Good morning, ladies and gentlemen, and welcome to the Boardwalk Real Estate Investment Trust Q4 results conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question- and- answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, February 22nd, 2019. I would now like to turn the conference over to Lisa Zmanich. Please go ahead.
Thank you, Jessica, and welcome to the Boardwalk REIT 2018 Q4 results conference call. With me here today is Sam Kolias, Chief Executive Officer, Rob Geremia, President, William Wong, Chief Financial Officer, Lisa Russell, Senior Vice President of Acquisition and Development, and James Ha, Vice President of Finance and Investor Relations. Note that this call is being broadly disseminated by way of webcast. If you've not already done so, please visit boardwalkreit.com where you will find a link to today's presentation, as well as PDF files of the trust financial statements, MD&A, as well as supplemental information package. Starting on slide two, we would like to remind our listeners that certain statements in this call and presentation may be considered forward-looking statements.
Although the expectations set forth in such statements are based on reasonable assumptions, Boardwalk's future operation and its actual performance may differ materially from those in any forward-looking statements. Additional information that could cause actual results to differ materially from these statements are detailed in Boardwalk's publicly filed documents. At the conclusion of today's presentation, we will be opening up the phone lines for questions. I would like to now turn the call over to Sam Kolias.
Thank you, Lisa, and thank you everyone for joining us this morning. Moving on to slide three, we enter 2019 with improving rental market fundamentals and positive momentum in operational growth. We believe Boardwalk offers our residents with the best product quality, service, experience, and value in the market. We have begun to deliver revenue and NOI growth from a cyclical bottom, and our trust units today represent exceptional value. Our current unit price trades at a significant discount to our IFRS NAV of approximately 30%. Our per-door trading value today is approximately CAD 147,000, well below our CAD 178,000 per door IFRS NAV, and well below recent multi-family real estate transactions in Alberta, which averaged over CAD 200,000 a door in 2018. Replacement costs are significantly higher than apartment trading prices.
In 2018, we have essentially accessed equity capital at our approximately CAD 60 per unit of IFRS value when we have sold assets at approximately our IFRS values in the private market. 2018 was a pivotal year for us, delivering 5.5% same-store NOI growth, 4.7% FFO per unit growth, and 3.9% same-store revenue growth. Our occupied rents are CAD 1,138, well below average household incomes, and represent exceptional affordability, a key indicator which most accurately correlates to future rental growth opportunity and underpins our ability to reduce incentives. In the H2 of 2018, incentives have been decreasing and represent a revenue recapture opportunity of CAD 45.9 million. We are introducing 2019 financial guidance of 4%-9% same-store NOI growth and between 6%-13% FFO per unit growth.
Our trust units represent exceptional opportunity for both value and growth. Moving on to slide four, we illustrate current rental market fundamentals for each of the markets where we operate. Boardwalk strives to create value through all stages of the rental market cycle. Approximately 60% of Boardwalk's portfolio is in Alberta, where the rental market fundamentals continue to improve and balance. Major refining, upgrading, and oil transportation investments were made in the last quarter. The Alberta economy continues to diversify, along with increased international migration continuing to increase the population and demand of housing. Grande Prairie is already seeing benefits from an improved economy and continues to move into a strong rental market, almost fully occupied with strong demand for rentals. Fort McMurray remains in a soft rental market with the Western Canadian Select differential recovery.
Calgary rental fundamentals are ahead of Edmonton, which is rebalancing and moving toward improving rental market fundamentals as we head into the stronger spring, summer seasons. Our focus on peak-performing team leaders, along with significant capital investment made earlier in Calgary, has produced an NOI gain of 16% and reflects the successful strategy of our product diversification, which is delivering significant gains in NOI. We are applying these lessons into our Edmonton market for better gains in NOI this year. Our Saskatchewan region saw some gains in the most recent quarter, with Saskatoon moving into a more balanced supply and demand. Our continued focus on a peak-performing team, better product quality, service, and experience are helping to turn our results back into positive territory in this region as well.
Ontario continues to deliver solid results as we increase investment and adjust our pricing to market levels in order to better position and compete with new supply. Quebec rental market fundamentals have improved, our sequential revenue for the last quarter has increased to 1.4% from 0.5% and is positioned for better results in 2019 as we have reduced expenses, increased occupancy, and rental revenue. Slide five, a number of positive economic trends supportive of rental demand in Alberta. Some highlights include continued positive net migration, labor growth, economic diversification with increased artificial intelligent investment in Alberta, CMHC rental market fundamentals improving, and increasing affordability for the renter demographic. The Alberta economy continues to change, we are finding new ways to deliver performance in this different economy. Slide six provides a summary of our strategy.
Over the next several years, priority number one remains the recapture of our revenue from this cyclical trough and increase cash flow. This represents a significant opportunity as our incentive reductions gather momentum. Our brand diversification has provided outsized returns and performance in our Calgary market, where we began this program over two years ago. We are applying our lessons and increasing our focus in our Edmonton market, which is much bigger in scale. Our lessons learned in Calgary will allow us to stretch our capital dollars much further in Edmonton, realizing better results. Fine-tuning our strategy, creating a scarcity of renovated units in Calgary will allow us to further enhance our returns from our brand diversification investments. Increased geographic diversification over the next decade will reduce volatility further while remaining opportunistic towards high-grading our Western Canadian portfolio.
Strong balance sheet and maximum reinvestment of cash flow supports an external growth strategy, maximizing our net asset value. I'd like to now turn the call over to William to provide a summary of our financial results. William?
Thank you, Sam. Slide seven is a summary of our revenue and NOI achieved for the Q4 and 2018 full year. Q4 same-store rental revenue was CAD 109.2 million, an increase of 4.4% from the same period last year. Total revenue of CAD 110.4 million increased 3.8% compared to the same period in 2017. For the year, total same-store rental revenue was up 3.9% to CAD 331.5 million, and total rental revenue was up 2.8%. Q4 same-store NOI of CAD 57 million was up 5.1%, and total NOI of CAD 56.1 million was up 2.6% from the same period last year. For the year, same-store and total NOI was 5.5% and 4.6%, respectively. Please note, total NOI is lower than same-store NOI due to shared warehouse distribution and operational costs. The next Slide eight, provides a summary of our FFO and AFFO for the Q4 and full year 2018.
FFO per unit of CAD 0.54 for the quarter and CAD 2.21 for the year was up 1.9% and 4.7%, respectively, compared to the same periods in 2017. These results include CAD 0.03 and CAD 0.06 of adjustments for the three and 12 months due to severance and condo fees payable as a result of a negative court decision with respect to common property in one of our Edmonton acquisitions, which closed in 2016. Adjusted funds from operation per unit, which includes an estimated CAD 695 per apartment unit of maintenance capital of CAD 0.42 for the Q4 and CAD 1.75 for the 2018 year, was up 2.4% and 4.2%, respectively. Slide nine reports on Boardwalk's stabilized property portfolio for the Q4 of 2018, as well as on a full year basis.
For the Q4 , overall revenue continued to improve, increasing 4.4%, while operating expenses increased 3.7%, resulting in an NOI increase of 5.1%. Alberta, in particular, posted a revenue increase of 5.7%, with a slight increase in operating costs, resulting in an NOI increase of 8%. For the 2018 full year, same-property revenue was up 3.9%, and NOI grew 5.5%, which was in line with the trust's overall financial guidance. I would now like to turn the presentation over to Rob Geremia. Rob?
Thanks, William. Slide 10 reports the trust stabilized property sequential revenue. Q4 saw an increased acceleration in the trust quarter-over-quarter revenue growth. Both Edmonton and on an overall basis, we reported a growth of 1.1%. This strengthening revenue was the combined effect of increasing market rents and the reduction of incentives, slightly offset by the increase in vacancy. Moving on to slide 11. Boardwalk continues to focus on its brand-specific strategic capital investments. We are constantly refining our capital investment process, searching for ways to increase our reported returns while meeting the needs and wants of our existing and prospective resident members. During 2018, the trust repositioned approximately 1,800 suites, investing CAD 118 million into its operational properties. As is shown on the slide, the investment is showing strong returns. After adjusting for maintenance capital, returns range from 8.6%- 21.1%. On a total basis, the return was 16.8%.
These returns are far superior to those reported in 2017.
We continue looking for ways to achieve superior returns by increasing our investments in our properties' common areas. Examples of these are shown on Slides 12- 14, and include common areas and amenity renovations. Upon completion of these projects, adjustments are made to the suite rents to achieve desired returns. Slide 12 showcases one such renovation, Varsity Towers, located in Calgary. The trust invested CAD 1.95 million in exterior signage, common area, and amenity upgrades, such as a social room and a fitness center. The trust has adjusted rents in this 297-unit property by CAD 50 per suite, per month to achieve the targeted return of 9%. To- date, we have been successful in passing on these increases both through new and renewing leases. Slides 13 and 14 demonstrate different levels of renovations that were performed on common areas in Edmonton at Tower on the Hill and Viking Arms.
As with Varsity renovations, we have adjusted rental rates on these properties at the completion of these projects to achieve long-term returns of 14% and 17%, respectively. In renovating these projects, our design team worked with our interior capital teams, supplemented by exterior contractors to complete these projects in a timely manner. Slide 15 reports the overall revenue and separates incentives and vacancy loss. As is shown on the left-hand chart, on an overall basis, total revenue continues to improve through balancing of vacancy loss and incentives. The chart on the right focus specifically on reported incentives, which are continuing to trend downward. Slide 16 reports the trust's overall occupancy level on a monthly basis. For 2018, average occupancy was over 96%, in line with our overall occupancy 2018 targets. Slide 17 shows continued stabilized revenue growth on both a quarter-over-quarter and a year-over-year basis.
The trust posted revenue growth of over 4% in Q4 as compared to the same period in the prior year. Chart on the right-hand side shows continued improvement in our reported occupancy rental levels. I would like to turn the call over now to Lisa Russell to update you on our acquisitions, dispositions, and development opportunities. Lisa?
Thank you, Rob. Starting on Slide 18, we are extremely pleased to announce a new joint venture with Redwood Properties, a Toronto area developer which provides best-in-class expertise in construction of high-rise apartment buildings and the development of large-scale master planned communities. Partnership was formalized in December of 2018 and will construct, own, and operate this landmark transit-oriented 365-unit mixed-use property on a 50/50 basis. Boardwalk is proud to welcome Redwood Properties as one of our newest strategic partners. The site located at 45 Railroad Street is near downtown Brampton and directly across from the GO Transit station. The development will total approximately 380,000 residential sq ft between two towers. The 25 and 27-story towers are connected by a three-story podium, featuring an additional 11,000 sq ft of retail space.
Boardwalk acquired a 50% interest in the land from Redwood Properties for CAD 7.9 million, equating to CAD 40 per sq ft buildable. Total construction cost of the development, including land, hard cost, soft cost, development levies, HST, and carrying cost, is estimated to be between CAD 200 million and CAD 215 million, equating to CAD 100 million- CAD 107.5 million for each partner. Excavation and shoring is underway, and the partnership is currently finalizing construction and trade contracts. First and second towers are estimated to be completed in 2022 and 2023, with stabilization of the entire development occurring in 2024. Boardwalk will act on behalf of the partnership as the operating partner once construction is complete. Partnership intends to fund this development with a combination of available capital and construction financing. The addition of newly constructed rental communities in a new target market is consistent with our long-term strategy of diversifying our portfolio.
This new development, which is exempt from Ontario rent control, provides a measured, high-quality entry into the Greater Toronto Area. Slide 19 provides an update on Brio, a premium 12-story concrete, 162 units mixed-use development in partnership with RioCan. The building structure is expected to be completed the first week of March. The envelope and window wall installation has commenced. Mechanical and electrical rough-ins are well underway, interior construction is starting to ramp up. Estimated occupancy remains to be in early 2020. Slide 20 provides a summary of our current internal development opportunities, which total over 6,000 apartment units on excess land we currently own. We are focusing on creating development concepts and mapping for our Ontario sites, we'll continue to provide updates as we progress through the development phases.
Our priority will be on entitlements in our supply-constrained markets of Ontario and Quebec, are in early stages of investigating these prime opportunities. In December of 2018, the trust sold a portfolio known as Kemme Apartments in Regina, Saskatchewan, as shown on Slide 21. This 140-unit portfolio consists of eight buildings, each ranging from eight- 32 units. We closed this transaction on December 14th, 2018, for a sale price of CAD 15.9 million, which is in line with the fair value of these assets. The sale proceeds of Kemme Apartments, combined with the 641-unit non-core Regina portfolio we sold a year ago, provided the trust the opportunity to high-grade our Western Canadian portfolio by redeploying these proceeds towards our recently announced acquisition of a well-located 299-unit portfolio in Calgary in December of 2018. We continue to be active in seeking opportunities that diversify and/or high-grade our existing portfolio.
I would now like to turn the call over to James Ha. James?
Thank you, Lisa. Slide 22 provides a snapshot of Boardwalk's liquidity position. At the end of the Q4 , the trust had approximately CAD 253 million of available liquidity, comprised of CAD 38 million of cash, CAD 15 million in committed financing, and an undrawn CAD 200 million operating line. The net of cash as a percentage of the trust's reported asset value remains conservative at approximately 47%. Of note, the trust interest coverage of 2.68x is a further improvement as the trust continues to grow and recover its revenues. Entering 2019, the trust had approximately CAD 535 million of mortgage maturities, which included a single CAD 313 million mortgage for our 3,100-unit Nuns' Island community located in Montreal.
As summarized on Slide 23, the trust opportunistically executed a forward interest rate lock arrangement with its lender for this Nuns' Island mortgage in December of 2018 to secure the interest rate of this mortgage upon its maturity in November of this year. The mortgage was forward locked at an interest rate of 3.27% for a term of eight years. When combined with our renewals completed in the first two months of 2019, the trust has forward locked and renewed 65% of its mortgage maturities. Currently, the trust anticipates its renewals to continue to bias longer-term mortgages with five and 10-year interest rates of 2.9% and 3%, respectively. Wrap up 2018, which marked a turnaround for Boardwalk, slide 24 provides a summary of our 2018 performance and progress relative to our strategic plan. Our first pillar was to recapture revenue from a cyclical trough in our Western Canadian portfolio.
Do so, we entered 2018 with a revenue opportunity, which consisted of vacancy loss of CAD 33 million and incentives totaling CAD 40 million. Our team did a great job of reducing our vacancy rates to our targeted range of 2%- 4% for most months in 2018. The result was a significant decrease in vacancy loss, which now totals CAD 18 million for 2018, which we believe we can continue to further reduce. This vacancy loss improvement has positioned the trust to reduce incentives into 2019 and represents an opportunity of over CAD 45 million over the next two to three years. Our second pillar was our continued brand diversification to elevate our Western Canadian portfolio. As Rob mentioned, our investment in suites, lobbies, and common areas are anticipated to deliver solid returns, while also diversifying our product offering to cater to a wider rental demographic.
Additionally, the trust sold over 700 units of non-core assets in Regina while redeploying proceeds towards a better-quality 299-unit portfolio in Calgary. In 2019, we anticipate a continuation of this brand positioning and are excited to increase our focus on our Edmonton portfolio, while also maintaining high occupancy and reducing incentives. Third, the trust set a goal of diversifying its portfolio over the next decade, as Lisa mentioned, we are excited to be in the ground on our first development in the GTA with a like-minded partner. By entering this new market with a landmark, high-quality development, we can best position the Boardwalk brand to deliver the best product and experience to our future residents. Fourth, we maintained our solid financial foundation by balancing our leverage, maintaining liquidity, and improving our debt metrics from a cyclical trough. We anticipate this to continue as we recover and grow our revenues.
Lastly, our results. Stabilized NOI growth for 2018 was a solid 5.5%, within our original guidance range of 2%- 7%. As William highlighted, an unfavorable legal and condominium expense in December of 2018, our focus on a team of caring peak performers, was both a cost and an investment. Our FFO of CAD 2.21 per trust unit, which includes CAD 0.06 of adjustments, represents a turn from a bottom in 2017, though was within the bottom half of our original guidance range, provides us room for improvement. We enter 2019 well-positioned to continue, accelerate, and deliver growth. I'd like to pass the call back to Rob to provide details on our 2019 forecast.
Thanks, James. Moving on to Slide 25. During 2018, we continued to look for ways to modify our existing operational structure for further efficiency, while striving also to increase the overall long-term strategic initiative of asset value creation. During the year, we created an alternative operational structure in our smaller area of Southern Alberta. This new structure more closely resembles an asset manager model. The model combines the daily operational needs while adding additional responsibility of long-term asset value creation. Under this new model, a significant amount of this manager's time focuses on long-term asset value creation. Under this new structure, we are able to operate with a decreased number of site associates and replacing these with a lower number of asset managers. As these new positions are managerial level, all costs associated with this position are classified as corporate expenses for reporting purposes.
With this in mind, we are introducing 2019 financial guidance. For 2019, we are anticipating an FFO and AFFO guidance range of between CAD 235-CAD 250, and CAD 188-CAD 203, respectively. Adjusting for the new model, we anticipate stabilized NOI growth of between 4%-9%. It should also be noted that the impact of IFRS 16 leases and the related financial reporting has been adjusted in determining the reported stabilized NOI. Consistent with our current strategic asset management model, we are now providing an operational range of value added capital of between CAD 72 million and CAD 99 million. The investment in this range will be dependent upon achieving anticipated levels of return. For 2019, we are anticipating maintenance capital amount of about CAD 717 annually per suite. In addition, we are anticipating a development expenditure of CAD 44 million for 2019 on committed projects.
Including this amount, overall capital to be invested will range from CAD 139.5 million-CAD 166.6 million. Slide 26, report to trust distributions. Boardwalk's distribution policy allows the trust to reinvest free cash flow into value-added opportunities. For the month of February through April 2019, our monthly distribution is set at CAD 0.0834 per month, consistent with our annual target of CAD 1 per trust unit. This concludes the formal part of our call, and just prior to opening it up for questions, we would like to remind everyone to keep their questions to a maximum of two, please, just to ensure that we are able to address as many callers as possible. We'd like to open it up now to the phone lines for questions. Jessica?
Thank you very much. Ladies and gentlemen, we will now begin the question- and- answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You'll hear a three-tone prompt acknowledging your request, and your questions will be pooled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Frederic Blondeau of Echelon Wealth Partners. Please go ahead.
Thank you. Good morning.
Morning, Frederic Blondeau.
Okay. I'll take two then. My first question would be just on Redwood Properties. Could you give us a bit more details on what your selection process was, the expected scope of the relationship, and maybe expected yield on the Brampton project?
Okay. We're expecting high single to low double-digit total return. We have worked and met this joint venture partner probably a year ago or so now. Two years we've been working with them. We think that they're a perfect cultural fit with us, they have the development expertise for high-rise concrete, and they're very successful in Ontario. We believe that we've selected another great partner. They have lots of excess land too, in other markets right now, we think that we have a potential pipeline down the road with them. Yeah, we look forward to this development. We're actually really excited about it.
I was under the impression that the initial plan was to be exposed to core central Toronto. Looks like your thought process might have changed here. Maybe some color on that?
It hasn't changed. We are looking at all opportunities as we're given these single opportunities. We continue to look in the core GTA or the core. We're also looking at suburban markets and different major cities. We're looking at all transit-oriented centers and opportunities from land to legacy. That hasn't changed. It's just more opportunity-driven at this point.
If I may, second question on the Quebec portfolio, the 0.4 same-store NOI growth. It's a little bit surprising. I was wondering if you could give us a sense of where the weakness comes from and maybe a bit more color on the OpEx increase in the sub-portfolio.
The slow revenue gains reflect quite a few units under renovation. When our units are under renovation and being repositioned, the revenue is not captured. We're seeing lower turnover, and we are actually turning around our units quicker as well.
Okay.
That's really why we're seeing a pickup in revenue sequentially in Quebec, because we are getting better in our turnaround times in our renovations.
Okay. Perfect. Thank you.
On the expense side, we had some operational expenses come through in the Q4 . As you can see, the expense is a little higher.
Yeah
than on a year-to-date basis. Those will normalize themselves as we go forward as well, too.
Okay. Perfect. Thank you. I'll leave it there.
Thanks, Frederic Blondeau.
Your next question comes from Jonathan Kelcher of TD Securities. Please go ahead.
Thanks. Good morning.
Morning, Jonathan Kelcher.
First question, just on your guidance, what assumptions are you making on incentives wearing off for 2019? I think previously you were thinking sort of a month, a year. Is that still what you're aiming for?
Jonathan, it's Sam. The summer peak season is coming. Last year we learned a big lesson. Last summer, we essentially went from two-three months incentives to zero, we learned that was too much of a change for our residents. This year, going into our peak season, we're targeting between CAD 50 and CAD 100 of reduction in incentives, which is between 4% and 8%. That will provide us with the NOI gains that we're looking for on the bottom line in our FFO guidance ranges as well. We're on track for January, February. Looking at our physical vacancy today was just over 3%, so we've dropped our physical vacancy significantly as of today. January and February are tracking slightly ahead of our budgets.
We're gonna continue to drive occupancy higher and be more moderate in reducing our incentives so we can deliver a very sustainable, predictable, and steady NOI and FFO increase.
Okay. That sounds good. Then just switching gears back to the Brampton development. First of all, just to clarify that the high single to low double digit, that's a levered return?
Yes, absolutely. Yeah.
Yeah.
Yeah.
How much construction financing will you put on that?
Hey, Jonathan Kelcher. It'll vary. At this point, we're probably somewhere between 50% and 65%. Both partners are fairly conservative when it comes to that metric. We'll finalize it once we get a little closer, but at this time, we're modeling somewhere between 50% and 60%.
Okay. You're looking at CAD 30 million-CAD 40 million of cash expenditures over the next three- four years?
Yeah.
Correct.
Phased over the next three years. Yeah.
Okay. Thanks. I'll turn it back.
Thank you.
Thank you, Jonathan Kelcher.
Your next question comes from Mario Saric of Scotiabank. Please go ahead.
Hi. Good morning.
Good morning.
My two questions will pertain to the guidance. The first question, at the midpoint of the guidance, what type of NOI margin is being reflected? Your 2018 NOI margin was 52%. That was up 90 basis points year-over-year. I think Rob, you mentioned that some of the Q4 expenses are going to be normalized going forward. I'm just trying to understand what type of margin growth you're anticipating this year.
Two things to answer that question, Mario. Number one is, adjusting for the new model that we have in place, again, the asset manager model versus the operational model. That's going to increase margins to around 55%, 56% by default. Adjusting for that, we're probably going to be adding about 2% to NOI margin growth over the year.
Maybe, I guess, the related question on the asset manager adjustment. What would the 4%-9% look like if the model wasn't adjusted?
Sorry, couldn't hear you, Mario. Could you repeat that, please?
Oh, the guidance, the same store NOI guidance of 4%-9%.
Yes.
What would that guidance look like if you hadn't adjusted the way you classify the costs associated with this?
7%-12%. It adds about 300 basis points to each end of the guidance range. We will be providing you a reconciliation for a couple of reasons. One is this change in operation structure. Also with the new IFRS leases section, it's going to muck up the reported NOI financial reporting. We will be providing in Q1 a reconciliation backwards as well, too.
Got it. Okay. 1%-5%, I guess, all is equal. Sorry, 1%-6%.
You'd add 3% to each end of the range. It'd go from 4%- 9% to 7%- 12%.
Got it. Okay. My second question, I guess, would be just on the mortgage financing picture for 2019. What's the overall expectation for mortgage up financing during the year?
Hey, Mario. It's James. Our budget is likely in the kind of CAD 60 million-CAD 80 million range today. Obviously, that's going to change based on opportunity. Again, we're anticipating somewhere in that CAD 60 million-CAD 80 million range.
Great. Thank you.
Keep in mind, Mario, that we pay down roughly CAD 60 million of principal every single year as well. Thanks, Mario.
Great. Thanks.
Thank you.
Your next question comes from Brendon Abrams of Canaccord Genuity. Please go ahead.
Hi. Good morning, everyone.
Good morning.
Good morning, Brendon.
Just in terms of the Redwood development, just curious whether you would be in any advanced discussions with maybe any other developers in Eastern Canada. I suppose how much of your balance sheet or maybe annual capital spend would you be comfortable with employing into development opportunities?
Excellent question, Brendon. No coincidence, and maybe it is, that both joint venture partners we have are named Eddie. Eddie Sunshine and Eddie Goldstein. Both of them are very long in land, and both of them really are a phenomenal fit in our culture and our values. Family values, most importantly, and they're very long in land. They really appreciate our experience in multifamily and our culture, and we're very long in multifamily rental operations experience. We believe it's a really ideal fit. We are very happy with our relationship with Eddie and his entire team at RioCan, and we continue to work together with the RioCan team, and we will continue to work together with Eddie Goldstein at Redwood, and his wonderful, amazing family, because they have plenty of land that complements our strategic partnership as well.
We are very excited with this because there's no rent control. We're very happy with the most recent provincial legislative changes to stimulate new supply and eliminate rent control in new developments. We're very happy entering into the Ontario market and growing in the GTA with brand-new non-rent-controlled product. We have other discussions with other partners as well. We are now, because of our brand diversification and renovation strategy, we are looking at legacy products again, to be honest. For all the realtors and legacy owners listening to the call, please call Lisa for any of your assets that you are looking to sell. Source of funds, Brendon, a great question. Free cash flow, the best source of funds of all.
That's why we reduced our distribution and introduced a maximum reinvestment of our distribution. It's important to know that we have a 10 to 15-year goal. As our CAD 45 million of incentives roll away, and again, we'd like to remind everybody, that's about CAD 1.20 a sq ft. We've done an extensive study of North American cities, period. There's a lot of data in the U.S. The number one leading indicator of rental growth is affordability, not supply. That's one thing that the data in the U.S. really stands out with, and we're using especially here, and we're seeing the big correlation here with affordability giving us the turnaround results in an economy that at best we can describe as changing. Affordability continues to be the most important correlation to predict revenue growth.
As our revenue growth and cash flows increase, we will have that free cash flow with a maximum reinvestment distribution policy to reinvest into developments and value add opportunity in different geographic regions, and particularly the GTA going forward. The West Coast as well, we understand the market is changing there and change is the only constant. We're constantly looking and spending a lot of our time and resources developing relationships, which are their biggest assets. Stay tuned for more exciting opportunities going forward. We've got a lot in the hopper.
Okay. That's helpful. Just turning to CapEx, in terms of your guidance here, or perhaps you could just provide some color. Now that the market's clearly improving towards balance in some of your core markets, are you shifting any of your spend? Also based on some of your lessons over the past few years from-
Yeah
whether it's suites versus common areas versus lobbies-
Yeah
perhaps you could just talk a little bit about-
Great question.
some of your renovations and capital.
Great questions. We started from the inside and went outside, which is backwards, mistakes are lessons. We learned it's important to start from the outside and upgrade that entire experience from the minute a new or prospective resident comes in. Especially our existing residents, this is a true story. Some of our existing residents cry after our renovations to the common areas are completed with our Wi-Fi lounges and our common area lobbies that allow our residents to live large on a very limited budget, to be honest. It's beautiful, common, shared living. Everybody doesn't need a 10,000 sq ft or a 5,000 sq ft living room, but when we have 200, 300 residents, that 5,000 or 10,000 sq ft of shared common area is shared within hundreds of residents.
It's definitely a way of the future and what's happening now in our sharing economy. Sharing is caring, is the other thing we say, it really makes a big difference in occupancy. It really makes a big difference in demand when our prospective residents come in, from the first moments, they see an amazing new lobby and shared common areas. It's a much easier sell or a job to match a resident with our very affordable, extremely competitive product ranges that go all the way from our classic units, which provide exceptional affordability to our lifestyle, and fully renovated turnkey units that provide a luxury-like brand new product at a very affordable price. We're repositioning ourselves to compete in this changing market that we're in here in Alberta with a lot of brand new product that continues to come on.
We are positioned in a very competitive way to offer exceptional value and rents at just over CAD 2 a sq ft, where it's essentially prohibitive to build new supply at that rental level. We're much better positioned, as a result, better prepared to deliver much better positive results going forward that are steady and sustainable because we're off at such a low bottom.
That is a very good point. Just to add to Sam's point, if you look at Slide 13 and 14, you take the cost on those slides and allocate it over the number of units. Really, it is a very small market rent adjustment. For Tower on the Hill, we just adjusted market rents by CAD 10, and we had no problem passing that on. For Viking Arms, CAD 20 per unit. Again, no problem passing that on. The customer saw the value right there. What we learned, as Sam mentioned, is you can get really good returns if you focus your investments, and that is what we really are focusing that on 2019. Particularly, suites still important, do not get us wrong. We are going to focus there, really, the common area amenities is really where the maximum returns are in this forecast.
Okay, that is helpful. I will adhere to the two-question policy. Thanks, guys.
Thank you.
Your next question comes from Matt Kornack of National Bank Financial. Please go ahead.
Hi, guys.
Morning.
Morning.
On the OpEx and G&A, want to confirm that for Mario's question that the 4%-9% is based on the current methodology. Also, if you look at Q4 in particular, under the current methodology. Can you quantify what the one-time items would have been from a G&A standpoint? As well as, I think some of the training may have fallen into OpEx, and if that's the case, what that would've been, and how to look at those OpEx numbers going forward.
Okay. To the first question, yes. The 4%-9% is in a current methodology. In 2019, it will be adjusted down to G&A, but we will adjust it backwards to give you comparables on that. Back to the point about if you go right off the financials, adjusting for leases, it's going to be 7%-12%. Again, we will do the same analysis for you on that one. On the Q4 Op one-time charges, William mentioned the biggest number there. It was a combined effect, really. We had the condominium loss that we actually half through operating expenses and half through one-time G&A charges, and we pulled them out.
Okay.
Mainly just because of the nature of the actual expenses themselves.
Sorry, what was the CAD figure total for just this quarter in terms of what to take out of both those if we wanted to adjust?
About CAD 1.6 million. Is that correct?
Yeah, because in Q4, we had adjusted for 2016 and 2017 catch-up, roughly about CAD 800,000. For the full year, it's about CAD 1.2 million.
Okay. Then the second question with regards to the leverage. On a debt-to-total assets basis, it's been fairly stable over the last period. But when you look at some of your income metrics, they've come down as NOI has come down. I'm just wondering if you could give me a sense, I think you have a covenant with regards to debt service coverage, but where it stands today and how you see it progressing given that you're spending a fair bit on development and some other things. I'm just wondering how those income metrics for leverage progress debt-to-EBITDA as well.
Again, great question. I can't remember the slide number where we show you our coverage ratios have dramatically improved over the year from 2.6- 2.68. As we're recovering our NOI, we're going to see it get even stronger on an overall basis as well, too. From a leverage point of view, you're correct. We're very happy with it. We're also happy if you adjust for the incentives that are in our numbers, you're going to see the coverage ratios come up dramatically. The development side, we're taking a very measured approach. We're putting our toe into Brampton right now. We're doing a small one in Calgary. We can handle that quite easily with our existing balance sheet with no problem there. We also can't forget, particularly with these development projects, they're over a number of years.
We don't have to invest all the money up front and put it away. We get the opportunity to recover our existing portfolio, cut into that CAD 45 million in incentives, and reinvest part of that money is back to the development side. Again, it's a long-term strategic plan, but it's going to come from all parts.
Okay, thanks for the color.
Thanks.
Your next question comes from Howard Leung of Veritas Investment Research. Please go ahead.
Thank you, and good morning.
Morning.
Good morning.
I want to ask about the leverage schedule as well. Just looking at the rest of the maturities in 2019. Do you expect, based on where rates are, and you gave some helpful color around five years, 2.9% and 10 years are 3%? Do you expect the maturing rate to be above 3% for the rest of the year or on a weighted average basis?
Hey, Howard. On a weighted average basis for the rest of the year, likely not. We've seen interest rates even decrease from that level. Today, like we said, all-in interest rates are sub 3%. We actually have some lenders who are providing tenure financing below that 3% mark today. Good news is with rates the way that they are, we likely will continue to advance our mortgage program as maturities come up. But really good news is that over 65% of it is done. On the remaining CAD 185 million or 35% of our maturities, we have the opportunity to balance that over the year. On a projection basis, likely right around the 3%, probably not much more than 3%.
Right. Okay. No, that's really helpful. My second question is on the renovations. I saw you guys, I think you took down the additional renovation revenue number from Q3. I think last quarter was CAD 11.5 million, and now it's CAD 9.3 million. I think part of that was the measurement changed. This one excludes vacancy loss and incentives. How much would the decrease from the exclusion of vacancy loss and incentives? Just want to know the impact there.
I'm not quite sure. I'm sorry. I may not think that went offline with you.
Sure
on a quarter-over-quarter basis. We're up to, on slide number, I'm just going to go there quickly. 11.
Yeah, on Slide 11. Yeah.
We're showing total revenues are CAD 15 million. That's combined with the two. Last semester, we showed nine, but it was a combined last one as well, too. Let me get back to you on that one in particular, how we measure it simply is how we adjust the market rents. Let me follow up on that one with you.
Sure. Yeah. That'd be helpful. Just from looking at the Q3 presentation, it was a higher number than this one. Just wanted to figure out the-
Sure. I'll get back to you on that one and reconcile it for you right away.
Okay. Awesome. Thanks. I'll turn it back.
Thanks.
Your next question comes from Dean Wilkinson of CIBC. Please go ahead.
Thank you. Morning, everyone.
Morning.
Morning.
Hey, Sam, I just wanted to clarify something on the incentives. You were looking for a 4%- 8% reduction in incentives. Can I take that to mean a 4%- 8% reduction in that aggregate number of the CAD 45.9 million, putting you somewhere, say, 40-ish for the year? Am I reading that wrong?
No. How you have to look at it is each renewing lease right now, we're getting 4% to 8% renewals.
Compounding
It's compounded, but the next day, we're issuing a new renewal as well, too, at a lower level. It isn't quite as simple as just taking that number and taking 20% off it.
Right.
It's going to be a gradual reduction over time.
Right. Gradual and compounding.
Correct.
That's why it's important to look at the year-end number and continue that going forward because it's exponential.
Right
as well. It's not only compounding, but it's exponential as well, so it's almost logarithmic.
Yeah.
I'm getting way behind here.
You know what? What's interesting, Dean, though, is in the Q4 , one of the biggest strengths in our revenue growth was the fact that our market rents were going up, and we were able to pass that cost part of the renovation program on to our customers. It was really interesting that all this renovation work that we've been doing for the last year is really starting to pay off, not only in unwinding incentives but also showing some market rental strength growth as well too. That's a real driver for us to continue the investment program, too.
Okay. Realistically, that number probably drops back below where it was in 2017 through 2019 based upon that compounding.
Well, Dean, based on a 4%-8%, we're looking at basically reducing incentives by the end of the year, about roughly CAD 15 million.
By CAD 15 million.
Because we'll-
Okay.
Yeah.
Oh, that's going to be well below it then. Okay.
let's say we're really talking about reducing our incentives two to three years.
Yeah.
Two to three years.
call it 15 a year. that'll take you three years out.
just to reemphasize, Dean, we manage total revenue.
It's not.
It's not fee.
It's not straight line.
It's not straight line.
No, no.
No, no, don't. It's not straight line.
Yeah. yeah.
We manage total revenue, Dean. That's the key for us. It'll be a balancing of vacancy loss, a balancing of incentives, but equally as important is the ability to generate the returns from these investments as well, too, that we're putting money into. To sit here and say, "What's going to be the exact number at the end of the day for incentives?" Is difficult because it will be an ongoing number.
Yeah.
We do believe the trend will be downward.
It will be downward.
Absolutely. Yes.
Downward and accelerating. Okay. That makes sense to me.
That's our objective is, yes.
Yeah.
Okay. It's a small question, more out of curiosity. The investment in the private technology venture fund that showed up, what is that?
That's a consortium of approximately 1 million apartment units. It's a way to distribute costs in real estate tech. One of the other Canadian partners is Jon Love of KingSett.
Okay.
The U.S. partners are Essex, UDR, United Dominion, and some large U.S. REITs and apartment companies that allow us to access technology and real estate innovation in a very affordable way, as well as to participate in the growth and opportunities of the real estate tech trends that are increasing significantly. We believe real estate may be one of the last frontiers where technology is really able to change our operational efficiencies and the product, service, and experience we're able to offer our residents. We're looking at smart suite as we speak, technology and connecting devices and voice-activated requests for maintenance and all sorts of really amazing self-shows is another opportunity where we can offer self-shows and self-check-ins similar to the hotels.
Once a resident has produced his or her ID and we've verified everything in person, then we can allow the self-check-ins as well with technology and self-locking and unlocking doors. We're really excited about that partnership. It's a five-year commitment, so it's a CAD 2 million commitment over five years. We believe it's a very economical way to participate in the leading innovations in real estate tech companies that are making the most exciting innovations today.
That's kind of neat. I guess the end result of this is it's going to give you either operational efficiencies or there's a marketing angle that you've got these different ways of accessing units or things that you can offer. Is that kind of what that should ultimately bring to you?
Well, it offers a, yeah, absolutely, an opportunity to access technology that normally wouldn't be offered to the overall real estate market because of our partnership with about 1 million units. The consortium of 1 million apartment units offers the technology company scale instantly, then it offers us technology quicker than everybody else as well. We're at the forefront of innovation and operational efficiencies and opportunities. We're trying and testing and proving these in a scaled manner, minimizing the risks of being too far ahead.
Okay. I guess we can look forward to something on the next property tour.
Yeah.
Thanks, guys. I'll hand it back.
Thank you.
Thank you. Thank you, everyone, for joining us on this call. We conclude as we began, entering 2019 with improving rental market fundamentals, providing exceptional value and growth opportunities. We extend our sincere gratitude to all our stakeholders, of which we would not be here without everyone's great commitment. Please accept our sincere appreciation for your time to join us on our Q4 2018 conference call. We look forward to attending the REIT conference hosted by Citi in March and hope to see you then. Thank you and goodbye.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.