Good morning, ladies and gentlemen, and welcome to the Boardwalk Real Estate Investment Trust Third Quarter Results Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Thursday, November 15, 2018. And now, I'd like to turn the conference over to James Please go ahead.
Thank you, Joanna, and welcome to the Boardwalk REIT 2018 Q3 results conference call. With me here today is Sam Colias, Chief Executive Officer Rob Deremia, President William Wong, Chief Financial Officer and Lisa Russell, Senior Vice President of Acquisition and Development. Note that this call is being broadly disseminated by way of webcast. If you haven't done so already, please visit boardwalk reach.com, where you will find a link to today's presentation, a PDF file for the Trust's financial statements, MD and A as well as supplemental information package. Starting on Slide 2, I'd 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. Moving on to Slide 3, our topics of discussion for this morning will include quarter highlights and economic update, acquisition update, financial highlights, operational review including our renovation program and lastly our financial guidance. As a reminder, at the conclusion of today's presentation, we will be opening up the phone lines for questions. I'd like to now turn the call over to Coats.
Thank you, James, and thank you everyone for joining us this morning. We are pleased to report on another solid quarter in 2018. Slide 4 provides a summary of our financial highlights for this Q3, which includes total same store rental revenue of 108,400,000 dollars an increase of 4.3 percent from the same period last year and an increase of 3.1% on total rental revenue. Same store NOI up $59,600,000 up 6.5% and total NOI up 58,500,000 dollars up 7.6% from the same period last year. Note, total NOI is lower than same store NOI due to new developments coming on stream with high initial vacancy and shared warehouse distribution operations.
FFO per unit of $0.59 on a diluted basis, up 11.3% from last year and adjusted funds from operation per unit, which includes an estimated $6.95 per apartment unit maintenance capital of $0.47 for the Q3 of 2018, up 9.3%. Slide 5 shows an FFO reconciliation from year over year 3 9 month period. Gains of $0.07 and $0.18 for the 3 9 months from increased stabilized property NOI, dollars 0.0 $0.03 losses from sale of properties and $0.02 $0.03 adjustments associated with severance and legal fees resulting in $0.59 $1.67 for the 3 9 months period. Moving on to Slide 6, despite further delays in pipeline approvals in both Canada and most recently in the USA with Keystone XL, we continue to see positive macroeconomic conditions in our core market of Alberta with many of the leading economic indicators showing continued improvement. Job vacancies continues to rise, a leading employment indicator.
Many of these jobs are lower paying and part time, which increases the demand for more affordable housing. As per the most recent CMHC forecast, vacancy is dropping, reflecting an increased demand for affordability. Vacancy for the quarter increased slightly with revenues increasing as incentives drop. The net result was revenue, NOI and FFO making another positive gain for the quarter. Our upfront investment in brand diversity, improved product quality, service and experience with a more balanced and targeted investment approach to value add opportunities increases our performance.
On Slide 7, 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 cycle. Approximately 60% of Boardwalk's portfolio is in Alberta, which continues to improve and balance. 2 major setbacks occurred during this quarter, the negative court decisions, which are delaying both the Trans Mountain and Keystone XL Pipeline, furthering the significant discount for Western Canadian Select crude. Despite these two major setbacks, our team is delivering stronger results.
On the positive, Imperial Oil announced the go ahead of the $2,600,000,000 Aspen Mine along with the go ahead of LNG Canada project paid at approximately a $40,000,000,000 investment. Grande Prairie is already seeing benefits from an improved economy and continues to move into a stronger rental market, almost fully occupied with a strong demand for rentals. Fort McMurray saw a soft and rental market with the Western Canadian Flex differential in an all time high and an increase in competition as more single family homes were reconstructed and delivered during the summer. We have called these smaller rental markets our canaries in the coal mine for our Calgary and Edmonton rental market in the past and reflect an evolving economy that is essentially mix. As we will see in upcoming slides, Grande Prairie has posted a 45% net operating income gain.
Fort McMurray is down slightly at 2.7%. Both Calgary and Edmonton are now in a balanced rental market with a continued positive revenue growth trend. With more capital investment in Calgary, NOI gained 18.6%, reflecting how our new strategy is succeeding, delivering significant gains even in a more competitive rental market. Our Saskatchewan region saw some gains in the most recent quarter with Saskatoon moving into a more balanced supply and demand. Our focus on increased product quality, service and experience are being well received in this region as well.
Ontario continues to deliver solid results as we increase investment to deliver even more product quality service and experience in this market, better positioning to compete with new supply. Slide 8 illustrates the positive trends in job vacancies, a leading economic indicator along with more jobs being created reflecting the Alberta economy continues to diversify. Slide 9 illustrates both interprovincial and international migration continue to be positive for Alberta. And migration is another indicator of future rental demand as a significant number of new migrants become renters. Saskatchewan net interprovincial migration has continued to increase, while we see a decline in interprovincial migration.
Slide 10 displays Alberta as the leader of projected regional economic performance in Canada. Slide 11 illustrates the flattening of units under construction as MLS sales data is weak and home and condo sales drop. Higher interest rates and tougher mortgage qualifying rules completion. Including our own 162 units currently under construction with RioCan in Calgary, there are approximately 2,000 purpose built rental units under them. These 2,000 units represent approximately 5% of the total rental market.
Increasing job vacancies and positive immigration trends will
help us grow.
Slide 12 outlines Edmonton's decreasing trends of condo and rental unit construction. Under construction in Edmonton is approximately 1700 purpose built apartment units representing approximately 2% of the rental assets. Slide 13 provides our progress on our vacancy targets as highlighted at the beginning of the year. We are slightly above our target as a result of reducing our incentive. Our vacancy in October decreased, reversing the trend.
We are keenly focused on both keeping vacancy down, while decreasing incentives. Slide 14 shows the current snapshot of incentives offered for new rentals. Compared to the same time last year, in October 2017, we were offering 1 to as many as 4 months of incentives on 12 months leases. As a comparison, this year, our incentives offered have reduced significantly to 0 to 2 months. With our resident friendly approach, our target on renewals continues to be approximately a 1 month reduction in incentive from our resident buyer.
Slide 15 highlights the significant decrease in vacancy loss we have seen from last year and our continued trend of total and average incentive decrease. It should be noted that approximately 1 12th of our leases are renewed every month and we'll have a continued cumulative positive impact on our investment. This provides a significant revenue opportunity to recapture the 2017 fiscal year loss from incentive book, $40,000,000 or $0.80 FFO per unit and normalized our vacancy loss from $33,000,000 in 20.17, half of this amount or $0.33 premium, resulting in a significant revenue opportunity. Slide 16 further illustrates the positive impact of our focus on vacancy loss and dropping incentives as rental revenue continues to increase. Increasing occupied rents is a result of reduced incentives as well as increased rents as a result of our fleet renovation program.
Slide 17 provides a summary of Boardwalk's strategy to maximize NOI and tenant success. In the near term, we remain focused on the recapture of NOI within our existing core portfolio and are continuing to see success in the recovery of revenue. Over the next couple of years, this remains our largest opportunity. In addition, the front loaded investments we have made in increasing our product quality service and experience, along with more strategic capital spending will further enhance our results, increasing our market share. Increased geographic diversification over the next decade will reduce volatility further.
Strong balance sheet and foundation provides capital for our strategic plan as we remain committed to delivering outsized NOI growth for unitholders, better quality product service, experience and value for our resident members, which provides enhanced NAV creation. We remain active in our core markets and as reflected in our financial results so far this year are in the early stages of a rental market recovery in Alberta. I'd like to now turn the call over to Lisa Russell to share details on an opportunistic acquisition we have made in Calgary. Lisa?
Thank you, Sam. We are proud to announce the acquisition of a 299 unit portfolio in Calgary. As shown on Slide 18, these properties are in prime locations, which provide both a significant mark to market opportunity on in place rents, while also adding further operating efficiencies given their proximity to our existing communities. We are scheduled to close on this portfolio on the 27th November and intend to fund this acquisition with existing liquidity. Based on the current in place rental rates, we estimate the as is cap rate to be approximately 4% and will be immediately accretive to our FFO.
As the Trust optimizes the cash flow from these new communities by increasing net rental rates and gains operating efficiencies with our other nearby communities, we anticipate the yields on this acquisition to grow to a stabilized cap rate range of 4.5% to 5%, resulting in significant net asset value creation. This is an example of an opportunistic acquisition within our core market, which provides growth, high grades our portfolio and is a value add opportunity in the early stages of a rental market improvement in Alberta. Slide 19 is a summary of our current development projects as well as our internal development opportunities. We completed construction on the 3rd phase of our Pine veg community in July of 2018. In addition, construction of Brio is well underway.
Our Western Canadian development opportunities on excess land remain high with over 4,400 apartment units equating to approximately 4,400,000 buildable square feet. These sites are in various stages of planning and approval and represent an opportunity for the Trust to high grade and enhance our portfolio's asset value. An initial deputy study across our Ontario and Quebec portfolio identified an additional 1600 apartment units totaling 1,600,000 buildable square feet of potential new assets. We are in early stages of prioritizing opportunities. Slide 20 provides an update on our Pines Edge community.
We have completed our lease up of Phase 2 with current occupancy of approximately 99% and anticipate an estimated yield of 6.4%. Phase 3, a 4 story elevated wood frame building with a single level underground Parked in Regina was completed in July. Total cost of this phase is estimated to approximately $13,200,000 or $186,000 per door, an increase from the prior phase mainly due to escalating construction costs and an increased provincial sales tax. The yield for this phase is estimated to range from 6% to 6.5%. Currently, this phase is approximately 50% leased.
Slide 21 provides an update on Brio, a premium 12 storey concrete 100 and 62 Unit mixed use development in partnership with BrioCann. The site is exceptionally located in Northwest Calgary along the LRT line and in close proximity to the University of Calgary, Foothills Hospital and De Nance Stadium. Construction commenced in January of 2018. We are currently forming the 5th and 6th levels with mechanical and electrical work underway. Window wall exterior cladding is set to begin in December.
We estimate occupancy to be in early 2020. Slide 22 provides our estimate for market cap rates in Boardwalk's existing market. Cap rates for stabilized, well located, better quality buildings continue to remain low as demand for multifamily real estate remains high. Slide 23 is a rendering of Duo, which will be built on excess land at Sarsi Trail Place in Calgary. We submitted a development permit for 2 15 storey towers, totaling 2 29 units with a connected 2 level underground parkade.
Our development permit has now been approved and will be valid until July 2021. Timing of this development will be subject to market conditions. We continue to be active in our core markets of Calgary and Edmonton and in addition continue to develop relationships with various potential partners to acquire and or develop communities in major growth markets. We will provide updates as opportunities progress. I would now like to turn the call over to William Wong.
William?
Thank you, Lisa. Slide 24 shows Boardwalk's investment property fair value at the end of the current quarter was RMB5.91 billion compared to RMB5.84 billion at the end of the previous quarter and $5,690,000,000 at the end of 2017, quarter over quarter increase of $70,000,000 primarily on our stabilized property assets. Unstabilized property fair value totaled CAD30.5 million as of September 30, 2018, primarily consisting of 2 development projects in Regina, Pine Edge 2 and Pine Edge 3. 2 properties in Edmonton were reclassified as stabilized during the current quarter. Weighted average cap rate at the end of the current quarter was 5.29 percent unchanged from Q1 and Q2 and from December 31, 20 17.
The next slide, Slide 25 presents Boardwalk's implied net asset value calculation and includes the IFRS fair value revenue and expenses used in the calculation. Net asset value under IFRS is calculated to be $63.05 per diluted trust unit inclusive of $0.09 in cash. This is equates to approximately $178,000 per door compared to $158,000 per door based on the truss unit trading price of $49 a discount to implied NAV per trust unit of 20%. Current trust unit are trading at a significant discount to NAV and offers exceptional value when considered against net asset value, recent transaction in the marketplace, replacement costs, other consumer housing options like condominium ownership and current valuations on private to market transaction. Slide 26 shows the breakdown of capital Boardwalk reinvests back into its properties for the 3 9 months ended September 30, 2018.
Capital invested in Boardwalk Investment Properties excluding development and PP and E was $9.95 per apartment suite in the current quarter and $2,571 for the 1st 9 months of the year. The chart to the right also shows Boardwalk's capital investments by major categories for the 1st 9 months of 2018. Building exteriors and suites renovations and upgrades including Boardwalk's internal capital program comprised approximately 80% of capital investments or approximately $72,800,000 a reflection of Boardwalk's continued repositioning and rebranding strategic initiatives. Boardwalk is starting to see certain regions reaching a balanced rental cycle and has adopted a measured approach of reducing elevated incentive incentives on a property by property basis. Maintenance CapEx reserve for the Q3 and 1st 9 months of 2018 was $174 $5.21 per suite respectively.
Utilizing a 3 year rolling average, 2018 maintenance CapEx is calculated to be $6.95 per suite per year compared to $6.55 for the prior year. Slide 27 shows Boardwalk's total G and A for the 1st 9 months of 20 15. Combining operating and corporate, total G and A was $49,800,000 compared to $46,000,000 for the same period in the prior year. Included in G and A was approximately $1,700,000 related to severance costs. We continue to expect to improve.
Jiffinity in Alberta, which posted revenue increase of 5.8% and with a slight increase in Alberta's operating costs resulting in an NOI increase of 10.5%. Overall, for the quarter, revenue was up by 4.3% with overall NOI increasing by 6.5%. A special note, the increase in reported operating expenses for Q3 in Edmonton was the result of a significant increase in property taxes in the range of 22%. This was the result of 2018 assessment. On an annualized basis, it is anticipated this increase will be limited to about 8%.
However, due to the timing of the payment schedule, a significant catch up was reported in Q3. On a 9 month basis, overall revenue increased 3.7%, resulting in an NOI growth rate as compared to prior years of 5.6%. Slide 31 reports the trust mark to market on an occupied rent. Overall, there was approximately $39 of positive spread between market and in place rents adjusting for existing incentives. On an annualized basis, this is estimated to be $15,000,000 once adjusted for existing vacancy.
We were to strip out all turn incentives, which we believe will unwind over time, the mark to market would increase to $150 or $57,000,000 on an annualized basis. Boardwalk liquidity continues to be strong. At September 30, 2018, the trust had access to an estimated $300,000,000 of available capital as is shown on slide 32. This represents approximately 11% of total debt outstanding. Slide 33 reports the trust's total debt maturity schedule.
On September 30, the trust's overall weighted average in place interest rate was 2.61%. Currently, the trust is obtaining NHA insured mortgages at 3.3% and 3.4% on 5 10 year terms respectively. Our mortgage maturity curve continues to be well balanced and we continue to focus on extending mortgage terms while staggering future maturities. Boardwalk's remaining mortgage amortizations under these insured loans in excess of 30 years And Boardwalk's 4th quarter rolling interest coverage ratio continues to be strong at 2.68 times. Slide 34 provides the reader with our estimate of current mortgage underwriting valuation.
Boardwalk's balance sheet continues to be conservatively levered at 50% of mortgage underwritten value after deducting our current cash portion. A special note, the trust has over 1300 apartment units that have no mortgage encumbrances, which carry an estimated debt capacity of $136,000,000 an amount that is in addition to the trust of $300,000,000 of 30%. Slide 35 highlights our 2018 mortgage financing program. During 2018, we have $201,000,000 on maturing mortgages and to date we have renewed $157,000,000 of these while up financing additional 54,000,000 The new reported rate of 3% on the weighted average renewal terms 5 years. In addition, we have added $54,000,000 from previously unlevered properties to be in total raised for the year to date of almost $109,000,000 Moving on to Slide 36, Boardwalk's 2018 financial forecast.
As we have in the past, it is the policy of the trust to review and update its financial guidance on a quarterly basis and where necessary make warranted revisions. Based on this review of the key input variables, we are reducing the high end of our FFO and AFFO reported amounts from $235,000,000 $190,000,000 to $230,000,000 185 respectively. Please note that we have not adjusted these numbers for the noted one time charges and reported previously reported. In addition to this, we have adjusted our stabilized NOI growth expected range to be between 4.5% 6%. Boardwalk's property capital budget for 2018 continues to target at $136,000,000 with an initial $30,000,000 to be invested in committed development projects.
Adjusting for the noted one time charges, our reported results for the quarter were in line with our internal expectations. As revenue continues to grow with the optimization of our occupancy, modernization of existing moderation of existing incentives and increased returns on invested capital improvements, we anticipate our operating margins continue to improve. Many of the operating costs associated with multifamily real estate are fixed regardless of the period of cycle. As our core market of Alberta enters early stages of recovery, the majority of the incremental revenues anticipated to flow directly to net net operating income. The trust remains committed to creating a culture of a team of peak performers.
The trust will continue to evaluate its controllable operating Slide 37 reports our distributions for the month of November 2018 through January 2019. The monthly distribution is set to $0.0834 per month, consistent with our annual target of $1 per trustee. Student. This concludes the formal part of our presentation, and we'd like to open it up for questions now. Operator?
Thank you. And your first question is from Jonathan Kelcher from TD. Jonathan, please go ahead.
Thanks. Good morning. Good morning, Jonathan. First question is on incentives. They're basically flat, I guess, quarter to quarter.
When should we start to see them begin to burn off in a meaningful way?
Hi, Jonathan. It's Rob. Yes, actually they are when we saw in the summer, we thought saw them peeling off nicely and then slowed down. So we anticipate for the rest of this year for sure we're going to be focusing on occupancy levels. So we don't anticipate them to increase much, but we don't anticipate also them to decrease in a term period of time.
So we think it's going to probably be mid to next year where we're starting to see that slowly or start to unwind at a more accelerated pace than we are right now. The good news is on our renewals, we're actually are able to unwind a little faster than we thought we are and that will have a cumulative effect going forward as well too.
John, it's Sam. The 1 month that we're gaining on renewal is essentially approximately 8%. So that's really what we're gaining on our renewal. And onetwelfth of our leases mature every month. So we are seeing about 8% gain on our renewals.
Okay. But shouldn't like 1 month is also a third of the incentives that you're offering to, correct?
Correct.
Yes, but it does vary by project. So the range that we're providing on that slide is an extreme range from 0 to all the way to 2 months in some case. So it will vary project by project and renewal as well. We are finding in some cases where the customer is very satisfied with our service and quality of products and we are able to offer less incentive on a renewal than even on a new rental. So it really will vary.
In Grande Prairie, the incentives are from 3 months to 0 months. And that's why the Grande Prairie annualized up 45%. So it really depends on the community. And in Calgary and Edmonton right now, we're seeing about an 8% increase in the year.
Okay. And then just secondly on the occupancy, it did dip a little bit in the quarter. When do you still thinking get to 97% and how long do you think that will take?
We're trending higher as we speak in occupancy and our rentals for October were much higher as noted in the conference slides than they were in September. So we're gaining traction again and the trends are trends and so we're moving up on the occupancy trends as we speak. And we're hoping by the end of this month, November, we're going to get close to 97%.
Okay. Thanks. I'll turn it back.
Thanks, Elliot.
Thank you. Your next question is from Mike Markidis from Desjardins. Please go ahead, Mike.
Hi, guys.
So I just want to make sure I understand what you said last in response to Jonathan's question. So the focus now is more on the occupancy side. So from a total dollar basis, the incentives probably stay relatively flat over the next couple of quarters. And then you're starting to see that peel off in next year. Is that fair?
Chad, I think that's a fair statement to focus right now for all our teams occupancy getting up as high as we possibly can. And higher you get it as the market improves, the faster you'll be able to unwind that. Prime example of San Menton's Grand Prairie, that's what we saw that. Red Deer as well saw some strong numbers there as well. So we originally thought we'd be able to unwind a little faster than we are, but however, we're still happy with our growth.
As Sam mentioned, we can't underestimate this is we still all of our leases churn every 12 months. So even if we have 40% churn, that means 60% is still renewing. So if we can get that strong renewal number moving forward, we're going to have some good growth.
Okay. And how would the market be, I guess, today relative to where you were, say, 6 months ago? Because it looks like you're holding the line on incentives, but then the occupancy is going up. So I'm just trying to get a sense of the level of competitive activity you're seeing from your peers.
Canada Mortgage and Housing Corporation just released their forecast vacancy and it's lower for both Calgary and Edmonton about 100 to 100 50 basis points. So we are seeing improved rental market and that's a reflection of harder qualifying mortgage requirements and lower paying jobs and part time jobs. So, the mixed economy and evolving economy that we haven't described is actually increasing demand for more affordable housing and that's coming through in the broader rental market fundamentals too.
Okay. And I guess going forward, safe to say that the interplay between incentives and occupancy or it's going to be, I don't want to call it an experiment, but suffice to say, it's reasonable to see a little bit of give and take on the quarters going forward?
This is really what's happening, Michael. When we look at the current incentive right now between 0 2 months, they're definitely less than 3 months. And so last year, there were 3. So on our renewals, we're going from 3 to 2. And so the existing residents are getting a better deal than some of our new residents.
And that's really what our goal is, is to give our existing more loyal and long term residents a better deal. And so we're seeing that drop, but the drop is slow because only a 12th of our leases come due every month. And so that's increasing our revenues as we speak. The incentives on our new are less than what they were last year by about a month as well. And so, we've got this 6% to 8% total revenue for Alberta gain that we're seeing and that's 60% of our portfolio.
And as a result, that's where the 4.3% overall increase in revenue comes from.
Okay. And last one for me. Just noticed that Calgary for sure, Grand Prairie looked really good sequentially on the stabilized revenue side. Edmonton seemed to slow down quite substantially. I was just wondering if you could expand on what you're seeing in that market particularly?
So in Calgary as our property tours over the last couple of years, we really focus Calgary and the improved product quality, service and experience. And the investment we made in Calgary was much higher. We're now accelerating that investment in Envysen. And so that is something that's been very, very successful in Calgary and it is actually helping us and being successful in Edmonton. The one setback in Edmonton was our 22% increase in property tax that we had to make this quarter, because the assessments were much higher than they were last year.
So, our expenses in Edmonton took a hit because of the huge increases in property taxes. We're not expecting 22% increase in property taxes going forward. And so this will help along with our investment that we're making. It's much more efficient. We're being much more measured and creative and innovative with respect to our common areas and our investment in our apartments and that the scalability of our improvement is something that's really helping us.
So, we're able to compete with our diversified brands in the really competitive price market, because price is really important. And we're able to provide other options that are more suitable for renters that want better quality product, service and experience and are willing to pay more for that. So, we're just scaling that in Edmonton as we speak and as a result, we believe the results in Edmonton will reflect that going forward because we've got a proven formula of delivering performance and increased revenues, NOI and FFO in a really tough competitive market, because of our approach to our brand diversification and the scalability of the offering we have for a more wide range of renters that are looking for all of the above price and product quality.
Okay. And just given
the size of the Edmonton portfolio relative to Calgary, would it be safe or it be a fair assessment to think that we could see CapEx trend back up again next year?
No, I think, well, again, we'll provide guidance on the capital spending in next quarter year end number. We're very happy with the pace. One thing we did learn in 2017 is you don't go too fast either because you can be your own worst enemy on pricing. So preliminary discussion is around the same pace, but again we'll update you in February on our targets for 2019 capital spending.
That's great. Thank you.
Thanks.
Thank you. Your next question is from Dean Wilkinson of CIBC. Please go ahead, Dean.
Thanks. Good morning, guys.
Good morning, Dean.
Rob, I think we've talked about the 2019 debt before. A big chunk of that is all wrapped up in the Nuns Island stuff. Is that right? That's correct. Yes.
And that's is that in November?
Yes. It's in November. The challenge with Nons Island is, remember, it's on a lease and under Quebec law, we can't go any longer than 5 years on the renewal term. So you'll see us targeting the 5 year term with that one's maturing. No problem with the valuation, no problem with the renewal.
It'll just be a matter of time before we lock the price in and go.
Okay. So it's probably too early to sort of get indicative pricing on that, right?
Well, it is. And if you notice the pricing on the CMHC product right now, the curve is really, really tight, only 3.3% and 3.4% between 5 10 year money. So it's really getting tight there. So as we get closer, again, we can't do 10 year money there, but you'll see it for sure probably target the 5 year in that range.
All right. So you're somewhere north of let's assume rates don't fluctuate from here, big assumption. That's rolling off at about a 2.1%, is that correct?
2.2. 2.2, yes. 2.2. Yes. There will be a bit of an uptick on the interest rate on the renewal for sure.
There is
an uptick on that, okay. And what was the total amount of that $500,000,000 $300,000,000 It's $300,000,000 Okay. Yes.
But the good news is our Quebec portfolio is showing some good revenue growth as well too. So on lease renewals, we're going to be able to get that back on the revenue side too.
Right, right. But we won't really see the increased interest expense flow through, I guess, then until more like 2020?
Yes, that's correct. It will because it's November 2019, there won't be very little impact on 2019, but more impact on 2020.
More impact 2020. Yes, that makes sense. And then just a question on the distribution. Sort of given where you are in the recovery that you've come through and where earnings are, does it look like the current $1 amount for 2019 would be sufficient to meet the requirement to pay out all of the taxable income? And I guess in another way, how much is do you think Well, that's a very
good question, Deane. We always every quarter, William runs the numbers to see what our return of capital versus the income portion of distribution is. And based on the most recent numbers for Q3, we're sitting at about 50%. We do have 50% return of capital still. Our policy is only to distribute what we have to distribute because when you're getting rates of return north, in some cases, 25% on our invested capital, that's the best place to place your capital.
So in the short term, we're going to see ourselves doing that. As we continue to improve, as things get better in the long run, we'll obviously, we'll have to review that again and see how much we have to distribute.
All right. So that'll probably come with the 2019 guidance then I would expect.
Great. Perfect. I will hand it back. Thanks guys.
Thanks, Dean.
Thank you. Your next question is from Howard Lung from Veritas. Please go ahead, Howard.
Good morning. Thanks. I wanted to touch on occupancies. I think on the call you mentioned that rent rolls are looking a little better in October. I just thought in the supplemental that Calgary and Edmonton though it looks like their occupancies are down slightly just for the month of October.
So is that expected to kind of uptick back?
Could you repeat that last point, Howard, please?
Sorry. Yes. Just in the supplemental, there's like city by city occupancy disclosures and just saw for the month of October that they had kind of both come down to 94% occupied. So, wanted to see your thoughts on the rest of the year.
Right. So in October, we rented more than our move outs, which will affect November. So we saw higher occupancy as a result in November. So you're not October is actually September result.
Oh, I see.
Right. Because the number you're seeing is the very first of the next month, which is the previous month's rental. Right. So that's the month's
Oh, I see. Okay. So actually
Yes, that's how it works out.
Yes. But we are seeing like this month, we're at about 500 rentals and we've got about 800 move outs and we're at the middle of the month. And we typically rent more in the back half than we do in the first half of the month. So everybody is aware, Howard, how important high occupancy is. And so we have many of our communities are over 98%.
And so we're asking all our team, how do we get every single one of our communities over 98%. That's the question we're asking you. And together we will figure out a way.
Okay. No, that makes sense. And then in the incentive spending, I think there was an update last quarter in Q2 in the presentation that Calgary was 0 to 1 month of incentives offered to new lease. And then this presentation, it was back to 0 to 2. Any major adjustments you had
to make there or just I think again that captures the 2 capture some communities with higher availability. And so we have to stress that it is community by community and unit type. And so we're just capturing a wide range when we're showing that. The drop in incentives is very marginal. So, we don't want everybody to use a magnifying glass to see the trend in incentives going down.
And so that's why conservatively we say it's flat. But technically the incentives dropped. They have dropped. So it's a debate whether you want to look at the curve that's ever so slowly dropping because again we stress our leases are coming due at 12 every month. And that's why it looks slow and the graph looks flat.
But they are dropping and it's cumulative, it's compounding. And so we're going to see a more pronounced drop in our incentive in another or 2 quarters because then the comparable year to year will be more pronounced. That's all. The slope of the curve will deepen downward as every month goes by. And that's what's so difficult to see in the graph of incentives today is we're just starting to see the drop in incentive.
And it's only a 12th every month and so the slope is just starting to decline. But in real time, the slope is declining about as we said 8% a month on 8% of our portfolio. So 8% of 8% is 1.5%. Right. That makes sense.
So it's just compounding that's going to help us and we're going to see a steepening slope on that incentive graph in the next quarter or 2.
Right. So you expect that pace to accelerate and in a year for sure it will all of these things will roll off? Correct.
Right. Trend is your friend and we're just starting to see that flow change. But because it's in real time, you're not going to see it on the graph. The graph looks flat.
Okay. No, that's helpful. And then in the kind of the IFRS NAV that you guys calculate, I saw there was a note saying that you make the assumption for revenue that they're kind of forecast market revenues with 3% to 5% vacancy. When you're applying those forecast market revenues, are they net of incentives or are they just the market revenues that I guess?
Market revenues, Yes. There's not include any incentive.
How we've adjusted for the short term incentive program is we've actually picked up vacancy by market just to adjust for the short term impact of that rather than taking incentives.
Okay, got it, got it. So the vacancies will be moved, but the incentives will there'll be no incentives to be higher.
That's correct. We'll be using 4% instead of 3%. In the market, you'd normally use 3% say, for example.
Right. Right. And then also I mentioned that there's you guys use the industry standard for the expenses. So is that industry standard I guess because property taxes and stuff have gone up, but the standard will keep up with that or is that more?
No, the standard is just for non actual. So it doesn't include property taxes, utilities are always actual as well too. It's just sort of the operating cost standardization, not the other two categories. Those are always actual.
Right. And if there is standard, is that kind of before you hired all those associates, I think, last year?
Well, standard is based on industry standard versus how we actually operate. So then that's sort of the way they evaluate because they want to compare apples to apples between buildings. So they just standardize on evaluation methodology how a building would operate.
Right, right. What the typical margins are and that?
Well, not so much the margin, just a particular expense by expense. For example, advertising has got a standardized costing, R and M has got a standardized costing for the most part. But again, the larger number ones being utilities and profits that are always actual.
Okay. That makes sense. Thanks guys. I'll turn it back.
Okay. Thanks.
Thank you. Your next question comes from Mario Saric from Scotiabank. Please go ahead.
Hi, good morning. Good morning. Just maybe coming back to the sequential revenue, the 30 basis points of quarter over quarter growth. I think Rob, you mentioned that internally the quarter met met forecast. How did that 30 basis points compare to expectations?
We're actually right on target. Our overall revenues are very close to where we thought they would be. But we did actually look at our numbers. We actually had a strong we internally expected a stronger second half and we are seeing that. So yes, we were very close on that number as well too.
Okay. And then in reference to the incentives, guess the comment was made that there was a bit of a slowdown after a pretty decent start to the summer. What do you think caused that slowdown?
Well, the rate of change in that going from 3 month incentive to 0 month incentive was just too much for the market at that particular time. And so it just was too big of a move for Calgary and Edmonton. And the overall rental market in our cities are still over 3% on average. And so the trend on market wide declines in vacancy is our friend. And when we see a 3% or less market wide vacancy just like we are in Grande Prairie then we can see like we are in Grande Prairie 0 incentives on renewals down from 2 3 months.
And so that's what we've seen in Grande Prairie because that market has recovered before any other market in Alberta. And trends are trend. We're seeing that in our core markets. And by next year, we believe we're going to get close to that 3% market wide vacancy.
Okay. Then I think Sam at the onset of the call you referenced to the setback during the quarter being Keystone and I guess subsequent to the quarter end, Trans Mountain. How do you think about those 2 projects in relation to the impact on in place demand, rental demand?
Well, we're there's a positive for every negative and obviously the negative is continued muted job creation from the oil and gas sector. The positive is the natural gas price, which is going up in the LNG project, which is a really huge project and we're seeing employment come back as a result of the LNG project. So that is an offset to the oil negativity. We have on a positive seen more diversified jobs being created driving around. If you looked at the dashboard in Alberta, economic dashboard, you'll see more new businesses created over the last 2 years than the prior 2 years before that.
So there's a lot of entrepreneurs and new companies that are setting up here in Calgary. Calgary ranks as one of the top livable cities in the world and we rank very, very high. If you get tired waiting in a car and traffic in Toronto and tired of commuting for 2 hours, check out Calgary and the commute times here. And it's great. The mountains, the lifestyle is in Alberta.
Edmonton is one of the hubs of artificial intelligence. Very few people realize that. And so we've got huge schools here. We're very focused on investing in educating coders and technology students and attracting students here in our market, which is a way to attract companies that need knowledge workers. And so necessity is the mother of invention and we're really seeing some positive successes from our economic development boards both in Calgary and Edmonton, our city, province and our feds actually are helping us.
There's positives for every negative and we are seeing the positives. And the longer this oil stays low, the more diversified our economy is going to be by necessity. And so that's the offset to the low oil price. We do believe the pipelines will get built. It's just a matter of when not if.
The differential and the economic benefit for Canada is just too far great not to see those pipelines go through. And so we believe over time that will happen. Everybody is disappointed at the delays and the decisions of the courts with respect to those pipelines, but necessity or some other invention and we're finding ways to deliver growth and create value in a mixed economy. And the question is, how do we produce value and growth in this economy, because there is no other option.
Right. Is it overly simplistic to say that a substantial reduction in the incentives requires at least some clarity or resolution on the 2 pipelines?
No, absolutely not. If you look at the late 80s, Mario, we had the same similar economy with respect to oil going from bad to worse. So if you look at the late 80s CMHC data and the oil went from bad to work, actually rents went up. Why did rents go up in that economic period? Because of affordability and the increase in demand for affordability.
House sales, homeownership, condo ownership is getting a lot tougher to access and that helps us and that is helping us. It's a good news, bad news sort of thing. The weaker economy sadly is helping rental, because there's more demand for affordable housing. And that's the good and bad news with respect to our improving rental market. Rental market has been contrary to the oil market and the late 80s if you look at the CMHC data versus the West Texas price is an example of that.
We're seeing that as we speak. We're seeing an improving rental market on the heels of a mixed economy. We can't say the economy like the economy is mixed. There are positives to this economy as well as the negative with respect to the differential in the oil pipeline. And so it is a mixed economy and it is producing jobs.
And again, we stress the jobs are less paying, they're part time and playing into higher demand for affordable housing becoming more of an essential requirement on an auction.
Okay. Maybe just two more questions on my end, one for Rob. Rob, you mentioned kind of accelerating renovation activity in Edmonton, similar to what was experienced in Calgary. Is that in response to any change in supply growth expectations in the market?
No, it's actually a response to returns. We're getting really very strong returns on the investments that we're making. But again, I want to rehighlight that part of the strength of the returns is the fact that we're doing it on a measured pace. We're not playing the market with quality as well too. As we saw in Calgary, that actually drove prices down farther.
So on a measured pace moving forward and by default because Edmonton is a larger portfolio we're going to see more renovations going on in Edmonton with the expectation again of better returns.
Got it. So there's no internally there's no concerns of accelerating supply growth in Edmonton?
No, because we're just upgrading our existing stock and as a result of the market itself that wants better value, wants better quality and service, we're just meeting that need head on right now.
Okay. My last question just relates to kind of the margin and the increase in the property tax and Edmonton was a bit of a surprise as you mentioned. In the past, you've talked about getting back to previous kind of peak margins, which were kind of in the low to mid-60s. Last year, you're at around 51 this year, give or take, you may come in at closer to 53 or so. How should we think about whether that low-sixty margin is still achievable and how long it may take to get there given kind of perhaps some of the higher than expected property tax increases that you absorbed?
Mario, the expenses are fixed And so, they're right now about 50 some percent is our margin to 40 some percent are expenses. The incentives are between 8% and 24%. And so if you look at the average of let's say 12%, you add that to 52% or 53%, you get back into
the 60%. That's the driver. When these kind of burn off, you're going to see margins grow quickly.
We in Ontario for many, many years saw margin that we're at right now. And as soon as revenues picked up into the double digits, the margins in Ontario picked up as well and chalked back up over 50%. So revenue is the key and that's the biggest driver in our industry. And that's how we continue to make up our margin. The one big variable everybody has to focus in on our average rents per square foot are around $1.25 a square foot.
So we're really an exceptional value proposition to provide you an affordable housing in our market. These rents can go like they have in Ontario for page project products over $2 a square foot. And that's a substantial amount of revenue opportunity and it's still just over $2 a square foot. And far below the $3 to $4 that's typically expected in performance for new buildings. And we're seeing $4 to $5 a quarter foot in some parts in Toronto where McMurray used to have rents of $23,000 $2,400 a month or $3.50 a foot.
So these rents are volatile and they can swing and recover quickly when the rental market recovers. And we're seeing the trend of the rental market recovery and that's due and reflecting of the increase in affordable housing and mixed economy. So we're seeing and delivering positive results despite the economic situation that we're finding ourselves in.
Okay. That's it for me. Thank you.
Thanks, ma'am.
Thank you. And your next question is from Brandon Abrams from Canaccord. Brandon, please go ahead.
Hi, everybody.
Just turning to Slide 29, the sequential revenue growth. I mean, obviously, it's been positive for the quarter. But also, though, the pace has decelerated over the last few quarters. How do you guys take a look at this? And do you think we've kind of hit a new kind of stabilized normal here after bouncing off the bottom or do you expect this trend to maybe reverse?
So the biggest gains we made was in occupancy. And we came up 100 basis points, 200 basis points in occupancy. So of course, quarter over quarter that's going to be reflected in our quarter over quarter numbers. And so and especially year over year gains are going to be even higher because of the occupancy gain. We still have that occupancy gain opportunity being around 96%.
We definitely can get back up to 97% and we're going to really work hard to get it to 98,000,000. So we can recapture an accelerated and outsized revenue gains in the next quarter or 2 by focusing in on occupancy and taking the pedal off a little bit on the drop in incentives for our new residents. Instead of 0 months, we can increase that to the 1 and to the 2, which is less than the 3 and it keeps on the other end incentives going down. So we can see some increased revenue gains over the next quarter or 2 simply because of the occupancy opportunity that
we still
have to move upward.
Right. Okay. And then just turning to same property NOI, I just wanted to get your views. I mean, it's been pretty strong both for the quarter and year to date, 5%, 6%, let's call it. How much do you guys attribute this to kind of your repositioning program and the capital invested over the last 2 years, which has been significant or and how much just to general market condition?
It's both. Good point. The general market is improving. And what we're seeing is an accelerated improvement in our occupancy and NOI gains. And in particular, Calgary is a great example where we focused on improvements and experimented with Calgary and we're really happy with the results.
The experiment turned out to be very positive and that's why we're scaling it out to all our regions. It's now a tried tested proven tactic to improve our not just our units, but our common areas and lobbies and leasing offices which we redefine as experience centers. And so we're really as my wife described it taken a holistic approach to the resident experience right from the get go, right from the curve into the home, the residential home. And so this holistic approach is really working in Calgary and we're seeing it with outsized NOI growth given the experiment and the testing that we did in Calgary proving to be very positive and effective. The key is choice and that's really what we've learned is it's important to offer both the low price because most residents come in with the choice of low price.
And then they look at what's available for a higher price and say what it's just like all of us when we go shopping for a new car or home or whatever it starts at a base price and we say, okay, that's great. But I'd like this extra and that extra. And so the extra is add up and we move up the rental value chain. And we offer something for more rental consumer. And so that's really, really working really, really well.
And we're going to do it in all our regions. We're doing it especially in Ontario now and Quebec. We're really keenly aware of how important it is to always improve our product quality, service and experience and value proposition always. And that's we're always asking everybody to do how do we get better, provide greater value to our residents. And as a result, we realize greater growth in our revenues and bottom line and it's a win win.
Right. Okay. And then just turning to the portfolio acquisition in Calgary. It looks like you guys are maintaining kind of your long term diversification strategy. How does that short term, in the near short term, given this would increase your Alberta exposure obviously?
Yes, we recognize that it does increase our Calgary core market. It's a relatively small portfolio and it is it was an opportunity that we are very familiar with these assets and given the mark to market that we saw, the well maintained quality of this portfolio, it's a one time acquisition. We still have our eye on the long term strategy that we have announced last year.
The really appealing and unique part about this acquisition is accretive at get go. Very, very difficult to purchase anything today that's accretive at get go. And so that is another great reason We went ahead with this acquisition and it's immaculately kept. It's a block away from our head office and just blocks away from our other really well kept communities and across the street from 1 in the Southwest. The locations are exceptional and it's really difficult to replace these locations and the state that these communities have been preserved and kept up is exceptional.
So they're really exceptional opportunities to allow us to high grade our portfolio and part of our strategic plan is to high grade our portfolio everywhere. So, as part of our asset management focus that we're really increasing, These acquisitions are allowing us to high grade our assets here in Calgary. And we'll be continuing to pair off other assets going forward that are more suitable for other owners that just are not suitable for us. And so we're going to continue to recycle our portfolio and our capital this works really well in doing that.
Okay. And last question for me before I turn it back. Just taking a look at Slide 49, the move out tenant survey, and I don't want to read too much into this, but there was a big jump on a percentage basis for the reason being rent is too expensive. So I'm just wondering how you guys are viewing kind of the roll off in incentives and increasing rents, while still kind of balancing tenant retention?
So the amount of increased due to rent being too expensive is approximately 50 residents. From 2016, it's actually dropped by about 50 residents and 2017 was a real exceptional low rent year. And so, 50 residents in the quarter, we don't really believe it's a significant amount, but we do look at every reason, seriously and we do have our entire team to be flexible always period. We really strive to help our residents in unique situations and always try still to work out a win win situation, get that back down and trending back down. Sadly, there are in this mixed economy some tough situations and residents are going through constant change and that was shown in the slight uptick of our ships as well as slightly up.
And so absolutely that's a reflection of a mixed economy where one focus still going through some tough situations and others are finding new jobs and the new jobs that are being created. So we're really keenly aware of that and that's why we're very flexible and we're going to try to keep those move out manageable.
Okay, great. I'll turn back. Thank you.
Thank you. That concludes today's Q and A session. I will now turn it back over for closing comments.
Thanks, Joanna. If you missed any portion of today's call, a copy of this webcast will be made available on our website again at 4blockretail.com, where you will also find our contact information in future episodes.
Thank you
again for joining us this morning.
Ladies and gentlemen, this concludes today's conference call. We thank you for participating and we ask that you please disconnect your lines.
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