InterRent Real Estate Investment Trust (OTC:IIPZF) Q1 2022 Results Conference Call May 10, 2022 10:00 AM ET
Sandy Rose - Director, Investor Relations
Mike McGahan - Executive Chair
Brad Cutsey - President and CEO
Curt Millar - Chief Financial Officer
Dave Nevins - Chief Operating Officer
Conference Call Participants
Jonathan Kelcher - TD Securities
Mike Markidis - Desjardins Bank
Matt Kornack - National Financial
Jimmy Shan - RBC Capital Markets
Johann Rodrigues - IA
Frank Lu - BMO Capital Markets
Brad Sturges - Raymond James
Welcome, everyone. Thank you for joining InterRent REIT’s Q1 2022 Earnings Call. You can find the presentation to accompany today’s call on the Investor Relations section of our website under Events and Presentations.
We are pleased today to have Mike McGahan, Executive Chair, 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 will 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. Please refer to the cautionary statements on forward-looking information in the REIT’s news release and MD&A dated May 10, 2022 for more information.
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 measures, including reconciliations to the nearest IFRS measures.
Mike, would you like to start things off?
Thank you, Sandy, and thank you everyone for following us over the years, it's been 50 quarters, 12 plus years as being the CEO. We've come from less than $40 million market cap to over 2 billion. all of this because we've had some great team members in past and present, but I do want to make some special mentions of the few key individuals. Bob Jarrett, Dave Nevins, Curt Millar, Will Chan, [Indiscernible] in the early years, Roseanne Holtman, Kelly Myers, [Indiscernible] Martin Vervoort [Indiscernible] who's been trying to retire for the last two, three years. And I have told him he can't do it. He was not impressed with the press release, but we've been on the phone at 7:00 AM and on the weekends. And so, he knows that this retirement is not happening. It is just a different role. So, we will have a long retirement plant between the two of us.
I have to say like in the 35 years I've been in the business I've seen lots of different things. I've seen the crazy rates of the 80s. And I'll tell you, I remember one of my first places I bought, while I was in university. I secured a second mortgage at 18%, and I thought that was fabulous. I remember coming home telling my dad, he didn't look as impressed as I was, but the recession of the early 90s, the tech bubble, the world financial crisis, the pandemic, and who knows what we're going through now. Now, it looks like just a mixed bag of a bunch of different things, inflation, pandemic, war, all sorts of stuff. But that's why we always talked about it being a very important to be prepared for these shocks and to bring our leverage down, which I think we've done a really good job on.
Also that this business is must be sustainable. It must be ready for anything. It's a living and breathing entity that we need to always care take and make sure we pass on. And that is part of our whole strategy about succession planning. And that doesn't just start at the CEO level. That's all the way through the organization. Nobody should ever be afraid of hiring great people because great people will just push you up. And I think we've always shown that and it helps you develop that deep talented team that I believe that we have that I don't believe, I know we have.
In late 2019, early 2020, I knew it was my time to start -- looking to step down. I usually work in tenure patterns or cycles as you may. And if my time was up and so I chatted with the board and we were going to -- we were putting together a whole succession plan, but it was well and underway. I had been grooming Brad for years and Brad's a very talented individual. So I knew that was the -- that would work in its way through in very short order. But then we hit the pandemic in early 2020, and we put all this on hold because it was time for us to all to roll up our sleeves, and in doing so, we had to come up with a strategy of what's their best path forward. And we saw our best path and strategy was not to occupancy, it was really about delivering top end, service top end product, and taking care of our residents, our very valued residents.
And I believe when you look at the results from this quarter, you'll see that this has proven it to be the right strategy. I think we're still going to see lots of different things coming at us. It's continual, we're going to have to really watch the cost containment that side for sure because obviously there's inflationary pressures. But when you look through the results and you know, we're burning off our promos, I'm pretty pleased. I have to say this team is very resilient and deep. And as I mentioned that it's gotten deeper over the last couple years, we've added more talent. And so it's really built for the future.
And I'm really not going to be far away. I'm the executive chair as you know, but I will have a very active role in the business and I do have a sneaking amount of shares, but I do believe this team is ready. And the timing was right. Brad is a wonderful leader. He's got so many different skill sets. He's been involved in the organization over the last seven years in so many different areas. So, he knows this business through in and throughout. He is very relatable and he does his leadership skill does to shine.
So when looking at the timing and that and knowing on the all the way through the organization and the private side, when you make a decision, somebody's moving to a different position. You make the call and you make the move. You don't need a big overhang and the organization needs clarity. And this is time for Brad to shine. It's the start of the leasing season. I want the people to know that they look to Brad here in the day to day operations and I have 150% confidence in Brad that he will deliver as we go forward.
I also feel really fortunate. The board saw a role for me as executive chair. I couldn't ask for better job description. I get to be involved in the strategy that capital allocation maintaining and adding to our GBV partnerships and coach and mentor. So, those are all great parts of the job that I love doing and I also are going to be very involved in working with the various governments and levels of government and the affordable housing side. We want to be part of the solution. We know it's really important for Canadians. We know it's very important for all of us to be involved and to be part of the answer.
I'm also fortunate to be able to do some stuff with my kids in our real estate business. So I am looking forward to that part. I'm not sure if they'll feel the same after six months, but I feel very fortunate to be able to do a little bit of that. So that'll be great. And I look at this as, when I put all the pieces together. I'm not retiring, I'm ramping up. So I love this business. I feel so passionate about it, and I'll tell you I feel so humbled and fortunate to work with so many talented people and to continue on to work with so many talented people at the reach.
But I do know that, the time right now is to pass this on to Brad. Brad's going to take the read on some very exciting pass along the way. And I look forward to the future. So at this point, I'm going to hand you over to Brad, our new CEO. And I want to say thank you to everybody for again for following us over the years and to continue following us as you watch what Brad does with this company. Thank you.
Thanks Mike. And I'd like to start off by just saying, I couldn't be happier with both of our new appointments. In my opinion, it truly reflects how strong a team we're surrounded by him. I truly feel blessed forever. Over to the quarter, got a great start to 2022, especially considering how we started things off with Omicron in January. We're pleased to see that at me held at December levels, and we're now firmly back in a historical range of 96%, 97%.
As expected given a 2021 record acquisition year, our total portfolio posts strong operating revenue and NOI growth prints for the quarter. We're also happy with the robust growth figures for our same property portfolio in Q1. As this demonstrates, our organic growth potential embedded in our portfolio and the strength of our teams are the ground in our communities. Look to the right side of the slide. You'll see that we're reporting strong FFO and AFFO growth on an absolute and per unit basis for the quarter and that our balance sheet continues to be in great shape.
Over this Slide 6, we continue to see strength and fundamentals our sector and saw 6% growth in average monthly rents in March relative to last year. You may have seen an announcement from an Immigration Minister a few weeks ago that the government is resuming its federal skilled workers program this July.
That's a big announcement because the program has been on paused since December, 2020 and is the main way the government manages skilled work applications from an immigration perspective. That a key piece of that announcement is that the IRCC is effectively be back to their six month service standard by the summer, which gives applicants more certainly in the process, the signals that we should see the share of permanent resident coming from abroad revert back to the majority.
Over to Slide 7, at the regional level, we continue to see steady year-over-year growth in the average monthly runs across all regions in emerge. Suggestion that the strength and fundamentals aren't isolated to specific regional pockets, the currency gap to mark in the excess of 20% across the portfolio. And that doesn't fully capture the return of international students in true inbound immigrations.
I'll hand it over to you Dave, to share some highlights on the operational side.
Thanks Brad. As Brad mentioned, we have put the elevated vacancy figures we reported at this time last year firmly behind us. And we were back to our historical occupancy range. In Q1, we usually see a seasonality effect in occupancy that could cause it to slip anywhere from 50 to 100 basis points from December.
Before recovering in our highly season of Q2 and Q3, and in that context, we're pleased to report that our overall portfolio occupancy is at 95.5% at the end of March, which is essentially flat relative to year end 2021. And our same property portfolio improved further in this quarter to finish at 96.4%. Again, this quarter, I'd like to highlight the vacancy evolution in Vancouver, which was sitting below 2% at the end of March and highlights the tight fundamentals in this region.
Look into the east, Montreal continues to lag our other regions with a vacancy level back above 7% after seeing a bit of a temporary bounce in Q4. As we mentioned on previous calls, we're waiting for the student effect to be realized in the upcoming months and expect to see progress on chewing through the elevated vacancy in that region toward the end of Q3.
Now looking at Slide 10, we know that inflation is on everyone's mind right now including ours. The operating expense line is the one over which we have the greatest ability to influence. This line item has increased up as a percentage of revenues in 2020 and 2021, while vacancy was elevated, but we are encouraged to see it back closer to levels than seen in 2018 and 2019 as shown in the left hand chart. It's worth noting, however, that this cost has crept up on awe basis over the years, as we've built out our operating platform to position us for future growth.
As we highlighted in our press release, we definitely felt the impact of natural gas rates across the portfolio, as you can see in the right hand chart. We have explored hedging programs on a regular basis and the most recent recommendation we received is to wait and revisit later this spring. Our biggest defense against utility rate boom is our efficiency programs, which we have continued throughout the pandemic. I encourage you to read through our sustainability report, which we published this morning for additional context on our many initiatives.
I'll turn things back to Brad to walk through our capital spend.
Thanks, Dave. Turning on the Slide 12. On the left side of the slide, you can see that the maintenance CapEx and Q1 was touch light on a suite basis, which we attributed to Omicron to some residents being hesitant to let our team in for non-emergency repairs in January. But the start of a new year a repositioned portfolio now constitute anything that the reacquired before January 1, 2019, which is why the number of non-repositioned suites are slightly lowered that as of December 31, but it still represents about 30% of our portfolio.
During the quarter, we continue to invest in value enhancing initiatives in both a non-reposition and reposition portfolios for a combined total of 16 million. We see excellent value creation and repositioning pro program. However, it's important in to note that individual suite upgrades follow the natural can of resident turnover.
Turn into Slide 13. As we mention with the Q4 results, we closed on two tuck-in acquisitions in Vancouver in January and February with our partners that fit in nicely with our existing footprint. Private market conditions remain extremely competitive, highlighting a huge disconnect between what we're seeing in the public markets for our sector.
We'll continue to go after bid for under managed properties where we believe we can add value, but we are also exploring new bills in some regions to generate strong cost flows on day one, by still generating upside from potential from expertise in marketing and leasing. We're still optimistic on acquisitions for 2022 and hope to have some announcements to share in the coming months, but we're unlikely to see a repeat to the record volumes from 2021.
Turning into Slide 14. You've heard us say before that, bringing on new supplies key to solving the housing affordability issue in Canada, and we're committed to play a role in delivering that supply. We are progressing well on our office of residential conversion in Ottawa at 473 Albert, which has been branded as the slate. Construction at the underway and construction costs are now 95% contracted. Marketing activities have already started and we look forward to welcome our first residents starting in late Q3 early Q4.
Turning to Slide 15. Development will become a bigger part of the story in the coming years. So we're to slow some additional details on the pipeline this quarter, which we hope will help model the potential for these incredible greenfield projects. We're working with great partners to bring the supply to market, and we're looking forward to sharing additional details as we get closer to get shovels in the ground.
I'll pass it over, Curt to go through our balance sheet.
Thanks Brad. In Q1, we recorded a $66 million fair value gain, which results primarily from our continued strong operational performance. We are currently sitting at a weighted average portfolio cap rate of 3.82%. This is a 4 basis point reduction from Q4 ‘21 and is driven mainly by the inclusion of our Q4 acquisitions with only a handful of tweaks to other assets that have progressed through the repositioning program.
Moving to Slide 18. We see that the REIT continues to be in a healthy financial position. Our debt to GBV on March 31st decreased slightly to 36.4% from 36.7% at the end of Q4 ‘21. At the end of March, the REIT had $1.45 billion in outstanding mortgages on our books. As we outlined during our Q4 call, we have been actively managing our mortgage ladder and have increased the average term to maturity from 3.6 years at year end to 4.5 years at the end of March as well as increasing our percentage of CMHC-insured mortgages from 63% at the end of December to 71% at the end of March.
As expected, those refinancing have led to an increase in our weighted average interest rate of 13 basis points going to 2.51% overall, which by historical norms is still very low. As at March 31st, we had approximately $340 million of mortgages remaining for renewal in 2022 of which we have already finalized 51 million subsequent to the quarter. At the end of April, the market rates for CMHC insured mortgages for a 10 year term were into 3.85% to 3.95% range. The rates are moving as much as 10 to 15 basis points a day up or down.
With such unprecedented swings in the rates on a daily basis, we are staying very active in managing the timing of our financings. Looking at what has closed or is in progress for Q2. We expect our June 30 average term to maturity to continue to improve with a further uptick in our CMHC insurer, moving away from our mortgage ladder and into our sustainability progress.
I'm on Slide 20. As Dave mentioned, our 2021 sustainability report was published this morning and is available in the sustainability section of our website, along with annual updates on our social and environmental performance metrics. Our aim with this report was to reinforce our commitments around both climate change and diversity equity and inclusion that we made to you in our inaugural report last call. We have set an ambitious plan and our team members are fully engaged as we move forward on these important commitments.
We welcome your feedback and look forward to some interesting discussions as we meet with investors over the coming weeks. I would like to thank Sandy and the whole team for all of their hard work, as there's been many hours put into moving these commitments forward and pulling together all of the information for this report. Brad, would you like to say a few closing words?
Thanks, Curt. Over to Slide 22. As I mentioned the top of the call, we had a good Q1 and encourage that fundamental to continue to strengthen those. Our true immigration comes in and international stream has come back in full force to on campus learning this fall. We're committed to being part of the supply solution and work with our peers to engage with our government partners explain the role of the re play as housing providers in Canada.
We're keeping a close eye on the cost we can influence, and we're pursuing energy and initiatives to reduce consumption. This current outline we are paying close attention to our Mortgage's ladder and have already worked through a big piece of a 2022 renewal that will only serve to reinforce our already topnotch balance sheet.
I'll echo the comments on my colleagues. So, we're encouraged to read through our sustainability report and check out the website. You're going to hear more and more from us on sustainability because these are big commitments, and we know that they are the right things to do for all stakeholders. Thanks to you all for your continued support and we look forward to seeing you in person soon.
Let's open it up for Q&A.
[Operator Instructions] Your first question comes from the line of Jonathan Kelcher of TD Securities. Please go ahead.
First question, just on the operation side. How has Q2 started out, IT'S your strong leasing season? How's it started out in terms of occupancy? And probably more important, are you the 20% uplifts are mark-to-market that you talked about? Are you starting to see that translate through?
Yes. Hi Jonathan, I'll turn it over Dave, but so far so good. Maybe Dave, you can give some more color.
Yes. I think just echo that the very, very strong in Vancouver and Southwestern Ontario, things are going extremely well. Little bit lagging in downtown Ottawa and Montreal, but things are really coming together. So, I think we're looking forward to a really leasing season coming up.
And I would also just highlight what we've said on previous calls. Vancouver is still is doing extremely well and up performing original expectations, and both the GTA area and Vancouver has started to see some immigration. And I think that's showing up in the numbers and just to Dave's point on Ottawa and Montreal, what we've seen some very strong recovery, there's still some upside left to be had. And I think we'll start to see that once we see the return of in the national students.
So, sort of end of -- closer to the end of Q3 for Ottawa, Montreal and strength in Vancouver and Toronto areas, it's all the way through?
Correct. And I'm not sure if you saw it, but the federal government made an announcement that they're going to increase -- they're going to increase study permit. So, we should start to see -- hopefully we start to see some statistics in around that in July.
And then secondly just on the acquisition side, just given where your stock price is, you probably don't want to be as active. Have you -- are you starting to look more at asset recycling?
Yes, as you know, Jonathan, we've never been married to our assets. So, we've always taken an approach where -- if we think we've realized the value that we have in a certain community, we're always open to the idea of monetizing that and recycling that cash flow into other opportunities and try to continue the value creation. There's no question right now or not only our enterprise, but unfortunately the REIT sector overall in the multi-pay pyramid.
We're trading at significant discounts to what you can actually buy up there. So I think it's safe to say the public markets are somewhat turned off at this point, but there are other ways to skin a cap and you just mentioned one of them. The recycling of capital is always a good idea. If you do have some communities that you think maximize that potential.
The other thing I would like to highlight and we entered into this last time we saw our unit price trade a pretty steep discount. We found ourselves a wonderful partner and became less dependent on the public markets. When we did the joint venture, Crestpoint in Vancouver, and they've been a great partner and they've been a great source of capital. and their capital motivation is lot different than the public market. And right now, there's contingent to disconnect between the public and the private market.
Okay. And would they be looking to get any assets in the like outside of Vancouver? So like maybe it's part of your Toronto or auto water Montreal portfolios?
I can't speak for them, Jonathan, but I do know this much. They're very extremely bullish on multifamily market and I, I believe they want to expand exposure. You would have to ask them, but so far, all indication has shown that it's been a great partnership so far, and I don't want to put words in their mouth, but I think they're extremely happy with us. And I think they partner with us for our operating abilities in our operating platform. And we partner with them because they've got a great track record and they've got a lot of institutional capital to put to work.
Your next question comes from the line of Mike Markidis of Desjardins Bank. Please go ahead.
Just two questions for me, Curt. You gave some good commentary on the refi activity you've done, but just, just wanted to make sure I got it all clear here. So the 340 million that's left, you've blocked down 51 million to-date. Is that correct?
Yes. That's correct. Michael.
Okay. And what would that rate be consistent with that 375, 385 through 395 range that you were talking about or if you going shorter than 10?
No, we were actually able to lock a lot of that prior to the rates moving on us. So, let me just grab what that overall rate is. It's yes, well, it it's sort of at the lower end of that range, if you will, but it it's in that range.
Okay. And then remainder would just be subject to current market or future market to the extent that it happens in…
Correct. And a lot of what we have right now, that's coming up at that is in the last quarter of the year. So, we've got some time ahead of us to sort of see, if the turbulence that we're currently seeing to say the least in the market sort of settles down. And then based on that, we have some options whether we continue to lengthen out, like you've seen, you've seen our, the barbell approach that we've had in the past with our recycle or not our recycling, but our repositioning into CMHC program.
And you've seen that jump up to almost 42% is beyond that five year mark as of the queue and it gives us an opportunity if things sort of stay high for a while, as we can sort of finish filling in that ladder and start to put some money into that two and three year bucket, which has a very low percentage of debt in there, just to sort of let the turbulence settlement and rates to return back to sort of more normalized levels.
And the other thing I'd say on that front is when you look and knowing our sort of history around repositioning and the work we do there, and sort of that strategy with building up that value, if you will. When you look at our repositioned portfolio, over 90% -- so that 94% range of our repositioned portfolio is actually CMHC insured. And even our same store portfolio is into the mid eighties CMHC insured. So, the percentage that's not really is focused on those assets that we've acquired mainly in the last 12 to 20 months, if you will. And that's what sort of makes up that more short-term focused and more interest rate sensitive portion.
And then just lastly, and this is a high level question, but I'll take, give you guys a stab at it anyways, but very fluid I guess bond market in the last eight weeks. I'm just curious if your confidence in the market has increased materially in the last eight weeks such that you would believe that if you were pending up an acquisition today would your expectations from future market rent growth offset the rise yield curve?
I think is the question that the industry as a whole is struggling with, I can't remember the last time we've seen such heightened volatility in the bond market and such a drastic rate of change in the increase. Good news, absolute levels are still relatively low and just in historical context. However, things the rate of change is been pretty, pretty large. Cap rates haven't changed if that's where you're kind of getting to the point of the question, but obviously, vendor expectations late, maybe the nuances of the capital markets.
That said, there are acquisition in the pipeline, as you know, we've always said, we've worked on some acquisitions and it's taken us over two years. So we always have had the pipeline of acquisitions that have been established or engaged at different points. And you enter into a different point. So our pipeline's not as static as you turn on the switch, you turn off the switch. That said, what we do have in our pipeline. I think we're very confident that they're great strategic opportunities, and we'll continue to add to our track record that we've already kind of shown.
Going forward, I think we have to set the back as a senior management group and reevaluate and see where the dust settles as far as going forward where expectations are given where the interest rates are. And as you're aware, and in my time of studying the capital America, things do adjust and they readjust and whatnot, but I don't want this discussion turn into solely on cap rates. We do look at things going out, and this is the second point of your question. If new supply is not delivered at a pretty quick speed, there's going to be pressure on reds.
And as an industry, we have to be the part of the solution and work with the different levels of government, right from the provincial of the municipalities. We have to help deliver that supply. Because if we don't rents going to increase at an alarming rate and those rent increases over long enough time period will likely offset what you're seeing as far as operating cost pressures and interests rate pressures, but there's a third variable that I should mention.
As you are in this environment where it still has high barriers to delivering that supply, an increase in interest rate environment, and an increase in operating cost environment. All of a sudden the existing apartment stock has got a lot more valuable, so on a replacement value basis, these how all forms of housing has just got a lot more valuable. So when people are somewhat, sometimes stuck on the actual yield calculation or evaluation, I think they're forgetting to look at the replacement value aspect.
And I don't think you're going to find anybody that any participant that's in the industry that would not say that we needed for new supply. We're an extremely tight market. And to be honest, the federal government has some ambitious immigration targets, which I think everybody -- every Canadian welcomes because that is going to help grow our wonderful country, but we better come up with a solution on how we're going to help those newcomers to Canada.
The only thing I think I would ask Brad was saying to Jonathan, is that the private, sorry. Oh, Michael, sorry. I thought it was Jonathan still. Sorry, Michael is that, the private market still is very hungry for multifamily. So even if our public company peers are seeing that pressure on the equity and the debt, the private market still wants to be in real estate still remembers what happened in the last financial crisis. Still sees it as a very safe Harbor and very turbulent times. So, there has not been led up on the bidding side of the equation.
Your next question comes from the line of a Matt Kornack of National Financial. Please go ahead.
Hi guys. Just a follow up on that last train of thought with regards to rent growth trajectory. Would you think at this point that it may be even near term, don't we have a lot of the conditions in place at this point given a lack of supply that the spring leasing market itself may be pretty frosty on the rent growth side?
Yes. Matt, I think what you've seen in our results in this quarter and even Q4, I think the fact that we didn't buy occupancy in anticipation that rent growth was on the horizon, I think is kind of proof in the pudding. We definitely saw some strong top line growth, and we're going to continue and we are experiencing it as we speak today.
Fair enough. And then I saw that you've an NCIB that was recently approved. Given your comments around potential JV sales, could you foresee kind of that as a source of capital or even you have leverage capacity ultimately to buy back stock given where you're trading is that entertaining at this point? Or yes, your thoughts on that?
I'm laughing because it's definitely entertaining. And the gentleman and ladies around this table with me today are laughing. Because all joke aside, this is a very healthy debate amongst her board and our senior management team. I think we all recognize that NCIB is a great tool on your toolbox, and it's a great way to add to your immediate NAV per unit. However, it does compete with other opportunities and it is competing capital.
And unfortunately, it does lever up your -- does lever up your balance sheet, but it's worthy of big discussions and there's kind of two views to it. Like I said, there's other ways it's going to cap to source equity, but at some point, your unit price is just so low that you can't ignore it. And I'm looking over at my boss and he's smiling because I think you shared the view and I don't want to put words in your Mike, but over to you.
Well, we're having -- we always have a lot of healthy debates and I look at it and I say, jeez, we could not buy our company, forget the platform, but just the properties. It's not even close to what we would be able to get this. This is like, we're totally undervalued. I've seen this disconnect before. And then, you start layering in the platform, which as we go forward at the whole new builds that are going to come down the pipe. It's going to be super, super important. So just, we're totally undervalued. That's the way I look at it. So, Matt, it's pretty compelling when I look at it right now. So, -- it's good to have these healthy debates. We'll see who wins at the end.
I think you're a couple hundred basis points above where cap rates were not too long ago and I can't imagine the private market has moved that much. And then just a last one back on, on operations, you noted it, but your op costs, I think they beat us. Obviously, utilities have been an issue across the board. But how much potential is there to kind of if not constrain costs at least keep them at bay in this inflationary environment?
I think the key is, I think we're all going to experience operating costs unfortunately. It is just the new reality. The good news is we're not in this alone. Every industry, every business is experiencing it. So the question is. Can you protect your margins? And increasing in an inflationary environment on your operating costs, you have to get the top-line growth. And I don't want to oversell it, but the culture at our shop is really about making sure when you have a vacant house that you're getting the price, and that means you just don't accept you go out and you really push to see where that rent can go. And at the end of the day, the offering torque you get on that will outs, strip and protect your margin.
So, I think we've seen the worst as far as knock on wood as far as where utility cost would be, everyone knows it's a seasonal business. Q1 is their worst quarter. Now does not gas prices come off by a lot? No, I can't say necessarily. They will, I think there's a lot of things especially the war in Ukraine has to get resolved before you see some relief on that front. But at the end of the day, if you don't have a culture where you are trying to really maximize the top line then you you're going to see margin erosion. But I'm pretty confident with this group that we're all very much -- very zero focus on watching every cent that we spend, so that we can protect those margins.
And I know like Dave speaks to this all the time and also comes down to the quality of our staff, the quality of the training. And we make sure to spend a lot of time through our teams and training our teams on all the little things they can do to help save money, whether it's a small thing that normally they might outsource our call in a contractor for a small plumbing repair, or different types of repairs. And our team spends a ton of time. We've set up training rooms in each of the regions. We have a whole program that Dave and his team have developed that they all go through, and they've done a really good job at trying to make sure we keep some of those costs down where we can have certain level of control that we can bring in house.
Yes, that's a great point. Currently like instead of paying another business, their profit margin, we try to capture that in house and use some of that in reinvesting in our own operating platform and training.
And the only other thing I'd add to is really working hard and following our sustainability plan, making sure that we're capturing all those savings we can within our CapEx program to make sure we're implementing all those pieces. So like Curt said, training and obviously keeping track of our utilities, the best we can with the measures that we put in place.
Your next question comes from the line of Jimmy Shan of RBC Capital Markets. Please go ahead.
So just on the market rent gap to in place rent, just want to clarify. Is that sitting at about 25% today? And how would you describe how that number breaks out by region process speaking?
We haven't broken it out sort of by region, Jimmy, and I don't know if I want to do that on the call. So we'll take that away and maybe try and include some of that in the future as far as our disclosure goes, but it is in that 25% range. We were closer to the 20 last year at the end of the Q4, but we've seen a very strong Q1, as you can tell, just from -- even from the point of view, normally our Q1 occupancy sort of goes down a little bit and we've actually held flat this year, which is a pretty strong start to the year. If I think Mike and his opening remarks talk talks about how we see this sort of getting back to almost pre-pandemic levels. And I think that given the current trajectory, if it continues, we'll definitely be back there by Q2 or Q3 not to put Dave and the ops team on the spot, but I think given the current trajectory and what we're seeing in our least turnover that those numbers seem very reasonable to me.
Okay. And sorry, I don't really need specific numbers in terms of geographical breakdown. I just wanted to get a sense whether that's tilted in a particular market or not.
I think it's fair to say Jimmy, if you look at the disclosure in the MD&A at the trends that you see in MD&A that it's fairly consistent with what's reported. The nice thing is everything's has shown a significant recovery from the troughs that we experienced at the height of COVID, but there has been some regions that have outperformed on a relative basis to the other regions. And I would say it's fair to say that the gap is fairly reflective of that.
And I think you mentioned it earlier on like Greater Vancouver area, Greater Toronto area, and the other one is other Ontario. It's been very, very strong. Like those three in particular have been very, very strong. And I think we'll see more of that pressure come into Montreal and the national capital region as we get into the summer leasing cycle and ready for the return of the students because those are markets where our product is very core is very near university. And if they don't cater directly, there's still that trickle on effect of the overall market within that zone, if you will.
Yes. Another thing I would mention to Curt's point, that's where the opportunity does lie, is within those more student dedicated markets. I'd also point to the fact that we're starting to see the promos come in, and I think we're going to continue to see the promos come in over the course of the year. And that's roughly 1.5 million this quarter, so that's significant when you kind of end of that number [Indiscernible]
And then quickly on the development pipeline that you outlaid on Slide 15, did you disclose what the total budget costs for those projects are? I think that would be kind of the final piece of the puzzle to put some math behind that.
Yes, we haven't, and it's not to be cute Jimmy until you have the call it the Grade A, Grade B or drawing. We really don't want to put ourselves out there in this environment. I think what you can take comfort in we're not going to start a project where we don't have good confidence in being able to achieve the pro forma. And essentially when you talk about a pro forma, it's really about the rent that you can achieve.
We're not going to start in and start occurring harp costs dollars of construction until we have a pretty good idea of where fixed costs are and that we can deliver into a market that we can achieve those rents. I think what's being fair is we've given you the yield. So yes, you can't see the, what costs are associated with them. We feel comfortable at this point that we can achieve those yields. And like I said, as we enter in fixed cost agreements and get the majority of the project contracted out, we feel more comfortable disclosing that number to the market.
But roughly speaking kind of not specific to those assets, but roughly cost to build per foot these days, sit at around what kind of range.
Obviously, it's gone up, I could give you a number, but it seems like it's going every day. What I would go back to saying what Brad was saying, we would not build without having fixed construction cost contracts, a good percentage 75% or more in place, probably more. It is changing a lot. So this is going on all the time and there's lots of different -- unfortunately there's lots of different issues going on now. There's actually a couple even strikes going on. We have the crane operators and the farm workers, which is a bit of an issue. And the plumbers I'm hearing they're potentially going to go. So, it's moving a lot. So, and that's the problem. When you start penciling out your numbers, it's very fluid right now. So, we have to be extremely careful.
And just add on that, Mike, it's not just the cost with some of these strikes we're seeing at the timing because that can lag a project a couple of months easily when you get different trades, because there is a knock on effect to when the order in which the work has to be done, right?
Last one from me, Mike, since on the line. So which side of the NCIB debate, are you on Mike?
Jimmy? What side are you on? I asked the question.
I asked you first.
You know what, it's a healthy, like we have a discussion, mean, I look at it and I say, jeez, like we could not -- like we are so undervalued. So, I really feel it's a not a bad time to be buying our, our stock to be Frank with you, but we have a healthy debate. It's been really -- I mean the, obviously the market has dropped really quickly. So, yes, I guess Brad wants to make his comment. So, we do have a healthy debate because it's very frustrating, right? Mike and
I and the rest of the team sit there and look, what's in the private market, and what cost to transact? And there's so much capital with this asset class because let's face it. If we are heading in a recessionary environment, which the bond markets saying, you couldn't asked to be in a better asset class than housing. And we all know that from studying this industry and us participating in this industry.
So who really knows that cap rates really do adjust to this increase in interest rates for this asset class is yet to be seen. The future will tell us, but we do know one thing it's frustrating to see where our unit price is trading today relative to what the private market is. So, I completely appreciate Mike's frustration and his usually comes to NCIB, but the other view would be the sense that if this is a macro fall and the forces to be are sitting there and saying, this is not about company specific and this negative sediment, you can throw a lot of money at NCIB.
Yes, add in theory increasing to NAV to per unit so move that from $17.80 to $18.50, $19. But if you're still trading, a $12, all are done is widen the discount and leave it up in balance sheet. When we actually do have some other opportunities in the portfolio that are going to be an accretive over the term, and through the cycle, and the other thing I would also say is and Mike touched on this and we all fall, hardly believe here at internet. So what makes us special is we're an operating platform.
That's what we do well, okay. When we find an asset, we reposition it, and we operate it. And I think that is our special sauce, and that I don't think you get at the same value back right. So, we have to continue to invest in that operating platform. So you can see there's really strong argument on either side and I don't think necessarily there's a right one.
Your next question comes from the line of Johann Rodrigues of IA. Please go ahead.
I just wanted to clarify, Curt, I think it was you that mentioned earlier that you're still seeing, the same strength in terms of pricing on bidding. But are you still seeing the same number of bidders in the same profile, I guess with respect to domestic and foreign given what may or may not be coming down the pipe regulatory wise?
I think basically I'll -- it’s Mike or Brad answer that one because they're a lot closer to the acquisitions team than I am. I'm just talking about what I'm seeing once it flows sort of through them on some underwriting over to my desk.
Yes. Like up to now, we have not got to realize that the acquirers are not looking at it in the same lens. They look at Canada where it's, where the potential is to grow over the long term. So really the depth of bidders has not changed at all, which I've really surprised me is the amount they're portioning to future density on these sites. I mean we've been on some bids where we weren't even close because people are looking at the potential density on those sites and be able to add on to those properties. So really up to now, we haven't seen anything happen. Does that mean that things won't shake out over the near term? We're going to be very careful what we do. So we'll be watching really careful and it could change. So it's as we all know, this is a it's fluid, and that's the beautiful part about the business, right? It always, there's always things changing. It's never static.
And the one thing I would add to Mike's comment too is, and we've been -- I think we've been communicating this for a while and done a good job of this is the after class is getting institutionalized, right? And some of those institutions are or could be equity buyers where they're not as reliant on debt. And the other thing I would say too is, on the private side, there are a lot of private buyers that will look to hold us as a generational asset to preserve capital.
So, they're less likely to be impacted by near-term financing. I do think, and I think we agree there will be some private buyers that might be taken over the market because of the higher interest costs. And all of a sudden the leave returns on a risk adjusted basis don't make as much sense. But I agree with Mike, I think it's still too early days and we haven't seen any indication from those institutional buyers that they're gone.
Just on turnover, obviously, turnover is plummeted the last two years both because of rising rents, but also because of the pandemic. But with the pandemic kind of easing, I guess, have you seen either tangibly or is the expectation for maybe a slight rise in turnover as we progress through the years?
I wouldn't say we've seen a -- I wouldn't say we've seen a rise. I think we've seen it come in a little it hasn't been that great, but it is coming in -- but you've touched on a point that I want to make is, and I think we have communicated this in the last while. It's -- you're going to start to see us participate in new supply. And I think this is one way to counter effect the sole coveted turnover rate, because at the end of the day, you really -- in order to capture and capture that return that's associated with the reposition is really the effect of the natural cadence of your portfolio on turnover.
And I think augmenting that with new supply, where if you are well operated, you should be able to maintain or better your growth profile than the least inflation on your new supply, which I think is a great way to augment your top-line growth. So I think, you will see us participate in more supply. That said, we're going to be very mindful of the feasibility and the returns of what we're purchasing, what we're going to delivered into given our current cost of capital. And we've seen, unfortunately, an increased in both our cost of debt and a cost of equity.
And then just last question for me is, obviously given where equity prices are. How much would you be willing to lever up to kind of complete the acquisition program this year? I mean, would you take it above 40%?
Yes. So, that's a great question, Johann. And if you asked us, if we were at a private company right now and I look around at my partners around the table, I don't think one of -- I don't think any of us would have a problem leaving us up into mid sixties and maybe even the mid seventies, if we're probably holding this for the long-term. I really don't because that's how visible the cash flow stream of the asset class is.
Obviously, we appreciate that we're a public company, and I think you have -- you've afforded a lower cost of equity when you have a clean balance sheet and a very conservative balance sheet. So, we would like to preserve all the hard work that Curt and his team has done to get us into these lower leverage. But if the world was to stay in this extreme volatility, I would say, and we saw the right opportunities. We would be willing to lever up into the low 40s and that would afford us quite a bit of -- that would afford us probably 200 million, 250 million call it of acquisition potential.
Yes. And the same person is operating on the private side for 30 whatever years, 35, 37 or even 38, I try to lose count. But anyways, I like the fact that we're not levered a lot like it gives us a lot of availability here where people may be shy and to maybe if we see a good asset that we'll take a look at it. And if we see some potential there, especially if we've got like we, I love the fact of having the JV partnerships, which we'll describe to more during these times. And we'll look at special acquisitions, especially we've very interested in some of the new builds because that is something you can really take up some of your upside a lot quicker. So, we're -- that's what we would look at, but we'd be very, very careful, and yes, we wouldn't not want to try to too much leverage.
But where I we're going this in the reverse way and know Mike and Curt team agrees is, we're changing that steep discount NVA and who knows where cap rates go, but I'm very confident given the asset class and knowing the capital that is chasing the asset class. The public market has this one has over always shot on this one.
Your next question comes from the line of Frank Lu of BMO Capital Markets. Please go ahead.
For the time being, I have a couple quick questions here, and first one our provincial election is less months away, and of course, no one can predict the outcome. But if we, I'm wondering. If we end up with a government that is more supportive on the supply side, and I'm curious to see what run participate in this. And would you be more robust on your development pipeline to help with the supply issue?
Yes, we're very hopeful that we will have I got to be careful what you say, but maybe not. We like the current government has got really understand to understand the whole issue to the best result. I mean, I saw the platform that just got released by the liberal party yesterday. Not as worrisome as you could always -- you always think of the worst case scenario. But I do believe -- look at everybody as priced at the worst case scenario into all of, not just us, but all of our peers. As I think either one of those parties being in power would be relatively positive to us, but obviously I think the current party really gets it very much.
So we do want to be part of the solution. It's a really key thing and element for us to look at. We will be -- we'd like to be like very involved in it. We are very involved in the government relations right now. I think if you asked all of our peers, we were probably I'd say that we were not on top of it before. We're all -- that's one thing about the whole going through the last two years. We've become very close not just peers or competitors, but actually friends. And that's not only in the public side, but also some of the large housing providers in the private side.
So, we've all got -- we've all been working very hard to make sure that all levels of all the levels of government understand all sides of the equation. Because at the end of the day, we are going to be able to deliver a lot of supply form, not only internally, but we'll also be the purchasers of a lot of these merchant builders building stuff. They need us at the end of it. So, we they've got to understand all the different pieces of it. So, I'm very hopeful that we'll have a very good outcome.
Let's see what's happening down the road, and just one quick one. So I think you touched on this a little bit before, but do you still using -- are you still using some extent up seeing some of your markets coming to the peak leasing season? And could you like to mention like which market specifically you're using more incentives over others?
Hey. Frank, its -- do you mind repeating the question? We didn't have a good quality on our side.
Oh, sorry. I mean like, I think you touched on this a little bit before, but I mean like, are you still using some incentives in some of your markets? And which markets do you expect to leverage more on incentives versus others?
Thanks Frank. Selectively, I would say we're taking a target approach to a right approach to some communities when it comes to incentives is definitely not a shotgun approach, and we definitely see that come way in the net. And I think really is very minimal and a very select communities where we are currently offering and it's really offering of one free month. And typically, where it would be, Frank, if there's a lease up going on in the direct proximity to our community because they're -- those lease up are using a little more aggressive incentive.
Your next question comes from the line of Brad Sturges of Raymond James. Please go ahead.
Just to go back to your commentary on central for capital recycling, I guess, where assets might have a little bit more limited upside is. Would you say that's reviewing opportunities within some of your core markets on an individual asset basis? Or are you going back -- I know you discussed in the past about maybe exiting some of the smaller Ontario markets that you're still in. I know it's not a large part of the portfolio, but any updated thoughts on capital rotation strategy there?
I think what you state in the past stands today. So, I think, there's one particular that you're probably thinking of and if there's the right offer, I think we would entertain, obviously we'd entertain disposing of that. There are some select smaller communities within our core portfolio that we believe given the local market dynamics that we probably maximize the rents to the best of the ability of that community and we would monetize and recycle that.
And we're not opposed to be quite honest to looking at little larger portfolio and maybe monetizing a partial interest depending on where the current capital market state is. If the current capital market state, if this is a new reality for the next two years, that's definitely going to be a possibility because we do have some pretty good opportunities in front of us that we think will continue to position ourselves as a stronger operating platform.
And at the end of the day that's what we are. We are an operating platform that owns a great asset class that has a great ability to be financed by CMSE financing. But at the end of the day, when we look around the table, we look at ourselves as a collection of great team members that are form a really good operating platform that we can provide housing services and be part of the solution to this housing crisis.
That's great color. And just one last question for me, just on the leasing environment, obviously you've noted within your release about the international students, the permits being up. I guess, when would you think you could see that flow through into more leasing activities that more of a Q3 event or could [Indiscernible]?
I think the leasing will show up in Q3, but I think we'll be able to provide more color in Q2. I think we'll start to see the inquiries pick up in Q2. So, the traffic should start to pick up in Q2, and that should result in natural leasing activity heading and being booked in Q3.
Just by the nature of the timing of the release by the time we're doing this call, the Q2 call we'll be in late July, early August. So, we should be able to provide more on it.
There are no further questions at this time. I'll turn the call back over to Mr. Brad Cutsey.
Actually, I'm just going to say, I forgot to call out our former chairs, Jacie Levinson, Victor Stone. They were amazing guiding us in the early days. And I also appreciate, Paul Amirault, he's done a fantastic job as a chair, and I appreciate his graciousness to step over to lead trustee. I'm passing over to Brad. This was my last call, took me 10 years to have a call.
Now it's over to you.
Thanks Mike. We're all chuck in here because it really did take us, so it at least took me seven years to get Mike to have a conference call. But at the end of the day, I'm not sure if we did a great job explaining the transition, but as you can see, Mike is not going anywhere. Mike is still very much committed and involved in the REIT. I still report into him. This team is still here and we're very fortunate and blessed to have Mike's experience, wisdom and council. And Mike is very much still part of the strategic and capital allocation decision.
So, I think this should be, really should be viewed as a smooth transition. Not often do we see executive chair, but essentially executive chair just that. They're made executive chair for a smooth transition. So I hope the market sees it that way. And we're delighted to still have Mike's commitment with us on a daily basis. So I like to thank Mike for giving myself and not only myself, this is a much of an employment of both the team members, I'm surrounded by.
So I'm very fortunate with the bench strength that Mike has left, and we're going to do everything in our power to make sure that we continue to work really hard and continue to post and continue to perform. And at the end of the day, this is about an operating platform, which to me is planning toward about the people. So at the end of day, we're going to continue to invest in this operating platform and we're going to continue to hopefully deliver our performance.
So, thank you very much for your time, and for your continuous support.
This concludes today's conference call. You may now disconnect your lines.