Canadian Apartment Properties Real Estate Investment Trust (CDPYF)
Q2 2022 Earnings Conference Call
August 11, 2022 9:00 AM ET
Company Participants
David Mills – Investor Relations
Mark Kenney – President and Chief Executive Officer
Julian Schonfeldt – Chief Investment Officer
Stephen Co – Chief Financial Officer
Conference Call Participants
Jonathan Kelcher – TD Securities
Kyle Stanley – Desjardins
Johann Rodrigues – Industrial Alliance
Jimmy Shan – RBC Capital Markets
Matt Kornack – National Bank Financial
Mario Saric – Scotiabank
Jenny Ma – BMO Capital Markets
Presentation
Operator
Good morning. Thank you for attending today's Canadian Apartment Properties REIT Second Quarter 2022 Results Conference Call. My name is Alexis and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions]
I would now like to pass the conference over to our host, David Mills. You may proceed.
David Mills
Hardly host, but thank you, operator. Before we begin, let me remind everyone that the following discussion may include comments that constitute forward-looking statements about expected future results and the financial and operating results of CAPREIT. Our actual results may differ materially from these forward-looking statements as such statements are subject to certain risks and uncertainties. Discussions concerning these risk factors, the forward-looking statements and the factors and assumptions on which they are based can be found in CAPREIT’s regulatory filings, including our Annual Information Form and MD&A, which can be obtained at SEDAR.
I'll now turn things over to Mark Kenney, President and Chief Executive Officer.
Mark Kenney
Thanks, David. Good morning, everyone. And thank you for joining us. Stephen Co, our Chief Financial Officer is with me this morning as is our new Chief Investment Officer Julian Schonfeldt. We are very pleased to have Julian join our team. He brings a wealth of strategic capital market and property investment experience to CAPREIT and we welcome him to our first investor conference call. Welcome Julian.
Turning to Slide 4, despite some lingering issues related to the pandemic and inflationary pressure on our cost structure. We are pleased to see solid increases in our NOI and NFFO in the second quarter. NFFO per unit was impacted by the 1.7% increase in the number of units outstanding in the quarter. Driving this improved performance was a 10% increase in revenues due to the contribution from our acquisitions increased monthly rents and much stronger occupancy at 98.2%, compared to 97.2% last year.
In May, we began purchasing our trust units for cancellation under our approved normal course issuer bid. At the end of the second quarter, we have purchased approximately 1.4 million units, which has since increased to approximately 1.8 million units as of the end of July, for an aggregate purchase price of $85 million. We believe given that our units are trading at a significant discount to our net asset value. These purchases are another way we are enhancing long-term value for our unitholders.
Turning to our six months results in Slide 5, you can see all of our key performance benchmarks were up including revenues, NOI and NFFO. Most importantly, market rent recovery is well underway. From an operations perspective, our ability to generate solid and resilient performance through all economic cycles is clearly demonstrated by the strong, consistent occupancies and growing revenues across our portfolio, as you can see on Slide 6.
Occupancies approved again in the second quarter, while net average monthly rents continue to increase. Our same property NOI is being impacted by the increased costs we are experiencing, which are higher maintenance costs, increases in utilities and higher realty taxes. We believe such inflationary cost pressures will impact our NOI over the next few quarters.
In addition, CAPREIT has an experienced team that is exploring alternatives to minimize usage and exposure to operating expenditures, including hydro sub-metering. As of quarter end, approximately 64% of the 59,635 suites in Canada are sub-metered or direct metered. Additional suites insights have sub-metering or direct metering in place that will be assumed by new tenants on turnover.
CAPREIT will continue to evaluate implementing sub-metering in the remaining suites and sites. Sub-metering lowers consumption resulting in a smaller environmental impact, lower operating costs and lower inflation exposure. Similarly, to protect against rising water and natural gas rates. Our utility teams continue to evaluate effective alternatives to mitigate our risk to rising utility costs.
Our leasing and marketing programs continue to generate increasing occupancies and average market rents as you can see on Slide 7. After two years operating under significant pandemic restrictions, our occupancy continues to strengthen, rising to 98.2% in the second quarter, up from Q1 and 97.2% in last year's second quarter. You can also see that rents for the total portfolio have risen 4.4% compared to the same time last year. Tenant incentives are continuing to decline to pre-pandemic levels, and we expect the majority of the amortization to be completed by the end of 2022,
We experienced a solid and positive trend in rent increases on turnover each quarter, since we bottomed out at the height of the pandemic in Q1 last year, as you can see on Slide 8. While turnovers were impacted by the pandemic over the last two years, we are now starting to see solid increases as we move rents closer to market, a 10.6% increase on turnover in the Canadian portfolio is solid result. And we expect to see this continue and grow through the balance of the year.
Our churn rate remains strong and are tracking at the historical trends of seasonal variations. Looking ahead, we are experiencing more in-person and online visits and we expect we'll start to see more higher mark-to-market increases in the quarters ahead, moving us toward the higher levels of increases we generated prior to the pandemic. I'll now turn things over to Julian, to outline how we are repositioning and strengthening our property portfolio.
Julian Schonfeldt
Thanks Mark. Turning to Slide 10. We continue to focus on increasing the quality of our portfolio through our active asset management program. Through 2021, our strong acquisitions team added 3,744 high quality suites insights to our portfolio, focusing on our key markets. Another 1,237 suites insights have been acquired to-date in 2022 with a further 300 suites subsequent to June 30. Importantly, almost all of our acquisitions in 2022 represent new build assets in our targeted geographies. These new additions to our portfolio are in line with CAPREIT’s strategy of rejuvenating its asset composition and increasing our geographic diversification into desirable major markets in Canada.
Additionally, we're happy to be contributing to stimulating the market for new build multifamily assets, contributing to the increase of new supply in Canada. Looking ahead, our acquisition pipeline remains strong and we intend on leveraging our best-in-class acquisitions and operations platforms to generate further accretive portfolio growth in the quarters and years ahead.
In addition to acquisitions, CAPREIT is also using dispositions to advance its core capital allocation strategy. CAPREIT’s $18 billion asset base as a result of 25 years of acquiring operating and enhancing multi-family properties, some of our assets were bought decades ago with strategic criteria that no longer perfectly aligned with our current strategic objectives, making some of these assets non-core.
Many of these non-core assets continue to attract premium pricing and generate bids that are above our IFRS NAV. As shown in Slide 11, we've been selectively executing dispositions, which have so far amounted to approximately $350 million in 2022. These strategic dispositions not only enhance the quality of our overall portfolio, but also results in disposition gains and introduce an incredibly attractive source of capital to fund our capital deployment priorities, which we've previously discussed, being our new build acquisitions, MHC sites, and NCIB program. We're committed to increasing the quality of the portfolio and enhancing returns and unitholder value.
As you can see on Slide 12, we are making real progress in repositioning our portfolio to reduce our exposure to older value-add properties while increasing our presence in new build properties and MHC sites in markets where CAPREIT wants to increase exposure. Our strategy is enhancing our portfolio quality, diversifying our tenant base and geographical exposure decreasing our operating expense and capital expenditure exposure. Important in these inflationary times and ultimately enhancing our risk adjusted return profile.
With that said, I'd like to thank you for your time this morning. And I will now turn things over to my partner and CAPREIT’s new full-time CFO, Stephen Co for his financial review.
Stephen Co
Thanks, Julian and good morning, everyone. As you can see on Slide 14, our balance sheet and financial position remains strong and flexible at quarter end with the conservative debt to gross book value and continuing high liquidity. Our $1.2 billion in Canadian unencumbered properties, which includes the majority of our MHC properties provides additional liquidity should it be needed.
Looking at our financings in the second quarter. We locked in interest rates of 3.4% on our refinancings and extended our term to maturity. We expect to finance a total of $1.1 billion in mortgages and top-ups in 2022. Importantly, over 99% of our mortgage portfolio incurs a fixed interest rate protecting us from potential future interest rate increases. In total, if we were to access all our available sources of debt capital, we would have approximately $1.4 billion available at quarter end.
Slide 15 shows we are successfully managing our interest costs in Canada and extending the term to maturity. And in fact, our strategy to leverage 10 year CMHC insured mortgage debt has resulted in CAPREIT’s having one of the longest term to maturity and lowest weighted average interest rate among our publicly traded peers. This provides us with strong protection against renewal risk, given where interest rates are at today.
Additionally, another benefit of our disposition program is a lower reliance on debt. As I mentioned, over 99% of our mortgage portfolio incurs a low fixed interest rate, protecting us from expected future rate increases. As of today, we have locked approximately 72% of our 2022 maturing mortgages at a 3.15% interest rate.
Further to our strong and flexible financial position, looking back over the last few years, you can see on Slide 16 that we have met our goal of maintaining a very conservative debt and debt and coverage ratios even through the pandemic. This conservative approach underpins the stability and resiliency of our business and the sustainability of our monthly cash distributions to unitholders. This focus on maintaining one of the strongest balance sheets in our business will continue going forward. Our mortgage portfolio remains well balanced as shown on Slide 17. As you can see in any given year, no more than 14% of our total mortgages come due, thereby reducing risk in the rising interest rate environment.
Looking ahead, our current ability to top-up renewing mortgages through to 2036 will provide further significant liquidity in the future. As we expected, interest rates have risen after the Bank of Canada announces four policy rate increases so far this year. In anticipation, we moved up the refinancing opportunities for our 2022 matured mortgages from second half of the year by paying some hedge costs and prepayment penalties and we’re able to achieve financing costs savings through closing on or pre-locking rates for those five year and 10 mortgages. Their rates were 2.8% and 3.3% respectively, lower than the current five year and 10 year estimated rates of approximately 3.6% and 3.7%.
I’ll now turn things back to Mark to wrap up.
Mark Kenney
Thanks, Stephen. Looking ahead, we continue to see a number of very positive value drivers that we are confident will generate strong and growing return for our unitholders over both the short and long-term. We will continue to focus on our proven asset allocation strategy as detailed on Slide 19.
On the apartment front, we are targeting the acquisition of new build modern properties in well located markets in Canada’s strongest centers. Yields are attractive. Growth is strong and stable and CapEx is modest. We also see condo rental rates increasing significantly in major urban centers, increasing the appeal of our more affordable rental rates.
With respect to our MHC focus, revenue and revenue growth are as robust as our apartment properties and have a very low risk profile with residents owning their own homes, CapEx needs are significantly reduced. Additionally, with home ownership costs rising significantly across the country, CAPREIT’s large MHC portfolio provides an affordable alternative for families looking for quality residences at a truly affordable cost.
Our third focus is on our NCIB program. While our unit price remains disconnected from the strong price that we are seeing in the private markets, we will continue to crystallize the value spread and execute instant value creation for our unitholders. Key to our growth in the coming months, we have the ability to capitalize on a number of market trends. Demand for our quality properties is growing as immigration accelerates with new Canadians seeking affordable homes in our largest urban markets. The return of international students is also contributing to the increased demand. The pandemic generated what we call household consolidation as young students and young people return to home to save costs and seek safety.
These young people are now moving back to rental accommodations as offices reopen and in-class learning returns. Demographics are also on our side as the growing seniors population looks to the rental market to meet their needs. We believe our quality and well-located properties offering more space on one floor at affordable rates, we’ll see increased demand by seniors looking to capitalize on the significant equity in their homes.
We also see families looking to quality rental accommodation, including our MHC properties as a highly affordable alternative to the increasing cost of home ownership. These are an excellent solution. Additionally, cash flows will increase as we prudently and responsibly increase rents.
Finally, on our ongoing property investments, as outlined on Slide 21 are reducing our costs and reducing our exposure to commodity prices through energy saving and other initiatives. Our technology solutions are increasing our operating efficiency, enhancing resident safety and making our properties more attractive and helping us meet our ESG commitment to enhanced environmental performance.
We issued our most recent ESG report on June 10. In it you’ll see significant progress that we are making with our environmental, social and governance performance as detailed on Slide 22. On the environmental front, our investments in energy efficiency have generated an 11% reduction in consumption and a 10% reduction in greenhouse gas emissions since 2010. Not only our ESG programs, improving our environmental footprint, they are also reducing costs. Looking ahead, we remain committed to our ESG program and look forward to keeping you updated on our progress in the years ahead.
To further strengthen our operating platform, we have added significant depth and experience to our senior management team over the last few months. The new members joining our team on Slide 23 and other additions reinforce our ability to capitalize on opportunities in our markets, ensure continuing strong and resilient operating performance and build on our track record of generating long-term value for our unitholders.
In summary, we remain very excited about our future. Our strategy of acquiring new build properties increases portfolio quality, diversifies our asset base, reinforces revenue growth and reduces our CapEx exposure. Our focus on high demand locations in strong major markets across Canada is responding to the strong population growth and is meeting the need for more housing space. We continue to leverage our best-in-class acquisitions and operation teams to create value throughout our portfolio.
Our industry leading balance sheet, leverage and liquidity position provides stability and the ability to grow going forward. And with demographic trends and increasing immigration, we are confident we will continue to drive value for our unitholders in the years ahead.
Thank you for your time this morning. And we would now be pleased to take any questions that you may have.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from the line of Jonathan Kelcher with TD Securities. You may proceed.
Jonathan Kelcher
Thanks. Good morning.
Mark Kenney
Good morning.
Jonathan Kelcher
First question, just on the mark-to-market turnover, the turnover uplifts that you’re getting. It looks like they’re sort of trending back to 2019 levels. Do you think you get there over the course of the next couple of quarters? And really, do you think the market might be stronger now than it was pre-pandemic?
Mark Kenney
Yes. I think our predictions are coming true. I think we called Q3 is the – as the strong quarter, the evidence is clear. The ruler analogy that I’ve given in the past still holds true. And we’re getting very, very quick uptake and our pricing teams are obviously looking at inventory and adjusting pricing relative to inventory by the day. So we’re very, very encouraged that it’s feeling more like the first quarter of 2020.
Jonathan Kelcher
Okay. That is helpful. And then just, I guess, the new slide that Julian spoke to just on the portfolio repositioning, do you have targets? Do you have set targets for value-add versus new build versus MHC?
Mark Kenney
No, we just remain opportunistic. At the end of the day, you can only buy what’s in the market and you can only buy what makes sense. So we’re extremely conservative as you have heard us say in the past Jonathan with our underwriting practice. So it’s a matter of things penning out. We are not – we do not have ambitions of CAPREIT to grow bigger. We have ambitions of CAPREIT to become a higher quality portfolio with stronger earnings per share. And if we have to do that through recycling, we’re going to do that.
Jonathan Kelcher
Okay. And where would the development fit into that?
Mark Kenney
Again, it’s opportunistic by site because every site’s a little bit different, but we’re extremely open to still looking at development, providing it pans out, and we are very ambitious on growing our development team. The development team has now grown to the largest size in CAPREIT’s history. But it’s extracting value through the sale of land or the sale of assets, once we can recognize and crystallize density, we’ll do that as well. But it’s on a property by property basis.
I can tell you that we are a cautious organization, as we’ve always said. And the first few projects you see come to market for us will probably not be the biggest projects we’ll do in CAPREIT’s history. We just – we want to wade slowly very open to selling our land as much as we are building on it.
Jonathan Kelcher
Okay. I’ll – thanks for that. I’ll turn it back.
Operator
Thank you, Mr. Kelcher. The next question comes from the line of Kyle Stanley with Desjardins. You may proceed.
Kyle Stanley
Thanks. Good morning, guys.
Mark Kenney
Good morning.
Kyle Stanley
You’ve made really strong headway on the capital recycling program year to date. I’m just wondering, do you believe there’s still a decent amount of wood to chop on that front?
Mark Kenney
We’d like to chop that wood all day long. We’ll stay opportunistic with sales and where we’re seeing very strong pricing in some of the value add assets. The wonderful matching exercise of buying our stock on super sale is an easy one to pan out. So we really are embracing the notion of hydrating the portfolio through either acquiring new assets or buying back our own stock. As Stephen talked about, we’ve got this tremendous debt ladder of low interest rate, long debt. And if I can buy that at significant discounts to NAV, it’s what you call in real estate, a complete no brainer.
Kyle Stanley
Okay. No, fair enough. And you mentioned the various kind of strategic uses of capital you have, including the buyback and the rotating into newer build outs. How do you make those decisions and has that criteria shifted at all? Obviously, I mean, with the stock trading at a discount to book obviously that pushes you more into the NCIB. But just wondering how you kind of balance those things.
Mark Kenney
Geographic diversification is one criteria. We do try to pan out return on assets five years out. We say 10, but really you can only count on five. So you take into account CapEx type investments. We look at the maturity of the asset, how long we’ve held it for, how optimal we think it is. And we look at fit. We sold a couple of 1.5 caps last year to developers. It just wasn’t in our wheelhouse of expertise. So again, if I can match 1.5 cap sale with buying back CAPREIT stock in the low to mid 4s I’m comfortable doing that. So there’s just a variety of factors.
You have to match the buyers with the ability to deploy the capital. And it’ll be a real mixture. We’ve seen some very interesting new build assets that will have to really make the decision, do we buy back our high grade stock or do we buy into high grade properties? Not a bad problem to have.
Kyle Stanley
Yes. Couldn’t agree more with that. Just one more, this is probably for Stephen. I’m just wondering if you could provide some color on the sequential decline in the other OpEx line. Was this just seasonal or were there some other factors there?
Stephen Co
Sorry. You were saying the sequential decline in OpEx?
Kyle Stanley
In the other OpEx line.
Stephen Co
On the other OpEx line, yes, they’re basically seasonal decline. But if you look at the normalized NOI margin going forward, I mean, that would be a good run rate for you to project up for the future quarters.
Kyle Stanley
Okay, perfect. That’s it for me. I’ll turn it back. Thanks guys.
Operator
Thank you, Mr. Stanley. The next question comes from the line of Johann Rodrigues with Industrial Alliance. You may proceed.
Johann Rodrigues
Hi, everyone. Just further on the asset sales. Are you listing those or are they unsolicited bids? And if you can maybe give a range of the cap rates of the stuff that you’ve sold in Toronto, East York and Ottawa?
Mark Kenney
Well, it’s always a mixture. They were listed the deals that we did to the buildings in Ottawa, we came to agreement with a joint venture partner to take those to market. We did that in a listed process. The same thing happened in Toronto. Cap rate wise, we targeted assets that we think again, we’ve maximized value where we can recognize high 2, low 3 cap rate type transactions. And we’ll continue to kind of plot around at that pace.
Johann Rodrigues
Got you. Okay.
Mark Kenney
The guiding principle just Johann on that is our IFRS value as you heard Julian talked about. We also get consideration to what the government will look at. And when we can exceed those values and achieve all the other objectives, then we’ve got something that we’ll consider.
Johann Rodrigues
Got you. Okay. And then just on the new build versus value-add, what is the difference in IRS if you’re buying today, like just say you’re buying a new build property right next to value-add, what would be the difference in your IRS?
Mark Kenney
Well, just go to cap rate and start with like, value-add assets are still selling and again, the high 2s, low 3s. And if you’re looking at low rise suburban new build, which is kind of what we’ve kind of targeted ourselves around, you’re talking low 4s. Low 4s, and again, another metric that we pay very close attention to is price per foot cost in these new builds. And what we’ve realized is that a lot of the new builds that have come to market are probably a good 20% below replacement cost. That’s an unheard of number to walk into a brand new asset below replacement cost without the development risk. Again, I think pretty smart real estate decision.
Johann Rodrigues
Okay. Thanks. I’ll turn it back.
Operator
Thank you, Mr. Rodrigues. The next question comes from the line of Jimmy Shan with RBC Capital Markets. You may proceed.
Jimmy Shan
Thanks. Good morning guys. Just to follow up on Johann’s question on the value-add versus the new building. I guess when I think about value-add, I think about there’s a lot of embedded mark to market, right, that could come down the road. So I guess the question is, kind of what makes it noncore, because yes, you may be selling up at a low cap rate today, but maybe on a longer-term, it actually looks at the same or even higher than some of the new builds. Maybe talk about that. And then the second question is on just in terms of what’s the expectation for more asset sale for this year.
Mark Kenney
Yes. I would just say that again, I go back to the starting point is kind of pure – our number, not broker number, our number cap rate kind of calculations. And again, we shift our mind to looking at what’s going on in Canada. What is going on with housing? What’s going on with housing supply? And what we see is the tide is rising on rents in all asset classes. So it’s not the old game of mark-to-marketing and repositioning and getting those increases. That is still there.
But for an asset that we’ve held for 20 years or more, the reality is we’ve done a lot of that heavy lifting. So then I look at other brand new assets in an backdrop macro environment where rents are going up and in an environment where in many cases the regulatory environment is different to capture those market rents even for renewals, we see opportunity. And this isn’t a broad-based large sweeping change. We have to stay on this path and over time I think do a better job of geographical diversification and move the quality ladder in the portfolio higher.
We’ve got – we started with – looking back a couple years ago, I would’ve characterized CAPREIT’s portfolio is being one of the highest quality apartment portfolios in Canada to begin with. We’re just going to the next level now.
Jimmy Shan
Okay. And what would be your expectation for the rest of the year in terms of asset sale?
Mark Kenney
Again, it’s opportunistic. If you ask me what’s on our desk today in terms of deals that we’re looking at, I’d have to check with Julian, that’s probably $600 million to $700 million, high likelihood, will do zero of that. So we’re always underwriting a pretty robust pipeline of opportunity. And I’ve never been confident saying exactly what we’re going to do. I can only kind of describe the environment, but there’s a lot of deals in the marketplace a lot. Even with these higher interest rates where we do think that there will be the opportunity for yield spread.
Jimmy Shan
Okay. Okay. Thanks guys.
Operator
Thank you, Mr. Shan. The next question comes from the line of Matt Kornack with National Bank Financial. You may proceed.
Matt Kornack
Hey guys, I guess, it’s a continuation of Jimmy’s comments there. But I think from your answer, you’re essentially saying that you can achieve similar type rent growth in the new assets as some of your existing assets given the rent control regimes with lower CapEx. Is that a fair assumption? I guess, it would be more economically sensitive and that it’s at market today. But is that how we should think about the rent growth potential within these new properties?
Mark Kenney
I think that’s fair. I would add – I would just add that we know all your markets are at rent, regulatory intervention does happen, you’re in a good spot for maintaining value.
Matt Kornack
Fair enough. And then on land value within your existing portfolio and how to potentially get at that and provide new supply, is there an opportunity to sell the land to a partner that would develop and then buy back the asset or a portion of the asset on completion, if you don’t necessarily want to incur the development risk or dilution associated with that? Or is that something you’ve entertained at this point?
Julian Schonfeldt
Matt, this is Julian speaking. We’re considering all options and all alternatives there. Specifically what you mentioned about entailing the land and then selling it there and recognizing the value. Like Mark said, it’s case by case, but if I can get 90% of the value for 10% of the work, unless a developer squeeze out the last 10% of value and do 90% of the work and risk and take the dilution for a few years, sure, we would consider that. But it really is case by case and parcel of land by parcel of land.
Mark Kenney
Especially in an environment where our stocks on super sale. And we can instantly deploy that small amount of gain that we’ve given up into an even greater opportunity in buying CAPREIT stock.
Matt Kornack
Okay. No, that makes sense. And then I guess, nothing in Canada's easy government wise but our tax system isn't entirely great in terms of capital recycling, but how should we think of the ability to manage tax in this process?
Mark Kenney
Yes, so we're actually if you're talking about the taxes that are associated to these sales, we're looking at how we're going to manage that for our unitholders. And that's something that we're going to take a keen look at and have something in place hopefully by year-end.
Matt Kornack
Okay. Thanks guys.
Operator
Thank you, Mr. Kornack. The next question comes from the line of Mario Saric with Scotiabank. You may proceed.
Mario Saric
Hey, good morning. I wanted to start off folks that, I wanted to touch on the IFRS valuation and kind of the $400 million give or take decline. Can you break that down between cap rate and any underlying changes in forecast NOI?
Mark Kenney
I'm going to let Stephen take it, but I just – before I do, I just want to reiterate, we've had a very conservative approach at CAPREIT over the years at calculating our valuations. And when you do this by quarter, you have to really kind of assess what's happening in the quarter with trades and really talk on The Street and how things are looking. And this is a process that does trade change quarter-by-quarter, but we felt it entirely appropriate to be as transparent and honest with our investors on being conservative on the valuation approach. So I'll let Stephen kind of build on the actual NAV calculation process and how we look at things.
Stephen Co
Yes. So just in terms of how we look at on a quarter-to-quarter basis, our methodology hasn't changed. I mean, we have discussions – various discussions with brokers, with our evaluators and we have extensive discussions internally around values. And as you already know, there's been volatility around interest rates, inflationary pressures, and also you could say they've limited buyers and sellers. But there are strong fundamentals, you see our stabilized NOI has increased but in light of all that, when uncertainty does exist, we believe that conservatism is the right approach.
So the adjustment really is more of a conservatism decision. And you can think of when we usually think about values, evaluators are usually plus or minus 10% in terms of difference in how they look at the asset, we're taking the more of the lower end of the range or more conservative range – point in the range, actually. So that's how we look at the values. And as you've already pointed out, stabilized NOIs fundamentals are strong.
So you can see that in our stabilized NOI on those assets. But if we look at, if we were trying to dissect the cap rate increase, I would say, part of that, there was an adjustment for conservatism and a little bit is also just to ensure that we don't bring up our values too significantly. So we've adjusted through the stabilized NOI component.
Julian Schonfeldt
Mario, it’s Julian, I'm just going to layer on there. As Stephen mentioned, our lower values, they're purely accounting conservatism and they have nothing to do with actual transactional evidence in the market over what's been a relatively quiet summer and more importantly, they have zero bearing on our price expectations for our disposition program. When I'm looking at our disposition program, I don't even consider our Q2 values. My starting point is the Q4s and then we have comprehensive discussions with our acquisitions team that is always active in the market and really has their finger on the pulse.
Mario Saric
Okay. So maybe just a couple follow ups then in terms of the breakdown of the $400 million between NOI and cap rates, what you're saying is 100% of the $400 million loss is related to higher cap rate and none related to any impact on – in terms of NOI…
Mark Kenney
Yes, majority of it. That's correct. I mean, there's some CapEx in there, but yes.
Mario Saric
Okay. And then secondly, on the $600 million to $700 million of assets that you're looking at for sale, are you able to quantify how much of the $400 million would be attributable to those.
Mark Kenney
Sorry, repeat that – 400, you mean of the write down?
Mario Saric
Yes. I'm just wondering if a disproportion amount of the write down would be attributable to the $600 million to $700 million of sales that you're looking at.
Mark Kenney
I don't have the number in my hand, but I don't think any – like, I think it would be proportionate to the portfolio. I don't think there's anything to read there.
Mario Saric
Okay. And then maybe just shifting gears on the operational side, there's a lot of R&M catch up due to the pandemic. I think last quarter, Mark, you talked about that kind of being done from an expense perspective, is that consistent in terms of the view today? Like is the pandemic related catch up done in terms of operating cost pressure?
Mark Kenney
Yes. At this point, the pandemic catch up is done, if we're seeing the pressures in R&M at this point, it would be inflationary pressures. And again, we're part of the expectation for us is we have put together a very dynamic new procurement team that we didn't even talk about in the presentation that we hope offsets some of those inflationary pressures through better pricing. But yes, we've got our own little signs now of inflation, pandemic build up the volume talk that we were having in Q4 and Q1 is over.
Mario Saric
And then in terms of the same-store revenue growth, it's getting better. Do you have any sense today what the rent income ratio looks like in the portfolio relative to where it was 12 months ago, given the…
Mark Kenney
Extraordinarily low, like we still – the average renter at CAPREIT is putting about 20% of their income into rent, which is just a jaw dropping number. When you look at the markets that we're in and the whole topic of affordability, we are Canada's affordable housing solution. And there are folks out there that are definitely struggling, but when you look at a portfolio average of 20% of income going towards rent, that is just a screaming sign of affordability in our view.
Mario Saric
Got it. And just to be clear that the 20% is reflective of CAPREIT’s rent versus kind of disposable income in CAPREIT's portfolio or is it kind of more broader market disposable income metrics?
Mark Kenney
We do it on broader market disposable income because we use – we have to dispose the data once we approve an application for privacy reasons, we have to eliminate that information. We can't hold it. So what I'm quoting those numbers, we're looking average Canadian family income in the markets that we serve.
Mario Saric
Okay. And you think it'd be materially higher, lower than 20% if we looked at CAPREIT in particular?
Mark Kenney
No, I think it's very indicative.
Mario Saric
Perfect.
Mark Kenney
Again, our portfolio is on the higher end of quality. So you would expect on that higher end of quality to see slightly higher end income.
Mario Saric
Makes sense. Great. Thanks.
Operator
Thank you, Mr. Saric. The next question comes from the line of Jenny Ma with BMO Capital Markets. You may proceed.
Jenny Ma
Thanks. Good morning and congrats to Stephen and Julian on your appointments. I'm wondering for the 600 million to 700 million of dispositions you're contemplating, could you comment on the geographies of these assets? Are they still very much concentrated in the GTA or is there opportunity to maybe peel off some assets in other lower cap rate jurisdictions like BC, for example?
Mark Kenney
The focus is definitely just been Ontario call it, there's been some like I said, a joint venture in Ottawa situation. We continue to look at couple of assets. We're premium pricing is the most frothy is in the GTA. And so helping us diversify Ontario is great. We really believe in the market, by the way, Jenny, we don't see the new builds in Ontario being quite the same as some of the value adds in the GTA for example, I wouldn't say though that what we are looking at is try to take a long view on return. And I would say that if there was opportunities in places like BC, where pricing is still very, very strong. I can't ignore this screaming super by that we get through our NCIB. So we would definitely have to weigh the future return horizon of assets with the unbelievable value that we're seeing in buying our own stock.
Jenny Ma
Okay, great. You kind of touched points that lead into my next question is that when you look at the capital recycling that you've done and some of the new acquisitions. It would appear that there's a bit of a shift in terms of your market waitings. I mean, it's not that much, but directionally it's trending that way. When you're thinking about buying new assets, is there any goal in terms of your geographic distribution or is this really just the result of the individual investment decisions that you're making?
Mark Kenney
It's always a consideration, but it remains opportunistic. Like I said, when there's assets in the market, we have to take a keen look. Like, I think it's just in part, if we want to comment on GTA, we're talking now construction costs $1,300 a foot that makes buying rental in the GTA concrete high rises pretty difficult. When we're looking at brand new construction in markets like, Quebec, and you're talking $300, $400 a foot brand new construction, this is pretty compelling stuff. So it's a multiple deep dive that we look at, always being mindful of geographical focus. But this is not – like I said, at the beginning, not a wholesale change of asset composition. We are moving in a high grading diversification direction that I think you'll see the trend that you're seeing continue.
Jenny Ma
So I guess, there's no deliberate target in terms of reducing exposure to the GTA and increasing exposure to other markets. It's really just a function of the investment decisions that you're making then, sort of on the margin?
Stephen Co
Yes, Jenny, just kind of layer onto what Mark said. We do have views on certain markets and our portfolio, which is taken over 25 years to math, has some overweight positions and some underweight positions. I'd say when we're looking at either acquisitions or dispositions, if they do help us achieve our diversification goals, then we'll consider them very clearly.
If they are a little bit off strategy in that regard, we'll still consider them. But I'd say just given they're slightly all strategy, we'll need a little bit better pricing to affect a transaction. So that kind of – that's been our philosophy, our guiding principles with that.
Jenny Ma
Okay, great. And then going back to the 20% discount to replacement cost that you're mentioning, Mark, is that a fairly good number across different markets or is it a little bit different in the GTA say versus in Edmonton, in Quebec?
Mark Kenney
We haven't seen much in the GTA and I don't think we would find that phenomenon here, the new build that's being really happening in Ontario is being held by those that are building. We haven't seen a lot of merchant building at all in Ontario, little bit in Ottawa, but not so much in Toronto. The screaming value in our view for new construction, our places like you've just said, like Alberta, for example, where projects were conceived five, seven years ago, takes time to build finally getting to market now and low rise. You're seeing incredible price per foot value in my mind for new construction there. And likewise, in Quebec, again, these projects don't show up two weeks after, there's an idea to build an apartment building.
So we're getting – pricing really that was locked in, I think three, four years ago. And when you have high velocity inflationary market like we have right now, 20% is probably conservative.
Jenny Ma
Okay, great. Thank you very much. I'll turn it back.
Mark Kenney
Thank you, Jenny.
Operator
Thank you, Ms. Ma. There are currently no further questions registered at this time. So I'll now pass the conference over to Mr. Kenney for closing remarks.
Mark Kenney
Well, thank you very much for joining us here today. On behalf of the management team here at CAPREIT, we thank you for your ongoing interest in our story. And if you have any additional questions, I would urge you to reach out to myself, Julian or Stephen. Thanks again. Have a great day.
Operator
That concludes the Canadian Apartment Properties REIT second quarter 2022 results conference call. Thank you for your participation. You may now disconnect your lines.
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Canadian Apartment Properties Real Estate Investment Trust's (CDPYF) CEO Mark Kenney on Q2 2022 Results - Earnings Call Transcript