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Edited Transcript of CAR.UN.TO earnings conference call or presentation 7-Nov-17 3:00pm GMT

Q3 2017 Canadian Apartment Properties Real Estate Investment Trust Earnings Call

TORONTO Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Canadian Apartment Properties Real Estate Investment Trust earnings conference call or presentation Tuesday, November 7, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Ehrlich

Canadian Apartment Properties Real Estate Investment Trust - Former Trustee

* Mark Kenney

Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director

* Scott Cryer

Canadian Apartment Properties Real Estate Investment Trust - CFO

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Conference Call Participants

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* Bradley Sturges

Industrial Alliance Securities Inc., Research Division - Equity Research Analyst

* Dean Mark Wilkinson

CIBC Capital Markets, Research Division - Director of Institutional Equity Research

* Heather C. Kirk

BMO Capital Markets Equity Research - Former MD of Equity Research & Analyst

* Jonathan Kelcher

TD Securities Equity Research - Analyst

* Mario Saric

Scotiabank Global Banking and Markets, Research Division - Analyst

* Matt Kornack

National Bank Financial, Inc., Research Division - Analyst

* Michael Markidis

Desjardins Securities Inc., Research Division - Real Estate Analyst

* David George Mills

Mills Investor Relations - President

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the CAPREIT Third Quarter 2017 Results Conference Call. I would now to turn the meeting over to Mr. David Mills. Please go ahead, Mr. Mills.

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David George Mills, Mills Investor Relations - President [2]

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Thank you, operator, and good morning, everyone. Before we begin, let me remind everyone that the following discussion may include comments that constitute forward-looking statements about expected future events in 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 our regulatory findings -- filings including our Annual Information Form and MD&A, which can be obtained at Sedar.com.

I'll now turn things over to David Ehrlich, CAP President and Chief Executive Officer.

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David Ehrlich, Canadian Apartment Properties Real Estate Investment Trust - Former Trustee [3]

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Thank you, David. As most of you know, I have been on the job for almost a week now. But I have known the management team for many, many years, including my time as COO of Irish Residential Properties REIT, the public company that CAPREIT sponsored in Ireland. And I'm excited and very excited to take this great company forward. With me today is Scott Cryer, our CFO; and Mark Kenney, our COO.

Now let me turn things over to Mark.

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [4]

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Thanks, David. And good morning, everyone, and thank you for joining us today.

Looking at Slide 4, our growth and strong financial performance continued through the first 9 months of 2017. You can see all of our key performance benchmarks were up with continuing strong organic growth. NFFO increased 9%, driven once again by solid portfolio growth and strong same-property NOI. Our growth continues to be accretive as NFFO per unit rose 4.1%, despite strong leverage in the 4.7% increase in the weighted average number of units outstanding. Our NFFO payout ratio also remains strong and conservative at 69.7%, improved from the same time last year. We continue to perform very well from an operational perspective as shown on Slide 5. Occupancies remain strong and stable with our average monthly rents rising in both the apartment and MHC segments of our business. Our ancillary revenues continued to grow in the quarter, including parking, laundry and tenant rentals and other sources of income. Ancillary revenues were up 6.3% to just under $25 million for the first 9 months of 2017. Our NOI margin also strengthened to 61.8%, up from 61.2% in the first 9 months of 2016.

As you can see on Slide 6, we continued to deliver strong organic growth in the first 9 months of 2017, driven by increased average monthly rents and high occupancies across all of our demographic sectors and asset types. Looking ahead, demand remains robust in the majority of our markets. We see occupancies remaining stable at these nearly full levels, and we believe average monthly rents will continue to increase over time.

Our turnover renewal rates are doing very well in the majority of our markets, as shown on Slide 7, with solid increases in rents, particularly in Ontario and British Columbia. Looking ahead, rent guidelines have been increased in Ontario and British Columbia for 2018: 1.8% in Ontario, up from 1.5% this year; and 4% in BC, up from 3.7% this year. These guideline increases bode well for continued organic growth in 2018.

For the last 20 years, we have demonstrated a consistent ability to generate what we believe is industry-leading organic growth, driven by our focus on high occupancies, stable and steady increase in average rents, managing our cost and enhancing operating efficiencies.

As you can see on Slide 8, our organic growth continued through the first 9 months of 2017, with same-property NOI rising 3.6%. For the third quarter, same-property NOI was up 3.1%. We are confident we can continue to deliver stable and steady growth in same-property NOI going forward. We continue to be pleased with our performance in Dublin, as detailed on Slide 9. In 2016, our asset and property management fees from IRES totaled $5.2 million, up from $3.3 million in 2015. Through the first 9 months of 2017, these were $4.4 million to-date, up from $3 million -- $3.8 million last year. We expect a steady and stable stream of recurring income to continue to grow as IRES builds its presence in the vibrant Dublin market. Our 15.7% retained interest in IRES also continues to generate a solid stream of dividend income amounting to $7.1 million for the 9 months ended September 30, 2017.

Through the first 9 months of 2017, we continued to expand our presence in the Netherlands, as detailed on Slide 10. In late October, we announced the purchase of an additional 540 suites in 11 properties for a purchase price of approximately EUR 82.6 million, which is expected to close in early December. The new acquisition will be financed by $50 million (sic) [EUR 50 million] 5-year mortgage with an interest rate of approximately 1.4%. With the expected December acquisition, our Netherlands portfolio stands at 2,088 suites. We continue to evaluate further growth opportunities in this region.

Similar to Dublin, we are exporting our proven management and marketing programs to these new properties. And so far in 2017, we've generated $5.3 million in NOI. With the current housing shortage in this -- in the country and strong demand created by a growing population that favors rental accommodation, we believe we will see solid returns as we expand our Netherlands portfolio. To ensure we continue to build our growth in the Netherlands, we recently opened our own management office in the country, moving 2 very experienced CAPREIT managers to run our operations there. You can see the pictures of our new office on Slide 11.

With this new office, we believe we will generate further operating efficiencies and lower cost as we bring our proven and scalable property management programs to these new properties. We look forward to introducing our new Netherlands portfolio to you on a future property tour.

I'll now turns things over to Scott to review our results. Scott?

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Scott Cryer, Canadian Apartment Properties Real Estate Investment Trust - CFO [5]

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Thanks, Mark. As Mark mentioned, we delivered strong financial and operating performance in the third quarter of 2017, as shown on Slide 13. Revenues were up 6.5% compared to last year's third quarter due to the positive contribution of acquisitions over the last 12 months and continued increases in average monthly rents and stable high occupancies.

Operating expenses improved to 36.5% of revenues in the quarter from 36.6% last year. Contributing to lower costs in the quarter was a reduction in realty taxes, including rebate and utility costs as a percentage of total operating revenue, although we took the opportunity of strong rental growth in markets to accelerate some of our R&M initiatives. NFFO rose 7.8% in the quarter, driven by the growth in revenues and our operating performance. The quarter also demonstrated accretive growth as NFFO per unit was up 4.7%, despite the increase in our units outstanding.

Turning to our balance sheet. We continue to maintain a strong and flexible financial position, as shown on Slide 14, with conservative leverage, strong coverage ratios and a further reduction in our interest costs. It's also important to note that we had approximately $289 million in properties at quarter end not encumbered by mortgages. This provides further flexibility to fund our growth and investment programs going forward.

Looking ahead, maturities through the end of 2019 represent a smaller portion of the portfolio in the next 10 years. You can see on Slide 15 that our mortgage portfolio remains well balanced between top-up liquidity and reduced sensitivity to an -- any interest rate increases. Effective May 15, 2017, CMHC introduced enhancements to its multiunit mortgage loans, including CMHC fee increases from 2.25% to 2.5% for 75% LTV. Also greater underwriting flexibility related to nonresidential space, furnished suites and introduce initiatives intended to incent housing developers into affordable housing.

In addition, with 97% of our current mortgages being CMHC insured, we have a large and diverse group of lenders willing to work with us at rates well below conventional financing.

On the liquidity front, we remain well positioned to continue our growth programs, as shown on Slide 16. Our liquidity position stands at approximately $60 million at September 30, generating an acquisition capacity of approximately $166 million and a 65% loan to value, all the while maintaining our conservative debt ratio. Looking ahead, solid top-up potential for 2017 will continue to provide sufficient liquidity to partially fund our CapEx programs. And as I mentioned, our pool of unencumbered properties provides additional liquidity for future growth.

I'll now turn things back to David to wrap things up.

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David Ehrlich, Canadian Apartment Properties Real Estate Investment Trust - Former Trustee [6]

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Thanks, Scott. In 2017, we are proudly celebrating at CAPREIT our 20th year as a publicly traded REIT, and I remember very, very well, the IPO and a lot of people who thought we couldn't do it. Well, 20 years of significant growth and significant value creation for our unitholders is proof positive that we could and we did do it. Looking back, we have accomplished a great deal. Our portfolio has grown to 50,058 residential units at September 30, 2017 from only 2,900 at the time of our IPO. NFFO has risen from $0.40 per unit in 1997 to over $1.77 per unit in 2016, and we're seeing continued accretive growth for the first 9 months of 2017, with NFFO per unit up another 4.1% compared to last year.

Cash distributions have risen to $1.28 per unit on an annualized basis, while at the same time we have maintained very conservative payout ratio. And from a financial position perspective, we believe we have one of the strongest balance sheets in the business with conservative leverage, reduced interest cost and solid coverage ratio.

Looking ahead, we remain confident in our future prospects as you can see on Slide 19. We've proven our ability to capitalize on our continuing strong fundamentals in the Canadian apartment business through all economic cycles. We have one of the strongest financial positions in the business with the flexibility and resources to continue our growth and sustain our monthly distributions over the long term. Finally, for the last 20 years, we have demonstrated that our business strategy is succeeding and prospering, and we will continue to build on this solid performance going forward.

Thanks, again, and we'll now be pleased to answer any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Jonathan Kelcher of TD Securities.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [2]

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First, on developments. You guys have previously talked about, I guess, up to close to 10,000 units over time and 1,600 units near -- can you maybe give us an update where you stand there? Is there anything changing? Are you reevaluating that?

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David Ehrlich, Canadian Apartment Properties Real Estate Investment Trust - Former Trustee [3]

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We are always evaluating our portfolio, the strengths and weaknesses everywhere and that applies to development as well. And so that is an ongoing process and when we have something to announce that's more solid than what we've given, we will.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [4]

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Okay. Turning to operations, and Scott, you talked about accelerating some R&M in the quarter, and was that mostly in BC?

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Scott Cryer, Canadian Apartment Properties Real Estate Investment Trust - CFO [5]

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Definitely. Mark, maybe, I don't know if you want to talk to some of these acceleration programs.

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [6]

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Yes, we always have planned maintenance programs. We did accelerate some of those programs in the third quarter. We did see some in BC, but we did a little bit across the country, Jonathan.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [7]

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Okay. It's just operating costs in BC were up, I think, 16% year-over-year. I was just wondering, is there -- was there anything onetime in there?

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [8]

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No.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [9]

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So you'd expect to run at sort of the margins you ran at in BC in Q3 for next year?

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [10]

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I wouldn't expect that because we did accelerate some things. I don't think you would plan to see exactly the same margin. I'd use the more historic margins going forward.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [11]

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Okay, fair enough. And then just lastly, your -- the rental increases on turnover have spiked the last couple of quarters and very strong this quarter. Was that -- and I guess, that mostly Toronto and Vancouver. Is that something you -- we can expect to see heading into 2018, given where markets are right now?

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [12]

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Yes, the markets remain strong, especially in Vancouver and Toronto. We don't expect to see any performance slowdown.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [13]

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So sort of 7%, 8%, 9% on turnover is something we can see?

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [14]

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It's been bigger this year because, remember, we've got to be careful that the same unit is turning over again. So if the same units turn over again, we wouldn't expect to see the same jump, but the markets do remain strong. We continue to evaluate the market on a regular basis, and our outlook for both Toronto and Vancouver is very positive.

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Operator [15]

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The following question is from Mike Markidis of Desjardins Capital.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [16]

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Maybe I'll get the first easy one out of the way. Scott, just north of the G&A continues to increase. I don't know if some of it was explained by the $1.6 million of the accelerated stock-based comp vesting. But can you maybe get some help in terms of what a good run-rate for G&A would be on an annual basis going forward?

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Scott Cryer, Canadian Apartment Properties Real Estate Investment Trust - CFO [17]

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Yes, yes, the $1.6 million definitely was the acceleration. There's probably another $0.5 million to $1 million if you strip those out, you're at a pretty good run-rate.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [18]

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Sorry, so take out the $1.6 million plus another $0.5 million to a $1 million for the run-rate?

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Scott Cryer, Canadian Apartment Properties Real Estate Investment Trust - CFO [19]

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Yes, and that's probably pretty reasonable.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [20]

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Okay. And then just with respect to the comments back on the acceleration with the R&M, I think you had tied some of the commentary back to strong market conditions. And obviously, you're getting the rent growth but also noticing that the turnover is decreasing year-over-year as well. So maybe if you could just help us understand that a little bit more, how those 2 are tied together.

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [21]

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Yes, in both Toronto and in Vancouver, we've been running an improvement program in the suites for payback. Those markets have run so strong we're cooling the improvements and by doing basic maintenance, we're almost getting the same rent lift. So we're -- that obviously resulted in increase in repairs and maintenance. So that acceleration, we're just playing in those 2 markets to maximize total investment return. And when it comes to acceleration, those are more preventative maintenance programs that we enact on a normal calendar basis and sometimes we like to pull them forward.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [22]

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Okay. And...

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Scott Cryer, Canadian Apartment Properties Real Estate Investment Trust - CFO [23]

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Very good value in those programs.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [24]

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Definitely, sounds like that. So I just -- thinking about the play between CapEx spend and the increased R&M. If that was to continue, how would you see your CapEx budget for 2018 and vis-à-vis where you are in 2017? Would that have a material impact?

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [25]

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It's early stages. Again, we started this in the third quarter. We liked the return that we're getting by doing more maintenance type turnover units in both Vancouver and Toronto. So I wouldn't want to give guidance at this stage, but certainly, positive feedback on what we're getting on turn.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [26]

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Okay. And last one from me before I turn it back. Can you just give us some sense about how the cap rates that you've been seeing in the Netherlands would compare, generally speaking to, let's say, the GTA or Vancouver in (inaudible)

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [27]

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Yes. So interestingly, enough, cap rates aren't that much different. We typically have been seeing cap rates in the 4 to 4.5 range. Getting to the submarkets, you're closer to a 5. That being said, the financing rates in the Netherlands are much more favorable than what we see in the GTA. Like I said in the presentation, Scott was able to secure financing at 1.4%.

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Operator [28]

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The following question is from Brad Sturges of Industrial Alliance.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [29]

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Just a couple of quick questions from me. Just in regards to acquisition opportunities, aside from the Netherlands, obviously, where you've been the most active, if you're looking at Canada these days, just given where pricing is and how -- where cap rates are, do you expect to continue to see opportunities there? If there is, I guess, looking at potential from markets where you're underweight, you'd like to get a little bit more exposure? Or vice versa, where you're looking at decreasing exposure and maybe there are some asset sales? Just walk through that for us, if you don't mind.

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [30]

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Yes, we continue to see cap rate compression in the major Canadian markets. That being said, it's very selective on where we currently are in those markets. So we'll look at that cautiously. That being said, because the markets across the country are really compressing, we are putting an eye to dispositions and looking at that where it make sense.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [31]

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Would we -- because I guess, on the disposition side, it's been very selective and opportunistic. Is that still the frame of mind right now? Or could we see something a little bit more scalable from that perspective, I guess, in terms of where assets are located, where there's a little bit more limited growth or more CapEx or commerce that doesn't make that much sense? I guess, is that the way to think about it?

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [32]

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Yes, you're naming all the things that we look at. Don't expect to see a dramatic change in CAPREIT strategy when it comes to disposition. That being said, we have much better models today that we look, exactly those things, future growth, required CapEx investments and where we've added the most value. In some of those markets, we may just want to get in and add value on new assets. In some cases, where we've added value, we -- we're going to put our mind to potentially disposing. But no major change of strategy there.

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Operator [33]

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The following question is from Dean Wilkinson of CIBC World Markets.

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Dean Mark Wilkinson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [34]

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Looking at the Netherlands portfolio, sort of as it fits right now, there's quite a healthy margin on, arguably, perhaps, a bit lower of an occupancy level. How should we be thinking of that on a normalized basis? And sort of the assets that you've recently entered into an agreement to acquire, are they running with the same metrics there? And kind of what I'm getting to is, what's the potential upside here looking at those margins and the occupancy levels there?

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [35]

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Well, the great thing about the Netherlands is that, firstly, you are seeing much better margins. That being said, it's a market that's going through deregulation. So on turnover, we're seeing significant jump to market rent when we do a prescribed list of renovations. So the way to look at the Netherlands is we wouldn't see typical Canadian turnover rates of 25% to 30%. We're more likely to see turnover rates of 8% to 12%, but in that 8% to 12%, there is significant opportunities to still lift rents with investment. So the growth we see is revenue growth, and that's where we think CAPREIT can add the most value from a marketing perspective and basically, how to get at that. There's not a lot of experience. The managers that currently exist in the Netherlands have not been operating in this environment and there is very, very little experience on how to deal with market rent.

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Dean Mark Wilkinson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [36]

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Interesting. And then the assets that you've agreed to acquire. Do they look like the same kind of occupancy and margin levels? Or would they, perhaps, be a little bit, say, higher on the occupancy level?

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [37]

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The -- they're all operating at virtually full occupancy. We got our team in place there as of mid-October. We don't expect any change. In fact, we expect the occupancy numbers to tighten further. And the fact that we're in direct management control as of mid-October is something very exciting for us.

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Scott Cryer, Canadian Apartment Properties Real Estate Investment Trust - CFO [38]

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But turnover for us in that markets are positive, I think. The investment opportunity to deregulate individual units and vest capital is really a big piece of that story. So lower occupancy buildings where we can do that or higher turnover is actually something that we are encouraging as opposed to being discouraged by. So definitely part of the Netherlands story.

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Dean Mark Wilkinson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [39]

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Okay. So fair to say that the organic growth that would come out of that market should be significantly higher than, say, what we're seeing in Canada?

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [40]

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Yes, we're positive on the Netherlands. That's why we're there and we expect to see decent growth numbers.

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Dean Mark Wilkinson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [41]

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That makes sense. And just one last simple one from me. I just noticed sort of something anomalous on the balance sheet, Scott, just for carrying that $26 million of cash. Is that just a timing issue between closing of that acquisition and we can expect that to go back down towards the zero level that it's historically been at?

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Scott Cryer, Canadian Apartment Properties Real Estate Investment Trust - CFO [42]

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Yes. I believe it's that and some inability to legally offset some cash though. I need to get back to you on the details on that, but we don't expect that to be elevated, no.

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Operator [43]

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The following question is from Matt Kornack of NBF.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [44]

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Just quickly turning to the Netherlands, again. Have you put any thought to how that portfolio fits in CAPREIT over the next few years? Do you anticipate continuing to hold that as a wholly-owned position, and get the upside and then maybe find a way to spin it out to a separate vehicle? Or has the view changed that you'd like to hold it as a sort of entity within CAPREIT for the long term?

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [45]

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I think the way we went to the Netherlands because of the quality of the real estate. [Tom] is very focused on the real estate first. We like the real estate. We approach it from a real-estate basis. You heard of it, the spreads are very favorable. We'll continue to look at options as time goes by in terms of what ultimately becomes of the Netherlands.

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Scott Cryer, Canadian Apartment Properties Real Estate Investment Trust - CFO [46]

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But we -- I mean, as far as our total investment levels with the closing of this upcoming portfolio, we really feel like we have significant size now to be meaningful to set up operations. We're not looking to take our exposure that much greater than where it is today. Obviously, we're going to look at ways strategically to grow that. So there's options that we are -- that we will continue to look at because we feel like there is really a deep amount of transaction flow and the ability to grow this meaningfully could be good. But we are conscious of total European exposure, so. So we'll keep that very balanced.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [47]

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Fair enough. Turning to the mortgage renewals, I think there was some noise in the quarter with regards to maybe the Netherlands financing in there. But if we were strip that out, I mean, in Canada, you're still, I would assume, going for longer-term financing at 8- to 10-year terms and...

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Scott Cryer, Canadian Apartment Properties Real Estate Investment Trust - CFO [48]

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Yes, we're mostly doing 10 year. Obviously, it spiked a little bit. We're just north of 3% on a 10-year deal, which you see it spike up a little bit, 10, 15, 20 basis points. But I think on a long-term basis, that's still very attractive. And we think that the long-term position is the right one in continuing to manage the duration of our mortgage portfolio. So we don't see that trend changing for a while.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [49]

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And in terms of just the way you finance the European operations, is there the ability to do long-term sort of secured mortgages? Or will it continue to be facility type transaction?

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Scott Cryer, Canadian Apartment Properties Real Estate Investment Trust - CFO [50]

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So the way that we finance the Netherlands so far is we've done lending with local domestic lenders there on effectively a mortgage -- first mortgage style basis. So that's -- we did a 5-year deal at 1.36% that we locked up couple of days ago. We've done 7.5-year deals closer to 1.9%. So we leverage about 60% locally. We think that gives us a good financing strategy based on any strategic plans we go forward with in the future. At that leverage level, it's easy to make sure we've structured corporately. And then on the Canadian side, what we've done, you'll see is we've entered into -- there is an opportunity to go into a U.S. LIBOR loan and swap out the FX and interest and save it significant interest rate. So really we've levered up the remaining European exposure through this U.S. LIBOR loan, that's swapped out. And so we're effectively 100% levered on those assets. So we've managed the balance sheet FX risk.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [51]

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And so 100% levered and the currency is 100% covered?

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Scott Cryer, Canadian Apartment Properties Real Estate Investment Trust - CFO [52]

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Hedged out. As well -- sorry, 100% on the debt side and on interest payments, we do still have exposure on the net income. We have not hedged the net income that will come off those portfolios.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [53]

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Fair enough. And then one last question with regards to operations in that 2 smaller markets. But can you speak to -- I know Halifax is building-specific issue. But also, can you touch on what's going on in Alberta? And if we've reached the point of stabilization in that market?

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [54]

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Yes, with Alberta, we think we are getting close to the bottom. I say that because we are getting rent increases on our renewals, although we are continuing to see a much smaller degree of erosion on turnover. We're very confident though that we're getting close to the stabilization there, and we're positive on the fact that once things do stabilize in Alberta, we will see the return to people going to rental. We all seem to forget this. Apartments do thrive in uncertain economic times. We think that this is the stage of transition and if uncertainty stays in Alberta, we do see a positive outlook for our rental portfolio there. When it comes to Nova Scotia, a small portfolio, we're looking very, very carefully at what to do there and we expect that to turn around in 2018.

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Operator [55]

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The following question is from Mario Saric of Scotiabank Bank.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [56]

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I wanted to circle back to the very impressive 8.5% rent bump on turnover. Your discretionary spend for 2017, roughly equates to about $2,500 a door. I'm just wondering whether the discretionary spend on those units that comprise the 8.5% turnover would have been materially different than the $2,500 a door?

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [57]

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We had a little troubling hearing. If I heard the question correctly, I think you're going back to our strategy of doing more maintenance work on turnover versus spending capital improvement dollars? Is that correct?

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [58]

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Yes, I'm just -- I'm trying to understand kind of what percentage of the 8.5% rent bump on the turnover was driven by just simple kind of market tightening versus deployment of capital into the suite upon turnover to get a higher rent?

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [59]

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Yes, we'll get you that number.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [60]

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Okay. And then, I guess...

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [61]

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It's significant though. It's significant. It's a definite contributor.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [62]

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Okay. And I think we talked about this last quarter or the quarter before, but given the very strong rent growth, do you have any sense in terms of whether affordability at all is becoming an issue in Toronto and in Vancouver from a rental perspective?

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [63]

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The way I would answer that is our bad debt continues to work at numbers lower than CMHC's mortgage default rates, like our bad debt numbers are extremely, extremely low. So we're not seeing it in our portfolio. We believe that we are appealing to the higher end of the market. So at this point, absolutely no signs of affordability issues in the portfolio at all.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [64]

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Okay. And then just on -- the last question on the rent bump. Like Mark you mentioned that we have to be mindful of the average lease duration of the tenant -- of the sitting tenant kind of going forward in terms of tenant roles and the rent bumps? Do you have any sense in terms of what the average lease duration would have been for tenants? They were occupying the space on those (inaudible) that comprise the 8.5%, would be materially different than the average for the overall performance?

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Mark Kenney, Canadian Apartment Properties Real Estate Investment Trust - CEO, President & Director [65]

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Our units that turn to market have historically gone for about a 2-year period. The -- what we are watching carefully is, if you get accelerated rent, lease terms tend to shorten a little bit. People will pay a higher rent but won't tend to stay for longer. That's why we're not -- it's really early stages to see the duration of the leases. That being said, the market continues to be very, very strong. So those that are staying short are being replaced by people that are prepared to pay a premium.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [66]

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Okay. And I may have missed this earlier in the call, but given the expectation for stable occupancy and the rent growth is very impressive. Can you give us a sense in terms of whether you think, in 2018 you can achieve similar same-property NOI growth relative to what you achieved year-to-date in 2017?

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Scott Cryer, Canadian Apartment Properties Real Estate Investment Trust - CFO [67]

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Yes, I think we've kind of talked to the continued top line growth. Obviously, between the guideline increases being kind of in line, those two strong markets in BC, Ontario, Alberta flattening where before it was really dragging results. We feel like it won't have a punitive impact going forward into '18. From an NOI point of view, we would expect similar total growth, same-store growth. I think, probably, if anything, utilities is one area where we really benefited from both a consumption and pricing point of view this year. So that's probably the biggest potential headwind from a margin point of view if that reverses, but hard to predict.

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Operator [68]

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The following question is from Heather Kirk of BMO Capital Markets.

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Heather C. Kirk, BMO Capital Markets Equity Research - Former MD of Equity Research & Analyst [69]

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David, you talked about the same CAPREIT's 20th year. And I'm just wondering, as you look out going forward, are there any things that you would be doing quite differently or tweaking from a capital allocation or risk-mitigation perspective?

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David Ehrlich, Canadian Apartment Properties Real Estate Investment Trust - Former Trustee [70]

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Right, I think, as we mentioned before, Heather, we are continuing to look at the portfolio and drilling down even more than we did in the past in terms of what the value of that property is, what the CapEx will be over the next 5 years and what the highest and best use of that is. Also, I think it's widely known that we have a lot of really good development sites. And so, again, we're putting that in the mix and evaluating all that very, very carefully. As I said before, when we can -- in an answer to Jonathan, when we can give better numbers and guidance and so forth, we will. We are heavily into the processes doing that in a very granular way.

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Scott Cryer, Canadian Apartment Properties Real Estate Investment Trust - CFO [71]

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And I'd say the one other difference is, obviously, very obvious is our market cap and our asset base. We've grown to a size that the need to grow has probably changed a little bit. Now we think we have a platform or an asset base that can really afford a top class operating platform. So just the need to grow has probably changed a little bit.

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Heather C. Kirk, BMO Capital Markets Equity Research - Former MD of Equity Research & Analyst [72]

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And I guess, this one's for you, Scott. How does that tie into your thoughts on the balance sheet as well in terms of both development, potentially ramping up and where you would be allocating proceeds from dispositions? I noted that. If you look at your debt, on a debt versus historical cost basis, is actually up. And I'm just trying to get your thoughts around the cap rate environment and all these other moving parts and how that ties into your views on debt.

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Scott Cryer, Canadian Apartment Properties Real Estate Investment Trust - CFO [73]

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Yes, I mean, I think, we definitely are trending more to the current debt level we're at, maybe even slightly down, we could use that. I think what David was saying is we really are taking a much deeper dive on the development aspect to see really the quantum that, that could be. We are focused mostly on infill on existing land, and we're looking at kind of even the ability to knock down buildings on some of the portfolios in the stronger Ontario, BC markets. So if it's meaningful enough, we'll manage our balance sheet to make sure we have the appropriate low leverage to fund those and in a lower risk way. So definitely not looking to spike that up in any meaningful way. And as our development plan comes forward, we'll probably look more to more conservatism going into it.

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Heather C. Kirk, BMO Capital Markets Equity Research - Former MD of Equity Research & Analyst [74]

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I know it's probably early at this point, but if there are sizable opportunities, what are your thoughts on partnerships with other capital partners in order to move that forward more aggressively?

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David Ehrlich, Canadian Apartment Properties Real Estate Investment Trust - Former Trustee [75]

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Yes, Heather, again, lot goes into this in terms of analysis of allocation of risk and how you can put that onto somebody else in terms of, if you're tearing down a building and have to house people and the cost of losing the rent and the cost of interest while you build the replacement, it depends if we have excess land, that's a different number, and so forth. So it's very, very site-specific, and we will pick the best strategy for each location that we look at, once we have the information. Structuring always comes last. First, we want to see all the business components to it, all the sensitivities and then we'll pick the best structure in each case.

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Operator [76]

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There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Ehrlich.

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David Ehrlich, Canadian Apartment Properties Real Estate Investment Trust - Former Trustee [77]

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Thanks, again, for your time and attention this morning. And if you have any further questions as always, please don't hesitate to contact us at any time. Thanks, again, and good morning, and have a great day.

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Operator [78]

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Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.