CA - InterRent Real Estate Investment Trust (IIPZF) Q2 2023 Earnings Call Transcript
2023-08-05 08:14:08 ET
InterRent Real Estate Investment Trust (IIPZF)
Q2 2023 Earnings Conference Call
August 2, 2023 10:00 AM ET
Company Participants
Renee Wei - Director, IR and Sustainability
Bradley Cutsey - President and CEO
Dave Nevins - COO
Curt Millar - CFO
Conference Call Participants
Mike Markidis - BMO Capital Markets
Jonathan Kelcher - TD Cowen
Kyle Stanley - Desjardins
Brad Sturges - Raymond James
Mario Saric - Scotiabank
Dean Wilkinson - CIBC
Gaurav Mathur - iA Capital Markets
Matt Kornack - National Bank Financial
Presentation
Operator
Good morning, ladies and gentlemen, and welcome to the InterRent Q2 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 today, Wednesday, August 2, 2023.
I would now like to turn the conference over to Renee Wei. Please go ahead.
Renee Wei
Welcome, everyone, and thank you for joining InterRent REIT's Q2 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 & 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 question.
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 recent news release and MD&A dated August 2, 2023.
During the call, management may 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, you're up.
Bradley Cutsey
Thanks, Renee, and good morning, everyone. Let's start by reviewing our Q2 highlights. Same property and total portfolio occupancy came in at 95.4%, a 30 basis points increase from June last year. Total occupancy was down 140 basis points and same property occupancy was down 150 basis points compared to March this year. This decrease is due to seasonality effect that typically results in the decline of anywhere between 50 basis points and 200 basis points of accuracy from March to June, as it's typical for residents' natural turn to occur during this period. When analyzing June occupancy rates the last six years, it becomes evident that the occupancy has rebounded to pre-pandemic levels and is in line with long-term average. We achieved a 15% same property NOI growth, a 16.8% total portfolio NOI growth. As you can see on the right hand side of the slide, our organic NOI growth and operating revenue have both returned to pre-pandemic levels.
Furthermore, we've also delivered an impressive 300 basis point expansion in NOI margin for same property and total portfolios. With our ability to contain our operating costs paired with reduction in vacancy and rebates, this quarter top-line growth flows through directly to improved NOI, demonstrating the efficiency and robustness of our operating platform and our extraordinary teams on the ground who continue to innovate and serve the communities our residents proudly call home.
The fundamentals of our portfolio and industry continue to strengthen as demonstrated by the consistent 6.8% growth in average monthly rent in June, relative to a year ago. During the second quarter, rent growth for our non-repositioned portfolio has outpaced that of our repositioned portfolio. This is due to changes in our portfolio composition resulting from our acquisition strategy over the last few years that is focused on core urban Americas such as Toronto and Vancouver, that we believe we will continue to benefit from immigration and population growth.
At the regional level, we continue to see a steady average monthly rent across all the core markets with other Ontario, GTHA and Vancouver leading the path. Rental growth in Montreal is also steady with a 4.6% year-over-year increase, and we believe there's a significant run rate still ahead for that market. FFO increased 3.7% to $19.6 million, and on a per unit basis is up 2.3% to $13.04. AFFO increased 3.8% to $16.9 million. We've achieved this growth despite the new normalization of higher financing costs during the quarter.
We are focused on enhancing our debt portfolio and managing interest rate risks and have made incremental progress. The results of the team's efforts will become evident in the next few quarters. Curt will provide further details into our balance sheet later in this call.
With our debt to gross book value continuing to be at historically low levels and stable available liquidity of $282 million, we remain in a strong financial position to execute on our strategy amid heightened volatility in the debt markets.
Dave, over to you. Take us through some of the operating highlights.
Dave Nevins
Thanks, Brad. As Brad previously mentioned, our overall occupancy has increased marginally when compared to June of 2022, and has shown a decrease from March of this year. This can be explained by a rental market seasonality typical for Q2 as highlighted in this five-year chart. Encouragingly, we've seen strong demand and activities for the rest of the summer following the quarter, as our occupancy rate historically show a noteworthy bump from June to September.
During the quarter, we've seen turnover remaining in the mid 20% range. However, due to the tight markets, we continue to expect turnover to decrease towards the low 20% range for the year. The vacancy rate differential between our reposition and non-reposition portfolios have widened to 200 basis points, demonstrating the effectiveness of our repositioning program and our ability to continue to capture additional revenues through it.
We take pride in running a well-maintained portfolio, on this slide. You can see our CapEx spend so far this year. Our maintenance CapEx came in at $5.2 million for the year-to-date or $1,020 on an annualized per suite basis, in line with historical levels. On the right hand side, you see we consistently allocate anywhere between 86% to 92% of our CapEx spend on value-add investment as we continue to see excellent value creation in our repositioning program. As of the end of June, we have 2,541 suites or 20% of our portfolio at various stages in our repositioning program. We have established a well-recognized track record of enhancing our resident experience, and at the same time, creating value with strategic investments in our communities through energy conservation programs, repair and upgrades to both the exterior, interior of our properties and in-suite renovations. As a result, our repositioned suites experienced lower vacancy rates and greater NOI margins.
During the second quarter, occupancy rates and NOI margins for repositioned portfolios are 200 basis points and 160 basis points higher when compared to non-repositioned portfolio.
Before I turn things over to Curt, I want to give a quick update on our first office conversion project, The Slayte, which we transitioned from active development to income producing properties during Q1. The construction side of the building is nearly complete and the lease rate has surpassed 60%, the site being surrounded by ongoing city construction. With its excellent location in downtown Ottawa just steps away from two LRT lines and the parliament, the building has attracted significant interest, especially from students and government workers. With the city construction outside the building nearing completion, and the remaining work on the rooftop amenity space concluding, we're confident that strong momentum will continue throughout the busy leasing season.
With that, I'll hand it over now to Curt to discuss our balance sheet and sustainability efforts.
Curt Millar
Thanks, Dave. Every quarter, we review the major assumptions around rents, turnover costs, and cap rates with our external appraisers. Based on this review and consistent with expectations, we have seen slight upward adjustments in cap rates in non-core markets and assets. We are currently sitting at a weighted average portfolio cap rate of 4.07%, up minimally from 4.04% in Q1. Even with this increase, we recorded a fair value gain of $7.4 million due to the robust rental demand. We had close to $1.7 billion in mortgages outstanding at the end of June, a marginal decrease from where we ended the previous quarter. Weighted average cost of mortgage debt increased marginally from March 2023 to 3.43% and variable rate exposure ended the quarter at 5%, a substantial decrease when compared to the same period last year.
36% of our 2024 maturities as highlighted in this mortgage maturity schedule chart, is related to our Vancouver portfolio, which is in the process of being refinanced with CMHC insured mortgages for all of the assets with anticipated funding to happen in late Q3 or early Q4. We have continued to strategically smooth out our mortgage maturities with no more than 13% of our total maturities due in any given year over the next five years. Our average term to maturity has decreased by 0.2 years to 4.9 years. The majority of our 2023 and 2024 maturing mortgages are currently at various stages of the review and approval process with CMHC. We look forward to reporting the results of these initiatives as they materialize in the next few quarters.
As you can see on Slide 17, our proportionate debt to gross book value at 37.7% reflected a decrease of 30 basis points over Q1 and remains at historically low levels. Available liquidity was $282 million, also in line with the previous quarter. Our liquidity levels and prudent debt strategies have continued to provide us with the financial flexibility for future capital programs, development opportunities and acquisitions.
Moving to Slide 19. During the quarter, we continued to make important progress on our sustainability objectives. On the consumption front, through our various ongoing energy efficiency projects, we achieved a 12% year-over-year reduction in gas usage, as compared to a 4% decrease in heating degree days. On the environmental front, we submitted our updated 2022 emission calculations including our Scope 3 emissions data to the Science Based Targets initiative or SBTi. We are currently awaiting validation of our science based emission reduction targets.
On the governance front, with the election of our newest Board member, Meghann O'Hara-Fraser at our 2023 AGM in June, we officially increased our female representation on the Board to over 30%. We are also actively expanding our building certification program with 6 pilot buildings in the GTHA and national capital region, on track to earn the Canadian rental building certification in the coming weeks.
I'll turn things back to Brad to walk us through our capital allocation strategy.
Bradley Cutsey
Thanks, Kurt. We have disclosed our agreement to sell a 54 suite property in Ottawa for proceeds of $11.5 million, which exceeded our IFRS value. We have been communicating to the market that we would direct some of the proceeds from our capital recycling program towards our NCIB. During the quarter, we purchased 26,300 units at an average price of $12.47 per unit through the NCIB, well below our IFRS value. Subsequent to the quarter, we remained active in purchasing additional units through the Automatic Unit Purchase Plan. We have identified various assets that meet our strategic disposition criteria that can potentially provide net proceeds of over $75 million over the next 12 months, which will help fund further growth opportunities, strengthen our balance sheet, and allow us to continue to be active in our NCIB.
Taking a closer look at the development pipeline, a key part of our future and part of the solution to the current housing supply situation in Canada. We currently have three ongoing development projects in various stages of the development cycle that could provide close to 4,000 new homes. All these projects are in our core markets in the GTHA and in Ottawa, strategically located near mass transit hubs where there's a strong demand for housing and supply among students and professionals alike.
However, we remain cognizant of the headwinds from rising hard and soft costs, as well as financing constraints related to construction. We are exploring various programs such as MLI Select and the [RCFI] programs to achieve optimum financing terms. The decision to move forward on any of our development project will be made after thoughtful consideration as part of our broader capital allocation strategy.
Over to Slide 24. I'd like to take this last moment in the presentation to highlight the conditions of Canada's housing market and what this means to our industry. It's an understatement to say that the housing market is far from a balanced state and that the core issues lie in the disparity between housing supply and demand.
Last year, Canada's population grew by an unprecedented 1.1 million people, most of them permanent and temporary newcomers. During the first five months of this year alone, Canada welcomed over 200,000 international students. As of July 16, Canada met the historic milestone of reaching a population of 40 million. Meanwhile, housing completion in Canada has remained stagnant, presenting a flat line over the past 10 years. Our population growth per housing completion reached a staggering 3.2 ratio last year compared to the already elevated historical average of 2. CMHC estimates that 5.8 million housing units are needed by 2030. We are currently on track to build less than half that needed amount.
We remain steadfast in our commitment to be part of the solution to address the housing supply shortage. You've heard about our almost 4,000 suites in various stages of developments, a period we’re rallying to contribute to. But this chronic supply shortage does not have a quick fix. We expect to see extreme tight market condition persist in the coming years, especially in our core markets, which are some of the most desirable destinations for newcomers, students and tech workers.
In order to meet a strategic growth plan to stay ahead in the future where housing supply and demand will eventually become more balanced, we are focused on building resilience through investments in our platform and our teams. We have always stressed that are our most valuable assets, and that's why we're giving them the best tools and technology to help them reach the next level. We have taken steps to invest in cutting edge business intelligence and best in class cloud platforms and more to improve efficiencies so that our teams can find more time for higher value-add activities, and deliver even better, more personalized service to our residents.
Meeting our sustainability objectives is important to us. We have adopted creative solutions such as building automation systems and renewable energy technologies to ensure our communities are resilient in the face of climate changes, and that our operations continue to stand on a sustainable foundation. At the heart of our business, lie our residents. We're carefully designing a well woven technology in every aspect of our residents' experience. This seamless integration allows us to better serve our residents and achieve incremental operational optimization in the process. We've created an experience that is customizable and responsive, resulting in happier residents and safer, more vibrant communities.
As part of our ongoing investment in our platform, we're also making important progress in enhancing our brand. We're in the early stages of launching our new branding, which is aligned with who we are and our visions for the future. We can't wait to share more details with you later this year.
Finally, I'd like to conclude by reiterating why we are so optimistic about continued strong NOI and FFO growth in the future, backed by three compelling reasons. The first being the fundamentals in the Canadian rental markets remain solid and will continue to support long-term top line growth. Two, our operating platform and best-in-class team have a proven track record of delivering value. We'll continue to empower them with cutting edge technologies and investments in training as we scale and achieve our strategic growth plans. And lastly, number three, we are truly excited about our various development projects where we bring in trusted partners with experience and expertise. These opportunities will not only contribute to Canada's housing supply, but also have the potential to elevate InterRent and our portfolio to the next level.
With that, let's open it up to Q&A.
Question-and-Answer Session
Operator
Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question will go to Mike Markidis at BMO Capital Markets.
Mike Markidis
Thanks, operator. Good morning, InterRent team. Congrats on a very strong operating quarter. A couple of questions. I guess I'll start off just with the seasonal decline in occupancy. See the chart that you've got there. See it's in line with historical average. Maybe you could just unpack that a little bit more. I mean, I get that more people move just because it's a little bit warmer in the second quarter, but coincided with that, I would've thought more people lease units as well. So maybe just a little bit more color as to why we typically see that decline?
Dave Nevins
Hi. Thanks, Mike, it's Dave. So typically we do see this decline in that time of the year because we do have more people moving out and we're getting suites ready, but then again it picks up later in the summer with a strong rental demand. So I don't think it is any different than what we've normally seen in the past.
Brad Cutsey
It’s just natural transient move. People don't want to move in or move out in the cold. So typically the summer is, you'll see a lot more movement. And to be even further details, the further you kind of get Southwestern Ontario, that leasing season to stretch even further. Like you'll typically see more move out and move ins relative to colder climates such as Ottawa, Montreal and Southwest Ontario. So it's really, you don't want to move in, you're not looking for an apartment until you're ready to like in the summer and vice versa.
Mike Markidis
Okay. And I guess as you -- as turnover increases naturally in Q2, you guys would have higher economic downtime just from doing more work on in suites, I would think as well, right? Just given your business model?
Dave Nevins
Yes. Correct.
Mike Markidis
Okay. Great trend line, the chart on the operating revenue. I guess, I don't know how many quarters it's been now, but I guess we're at five or six in a row at kind of close to 10% on the rev line. If we think about maybe a year ago, it was occupancy gains. Now it's less occupancy year-over-year and more AMR and augmented by your incentive reduction or the incentive amortization reduction. So just given your comments on lower turnover throughout the rest of this year, how do you expect -- or how are you thinking about year-over-year operating revenue sort of as we move through the rest of this year and into next year? Like, is AMR going to -- as -- you are going to lose the incentive benefit. So I guess my question is, is AMR going to continue to march higher or market rents' turnover slows?
Brad Cutsey
We believe so. I think, I think the markets are so tight right now, Michael, that we don't see any pressure leaving off the AMR anytime soon. And unfortunately, for renters out there, it's going to get just tighter, given the amount of demand that's driven by immigration. So that AMR is going to continue to be under pressure. And you're right, going forward, top-line growth will be primarily driven by that. Also, you are going to have what's augment that will be -- is above guideline increases. But within our own portfolio, I think we mentioned this on the last call, was finding, getting creative with our communities and adding new homes within those communities, finding space and kind of converting and adding to that. And one of those examples would be Earnscliffe in Montreal. We have a community where we took Class C office space, which is quite -- almost obsolete type office space and created three to six homes, right? And we have a number of those opportunities that we have identified within our portfolio. So that should help to augment that top-line growth. And as well that hasn't hit our top-line as of yet.
We do have some commercial space that we have had made some inroads on, as far as leasing up that should also help augment that top-line with that AMR that you are talking about. So I think here we feel strong that we be able to continue to produce above high single-digit top line revenue growth in the foreseeable future.
Mike Markidis
Okay. That's great color. Last one for me, before I turn it back, more of a high level question. I guess we have had an announced change at the ministerial level for Canada's cabinet. And maybe if you could just give us a quick update if that actually means anything or if it's -- the change at the top, so to speak, if that's stalled or impacted your continued GR relations effort for you and your peers?
Curt Millar
It's Curt here, Mike. I think the -- I'll speak for ourselves and I think our peers will feel the same that, we are actually very encouraged with how the government is trying to work with private sector and all three levels of government to move things forward. There is a lot of moving parts with that. So it's not as fast as any of us would like probably, but we are encouraged by the progress. The fact that the minister that was with immigration and housing is sort of -- has moved over to the housing side, we think there'll be even a better tie in between the two and the need for housing supply to align with immigration policy, which is kind of what us and all of our peers have been advocating for. So we think it's a positive, not a negative by any means. And it's just going to take more time to continue to work through the different levels.
Operator
Your next question will come from Jonathan Kelcher at TD Cowen.
Jonathan Kelcher
First question, just on the operating costs in the quarter. Was that a pretty clean number or is there anything in there that for timing reasons may have gotten pushed to Q3 or Q4?
Curt Millar
It’s Curt here, Jonathan. No, it is fairly clean. I mean, there's always stuff that flows from one quarter to another just from timing perspective, but nothing major that would cause that to be off significantly. So from a quarter run rate perspective, I think it's pretty clean.
Jonathan Kelcher
And then how much -- you're talking about lower turnover, how should we think about that impacting operating costs?
Curt Millar
It's an interesting question. Let me get Dave and Brad also. It's an interesting question. I mean there's a couple of things that go with that, right? It should lower them a little bit, from the point of view of move ins, move outs, some of the extra operating costs that goes with that. But on a major turn, you’re CapEx-ing that versus expensing it if you're doing in-suite repairs and upgrading the suite. So you might see a little bit of a reduction, but I don't think you see a big reduction from that. A lot of your costs for cutting the grass, getting some of the properties clean, your utilities and all that other piece is not going to be affected by that. So I don't see a big decrease there. But Dave…
Bradley Cutsey
I totally agree, Curt, with the answer. I think the way to look at it is how many of your unit turns are you actually doing work to. And I think in today's environment, you'll take the opportunity to upgrade the suite. So to Curt's point, those will be capitalized costs. So to the point that you're doing it back to back -- you're right, Jonathan, you would see RM come in. But here at InterRent, we haven't -- that's not a big part of our business model, tunes back to backs. We take every opportunity that we have to put money back in and enhance.
Jonathan Kelcher
And then just switching gears on The Slayte. When would you expect that -- it sounds like the leasing velocity should pick up the back half of this year. When would you expect that to be stabilized?
Dave Nevins
It’s Dave here. So I'd say, first off, we're really happy with the traction that we're getting on the rentals. Team is doing a great job. The construction from the city is kind of wrapping up outside, so, which is really going to make a big difference, but we're looking to be in that 90% range before the end of the year.
Jonathan Kelcher
And then that asset, that will not be subject to rent control, correct? Is this new or is it because of the conversion?
Dave Nevins
Yes, correct. It's not subject to rent controls.
Brad Cutsey
And because the previous use was non-residential, so therefore it is counted as new.
Dave Nevins
Yes.
Operator
Your next question will come from Kyle Stanley at Desjardins.
Kyle Stanley
So your international student commentary in your disclosures continues to be very positive. I'm just wondering in your discussions with the universities in your markets, what's the outlook for demand from the student population as we approach the fall?
Dave Nevins
It’s Dave here. The outlook is good, it is strong. It's backed, it is normal. The student population is picking up. We see the trend is going in the right direction. So we're anticipating it to be strong throughout the rest of the leasing season and into September.
Brad Cutsey
Yes. And I mean that's anecdotal and when we are talking with -- and also to augment that, we're talking with our actual leasing teams on the ground. We're seeing we're back to pre-pandemic levels, but if you want something to kind of hold -- hang your hat on, I'm looking over at Renee and making sure I'm not misspeaking, but I'm pretty sure study permits are at an all-time high, and that's something that's out there and you can hang your hat on. So we're seeing it, are in discussions with their leasing traffic with their teams and discussions with the different institutions that we try to partner up with. So, we're quite happy with what we're seeing on that front for sure, Kyle.
Kyle Stanley
Okay. Thanks. I guess, so with that in mind, would you see occupancy trending maybe back towards where we would've finished the year last year or where we were in Q1 throughout the balance of the year?
Brad Cutsey
Yes, I do. August is an all important month when it comes to that student population. Believe it or not, there's still a large number of the student body that actually lands in Canada and find short-term accommodations and then secure longer term accommodations. And the other thing I would mention, I think we mentioned this previously on other calls, is we have a bigger uptake of leases expiring in September than we would have and that was created by pandemic. So through the next couple of months will be all in telling, but there's nothing to suggest that what we've seen to date that we won't be able to mirror the successes that we had towards the end of the last year.
Kyle Stanley
Just switching over to the disposition front. I mean, great to see the post quarter disposition. Just wondering if we get a bit more detail on the process, the type of buyer, number of interested parties. Just I guess what's going on in the market now that -- you mentioned potentially $75 million of incremental proceeds and how do we get there over the next 12 months?
Brad Cutsey
Yes, I'm not going to get into too much of the details over that program, but for the first time we thought we try to help the analyst community with what kind of numbers that we could be potentially looking at as far as the proceeds, just to understand the whole recycling of our capital allocation and the different opportunities that we have in front of us. I would say, Kyle, it still does remain more of a smaller private buyer for the type of assets that we are disposing of. So the process is a much longer process, and you might anticipate when it's a institutional buyer. And the main reason being -- and it's no shocker, it’s the conditions on financing, right? They tend to -- the private buyer will tend to finance at a higher leverage. And the process right now to get through CMEC is a lot longer than it what has historically been. So that's been one of the challenges. So we're not going to come out and -- think we have different communities at different parts of the process right now within that disposition program. So we are confident and I believe that we should be able to achieve what we put out there. But, only time will tell.
Kyle Stanley
Perfect. And just one last one for me over to Curt. Just, you talked about using the early rate locks when appropriate for the debt refinancing. I'm just wondering, just given the higher in-place rates for the maturing debt in 2024, it sounds like you have already made progress on that, but just curious, like, how much of that has maybe been rate locked to date? And where would that rate potentially be?
Curt Millar
Thanks, Kyle. The variable rate debt that we have in 2024, none of that is locked at this point. We got to a point in the cycle where we can rate lock it, but we didn't like where things were at given what the 10 year money was like. So we are ready at any point between now and the time it gets through CMHC. If we see anything like what happened with SVB and rates come back in, we are ready to do it and move forward with it. But at this point, that full amount is sitting at market rate.
Operator
Your next question will come from Brad Sturges at Raymond James. Please go ahead.
Brad Sturges
Hi, good morning. Just to follow-up on Kyle's question there on the financing you are looking to do at the end of the year. At this point, do you have a preferred term that you might look to execute on? And would there be incremental liquidity or proceeds that you would generate from that financing at this stage, if you get it done by late Q3 or Q4?
Brad Cutsey
I mean, one of the big ones we were working on this year was the takeout on The Slayte, which just closed yesterday. So that's in the bag now. We probably have another 10-ish million on equity takeout on the ones that are coming through the remainder of this year. And we have already started working on most of the front half of 2024 and into basically the fall of 2024, probably somewhere between another $70 million to $80 million of equity takeout potential there. As far as -- that will get us through 2024 and see where things are at.
Brad Sturges
And do you have a preference, sorry, on term at this point, given where rates are today? I mean, if you were to refinance, is there -- you prefer to be longer or shorter?
The Slayte
I think the -- what we have moved to -- we talked about this over the last few calls with what happened with variable rate exposure and everything around that and what we have been communicating to the market for last few quarters is that we really are trying to make sure that we don't take a bet on any given year and smooth out our mortgage ladder. So we will continue to do that. I think five year money is more expensive than 10 right now. And you can always throw 10 year money on. And if rates come back in, you can always look at doing the parity pass-through or top up second type of mortgage on top of it three or four years out with the value creation and the lower rates if it makes sense. So I think we will probably trend to the longer side and we will continue to fill out the mortgage ladder.
Dave Nevins
And I would add to, I think the team has done a really good job, filling in that mortgage ladder. And then -- and dealing with any of the near-term expiries. So with that said, I think times on your side, given where we are with the recent rate hikes, right? I think, at least here in Canada, I don't want to -- I'm not paid enough to call the fixed income market, but I would say, it certainly feels like deferred rate hikes were pretty close to the top, if not at the top.
So with that said, I think now time's on your side where obviously we run 12 to 18 months ago, you were racing against the clock.
Brad Sturges
Just to go back to the capital recycling of the asset sales. I just want to clarify that $75 million, that was a net number, correct?
Curt Millar
Yes.
Brad Sturges
Is there any debt on those assets or is that a clean -- like are those assets on encumbered?
Curt Millar
No, there would be debt on those assets.
Brad Sturges
How would that…
Curt Millar
Just to be clear, sorry, that $75 million is net of the debt. Like that the -- fashion your jeans at the end of the year.
Brad Cutsey
That's not asset value. That's net proceeds.
Brad Sturges
And how would that leverage profile look compared to where you're running across the portfolio?
Curt Millar
It would be similar to our portfolio average. I mean, it's going to depend a little bit from 1Q to the other, which one's hit because not all of them are exactly at that number. But you'd be in that range. So if you do the back math, which I think is what you're getting at, you're probably in around $200 million.
Operator
Your next question will come from Mario Saric at Scotiabank.
Mario Saric
Just sticking to the asset sales, how -- to the extent you can provide the detail, like how thorough of a review of the portfolio would you say the REIT went through to get to that $200 million growth level? And is there an upside to that number?
Brad Cutsey
I think we've gone through a very thorough review. Like meaning -- I'm not really sure how to answer that, Mario. Like, obviously -- I'm looking at Curt, if Curt wants to say -- also comment, but obviously we will look at what we believe the potential is over the next five to seven years, and we will look at different benchmarks such as IRRs and different things, and then what other opportunities we have that we are currently looking at over the next 12 to 24 months. And we got to weigh the two off of each other.
And I think at the end of the day, I think we've shown in the past that we have disposed of assets that we believe we've taken as further as we can. Now, that doesn't necessarily mean a different buyer can't do something different with it, right? So it's all how it fits into some of these portfolios. So it's very much no different than portfolio management with stocked-in buyers is how do these different communities all fit within as well? So, there's a lot of different variables that take into consideration. But there's obviously a very thorough financial review and what we believe the asset or the community can produce over the next couple of years. And then also looking at it, how does it fit within our own operating and strategic importance within our portfolio. Curt…?
Curt Millar
I think you've answered it. I think that that's where I was going to go with it, is that, we look at it every year. Every year as part of our budgeting and our planning process, we look at all of our properties, we look at the yields, we look at everything. In certain times when you're having a lot of high turnover and big rents growth and declining cap rates and declining interest rates, you see a lot of upside potential in those properties and you want to hang onto them to capitalize on some of that. As you get into a market where interest rates are going up, turnover's going down, you got to look at the total asset management side of things and where you see the returns going and look at culling. And that's something we've done over time at different points in any cycle, right? We did it with Homestead, we did it with Kingston, we did it with Sarnia over the years.
Mario Saric
I was just curious in terms of whether like these are assets that had like specific non-solicit bids on it and things like that versus a more comprehensive review?
Curt Millar
No, it's more of a review from our side.
Mario Saric
Shifting gears to the operational side. I think Brad, you mentioned an expectation for above high single digit top line growth for the foreseeable future, given the strong demand you're seeing in the market. How sustainable is 0.6% same-store expense growth year-over-year over the next couple of quarters?
Brad Cutsey
On the expense growth side, the 0.6% in Q-over-Q. I think it boils down to some of the costs just being related to salaries and reviews. And we do that on an annual basis. So that's, I think partially why you saw Q1 sort of be a little higher is that's when all those rolled through. So, I think Q2, Q3, Q4 will continue around the lines where we are today. Q2 is a good run rate on that side, all that -- because I'm talking operating costs, not the utilities portion of our overall operating expense, because that fluctuates for every quarter as you know. So I think, overall for the year, we've talked in the past about being around that 5% mark and I think we'll still be around that when you look at an overall annualized basis.
Dave Nevins
And we have talked in the past, Mario, that we think 2024 was going to be a year that we weren't going see the same level of pressure on the operating costs. And we still believe that. We’ve seen it in supply chain and within our -- on the supply side, but we're also seeing it on the labor side. Back to Curt's point, we believe the majority of the wage pressures have already being inherent in the numbers.
Mario Saric
And then just lastly maybe kind of going back to occupancy, appreciate the commentary on the seasonality. Can you share with us where total portfolio occupancy stood at the end of July versus the 95.4 quarter end?
Curt Millar
We haven't typically sort of gotten into off quarter end disclosure around it. I can tell you that from a historical perspective, it usually, June to July isn't a big improvement in the occupancy. It typically starts to get better in August and in September, because you get that movement for August and September move-ins. So July wouldn't have seen the improvement over June. It really is the latter half of the Q where you see that ramp up happen.
Mario Saric
But as Jon mentioned before, if we go back over…
Curt Millar
Sorry, Mario, just said different, we are back into pre-pandemic type leasing cycle. There's nothing today that we look at that's abnormal from what we've seen prior to the pandemic. So we're right back in, other than the fact that there were more leases that were new leases in 2022 in late Q4. That'd be the only difference than from previous cycles. So we are quite encouraged and we remain quite bullish on the fundamentals of our business right now.
Mario Saric
Got it. Okay. So if we go back over time and we look at that chart that you included and we take an average Q2 or Q3 versus Q2 occupancy, we should see kind of a similar bump in relation to the total leverage?
Curt Millar
Yes.
Mario Saric
Okay. And then, coming back to Mike's question on the seasonality. Does that -- is that seasonality fairly similar across the markets? Like, I know that Ottawa, the change in occupancy was higher than what we saw in other markets Q2 versus Q1. So is that all just weather related, as you mentioned or was there something else going on there?
Curt Millar
No. I don't think there is -- like Brad commented earlier that there is a bit of a change, like a little bit different in Southwestern Ontario versus Montreal versus Ottawa. And I'm looking over at Dave to date a lot closer to this time. So maybe I will be quiet for a second. Let's see if that's registered.
Dave Nevins
I think it did. But even, like, even Vancouver has a longer leasing season, right? So Vancouver, Southern Ontario is a lot different, just because weather related, right? And so people move. But, this -- I think all regions, it looks very similar to a normal year, pre-pandemic.
Mario Saric
Okay. Last one for me. Vacancy rebates as a percentage of revenue went up 60 basis points quarter-to-quarter to 4.8%. Is that also primarily kind of seasonality related, or did you increase incentive offering in any specific markets?
Dave Nevins
Sorry, Mario, it was hard to hear the beginning of that question. Could you just repeat it?
Mario Saric
Sure, sorry. So vacancy rebates as a percentage of revenue went up 60 basis points, from Q1 to 4.8% of revenue. Is that uptick also primarily seasonality related or were there incentive offerings in specific markets or buildings during the quarter?
Dave Nevins
No. it wasn't related to the promos. That was pretty much flat. It was related to just the normal uptick in the -- with the vacancy side or the downtick in the occupancy.
Operator
Your next question will come from Dean Wilkinson at CIBC. Please go ahead.
Dean Wilkinson
Thanks, and good morning. Brad, you guys are one of the few who have been able to actually successfully do an office conversion. When you look at Slayte at around 520 a door, how would that compare to, say, ground up new construction?
Bradley Cutsey
Well, it all depends where are you at. But I mean, that's still at a discount. It's not as much of a discount, to be fair, Dean. So you don't go into this, particularly looking at this, that it's going to be a lot cheaper, if I'm going to the ground up. And it's certainly from an ability to get things done, it does take a lot of expertise and skills and time, because you are dealing with the unknowns. But I think that's something -- and you just highlighted, I think that's something that really highlights about this team and our partners with the office converters. But you are really doing it for the reason that you believe: One, it's really well located; and two, there is a sustainability aspect of it, right? So you reduce carbon footprint by both -- the carbon savings are roughly call it 55%, when you are looking at this.
So when you look at the fact that if you can make meet your economic returns, right, your threshold and then you look at that you are converting obsolete space in the downtown and be able to do it by reducing what would normally be if you get a new build by 55%, there's a lot of different stakeholders that are winning, right? Our stakeholders are winning from a sustainability standpoint. Our citizens in Ottawa are winning because we delivered much needed homes and we're still making and meeting our return requirements. But I wouldn't say the main motivation is from a cost perspective.
And it's quite the opposite. And then really we're working with governments at all levels of governance to help explain. Yes, office convergence can be a part of the housing supply issue and a solution to it. But it will need to take a lot of collaborations with municipalities, with the provincial government. And even at the federal government. I know, Curt, you've had some discussions with CMHC and how they can get involved.
Curt Millar
Yes. And we continue to work with CMHC on that front. They're quite interested. They've had a lot of senior people looking toward the asset. We're working with the City of Ottawa with our development partners in the City of Ottawa to look at different potential around it. So there's a lot of encouraging there and not nothing to really report yet. A lot of movement and a lot of interest. The other thing that I would add is that time to market, you probably shave off anywhere from a year, and Dave, correct me if I'm wrong, about 1 year to 1.5 years.
Dave Nevins
Yes. Around there.
Curt Millar
In your time to market with the conversion, because your superstructures already done.
Dean Wilkinson
I guess that does actually create a significant cost savings just vis-a-vis the carry on the construction financing, right? Because that's 6%, 7% money. So was that the same view on the sort of post quarter acquisition for the 25% stake in the next office conversion project? Can you talk a little more to that or is that something we can look forward to in sort of coming months and quarters?
Bradley Cutsey
Well, I think it's something that we can look forward to in the coming months, but we really love the location. What I can tell you is we really love the location and we actually like the footprint of this structure even more so than Slayte. So we've learned a lot from Slayte. We're extremely happy with the progress and what we've seen at Slayte. And I think it's been -- like I said, it's been a win-win on a lot of different fronts to Slayte. So we were really excited when this opportunity came up that we thought that we can mirror something similar to the Slayte.
Dean Wilkinson
We'll stay tuned on that. And then Curt, you mentioned that the Slayte takeout financing was completed. Are you guys able to provide where that sort of appraised out for the financing or is it just going to stay higher and that's it?
Curt Millar
Look, I'm not going to get into the appraisal because, a third-party appraisal, our internal number and what CMHC uses for their valuation on a financing can all be a little bit different. What I can tell you is that the amount we raised on this. We were able to actually take advantage of a dip in the market and lock the rate in a little while back on it. So we were able to lock it in at basically an all-in rate of about 3.9%. And we were able to pull out just a little north of $60 million on it.
Operator
Your next question will come from Gaurav Mathur at IA Capital Markets.
Gaurav Mathur
Thank you and good morning, everyone. Congrats on strong operating performance. Just very quickly. When I look at your maintenance CapEx number and notice a slight uptick, it'd be great if you could provide some color on what's driving that and how we should think about it over the next couple of quarters?
Curt Millar
I think if you look at it compared to last year, if you annualize the sort of first half of the year compared to last year, it's actually down a little bit. If you go back and look at it over several years, it's up, but it's not really up by much more than inflation, if you will. And I think when you look at the -- I always worry when we show this number to be honest is that when you're showing a couple of months and you're annualizing the number, that can be tricky because there's a lot of timing issues that can hit maintenance CapEx, right? So you just take two quarters and annualize it, it's a little bit tricky. We do it to try and give people a sense. But when you sort of take the history of where we've been tracking over the last five years and you look at a normal CPI type inflationary rate on that, it feels right in line with where we have been.
Gaurav Mathur
And then just switching gears to the capital recycling program and the sites that you have identified for dispositions, just could you provide some color on what the buyer pool looks like and what bid ask spreads are across different markets?
Bradley Cutsey
Yes, I'm not going to get too in much detailing with the disposition program because we're at various stages, so we really don't want to be self-dealing with my disposition program. So I'm going to start with that commentary and I hope everybody can appreciate that on the call and whatnot, right? So we typically don't provide this information, but we felt that quite honestly, we inherit for not providing it. Okay. So we're giving you what we believe is a realistic number that we can meet over the next 12 to 18 months as far as what net proceeds we believe we can take out. I can tell you that the portfolio and the different communities we're looking at selling, there's different reasons for it. Going back to Mario's question, there's being a full thorough review analysis from a financial standpoint and also from an operating standpoint and a portfolio optimization standpoint. I hope you can appreciate that commentary.
Gaurav Mathur
I do, and I appreciate the color.
Bradley Cutsey
But I would say, I'll reiterate because we have maintained this, and we've said this for a bit, the buyer pool for some of the communities that we're looking to dispose of are more typically private buyer, which makes a lot of sense because the majority of the rental stock is owned by the private landlord or owner.
Operator
Your next question will come from Matt Kornack at National Bank.
Matt Kornack
Maybe just taking the opposite side of that discussion from a capital allocation standpoint at this point, I know you did a bit on the NCIB, but where do you see the most attractive place to deploy funds at this point between kind of development, stabilized assets, buying back your stock or repaying debt?
Bradley Cutsey
Well, I'll start off with NCIB. We've always been on record of saying that we believe in buying back units when it's trading below its IFRS value. And we all understand that, but we are also being on record saying we are not going to lever up our balance sheet to do it. You saw that we were active. We did go firm on traditional on one of our communities, and we felt that this was -- we felt comfortable enough that this should close. And we went in the market, buying where our units are trading. Obviously, we were very frustrated as a management group that our units are trading where they are because when you look at the type of organic growth and organic growth that we feel that we see over the next two years, we are trading at well below our replacement value, call it, over 50%, when you have an assets that can generate double-digit organic growth.
So there is a major disconnect and we are having -- to be quite honest, we are quite frustrated with it. So for sure buying back our units will make sense. But there is also other capital allocation decisions that make a lot of sense too. When your line of credit is expensive as it is up in close to 7%, it makes a lot of sense to use some proceeds to pay down your line of credit, as one. And then we also have longer-term growth generating initiatives such as office conversions and their developments that will make a lot of sense of adding value on a NAV basis over the longer-term, right? So we have to, as a group, balance the short-term value creation initiatives with some of those longer terms. And I quite honestly think you are going to see a mix.
One of the easiest things to do is obviously in the short-term pay down your LOC and buy back some of the units, but you want to be mindful of your development program and your balance sheet to make sure that you have got enough conservatism and flexibility in your balance sheet to be able execute on those longer-term growth initiatives.
Matt Kornack
Okay. That makes sense. And then it's tough because the public markets are I would say much more yield focused than basis at this point. But how do you think about the interplay between those two? Because, obviously, you have assets that are well below replacement costs. But at their current point, they may not be yielding as much. So when you make investment decisions, what is the primary driver of your decision making?
Bradley Cutsey
That's really actually an easy one, because my network tied up in this thing and the majority of this management team and investors as well. So we are not waking up every day looking unit price is why we are frustrated because it dictates where our cost of capital is today. And we will govern how we allocate capital and how many opportunities we can participate in. We wake up every day going five years out, 10 year out, 15 year out. What does this entity look like? How much value have you created, and how much have we strengthened the operating platform? And I can tell you the operating platform is the nucleus of this. And we will continue to invest in our people and we will continue to invest in technology to make sure that we are industry leading and then in a position to be able to continue to provide above average industry growth. And over the longer-term, Matt, I think that is where you will eventually realize, and I think the market will eventually pay you for that.
Matt Kornack
That absolutely makes sense. And I guess that -- like, last question for me, but it's a tangent off of that. With regards to expenses and margins, we did see some expansion. But does some of that expense kind of benefit your investment in the platform in the form of PropTech or maybe doing more with less in terms of employees, et cetera? And is that margin expansion kind of sustainable going forward, given more investments in that type of operation?
Bradley Cutsey
I'm going to give you the shortest grasp of the answer ever, yes.
Matt Kornack
I'll take that for now. It's been a long call.
Curt Millar
We're happy with our PropTech investments and like a lot of investments when you're first putting the capital to work in them, it's a bit of a drag, because you're changing processes, you're changing systems, you're fixing things, you're correcting things, whatever. So it starts out as actually being an addition to your cost the first couple of quarters as you're pushing through these things. But I think we're seeing the benefit of it now. We've worked out a lot of pieces that we needed to work through.
And for us, we've built a solid foundation with those different PropTech investments that we've done. And we see ourselves being able to continue to build on them and actually find more efficiencies as we go forward. So we're very happy with the work we've done around that. Our investment in our CRM system, our investment in [Sweet Spot], which helps our operations team substantially, and our investment in 1Valet. All of them have really boded well, and we're very happy with all three.
Operator
There are no further questions on the phone lines. So I will turn the conference back to Renee Wei for any closing remarks.
Renee Wei
Well, that concludes the call today. Thank you everyone for your time. If you have any further questions, please don't hesitate to reach out anytime, and have a great day.
Operator
Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your lines.
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InterRent Real Estate Investment Trust (IIPZF) Q2 2023 Earnings Call Transcript