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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 Q4 2022 Year-End Financial Results 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 Friday, February 17, 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 Q4 2022 year-end financial results 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, strategies, 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 future results, levels 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 have delivered strong financial and operating results for the fourth quarter and for the year ending December 31, 2022. However, the past year came with new uncertainties and headwinds. Nevertheless, we remain focused on our three core growth strategies. We achieved 4.7% same-property NOI growth across the portfolio, which included 4.5% same-property NOI growth in our apartment portfolio, 6% same-property NOI growth in our manufactured home community portfolio and 7.9% same-property NOI growth for our commercial properties.
Despite pressure in the capital markets in 2022, multifamily fundamentals in Canada with the strongest we have seen in our 20-year history. Killam ended the year at 98.3% same-property apartment occupancy, also the highest in our 20-year history. 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 our financial results, followed by Robert, who will discuss our MHC and commercial portfolio results and an operational update. I will conclude with an update on our current and recent developments and our capital allocation strategy.
I will now hand it over to Dale.
Thanks, Phil. Slide 5 highlights Killam's financial performance. Killam earned net income of $122.7 million in 2022 and FFO per unit of $1.11, up 3.7% from last year. AFFO per unit of $0.93 was up 3.3% from 2021. Killam's same-property NOI, FFO and AFFO growth in Q4 and for the year are summarized on Slide 6. The growth in FFO and AFFO is attributable to increased NOI from our same-property portfolio and incremental contributions from acquisitions, which totaled over $500 million since the beginning of 2021. This growth was partially offset by an increase in the weighted average number of trust units outstanding and the impact of rising interest rates.
Strong topline growth continued to drive positive results in Q4. Same-property revenue growth of 5% was driven by higher rental rates on all three business segments coupled with a 130 basis point increase in apartment occupancy ending the year with Killam's highest occupancy level in its history.
The weighted average rental increase chart on the top of Slide 7 captures the increase in rents based on the leases that came into effect during each period. This chart shows that in Q4, we achieved a weighted average increase of 4.3% for new and renewing leases that started in October to December, well above our 3.7% year-over-year growth. This 4.3% increase is made up of 2.1% rent growth on leased renewals and an average increase of 12% on unit turns from new tenants moving in during the quarter.
Slide 8 illustrates our total same-property operating expenses, up 5.4% in 2022. The most significant increase was in property utility and fuel expenses, driven primarily by higher natural gas prices. Same-property general operating expenses were managed below inflation, increasing by 3.6%, while property tax expenses increased by 2.2%. Killam's debt maturity profile, which can be seen on Slide 9, includes average apartment mortgage rates by year versus prevailing five year CMHC-insured mortgage rates.
Based on today's bond yields, current fair borrowing rates are above Killam's annual weighted average interest rates. In 2022, Killam refinanced $152 million in maturing mortgages with approximately $213 million of new debt at a weighted average interest rate of 3.7%, 90 basis points higher than the average rate on the maturing debt. Refinancing at higher rates is expected to lead to increased interest expenses. However, this increase is expected to be gradual due to the staggered nature of Killam's debt ladder. We remain focused on reducing our debt levels and ended the year with debt to normalized EBITDA of 11.2x and debt as a percentage of total assets of 45.3%, just above our target of 45%. The increase in this ratio is attributable to higher balance on Killam's credit facilities from acquisitions during the year and the recognition of fair value losses related to investment properties due to a moderate expansion of cap rates in the second half of the year. Killam's debt metrics are included on Slide 10.
I will now turn the call over to Robert, who will discuss our operating results in more detail.
Thank you, Dale, and good morning, everyone. We continue to see positive results across all Killam's business segments. Our MHC and commercial portfolios had strong fourth quarter 2022 results and are expected to continue to add meaningful contributions to Killam's future growth. The MHC sector also delivered an impressive performance for the year as a compelling affordable housing solution. As well, Killam's seasonal resorts outperformed previous years as Canadians enjoyed these well-located affordable vacation destinations during the summer and fall of 2022.
As noted on Slide 11, Killam's MHC portfolio realized same-property revenue growth of 5.8% and NOI growth of 6%. This growth is mainly attributable to increase seasonal revenues achieved through annual rent increases plus more short-term rentals, all compared to 2021. Killam's MHC business segment generated 6.1% of Killam's overall net operating income for 2022.
Slide 12 highlights Killam's same-property commercial portfolio, which also performed very well in 2022 with revenues up 5.9% and a 7.9% increase in net operating income. These improvements are primarily due to a 240 basis point increase in occupancy to 93% for the year. Killam leased 50,000 square feet of net new commercial space and renewed a further [108,000] square feet throughout the portfolio during the year. Combined, new and renewal leasing generated a weighted average net rental rate increase of 11.4%. Killam's commercial portfolio is proving to be very complementary to our apartment portfolio.
On the apartment side, we continue to strategically invest capital in our portfolio with capital upgrades energy efficiencies and unit repositionings. Killam is well positioned to deliver quality housing solutions to our residents and communities. Our suite renovation program is an important initiative that meets the market's demand for modernized suites. Potential first-time homebuyers are turning to the rental market as an increasingly affordable option given today's surging single-family home prices. At Killam, we are cognizant of our responsibility in Canada's competitive apartment market. For example, Killam upgrades only those suites that come vacant when tenants do not renew as we do not engage in programs to influence returns through aggressive rent hikes or incentive offerings.
As shown on Slide 13, Killam repositioned 617 suites, exceeding our 2022 target of 600 suites. This represents approximately 15% of the suites turned and 3% of our total portfolio. Over the years, Killam has fine-tuned its upgrade processes and has the ability to reposition most suites within 28 days and provide our residents with the best finishes based on appeal, functionality and durability.
Slides 14 and 15 profile a number of Killam's upgrade projects in 2022, where we invested capital to improve the attractiveness and curb appeal of all of our properties. We added two new amenity rooms at Quinpool Towers in Halifax, a fully equipped 2,000 square foot gym along with a 2,000 square foot residence lounge. Further, we installed a dedicated elevator to ensure our mobility-challenged residents can also access and enjoy these facilities. At Brentwood, Apartments, also in Halifax and the Belvedere in Charlottetown, Killam installed new exterior cladding and windows. These capital investments improve the durability of the properties given climate changes related to weather and increased installation for improved energy efficiency and resident comfort.
Our energy efficiency investments totaled $8.5 million in 2022, exceeding our annual target. This included projects such as solar, photovoltaic installations, electric vehicle charging stations, geothermal heating and cooling systems, boiler and heat pump replacements and electricity and water conservation projects. These advanced green initiatives will reduce Killam's impact on the environment and help mitigate our exposure to volatile energy costs.
As the chart on Slide 16 highlights, continued population growth in Canada and specifically, in the Halifax region, our largest market, is also expected to drive demand for our properties. Population growth in Halifax has continued to remain at record levels. The city is attracting people from across Canada and around the world. According to Statistics Canada, Halifax was the second fastest-growing region in the country behind Moncton Canada leading impressive 5.4% population growth. Not only our Atlantic Canadian cities growing at a record rate, the average age of the population in the region is also trending younger.
Demand for housing is unprecedented. We recognize that housing supply and affordability is a challenge in Canada, and as I noted earlier, Killam is committed to contributing to a solution. In 2022, we increased our long-term commitment to affordable housing through CMHC's innovative MLI select mortgage loan insurance product. We ended the year with over 1,000 apartment suites having a long-term affordable commitment, an 18% increase from 2021.
At year-end, fully 42% of our portfolio remains affordable as defined by CMHC's 30% of median household income metric. Our environmental, social and governance priorities are core to our business, and in 2022, we continue to focus on inclusive and sustainable growth. Our annual third-party managed residential survey is an essential way we measure our progress. In 2022, we continue to score well on these metrics compared to industry benchmarks with 86% of our residents stating that they are happy to rent from Killam. We certified an additional 10 properties this year under that certified rental building program, and we are well on our way to reaching our portfolio goal of 20% certified by 2025. These certifications ensure that we have the best operating and healthy living standards for our residents.
I will now hand you back to Philip to provide an update on our developments, acquisitions and capital allocation strategy.
Thank you, Robert. We completed $119 million in acquisitions in the first half of 2022, expanding our portfolio in Halifax, Waterloo, Guelph and on Vancouver Island. We reduced our acquisition activity during the second half of the year because of rising interest rates and focused on maintaining capital flexibility. Future acquisitions will continue to be an important component of Killam's growth. However, we believe now is not the time to be aggressive.
During the last two to threer months, Killam has been focused on identifying assets to sell and reallocating this capital to pay down our variable rate debt. After repayment of debt, we will use the capital for new developments or our NCIB program. Killam has received many inbound inquiries for off-market sales from private capital, and we expect to close on several small transactions in the coming months. PEI is one of the markets where we've had many inquiries, and we will look to reduce our ownership exposure throughout 2023, 2024.
Killam's focus on dispositions is driven by a desire to recycle capital, increased geographical diversification and reduced leverage. Developing high-quality properties in our core markets is an important component of Killam's capital allocation strategy as we grow our portfolio and contribute to new housing supply that is so badly needed in Canada today. This past year has been Killam's largest year for development since our program started in 2010 with $243 million in completed developments. This component of Killam's growth strategy is one that distinguishes us from our peers and allows us to add assets to our portfolio in strong markets.
As seen on Slide 19, in 2022, we completed three developments in the Ontario region: The Kay, a property in Mississauga; Latitude; and Luma in Ottawa. These developments are exceptional additions to Killam's portfolio and are expected to contribute positively to our NOI and FFO growth in the coming year. We finished the year with three developments underway, which will add an additional 320 high-quality suites to Killam's portfolio over the next 24 months. They are profiled on Slides 20 to 25 and include The Governor in Halifax and Civic 66 in Kitchener. The Carrick in Waterloo, which broke ground last fall, is expected to be completed by the end of 2024.
To conclude, Killam has a strong balance sheet, has a proven business model and an experienced management team. We recognize that Canadians rely on us more than ever, and Killam will be there for our residents and our communities as a responsible corporate citizen. We are committed to being an ESG leader, developing a culture of diversity inclusion, building meaningful purpose-built rentals and investing in initiatives to improve operating efficiencies. I would like to thank our Killam team across the country for their hard work and dedication, our residents for choosing Killam as their home and our unitholders for their continued support. We are optimistic of the year ahead, and we will continue to execute on our priorities and create value for our unitholders during 2023.
Thank you. I will now open up the call for questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question comes from Mike Markidis of BMO Capital Markets. Please go ahead.
Thank you, operator. Good morning, everyone.
Good morning.
So just on the – just want to get a little bit of additional clarity on the dispositions. Is that a gross figure? Or is it net? And I guess what I'm getting at is, are you contemplating doing any acquisitions at all this year?
And that is right now a growth is minimal. So it could go higher than that. It depends on basically the deal and that's going to be deal-by-deal. These are all smaller properties that we're looking at, and it doesn't really exclude acquisitions. But again, from our point of view, on the growth side, right now, we don't see a lot of value and opportunities on the older stock from looking at it. If there's opportunities out west on maybe newer product and second half of the year, we'll look at that, but the focus on growth for us this year will be on our development side of the business.
Okay. So not ruling out acquisitions, but not explicitly putting a target out fifth year?
Right.
Got it. Okay. Just on the guidance for same-property NOI of 3% to 5% for this year, perhaps you guys could give us a little bit more color in terms of what you're expecting from the top – and topline versus the OpEx inflation side, that would be great.
I'll take that one. So on the topline, I mean we are seeing acceleration in terms of rent growth, as you would have seen in the results. So first, starting off 2023, that's continuing. So we're pretty bullish in terms of being able to get 4% to 5% on topline. Again, reminder, occupancy is pretty high in most of our markets. So it's all going to be about rent growth. Although we do have some occupancy gains to be made in 2023.
And then on the expense side, we've talked a lot about nat gas exposure, and we're going to have a lot more information after Q1. So heading into 2023, I think that was our biggest cost pressure that we were seeing, especially some of the pricing where we're high in Atlantic Canada. What we have seen is that pricing is coming in a bit lower than we had originally expected. So on the expense side, I think similar to probably what – where we would have ended this year when we look across the board. The mild weather is certainly helping us on that side.
When we look at other expenses, property taxes will probably 3% to 4%. We've got some provinces that are going to be a lot less, some is going to be more. We are having inflationary pressures on a lot of our repairs and maintenance and contract-related costs. Those are being offset by some other efficiencies we've got internally. So overall, that should get us to the range that we talked about.
Okay. And just – I mean, you didn't say it explicitly, Dale. And I think you guys are likely being conservative for a variety of reasons, probably lower turnover on the OpEx side, like you noted. But would it be fair to say that you're expecting a lower turnover. From a topline perspective, you're expecting lower turnover, but that 12%, and really, your new leasing spreads have started to in check with the last couple of quarters will be the offset, and that will continue to go higher. And then on the OpEx side, likely some conservatism there. We just got to get through the Q1 bogie, and then we'll reassess. Is that fair?
I think that's fair. The turnover is one you would have seen like it really came down a fair bit in this past year, and that trend, we are expecting that to continue. So that's the big question when we look out how much lower turnover are we going to have.
That's great. Thanks. I'll turn it back.
Thank you.
Thank you. The next question comes from Mark Rothschild of Canaccord. Please go ahead.
Thanks, and good morning everyone. Philip, in your comments about not being aggressive in acquisitions this year, I assume that was referring to just the returns you can get, and you also mentioned that you're getting inbound calls to sell properties. What do you think changes over the next little while? Do you think that prices need to come down? Or does the market just need to stabilize as far as interest rates go? Because obviously, over the long-term, you do want to be active in buying properties, and I understand your point that the numbers don't seem to work right now?
Well, I think of the two comments are the two reasons. The one that's more concerning to us is just to understand where the interest rates are going to be. And again, it's been a constant sort of increase throughout last year. The beginning of this year, they started to come down, and now they've moved back up in the last three or four weeks ago, and all we want is a little bit of certainty. We want to know that the Bank of Canada has signaled, this is the end of their rate increases because I think that once that happens, for sure, we will start to see the bond yields and even the cost of our debt on a five or 10-year to come down a little bit. And even if it doesn't, that's not the end of the world. What is really hard to sort of work with, if you look at a property and it's going to be a 60 to 90-day sort of tie up, you don't even know what it's going to be when you close. And we just want a little bit of certainty, and for the last 10 years, it was always quite simple. It was going to be relatively stable or less, and that's the part. And again, we're looking at – typically, the acquisitions are all going to be $50 million plus. And so you don't really want to make a mistake if you can sort of postpone that sort of uncertainty for a few months.
Understood. Okay. Great. And then maybe on the development side, where you've been successful and remain active, the cost to develop, whether it's development charges or just general costs, have gone up quite a bit. Are you seeing further pressure on returns? Or is the rent growth – the rise in rental rates enough to offset that and get to comparable returns?
I think it's – to answer your question, again, we see that there is the ability to move those rents, and so therefore, when even if you look at it and say, it's 4.5 development yield today, and even if there's cost pressure over the next 30 months as you build it, we truly believe we can move the rents. And again, if you look at it, what this country needs is new supply. And so from a pure real estate company, the growth side should be on the new supply. And so you can do your own developments, you can sort of maybe partner up with other developers and have joint ventures on the new construction. So I think that, that's really what we're going to concentrate on because that's the biggest opportunity in need for the country.
Okay. Great. Thank you so much.
Thank you. The next question comes from Jonathan Kelcher of TD Securities. Please go ahead.
Thanks. Good morning. Just going back to the same-property NOI guidance, Dale, you said 3% to 4% expected increases on the property tax and utilities are obviously always going to be a wildcard at least through Q1. But what are your expectations for your R&M or your general operating expenses?
They’re more. Yes, 4% to 5%.
4% to 5%. Okay. And then on the – Phil, you talked about in your remarks about selling assets to reduce leverage. But if your sort of outlook or targets for the year, you have leverage basically flat. What – where do you think you want to take leverage over, I guess, a two to three year period?
Well, again, the trend has always been to try to move it down. Right now, we're at 45.3%. And when I say we're reducing the debt, it is our sort of our line of credit that we would have typically for the last number of years been partially into the line, which is variable. And then basically, we've been, over the last three or four years, fortunate enough to be able to raise money on the market through the markets, pay down that line and then go over and look for acquisitions and use that line in terms of quickly being able to close. We know where everybody's stock price move last year. We're not prepared to raise equity at this time. So therefore, one of the ways to pay down that line is to sell assets. I mean there's such huge demand. Pricing looks incredible. Use that to pay down the line, and it will reduce our leverage to a certain extent, and then we have the flexibility in the capital flexibility to look at opportunities. We're going to put it back into their development program or, as I said, our NCIB program.
Okay. That makes a lot of sense. And you mentioned specifically PEI. Is that basically due to the regulatory environment there? You just can't get enough or as much growth as you can in the rest of your markets?
I think in – as we sort of thought about if we were going to get asked that question today, I mean we are looking at opportunities to sell assets in Ontario, New Brunswick, Nova Scotia and PEI. PEI is basically, we've been there almost for 20 years. It's been very good to us. But the last couple of years have been – the rent control side of it has been less than what we hoped for and expected. And it comes to the point where we know that our capital can find a better home, and if we can sell down some of those assets, then we're prepared to do that.
Okay. And then just last for me on rent control. Is there anything to suggest that it doesn't go away at the end of 2023 in Nova Scotia?
Well, there's talk one way or the other. We don't know anything for sure. But again, my comment on rent control this morning, I guess, is if you look at it with basically BC at 2, Ontario with 2.5, Nova Scotia at 2. So these are the provinces that affect us the most. My comment is that as we've experienced the inflationary pressures for the last two to three years, it's been a lot higher than that 2 to 2.5 range. So I think that as a landlord and even sort of talking to these provincial governments or just even being involved in the industry, we need a little bit more of an increase on these rate control markets.
Okay. That's helpful. I'll turn it back. Thanks.
Thank you. The next question comes from Brad Sturges of Raymond James. Please go ahead.
Hi there. Just to continue on the line of questions on the asset sales. It sounds like there's potential for several small transactions. Is it fair to say that you're targeting or contemplating it, I guess, some smaller assets? Maybe a little bit perhaps older assets? Or are there other attributes that make an asset sale attractive at this point?
I would say that, that's a big chunk of the opportunities in front of us are older and smaller assets for sure.
Okay. And...
And then, sorry, just one more comment. It's almost because that's the biggest pool of potential buyers in the smaller range of these assets.
Because it's mainly private buyers that are approaching you, yes.
Yes.
Can you comment on where those conversations are going in terms of pricing relative to the IFRS? Are you expecting to basically achieve your current book value, if you were to sell assets?
That would be fair to say, for sure.
Okay. I'll turn it back. Thanks a lot.
Thank you. The next question comes from Kyle Stanley of Desjardins. Please go ahead.
Thanks. Good morning everyone. Just going back to the earlier comments on PEI. I'm just wondering, as you do look to sell some of the assets in the province, do you – are you seeing reduced investor interest or any impact on potential pricing just given the recent regulatory shift?
No, not at all.
Okay. Good to know. You did disclose that kind of 10% to 20% mark-to-market upside across your portfolio. I'm just wondering, could you talk about how that may differ across your geographies?
Sure. Yes. I mean I think that with the moving target every month, looking at it, it is a hard one to peg down. I'd say, we've seen acceleration in the West, where we wouldn't have had, I'd say, in the last two quarters much on that mark-to-market, but that's really starting to broaden. And especially, when we look at net effective rents after incentives in that market, I think that's like 10% plus in Alberta that we haven't seen. Nova Scotia is one that Halifax got a lot of headlines when CMHC test stats came out. That's another one that it's moving up quickly. So mark-to-market in this market is probably 15 to 20, but it gets higher when we do some repositioning. Ontario, it's very healthy. I'd say, New Brunswick still strong, but maybe just a little bit under 10. Newfoundland is probably three to eight, yes.
So the vacancy has gone down materially in St. John's. We're seeing good gains there. And Southwestern Ontario across the board has been very strong.
Very strong, yes.
Will probably lead us.
So really like that 10 to 20 is probably closer to the 20, and it's – we're just keeping an eye on what we're capturing.
So a lot of it is a function of the decrease in turnovers. So with the jurisdictions having rent control, people are choosing not to move. So therefore, fewer units come up. And those, when they do come up, there's a requirement to maximize rent.
And that's an average number, too. Just a reminder, too. So we're seeing some far above that and some lower.
Okay. Perfect. That's exactly where – I guess, why I asked the question, just thinking that maybe the number is maybe a little closer to the 20%. So great to hear. And just one more for me. Just on your capital budget for 2023, I mean capital spending was up decent amount, I think, about 30% in 2022. I do believe some of that was catch-up. And I mean you highlighted the fact that maybe you do fewer repositioning this year, but I'm just wondering where your capital spending maybe trends in 2023 versus last year?
It will be relatively comparable. It will be, let's call it, $85 million to $90 million. So it will be very similar to this year.
Okay, thank you very much. I'll turn it back.
Thank you. The next question comes from Mario Saric of Scotiabank. Please go ahead.
Hi. Good morning. And I want to come back to the turnover as well. In 2022, it was 23%. It sounds like you mentioned or you did mention that you expect it to come down this year. Can you give a sense of what is baked into the guidance in terms of how much more it can come down? And the reason I ask is, there's essentially a structural turnover that takes place that irrespective of the market, people move. Like what do you think that structural churn rate is for your portfolio?
We're expecting for this year probably in the range of 18% to 20%. And that structural number, I think. Are we there?
I can hear you, Dale. I just...
Sorry, I had some technical problems. Can you hear me?
Yes.
So I think probably 10% is probably that. When we look at – it's probably that technical number.
Got it. Okay. And then in terms of – so we come back to the turnover, have you had a chance to track that turnover by lease durations? Look, it's 23% for the overall portfolio, but how that vary for leases that have been existence for 10 years plus five to, is there a wide variation in that?
We don't have by tenure. We haven't dug into that detail. And I would say, yes lower turnover for the one that has been there for a longer period of time generally, yes. Yes.
But obviously, the main driving factor of the reduction in turnover is simply the increased population right across the country and our ability not to keep up with the supply side.
Right. Okay. And then just my second question. In terms of cap rates, in your Q3 disclosure, I think you talked about the expectation of CapEx moving higher, which we saw evidence in your IFRS valuation this quarter. That disclosure was missing this course. I'm not sure if that was intentional or not, but based on, I guess, Dale's commentary regarding strong market pricing, is it fair to say that the current rate environment you think that the upward pressure on cap rates is pretty much done?
We think so. It's that balance between the rent growth, and I mean we feel good where cap rate settled for the quarter. And we're – especially with the transactions that we're looking at, as Phil already talked about in terms of sales, there's lots of support for the values that we have. So at this point, we're not expecting those continue to move in any material way based on current information.
I mean, the other comment I'll make. It's interesting that as a sector. The other – Killam and all the other publicly traded have prevalent rates, we own 3% of the market. And just by default, we don't dictate where volumes are going. And even if we stop buying, there's a larger market out there behind us that basically sees a lot of value, and that's just being reinforced to us almost every day with the number of inquiries we're getting to sell assets.
Okay. And then I guess, I don't know if you answer this question, but with these buyers, like what are they seeing in so far as cap rates still seem to be a bit below where financing costs are today across – what are they saying?
What they're really seeing is that they look at it, they probably – and in almost every case, they already are landlords and a small – obviously, at a smaller scale. We're seeing the incredible pressure on rents. They're seeing that they basically know that rents are going to go up. What they're buying depending, on the market, a lot of it would be under rent control. And then they look at it and say, I don't have to report it every 90 days. So therefore, I take the long view, and these assets are really appreciated in value. And on that size where I can see real wealth creation by being a smaller midsized landlord because I like the business.
The hard aspects of the inflationary pressure is going to – as we see the cost to replace is significantly higher, and it's accelerating. So taking those assets in time, they will pay back.
Okay. That makes sense. And maybe just the last one. Where would kind of five and 10-year you see financing costs today?
Would be in the range of kind of a 410 to 430, depending on the day.
And again, two or three weeks ago, it's about 30 to 40 basis points less. And depending on sort of the way that the bank account reacts in the rest of the year, and we kind of expect that it will go back up and down as a bit of a roller coaster.
Okay, great. Thanks for the color.
Thank you.
Thank you. The next question comes from Matt Kornack of National Bank Financial. Please go ahead.
Good morning, guys. Just wanted to quickly go back to the CapEx guide being similar to 2022. Is the composition changing there in terms of where you're spending the capital in suite versus on buildings? And then in terms of the building improvements, what's kind of the target in terms of how you go about that CapEx spend?
So it's a very detailed budget and that gets allocated accordingly. Certainly, for us, one of the main thrusts of that program is our repositioning program. So we're looking at 450 turns this year on the repositioning side. So we'll invest there, returns being 13% all cash. But across the board, it's building envelopes. When we're doing that, we're improving our value of the building. So we're saving money operationally. So there's a payback on that. And – but in terms of the breakdown, it will be very similar. The other key initiative we have is just our green program where we're using more photovoltaic installations that are working for us on new construction geothermal is the way to go unless you – the compelling reason you can't do it, that's exceptional payback. And across the board, we're modernizing our properties and working to make them more weather resistance, given there's a fair bit of variability these days and frequency of the storms.
Okay. No, that's perfect. Appreciate that color. And then just the last one for me. With regards to your development pipeline, can you give us a sense as to what the impediment would be to build at this point or preventing you from building further? Is it access to capital returns or kind of process-driven zoning items? And then is the development pipeline or expanding it at all dependent on the disposition program?
Right now, I think it's independently – one of the biggest focuses we'll be doing for the rest of this year is looking at all our developments, all the opportunities in front of us and moving ahead from the entitlement process on a number of files straight up. And so if there is a theme is that on this call or were what we see in terms of the big opportunity in front of us, is to be involved in the supply side. So it takes a lot of time for every single project from a concept to an entitlement to the beginning of construction. So we've got three developments. Currently two finishing up. One just starting. There will be another 24 months. We're involved in another one and a smaller percentage ownership in Calgary. And we truly want to get the next one or two, at least one started this year. So we get high probability of that happening. We are looking at that one to kind of do a little bit of value engineering to see if we can bring down the cost a little more time because we still haven't received the permitting up until the last few weeks, and that's not going to be the issue.
And then really, the next one, we've got a number of files that we just really have to push. And then to be able to look at these opportunities and bring them up to the next level as a big chunk of work that we're prepared to do at this time. One of the more exciting ones will be Westmount. That's the one where we have The Carrick underway. The second phase would be as of right potentially up to 244 units. And then there's the master planning behind that, which is – we will be quite aggressive on trying to get the number up in terms of building a real community there over time.
Okay. No, that makes sense. And given your expertise on the building front, your contribution to new supply would be through development more so than buying of new assets. Is that fair characterization?
Well, again, I think the big – as I was hopefully trying to reinforce, if we see stabilization of interest rates in the second half of the year, then we know what kind of return we're going to get looking at opportunities on the new side of the – of acquisitions. I think right now, the idea of buying something relatively old can do in the added value with a low turnover, it's just going to take that much more time to basically turn these buildings around and see huge improvements in cash flow. I mean that's better served for the private investor because they don't have the time horizon than we do.
That makes sense. Thanks guys.
Thank you. Our next question comes from Jimmy Shan of RBC. Please go ahead.
Thanks. Just a quick follow-up on the turnover rents spread. So when I look at the CMHC rental report, they're reporting spreads in markets like, Halifax, Kitchener, Waterloo in the 25% to 30%, and even in New Brunswick in the kind of low teens and that was October data. So I'm just trying to square that with your reported 12 for the quarter. Is that – I don't know if that's just law of averages, but just any thoughts as to why there is seemingly a big difference?
Yes, we've been having the same question. So when we look at it, I will just highlight that CMHC, how they gather the data, they do note that Halifax actually has a Level D, which is poor data supporting that. So I'm not sure how they pull it. Certainly, when we look at the repositions, those numbers make sense, but regular churn say seem high. So for example, our [indiscernible] largest landlord here, and we were not included in those conversations. So I think it's – it is probably what group they pulled to get that data. So yes, it is different than what we're seeing, but I think that the trend with those market rents increasing is absolutely true, but I'm expecting that their sample pool was quite small. And if you look at our more – depending on some of our older assets, those numbers do make sense. But that's – they don't fully align with what we're seeing.
Jimmy, did you pick that up in terms of the data they're saying that it's – the quality of it was a D in New Brunswick was a C. So really, you're talking a very small sample. And for us, I mean, 6,000 units, I mean, statistically, we'd be 10%, and they never called us.
Okay. All right. Well, that makes sense. Okay. So just turning to the debt maturity on 2023. So I think half of the maturities on the apartment side are non CMHC insured. Maybe if you could remind me like what was the rationale to not have CMHC insured to begin with? And then as a prospective plan is to refinance those debt with CMHC financing?
Yes, I mean, most of those would've been either assumptions, that we would've assumed when we acquired those assets or debt that we put in place just immediately upon an acquisition. All of those would likely go CMHC this year.
Yes, I mean there was been recent acquisitions out west that did not have CMHC money on it, and we assumed with debt when we bought it in the last couple years, and they're relatively short-term, like three year term, two to three years.
Yes. In a while on new developments, we weren’t necessarily putting CMHC insured just because of timing and whereas the new development today, we are doing it, and we're able to get – use the MLI select and use the energy efficiencies, and that's really positive for us on the development. So some of the changes that CMHC made has, and we're fans of and we’re using on the new development financing.
Okay. Great. Thanks, guys.
Thanks.
Thank you. The next question comes from Gaurav Mathur of IA Capital. Please go ahead.
Thank you so much. And good morning everyone. Firstly, thank you for the guidance. It’s really helpful. But thinking of capital recycling in 2023 and given the upward – recent upward movement in cap rates are there any markets which look more favorable from an acquisition viewpoint than the others, especially once financing rates stabilize?
So sorry, if I – your question is, what – where do we see the most attractive markets for acquisition, not disposition of assets? Is that correct?
Yes.
I would think from a cap rate, it will be the West Alberta.
Okay. Thank you. And just on the disposition front, could you provide some more color on how deep the buyer pool is? And if that's changed materially from the last 12 months?
Well, I think it's – well, the list is different. It's quite deep. When we're looking at the opportunities in front of us, like I mentioned earlier, these are off-market inbound inquiries. And basically, it is the one person coming out and saying that I want to buy it, and this is what I'm willing to pay. And because of the pricing, we're more than happy to entertain that negotiate with them. And that’s the starting point.
Okay. Thank you for the color. I'll turn it back to the operator.
Thank you. The next question comes from David Chrystal of Echelon. Please go ahead.
Thanks. Good morning, guys. Just really quickly on the disposition proceeds. Do you have a target for debt reduction? And below that level, would you kind of focus on the NCIB? Or how would you balance the kind of proceeds of dispositions?
Well, I mean our line – our acquisition line is now currently six-plus percent. So therefore, I mean the goal is to sort of pay that down, and then we'll look at the capital to look at the development side or the NCIB program.
To clarify, refinancing will help pay down that line as well.
Okay. But the goal really is to get that line down as close to zero through dispositions and refinancing?
Yes.
Okay. And then just maybe a quick housekeeping one for the developments you delivered in 2022. Can you provide the total NOI contribution from these assets in Q4 just relative to the $6 million annualized run rate?
Q4, well, we'll probably...
So you have the number...
200, 300. Yes, this year was about 1.2. It's probably about 300,000 any contribution in the fourth quarter.
So is fully leased up and contributing very positively for FFO as well.
Sorry, that was FFO, I don't know.
No. I think the question was – your answer.
My answer was FFO
Yes. So from an NOI perspective, it would be a fair bit higher. So I know looking out to 2023, Erin, do you want to comment on those just to go a bit about...
Well, 2023, we had in the MD&A that was about $6 million in NOI. That's on a stabilized basis, that would be between 2023 and 2024.
Yes. I'm just trying to get a sense of the incremental like how much was the NOI in Q4? And how much incremental upside is there from stabilization?
There's still lease-up happening on both Luma and Latitude. The Kay in Q4 would have been relatively stabilized. You probably have a couple of hundred grands from occupancy gains year-over-year, and you'll see a bit of a reduction in interest expense from an FFO perspective as well as that debt is fixed.
Okay. That's helpful. Thanks. I'll turn it back.
Just look – I mean, overall, when we look at our developments that we finished last year, we would expect from an FFO perspective year-over-year contribution of around $1.2 million. Does that help?
Yes, that's great.
Thank you. [Operator Instructions] Our next question comes from Dean Wilkinson of CIBC. Please go ahead.
Thanks. Good morning. Dale, on the debt, I think if we talk about rates stabilizing, and I think that's – we can all agree that's a euphemism for being lower than they are today. If that stabilization doesn't come until, say, into 2024, would you be willing to look at trading off term for rate with a view that you might be able to do something better? Or would you rather just ladder out the debt maturity right now and then sort of take the rates as they are?
I think we – generally, overall, we're looking long term in terms of laddering. Now one-off opportunities, that's a different discussion. But overall, we want to make sure that we are allocating that risk, not overloading any one year. So I'd say that we will continue to manage our debt ladder, ladder in a responsible way.
I mean, looking at it, I think I don't have it in front of me, Dean, but this year is about, what, 200, 250. And even next year, it's maybe around 300. So these are smaller years relative to the $2 billion. I mean what we're talking about in terms of thinking on the line and you just asked that question here, what are we doing on the new developments? Is it a five? Is it a 10? Because where rates are today. And I think you've never been able to beat the market relative to what it's going to do. And so the easiest thing and the most conservative thing is, we look out and see that actually makes sense. So – and always in the last 20 or 30 days, the cheaper form with part of the curve has been five versus 10. That wasn't – but we've just come off a 20-year decline in interest rate environment. And so now it's a little bit more complicated, but at the same time, our existing debt will just naturally roll up, and we've been looking for that same five and 10-year sort of matter. And on the new development, it will take a little bit more decision-making from our pact to decide whether it's five or 10.
No, that's great. I guess we all lose sight of the fact, Phil, that over our lifetimes, 4.2% is still actually pretty cheap debt. My back tells me that I'm probably too old to be playing great games. Thanks guys. I'll hand it back.
Thank you.
Thank you. There are no further questions at this time. Please continue with closing remarks.
I would just like to say thank you very much for everybody participating today, and we look forward to Q1 2023, the 1st of May. Thank you.
Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.