InterRent Real Estate Investment Trust (IIPZF) Q3 2023 Earnings Call Transcript

InterRent Real Estate Investment Trust (OTC:IIPZF) Q3 2023 Earnings Conference Call November 1, 2023 1:00 PM ET

Company Participants

Renee Wei – Director, IR & Sustainability

Brad Cutsey – President and CEO, Trustee

Dave Nevins – COO

Curt Millar – CFO

Conference Call Participants

Fred Blondeau – Laurentian Bank Securities

Mike Markidis – BMO Capital Markets

Jonathan Kelcher – TD Securities

Matt Kornack – National Bank Financial

Kyle Stanley – Desjardins Capital Markets

Brad Sturges – Raymond James

Jimmy Shan – RBC Capital Markets

Operator

Good morning, ladies and gentlemen, and welcome to the InterRent Q3 2023 earnings call. [Operator Instructions]. This call is being recorded on Wednesday, November 1, 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 Q3 2023 earnings call. My name is Renee Wei, Director of Investor Relations and Sustainability. You can find the presentation to accompany today’s call on the Investor Relations section of our website under Events and Presentations.

We’re pleased to have Brad Cutsey, President and CEO; Curt Millar, CFO; and Dave Nevins, COO, on the line today. The team will present some prepared remarks, and then we’ll open it up to questions.

Before we begin, I want to remind listeners that certain statements about future events made on this conference call are forward looking in nature. Any such information is subject to risks, uncertainties, and assumptions that could cause actual results to differ materially. For more information, please refer to the cautionary statements on forward-looking information in the recent news release and MD&A dated November 1, 2023.

During the call, management will also refer to certain non-IFRS measures. Although the REIT believes these measures provide useful supplemental information about its financial performance, they’re not recognized measures and do not have standardized meanings under IFRS. Please see the REIT’s MD&A for additional information regarding the non-IFRS financial measures including reconciliations to the nearest IFRS measures.

Brad, over to you.

Brad Cutsey

Thanks, Renee, and good afternoon, everyone. Let’s get started with an overview of our operational performance on slide 5.

As you can see, our track record of growing average monthly rent continued its positive momentum during the quarter. For our total portfolio, AMR increased by 7.8% year over year and 7.3% on the same property basis. This robust AMR growth was underpinned by strong increases consistently observed across all markets. While we did experience a marginal dip in occupancy by 40 basis points compared to the previous year for both total and same property portfolios, our occupancy rate remained at a steady 95.2% in line with our historical performance and strategic approach.

We’re pleased to see strong leasing momentum in our Montreal portfolio which accounts for about a quarter of our total portfolio. Vacancy in the greater Montreal region decreased by 380 basis points year over year driven by sustained recovery in downtown and urban locations. The uptake in the portfolio wide vacancy was primarily concentrated within specific submarkets of our portfolio, where our price discovery program did not adjust quickly enough when seasonal demand started to shift. Notably, these markets Greater Toronto and Hamilton area, Greater Vancouver area, and other Ontario took the lead in AMR growth for the quarter, with each one achieving growth rate of 8% or higher.

Encouragingly, we are witnessing robust leasing activities in the first half of Q4, and we are confident that the occupancy levels will revert to their historical norms as we move into 2024. Dave will provide more details on this later in the call.

Over to slide 7 for an overview of our financial performance. We’re happy to report yet again double-digit same property NOI growth at 10.5%. Our operating margins increased by a healthy 140 basis points year over year to 67.6%, the highest level since Q3 2019 and firmly returned to our pre-pandemic levels. This was driven by consistent revenue expansion, coupled with our disciplined management of operating expenses. Despite the persistent new reality of higher financing costs, our topline improvements have been able to flow down to enhance bottomline performance as seen in the chart on the right-hand side.

FFO increased 4.9% to $21.3 million and on a per unit basis is up 4.3% to $0.146, representing our third consecutive quarter of FFO growth. AFFO increased 6.3% to $18.9 million, a 4.9% increase to $0.129 on a per unit basis.

Taking a closer look at our balance sheet, we’re in solid financial position. Our debt-to-gross book value at 38.6% is favorably positioned at the lower end within the industry. We have a comfortable level of $268 million of available liquidity as of October 27, with stable available liquidity and a significantly enhance debt profile. We are in a robust position to pursue our strategic initiatives even in the face of market fluctuations and challenges.

Dave, over to you to take us through some of the operating highlights.

Dave Nevins

Thanks, Brad. As Brad previously mentioned, vacancy in September, while in line with our strategic approach, experienced a slight uptick. This was mainly isolated to specific suburban markets within our GTHA and other Ontario portfolios. Our proactive approach where we deploy revenue maximization programs to explore price elasticity across our diverse regions has enabled us to consistently deliver outside rent growth. However, our pricing strategy is flexible as we continuously evaluate and adapt. In this case, we have implemented targeted adjustments on submarket specific level. It’s important to emphasize that we continue to strategically accept slightly higher vacancy to position ourselves for optimal revenue growth, particularly considering the industry-wide trend of reduced turnover.

Encouragingly, we’ve been seeing positive developments pointing to robust leasing activities for the remainder of the year. In September, we observed a substantial increase in the number of leads across all regions, and the number of tours has seen significant growth in areas with greater availability. In the GTHA and other Ontario regions, tours have nearly doubled compared to the previous year. Early trends indicate that vacancy will be absorbed, and we are well on course to end the year with over 96% occupancy without compromising our average monthly rental growth.

Slide 11 shows a breakdown of our operating expenses which came in at $19.3 million for the quarter. Operating expenses for the quarter are up 4% year over year, while operating revenue grew by 8.6%. On a per suite basis, our operating expenses came in at $1,515, an increase of 3.8% compared to the third quarter last year. This improvement was driven by reduced utility costs which were $0.1 million lower year over year or a 60-basis-point reduction as a percentage of revenue.

During the quarter, we achieved 14% savings on natural gas cost due to a combination of lower gas prices and decreased usage thanks to our effective energy efficiency programs. Electricity costs are also down slightly over last year despite the larger portfolio under ownership. We continue to manage electricity costs through our hydro submetering initiative which reduced electricity cost by 37.9% for the quarter. Property taxes for the quarter increased by $0.3 million year over year to $6.3 million as a result of our expanding suite count and minor annual rate increases. We are constantly reviewing property tax assessments and making individual property tax appeals when necessary.

Turning to slide 12, we maintain a highly strategic approach to our capital expenditures. Year to date, we’ve directed 11% of our capital expenditure to maintenance CapEx, ensuring our communities remain clean, safe, and well managed offering our residents a sense of pride in their homes. Over the course of this year, 89% of our capital expenditures have been allocated to value-add opportunities consistent with our historical norms. Our repositioned suites, as demonstrated at the right-hand side of the slide, continue to deliver substantial benefits in terms of both occupancy and NOI margin compared to non-repositioned suites. As of September 30, 2,598 suites consisting of 20% of our portfolio are at various stages in the repositioning programs, representing a significant future potential for rental growth.

Turning to slide 13, a quick update on The Slayte, our first office conversion project. During the quarter, we completed all interior renovations including all amenities on the rooftop and the lounge area and have now made them available to our residents. Leasing activities are progressing well despite ongoing construction on Bronson Street by the City of Ottawa. Lease rate has already surpassed 84% as of the end of October, and we are confident of our trajectory towards stabilization, which we expect to achieve before the year’s end. With its central location just steps to the Parliament Hill and close to two LRT stations, The Slayte remains a desirable destination for students and young professionals.

With that, I’ll hand it over to Curt to discuss our balance sheet and sustainability efforts.

Curt Millar

Thanks, Dave. As expected and based on our quarterly review with our external appraisers, we have witnessed upward adjustments in cap rates during the quarter. Our weighted average is currently at 4.22%, an increase of 15 basis points from the last quarter, driven by moderate cap rate expansion across all regions. The Bank of Canada 10-year bond yield has increased more than 80 basis points since the year’s outset, including a 50-basis-point increase in September alone. As a result, the transaction market is experiencing minimal activity.

Despite subdued transaction activities, we’ve adjusted our cap rates in anticipation that rates are not set to revert in the near term. We will continue to monitor market dynamics and collaborate with our external appraisers to adjust our cap rates accordingly. Since the fourth quarter of 2022, when removing the impact of the Ottawa property sold in the quarter, we have adjusted cap rates by 19 basis points through the first three quarters of this year.

Slide 16 shows the staggered maturity profile of our mortgages. We continue to pursue this strategy to enhance our flexibility and mitigate our exposure to renewal rates. No more than 14% of our mortgage debt is coming due in the next four years. For the remainder of this year, we have 61.3 million of mortgages maturing with an average interest rate of 5.19%. Our 2024 maturities carry a weighted average interest rate of 5.33%. And as such, we anticipate our 2024 mortgages being renewed at or below this rate, which will significantly reduce the headwind we have been facing over the last year.

Our floating rate exposure continues to move in the right direction, finishing the quarter at 5.7%, including our line of credit debt, a moderate decrease from the same period last year, which was at 7.9%. By continuing to fix our interest rate costs, we’re actively mitigating our exposure to market volatility and proactively managing our interest rate expense.

We are excited to highlight some remarkable sustainability milestones from the quarter. In September, our annual Mike McCann Charity Golf Tournament took place, bringing together hundreds of supportive partners from various organizations. This event successfully raised an incredible $1.67 million, bringing our cumulative total to $8.2 million since the inception of the tournament. All proceeds from this event will be directed to support various charities within our communities, including the Boys & Girls Club, Habitat for Humanity, and Shepherds of Good Hope, just to name a few. To all those who joined us at the event, we once again extend our heartfelt gratitude for your support and generosity.

We’re also making significant headway in our building certification efforts. In October, we announced the successful certification of our initial six communities through the Canadian Rental Building Program. During this process, we’ve also met the requirements for corporate level documentation and employee training, paving the way for further certifications in the near future. This achievement is a well-deserved testament to the excellence of our buildings and the dedication of our on-site teams. We’ve committed to expanding our CRB program and anticipate more announcements and more certifications in the months ahead.

Earlier this month, we also received our 2023 GRESB results, where we successfully improved our score from the previous year and maintained the Green Two-Star designation. We’ve also earned an A rating of the GRESB public disclosure survey, outperforming the global average in our comparison group average.

I’ll turn things back to Brad to walk through our capital allocation.

Brad Cutsey

Thanks, Curt. Turning to slide 20. We’re pleased to provide an update on our recent strategic moves.

Last quarter, we shared news about the successful sale of a 54-suite property in Ottawa bringing in total proceeds of $11.5 million. This transaction was finalized on August 30. Approximately, $2 million of the proceeds were allocated from our NCIB program, allowing us to acquire a total of 157,200 units at a weighted average price per unit of $12.71. As disclosed in Q2, we had identified various assets that align with our strategic disposition criteria. However, the investment community overall sentiment has been cautious resulting in muted deal volumes. Additionally, the recent fluctuation in the bond market have influenced the prospect for dispositions in the immediate term. Despite these factors, we remain committed to maintain a disciplined approach when evaluating capital recycling opportunities.

Moving to slide 21, we announced last quarter a commitment to purchase 25% of the second office conversion project in Ottawa, and we’re delighted to share light on this exciting new project added to our development pipeline. 360 Laurier is our second office conversion in downtown Ottawa. It will add 139 residential homes to address the ongoing shortage for rental units.

Currently, the adaptive reuse project is in the site plan control process, having already secured approval for minor variances from the City of Ottawa in October. We anticipate full site plan approval in Q4 of this year with preliminary investigative demolition in progress. Full demolition is scheduled for Q1 next year followed by the reconstruction starting in Q2. We’re taking on this project with pride and confidence alongside our trusted partner, CLV Group, and a respected institutional partner. Building on the valuable experiences and lesson learned from The Slayte, we’re well prepared to meet the new project a success.

We’re encouraged to see the commitment of the federal government to exempt GST on new rental building construction and multiple provinces announcing their intention to remove the provincial portion of the HST. 360 Laurier, as an office conversion project, will see substantial benefit with savings expected to be closed at 8%.

Our development pipeline is important to us, and we remain committed to contribute to the solution for Canada’s housing shortage by introducing much-needed housing suites to the market. Nevertheless, we are truly aware of the persistent challenges we face, including rising hard and soft costs along with constraints on financing. We are proactively examining a range of financing alternatives, including MLI Select and RCFI. We will continue to exercise prudence in our development opportunities on them with our broader capital allocation strategy.

Turning to slide 23. As we approach the conclusion of our presentation, I’d like to draw your attention to the inherent strength and resilience ingrained in the fundamentals of the multi-family residential industry. Despite recent interest rate fluctuations and economic uncertainties, we are confident that the strong fundamentals that underpin our robust operational performance will continue to serve as tailwinds in the foreseeable future. We’re seeing housing affordability being further magnified by rising interest rates and an increased shift away from homeownership that is especially pronounced among young professionals and empty nesters. When coupled with the systemic and historic nature of housing supply constraints, these trends will continue to drive sustained rental demand in our portfolio.

While multi-family has always been a strong asset class across varying economic conditions, it has historically shown unique resilience to macroeconomic volatility with demand remaining relatively strong and rents recovering faster than many other property types. As you can see in this chart, going back to 1990s during the past three recessions in Canada, the increase in multi-family vacancy rates had never exceeded 90 basis points in any given year. Furthermore, the sector has also demonstrated strong performance during the recovery and expansion period following recessions.

Finally, I’d like to conclude by saying that we’re very pleased with our strong Q3 results and our conviction about continued strong NOI and FFO growth in the future, backed by three compelling reasons. One, the fundamentals in the Canadian rental market remain solid and will continue to support operational outperformance. Two, our operating platform and best-in-class team continue to build a strong track record of generating organic growth while reining in costs. Three, we are on solid financial footing with a conservative and flexible balance sheet that empowers us to confidently pursue our strategic goals.

And finally, as previously disclosed, we are working hard to develop a fresh new brand identity for InterRent that better aligns with who we are and our vision for growth. We’re happy to report significant progress and are eager to share our new branding with you in the coming weeks.

With that, let’s open it up for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from the line of Fred Blondeau from Laurentian Bank Securities.

Fred Blondeau

Just looking at the fair value adjustments, I was wondering if you could give us your views on cap rates. I mean, do you feel — is it fair to say that we reached somewhat of a plateau here in terms of cap rate increases or where you see a bit more volatility entering in the new year?

Curt Millar

Thanks for the question, Curt Millar here. We haven’t seen a lot of market transactions. So a lot of this is based on very slim market. But in discussion with appraisers in what has been coming to market, what we’re seeing, that’s why we took the — lifting the cap rates. If interest rates stay where they are and people believe they’re not going to come down anytime soon, I think there might be a little more pressure. How much that is, I don’t know at this point. That be another 5 or 10 basis points, maybe 15 potentially.

If things start to turn and we see interest rates plateau, and we start to get a belief that they’re going to come down again, then this might be the top end of it, but it’s really hard to say at this point unless you get a real firm view on what’s going to happen to interest rates in the next 12 to 18 months.

Brad Cutsey

Hey, Fred. It’s Brad. And just to add that, the investment market really is frozen as well as development like everybody has pens down on all sides right now. I don’t think we really have seen this kind of increase in the long end of the curve you’ve got to go back to the early 90s, and not to mention the volatility. At any given day, there have been points where we’ve seen the long end of the curve, or I should say the medium to the long end like the 10-year move as much as anywhere between 10 to almost as much as 20 basis points in the day in the trading section. And we’ve seen that occurrence more than once.

So that volatility is really playing havoc with a lot of people’s short-term outlook. So everybody has really put their pen down on anything when it comes to trying to project out a level of financing. So not only is the investment market quite frozen, you’re hearing a lot of developers out there that might otherwise have been going with their projects on hold.

Fred Blondeau

No, that’s helpful. And then just looking in terms of your occupancy objectives. It looks like you’re trying to get a bit more proactive on that front. How should we view the CapEx budgeting for 2024? I mean, do you feel any particular pressures here especially, I guess, especially given the current rental rate levels?

Brad Cutsey

Yeah, it’s kind of a — I’ll try to impact that. I think you kind of have two questions in one there. I’ll answer the last one first about the CapEx. The good news is, I think everybody is pretty aware that InterRent has spent a lot on the capital expenditure programs through the years, and we’ve always believed you should always be maintaining and bringing the communities to a certain level. And we’ve always done that. It typically have led to a probably above average capital expenditure when you look across the industry.

That said, I think we’ve done a lot of the work that has needed to be done. And I would look out without any external opportunities brought on it. I think you could picture a scenario where you’ll see that CapEx coming in. Obviously, from a capital allocation perspective on repositioning, some of our best returns are really related to the repositioning and whatnot, and it’s kind of linked to the natural cadence of our turnover. But that said, I think a lot of the heavy lifting within our portfolio, as far as capital going to building improvements and whatnot, has been dealt with. So I think under that scenario, a status quo scenario, you can start to see that line item coming.

I don’t know Curt if you want to add anything to that.

Curt Millar

I think you covered it.

Brad Cutsey

And then to answer the first part of your question, Fred, just with regards to vacancy. We have a little higher vacancy at this point in the quarter than we have historically and versus last year. Some of that’s just at the — it’s actually not by design, but it’s cause I wouldn’t look into it as a indicator or try to take away from that to do with the market. That’s really InterRent in its price discovery process and trying to see where the maximization of where we can take some of those rents. And we might have gone a little too hard in some regions and have since made some adjustments. And we are quite happy with what we have seen post quarter and where we are at today relative to where we would be, call it, at this point in previous years.

Fred Blondeau

That’s great. And then maybe one last quick one for me. I was wondering if you could — if you’re starting to come across any distressed opportunities on your acquisition radar and even maybe distressed development projects?

Brad Cutsey

There’s no question there’s a lot of opportunities out there, and I think in this kind of environment, we’re going to continue to see more opportunities. Unfortunately, until we see some visibility as to where our cost of capital stabilizes out, we’ll be very selective on what we choose to participate in those opportunities, Fred, because I think the COPs capital allocation today is changing daily, and we have to take that into consideration when we look at our own capital allocation.

So I think there’s going to be a lot of great opportunities. I think you’re going to have to get creative if you want to participate in some of those opportunities. And we are, as a group, okay with watching an opportunity and making sure that we’re educating ourselves on what’s happening in the market and what’s out there but also very mindful of the fact that there’s a lot of volatility right now on both sides of it on the cost of equity and cost of debt. And we’re very mindful of that. So we’re also very happy with the organic growth and the runway that we believe we have in our portfolio just harvesting our internal growth.

Fred Blondeau

That’s great. That’s helpful. I’ll leave it here.

Operator

Our next question comes from the line of Mike Markidis from BMO Capital.

Mike Markidis

Sorry, guys. This conversion from Android to Apple still befuddles me every once in a while.

Just two for me. Maybe just the first one with respect to the price discovery alluded to and obviously a very dynamic market. Is your sense that the market rent growth trajectory has slowed to some degree over the past several months? I mean, obviously, I recognize it’s not linear, or do you think that we still have momentum here as we enter 2024?

Sorry, just to clarify. I don’t mean your AMR. I mean market rent levels in particular.

Brad Cutsey

And I took it as such. Thanks for the clarification, Mike. I’ll give Dave the opportunity to also give his views. But my view is I don’t think they necessarily slowed, Mike. Now at some point market rents on a year over year gets tougher and tougher, right, because your year-over-year comparison is high to begin with. So just simple math, at some point, you’re going to have to start to see it come in.

That said, I don’t necessarily think it has slowed. I think it was more a question of us on a price discovery, where could we actually take them. And meaning the rate of change, maybe we went a little too aggressive on that. If that helps.

I don’t know, Dave, if you —

Dave Nevins

I agree. Obviously, the volume of these is similar to pre-COVID. I think that this has been extremely busy in all the markets. I think, one, this further is probably just to make sure that we’re cautious in projecting the growth in thinking that the markets where we (inaudible)

Mike Markidis

Okay, thanks. And then just the last one for me. Again, kind of a high-level question here, but it seems like the tone has shifted a little bit just building on Fred’s line of questioning with respect to potential. I don’t know if distress is the right word, but interesting opportunities that might be forming over the — maybe the course of the next year or so. Is that a notable shift? I guess what I’m trying to get at is how do you view what you’re seeing there versus where you think values are for the existing assets? And then lastly, just trying to tie it all together, if given what you’re seeing means the NCIB would effectively be on hold in the foreseeable future.

Brad Cutsey

I’m not sure if you’re taking the tone as a negative shift or a positive shift, Mike. But I don’t think my view of the world has changed from a quarter-over-quarter perspective other than the fact that earlier this year, we saw some stabilization coming on the rates, and you had a much more willingness on opportunities on both sides from a vendor perspective and from a bid perspective. I think given the recent run-up and the speed of that run-up in the yield curve has caused a lot of people to pause. And I think from an opportunity perspective, I think that just will create even further opportunity.

So if anything, I think my tone is just going to be more positive in the sense that I do think when your financing costs increased as much as it has, and there has been some development that happened, and there’s going to be some work to work through per se. Now that said, the good news about in our space is, and you’re seeing in operation and you’re seeing it through double digit NOI growth, is a lot of visibility on our cash flow side, right?

But there’s a lot of people that are developing new supply or were about to develop new supply. And their pro forma has changed given where the takeout financing might be, given the construction financing has increased, and where do cap rates settle out at. I think, encouragingly, Mark, while you saw that we did increase our cap rate assumptions, I’ve got to reiterate there’s not a lot of transactions. This is us being somewhat proactive, realizing that there is a correlation between the bond yield and cap rates, but a lot of times on these appraisals, it’s backward looking.

So we’re trying to take a conservative and proactive approach on this, but there’s not 100 data points where you going to hold the hat and transactions and cap rates have moved 25 basis points. And therefore, hey, if you’re looking at a new opportunity on an IRR basis, your terminal cap rate has moved by X, right? So one of the reasons why I think the market is pause is because there is no real conviction where things maybe will shake out at the end of it. So with all that said and done, I think it does create an environment, depending on how you are cap wise, I think there is going to be some real opportunities for people that do have a well-capitalized balance sheet.

Now, if my tone seems a little more neutral on capital certainty going through the year, it’s because I think we need to see as a group where financing feels like it’s going to shakeout, right? And I don’t think anybody has a real good picture on that today.

Mike Markidis

That’s a useful commentary as always.

Operator

Our next question comes from the line of Jonathan Kelcher from TD Cowen.

Jonathan Kelcher

Just sticking with Mike’s line of questioning and your answers there, Brad, you guys on the development side looks like you took out your expected yields and pushed out some dates. And I think you talked about being pencils down. How do you guys look at go or no-go decisions? What targeted returns or how do you really think about that when you’re looking at starting a new project?

Brad Cutsey

Well, I think you’ve got to look at your IRRs, Jonathan, and your use of capital across the board in the different buckets, and then look at what your corporate IRR is, and then see what gives you the best outstripped return relative to your corporate IRR. I’d say that’s starting point. And then as you can rank it, your use of capital from there and then floor types, as a go or no-go decision, I think on something like development on a greenfield, I think you want to go out and make sure that you’ve got some kind of certainty on your pricing, and then some kind of comfort on your ability to finance that development and that construction, and see where the returns pro forma at that point.

The fact that we took out the yields on the development page, and you nailed it, one of the reasons why we did take that out is because of the financing lull over the map. It could be 7% financing on the line of credit or it could be sub 4% financing if you’re lucky enough to obtain RCFI, right, finance it with CMHC. So that materially changes the outlook to the pro forma and the economics of the development. So before I think you’d go in the ground, you really would want to have certainty on the cost to complete and have a better comfort on how you’re able to finance the development before you would break ground.

Jonathan Kelcher

Okay, that’s helpful. And on three 360 Laurier, I might have — when you were talking about that in your prepared remarks, I heard 8%. What was that? I’m not sure what that was related to. I missed that. Or did I miss the whole thing?

Curt Millar

Can you repeat that, Jonathan?

Jonathan Kelcher

I think when you were talking about 360 Laurier in your prepared remarks, you did say — I thought I heard the word 8% in there, but I can take that offline after.

And my second question is —

Brad Cutsey

No, Jonathan, that’s just talk about the savings on the GST/HST.

Jonathan Kelcher

Okay, fair enough. Fair enough.

Dave Nevins

Sorry about that if I wasn’t speaking clearly.

Jonathan Kelcher

No problem. And then, secondly, just on sounds like you remain committed to doing some dispositions, some capital recycling, but the market slowed down. What do you expect to happen with that over the next, say, two, three quarters? Like do you expect to sell anything in Q4?

Brad Cutsey

I said, to be quite honest, I think it would be quite challenging. I think it would be at the last quarter. If I thought Q4, I’d still say it would be quite challenging and one of the reasons being is CMHC is really understaffed right now given the level of activity coming at it. So there’s still a logjam at CMHC right around, and it’s just taken a lot longer.

So on the disposition front, anybody on the disposition front would typically need a financing condition. And under that scenario, the best they’re going to be able to probably get through — and once again, it’s not me blaming CMHC, it’s just the reality, it’s probably six months. And in this kind of marketplace, when you’re seeing the volatility that you’re seeing in the yield curve, that really does present to your disposition.

So will we continue and are we at different stages of negotiations? Yes. Can I say with confidence that we can be in a position to announce something anytime soon? No.

Jonathan Kelcher

Okay. That’s helpful. I’ll turn it back.

Operator

Our next question comes from the line of Kyle Stanley from Desjardins Capital Markets.

Kyle Stanley

Just going back to your price discovery discussion for a second. I mean, thanks for the market rent growth commentary and your view going forward. I’m just wondering, do you think you started to hit maybe an affordability threshold in some markets? Or is this really just you guys feeling out where market rents are going at this point?

Brad Cutsey

It’s us feeling where market rents are going. The fact that we’ve seen stronger leasing activity than we normally would at this time of year suggests that all the markets are still extremely tight, and you wouldn’t generate that kind of leads because somebody acquiring knows what price they’re acquiring about, Kyle. So typically, that’s a pretty good indication of the level of interest out there. So I would say it’s more the latter.

Kyle Stanley

Okay. Fair enough. That makes sense. Another more, I guess, high-level question, but there has been a lot of talk in the last little bit about tuitions increasing in Quebec. I’m just wondering — for English language schools, I’m wondering, have you had any discussions with some of the university leaders in the province of Quebec? And do you have any indication on the potential impacts that may have?

Brad Cutsey

Well, I hope I don’t know embarrass Jonathan Kelcher on this call, but both Jonathan and I are alumni of one of those three schools. They’ve got a lot of mention in the press being Bishop’s. This kind of announcement, unfortunately, could really hurt Bishop’s, but Bishop’s, you got to put in perspective, is only, call it 2,500 students. The bigger issue obviously — I mean, we don’t have any homes in Sherbrooke, but the bigger question is, how does it impact McGill? And how does it impact Concordia?

I don’t think it does any favors on the overall outlook for enticing people to Quebec but don’t want to deal with politics. But I think the reality is, I don’t think, given how tight things are across the board in our focus markets and in Montreal, I don’t think this announcement — it might change the composition of the domestic students, but at the end of the day, it’s still probably cheaper to go to university at McGill or Concordia than it is at University of Ottawa or Western just on house affordability alone, okay?

And I think that’s bigger consideration. I think when a student goes to study somewhere, they’ll look at the all-in cost. I still don’t think that even with the change it will be that significant of a change in your all-in cost. And then from a foreign student’s ability, I mean, the jury’s out, but on foreign students, I still very much believe that the price points when you look at a Canadian reputable university relative to a university in the US with similar quality, the difference already in the level of cost of the tuition relative to the value of tuition you get is still substantial here in Quebec.

So obviously, it’s not a policy that we love and we’ll get behind. But in the same token, I don’t want to overexaggerate it and the impact it might have. And lastly, I’ll just say the level of increase in international students into Canada over the last three years relative to, call it, maybe the norm 10 years ago is significant, okay, like we’re talking greater than 20%. And even at that point previously, they had a pretty strong impact on the overall. So long-winded answer. Short answer is, I don’t think it’s going to have an impact.

Kyle Stanley

Okay, fair enough. Just two quick housekeeping items. So just the capitalized interest ticked up this quarter. I’m just wondering if you could elaborate on that a little bit. Just trying to understand, have you fully decapitalized the interest related The Slayte and maybe what’s driving that movement, and where does it trend?

Curt Millar

Yeah. It’s Curt here. I’ll do my best to walk you through this as much as I can and be as much clear as I can. There was still a little bit of interest capitalization to Slayte in the quarter, but that has definitely come down. There was also a little bit about increase, pretty minor, related to 360 Laurier that we announced in the quarter. The bigger variances just, with the way we do this, the way we interpret the rules around this, I don’t believe we’ll use different mechanisms. Some people use the weighted average interest rate to determine the capitalization of interest expense. We tend to use what has been drawn either on our line of credit or if we’re not into our line of credit, on our most recent financing.

So given where our line of credit was throughout the quarter, the second quarter versus the third quarter, and when we funded certain large CMHC mortgages such as The Slayte itself, which funded in Q3, it can vary — it can make that vary quite a bit and introduce a bit of volatility just based on what capital source we’re tapping into for the quarter. So it’s mainly coming from prior quarter being more captive to CMHC level financing rates for the amount we were capitalizing versus this quarter being more into our credit facility and capitalizing at that rate.

Kyle Stanley

Okay. I think that’s clear. And just the last one to G&A, it was down a bit sequentially. Just wondering would the third quarter number be a good run rate or best to look at the year to date and take a number like that?

Curt Millar

Yeah, I think what we’ve been telling people is 4.25 or 4.5. I think we still stay inside that range. There’s a few things that may happen in Q4 or may get pushed into next year. But I think if you’re in that range, you’re still paying on. And I maintain that for next year. I still think in the 4.25 to 4.5 for per Q going into next year also.

Kyle Stanley

Okay, great. Thanks for all the color. I will turn it back.

Operator

Our next question comes from the line of Brad Sturges from Raymond James.

Brad Sturges

Just to go back to the asset disposition program commentary, just to reconcile from the last quarter, is the plan of the program or the target of the program still to be net sellers of 75 million through that program once you’re able to do so and the opportunity allows to do so or has that program changed in any way?

Brad Cutsey

No, I think that the assets that we’ve earmarked are assets that have below target IRRs over the next five years relative to our corporate IRR. That hasn’t changed, Brad. There’s still quite good cash flow. And quite honestly, they’re still a pretty good growth profile. It just doesn’t meet our overall growth profile. So it makes sense to recycle that capital.

But I want to be clear, there’s nothing in that portfolio given the strength of our balance sheet and what’s coming at us that we need to dispose of anything, okay. So we are not sellers or we have to be sellers of anything. If we get the appropriate price, and there’s a strong offer, and it meets our threshold, and we think we can recycle that capital and recycle that capital on a better return than what our overall corporate return is, then we’re going to do it. But by no means are we in a position where we have to do A, B, and C in order to do easy math.

And I really want to make that clear. So it’s a nice position to be in, and that’s the position we are in. But we have earmarked what we feel is seven $75 million of proceeds, but I will caveat that with the fact that there’s a lot of volatility in the long end of the curve, and I don’t think a lot’s going to get done on anybody’s side until there’s a stabilization of that. But that’s not to say things won’t get done if the long end of the curve stays here. But it has to stay here for a while comfortable, and it might be a reset if it stays here. To Curt’s point, if it comes down a little, then maybe we’ve seen the majority of the reset is behind us.

Brad Sturges

Yeah, that’s great commentary. That’s quite helpful. And just on the, I guess, my other question would be just on the expected financing, refinancing activity that you have earmarked for the end of the year. It looks like the timeline got pushed out a bit. Is that just because of the backlog with CMHC or is there anything else that’s driving the timing of that towards, I guess, the late Q4 and Q1, early Q1?

Curt Millar

Yeah, I think it’s just more of the timing. We’ve talked about that Vancouver portfolio before. And that’s one of the bigger portfolios. We have other assets that are into CMHC also. That’s one of the bigger portfolios. We were really hoping we could get that through there in Q3 and sometime in Q4 have the financing done by early Q4.

A few of the properties have been picked up, so we’re glad to see that and really hoping that I’ll finish getting through everything. But at this point, given where we are in the year, it does very much — we’re going to try our best, but I doubt very much it will actually end up getting funded in Q4. To me, it probably drags into early to mid-January ticket timeframes. This is probably our best case scenario at this point.

Brad Sturges

And at this point, you’re not rate locked on that. That’s still — you still have some flexibility around rate at this point depending on where benchmark yields go?

Curt Millar

Correct. We’re not rate locked on it yet. So let’s all keep our fingers crossed that these come down.

Brad Sturges

Okay. Thanks a lot. Appreciate it. I’ll turn it back.

Operator

Our next question comes from the line of Jimmy Shan from RBC Capital.

Jimmy Shan

Curt, you mentioned when you were determining the cap rate assumption, you’ve taken clues from brokers bringing products to the market. I was wondering if you could provide some color on what that pipeline of products look like, deal size, type of assets, pricing indication, that sort of thing?

Curt Millar

I can give you a little bit, Jimmy, because like I said, there’s not a lot of deals that have actually closed, and we’ve chatted a lot about that internally here. I’ll give you another data point to think about also before I answer that is that If you go back and look at the CBRE cap rate reports from the last, call it, five years, from the lows of about 2019, 2020 to where they are in Q3 reports, if you look across the major markets we’re in, the delta has been somewhere between 30 and 60 basis points, so increase of between a low end of 30, a high end of 60 basis points across those markets.

And if you look at our low point when you factor mostly asset, we would have been at about 3.83 and now we’re at 4.22. So we’ve had about a 40 basis point increase on average from our low to where we are today, which kind of lines up pretty well with those CBRE reports, so the overall market over the last couple of years. So just wanted to give you that as a data point. I think about it also, if you will, from a deal perspective. I mean, there has been — there has only been one notable transaction that we would compare under GTHA in the last Q that’s closed.

Brad Cutsey

And that was like at over 600,000 a door, Jimmy. There’s one in Montreal, a smaller size, that was —

Curt Millar

Just about 200 a door.

Brad Cutsey

Just about 200 a door. It wasn’t urban. It wasn’t an urban floor. And then there’s one in the Greater Vancouver area just shy of 500,000 a door. The one comment I would add to this is, really any build of size is completely off the table right now, right, because all your institutional players really do want to see stabilization in their financing, okay? So if there are deals getting done that tend to be on the smaller side, they’re probably a little less institutional and probably not as much of a fair reflection of value of the publicly listed. And I’ll throw in my peers as well of the public REITs versus some of these smaller transactions that are closing.

But even that said, even that has come right it. They were taken up the majority of the deals that were getting done with these smaller-sized deals. But even now at the last, call it, four weeks, even though they’re becoming farther and here between. And I know there’s not a lot of color there for you, Jimmy, but that’s just the reality of the world we’re living in right now. It’s very much at a stalemate. It really is pens down on all sides.

Jimmy Shan

Okay. No, that’s fair. Then my last question is just on the distribution increase. And I know you guys have a track record maybe you don’t want to break, and it’s not a big amount, but I wondered how you guys and the Board have thought about increasing the distribution versus things like paying down debt, buying back stock, or financing some of your developments?

Brad Cutsey

Well, for sure. I think you hit it. It’s not a big amount, Jimmy. And we want to send the right signal to the market. And I’m hoping we’ve communicated this to the disclosure document in this call today. We’re very bullish on where we sit today from an operational standpoint. And I think since we do have such a strong track record of increasing the distribution conservatively and being very mindful when we make those increases, we want to make sure that the market understands that our distribution policy aligns itself with how we see the future within our operations.

And we continue to believe there’s very robust growth in our operations in the near term. What I mean the near term, not just the next four quarters, I mean, the next three years. So you’re right. You could have a higher cost of debt, but you might be able to pay it down. I don’t think it’s a big number, Jimmy, and that cost of debt will fluctuate, but you can be self-assured that we are managing that and are very positive of our debt levels, of where our variable rate exposure is, and the cost of what our line cost, and we’ll take every opportunity to manage that prudently.

I hope that answers because I mean, the comment you made could be a five-hour call to really want to go through it.

Curt Millar

I think if I could just add, I think when you look at the quantum, Jimmy, as you touched on, based on that increase, you’re talking about a total impact of $2.7 million, $2.8 million and the cash impact of about $1.6 million, $1.7 million given the amount of people that participated in playing this up. It’s not a big number, but as you know, and you’ve followed us for years, you know that we watch every penny that goes out the door very closely.

Jimmy Shan

Okay, great.

Operator

Our next question comes from the line of Matt Kornack from National Bank Financial.

Matt Kornack

I’ll try to be quick. Just with regards to the 360 Laurier, can you give any sense on the cadence and the total outlay at your ownership interest in terms of spend for that project?

Curt Millar

Our total ownership interest is 25%. That’s our total ownership interest. At this point, we’re still working through the plan with partners and dealers to working through the plans of the design, allocated pieces that go into it, getting pricing and looking at financing options. So it’s a little early to get metrics on it. I think as we sort of get through this, our anticipation is that it would be even more accretive than Slayte just given the size of the building is actually that itself even slightly better.

But there’s a lot of things to work through over the next few months before I will feel comfortable putting a number out there.

Brad Cutsey

But — and I was going to answer, that can wait. Currently, we’re not trying to be cute and cheeky, but we feel quite confident that this is going to be, from an economic standpoint, even that much greater than Slayte. And we met our targets on Slayte, so take what you want from that. But you can rest assured, we’re really excited about the 360. And so far, Slayte has really been a great addition to our overall portfolio.

Matt Kornack

Sure. No, it makes sense. And you can do these pretty quickly based on your target completion date and where you are in the process. So that’s plus. And then just on Montreal, you did deliver, I think, 36 new suites in formerly common area space. Was that the impact on vacancy in the quarter, but it also looks like you pushed rate quite a bit in the market. So any color there?

And also, just with regards to additional potential units, any disclosure over the next 12 months as to what else you may be adding to the portfolio and suites in common areas?

Brad Cutsey

Yeah, the first part of your question, though, about the impact on vacancy, and you kind of answered it with your own commentary on that. But that said, we’re extremely happy with where we sit right now in Montreal. And then the last the last part of your question was, what’s that? Sorry.

Matt Kornack

Just like in addition to the 36 that you delivered, are there any others kind of in the near term that you’d expect to add to the portfolio in common areas, new suites?

Brad Cutsey

Well, the number is greater than 36. I wouldn’t see more than 30 necessary in Montreal. But as we mentioned before, across our portfolio, our ops team does a really good job of visualizing dead space or recreating space by kind of merging or taking existing space and working with it. So we’re at different levels of planning throughout our portfolio on that. So nothing concrete to add, I think, of this thing, but it’s as much as a small high-rise.

Matt Kornack

Right, yeah. Fair enough. Okay. I won’t take any more of your time.

Brad Cutsey

Okay. I think that’s all the questions. I’d just like to thank everybody for taking the time for listening in and for the questions. We had a good quarter, but I’m really excited, to be quite honest, about the future and what the outlook looks like for us in the remainder of 2023 and 2024. And the team is working really hard to make sure that we deliver on what we can control, and that’s our organic portfolio.

And we will continue to monitor the externals that we can’t control, things like the bond yield and the volatility within it. So once again, thanks a lot, and we look forward to talking to you soon.

Operator

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.