Earnings call: InterRent REIT sees growth in Q4 with strategic capital moves

InterRent REIT (IIP-UN.TO) has reported a strong performance in the fourth quarter of 2023, highlighting increased occupancy rates, rental growth, and positive financial outcomes. The company’s strategic financial management and development projects were key topics during the earnings call, as they discussed financing, dispositions, and expectations for future revenue growth.

Key Takeaways

• InterRent REIT reported increased total and same property occupancy by 180 and 20 basis points, respectively.
• Average market rents across the portfolio grew by 7.9% year-over-year.
• Total operating revenues for Q4 rose to $61.9 million, a 8.8% increase.
• Same property NOI increased by 10.5% to $39.7 million for the quarter.
• FFO and AFFO reached $20.8 million and $0.482 per unit, respectively.
• The company financed $183.5 million in maturing mortgages at a 4.25% rate and reduced variable exposure to less than 1%.
• Four development projects are underway, signaling future growth.
• A 224-suite portfolio was sold for $46 million.
• The company expects 6-8% same-store revenue growth in 2024 and aims to generate $75 million from capital recycling.

Company Outlook

• InterRent REIT is optimistic about its second office convergence project in Ottawa.
• The company is committed to expanding the housing stock and does not expect the international student cap to significantly impact turnover rates in the near term.
• A focus on high potential risk-adjusted returns guides their capital allocation strategy.
• Management is considering the use of a Normal Course Issuer Bid if unit prices remain low.

Bearish Highlights

• The international student cap could potentially impact student resident turnover rates, although the company does not foresee a material change in trend.
• Properties in St. Luke were disposed of due to competition with new supply.

Bullish Highlights

• The company has established a sustainability committee and introduced mandatory climate training.
• Over 70% of suites are now certified under the Certified Rental Building Program.
• Value-add investments remain core to InterRent REIT’s strategy.

Misses

• The company did not mention any specific areas where performance fell short of expectations or goals.

Q&A Highlights

• The discussion included the impact of new measures on student residents and the company’s approach to managing cash balance.
• Executives discussed their preference for joint venture partnerships in the acquisition market.
• They provided insights into the renewal and new leasing spreads for the full year.
• The company provided a rough estimate of the cap rate for the St. Luke property transaction.

InterRent REIT’s recent earnings call revealed a company in a strong financial position, with strategic initiatives aimed at sustaining and enhancing growth. The company’s proactive approach to managing its mortgage debt, capital expenditures, and property portfolio, along with its commitment to sustainability and value creation, positions it well for continued success in the real estate investment trust sector.

Full transcript – None (IIPZF) Q4 2023:

Operator: Good morning, ladies and gentlemen, and welcome to the InterRent Q4 2023 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, February 29, 2024. I would now like to turn the conference over to Renee Wei, Director of Investor Relations. Please go ahead.

Renee Wei: Welcome, everyone. Thank you for joining InterRent REIT’s Q4 2023 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 risks, uncertainties and assumptions that could cause actual results to differ materially. For more information, please refer to the cautionary statements on forward-looking information in the REIT’s news release and MD&A dated February 29, 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. We ended 2023 on a strong note. We improved our total and same property occupancy by 180 basis points from Q3 2023 and 20 basis points from Q4 2022. Total portfolio occupancy level at 97% marked the best it’s been going into a New Year that we’ve experienced in six years. When you break down vacancy by reposition and the non-reposition portfolios, a notable concentration of vacancies is in the non-reposition portfolio, which aligns with our business model of seeking greater upside potential in these suites through value-enhancing programs. Average market rents across the portfolio gain a further momentum reached 7.9% year-over-year, our highest growth to-date and surpassing pre-pandemic levels. We’ve seen strong growth in all regions, especially in the GTHA and other Ontario, each exceeding 8% for both total and same property growth. Dave will give more information about regional rent and occupancy later in the call. Strong AMR growth and occupancy fueled our revenue and NOI growth. Total operating revenues increased by 8.8% to $61.9 million for the quarter and 10% to $238.2 million for the year ended 2023. We viewed on a same-property basis, our operating revenues have increased by 8.2% to $60.6 million for the quarter and 9% to $233.8 million for the year, demonstrating the strong organic growth potential of our portfolio. Throughout 2023, we consistently delivered double-digit NOI growth every quarter, including Q4. Same property NOI for the quarter was $39.7 million, a 10.5% increase. Total portfolio NOI was $40.6 million, an 11.1% increase. On an annual basis, same-property NOI reached $153.4 million and total portfolio NOI was $156.3 million, representing an 11.8% and 12.9% improvement, respectively from 2022. We closed out the year with an NOI margin of 65.6% in line with t he strong levels we achieved prior to the pandemic. During the fourth quarter, the strong NOI growth that we produced was able to absorb the increased interest costs and still delivered bottom-line growth. Our FFO growth continued to strengthen throughout the year, reaching $20.8 million or $0.142 per unit in Q4, reflecting 11.2% and a 10.1% growth, respectively. We delivered $80.6 million in FFO for the full year, at $0.51 on a per unit basis, surpassing pre-epidemic high water markets. The AFFO for the full year achieved a new record high, up 4.5% overall at 3.4% on a per unit basis to reach $0.482. We’ve also seen strong momentum building throughout the year with AFFO for Q4 and breaking 13.1% to $18.1 million and up 12.7% to $0.124 per unit. Taking a closer look at our balance sheet, we ended the year in a solid financial position. Curt will provide more details later in the call. I’d like to highlight some post-quarter activities that have further enhanced our position. So fan 2024, we successfully financed $183.5 million of maturing mortgages with a weighted average rate at 4.25%, compared to maturing weighted average rate of 6.6%. Our overall weighted average cost of mortgage debt is now sitting at 3.37%. Dave, over to you to, take us through some of the operating highlights.

Dave Nevins: Thanks, Brett. We’re pleased to report the positive leasing trends, we’ve discussed last quarter continue to materialize this quarter. Occupancy ended the year on a strong note, alongside robust average market rent growth. This was driven by rent growth from a mix of lease renewals and suite turns over expiring rents. On an annual basis, we achieved 3.3% average rental lift on lease renewals and 21% increase on new leases. Mark-to-market gap is approximately 30%. As previously disclosed and in line with industry norms, turnover has been trending lower over the past few years, due to tight rental market conditions. Total portfolio turnover in 2023 was 24.8%. Our repositioned portfolio had a vacancy of 2.7% and our non-repositioned vacancy sat at 4.3%, as of December. As you know, we anticipate higher vacancy in our non-repositioned portfolio, as we work through our value-add CapEx program. All properties in our entire Vancouver portfolio, representing 4% of our Q4 NOI is currently undergoing repositioning. As of December, vacancy in Vancouver increased 340 basis points year-over-year, primarily due to planned upgrades in recently vacant suites. As we finish our work on these suites and bring them back online, we’re seeing strong demand for the renovated suites. We expect vacancy in Vancouver to normalize in subsequent quarters. We’re also keeping a close eye on transition of Airbnb units to long-term rentals, ahead of new regulations set to take effect in the spring in BC. We believe any potential impact will be short-lived. CMHC projected that housing supply gap will exceed 0.5 million units in British Columbia by 2030 and in the provinces constrained rental market suggests that a relatively modest increase in supply from short-term rentals will quickly be absorbed. However, we’re closely monitoring rent levels of Vancouver and will remain agile in a revenue strategy to adapt to any changes in market conditions quickly. Our operating expenses came in at $21.3 million for the quarter, up 4.8% year-over-year, while operating revenue grew by 8.8%. Operating expenses as a percentage of revenue was 34.4%, a decrease of 130 basis points compared to the fourth quarter last year. On an annual basis, operating expenses as a percentage of revenue decreased by 160 basis points to 34.4% on a weighted average per suite basis, while our annual rental revenue grew per suite by 8.5%. Operating expenses per suite only increased 3.5%, reflecting our ability to manage expenses effectively to drive long-term value for investors. Utility costs came in at $18.1 million or 7.6% of revenue for the year compared to 2022, utility costs decreased by $0.1 million or 80 basis points as a percentage of operating revenue. During the quarter, we achieved 10% decrease in usage due to a combination of lower heating degree days and our effective energy efficiency programs. Electricity costs are consistent with last year despite the larger portfolio under ownership. We continue to manage our electricity costs through our hydro submetering initiative, which reduced electricity costs by 27.1% or $2.1 million for the year. Property taxes for the year increased by $1.7 million year-over-year to $25.6 million as a result of higher site count and annual rate increases. As a percentage of operating revenues, property taxes actually decreased by 30 basis points. We are consistently reviewing our property tax assessments and make individual property tax appeals when necessary. We invest in our portfolio to drive growth and deliver sustainable returns. For 2023, our maintenance CapEx came in at $1,005 per suite, which has come down slightly from 2022. The vast majority of our spend close to 90% is directed towards investments aimed at enhancing value. As you can see on the right-hand of the slide, our repositioning program, which remains at the core of our business strategy has been a significant driver of value creation for us. As of this year, about one-third of our portfolio is at various stages in their repositioning program, representing significant potential for continued organic growth. Before I hand it over to Curt to discuss our balance sheet and sustainability programs, I’d like to provide a final update on The Slayte, our first office conversion project. Lease up rate has surpassed 90% as of February this year. We’re proud of what we’ve accomplished, not only do we manage to deliver crucial housing supply quickly, but we’ve also built a vibrant community right in the heart of downtown Ottawa, all while achieving a 55% savings in greenhouse gas emissions by reusing the structure. With that, over to you, Curt.

Curt Millar: Thanks, Steve. As part of our year-end review, we work with our external appraiser to conduct a portfolio-wide valuation and fine-tune our key assumptions around rents, turnover, input costs and cap rates. After this review, we are keeping our Q4 cap rate unchanged at 4.22%. For some context, you may recall that our cap rates have increased 40 basis points from their lowest point in Q1 of 2022. The minor changes within regions that you see on this slide reflect changes related to NOI at a property level and the resulting impact on the average for the region. For the quarter, we recorded a $14.8 million proportionate fair value gain, driven by continued strong operational performance. Our sound financial position continues to strengthen. We’re pleased to report that following the end of the year, we successfully financed mortgages totaling $183.5 million with a weighted average interest rate of 4.25%. These had a maturing balance of $144.9 million with a weighted average rate of 6.06% and will translate into significant interest expense savings. This work netted $34 million of proceeds, which were used to further reduce the REIT’s total variable exposure, which currently sits at less than 1%. Following these transactions, the REIT has a weighted average cost of mortgage debt of 3.37%. The remaining balance of 2024 mortgages mature in the second half of the year and carry a weighted average interest rate of 4.9%. We will continue to focus on managing financing activities carefully and anticipate our interest expense for 2024 to be in line with 2023 given the activity in the first two months and the current market conditions. Moving to slide 18. Earlier this year, we established a sustainability committee at the Board level to enhance governance oversight and drive sustainability initiatives forward. To further enhance collective climate understanding and commitment throughout our organization, we introduced mandatory climate training for our Board of Trustees and across our entire team. We established our ISO 5001 aligned energy management system to better guide our operational efficiency initiatives and reduce greenhouse gas emissions. Towards the end of the year, we collaborated with external advisers to integrate climate considerations into our acquisitions and capital expenditure models. These enhancements will continue to add climate considerations when reviewing our existing portfolio or evaluating potential new acquisitions. Finally, the strong operational performance of our teams within our different communities has been recognized with more than 70% of our total suites now certified under the certified rental building program, and the remainder anticipated to receive certification within the next few months. I’ll now turn things back to Brad to walk through our capital allocation.

Brad Cutsey: Thanks, Curt. During the quarter, we continue to pursue strategic dispositions as part of our broader capital allocation strategy. In Q2 last year, we communicated that we identified certain non-core repositioned assets that meet a disposition criteria and can potentially provide net proceeds of over $75 million. Relative to other assets in our portfolio, we believe we have done an excellent job of maximizing revenue and our projected forward return are comparatively lower versus the cost of capital. We have also carefully consider operational scale and efficiencies. During the quarter, we committed a sold 224 suite portfolio, consisting of five properties in Côte-Saint-Luc in Greater Montreal area for the real sales rates at $46 million, which is above their IFRS values. After the quarter, this transaction successfully closed with net proceeds of approximately $22 million after repaying in place mortgages. Proceeds from strategic dispositions will be used to reduce and fund various capital allocation priorities for the year. As seen on this slide, we finished the year with four development projects under the way, total over 4,000 streets or they’re in various stages of development. Our development pipeline will not only contribute much need to new housing supply, but will also add exceptional quality to our portfolio, driver NAV accretion and contribute to our FFO growth in the years to come. We are optimistic about our second office converged project, 360 Laurier in Ottawa. Demolition is currently under the way, and we’re gearing up to start construction in late Q2 this year with the goal to complete construction by Q3 2025. Keeping a close eye on development costs and capital constraint, we carefully manage the pace of each project. However, we understand the importance of sizing the opportunity in executing our prudent strategic investment to enhance the quality and scale of the portfolio over the long run. Over to slide 23, with the recently introduced new measures to limit underground international students and tape, we wanted to shed some light on the student residents. About 15% of our residents are students and over half of them live in our communities located within two kilometers of well-established post-secondary institutions. Not all rental markets will be impacted equally. The national cap is based on provincial population shares and more constraining in Ontario and BC. We have a higher concentration of student residence in Quebec, where the CapEx sees the current intake of international students. Approximately one-third of our student residents are in our GMA region. International students residing in Canada surpassed $1 million as of last year. The record influx of the no students in 2023 and 2022 is anticipated to support the student population in Canada over the next two years before outflow is expected to pick up. During this period, we are expecting growth of international student population to persist out of the more moderate pace. Canada’s high population growth has often been cited as a key support factor in the multifamily industry fundamentals. However, our analysis suggests that Canada’s housing deficit will persist even in the scenario where immigration returns to pre-COVID levels and 2.3 million new homes are built by 2030, an outcome deemed highly unlikely by the CMHC. In fact, CMHC project a house a shortfall of over 3 million units in this low economic growth scenario with the gap widening to $3.45 million in this baseline scenario. As you can see on this slide, more than 85% of the supply deficit is concentrated in three provinces where we operate. To tackle this persistent supply shortage, we are steadfast in our commitment to expanding the housing stock through methods such as intensification, office convergence or development. At the same time, we are focused on strategic investments in their properties to share from a competitive edge and position ourselves for a future where supply gradually aligned with demand. To sum up, 2023 has been a fantastic year for us. We have consistently delivered top-notch operational performance and generate significant value through our repositioning programs with the industry on solid ground, a strong and flexible to management position and our experienced and dedicated team, we’re going to be more optimistic about what 2024 holds. When considering how take the rental market has been and the forecast of supply and demand for the next few years, it laid out a path for 6% to 8% same-store revenue growth, which leads to high single, low double-digit same-store NOI growth. I wanted to thank everyone for your continued support and would like to encourage you to go to our website and check out our interactive annual report to on more about our achievements this year. Let’s open it up for Q&A.

Operator: Thank you. And ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Kyle Stanley from Desjardins. Your line is open.

Kyle Stanley: Dave, I just wanted to clarify, I think, some of your commentary earlier, just on the rent growth on turnover and renewal, would you be able to repeat that?

Dave Nevins: Sure. No problem. Thanks, Kyle. We were at 3.3% rent growth on renewals and 21% on new leases.

Kyle Stanley: Okay. So, 21% on new leases. How do you think about that, I guess, trending as we kind of push through 2024, I guess, in the context of the commentary in the MD&A about continuing to see turnover slow as well?

Dave Nevins: Yes. I think looking at the numbers, we’re looking at renewals probably in that 3% to 3.5% range for 2024, and turnovers probably stay consistent in that low-20s to mid-20% range. Yes. So it’s up to us to model what you want to model for turnover. Obviously, turnover is the wild curve, when it comes to the value add. Curt and I have, I think, been saying to our stakeholder base for quite some time now that didn’t expect turnover to come in. And I think it is coming in, and you see that through the different publications and whatnot, but it hasn’t materially changed on a year-over-year basis for us. Yes, it’s come in from low-30s historically. But as we disclosed this in the mid-20s range, we do anticipate that it’ll probably continue to come in a little, but surprisingly, it’s been a little more stubborn than one would imagine. We think it’s to do with the fact of our urban portfolio and where it’s situated close to technology ecosystems, life sciences, hospitals, all sectors institution, why we garner higher than average turnover rate.

Kyle Stanley: Okay. No, that makes sense. And I do believe that’s a new disclosure, so very much appreciate it. Secondly, just within the portfolio, are you seeing certain unit configurations, whether that might be bachelor 1-bed, 2-bed or finished quality outperforming others? And maybe if so, like how are you thinking about those ones that might be a little less in demand today? Or what’s driving that? And how do you manage through that?

Dave Nevins: Yes. Well, Kyle I guess, maybe what you’re getting at is as the fundamental is so tight. And I can think it’s good for all, everybody around the table here. We haven’t seen these kind of fundamentals ever. So, we remain quite optimistic and bullish on the fundamentals for the outlook across Canada, and specifically to the markets and the nodes that we operate in. I think where the question you’re leading to is to our affordability. Yes, rents actually continue to push up. So there are going to be something else in some layouts that will tend to do better just by the very nature that somebody can take on a roommate or an additional person to help with the rents. When you look outside of Canada and it’s really a clean phenomenon, having the right to kind of your own home, you look at a lot of different places around the world. It’s not uncommon to move out of your parent space and look for a roommate that you maybe have never been known. So, you kind of take that viewpoint from an affordability perspective, the majority of our portfolio, when you look at the household income is affordable. So, in some region where rents are continuing to see increased pressure and starting to put up to an area, I do think the two bedrooms start to outperform the one bedrooms and all of a sudden, kind of the rent pressures that all housing is experienced right now, is a lot more manageable from a credit underwriting perspective.

Kyle Stanley: Okay. That makes sense.

Brad Cutsey: I think that’s what you’re getting at?

Kyle Stanley: Yes, yes. Definitely. Definitely. That’s it. And that’s a good answer. Thank you for that. Just a last question. Good progress on the capital recycling. Would you say, there’s still about $50 million of net proceeds targeted for the next little while? And I think your disclosure said, use of proceeds, funding capital requirements, reducing leverage and buying back stock. Would that be in the order of preference?

Brad Cutsey: I don’t think it’s an order of preference. I think we weigh all capital allocation decisions as different opportunities are in front of us, and then we weigh, which one has a better overall outlook. Sometimes you might do something for strategic reasons as well, Kyle. So I think our track record speaks for itself as far as being pretty prudent when it comes to capital allocation, and we’re definitely going to maintain that discipline. So yes, to your first question, I think we’re on pace to meet the previous disclosure of $75 million in net proceeds. And quite honestly, we might – we’re hopeful that actually going to generate a little more. You can be assured that whatever we are allocating back into is going to be at higher potential risk-adjusted returns than what the proceeds generated have been forecasted for. Obviously, the name of the game is really managing the cash balance. And I think that’s when NCIB come into play for unit price continues to stay well below, where we believe our intrinsic value is. And we don’t have an opportunity at the current moment to redeploy that and recycle that capital into and that’s a great tool. However, if we are working on opportunities, which we have forecast that those return thresholds are greater than our internal cost of capital, then we’ll reserve that, and we will manage that and recycle that into those opportunities. As you know, though, there’s timing delays that typically happen when you’re looking at either development or external opportunities, it takes time that for different deals come through to fruition, different timing when it comes to development for the tendering process and the entitlement process. So we look at all of those opportunities. But I think the no-brainer, obviously is as cash comes in, you do pay down the credit facility because that’s pretty expensive here, all the high six, low sevens.

Kyle Stanley: Okay. No, that’s great color. I will turn it back. Thanks, guys.

Brad Cutsey: Thanks, Kyle.

Operator: Thank you. And your next question comes from the line of Brad Sturges from Raymond James. Your line is open.

Brad Sturges: Appreciate the commentary on the student – international student cap. I’m curious, just based on your analysis and expectations for turnover rate, would you expect the cap to have any material impact on your turnover rate? Or is it more to do with, I guess, how tight the rental conditions are within your markets?

Brad Cutsey: Yes, it’s a good question. I think, to be quite honest, I don’t think it’s still in place that much on the turnover, unless maybe you’re leaving, unless you’re leaving and coming in. But for the first couple of years, we don’t in the cap — I think it’s going to be quite neutral. We don’t really see the cap affecting our current basis probably till three years out, because the student population base, at least to where our communities have that exposure to, we’ll burn off because there might be in year this year, year three next year than year four. Obviously, the cap doesn’t apply, not obviously, but the cap doesn’t apply to the graduate study. So that’s a good news as well. We take a lot of comfort in the fact that, where our communities are located. They’re in prime location relative to some of the best post-secondary institutions in this country. So, irregardless of the cap, we think we’re extremely well located to get the cream of the crop to begin with. That said, a good portion of — and as you know, Brad, a good portion of our student exposure is in Montreal. And then we have an extremely urban core portfolio in Montreal and very close — a lot of our exposure is close to Neville and Concordia, the cap doesn’t apply to Quebec, okay? So that’s good news. So, we’ll have to take a wait and see approach. Typically, unfortunately, it’s great having the foreign students. We love having that part of the exposure. The only thing that comes with it, you don’t have a lot of visibility. You kind of have — it’s kind of a wait and see until August. You do everything you can to get the early birds that are looking ahead of that. So you try to secure that. But the reality is, when it comes to our Montreal portfolio, you really wait and see the logos [ph]. That said, around this table, there’s consensus that we don’t anticipate, it might be naive, but we don’t anticipate, we’re going to see a big change in trend when it comes to the student population. It is more Ontario and B.C. that’s impacted, but we feel pretty confident with our exposure that we’re going to continue to be able to perform on that basis.

Brad Sturges: Okay. That’s great color. I appreciate that. In terms of redeploying capital out — from the capital rotation on cycle you’re doing and you’re assessing potential external opportunities. I guess I’m curious to get an update in terms of what you’re seeing in terms of the acquisition market today, in terms of the opportunities across your markets in either the value-add category or other kind of total return opportunities that could make sense for the REIT?

Curt Millar: Yes. We’re in a really interesting time. I think if we had a cost of capital that we had prior to COVID, we’d be salivating right now. It is definitely not as competitive a market as it was pre- COVID when it comes depending. I don’t want to take that commentary that there isn’t capital earmark for the past very much is. We don’t have any problem when it comes to looking for private capital, institutional quality partners that want to increase the exposure to the asset cloud. That said, there hasn’t been a lot of transactions. So really, it’s not a wait and see, maybe a tab on seeing the bond yields stabilize. When the bond yield towards the end of the year, last year came down as low as it did, there’s definitely a lot more activity and a lot more people underreading. It is the buyer’s market. I do think we have to put into context the overall investable set in Canada is still very much controlled by the private smaller owner, which is a real advantage to the institutions and to the publicly-listed REITs in the sense that we have a much longer time horizon. And as this private ownership group gets older and they’ve seen visibility in a low interest rate environment for such a long period, and now we rolled back last year, has created some uncertainty into their generational planning. And now I think to is much more of a willingness to maybe now is the time to start to think about succession in the state planning. So I do think there’s opportunities to be had out there. And I do think the bid-ask spread will continue to come in. We — in our own portfolio for smaller ticket items, we’re seeing some good interest from private buyers. So there is the private — competition from private buyers who are more wealth, I would say, more well preservation type of capital out there looking at really increasing exposure, which, to me, I think, a very opportune time to be doing this because I couldn’t think of a better inflation hedge asset class than our asset class, given how undersupply the market is, has been, if you can wake through the near-term, the volatility in the interest rate cycle, you are going to do extremely well, private or publicly. Obviously, the public market is trading below where the private valuations are. We’re starting to see that gap close, but I still think there’s a ways to go.

Brad Sturges: So if you were to execute right now, and there’s a really compelling opportunity, would be more likely or less likely to pursue it through a JV with a partner or–?

Brad Cutsey: We’d be — we’d be more likely to do continuing to use joint venture partners. We’ve got to spread our capital across the many opportunities that we feel that fits in our alliances with our strategic plan. I think that’s just prudent business. There are opportunities we would love to own 100% up. Given that our capital pool right now, while we believe we have great liquidity, it is limited. And it is limited, we’ve got it be very choosy with how we allocate that capital. And if we can participate and have a toehold and scale our operations with using a like-minded partners, we’re going to continue to do so.

Brad Sturges: Okay, that’s great. I’ll turn it back. Thanks a lot.

Operator: Thank you. And your next question comes from the line of Mike Markidis from BMO Capital Markets. Your line is open.

Brad Cutsey: Hey Mike.

Mike Markidis: Thank you, operator. Good morning, everybody. Maybe just starting on the — can you guys hear me?

Brad Cutsey: Yes.

Mike Markidis: Okay. Just starting on the dispositions, I guess a concentration of stuff in St. Luke and maybe tying this back to your comment on the international students and not thinking it’s much of an impact to federal cap. But does the provincial change? I mean your co-St. Luke properties are, I think, close to Concordia. So, maybe if you could just shed some light on whether that that concern was part of the reason for the disposition of those properties? Or am I just think you’ve got too much time in mind and thinking too much over here.

Curt Millar: I think, first of all, just on the sort of second part of that question, Mike, about their proximity to Concordia, those wouldn’t be very close to Concordia. They’re sort of more out of the downtown core. They’re not within that sort of corridor where we have quite a few assets that sort of serve as both McGill and Concordia, they are a little further.

Brad Cutsey: The other thing I would say to you is consistent with what we’ve communicated in the past. When we look at what we’re disposing of — to kind of look at the opportunities organically within our company and how does this community stack up relative — and to be honest, I think we’ve done a really good job of operating this community. So it’s a bitter sweet to be really honest. It’s a beautiful community. I’m very proud of what we’ve built, invested in that community, when we took it over. And to what the current buyer is receiving, there is even an amazing asset, a great community in a very well-located area of Côte-Saint-Luc. That said, the projected growth for us versus what our overall portfolio is, it was below it. And we were starting to bump up against new product reps. And that’s not necessarily sustainable if we felt that we can do more with the asset to be competitive with that new supply. So it really came down on a part where – we felt that while this buyer will probably do well with it relative to the context of our overall organic growth profile, it wasn’t a key pace. So it was a good one earmark for us to dispose of. I think it was a win-win.

Q – Mike Markidis: Okay. Thanks for that. I appreciate it. And then just on the cap rate for that transaction, should we be thinking something in line with the average of your Montreal portfolio? Or would it be somewhat higher than that?

Brad Cutsey: I’d say it’s a little higher than that.

Curt Millar: Yes, it would be — Mike…

Brad Cutsey: It is — outside of our core of Montreal. I think — just for modeling purposes for the call. I think mid-fours, you’ll be fine with.

Q – Mike Markidis: That’s great. Helpful. Thank you. I guess last one for me, before I turn it back — actually two last one sorry, quickly. So just to confirm, the renewal and new leasing spreads that you guys gave, was that full year or just for the quarter?

Brad Cutsey: Sorry, say that again?

Q – Mike Markidis: The renewal and turnover spreads that you guys gave earlier in the…

Brad Cutsey: For the full year.

Q – Mike Markidis: For the full year. Got it. Okay. And then just, Curt, I just want to make sure I got this correctly. Did you say that you expect interest expense for 2024 to be flat year-over-year, given everything that’s happened?

Curt Millar: Yes. I think it will be like depending on what happens with — Brad has mentioned previously, but hopefully, having some dispositions through the year, recycling that capital. I think it will be flat to plus or minus $500,000, depending on the timing of dispositions and recycling that capital – if your’re modeling flattish, you’re probably in the right range.

Q – Mike Markidis: Okay. But just that’s just contemplating the dispositions that have happened? Or is it anticipating more dispositions?

Curt Millar: It’s anticipating a little bit more dispositions, but very conservatively.

Q – Mike Markidis: Okay. That is very helpful. Thank you very much. I’ll turn it back.

Brad Cutsey: Thanks, Mike.

Operator: And your next question comes from the line of Jonathan Kelcher from TD Cowen. Your line is open.

Q – Jonathan Kelcher: Thanks. Good morning….

Brad Cutsey: Good morning Mr. Kelcher.

Q – Jonathan Kelcher: Good morning. Just going back to your one comment, Brad, on one of the reasons that you’re selling Côte-Saint-Luc, is rents were approaching new product rents. How much of your portfolio would you say is getting close to new product rents when you’re on turnover?

Brad Cutsey: It’s a good question. I don’t have that handy read off, because it’s really, really no specific. So I wouldn’t be able to give you a consolidated view on it. Said differently, Jonathan, though, I think when you look on the overall, it’s legible, right? I’d probably say — I’m just going out. I don’t have — it’s probably less than 5% of the portfolio.

Jonathan Kelcher: Okay. That’s helpful. And that would obviously be something in your — when you’re looking at which assets that you might wish to sell going forward?

Brad Cutsey: Sorry, say that again, Jonathan?

Jonathan Kelcher: I guess, looking where — how much more rent growth you can get would be obviously something that you’re looking at, and which assets you’re looking to dispose of?

Brad Cutsey: Sure. 100%.

Jonathan Kelcher: Now when you’re looking at — just staying with capital allocation, when you look — have you guys looked at selling partial interest in properties to some of your existing JV partners? Is that something you…

Brad Cutsey: I think everything is on the table, and you got to weigh everything that comes with that, Jonathan. So we wouldn’t look at that — we have looked at that.

Jonathan Kelcher: Okay. And then just lastly on the — I don’t know if you want to call it guidance, but your last part of your prepared remarks, you talked about 6% to 8% revenue growth and high single to low double-digit same-property NOI growth. What do you assume in terms of expense growth for that? Would that be inflation-ish or a little bit more than that?

Brad Cutsey: A tad more than inflation, but definitely not what we’ve been accustomed to over the last couple of years. I think you’re going to still come in and you and I could debate what inflation is all day long. Unfortunately, others might not agree who sets we’re trying to manage the inflation. But I think, Jonathan, if you model in that 4% to 5% range, we would feel comfortable.

Jonathan Kelcher: Okay. That’s it for me. I’ll turn it back. Thanks.

Curt Millar: Thanks, Jonathan.

Operator: Thank you. And your next question comes from the line of Jimmy Shan from RBC Capital Markets. Your line is open.

Brad Cutsey: Hi, Jimmy.

Jimmy Shan: Hi. So just a couple of quick ones. Was there any material costs associated with the rebranding initiative that might have impacted the quarter at all?

Brad Cutsey: Yeah, I wouldn’t say anything significant. I think we’re going to continuing to see a little more cost in the earnings maybe would in the G&A line, but then they show some of the initial cost. I think it was an additional $200 million, but I don’t think it’s enough to call out, although you just made me call it out.

Jimmy Shan: All right. With respect to the student comment, I think you said that you won’t know until August, whether you’ll see potentially an impact, if any. Is there anything that you can do or are doing to prepare for, or to make sure that your buildings that are geared to a students remain full to the extent you do see an impact?

Brad Cutsey: Well, I think, Jimmy, we’re not — I think the community that we’re talking about at the end of the day, the not 100% geared to student. There might be two communities within a full portfolio that might have over 90% geared towards students. So at the end of the day, the best way you make sure that your community is defensive is by properly amenitizing it and providing the best service possible, and you will also attract additional residents such as young professionals, right? And I think as you continue to see — it might not be as fast as office owners would like. But as you continue to see different team members come back into the office. We’re only going to continue to see more demand from that segment come back into the rental pool as well.

Jimmy Shan: Okay. And sorry, just last one. CapEx budget for 2024, how should we think about that relative to 2023?

Brad Cutsey: Yes. I don’t think you’re going to see a major dramatic difference. I think we could see a trend a little lower than what we posted in 2023, which is down a little from 2022. It also — this will also be a factor of a development program. We are going ahead the 360 Laurier. Richmond Churchill is currently a contender. So we’ll have to wait and see where that comes back before we see if we’re going to spend real hard dollars on that.

Jimmy Shan: Okay. That’s it.

Brad Cutsey: Great. Thanks, Jimmy.

Curt Millar: Thanks, Jimmy.

Operator: Your next question comes from the line of Matt Kornack from National Bank Financial. Your line is open.

Matt Kornack: Hi, guys. I just had a follow-up.

Brad Cutsey: Hi, Matt.

Curt Millar: Hi, Matt.

Matt Kornack: Good morning. Just a follow-up to Jimmy’s comments on CapEx and just generally, the idea of value add within apartment investments. It seems like there’s been a bit of a shift away from value-add from some of your peers, but it is core to the InterRent story. Like are you still seeing that as something that is core to the story going forward? And how should we think about value add within the context of the current rental market?

Brad Cutsey: Matt, I’ll answer this way, value-add is InterRent. We’d like to believe anything — anytime we put out $1 of capital, it’s about yet. And I’m not trying to be cute about that. But it can be value-add and you take on a new project, maybe it’s not leased up. We think we have one of the best leasing teams in the business. That’s value-add, leveraging of our operating platform. Yes, it’s also value-add, taking an asset that was built 55 years ago, and you have in-house, the team at experts that can come in, take a look and have a vision for an asset and see that, hey, on paper, it says it has 135 suites. By the time we’re done, let’s say, it has 145 suites, 150 suites and yes, it is underrented. And yes, turnover has come down, but it meets some of our investment criteria that we believe why we have some of the highest turnover in the business is because we’re located where the communities were willing to put money in maybe that comes in a little, but there are some natural tendencies that goes around being around tech ecosystems and hospitals and institutions, so that we feel that we can put real dollars to a community to reposition it in order to recover and meet our return thresholds. So, I think everything we approach, we try to make it value add, otherwise why put the dollar out, right? So, you will continue to see us look at vintage communities and for us to reinvest in them and bring them back to the gamer that they once were perceived to have when they were newly developed, and we’ll do so by weighing the risk-adjusted return relative to other opportunities. You will also see us purchase a new asset that we think is really well located, but there’s been some design flaws or is being mismanaged on the lease-up. So, you’ll see us take advantage of those opportunities. I think going forward I think the big thing you can expect from us is we’re going to continue to invest in our platform and our people. And I think that’s a big difference for our story. We’re in the people business and it starts with our own people. And really, that’s where we’re going to leverage and continue to try to add the value. So we’re not deviating from that at all.

Matt Kornack: Fair enough. And just given your cost of capital relative to kind of opportunities in the market understand that you’re selling some assets to probably deleverage and fund commitments in the near term. But how should we think of the growth profile and taking advantage of the platform longer term? I mean, I’d assume your goal is to get back to a cost of capital where it makes sense to grow the portfolio — is that fair?

Brad Cutsey: Yeah. I mean, we could sit here and have steroidal debates all day long about what is the true cost of capital. That’s a great favorable finance. But the one thing I get a lot of comfort in, Matt, is when you look and you operating within the SaaS class, you’re seeing the visibility of this cash flow and seeing the organic growth profile that we have inherent in our portfolio. That allows us to plan for the external growth with some comfort, right? Now yes, the bond rates are moving on us. Yes, our cost of equity is not where it used to be. But we can do things in the near-term that are in our control, being disposal communities where they are forecast to be under our projected growth rates and recycle them into opportunities that we believe exceed our growth rate. And by the very nature of managing that from a portfolio perspective, we should be able to continue our track record of above industry posting above industry grow. And in early at the end of the day, that’s kind of approach to it, and we’ll continue to do it. If you ask me, are there enough external opportunities that can exceed our current outlook? There is, and for different reasons. And that’s a great thing about this. Not everybody is capitalized in the same way and not everybody has access to cash flow the way some of the publicly look to reach to that, And I think we’re coming into a time where we’re going to be able to optimize their portfolios and use some of that organic cash flow to buildup for future growth.

Matt Kornack: Okay. Yeah. That’s very helpful.

Brad Cutsey: It’s quite different. I probably should want to make sure we’ve got this point across in the call. We’re not going to do that extensively with not the balance sheet till. So when we’re making these — when we’re making these comments, you can assume we’re making leverage-neutral capital allocation decisions. Yes, there might be timing blips where we might feel comfortable increasing that leverage for a very short period. But there’s a reason behind it that we know about, that will bring it back to where we currently sit.

Matt Kornack: Okay. That makes sense. I appreciate that.

Operator: Thank you. And we have a follow-up question from Mike Markidis of BMO Capital Markets. Your line is open.

Mike Markidis: Thanks. Just a follow-up on Jimmy’s question on the CapEx, I guess, Brad, you were talking about it in the context of including development. But if we just look at the rental portfolio spend, including the repositioning portfolio. That number has been trending up over the past couple of years. So what are your expectations just on IPP spend, for 2024?

Brad Sturgess: Actually, I think it’s down, Mike, I’m not sure what you referred to. We can take it offline if you want to make sure that we’re comparing apples-to-apples.

Mike Markidis: Okay.

Brad Sturgess: But I would — for you 2024, you can assume that our CapEx spend, excluding development will come in.

Mike Markidis: Okay. Yeah. All right.

Brad Sturgess: We’re not out there saying that there’s a significant change in the way we’re operating. We’re not saying that.

Mike Markidis: Yeah. No, that’s fair. Okay.

Brad Sturgess: We think for the reason we’re seeing a little relief in some areas and different things. But let’s take that offline. If you — it’s not fair.

Mike Markidis: It sounds good. Thanks.

Brad Sturgess: Thanks Mike.

Operator: And ladies and gentlemen, we have reached the end of our Q&A session. I’d like to turn it back to Renee Wei, Director of Investor Relations for closing comments.

Renee Wei: Thank you, everyone, again, for joining today’s call. If you have any additional questions, please feel free to reach out. Have a great day.

Operator: Thank you. And ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.

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