Good morning, ladies and gentlemen, 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. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, November 15, 2018. Now, let's turn the conference over to James Ha. Please go ahead.
Thank you, Joanna, welcome to the Boardwalk REIT 2018 third quarter 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. Note that this call is being broadly disseminated by way of webcast. If you haven't done so already, please visit bwalk.com where you will find a link to today's presentation as well as PDF files of the trust's financial statements, MD&A, as well as supplemental information package. Starting on slide two, I'd like to remind our listeners that certain statements in this call 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 the 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 three, our topics of discussion for this morning will include quarter highlights, an economic update, acquisition update, financial highlights, operational review including our renovation program, lastly, our financial guidance update. 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 Sam Kolias.
Thank you, James, thank you everyone for joining us this morning. We are pleased to report on another solid quarter in 2018. Slide four provides a summary of our financial highlights for this third quarter, which includes total same-store rental revenue of CAD 108.4 million, an increase of 4.3% from the same period last year, an increase of 3.1% on total rental revenue. Same-store NOI of CAD 59.6 million, up 6.5%, total NOI of CAD 58.5 million, up 7.6% from the same period last year. Please note total NOI is lower than same-store NOI due to new developments coming on stream with high initial vacancy and shared warehouse distribution operational costs.
FFO per unit of CAD 0.59 on a diluted basis, up 11.3% from last year, and adjusted funds from operation per unit, which includes an estimated CAD 695 per apartment unit of maintenance capital of CAD 0.47 for the third quarter of 2018, up 9.3%. Slide five shows an FFO reconciliation from year-over-year, three and nine-month periods. Gains of CAD 0.07 and CAD 0.18 for the three and nine months from increased stabilized properties NOI. CAD 0.01 and CAD 0.03 losses from sale of properties, and CAD 0.02 and CAD 0.03 adjustments associated with severance and legal fees, resulting in CAD 0.59 and CAD 1.67 for the three and nine-month periods. Moving on to slide six.
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 with 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 seven, 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 in balance. Two major setbacks occurred during this quarter, the negative court decisions, which are delaying both the Trans Mountain and Keystone XL Pipeline, furthering the significant discounts 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 CAD 2.6 billion Aspen mine, along with the go-ahead of LNG Canada project, pegged at approximately a CAD 40 billion investment. Grande Prairie has already seen 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 softened rental market with a Western Canadian Select differential at an all-time high and an increase in competition as more single-family homes were reconstructed and delivered during the summer. We've called these smaller rental markets our canaries in the coal mine for our Calgary and Edmonton rental markets in the past and reflect an evolving economy that is essentially mixed. 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 today. 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 investments to deliver even more product quality, service, and experience in this market, better positioning to compete with new supply. Slide eight illustrates a positive trend in job vacancies, a leading economic indicator along with more jobs being created, reflecting the Alberta economy continues to diversify. Slide nine illustrates both interprovincial and international migration continue to be positive for Alberta.
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 continue to help the rental market. Rental construction remains elevated, though offset with lower house and condo completion. Including our own 162 units currently under construction with RioCan in Calgary, there are approximately 2,000 purpose-built rental units under way. These 2,000 units represent approximately 5% of the total rental market. Increasing job vacancies and positive immigration trends will help absorb this new supply.
Slide 12 outlines Edmonton's decreasing trend of condo and rental unit construction. Under construction in Edmonton is approximately 1,700 purpose-built apartment units, representing approximately 2% of the rental market. 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 incentives. Our vacancy in October decreased, reversing the trend. We are keenly focused on both keeping vacancy down while decreasing incentives. Slide 14 shows a current snapshot of incentives offered for new rentals. Compared to the same time last year, in October 2017, we were offering one to as many as four months of incentives on 12-month leases. As a comparison, this year, our incentives offered have reduced significantly to zero to two months.
With our resident-friendly approach, our target on renewals continues to be approximately a one-month reduction on incentive from our residents prior. Slide 15 highlights the significant decrease in vacancy loss we have seen from last year and now continued trend of total and average incentive decrease. It should be noted that approximately one twelfth of our leases are renewed every month and will have a continued cumulative positive impact on our results. This provides a significant revenue opportunity to recapture the 2017 fiscal year loss from incentive from $40 million, or CAD 0.80 FFO per unit, and normalize our vacancy loss from CAD 33 million in 2017 to half of this amount, or CAD 0.33 per unit, 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 suite renovation program. Slide 17 provides a summary of Boardwalk's strategy to maximize NOI and NAV. 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 of November and intend to fund this acquisition with existing liquidity. Based on the current in-place rental rates, we estimate the added 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 stabilized cap rate range of 4.5%-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 third phase of our Pines Edge 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 4.4 million billable sq ft. 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 density study across our Ontario and Quebec portfolio identified an additional 1,600 apartment units totaling 1.6 million billable sq ft of potential new assets.
We are in early stages of prioritizing these 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 four-story elevated wood-frame building with a single-level underground parkade in Regina, was completed in July. Total cost of this phase is estimated to be approximately CAD 13.2 million, or CAD 186,000 per door, an increase from the prior phase, mainly due to escalating construction costs and an increase of provincial sales tax. The yield for this phase is estimated to range from 6%-6.5%. Currently, this phase is approximately 50% leased. Slide 21 provides an update on Brio, a premium 12-story concrete, 162-unit mixed-use development in partnership with RioCan.
The site is exceptionally located in Northwest Calgary along the LRT line and in close proximity to the University of Calgary, Foothills Medical Centre, and McMahon Stadium. Construction commenced in January 2018. We are currently forming the fifth and sixth 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 markets. Cap rates for stabilized, well-located, better-quality buildings continue to remain low as demand for multi-family real estate remains high. Slide 23 is a rendering of Duo, which will be built on excess land at Sarcee Trail Place in Calgary. We submitted a development permit for two 15-story towers totaling 229 units with a connected two-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. 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 CAD 5.91 billion, compared to CAD 5.84 billion at the end of the previous quarter and CAD 5.69 billion at the end of 2017. Quarter-over-quarter increase of CAD 70 million, primarily on our stabilized property assets. Unstabilized property fair value totaled CAD 30.5 million as at September 30th, 2018, primarily consisting of two development projects in Regina, Pines Edge II and Pines Edge III. Two 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%, unchanged from Q1 and Q2 and from December 31st, 2017. The next 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 CAD 63.05 per diluted trust unit, inclusive of CAD 0.90 in cash. This equates to approximately CAD 178,000 per door, compared to CAD 158,000 per door based on the trust unit trading price of CAD 49, a discount to implied NAV per trust unit of 20%. Current trust units 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 market transactions. Slide 26 shows the breakdown of capital Boardwalk reinvests back into its properties for the three nine months ended September 30, 2018. Capital invested in Boardwalk's investment properties, excluding development and PP&E of CAD 995 per apartment suite in the current quarter and CAD 2,571 for the first nine months of the year.
The chart to the right also shows Boardwalk's capital investment by major categories for the first nine months of 2018. Building exterior and suite renovations and upgrades, including Boardwalk's internal capital program, comprised approximately 80% of capital investment, or approximately CAD 72.8 million, a reflection of Boardwalk's continued repositioning and rebranding strategic initiative. Boardwalk is starting to see certain regions reaching a balanced rental cycle and has adopted a measured approach of reducing elevated incentives on a property-by-property basis. Maintenance CapEx reserved for the third quarter and first nine months of 2018 was CAD 174 and CAD 521 per suite respectively. Utilizing a three-year rolling average, 2018 maintenance CapEx is calculated to be CAD 695 per suite per year, compared to CAD 655 for the prior year. Slide 27 shows Boardwalk's total G&A for the first nine months of 2018.
Combining operating and corporate, total G&A was CAD 49.8 million, compared to CAD 46 million for the same period in the prior year. Included in G&A was approximately CAD 1.7 million related to severance costs. To improve, particularly in Alberta, which boasted revenue increases of 5.8%, and with a slight increase in Alberta's operating costs, resulting in an NOI increase of 10.5%. Overall, for the third 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 a result of the 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 nine-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's mark-to-market on occupied rents. Overall, there was approximately CAD 39 of positive spread between market and in-place rents, adjusting for existing incentives. On an annualized basis, this is estimated to be CAD 15 million, once adjusted for existing vacancies. If we were to strip out all current incentives, which we believe will unwind over time, the mark-to-market would increase to CAD 150, or CAD 57 million on an annualized basis. Boardwalk's liquidity continues to be strong. As of September 30, 2018, the Trust had access to an estimated CAD 300 million 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 30th, 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 five- and 10-year terms respectively. Our mortgage maturity curve continues to be well-balanced, and we continue to focus on extending mortgages terms while staggering future maturities. Boardwalk's remaining mortgage amortizations under these insured loans in excess of 30 years, and Boardwalk's fourth quarter rolling interest coverage ratio continues to be strong at 2.68 times. Slide 34 provides the reader with our estimated current mortgage underwriting valuations. Boardwalk's balancing continues to be conservatively levered at 50% of mortgage underwritten value after deducting our current cash portion. A special note, the Trust has over 1,300 apartment units that have no mortgage encumbrances, which carry an estimated debt capacity of CAD 136 million, an amount that is in addition to the Trust's CAD 300 million of liquidity position.
Slide 35 highlights our 2018 mortgage financing program. During 2018, we have CAD 201 million of maturing mortgages, and to date, we have renewed CAD 157 million of these, while up financing additional CAD 54 million. The new reported rate of 3% on the weighted average renewal term is five years. In addition, we have added CAD 54 million from previously unlevered properties for being a total raise for the year to date of almost CAD 109 million. 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 CAD 235 and CAD 190 to CAD 230 and CAD 185 respectively.
Please note that we have not adjusted these numbers for the noted one-time charges 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 be targeted at CAD 136 million, with an initial of CAD 30 million to be invested on 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, moderation of existing incentives, and increased returns on invested capital improvements, we anticipate our operating margin to continue to improve. Many of the operating costs associated with multifamily real estate are fixed regardless of the periods of cycle.
As our core market of Alberta enters early stages of recovery, the majority of the incremental revenue is anticipated to flow directly to 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 expenses. Slide 37 reports our distributions for the months of November 2018 to January 2019. The monthly distribution is set to CAD 0.0834 per month, consistent with our annual target of CAD 1 per trust unit. This concludes the formal part of our presentation, and we'd like to open it up for questions now. Operator?
Thank you. 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. Should you wish to decline from the polling process, please press star followed by two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question is from Jonathan Kelcher from TD. Jonathan, please go ahead.
Thanks. Good morning.
Morning, Jonathan.
Good morning.
First question is on incentives. They're basically flat, I guess, quarter-over-quarter. When should we start to see them begin to burn off in a meaningful way?
Hi, Jonathan. It's Rob. Yeah, actually, they are. When we saw in the summer, we thought we saw them peeling off nicely, and then it slowed down. We anticipate for the rest of this year, for sure, we're going to be focusing on occupancy levels. We don't anticipate them to increase much, but we don't anticipate also them to decrease in a period of time. 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 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.
Jonathan, it's Sam. The one month that we're gaining on renewal is essentially approximately 8%. That's really what we're gaining on our renewals. One-twelfth of our leases mature every month. We are seeing about 8% gain on our renewals.
Okay. One month is also 1/3 of the incentives that you're offering too, correct?
Correct.
It does vary by project. The range that we are providing on that slide is an extreme range from zero to two months in some cases. 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 product, then we are able to offer less incentive on a renewal than even on a new rental. It really will vary.
In Grande Prairie, the incentives are from three months to zero months. That is why the Grande Prairie annualized up 45%. It really depends on the community. In Calgary and Edmonton right now, we are seeing about an 8% increase in renewals.
Secondly, on the occupancy, it did dip a little bit in the quarter. Do you still think you can get to 97%, and how long do you think that will take?
We are trending higher as we speak in occupancy. Our rentals for October were much higher, as noted in the conference slides, than they were in September. We are gaining traction again, and the trends are friends, and so we are moving up on the occupancy trends as we speak. We are hoping by the end of this month, November, we are going to get close to 97%.
Okay, thanks. I'll turn it back.
Thanks, Jonathan.
Thank you. Your next question is from Michael Markidis from Desjardins. Please go ahead, Michael.
Hi, guys. I just want to make sure I understand what you said last in response to Jonathan's question. The focus now is more on the occupancy side. 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 a fair statement?
Yeah, that's a fair statement. The focus right now for all our teams is occupancy, getting up as high as we possibly can, because the higher you get it, as the market improves, the faster you'll be able to unwind incentives. Prime example, as Sam mentioned, was Grande Prairie. That's where we saw that. Red Deer as well, saw some strong numbers there as well. We originally thought we'd be able to unwind a little faster than we are, but however, we're still happy with our growth and focusing. As Sam mentioned, we can't underestimate this, is all of our leases turn every 12 months. Even if we have 40% turn, that means 60% are still renewing. If we can get that strong renewal number moving forward, we're going to have some good growth.
Okay. How would the market be, I guess, today relative to where you were, say, six months ago? Because it looks like you're holding the line on incentives, but then the occupancy is going up. 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 by about 100 to 150 basis points. We are seeing improved rental market, and that's a reflection of harder qualifying mortgage requirements and lower-paying jobs and part-time jobs. The mixed economy and evolving economy that we have and describe is actually increasing demand for more affordable housing, and that's coming through in the broader rental market fundamentals, too.
Okay. I guess going forward, safe to say that the interplay between incentives and occupancy. 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 incentives right now between 0 and 2 months, they're definitely less than three months. Last year, they were three. On our renewals, we're going from 3 to 2. The existing residents are getting a better deal than some of our new residents. That's really what our goal is to give our existing, more loyal, and long-term residents a better deal. We're seeing that drop, but the drop is slow because only a twelfth of our leases come due every month. That's increasing our revenues as we speak. The incentives on our new less than what they were last year by about a month as well.
We've got this 6%-8% total revenue for Alberta gain that we're seeing, that's 60% of our portfolio, as a result, that's where the 4.3% overall increase in revenue comes from.
Okay. Last one for me, just noticed that Calgary for sure, Grande 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.
In Calgary, as our property tours over the last couple of years, we really focused Calgary in the improved product quality, service, and experience. The investment we made in Calgary was much higher. We're now accelerating that investment in Edmonton. That is something that's been very successful in Calgary, and it is actually helping us in 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. Our expenses in Edmonton took a hit because of the huge increases in property taxes. We're not expecting a 22% increase in property taxes going forward. 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, in that the scalability of our improvements is something that's really helping us. 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.
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 wide range of renters that are looking for all of the above price and product quality.
Okay, just given the size of the Edmonton portfolio relative to Calgary, would it be safe, or would 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 the next quarter year-end numbers. We're very happy with the pace. One thing we did learn in 2017 is you don't go too fast either because you become your own worst enemy on pricing. Preliminary discussion is around the same pace. 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. Morning, guys.
Morning.
Morning.
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. Yeah.
Is that in November?
Yes, it's in November. The challenge with Nuns' Island is, remember, it's on a lease. Under Quebec law, we can't go any longer than five years.
Okay
on the renewal term. You'll see us targeting the five-year term with that one. It'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. It's probably too early to sort of get indicative pricing on that, right?
Well, it is. If you notice the pricing on the CMHC product right now, the curve is really tight, only from 3.3%-3.4% between five and 10-year money. It's really getting tight there. As we get closer, again, we can't do 10-year money there, but you'll see us for sure probably target the five-year, in that range.
All right. 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, yeah.
2.2.
Yeah. There'll be a bit of an uptick on the interest rate on the renewal for sure. Yes, it will.
There's an uptick on that. Okay.
Yes.
What was the total amount of that CAD 500 million?
CAD 300 million.
It's CAD 300. Okay.
Yeah. The good news is our Quebec portfolio is showing some good revenue growth as well too. On lease renewals, we're going to be able to get that back on the revenue side too.
Right. We won't really see the increased interest expense flow through, I guess then, until more like 2020.
Yeah, that's correct. Because it's November 2019, there will be very little impact on 2019, but more impact on 2020.
More impact 2020. Yep. That makes sense. 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? I guess in another way, how much do you think?
Well, that's a very good question, Dean. Every quarter, William runs the numbers to see what our return of capital versus the income portion of our distribution is. 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. 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, obviously, we'll have to review that again and see how much we have to distribute.
All right. That'll probably come with the 2019 guidance then, I would expect.
Right. Perfect. I will hand it back. Thanks, guys.
Thank you.
Thank you. Your next question is from Howard Leung from Veritas. Please go ahead, Howard.
Good morning. Thanks. I want to touch on occupancies. I think on the call you mentioned that rent rolls are looking a little better in October. I just saw it in the supplemental that Calgary and Edmonton, though, look like their occupancies are down slightly just for the month of October. Is that expected to kind of pick back?
Could you repeat that last point, Howard, please?
Oh, sorry. Yeah. Just in the supplemental, there's city-by-city occupancy disclosures, and just saw for the month of October that they had both come down to 94% occupied. wanted to see your thoughts on-
Okay
just kind of the rest of the year.
Right. In October, we rented more than our move-outs, which will affect November. We saw a higher occupancy as a result in November. October is actually September results.
Oh, I see.
Right. The number you're seeing is the very first of the next month.
Correct.
Is the previous month's rental.
Right.
Yes.
Right. That's a month behind.
I see. Okay.
Yeah. That's how it works ends up. We are seeing, this month, we're at 500 rentals, and we've got 800 move-outs, and we're at the middle of the month. We typically rent more on the back half than we do in the first half of the month. Everybody is aware, Howard, how important high occupancy is. We have many of our communities are over 98%. We're asking all our teams, how do we get every single one of our communities over 98%? That's the question we're asking everybody. Together, we will figure out a way.
Okay. No, that makes sense. In the incentive spending, I think there was an update last quarter in Q2 in the presentation that Calgary was 0-1 month of incentives offered to new leases. In this presentation notice it was back to 0-2. Any major adjustments you had to make there?
Again, the two captures some communities with higher availability. We have to stress that it is community by community and unit type. We're just capturing a wide range when we're showing that. The drop in incentives is very marginal. We don't want everybody to use a magnifying glass to see the trend in incentives going down. That's why conservatively we say it's flat. Technically, the incentives dropped. They have dropped, 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. That's why it looks slow, and the graph looks flat. They are dropping, and it's cumulative, it's compounding.
We're going to see a more pronounced drop in our incentives in one or two quarters because then the comparable year-to-year will be more pronounced. That's all. The slope of the curve will steepen downwards as every month goes by. That's what's so difficult to see in the graph of incentives today, is we're just starting to see the drop in incentives, it's only a 12th every month, the slope is just starting to decline. In real-time, the slope is declining about, as we said, 8% a month.
Right.
On 8% of our portfolio. 8% of 8% is 1.5%.
Right. That makes sense.
It's just compounding that's going to help us, and we're going to see a steepening slope on that incentives graph in the next quarter or two.
Right. You expect that pace to accelerate.
Correct
In a year for sure, all of the incentives will roll off.
Correct. Right. Trend's your friend, we're just starting to see that slope change. Because it's in real-time, you're not going to see it on the graph. The graph looks flat still.
Okay. No, that's helpful. In the IFRS NAV that you guys calculate, I saw there was a note saying that you make the assumption for revenues, that they're kind of forecast market revenues with 3%-5% vacancy. When you're applying those forecast market revenues, are they net of incentives or are they just the market revenues that?
Market revenues.
Yeah. It does not include any incentives. It's market revenues.
How we've adjusted for the short-term incentive program is we've actually ticked up vacancy by market just to adjust for the short-term impact of that rather than taking incentives in.
Okay. Got it. The vacancies will be moved, but there'll be no incentives for the IFRS.
That's correct. We'll be using 4% instead of 3% in a market you'd normally use 3%, say, for example.
Right. Also it mentioned that you guys use the industry standard for the expenses. 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?
No. The standard is just for non-actual. It doesn't include property taxes. They're always actual. Utilities are always actual as well, too.
Okay.
It's just sort of the operating cost standardization, not the other two categories. Those are always actual.
All right. If they're standard, is that before you hired all those associates, I think last year?
Well, standard is based on industry standard.
Okay
versus how we actually operate. That's 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. What the typical margins are and that.
Well, not so much the margins, just particular expense by expense. For example, advertising has got a standardized costing. R&M's got a standardized costing, for the most part. Again, the larger number ones being utilities and profit 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.
Morning.
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 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. If you look at our numbers, we internally expected a stronger second half, and we are seeing that. Yeah, we were very close on that number as well, too.
Okay, in reference to the incentives, I 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?
The rate of change in that going from three-month incentive to zero-month incentive was just too much for the market at that particular time. It just was too big of a move for Calgary and Edmonton. The overall rental market in our cities are still over 3% on average. The trend on market-wide declines in vacancy is our friend. 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, zero incentives on renewals down from two and three months. That's what we've seen in Grande Prairie because that market has recovered before any other market in Alberta. Trend's our friend. We're seeing that in our core markets. By next year, we believe we're going to get close to that 3% market-wide vacancy.
Okay. I think, Sam, at the onset of the call, you referenced two setbacks during the quarter being Keystone and I guess subsequent to the quarter and Trans Mountain. How do you think about those two projects in relation to the impact on inflation demand, rental demand?
There's a positive for every negative, obviously the negative is a 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. 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 two years than the prior two years before that. 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, we rank very high.
If you get tired waiting in a car in traffic in Toronto and tired of commuting for two hours, check out Calgary and the commute times here. It's great, the mountains, the lifestyles in Alberta. Edmonton is one of the hubs of artificial intelligence. Very few people realize that. 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. 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, we are seeing the positives. The longer this oil stays low, the more diversified our economy's going to be by necessity.
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 great not to see those pipelines go through. We believe over time that will happen. Everybody's disappointed at the delays and the decisions of the courts with respect to those pipelines. Necessity is the mother of invention, and we're finding ways to deliver growth and create value in a mixed economy. The question is, how do we produce value and growth in this economy? There's 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 two pipelines?
No, absolutely not. If you look at the late 1980s, Mario, we had the same similar economy with respect to oil going from bad to worse. If you look at the late 1980s CMHC data, and oil went from bad to worse, actually rent went up. Why did rents go up in that economic period? 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 rentals because there's more demand for affordable housing. That's the good and bad news with respect to our improving rental market. Rental market has been contrary to the oil market.
The late 1980s, 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. The economy is mixed. There are positive statistics economy as well as the negatives with respect to the differential in the oil, the pipeline delay. It is a mixed economy, and it is producing jobs. Again, we stress the jobs are less paying, they're part-time, and playing into higher demand for affordable housing is becoming more of an essential requirement going long-term.
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?
Well, no, it's actually a response to returns. We're getting really very strong returns on the investments that we're making. Again, I want to re-highlight that part of the strength of the returns is the fact that we're doing it on a measured pace, we're not flooding the market with quality as far as well, too. As we saw in Calgary, that actually drove prices down farther. On a measured pace moving forward, and by default because Edmonton's a larger portfolio, we're going to see more renovations going on in Edmonton with the expectation, again, of better returns.
Got it. Internally, there's no concerns of accelerating supply growth in Edmonton?
No, because we're just upgrading our existing stock, 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 were 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 60 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, they're right now about 50 some percent of our margins or 40 some percent are our expenses. The incentives are between 8% and 24%. If you looked at the average of, let's say, 12%, you add that to 52 or 53, you get back into the 60s.
That's the driver is when these incentives burn off, you're going to see margins grow quickly.
We, in Ontario, for many, many years, saw margins that we're at right now, as soon as revenues picked up into the double digits, the margins in Ontario picked up as well and shot back up over 60%. Revenue is the key, that's the biggest driver in our industry, 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 CAD 1.25 a square foot. We're really an exceptional value proposition to providing affordable housing in our marketplace. These rents can go, like they have in Ontario for a page product, over CAD 2 a square foot.
That's a substantial amount of revenue opportunity, and it's still just over CAD 2 a square foot and far below $3 to $4 that's typically expected in performance for new builds. We're seeing $4 to $5 a square foot in some parts in Toronto, of course. Fort McMurray used to have rents of CAD 2,300, CAD 2,400 a month or CAD 300, CAD 350 a foot. These rents are volatile, and they can swing and recover quickly when the rental market recovers. We're seeing the trend of the rental market recovering, and that's due and reflecting the increase in affordable housing and mixed economy. We're seeing and delivering positive results despite the economic situation that we find ourselves in.
Okay. That's it for me. Thank you. .
Thank you. Your next question is from Brendon Abrams from Canaccord. Brendon, please go ahead.
Hi, everybody. Just turning to slide 29, the sequential revenue growth. Obviously, it has been positive for the quarter, but it looks as though the pace has decelerated over the last few quarters. How do you guys take a look at this, and do you think we have kind of hit a new kind of stabilized normal here after bouncing off the bottom, or do you expect this trend to maybe reverse?
The biggest gains we made was in occupancy, and we came up 100, 200 basis points in occupancy. Of course, quarter-over-quarter, that is going to be reflected in our quarter-over-quarter numbers. Especially year-over-year gains are going to be even higher because of the occupancy gains. We still have that occupancy gain opportunity. Being around 96%, we definitely can get back up to 97%, and we are going to really work hard to get it to 98%. We can recapture an accelerated and outsized revenue gains in the next quarter or two by focusing in on occupancy. Taking the pedal off a little bit on the drop in incentives for our new residents.
Instead of zero months, we can increase that to the one and to the two, which is less than the three, and it keeps, on the other end, incentives going down. We can see some increased revenue gains over the next quarter or two simply because of the occupancy opportunity that we still have to move upwards.
Right. Just turning to same property NOI. I just wanted to get your views. It has been pretty strong both for the quarter and year to date. 5%, 6%, let us call it. How much do you guys attribute this to kind of your repositioning program and the capital invested over the last two years, which has been significant, or/and how much just to general market condition?
It's both. A good point. What we're seeing is an accelerated improvement in our occupancy and NOI gains. In particular, Calgary is a great example where we focused on improvements and experimented with Calgary. We're really happy with the results. The experiment turned out to be very positive. That's why we're scaling it out to all our regions. It's now a tried, tested, proven tactic to improve not just our units, but our common areas and lobbies. Leasing offices, which we redefined as experience centers. We're really, as my wife describes it, taking a holistic approach to the resident experience, right from the get-go, right from the curb into the home, the residential home.
This holistic approach is really working in Calgary. 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. 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. Then they look at what's available for a higher price and say, "You know what?" It's just like all of us when we go shopping for a new car or a home or whatever. It starts at a base price. We say, "Okay, that's great, but I'd like this extra and that extra." The extras add up. We move up the rental value chain. We offer something for more renter consumers. That's really working really well.
We're going to do it in all our regions. We're doing it especially in Ontario now, Quebec. We're really keenly aware of how important it is to always improve our product quality, service, and experience and value proposition always. That's what we're always asking everybody to do is how do we get better, provide greater value to our residents? As a result, we realize greater growth in our revenues and bottom line. It's a win-win.
Right. Okay. Then just turning to the portfolio acquisition in Calgary, it looks like you guys are maintaining your long-term diversification strategy. How does that come into play when you're making acquisition decisions in the near short-term, given this would increase your Alberta exposure, obviously?
Yeah, we recognize that it does increase our Calgary core market. It's a relatively small portfolio, and it was an opportunity that we are very familiar with these assets. 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 had announced last year.
The really appealing and unique part about this acquisition is it's accretive at get-go. It's very, very difficult to purchase anything today that's accretive at get-go. That is another great reason we went ahead with this acquisition. 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 one in the southwest. The locations are exceptional, and it's really difficult to replace these locations. The state that these communities have been preserved in and kept up is exceptional. They're really exceptional opportunities to allow us to high-grade our portfolio. Part of our strategic plan is to high-grade our portfolio everywhere. 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.
We'll be continuing to pare off other assets going forward that are more suitable for other owners, that just are not as suitable for us. We're going to continue to recycle our portfolio and our capital. This works really well indeed.
Okay. One last question from me before I turn it back. Just taking a look at slide 49, the move-out tenant survey. I don't want to read too much into this, but there was a big jump on a % basis for the reason being rent is too expensive. I'm just wondering how you guys are viewing the roll-off in incentives and increasing rents while still balancing tenant retention.
The amount of increase due to rent being too expensive is approximately 50 residents. From 2016, it's actually dropped by about 50 residents. 2017 was a real exceptional low-rent year. 50 residents in the quarter, we don't really believe it's a significant amount. We do look at every reason seriously, and we do ask our entire team to be flexible always, period. We really strive to help our residents in unique situations, and always try to work out a win-win situation to 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. That was shown in the slight uptick of our skips as well. It's slightly up.
Absolutely, that's a reflection of a mixed economy where some folks are still going through some tough situations, and others are finding new jobs and the new jobs that are being created. 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-outs manageable.
Okay, great. I'll turn it back. Thank you.
Thank you.
Thank you. That concludes today's Q&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, it's bwalk.com, where you'll also find our contact information should you have any further questions. 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.