InterRent Real Estate Investment Trust (OTC:IIPZF) Q2 2024 Earnings Conference Call August 7, 2024 10:00 AM ET
Company Participants
Brad Cutsey – President, Chief Executive Officer
Curt Millar – Chief Financial Officer
Dave Nevins – Chief Operating Officer
Asad Hanif – VP Acquisitions
Renee Wei – Director of Investor Relations and Sustainability
Conference Call Participants
Kyle Stanley – Desjardins
Brad Sturges – Raymond James
Mark Rothschild – Canaccord
Jonathan Kelcher – TD Cowen
Matt Kornack – National Bank Financial
Jimmy Shan – RBC Capital Markets
Mike Markidis – BMO
Mario Saric – Scotiabank
Dean Wilkinson – CIBC
Fred Blondeau – Green Street
Operator
Good morning ladies and gentlemen. And welcome to the InterRent REIT Second Quarter 2024 Earnings Conference Call and Webcast. At this time all lines are in listen only mode. Following the presentation we will conduct a question-and-answer session. [Operator Instructions]. This call is being recorded on Wednesday August 7th 2024.
I would now like to turn the conference over to Renee Wei. Please go ahead.
Renee Wei
Good morning everyone. Thank you for joining InterRent REIT’s Q2 2024 earnings call. My name is Renee Wei, Director of Investor Relations and Sustainability. You can find the presentation to accompany today’s call on the Investor Relations section of our website under Events and Presentations.
We’re pleased to have Brad Cutsey, President and CEO; Curt Millar, CFO; and Dave Nevins, COO on the line today. As usual the team will present some prepared remarks and then we’ll open it up to questions.
Before we begin, I want to remind listeners that certain statements about future events made on this conference call are forward-looking in nature. Any such information is subject to risk, uncertainties, and assumptions that could cause actual results to differ materially. For more information please refer to the cautionary statements on the forward-looking information in the REIT’s news release and MD&A dated August 6th 2024.
During the call management will also refer to certain non-IFRS measures. Although the REIT believes these measures provide useful supplemental information about its financial performance, they are not recognized measures and do not have standardized meanings under IFRS.
Please see the REIT’s MD&A for additional information regarding non-IFRS financial measures including reconciliations to the nearest IFRS measures.
Brad, over to you.
Brad Cutsey
Thanks, Renee. And welcome, everyone. We are pleased to build on the momentum and deliver another quarter of strong financial and operating results. Demand for our quality communities remain elevated across our markets with occupancy rates increasing year-over-year to 96.2% for both same property and total portfolios.
Rent in InterRent optimal range of 96% to 97%. Rental rates continue to show strong growth this quarter with an 8.4% increase for the total portfolio and 6.8% for the same property portfolio. We’re seeing solid performance in both AMR and occupancy across all regions. Dave will provide more detailed regional insights later in the call.
Over to Slide 6. Strong AMR increase and high occupancy rates drove solid top-line growth. Total portfolio revenue growth for Q2 was 4.8% which was impacted by dispositions during the quarter. For the same property portfolio, revenue increased by 7.6% while operating expenses rose by a moderate 3.3% leading to 130 basis point expansion in NOI margin over the same period last year, reaching 67.7%.
Same property NOI for Q2 was $40.6 million, marking an increase of 9.7%. As highlighted on the right-hand of the slide, we achieved outsized FFO and AFFO growth both on a total and per unit basis. Our FFO in Q2 increased by 17.9% to $23.1 million, representing a 17.2% increase to $0.157 cents on a per unit basis.
We delivered $20.4 million in AFFO or $0.138 per unit, reflecting an increase of 20.9% and 19% respectively. This growth was driven primarily by increased NOI and reduced financing costs. This impressive growth was partially offset by dispositions having a negative impact of $0.03 for the three months ended June 30th. On a trailing 12-month basis, year-to-date dispositions have had an FFO per unit contribution of $0.0315.
Over to Slide 7. We kept our variable rate exposure including credit facilities at below 1% as compared to 8.4% at the same period last year. With the successful execution of our refinancing strategy, we’re now seeing a tailwind with weighted average interest rates decreasing by 6 basis points year-over-year to 3.37%, benefiting our financing costs.
Our balance sheet is solid and flexible with sufficient liquidity from disposition proceeds, credit facilities, and unencumbered assets. We are well positioned to advance our capital allocation priorities, including external growth opportunities. You will hear more details on that front later in the call.
But first, Dave will take us through some of the operating highlights.
Dave Nevins
Thanks Brad. Slide 9 highlights our ability to consistently achieve additional gains on leases, building on an already strong outgoing rental rate. We executed 640 new leases during Q2, generating an average gain on lease of 16.1%, which translates into an incremental annualized revenue growth of $2 million, or 0.8% annualized Q2 revenue.
Turnover rates remain close to last quarter’s levels, with trailing 12-month turnover at 24.3%. We’ve adopted a flexible pricing strategy to maximize both occupancy and revenue as we gear up for the crucial summer leasing season. This puts us in a great position to make positive market adjustments in some of our communities. Rental market conditions remain resilient, and we estimate that the average market rental GAAP across our portfolio remains just shy of 30%.
Occupancy on average market rent growth has been strong across the board. Total portfolio and same property occupancy rates were at 96.2% in June, showing improvements of 80 basis points and 70 basis points, respectively, compared to the same period last year.
Occupancies improved in all regional markets, except the Greater Vancouver Area, where we saw a small 60 basis point increase in vacancy year-over-year. As we explained on our last call, Vancouver is part of our non-repositioned portfolio, where suites may be turning over for the first time and thereby require more time to make the upgrade to help us achieve the higher market rental rates.
During the quarter, Montreal continued to perform well, with occupancy improving by 260 basis points from a year ago to reach 97.3%. In the National Capital Region, when accounting for disposition of our communities in Ottawa and Aylmer, Quebec, our same property average market rent growth is 6.4%.
Turning to Slide 11, our revenue growth continued to outpace our expense growth. Property operating costs, property taxes, and utility costs have all been reduced as a percentage of revenue. Total operating expenses as a percentage of revenue were 32.5%, reflecting 120 basis point improvement from a year ago. We continue to benefit from lower utility costs this quarter, which totaled $3.7 million, or 6% of revenue. This represents a decrease of $0.2 million, or 60 basis points as a percentage of revenue.
On a per-suite basis, utility costs have decreased 2.3% compared to last year, at $300 per suite. This was primarily driven by lower natural gas costs, with a 10% decrease in usage, coupled with a 13% decrease in rate. Electricity and water usage were both in line with the same period from 2023, but average rates were up 7% and 9% respectively.
Moving to CapEx spends, as you can see on the left side of Slide 12, over the last three years we’ve been spending about $1,000 per suite on maintenance CapEx. We continue to see excellent value creation and a repositioning program. Through cost-effective capital investments, suites in a reposition portfolio on average had a 50 basis point higher occupancy rate in June, along with an 80 basis point higher NOI margins year-to-date when compared to those in our non-reposition portfolio.
With that, Curt, over to you.
Curt Millar
Thanks, Dave. From our discussions with our internal acquisition team and external appraisers, and taking into consideration the somewhat limited recent transactions, we have decided to adjust our cap rates in several of our regional markets. Slide 14 illustrates the quarter-over-quarter change in cap rates in our GTHA, NCR, and Montreal markets. The net result is an overall increase of 8 basis points, bringing our Q2 portfolio cap rate to 4.25%.
The strong operational performance in the quarter was mitigated by the increase in cap rates, which has resulted in a fair value loss of $34.6 million. Had the cap rates remained unchanged, we would have seen a fair value gain of $36.5 million. We are keeping a close eye on market conditions as transaction activity appears to be picking up.
Moving to Slide 15, InterRent continues to be in a healthy financial position. Our variable interest rate exposure, including our credit facilities, remained below 1%, and our CMHC insured mortgages remained at 90%. The successful execution of our refinancing strategy puts us in a unique position in our industry to benefit from a lower-weighted average interest rate, with expiring rates for the remainder of 2024 being a tailwind.
With our current credit facilities undrawn, the liquidity from our dispositions, and our unencumbered assets, we are well positioned to capitalize on growth initiatives both within and outside the organization.
Our debt to gross book value currently sits at a comfortable level of 37.8%, and as previously mentioned, we are open to moving it up to the low 40s for the right opportunities. We have a proven track record of value creation on acquisitions, and we believe we would be able to organically bring it back below the 40% over time.
Moving to Slide 17, we continue to look at sustainability as an important catalyst for value creation and long-term success. Our 2023 sustainability report was published in June, and we invite you all to explore it on our sustainability website. Some of the highlights from the report include investing $3.7 million in energy efficiency initiatives such as high-efficiency boilers, LED lights, and building automation systems.
These investments have helped us cut total Scope 1 and Scope 2 greenhouse gas emissions by 5.6% in 2023, bringing us closer to meeting our sustainability goals while also lowering utility costs. Additionally, we have achieved a significant increase in building certifications across our portfolio and strengthened our governance by establishing a sustainability committee at the board level.
These are just a few highlights of our accomplishments in 2023. So far this year, we have kept up the momentum by continuing to test different GHG reduction initiatives and advancing on our building certification program. I want to thank our entire team for their dedication and hard work as we continue to push forward with our sustainability efforts.
And with that, I’d like to hand things back over to Brad to walk through our capital allocation.
Brad Cutsey
Thanks, Curt. As you can see on Slide 19, our capital recycling program was very active in Q2. Last quarter, we told you about the disposition of a non-corporate community located in Aylmer, Quebec. That transaction has been successfully closed for a sale price of $92 million.
Additionally, we sold one community with 27 suites in Ottawa for $5.5 million, or $204,000 a door, also above its IFRS value. The net proceeds from these dispositions were partially used to buy back units under our NCIB program.
After the quarter, we purchased 405,300 units for $5 million, or for an average price of $12.33 per unit. All units were purchased for cancellation. We continued to carefully assess attractive external opportunities in organic growth prospects.
Meanwhile, liquidity from the remaining proceeds have contributed to an increase in interest income of $300,000 near the later part of the quarter. As Curt explained earlier, we are fortunate to be in a strong financial position that allows us to seize opportunities that can make a big difference in the scale of our portfolio and launch our next phase of growth.
We are progressing well in our second office to residential conversion project in Ottawa at 360 Laurier. We received full site plan approval in April and a building permit was issued in July. Full interior demolition is 90% complete and we are moving into the early stages of construction as we speak.
At a Richmond & Churchill development in Ottawa, demolition has started as of July and is anticipated to be completed in September. We continue to explore various types of heating and cooling technologies that not only position us to qualify for potential government incentives and attractive financing opportunities, but allow us to minimize long-term operating costs and reduce greenhouse gas emissions.
In conclusion, we have had a strong quarter and once again extended our track record of excellent NOI and FFO growth. Thanks to the strength of our operating platform and the efforts of our team members in the communities.
We are encouraged to see strong market fundamentals heading into the busy summer lease and season in Q3 and continue to believe the current demand, supply and balance will remain well into the foreseeable future.
Our effective disposition program has further fortified our financial flexibility and boosted our liquidity. This has not only enabled us to buy back units, but also positioned us well to capitalize on opportunities that will drive long-term growth.
We will continue to use joint venture partners to pursue external growth opportunities. To date, we have taken an ownership interest of anywhere between a minimum of 10% up to 50% in these partnerships, allowing us to scale our operations by generating fees to reinvest and by stretching our available capital to participate in a greater number of growth initiatives.
I wanted to thank our team for their continued dedication which has brought us to this position. We are excited about the opportunities to come.
With that, let’s open it up for Q&A.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]. Your first question comes from the line of Kyle Stanley from Desjardins. Please go ahead.
Kyle Stanley
Thanks. Good morning, guys.
Brad Cutsey
Morning.
Kyle Stanley
Could you just elaborate a little bit on the flexible leasing strategy, you discussed in your prepared remarks? I think maybe the first time I’ve heard this reference. Just curious on maybe what that entails.
Curt Millar
Well, obviously I think it’s just for us to be able to look at what’s going on in the different nodes all over, just making sure that we’re being dynamic with our pricing and that we’re staying on top of hands and where we can go with our lifts on turn in each of the different regions.
Kyle Stanley
Okay. That makes sense. I guess on that note, historically it does seem like occupancy tends to gain on a sequential basis in the third quarter. So, how are you thinking about that for this year, especially, I guess, in the context of, the foreign student visa cap and that coming into effect, later or already in effect this year, but really impacting the portfolio in Q3. Just curious on your thoughts there.
Curt Millar
I think we’re feeling good about it. All indications are showing that’s going to be a typical year like all others. So everything seems to be shaping up in all regions similar to other Q3s in previous years.
Brad Cutsey
Okay. Kyle, it’s early, it’s Brad here. Its early days, right? August is all important to month when you talk with those ForEx students, especially in Montreal. But we haven’t seen any indication to say it won’t be similar to previous years.
Kyle Stanley
Okay. Fair enough. Just looking at your turnover spread this quarter at 16%, obviously a little bit lower from last quarter. Just wondering, what the driver there might be. Is it that maybe you’re seeing more units that have recently turned kind of coming back and that gained a lease a bit smaller? Just curious on thoughts and how you expect that to maybe trend as we go forward.
Curt Millar
I think, you know, I think you hit it there. That’s driven mainly by areas like Ottawa and Montreal where we have higher turnover. And the turnover is higher because most of these buildings are closer to post-secondary institutions. Definitely this has given us market type lifts because they are turning over more often.
But if you looked at, if you took out some of maybe some of our newer constructed communities like say, Brossard or 236 Richmond, it gets us, the 17.5% on our lifts this quarter. So, yeah, I think it definitely, the more lifts in Ottawa and Montreal bring the overall average down just because of the nature of those communities.
Brad Cutsey
For whatever reason, we saw a little more turn in Ottawa than we have typically seen in the past. And Ottawa, as you all know, is our most stabilized portfolio. So, we have a higher percentage of our vendor mates within that Ottawa portfolio closest to market.
Kyle Stanley
Okay. Okay. That’s good color. I will turn it back. Thanks, guys.
Operator
Your next question comes from the line of Brad Sturges from Raymond James. Please go ahead.
Brad Cutsey
Hey, Brad.
Brad Sturges
Hey, good morning. Just to follow on your question on the indicators heading into the August leasing season. I guess you talked about Montreal as it relates to the student demand that you’re expecting. Has there been any indications of change for the student demand within Ottawa as well? Or is that kind of trending similar to historical patterns in the last few years?
Curt Millar
Yeah, I’d say definitely, it’s trending normal. Looking at the areas that we’re close to either, you know, at the top of our universe in Ottawa, pretty much it’s right on pace with the last year for sure and pre-pandemic years also.
Dave Nevins
I don’t know why it’s like this either, Brad, but Ottawa tends to — students tend to come a tad sooner. I wouldn’t say it’s a lot earlier, but they do tend to see more leasing activity a little sooner in Ottawa for whatever reason. Montreal seems to be a very much land in August and then search for your apartment.
We have leasing activity right in through September in Montreal typically. Where in Ottawa, you typically kind of know where you stand.
Brad Sturges
Okay. That makes sense, but it sounds like you’re pretty confident in the Montreal market, that the demand for the buildings particularly around the goal are still quite strong.
Dave Nevins
Well, I think you’ve seen where our occupancy level sits today. We’re in good shape in Montreal. Like I said, guys, we’re only, what, seven days into August, right? So, yeah, I mean, we’ve seen a nice pickup in activity in the communities which are closely located to communities that typically help our students. So, there’s no reason for us not to believe that activity will continue, but we won’t really know until the last, like we’ve got three weeks left to go. And like I said, sometimes the leasing goes into September, but so far we’re seeing normalized type activities from the student market.
Brad Sturges
I guess, switching gears on the, Curt, you had some commentary around, obviously you made some cap rate changes, but you also highlighted that you’re starting to see some acquisition or transaction activity starting to come back. Just wanted to get a sense of what you’re seeing from your perspective and is there increasing opportunity to maybe to deploy capital through a JV strategy or how do you see the transaction market as it sits today?
Curt Millar
I think, and I’ll Brad or Asad can hop in if they feel I’m going down a wrong path here on this, but we’ve seen products coming to market a little bit. We’ve seen a little more activity, but not a lot of deals have closed yet. And appraisers tend to be backwards looking. They want to see what’s happened retroactively in the last six months. So, they’re still being a little bit cautious in regards to adjustments and tweaking things too early.
But we look at multiple things. We look at is the market heating up a little bit, what deals are getting done at. We look at our own portfolio. So, as we get things through our repositioning program, and we have less stuff in repositioning now, as we get through that program, your cap rates adjust a little bit because you’re starting to achieve some of that market rent. So, we’ll tweak a little bit based on that.
And in areas where we’ve done really, really well and our NOI per door leads to a high value per door, we monitor that against market transactions to make sure it’s not getting out of whack. Even if your cap rate is well within market, buyers still have a sense of a price per door thought concept. And if you start getting outside the market, then you start adjusting your cap rate to sort of bring it back in line. So, we kind of look at all these factors.
I think there’ll be more transactions in Q3 and Q4 to give appraisers a lot more sort of firm ground to stand on to suggest changes. Could we see more adjustments in the next two quarters? I think we could, but I don’t know for sure because on the flip side of that, we’ve seen interest rates come in pretty strong.
You’re now doing five-year. You can get it 350 to 360. You can do 10-year for sub-4, well sub-4 right now. So, if that keeps happening, could the levels stay where they are today? I think so. There’s a lot of moving pieces still. I think we’re just trying to be conscious of staying within the market on our portfolio and not getting out of whack.
Brad Cutsey
Yeah, like the only thing I would add is there’s been a lot of volatility in the equity and the fixed income market. Given the direct property, the nature of the direct property market, the liquidity of that type of an asset, volatility in the capital markets doesn’t avoid wealth for an active transaction market in the private market.
So, you really do need to see things stabilize out before you really will start to see people willing to transact. So, from what we’ve seen, I’m looking over at Asad. I’ll give Asad a chance to give his views. But from what we’re seeing is there still remains a little bit of a, at least with institutions, maybe not as much with the private buyer, but with institutions, there still remains a little bit of a gap between vendor and expertise and where people are willing to purchase.
I think some of that just comes down to the volatility that they’re seeing in the capital markets. But to Curt’s point, I agree with Curt. I do think the recent two cuts, at least here in Canada, and the conversations around what the Fed might and likely do, I think buoys wealth for the overall transaction market.
I don’t know, Asad, if you want to add.
Asad Hanif
Yeah, I would say the stability and bond yields at these levels should potentially spur activity down the road. The bid-ask spread still persists, but we could see that narrowing with stability in the 10-year.
The deal flow is there and there’s opportunities for everyone to look at. It’s just a question of meeting of the minds between the buyer and the seller and arriving on pricing.
Brad Sturges
Okay. That’s quite helpful. I’ll turn it back [inaudible].
Operator
The next question comes from the line of Mark Rothschild from Canaccord. Please go ahead.
Mark Rothschild
Thanks and good morning, guys.
Brad Cutsey
Good morning, Mark.
Mark Rothschild
Hey. So we’ve seen some, obviously, substantial bank growth over the years. Can you just talk a little bit more about maybe the most recent trends you are seeing, if you’re seeing some moderation in rent growth? And then maybe from what your perspective is with experience on if immigration slows, do you think that there still is going to be more demand to just keep driving rents higher or are we maybe at a place where it needs to moderate over the next year or two?
Brad Cutsey
Yeah. No, it’s a good question, Mark. I think there’s been a lot of literature and different reports. According to maybe the second derivative of that rent growth, the pace of rent growth is starting to moderate and maybe have peaked a couple of quarters ago.
I think it is important to keep in mind that household formation still outstrips new supplies being delivered by a wide market, suggesting that we’ll continue to see pressure on market rents. It might not be at the double-digit clip that we’ve been accustomed to over the last, call it, eight quarters.
So I would agree that the second derivative is starting to moderate. I feel quite confident and comfortable that market rates will continue to exceed at best inflation, like at the minimal inflation. I do think going back into more of a range of 5% to 7% is quite realistic and reasonable.
And you kind of do see it when you are looking at the leads and whatnot. These are down to the industry class of board and I think that’s really just a function of affordability. There’s not as many people looking for an apartment to rent that are currently renting, because unless they have to move, they are likely not going to move given where rents have gone.
Now, the good news in that is for us, of those 640 leases that we’ve signed, people actually see an affordability or rental income ratio actually improve. It’s improved by a couple of hundred basis points to below 30%. So for us, it’s good news. Our ops team has been working hard and our credit underwriting has been working hard to make sure that we’re putting the right residents in that portfolio.
So we still feel quite comfortable and the mark-to-market is at 30%. We’ve seen leases being rented at market, so we feel comfortable. So it’s really just for us, and as you know, we’re willing to accept vacancies, specifically in a low turnover area and wait for somebody to hit that market rent, meaning we will carry more vacancies than maybe some other owners would, in anticipation of waiting for the right residents to come in, especially in a low turnover area.
As you know, in higher turnover areas where we think we can get back at the suite faster, we will accept or have a higher option level.
I hope that answers your question, Mark.
Mark Rothschild
Yeah, that’s helpful. Thanks. I’ll turn it back. Thanks so much.
Operator
Your next question comes from the line of Jonathan Kelcher from TD Cowen. Please go ahead.
Jonathan Kelcher
Thanks. Good morning.
Brad Cutsey
Hey Jonathan!
Jonathan Kelcher
Hey, Brad. Just I guess first on the external opportunities that you are talking about, how much acquisition firepower would you comfortably have on your balance sheet right now?
Brad Cutsey
Yeah, I think for the right – and we’ve said this in the past Jonathan. I think for the right acquisition opportunities, general opportunities, I think we’d be willing to bring our debt to growth portfolio ratio up into the low 40’s, with the goal of through value creation and natural attrition, bring it back to below 40.
So with that in mind, we have, call it roughly around $360 million of acquisition passing. And I think we will prefer to continue to do joint ventures to stretch that out even further, which will allow us to kind of scale the operation and allow us to enhance overall returns by generating extra fees. And it will allow us to replenish our non-reposition bucket, which we all know too, is another growth driver for our organic side for the future.
So we’re pretty optimistic looking over the kind of the next 18 months. We still do have a disposition program that we mentioned on our last call. So we’re through our first target and we’re kind of in the second phase of that disposition program, and we think we can generate a further $50 million in net proceeds, which will recycle into these external developments and things like the 360 office conversion that we’re currently working on right now on Ottawa.
Jonathan Kelcher
Okay. That’s helpful. I guess a couple follow-ups there. Do you think you are more of a net buyer or seller over the back half of this year?
Brad Cutsey
We’re more of a net buyer.
Jonathan Kelcher
Okay. And are you looking at any new markets?
Brad Cutsey
Not at this time, Jonathan. I think we’d like to see our cost to capital continue to come in before we would enter in a new market. That said, there is one and maybe two markets that we are currently not in, that we have kept an eye on over the years and we will continue to stay educated on it. But we just feel there’s enough opportunities in our core markets today, and given the limited amount of capital, while I believe 360 with the right joint venture still afford us the ability to do a lot over the next, call it 12 to 24 months. I don’t think we would want to enter a new market until we saw a significant improvement in our cost to capital.
Jonathan Kelcher
Okay. Fair enough. I’ll turn it back. Thanks.
Operator
Your next question comes from the line of Matt Kornack from National Bank Financial. Please go ahead.
Matt Kornack
Hi, guys. Just a quick follow-up on that thought process around capital deployment. Would you look to joint venture any of your existing portfolio in order to fund some of your acquisition activity or would it only be on new activity?
Brad Cutsey
No, we would. We would look to monetize certain parts of our portfolio with the right partner, if we felt that – obviously to use it as a source of funding for the right external non-requisition opportunity. Absolutely!
Matt Kornack
Interesting. And then if I look at margins, I mean, it still sounds like if market rent growth is going to be 5% to 7%, you are kind of achieving in and around that number on AMR growth, so your mark-to-market will be sustained. But can you give us a sense, expense growth seems to have slowed down, so you get margin expansion and then I guess from an earnings growth standpoint, at this point your weighted average in place, mortgage interest rate is kind of similar to market five-year rates, so should we expect pretty substantial earnings growth going forward?
Brad Cutsey
Yeah, I’ll start with the first and I’ll pass it over to Curt, but I do feel on the expense, and we’ve been out there saying this now probably for four quarters, that we always thought 2024, even in 2022, 2023, 2024 that we’d start to see our expense side start to ease, at least from the rate pressure, that’s a big line item and we are seeing that easing and we’re making a lot of investments in our platform for efficiencies from an operating side.
So I do think Matt, 3% to 4% expense growth going forward is a very sustainable, and under that scenario, it should generate some margin expansion. I’m getting a little bit of feedback here. Are you getting a feedback?
Matt Kornack
You sound okay to me. It maybe my end.
Brad Cutsey
Okay.
Matt Kornack
It’ll mute.
Brad Cutsey
Okay. And then just on the mortgage, over to you Curt.
Curt Millar
Yeah, I think if you look at the rest of the 2024 stuff, there’s definitely a bit of a tailwind still with 5.04% on the expiring mortgages for ‘24. 2025 at 326 is not too far off of where the market’s been heading as of late, so a lot of our 2025 mortgages are sort of more towards the back half than the front half of the year. Hoping we can sort of get those done pretty much flat or very close to it.
So under that scenario, you definitely don’t see what we saw last year, the year before, where a lot of the great work the ops team was doing was getting chewed up by extra financing costs. And with our variable rate debt now below 1%, no plans to sort of bring it back up, I think we’ll stay in a good position with the mortgage ladder and the financing costs.
Now, with some of these mortgages coming at us late this year, next year, depending on how we decide to do the refinancing, you may see some one-time costs hit if there’s deferred financing write-offs, if you renew certificates and stuff, but that’s not really affecting your cash flow and your overall mortgage rate.
So there could be some one-time hits here and there, just related to write-off of deferred financing fees. We’ll do it – we’ll try to make sure we communicate that to you guys in advance of quarters where that might hit, so you can see it well.
Matt Kornack
Okay. Now that would be helpful. And then I guess as you look to duration on debt, you mentioned there’s a bit of daylight between the five-year rate and the 10-year rate at this point. Would you be inclined to go shorter duration or a blend of five and 10 or maybe 10 just because you want to lock in with certainty?
Brad Cutsey
Yeah, I think for us right now, we’re looking at our overall mortgage ladder and still trying to make sure we have a really well-balanced ladder. We’ve been working on that for the last year and a half or so. So the 2024 stuff is probably looking at five years, that 2029 pocket for us has some room in 2030 and 2031. So kind of like to work with five to seven-year money right now and fill that out and have a really well-balanced mortgage ladder. And then as rates continue to come in, we’ll continue to evaluate it and probably push it up into 10 also. I don’t see us going really anything shorter than five at this point.
Matt Kornack
Makes sense. Makes sense.
Operator
Your next question comes from the line of Jimmy Shan from RBC Capital Markets. Please go ahead.
Brad Cutsey
Morning, Jimmy.
Jimmy Shan
Yeah, good morning. So just a quick follow-up on the CMHC debt. So at 3.5 to 3.6, 50 to 60 basis points is the spread. I guess that’s come in. I was a little surprised to hear how that was so tight today.
Curt Millar
Yeah, we’re looking, I mean, and again, there continues to be big volatility, right. We’ve got quotes on mortgages as of yesterday and early this morning in that range. Could it be up 10 basis points tomorrow? Yeah, we’ve seen a lot of volatility, but it’s been pretty consistent below four for the last little while on the 10-year and sort of below 385 on the five-year and it’ll just depend on how the markets move. But it’s definitely removed the micro day-to-day jumps you are seeing. The macro sort of trend line has been down and looks like that’ll continue.
Jimmy Shan
Okay, thanks. And then the other question is on the CapEx spend. For the first half of the year, it’s still pretty materially lower than a year ago, and I think you guys talked about that last quarter. How do we think about the CapEx spend overall for the balance of the year?
Brad Cutsey
Yeah, I mean, some of it’s a function of where you are seeing some of the turn, right? And what kind of lifts you can achieve, Jimmy. So like we said, we saw a higher number of turns over the last year for this quarter in the Ottawa region, which majority of that proposal is already kind of repositioned. So that speaks to some of the CapEx spend lower. So really, it’s a function of where we’re getting. Some of that turn will be a pretty big part.
We’ve been lucky. A lot of our CapEx has been done over the last four to five years, and we’ve been on the higher side of that. We’ve been communicating of late that you’ll start to see the CapEx spend come in a tad. It’s not that we have changed our business model at all. We, as you know, we target 20% return on our investments. So we’re going to continue to put capital out where we think we can meet those kind of returns. But will it be lower than by the year end? Will it be lower than 2023? Yeah, it will be.
Brad Cutsey
Yeah, especially when you think about it, Jimmy, if you look at the amount of repositioned suites in that portfolio compared to past, a percentage of our portfolio that is under repositioning still has come in. And that often directly ties to that CapEx number coming in or growing in years where we’ve been very active.
Curt Millar
Yeah, you always see a blip, an increase in our CapEx spend right after a very active year. And as you know, we’ve always said three to five years for that to stabilize. And you’ll always see a pretty big spend following active year of acquisition. The following three years, you’ll see a lot of CapEx go out the door.
And to be quite honest, I’m very hopeful that we’ll get back to a point where we can deploy and recycle some of this capital from our disposition program, and be able to bulk up that non-reposition bucket again. And perversely, you start to see CapEx go up a little, but that means we’re doing what we do really well.
Jimmy Shan
Yeah, okay. Sorry, I just had one last. You haven’t talked about the NCIB. And you have been active post-quarter and for the first time in a long time. Just kind of how you are thinking about the NCIB program going forward in terms of the data and opportunities.
Brad Cutsey
Nothing’s changed there, Jimmy. Obviously, our unit price went down into the low 12’s. Obviously, for us, there’s a lot of value to be had in those tweaks. We’ve always said we won’t – we will do share buybacks on a launch [ph] neutral basis. We disposed of community. We took some of those proceeds and bought back. But we’ve got to weigh the buyback with other opportunities. And it comes down to timing and it comes down to ranking the different opportunities that sit in front of you and what that capital is earmarked for. But we tend to take a five-year view and we look out and we rank all of these different value-add initiatives such as share buybacks versus development versus external against each other, and we will earmark that capital accordingly.
Jimmy Shan
Okay, thanks.
Brad Cutsey
Thanks Jimmy.
Curt Millar
Thanks Jimmy.
Operator
Next question comes from the line of Mike Markidis from BMO. Please go ahead.
Brad Cutsey
Hey, Mike.
Mike Markidis
Thank you. Good morning, everybody. Brad, I think on the last couple of calls, you had pretty good confidence on a 68% organic revenue trajectory over the next two to three years. And just given your comments on the slowing, albeit still healthy, market-ranked growth and maybe your comments with respect to potentially seeing more turn at the shorter end of your – in terms of the shorter duration leases. Pardon me. Do you see any rest of that outlook or is that still sort of the outlook that you are looking towards?
Brad Cutsey
Listen, I mean, in the six to eight, five to seven, I’m still pretty confident as high single digit, low double digit NY growth. I think somewhat splitting hair when you look at the bigger picture, Mike. I still feel very confident that the demand and supply fundamentals remain extremely tight on the whole. Where you got to get to sometimes is in the attentions in the detail, where some of the supply is coming on, right.
So it’s not like there’s no new supply, right. Like Ottawa, as we know has some supply. And I’m quite confident over time, Ottawa’s supply is going to get absorbed and it’s going to continue to be a marketplace that should do quite well from a population growth, given the affordable nature of this marketplace.
Another example is London. London has close to 4.5% of new supply, so – as and it’s close to one of our communities. So as that supply gets absorbed, obviously, we’re not going to have the same kind of lift on terms. But once it’s absorbed, we’re quite confident that things will normalize back to the lift of terms that we’ve historically been accustomed to.
So, listen Mike, I don’t want to overblow the 16% versus 20%. These numbers are going to jump around depending on where the term comes from and depending on where supply is situated. But I can guarantee you won’t find any of my colleagues, anyone that was going to say that this market’s in equilibrium, that the supply is meeting household formation. It’s not. But there’s going to be different pockets where things kind of get impacted differently. So I do remain comfortable that we’ll be and you’ll just kind of see that top revenue line growth, of what we’ve communicated in the past.
Mike Markidis
That’s helpful. Thanks. And then I don’t know, I think I heard you correctly, but I think you said that your rental income on the 640 leases this quarter came in at lower than 30%. Did I pick that up correctly?
Brad Cutsey
Low 30%. Not lower than 30%, but low 30%.
Mike Markidis
Low 30’s. Got it. And I mean, that’s the first time I’ve heard you reference that. Like where has that been historically?
Brad Cutsey
Well, I think I’m referencing that to help give people on this call comfort that while we might sit with an in-place rent higher than market averages, we also pride ourselves on delivering a certain level of experience. And we also pride ourselves on our operation teams and investing in the operating platform. It’s those things that make a difference. We are able to attract a quality resident that is willing and chooses to rent at those levels.
A – Curt Millar
Yeah. And I’d say if you look sort of over the last little while, that number hasn’t gone up. If anything, it’s actually come in marginally.
Mike Markidis
Okay, so it wasn’t – it’s down marginally. It’s not like it was a massive change from what you’ve seen in the past.
Curt Millar
No. It hasn’t gone up as rents have gone up, it hasn’t gone up.
Brad Cutsey
I think the point I was trying to make Mike is, turnover is going to continue to come in as an industry, as a whole and our proposal is no different. We’ve been fortunate that we’ve been above average as a turnover rate, still kind of in that 24% range. But turnover is going to continue to come in as market rents continue to increase.
People, there’s going to be less and less people willing to move and look for a new apartment, because they just won’t be able to afford it. My comment with that data point is trying to help give you some comfort on the other side that listen, like yes, as a whole the affordability is coming in and there’s going to be less turnover. But there are still very much a segment of the population that can afford the market rents in which we are listed at. And going back to my comment about mark-to-market, that we’re comfortable at 30%, because we have tested those prices and we’re leasing at those prices.
Now, where we see the turn depends. It just depends on the circumstances where you are seeing turn and where you are seeing migration patterns and whatnot in the meantime. So that is going to fluctuate. But on the whole, I feel comfortable that we’re going to be able to continue to maintain here, kind of that 15 and 20, and we’ll be able to chip away at the mark-to-market.
Now, will the mark to market grow back? I don’t know. That’s my comment about the second derivative coming in a little. So we might start to see that gap close a little. That mark-to-market might start to come in a little as the market rents aren’t as…
Curt Millar
Grown as fast.
Brad Cutsey
As grown as fast as they have been in the past. But let’s not forget, 30% mark-to-market is still a pretty good spot to be, especially at a 24% turn.
Mike Markidis
Yep. No, absolutely. Okay, and then this last one. I think, Brad, you mentioned your second phase of your disposition program. I just – can you refresh if there’s any sort of metrics you’d put around that or what exactly that refers to?
Brad Cutsey
We just, we evaluated all the communities within a portfolio. We have an asset management profile for all of those communities. We kind of look at the five-year IRRs, and we take other factors into consideration, but we kind of look at where corporate IRR is relative to that.
And for those communities that are significantly below where a corporate is over the next five years, those are obviously earmarked for communities in which we believe we’re going to maximize the value and it’s going to bring down our overall growth cycle. So those are worthwhile. And then we’ll recycle those into opportunities that are significantly higher than our corporate IRR, bringing up hopefully, overall our corporate IRR.
Mike Markidis
Okay. Thanks for that. Have you set a target in terms of volume? I think it was about a year, a year and a half ago, and you’ve exceeded that target. So I’m just wondering if you’ve refreshed targets on disposition volume.
Brad Cutsey
Oh, sorry. Sorry Mike, I didn’t – maybe I just misunderstood your question. We came out last quarter and said that we felt pretty comfortable and gave another 12, 18-month time frame that we thought another $50 million of net proceeds was reasonable.
Mike Markidis
That’s a good reminder. Thanks for that. That’s it for me.
A – Brad Cutsey
Great. Thanks Mike.
Operator
Your next question comes from the line of Mario Saric from Scotiabank. Please go ahead.
Brad Cutsey
Hi, Mario.
Mario Saric
Hey, guys. Just a couple of quick follow-ups. On the rent growth discussion, I just wanted to clarify, the 5% to 7% that’s being referenced. Are you referring to the expected kind of target change in average in place of rent for the portfolio, or are you saying that you expect still market rents to grow 5% to 7%? For example, if the average market rent in Canada is $1,000, do you think it could be continued at $1,050 to $1,070?
Curt Millar
I think the comment was more towards where we see our operating revenue, our AMR growing, not the overall market. I mean, the overall market, we’re – if you look at the average CMHC producer, others were above it in many markets, right. As every market, an average can be misleading, because you got it all over the place, but that comment was addressed towards where we see ours growing.
Mario Saric
Okay. I guess the rationale of the other question was just because we are seeing some reports out there talking about that market rent stabilizing or flattening, if you will. So, I’m just curious if you, given the expectation that demand should continue to exceed supply, if the expectation is for the broader market and the rents to keep coming up a bit more?
Curt Millar
Yeah. I don’t think anyone from any data that anyone is looking at or publishing or that you could reasonably get to, I don’t think anyone is seeing that supply is even coming close to demand at this point. It’s just how are things shifting. People are doubling up, tripling up, whatever, and then sort of changes in that habit.
So, we’re not saying that the market rents are going to grow at that five to seven. We think our AMR will. And I think what Brad was getting to a while ago is, if the market is growing at two or three and our AMR is growing at five to seven, you could see our mark-to-market come in a little bit over time. Does that answer it?
Mario Saric
Understood. Yeah, that’s perfect. Thanks Curt. And then just my next one, I don’t know if you can answer this question, but you mentioned taking a five-year view on the capital deployment. That included the NCIB activity that you did. You’ve talked about kind of minimum 20% ROI on CapEx spend. When you are looking at that five-year outlook when you are buying back units, what type of five-year IRR do you think you are achieving?
Brad Cutsey
Yeah, I’m not going to answer that Mario. You can take comfort though, that we are ranking our buyback relative to the other opportunities we’re looking at.
A – Curt Millar
For sure.
Mario Saric
Okay. Thank you.
Brad Cutsey
Thanks Mario.
Operator
Your next question comes from the line of Dean Wilkinson from CIBC. Please go ahead.
Dean Wilkinson
Thanks. Good morning guys.
Brad Cutsey
Good morning Dean.
Dean Wilkinson
Most of everything has been answered. Not sure if you can touch on this one or not, Brad. The conversion of the Class B units, is it fair to assume that that was perhaps a tax or an inclusion rate-driven decision?
Brad Cutsey
You’re a smart man.
A – Curt Millar
Yeah, we had two different parties that had Class B units, and when everything got announced around the changes in capital gain rates coming at us, they both reached out and said they’d like to convert. So we worked with them to make sure it was done before the deadline.
Dean Wilkinson
Got it. And those would be freely trading now, correct?
A – Curt Millar
Yes, once the conversion is done, yes.
Dean Wilkinson
Once it’s done, yep. That’s all I had.
Operator
[Operator Instructions] Your next question comes from the line of Fred Blondeau from Green Street. Please go ahead.
Fred Blondeau
Thank you, and good morning, Fred. Just going back to the turnover discussion, I was wondering if there are any way you could give us a bit more color on how much turnover is attributable to student tenants versus the rest of tenants?
Brad Cutsey
Sorry, the question is how much of the turnover is student versus overall?
Fred Blondeau
Yeah.
Brad Cutsey
Yeah, so I mean, we don’t break out a turnover by region, Fred. So I don’t think we’re in a position that we’re going to break it out further. But you can assume for most students, that’s the maximum lease that they are going to stay in maybe two years. But most people, it would be 12 months, so.
Fred Blondeau
Okay, got it. Okay, and then just looking at the realized gain on lease, it looks like it’s been trending down from the 23.8% that you guys reported for Q2 ’23. I was wondering, notwithstanding seasonality here, what should we be expecting for a second half of 2024 on that?
Curt Millar
So are you asking what we’re looking at for the rest of the year on our gain on lease?
Fred Blondeau
Yeah, realized gain on lease.
Brad Cutsey
Fred, it really will be a function of what turn is coming up. So it could be anywhere from, call it the 15% to the 22% that we’ve seen. We don’t provide for guidance. In the past, we’ve told you we feel comfortable with the range of 6% to 8% on the top line growth. We’re kind of within there. It might, it could come in by towards the end of the year, closer to 6%. I’m not sure. But we feel comfortable with what we’ve been out there already with.
Fred Blondeau
Got it.
A – Curt Millar
Maybe it can vary a lot. You don’t control who comes to market when, so it can vary a lot Q-to-Q quite frankly. And I think we take comfort in the fact that our turnover, given the regions we’ve decided to grow in over the last five, six, seven years, our turnover is still higher than average in the market and it’s a function of what we’ve chosen. And we kind of control that a little bit by where we choose to buy as best we can. But who decides to turn, you can’t always control it, right.
Fred Blondeau
Of course. Got it. And then maybe one last for you, Curt, on the debt to EBITDA ratio. I was wondering if you had a specific target for the end of 2024 or maybe longer term on that front?
Curt Millar
I think what we’ve communicated to the market is longer term. We would like to get that down definitely below double digits and into that nine-ish, eight-ish range even. I think it’s just a function again of our repositioning versus our non-repositioning. We provide that breakout on the presentation, that if you look at just our repositioned portfolio, we’re already some 10. And if you, we said no more repositioning activity, we’d definitely bring the whole portfolio well below that.
Quite frankly, I hope it doesn’t, because that means we’ve been active on our repositioning program. We’ve been able to get more repositioning opportunities into our portfolio. And I think we have a proven track record of providing exceptional growth when we’ve been able to do that. So part of me hopes it doesn’t go below, because it means we’ve had a good run on the repositioning side.
Fred Blondeau
That’s great. Thank you. I’ll leave it here.
A – Curt Millar
Thanks Fred.
Operator
There are no further questions at this time. So I’ll hand the call over to Renee Wei for closing remarks. Ma’am, please go ahead.
Renee Wei
Thank you, everyone, for the call. And as always, if you have any questions or comments, please don’t hesitate to reach out. Have a great day.
Operator
Ladies and gentlemen, this concludes today’s conference. Thank you very much for your participation. You may now disconnect.