards to the turnover and the cadence on that, I think you'll see things start to return to a more normal cadence as we've seen in the past given like Brad mentioned earlier, given the return of the international student union, the return of the downtown core and more and more people being moving back to working back in the office.
So I was specifically referring to the lease renewal rates. So, essentially if you increase the rent on Jan 1 of ‘22 then the increase will be coming through Jan 1, ’23 this year?
Yeah, I think. Yeah, I think it in Ontario, you'll definitely see. I think it'll come in from where it was because you had some turnover from, from the point where the government reset that. We've had some turnover. So it's not going to be as much into that 1st January this year as we had last year and the next year, we'll get even better next year. The year after that, we'll get even better because the turnover happens not necessarily in January typically.
So, it will take a few years for that trend to even back out. So if you go back, historically, yes it will be more January historically. If you go back to last year, it should be less than last.
Okay, that makes sense. And then, just on the repositioning program, I'm not sure if you can answer this, but of the 3,659 suites that are under various repositioning initiatives at the end of the year, do you have a sense of what that number would look like at the end of this year, assuming no new acquisitions.
Yeah, I don't have that probably, maybe I can circle back with you, but just based on the acquisition date, right? So what moves in and out of that bucket, it's just dependent on the acquisition date. So, I can, I can provide that to you separately if you want or anyone else that wants it? Reach out I’ll give you the dates and what moves into what bucket at what time.
Okay, the time frame, the three to four years may vary by project just on the current trend. Curious, whether there's any large projects that we should be aware of that are coming for completion this year.
Yeah, typically from the point of view of what we report done, we've been consistent like it sometimes takes anywhere from three to five to do it. So we kind of set a cut-off of four years on that. We've been consistently applying that for the most part and there was one exception in the last six or seven years, and we voted that. But typically, we've been, we've been applying the four years consistently across the board.
Okay, and then, just maybe, two more on my end. Is there, from an acquisition standpoint, is there a reasonable range of net acquisitions that you're thinking about in ‘23?
Sorry, yes. So net acquisitions? Yeah. I think, I think the acquisition market is starting to soft Mario and you're starting to see a lot more deals and maybe how it actually translated into that to ink, per se, but it does feel like the market is thawing and there looks like there might be a little more velocity happening. Similar to a previous commentary we will continue to look at different opportunities within our core markets. If there's something that meets our investment criteria we will likely enter into a scenario where we'll partner with our joint venture partners and use private capital to go in and take ownership interest in the project with a co-ownership type of structure and hopefully be – maybe structure something, where we might take a little small of a ownership interest and, you have the optionalities to buy up the interest. So I think until there is a little more certainty around cost of capital, it’s a good way to approach our external opportunities.
Got it. Okay, so is it fair to say that I think the vast majority of any acquisition activity done this year will be through the JV structure as opposed to 100%
If I talk to capital stage where it is, that's a fair comment.
Okay. And then just lost another question but similar to Mike’s question on the interest expense, if we can maybe just touch on that offline. It was up $2 million quarter-to-quarter on the mortgages and I'm having a difficult time of getting to that $2 million quarter-to-quarter increase. So any incremental color would be helpful.
Sorry, Mario it’s very - hard to hear what you're saying there.
He is having a difficult coming up with the extra $2 million quarter-over-quarter increment in the interest cost. So if you can help him.
That's basically asked Mario.
Okay, thanks Curt.
Thanks a lot, Mario.
Next question will be from Gaurav Mathur at IA Capital Markets. Please go ahead.
Thank you, and good morning everyone. Just on the refinancing front, would you be potentially looking at a shorter term with a view that rates could be more favorable two to three years out as you look forward? And just what sort of the gain when you are thinking, turn as well as rates?
Sorry, I got the first part. I’ll answer that, and maybe I get some pair and get the second part of the question. So the main focus on sort of looking at that one year, three year and a few others year buckets right now is not necessarily driven by the fact that we believe rates will come down. It’s more driven by flattening out our or evening out our mortgage ladder.
Now, I do believe that the rates potentially will and when you look at a tightening cycle, it's often via a loosening cycle, if you will from the latest Federal Government Canada stuff, but that's not the primary driver and be a benefit if it happens, the primary driver is just flattening of the mortgage ladder.
The second part of the question, I'm not sure I heard properly.
I was just wondering how you're thinking through your turn versus rate and I do believe you gave me some color on that, but there's – I appreciate it.
Sorry, the first two words are getting garbled there. The - what rate?
Sorry, in on mortgage terms versus mortgage rates, how you are thinking about balancing out?
I think I think Curt was alluding to that after you me Gaurav. I think really, as you know, we've always had the barbell strategy given the value add nature of our business model and it's - it has served us pretty well in the past where we in the near term on their mortgage ladder, we've had minimal exposure to essentially real ladder.
So, I think given the nature of how volatile rates have been over this last kind of year, we've taken the view that we are just can smooth out the mortgage ladder. So we really want to not make anyone bet on when interest rates are going to start to come down or up. So, yes, that might cost us as we fill in some of the short part of the mortgage Lottery. But as we fill in the four or five years out of the mortgage ladder, you'll benefit from the inverted yield curve. So really the strategy right now going forward is just smoothen out that mortgage ladder and not making any one bet at any given time.
Okay, great. Thank you for that. And just lastly, on the increase in cap rates, do you think there's more to come or are we probably in the later innings as far as valuation rebatings up on trend?
Well, it's been a really thin transaction markets and as we all know appraisers have a tough job. They really look backwards looking at, it's not it's not because they don't have the ability to look forward. It's just really they rely on print, right? They rely on ink deals and the nature of a lot of real estate deals can take anywhere from one month to as long the year to close. So, really, they're at the mercy of a kind of looking back and see when transactions actually close.
So I think, there is a little bit of catch up being played by a lot of the major appraisal firms. The fact that it feels like the sentiment towards acquisition markets that they're more eyeballs looking on deals. To me it means there is some thawing out so maybe there'll be a little more price discovery to happen in 2023. So time will tell if there's still room left for cap rate. But It does feel like to the core. The core hasn't moved up too much, it has come up a little. I would say that come up a lot more in the non-core secondary tertiary market, probably as much as 50 basis points. And that's where you've seen a lot of movement. So you’ve actually seen the kind of risk return quality spectrum revert to a more positive sloping curve, where it in the kind of pre-pandemic days, really kind of flatten out. Your really achieving a risk premium for AAA located asset versus a secondary non-core asset.
Okay, great, thank you for the color gentlemen. I'll turn it back to the operator.
Thanks, Gaurav.
Next question will be from Jimmy Shan at RBC Capital markets, please go ahead.
Thanks. So it’s two questions for me. Just following up on the 30% plus mark-to-market opportunity, I wondered if you could be a bit more precise on what that number looks like. Because last quarter it was 30 and I thought market would have moved a decent amount quarter-to-quarter. And then, the second related to that is, are you just finding that your tenants are trying to hit some affordability issues on some of those lease turnover activity?
So on the, on the mark-to-market, when you think about the turnover that we got, and the lift on the market, Jimmy, it shows you at the market if we're still sort of north of 30 a little bit but the market has moved in line to keep us there. So it has grown a little bit. Otherwise the mark-to-market would have come back in.
In regards to affordability, we do know that given our housing policy and given our immigration policy that it is becoming more and more difficult. And with the protection that's in place in most of the provinces we operate in, it's not becoming more difficult for the tenant or the resident that's been in that suite for a long period of time and it's been there already. It's more difficult for the new person. So, the new immigrant coming to Canada or the person leaving their parents home for the first time, it's more difficult for them. But it's not more difficult for the student tenants given the right protection in place in all of our rent controlled markets.
Yeah. And then I mean it's been pretty well well, publicized Jimmy, is it really is a demand-supply imbalance and we just have to do a better job and all three levels of government and the private sector getting together and collaborating, and being able to deliver the supply. I know all three – or all four parties are actually quite willing and wanting the same outcome. So that's a good news. I think we're all on the same page when it comes to wanting to deliver the supply. So now we just got to kind of work through it and hope that some of that immigration policy, those some of those have to your targets are targeting skilled labor that we can bring in to actually help deliver some of that supply.
But I think the one thing I would mention just on the portability issues side of it is, the actual rent growth that's been for a sitting tenant to Curt’s point the disposable income per household has grown at a much faster clip than the actual rent increases, if you use Ontario as an example. But listen, nevertheless, there's a major imbalance and companies like InterRent and some of our peers are at the forefront of helping and wanting to help deliver some of that supply.
And lastly I would just say to, is on the affordability, issue it’s probably not as well understood is all of the REITs have a pretty big percentage of the portfolios that does meet that affordability definition. So that I would just remind the listener or the reader to, as well.
Okay, thank you.
Thanks Jimmy.
Next question, will be from Matt Kornack at National Bank Financial. Please go ahead.
Hey guys, just quickly on Montreal. It was obviously a very active leasing quarter. Would you say the bulk of the 190 plus units that you leased in the quarter would have been to students? And can you comment as to whether there was any discounting or incentives involved in leasing that space?
There is - there was a little bit of symptoms and but as you can see, as you can see from the quarter, our - have come in quite a lot. So it was – it would be very minimal, Matt. We are just in a situation where maybe there's a little bit of the supply competing, but I think it really is a non-event. I think it was a combination of foreign students coming back and the pent-up demand working for you through the system. But I wouldn't - I wouldn't under whatever the right term and I wouldn't underestimate the impact of Montreal slowly coming back to the office. I don't think it's still quite where Toronto is, but people or the younger professional is starting to come back downtown.
And then, the other the other phenomenon I think you started to see is Airbnb, which were essentially Airbnb is where conventional apartments I think I think you're starting to see the tourism pick up a little in Montreal and I think that started to having an impact wall. So the good news is I think all the traditional kind of rental demand is really or the two traditional rental demand is slowly back to where it was. And then, the additional supply brought on by the conversion of Airbnb, I think some of that left to the market.
Fair enough. And then I, we have …
We have overall Matt. We have overall continuing to see for most burn off like – burn off in the quarter and continuing to come down. We are getting back or approaching a more historical sort of frictional, rebate rate, as we sort of experienced last year, year and a half.
Now, that makes sense. And I would assume that we're at a point where given where occupancy has trended in the market broadly and your portfolio pricing power, probably builds into the spring and in that particular market. But also, could you just there was a sequential decline and occupancy in Vancouver. I don't know if there was anything to it. The rent growth was pretty strong, but if you could maybe quickly highlight that market, as well.
Yeah, I don't think there's anything particular to that, Matt. It's a little bit of a different market. They get to one of them being noticed and that market and it's potentially longer season by the very nature of the weather. I don't see any just concerning trends on the quarter-over-quarter basis. I think where it happens where the traffic has been and drilled with that market. So keep in mind Matt that Q3 vacancy for that market was 0.8%. So seeing it pick up a little bit is not a concern.
Fair enough. Okay. We're over an hour. So I will turn it back.
Thanks Matt.
Thanks, Matt.
Next question is from Dean Wilkinson at CIBC. Please go ahead.
Thanks. Good morning everyone. Brad, just turning to that 30%. Turning to that 30% mark-to-market and potentially growing, how are you guys looking at sort of, yield maximization versus, wanting to just get the thing fully leased up sort of, the point being, do you buy some occupancy now to pick up potentially a bigger gain, a year or two out? And what's the opportunity for perhaps selective lease buyouts to increase churn?
Yeah. Dean, like, I don't think we are going to have any change as far as the way we approach our top-line growth. So, like - as far as the way, we go about price discovery on our vacant units we will continue the same process and we will continue to manage our top-line the way we have historically. We tend to operate like I said in that kind of 95.5 to 96.5 type range for the full year and we will continue to manage towards that. And yeah, there's really no change on that.
Okay, that's all I had. Thanks, guys.
Great, thanks, Dean.
Thank you at this time, we have no other questions registered. Please proceed with any closing comments.
Well, I’d like to thank everybody for taking the time and question and answers and if we didn’t get to any of your questions, please reach out to the Management Group and we'll be more than happy to try to answer those for you. Otherwise, have a great day and enjoy the rest of the earnings seasons.
Thanks everyone.
Thank you. Ladies and gentlemen this does indeed concludes your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.