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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. Welcome to the Killam Apartment Real Estate Investment Trust First Quarter 2020 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, May 4, 2023.
I would now like to turn the conference over to Mr. Philip Fraser, President and CEO. Please go ahead.
Thank you. Good morning, and thank you for joining Killam Apartment REIT's First Quarter 2023 Conference Call. I am here today with Robert Richardson, Executive Vice President; Dale Noseworthy, Chief Financial Officer; and Erin Cleveland, Senior Vice President of Finance. Slides to accompany today's call are available on the Investor Relations section of our website under Events and Presentations. I will now ask Erin to read our cautionary statement.
Thank you, Philip. This presentation may contain forward-looking statements with respect to Killam Apartment REIT and its operations, strategy, financial performance conditions or otherwise. The actual results and performance of Killam discussed here today could differ materially from those expressed or implied by such statements. Such statements involve numerous inherent risks and uncertainties. And although Killam management believes that the expectations reflected in the forward-looking statements are reasonable, there can be no assurance that the future results, level of activity, performance or achievements will occur as anticipated.
For further information about the inherent risks and uncertainties in respect to forward-looking statements, please refer to Killam's most recent annual information form and other securities regulatory filings found online on SEDAR. All forward-looking statements made today speak only as of the date which this presentation refers, and Killam does not intend to update or revise any such statements unless otherwise required by applicable securities laws.
Thank you, Erin. We are very pleased with our strong financial and operating results for the first quarter of 2023. Killam delivered FFO per unit of $0.25 in the quarter, a 4.2% increase from the $0.24 per unit in Q1 2022. We achieved 6.3% same-property NOI growth across the portfolio, which included 6.1% same-property NOI growth in our apartment portfolio, 1.3% same-property NOI growth in our manufactured home community portfolio and 11.8% same-property NOI growth for our commercial properties. Despite the recent pressure in the capital markets, multifamily fundamentals in Canada have been the strongest we have ever seen in our 21-year history.
During the quarter, Killam achieved 98.6% same-property apartment occupancy compared to 97.8% in Q1 2022, a 80 basis point improvement. We are optimistic of the opportunities ahead, and we'll remain focused on growing our portfolio, our cash flow and the underlying value of our assets. Dale will take us through the financial results, followed by Robert, who will discuss our operating results and the electrification of our portfolio. I will conclude with an update on the current and recent developments and our capital allocation strategy. I will now hand it over to Dale.
Thanks, Phil. Key highlights of Killam's Q1 financial performance can be found on Slide 5. Killam achieved solid earnings growth in Q1, resulting a net income of $84 million compared to $60 million in Q1 2022. This increase is attributable to earnings growth from our same-property portfolio, lease-up of our developments and increased fair value gains from strong NOI growth.
As shown on Slide 6, growth in revenue was the main driver of Killam's 6.3% NOI growth in Q1. A 60 basis point increase in same-property apartment occupancy and a 4% increase in apartment rental rates in the quarter highlights the strong demand for apartment units across the country. Ancillary revenue, including parking, laundry and storage, was also up nicely in the quarter. Market rents are moving up steadily, and we are seeing strong rental increases on unit turns. Slide 7 provides more details on the rental increases we are achieving on a quarterly basis.
The chart on the top right of Slide 7 clearly shows the growing mark-to-market spreads we're achieving on unit turns with 14.3% rent growth for tenants who moved in during Q1, the highest in Killam's history. The weighted average increase on Q1 turns and renewals combined with 3.8%, down slightly from Q4 2022. This reduction is strictly based on the percentage of renewals versus turns in the quarter. As highlighted on Page 17 of the MD&A, only 12.3% of the 5,800 units with Q1 lease expiries turns with new tenants moving in compared to an expectation of 18% to 20% turns for the year. This is due to timing of more lease renewals being weighted to January 1.
This weighting is expected to reverse in the remaining quarters. Our other business segments continued to contribute positively to our overall performance, as shown on Slide 8. Our MHC portfolio recorded 3.2% revenue growth for the quarter, and our commercial portfolio generated 9.1% top line growth. Killam's 383,000 square foot royalty crossing, previously known as Charlottetown Mall, was a standout in Q1, with revenue up 18% from Q1 last year and net operating income up 35%. Killam has been highlighting the increased leasing activity of royalty crossing for the last two years.
We're pleased to see the investment in the property and the operating platform translate into strong revenue and earnings growth. Expense management remains a priority. Same -- total same-property operating expenses were up 4.1% in Q1, as shown on Slide 9. Killam's general operating costs were up 5.8%, in line with our expectations for the third quarter and reflective of the current inflationary environment. Natural gas costs were up 18.4%, driving an 8.9% increase in utility and fuel expense.
Based on market prices of natural gas heading into this past winter and the forward fixing of contracts by our gas distributor in Nova Scotia, we were expecting sharp price increases in Q1. Although up from Q1 last year, pricing surprised us on the positive side as the mild winter in Nova Scotia resulted in both lower consumption and lower market rates than expected. I'm pleased to report that currently for both April and May 2023, natural gas rates are lower than April and May last year, both in Nova Scotia and New Brunswick. This is something we haven't seen in a while. Property taxes are down 2.9% in Q1, driven by a reduction in mill rates in Nova Scotia and expected tax subsidies in PEI.
Overall, we achieved 6.3% same-property NOI growth and revised our target for the year. We're now forecasting same-property NOI to exceed 5% compared to our original target of 3% to 5%. This change reflects both higher rental rates and lower natural gas costs and property taxes. We're pleased to have strengthened the balance sheet in Q1, with debt as a percentage of total assets of 44.6%, down 70 basis points from year-end, as shown on Slide 10. This reflects a $55 million reduction in our variable rate debt in the quarter.
Looking ahead, additional refinancings and dispositions are expected to continue to create capital flexibility to further reduce the outstanding balance on our credit facility. Slide 11 includes average apartment mortgage rates by year versus prevailing CMHC insured mortgage rates. Our mortgage maturities are strategically staggered to avoid overexposure in any one year. Killam has $220 million of mortgage maturities during the remainder of 2023 with an average interest rate of 2.97%. Killam's mortgage refinancing program has remained consistent throughout the volatility of the last year with strong support from our lenders and with the continued ability to up finance on renewal.
We expect this positive refinancing environment to continue. I will now turn the call over to Robert, who will discuss our electrification initiatives in more detail.
Thank you, Dale, and good morning, everyone. Improving our portfolio's energy efficiency is a priority at Killam. The two primary goals being the reduction of energy consumption to help mitigate or even better fully offset commodity price increases, while simultaneously making a material impact on lowering Killam's carbon footprint. Management expects to invest a minimum of $8 million in energy-related projects in 2023 to help achieve our ESG targets and moderate rising operating costs, such as realty taxes, water insurance and higher carbon taxes. It is simply a matter of time before Killam's carbon emissions will be governed by more stringent and costly building and energy codes.
To better manage these escalating costs now and into the future as Killam continues to grow its portfolio, we believe electrification of building operating systems is key to achieving lower carbon intensity. As a developer, Killam has the ability to incorporate green technology in the apartment buildings and MAC communities we own and construct, creating additional unitholder value. For example, Killam's 128-suite property in Mississauga, The Kay, shown on Slide 12, uses a geothermal heating and cooling system. With this technology, we are targeting a 32% reduction in energy use and 47% less emissions when compared to a typical building heated exclusively with natural gas. Killam's 169-unit Civic 66 development in Kitchener, Ontario, shown on Slide 13, opened attendance this spring and take electrification one step further.
It generates a portion of the electricity it consumes with rooftop solar panels. These PV panels, combined with the geothermal system for heating and cooling plus air to water heat pumps to generate hot water, should see Civic 66 deliver a 52% reduction in energy use and produce 67% fewer emissions compared to natural gas heated buildings. Yet, despite the obvious global benefits of these green technologies, we still face many challenges in the permitting process. The 139-unit Carrick, our development underway Waterloo, which is highlighted on Slide 14, has the potential to be completely electric. Challenges with city permits, however, have restricted the use of geothermal in the area.
With that in mind, we determined our next best option was to use variable refrigerant flow and air heat pumps for heating and cooling, and supplement these systems with PIRANHA heat pumps to recover heat from the buildings wastewater. Due to an unfortunate interpretation of the plumbing code by the city, the PIRANHA heat pumps were prohibited. Undaunted and cognizant of the tremendous need for innovative electric solutions, our team ultimately obtained approvals or specialized air-to-air heat pump to heat the building's hot water instead of the PIRANHA system. So despite the roadblocks obtaining municipal approvals, we are proud to advise that The Carrick will be Killam's first fully electrified development in Ontario.
Another example of our electrification effort is Killam's news development, The Governor and Halifax, which is profiled on Slide 15. This development is unique and that it's relatively small, containing 12 luxury suites and 2 commercial units, so we provided the opportunity to test new technologies to increase its energy efficiency and help future-proof to development. The suites are heated and air conditioned by individual heat pumps. Dedicated condensers are mounted on the roof and connected to each suites electric panel. Having installed separate water meters for each suite in earlier developments tells us that residents are notably more diligent in their consumption of resources when built directly for the cost.
WiFi-connected thermostats can be programmed to the residents schedules and adjusted remotely in order to save energy. Additionally, every parking stall is wired to accept Level 2 EV chargers. These are just a few examples of the impressive progress our development team is making to reduce Killam's carbon intensity, lower operating costs and hedge against future carbon pricing, all leading to carbon neutrality. We are determined to integrate energy-saving technologies as we develop our apartment and MHC portfolios. Later this month, Killam's 2022 ESG report will be published and we invite you to visit Killam's website to see the complete report.
I will now hand you back to Philip to provide an update on development and disposition activity.
Thank you, Robert. A lot has changed in the last 12 months. We still have an inverted yield curve where the Bank of Canada 10-year bond yield is less than the 5-year bond yield. In addition, the key interest rate from the Bank of Canada has increased 6x in the last 12 months, currently sitting at 4.75%. During this period, we reduced our activity -- acquisition activity because of rising interest rates and focused on improving our liquidity and capital flexibility.
Future acquisitions will always be an important component of Killam's growth strategy. However, we still believe now is not the time to be aggressive on the acquisition front. During the last 5 months, Killam has focused on identifying assets and exploring accretive disposition opportunities to achieve the strategic target of recycling $100 million of non-core assets. Today, we have announced two dispositions noted on Slide 16, totaling $42.8 million with net proceeds of $27.1 million.
In addition, we have two additional transactions that we have agreed to sell totaling $39.2 million with net proceeds of $20 million. With a total of approximately $82 million confirmed and an additional $100 million of dispositions under contract or at various stages of due diligence, we are confident that we will exceed our target of $100 million. Killam's focus on dispositions is driven by a desire to recycle capital, increase geographical diversification and reducing our variable rate debt exposure. During the quarter, we increased our commitment to providing long-term affordable housing to our tenants. This was achieved by arranging two MLI select CMHC financings with a 40% long-term affordable component.
The new mortgages were placed on Lakefront Apartments shown on Slide 17 and Parkway Street apartments in Dartmouth, committing 240 of the 600 units to long-term affordable rents. Last year, we completed 3 developments, which we have talked about on previous conference calls. These 3 new developments shown on Slide 18 are now leased. And it is only the Luma that is waiting for the CMHC underwriting process to be completed before long-term debt replaces the floating rate construction loans.
Slides 20 to 22 show renderings, progress photos and key financial information on The Governor in Civic 66.
We are expecting our occupancy permit for The Governor by the end of May, which will allow the first tenants to [move in] on June 1. Civic 66 has received a partial occupancy permit with floors 2 to 8 open, and we expect the full occupancy permit by the first week of June, which will allow us to replace the construction loan at this time with a permanent 10-year CMHC insured mortgage. Slide 23 shows the update -- an update on the construction of The Carrick and Slide 24 shows progress photos of the second phase of Nolan Hill in Calgary. To conclude, we are very pleased with our Q1 performance. I would like to thank our employees for their hard work and dedication.
We are optimistic for the future, and we will continue to execute on our priorities and create value for all of our unitholders. Thank you. I will now open up the call for questions.
First question comes from Mark Rothschild at Canaccord.
First, starting on the guidance, which has improved. For the rent growth, I understand that part of the reason for the higher guidance is stronger rent growth. Maybe what changed in the past couple of months that you weren't aware of earlier in the year when you last reported? Or is it just having a quarter under your belt being less cautious maybe or just less conservative that you were earlier in the year, because -- obviously, because things went well? I just want to understand what trends maybe have changed.
So I think market rents are moving up. I think that, that's one thing that even when we would have originally set the target for the year, the fact is we're seeing it across the country, market rents are moving up. And we're working with our teams, our leasing agents are doing a fantastic job in capturing that increase. And so I think it's 2 factors. One, we're capturing more, but those market rents continue to move up.
Okay. Great. And Phil, maybe on the development, you guys have been developing for a number of years and have quite a few newer buildings in the portfolio. Based on the rise in development costs as well as rents going up, how are your development yields changing? And does this alter at all, the rising costs, all your plans for future development in the near term? Or will you continue to -- continue at this steady pace?
Okay. So let's break down that question. There's about 3 parts, right, I think. And tell me...
2 or 3.
2 or 3. The first one is really, yes, construction costs are rising, but so are the rental rates that you're able to achieve. And even on a pro forma when you actually start the construction of the project, basically, it's now 2.5 to almost 3 years to fully develop it and get it open if it's a fairly large building. So with that, you kind of know that even your pro forma when you start, it's going to be higher by the time you start to release it. The yield itself, depending on -- is still around that 5 that you're still looking at.
And even where the cost of debt is, basically, today, on a permanent financing point of view, is there's 100, and maybe it might even be 150 by the time you're finished. Your construction leverage debt is going to be more expensive today because it's running around 6.5. Any new project that we undertake, we basically would think that within 1 year to 1.5 years, interest rates are going to start to come down a bit because the first year or 1.5 years, you're not -- it's your own equity, it's your land before you really start to see the cost of construction and how it accumulates. So it might be a little bit more, but overall, there's value. And I think it's -- the other comment is that the country needs new supply. So we're going to have to figure this out.
Next question comes from Jonathan Kelcher at TD Cowen.
Just going back to the NOI, Dale. I think first of all, the property tax decreases. You got New Brunswick and PEI. I guess we could expect you guys to benefit from those for the full year.
Yes.
Okay. So you're through with Q1 on utilities, and it looks like natural gas prices are lower in April and May, which is good. How do you think expenses trend?
So on property tax -- so I just want to clarify something on property tax. So if you look back at last year's Q1 and Q2, again, the reductions that we've seen in New Brunswick, we would have had higher property tax in Q1 than Q2 because we got more information in Q2. So looking forward, I think that what we have for same property is reasonable for property tax. We may see that move a little bit when assessments get finalized, so it may increase a little bit. But we saw a reduction this quarter. I think that we don't expect to see that much of a reduction every quarter. So just to clarify. Year-over-year...
Okay. Q1 is a decent run rate or should be a decent run rate with a little bit of...
Yes, you might see it up a little bit. But yes, I just wanted to clarify that from Q1 and Q2 last year. Sorry to cut you off.
Okay. No. And the next one is like how do you think the expense growth trends for just basically operating expenses?
Yes, we would expect to continue to see some increases, but we're not going to see kind of the same level of increase that we saw this past quarter, primarily because of those energy costs. We know Q1 is the biggest. They were up, as I mentioned. So I think we'll see those moderate a little bit overall, but still [indiscernible], 3% to 4% [estimate].
Okay. That's helpful. And Phil, this is the first time you guys are really doing any sort of dispositions. What's the process? Or what criteria are you looking at when you're deciding which properties to sell?
Good question. And I'll be a little bit back because otherwise, I'd be sort of tipping my head on some of the stuff that we're looking to sort of sell and don't have under contract or it might be under contract. But essentially, really, if there's a number of criteria that we're looking at, and I mean one of them would obviously be size. And so the smaller buildings that we have owned for a number of years, as you've grown the portfolio, each building takes its own sort of time in terms of the accounting, basically looking at the budget on a yearly basis, looking at the capital program for those assets. So there is the rationale that the smaller assets probably should be looked at from a disposition point of view right across the board.
And then obviously, there's geographical considerations. And then the other part of it -- the -- basically, in terms of the -- if we talk a lot about the rising cost of new construction, there is a parallel to the rising cost for repair of the existing assets. And sometimes, depending on the size, the best decision might be, it's better to sell now than sort of put that capital because of the cost today on the smaller buildings.
I'd add a bit to that. Just in some cases, it's the regulatory regimes that are in place and how they look at the rental stock and control the increase -- the ability to increase and move rents. So that's a driver in some cases.
Next question comes from Mario Saric at Scotiabank.
Just sticking to the capital recycling theme. I think, Phil, you mentioned $88 million kind of done now, another $100 million potentially under due diligence. So that gets close to $200 million. How do you feel about the redeployment on those proceeds today? I saw you bought back a bit of stock in Q2. How do you think about paying down debt versus becoming more active when you do the buy back? If you were here to execute, you don't need disposition.
First priority is paying down the sort of the variable rate debt, the higher interest rate.
We're replacing with...
[indiscernible] first, the majority -- by June to July, the majority of that construction variable rate debt will be gone as well.
Got it. Okay. And which presumably you've owned for longer. Is there the ability to sell what you want to sell without having to do a special distribution?
Yes. We're not...
Okay. And then lastly, just -- okay. And then just a last question on the capital recycling. In terms of Nolan Hill, it looks like that will be completed in early '24. When do you expect the required conditions to be satisfied to acquire the building? And based on current market rents, what would your unlevered kind of return beyond the $65 million?
The first part is that's the sort of the schedule right now in terms of the first quarter of 2024. Like a lot of construction, it probably will slip a few months. So then we're kind of maybe looking at maybe the middle of next year for that. I think the yield is going to be very attractive when we announce it on that because it's been a fixed price for the last 1.5 years. It's going to be plus 5 for sure.
Okay. And then just turning over to -- on the operational side. I think in your MD&A, you noted that you expect tenant turnover to be sub-20% in '23. Can you highlight kind of the geographies that would represent the low and the high end of that range, that makes up the 20%.
Well, I think the low -- I mean, Ontario is what we've seen in the past for the low, and -- but we are -- we've seen how fast it's coming down. I'd say every market is coming down. So -- but Ontario has been low, and we expect that to continue to be below.
And then on the high, I would presume either Alberta or [Brentwood]. Is that fair?
I think that's fair, Alberta and yes...
Alberta, more transient.
Yes.
Okay. And then the disclosed 20% mark-to-market in the MD&A, can you remind us of how much CapEx per suite is required to achieve that 20%? Or it simply becomes [good] on average, you think you can increase it by 20%?
When we talk 20%, I'd say it's pretty safe thing to say, we could be 20% without spending a lot of capital. What we are looking with capital deployment, that number increases over 30%, I would say. And even that 20%, those numbers are moving quickly, as we've already talked about. So I think that, that's even a conservative number on the mark-to-market.
Mario, so what's happening also is the investments in the units and some -- what we're seeing now, we've been doing this long enough, we're turning more of the units that we had renovated 2 or 3 years ago, and it really requires minimal investment, and you're still seeing the ability to move rents to market. So we are benefiting from that.
But we're looking at that closely, property by property and region by region to say, with the market increases, when does it make sense to do the repositioning and when not. So we're looking at that on a regular basis.
Got it. Okay. And then I guess the difference between the 20% and the 14% that you achieved in Q4, is that just a mix thing? Or is that seasonality?
I think it's a mix, and it's -- every month, we're seeing that number increase. So it's working with the teams to recognize the opportunity, and we're seeing that continue to grow as we've shown in our disclosures. So it's making sure we can capture the America rent.
Got it. Okay. Last one for me. In terms of heating costs in Halifax, is it too early to gauge how much lower the cost is expected to be in Q1 '24 versus this quarter? And when could we get it done...
That's a big question because what we know is those mild temperatures in Nova Scotia and the whole eastern coast of the U.S. and Europe contributed. So should we have a cold winter next winter and the war in Ukraine still going on, unfortunately, I don't think we can bank on lower costs, market rates next winter. So it's too early to say.
Yes. The reality is it's too far out to forecast.
Yes.
We'll have more line of sight on that as we come through the fall of this year.
Yes. But it's a good place to be now because I think some of the forward curve for the contracts that are being purchased by our distributor, we're expecting that they're able to lock in some rates lower year-over-year. It's always that last variable exposure that can make a big difference, but we don't expect the same kind of increase as we've seen in the last 2 years.
Next question comes from Kyle Stanley at Desjardins.
So it sounds like one of the operations at royalty crossing in Charlottetown are going very well. Just would like an update on kind of your plans at the property moving forward and future leasing or development upside there?
We have about 70,000 -- sorry, 60,000 feet that's available to lease, so we're working on getting that done. We can add a little more space in the building. We have a couple of larger tenants that would like to have that premises. We have a couple of existing tenants that want to expand. So we're able to accommodate them. So it's moving along nicely. There's a couple of brands we love to get in. We're trying to attract them. And hopefully, we can get a few of those ones everybody wants. But we have some conversations back and forth these days, and we're optimistic that we can see some Tier 1 retailers showing up.
Okay. Great. And then just going back to the dispositions for a second. Have you seen -- Phil, have you seen any changes in the buyer universe for the assets you're looking to sell since we spoke last after fourth quarter? Or I guess, in other words, are you seeing any different parties come to the table for acquisitions? Are we seeing the market open up at all? Or is it still pretty scarce at this point?
Well, again, I think there's a lot of, what I would call, medium to small investors that would be local in nature, and they're very interested in acquiring assets from us. I mean I get at least 2 to 5 inquiries, do you have anything in this market for sale, weekly.
Okay. Okay. Great. And then just two quick ones, one kind of modeling. So would 1Q G&A be a good run rate for the balance of the year?
Yes, it would be.
Perfect. And then just the last one. I noticed Aurora was moved out of the developments, expected to start this year. Just wondering if you can elaborate on that move a little bit.
Well, I'd tell you, it's one of those things from a phasing point of view. I mean we've been doing a lot of capital work on the building in front of it. And if anything, it's almost like -- again, if we decide to go on the other side of the street, we would do that first because it's almost like the effect on the tenants that basically have been under renovation of the building, and we almost want to give them a break.
Next question comes from Mike Markidis at BMO Capital Markets.
I guess, the interesting to me is just your focus on electrification, which without insulting anyone else is complementing you. You're ahead of your peers on that. With the success that you had recently and I guess the road blocks that you're running into with the municipalities, how feasible is the VRF in terms of your future projects? Is this sort of the path forward? And what is the cost versus the benefit look like on the initial yield? But I guess, the long-term story, I'm just trying to get a sense of if it's a penalty in the short term.
So the yield on the VRF is something between 5% and 7%, but it will just improve as we go forward with the increased cost of utilities, right, so commodities like natural gas. So we want to continue to do that. And I find it interesting that I'm a big fan of geothermal. You can't do it everywhere. But the VRF is really, I'd say, a viable substitute to abandon actually doing the geothermal both strictly one to one and have that as your main source with a backup being an electric boiler. So it's looking promising. And especially in provinces like Ontario where 95% of the energy is green because there's so much atomic as part of it. So that's where we are.
Okay. And then just with respect to -- I mean, obviously, nat gas boilers and everything is -- we know what the life spans are of those things. Is there -- how good is your confidence just in terms of the long-term resilience, I guess, is the term? Or just how long these things will last and any potential maintenance problems going forward if at all?
That's actually a great question. Over the years, we've been at this a while now, and some things we've installed didn't last very long. But in this case, this technology on the heat pumps, it's been around a very long time. And the big question has been, how cold can it get before the heat pump is not effective? And it used to be that it was at 5 degrees, then it was 10 degrees like negative, now it's up to 25 to 30. So it is better for a longer time, so you don't even have to worry about it as much. And personally, I've had heat pumps in my house now for over 10 years, and they're incredibly durable. We really don't have an issue with them. And we've been building with them for some time. So I'm optimistic. Now there's some brands are better than others, frankly, and we tend to invest upfront, but I think that -- I'm not overly concerned with that being a major issue.
Next question comes from Jimmy Shan at RBC Capital Markets.
So just on the financing side, CMHC, they raised their premiums and you talked about tightening their underwriting. I wonder, can you provide any color there in terms of how that is or is not impacting you?
Well, I think a lot of that takes effect June 1.
Mid June.
Mid June. So we really -- and if anything, if you call up CMHC, they would tell you that they are very, very busy with a lot of people getting into applications before that date. So what is it going to look like after that? You know what, I mean, our thought process is that, yes, it's going to come a little bit more. And you just got to be basically planning your sort of renewals or first time on a file, a little bit longer with them because it's understandable that there's a lot of people looking for basically the insurance for these mortgages.
And how are they tightening their underwriting?
How are the timing? Very...
How are they tightening?
You know what, I don't know that I've seen any color on that. I mean a lot of times, it would be -- but again, if you're not looking for max, 80%, 90%, if you're looking for some amount less than that, then it really won't affect us too much.
Okay. And then the other question I had just was on the cap rates on the asset sale that's done so far. Are you able to provide what the cap rates are?
I don't think we've -- I mean the Halifax one was very low 4s. And the Bronson one was high 3s.
Next question comes from Matt Kornack at National Bank Financial.
Just as you go through the process of disposing of assets, is your longer-term goal still to have more geographic diversification, newer assets? Or have your thoughts on kind of what the ideal portfolio would be changed at this point?
I mean we still want more geographical diversification. Now by getting a lot of the stuff is that as we do -- we don't have a lot of assets that we'd be willing to sell in Ontario or west of BC. So the bulk of it over this period of time will be Atlantic Canada. And again, I think that when you look at it, even the age profile of what we own, which a lot of it is relatively on the newer side, I think, every year, there's going to be opportunities to look at assets that we would consider non-core and disposal in the future. This will be an ongoing process for, I'm sure, as long as Killam is going to be around.
Okay. No, that makes sense. And then just with regards to the changes in the cap on renewal rent increases in Nova Scotia. Historically, you guys have had kind of internal rent control to some extent. But do you see a move in terms of what renewal rent increases potentially would be? And is that cap even attainable? Or would you want to attain it at this point?
So the provincial government in Nova Scotia has told us that they're looking at a 5% cap in 2024 and 2025, is what they're giving guidance on. We'll see if they finalize it at that, but it looks very optimistic.
Okay. And then I don't think in the past, you probably have pushed rents that much in Nova Scotia, but I guess the market has also changed substantially over the last several years. But just any thoughts as to...
I think what you have to consider is that the last 2 years, it's been capped at 2% when inflation was running 7%, 8%. So it's a bit of a catch-up. I think that, that's fair. And that's why we're seeing bigger numbers for the next couple of years.
And they've also published the increase allowable on the manufactured home community side of our business for next year, and it's 5.8%.
No, that's a fair point with regards to inflation versus rent growth over the last couple of years.
And the next question comes from George Huang at Raymond James.
Just one question for me. As you go through lease-up of some of your newer assets in core urban markets, are you seeing any tenant resistance to higher rents from an affordability perspective?
Well, again, the newer properties that we have, they would be at the upper limit of the market. So I think it's safe to say that the people that are seriously looking at the unit to rent, they're not in that sort of employment or income level where they would look at and say it's unaffordable.
I think another way to look at it as well is, I mean, that's on the newer developments. But even on our older properties where we're renovating the units, there's such demand and they're prepared to pay a fair bit of -- a bit fair of higher rent because they're looking for modern amenities and upgraded units. So there's capacity in the marketplace, certainly, for these products for the updated housing.
I mean the other way to look at it, anywhere you look or see what's being sort of published, the average rent is at least $2,000 in every major market in Canada. We still have -- our average rent is $1,304 across 19,500 units. So basically, we are an affordable alternative, but our average rent is way less than the current asking rent in every market that we're in.
So from a value proposition, two people making minimum wage, call it, $15 can afford to pay based on CMHC's number using 30% of the income. When you take it annually, $1,450, they would still be under the 30%. So what's being offered is a tremendous value in terms of pricing for these days.
Next question comes from Sairam Srinivas at Cormark Securities.
I'm sorry if this question has already been asked because I just came in a bit late. In terms of higher rates coming up and developers obviously struggling with variable rate loans and construction debt. Would you think that is something that could probably see some more assets come into the market in Halifax? And I know acquisition is not a priority, but do you think that's something that could change your view on that strategy?
So you're asking it because of the higher construction cost to build, there might be other developers willing to sell or for us just to...
Yes, I think...
I don't -- yes.
Sorry.
I don't see a lot or really any stress in the market, especially with the local developers that we're aware of, whether they're in Atlantic Canada or other markets. People are building it because they want to own these assets long term. Now the merchant builders are a little bit in a different category, and they're already actively talking about their projects well before they even go into the ground. But I mean, the real issue is that, collectively, we have to build more apartments in this country. And the 5 REITs combined and even a couple of the private REITs, we own such a small percentage of the marketplace that there's a big, big world behind us, and they're willing to sort of grow -- a big part of the growth in all our markets in terms of adding new supply to the country.
Next question comes from Gaurav Mathur at iA Capital Markets.
Just one quick question from my end. We noticed the uptick in AFFO this quarter, and I'm just wondering if there's an AFFO payout ratio that you're targeting for 2023.
We don't have an AFFO payout ratio that's been targeted for that policy for the Board to say that it's looked at on a regular basis by the Board.
There are no further questions at this time. You may proceed.
Just to say thank you very much for participating today, and we look forward to being back here at the end of Q2 in August to take all your questions. Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.