Good morning, ladies and gentlemen, and welcome to the Boardwalk Real Estate Investment Trust second quarter results conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Monday, August 13, 2018. I would now like to turn the conference over to Mr. James Ha. Please go ahead.
Thank you, Leonie, and welcome to the Boardwalk REIT 2018 second quarter results conference call. With me here today is Sam Kolias, Chief Executive Officer, Rob Geremia, 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 boardwalkreit.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 and presentation may be considered forward-looking statements. Although the expectations set forth in such statements are based on reasonable assumptions, Boardwalk's future operations 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 three, our topics of discussion for this morning will include a macroeconomic update, our quarter highlights, a development update, financial highlights, operational review, including our renovation program, and lastly, our financial guidance update. I'd like to now turn the call over to Sam Kolias.
Thank you, James, and thank you, everyone, for joining us this morning. We are pleased to report on a solid second quarter of 2018. Beginning on slide four, we continue to see positive macroeconomic conditions in our core market of Alberta, with many of our leading indicators showing continued improvement. The stabilization in our rental market is continuing through the summer rental season, and as previously highlighted, our portfolio vacancy remains in balance, and incentives are in the early stages of being reduced. The initial compounding impact of these improvements as part of our strategy has resulted in significant growth in revenue, which has further enhanced both our NOI and FFO. Two factors that materially drive these positive results are an improved occupancy and higher rents as a result of our front-loaded investment in suite and common area renovations, and a further downward trend of our incentives.
Many of our communities where we were offering one to three-month incentives this time last year are now being leased with limited to no incentives. The compounding impact of incentive reductions, as well as capturing higher rents from in-suite and common area renovations, will further bolster our recovery and growth. On slide five, we illustrate current rental market fundamentals for each of the markets where we operate and their current state. Boardwalk strives to create value through all stages of the rental cycle. Approximately 60% of Boardwalk's portfolio is in Alberta, which has entered economic recovery and has entered into a balanced rental market. Economic reports continue to project a continued improving economy in Alberta, more specifically forecasts for the province remain positive for GDP growth, employment growth, and in migration growth.
Keystone XL Pipeline, along with the Trans Mountain Pipeline, have received federal approval, and construction is estimated to begin this fall for Keystone XL and in 2019 for Trans Mountain. The completion of these two pipelines will significantly improve both national and provincial economies. Grande Prairie is bordering a strong rental market, almost fully occupied with a strong demand for rentals being seen in this region. McMurray has had more of a muted response with modest occupancy gains and revenue growth. We have called these smaller rental markets our canaries in the coal mine for our Calgary and Edmonton region. These smaller markets have historically been accurate leading indicators for our primary Calgary and Edmonton rental markets. As we will see in upcoming slides, Grande Prairie has posted a 60% net operating income gain.
Both Calgary and Edmonton are now in a balanced rental market with a continued positive revenue growth trend. The Saskatchewan region remains in a soft rental market with a slower recovery taking place in the province, along with elevated levels of new supply. Ontario's growth continues to improve. The market continues to be in a strong rental market with new construction increasing. Slide six illustrates the diversifying Alberta economy and strengthening of the labor market as the overall downward trend to the unemployment rate continues. As a leading indicator to employment trends, Alberta job vacancies have increased since last year, with the majority of employment in the goods-producing sector. As the economy diversifies, while still noting the increased amount of positive labor changes in the oil and gas sector as the economy improves. Slide seven, Alberta continues to see positive interprovincial and international migration.
A positive as immigration is another indicator of future rental demand, as a significant number of new migrants become renters. Saskatchewan net international migration has continued to increase while we see a decline in interprovincial migration. Slide eight displays Alberta as the leader of projected regional economic performance in Canada. Slide nine further illustrates the housing market in Calgary with lower home ownership and condo unit construction. However, a slight increase in rental unit construction. Including our own 162 units currently under construction, there are approximately 2,000 purpose-built rental units underway. These 2,000 units represent approximately 5% of the total rental market, and we believe will be necessary over the next 12 to 24 months as demand for rental housing in Calgary, driven by net migration and affordability, continues to increase, as shown in our results today. Slide 10 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 11 provides our progress on our vacancy targets, as highlighted at the beginning of the year. We remain on trend and within our target range. Slide 12 provides a general snapshot of incentives offered for new rentals compared to the same time last year. In July 2017, we were offering one to as much as four months of incentive on 12-month leases. As a comparison, this year, our incentive offered have reduced significantly to zero to two months. With our resident-friendly approach, our target on renewal continues to be approximately a one-month reduction on incentives from a resident's prior lease. Saskatchewan continues to be in a softer market with limited to no incentive reductions from the same period last year.
Slide 13 highlights the significant decrease in vacancy loss we have seen from last year and the early trends of total and average incentives beginning to decrease. It should be noted that approximately one twelfth of our leases are renewed every month and will have a cumulative positive impact on our results. This provides a significant revenue opportunity to recapture the 2017 fiscal year loss from incentives of CAD 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. Noting that there will naturally be vacancy loss even as the market returns to stabilization, as optimal levels are around 2% or 98% occupancy. Slide 14 further illustrates the positive impact of our focus on vacancy loss and incentives as rental revenue continues to increase.
This slide is more of a rearview mirror of incentives, as Slide 12 more depicts the sharper decline occurring in the third quarter we are already in today. As previously mentioned, increasing occupied rents is a result of reduced incentives as well as increased rents as a result of our suite renovation program. Slide 15 highlights the compounding impact of quarterly growth, which has led to a 3.7% stabilized revenue growth in Q2. All regions have posted positive sequential revenue growth. Slide 16 provides a summary of our financial highlights for this second quarter of 2018, which includes total rental revenue of CAD 108.4 million and same-store rental revenue of CAD 106.8 million, an increase of 2.7% and 3.7%, respectively, from the same period last year. Total NOI of CAD 59.1 million, up 8.6% from the same period last year.
FFO per unit of CAD 0.60 on a diluted basis, up 11.1% from last year, and adjusted funds from operation per unit, which includes an estimated CAD 695 per apartment unit of maintenance capital, up CAD 0.49 of the second quarter of 2018, up 16.7%. Slide 17 provides a summary of Boardwalk's strategy to maximize NOI and net asset value. 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. Presently, this remains our largest opportunity. In addition, the front-loaded investments we have made in our product quality and service will continue to further enhance our results. With this foundation, we remain committed to growth in major centers, which will provide both NAV creation and future diversification amongst our portfolio in the long term.
I'd like to now turn the call over to Lisa Russell to discuss our development and acquisition opportunities. Lisa?
Thank you, Sam. Slide 18 is a summary of our current projects. We completed construction on the third phase of our Pines Edge community in July 2018. It is a four-story elevator wood frame building with a single-level underground parkade in Regina. In addition, construction of Brio, a 12-story concrete high-rise building in Calgary, is well underway. Slide 19 provides an update on our Pines Edge community. We remain on schedule with our lease-up of phase 2, with current occupancy of approximately 92%, and anticipate an estimated yield of 6.4%. Construction of phase 3 began in June of 2017 and was completed in July 2018. 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. The yield for this phase is estimated to range from 6%-6.5%.
Slide 20 provides an update on Brio, a premium, 162-unit mixed-use development site 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. The two-level underground parkade structure is close to grade, and the above-grade slab and mechanical and electrical work are underway. We estimate occupancy to be in early 2020. Slide 21 provides our estimate for market cap rates in Boardwalk's existing markets. As indicated on this slide, sales transactions in London, Ontario, indicate declining cap rates. Cap rates for well-located, better-quality buildings continue to remain low as demand for multi-family real estate remains high. Our Western Canadian development opportunities on excess land remain high, with over 4,400 apartment units equating to approximately 4.4 million billable square feet, as shown on Slide 22.
These sites are in various stages of planning and approval and represent an opportunity for the trust to high-grade and enhance our portfolio of asset value. We recently completed an initial density study across our Ontario and Quebec portfolio, which identified an additional 1,600 apartment units totaling 1.6 million billable square feet of potential new rentals. We are in the early stages of prioritizing these opportunities. An example of this is shown on Slide 23. This 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 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 CAD 5.84 billion, compared to CAD 5.78 billion at the end of the previous quarter and CAD 5.69 billion at the end of 2017, a quarter-over-quarter increase of approximately CAD 65 million, primarily on our stabilized property assets. Unstabilized property fair value increased slightly quarter-over-quarter due to higher occupancy at Pines Edge Two and now total approximately CAD 91 million of investment property fair value. Two properties, one in Calgary and one in Edmonton, were reclassified as stabilized during the current quarter. Weighted average cap rate at June 30th, 2018, was 5.29%, unchanged from the previous quarter end and from December 31st, 2017. The next slide, Slide 25, presents Boardwalk's implied NAV calculation. That includes the IFRS fair value revenue and expenses used in the calculation.
NAV under IFRS is calculated to be CAD 62.22 per diluted trust unit, inclusive of CAD 1.60 in cash. This equates to approximately CAD 176,000 per door, compared to CAD 164,000 per door based on the trust unit trading price of CAD 46, a discount to implied NAV per trust unit of 26%. Current trust unit are trading at a significant discount to NAV and offers exceptional value when considered against NAV, recent transactions in the marketplace, replacement costs, other consumer housing options like condominium ownership, and current valuations on private market transactions. Slide 26 shows a per-unit reconciliation of FFO for the current quarter and first six months of 2018 from the FFO per unit amount reported for the same periods in 2017. A reconciliation of FFO to profit, as shown on Boardwalk's condensed consolidated financial statement, can be found in the appendix of today's presentation.
Stabilized and non-stabilized properties added CAD 0.10 and CAD 0.01 respectively to FFO per unit for the current quarter. We are seeing a positive trend in our rental performance on a sequential basis in both occupancy levels and occupied rental rates, demonstrating a recovery in the Alberta market rental cycle and a demand for renovated suites as they are completed. Ontario's continued strong NOI growth also added to the positive performance. Administration was higher due to higher customer service wages and salaries, reflecting our continued enhancement to our resident members' service and experience, as well as increased call center costs and higher travel costs. There were minimal severance costs in Q2 2018. Slide 27 shows the breakdown of capital Boardwalk reinvests back into its property for the three and six months ended June 30th, 2018.
Capital invested in Boardwalk's investment properties, excluding development and PP&E, was CAD 725 per apartment suite in the current quarter and CAD 1,577 for the first six months of the year. Over the past 10 years, Boardwalk has invested over CAD 1 billion in capital improvements on its property portfolio. The chart to the right also shows Boardwalk's capital investments for the first half of 2018. Building exterior and suite renovations and upgrades, including Boardwalk's internal capital program, comprise 77% of capital investment, or approximately CAD 43.4 million, a reflection of Boardwalk's continued repositioning and rebranding strategic initiatives. Boardwalk is starting to see certain regions reaching a balanced rental cycle and anticipates it will be able to start reducing past elevated incentives in the second half of the year. Maintenance CapEx reserved for the second quarter and first half of 2018 was CAD 174 and CAD 348 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 2017. I would now like to turn the presentation over to Rob Geremia. Rob?
Thanks, William. Moving on to slide 28. Boardwalk continues to focus its investment based on its brands, which range from affordable to luxury. For 2018, we are targeting renovations on between 1,000 to 2,000 suites at various renovation levels. We have refined our process to minimize the related transitional costs while continuously upgrading the portfolio. Slide 29 highlights the different levels of suite renovations associated with our separate brands. In addition to the suite-specific renovations, we have expanded this program to include common areas and lobbies. As is shown on slide 30, renovations in these areas, for the most part, are being performed by our in-house teams, with costs coming in significantly lower than had we outsourced these projects to third-party contractors. As with suite renovations, lobbies and common areas are upgraded in accordance with brand renovation guidelines. Moving on to slide 31.
For the first half of 2018, the Trust invested CAD 52.3 million back into its buildings. Simple returns continue to be strong, ranging from 12.5%-22.6% on value-added capital and 11%-17.6% on total capital invested. The total asset value creation on these renovations is over 400%. Slide 32 reports Boardwalk's stabilized portfolio for the second quarter of 2018, as well as on a year-to-date basis. For the second quarter, revenue continues to improve, particularly in Alberta, which posted a revenue increase of 4.6%. Overall, revenue was up 3.7%. We continue to work on reducing our controllable operating costs. This focus has shown a reduction in overall operating expenses were down 2.1% for the quarter, resulting in NOI increasing by 8.8% for the quarter. On a year-to-date basis, revenue increased by 3%, with operating costs increasing by 1.1% and NOI increasing by 4.6%.
Slide 33 reports the Trust's mark-to-market unoccupied rents. Overall, there is approximately CAD 36 positive spread between market and in-place rents. On an annualized basis, this is estimated to be CAD 14 million when adjusted for existing vacancies. If we were to strip out the current incentives, which we believe will unwind over time as the market continues to get stronger, the increase would be CAD 152 or CAD 58 million on an annualized basis. Boardwalk's liquidity continues to be strong. As of June 30th, 2018, the Trust had an access to an estimated CAD 281 million of available capital, as is shown on slide 34. This represents approximately 10% of total debt outstanding. Slide 35 reports the Trust's total debt maturity schedule. On June 30th, the Trust's overall weighted average in-place interest rate was 2.61%. Currently, the Trust is obtaining NHA-insured mortgages at 3% and 3.3% on five and 10-year terms respectively.
Our 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 is still in excess of 30 years, Boardwalk's four-quarter rolling interest coverage ratio continues to be strong at 2.64 times. Slide 36 provides the reader with our estimate of current mortgage underwriting valuations. Boardwalk's balance sheet continues to be conservatively levered at 63% of mortgage underwriting value after deducting our current cash position. Of special note that the Trust has almost 1,300 apartment units that have no mortgage encumbrances, which carry an estimated debt capacity of CAD 126 million, an amount that is addition to the CAD 281 million previously noted. Slide 37 highlights our 2018 mortgage financing program. During 2018, we have CAD 201 million of maturing mortgages.
To date, we have renewed CAD 93 million of these, while up financing an additional CAD 23.4 million. The new reported interest rate of 2.86% is slightly better than the maturing 2.91%. The weighted average renewal term is five years. In addition, we have added CAD 54 million from previously unlevered properties, bringing the total raise to date to almost CAD 78 million. Moving on to slide 38, Boardwalk's 2018 financial forecast. As we have in the past, it's our policy of the Trust to review and update financial guidance on a quarterly basis and where necessary, make any warranted revisions. Based on this review of the key input variables, we are increasing our reported lower end of our financial guidance from CAD 2.15 to CAD 2.20. The new FFO range is now CAD 2.20 to CAD 2.35 as compared to CAD 2.15 to CAD 2.35.
A similar adjustment has been made to our 2018 AFFO guidance, increasing the lower-end range to CAD 1.75 from CAD 1.70 while maintaining the high end of the range. We have also increased our target stabilized NOI range from 2% to 7%, to 3% to 7%. Boardwalk's property capital budget for 2018 continues to be targeted at CAD 136 million, with an additional CAD 30 million to be invested on committed development projects.
The improvement this quarter in our financial results was within our expectations and in line with the trends the trust has been seeing since the beginning of the year. The 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 margins to continue to improve. Many of the operating costs associated with multi-family real estate are static regardless of the period of cyclicality. As our core market of Alberta enters its early stages of cyclical growth, the majority of incremental revenue is anticipated to flow directly to NOI. The trust remains committed to the modernization of the potential of our team to reflect our culture of a peak team of peak performers. The trust will continue to evaluate its controllable operating expenses.
Slide 39 reports the trust distributions for the month of August through October of 2018. The monthly distribution is set at 0.0834 cents or CAD 0.0834 per month, consistent with the annual target of CAD 1 per trust unit. This concludes the formal part of our presentation. We'd like to open it up now for questions. Leonie?
Thank you. Ladies and gentlemen on the phone line, should you have a question, please press star followed by one on your touch-tone phone. If you're using a speakerphone, please lift your handset before pressing any keys. One moment, please, for your first question. Your first question is from Fred Blondeau from Echelon Wealth. Fred, please go ahead.
Thank you. Good morning.
Morning.
Good morning.
Two quick questions from me. Could you remind us what your expected yield on Brio, and whether or not your view has changed on the yield since the beginning of the year?
Right now, it's pretty early in the stages to give out a cap rate. We know we run a very conservative pro forma, and at this point, as we get closer to the construction and through occupancy, we can give you more information at that time.
Okay, that's fair. I guess the same question on these 6,000 apartment units development opportunity. Could you remind us what your expected yield on these?
At this point, again, it's pretty early in the process. Similar to the 4,400 units that we have across Alberta, we have just recently completed the densification study in Ontario and Quebec, which we are looking at potentially another 1,600 units. Again, as the developments and opportunities reprioritize and determine, we'll definitely look forward to giving you updates.
Fred, you bring up great questions. The potential is in the future, it really pales in comparison to the significant opportunity we have in reduced incentives. We want to keep everybody focusing on the biggest prize is the recovery of our revenue. That's our biggest opportunity to drive NOI and our margins and our FFO much, much higher. That's really what our primary opportunity is right now and our primary focus. That's why the biggest deals as well are on our common area and suite upgrades. There's double digits and even triple-digit returns on NAV growth in investing in our existing communities. That's where we want everybody's focus more to be on, because that's really the significant opportunity we have.
Perfect. Thank you. I'll leave it there, congrats on the results.
Thanks, Fred.
Thank you.
Thank you. Your next question is from Mario Saric from Scotiabank. Mario, please go ahead.
Thank you. Good morning.
Good morning.
I wanted to just come back to the incentives. It looks like they were down about CAD 2 per suite per month quarter-over-quarter to CAD 1.16 per month per suite. The tone of the disclosure, including slide 12 in the presentation, sounds very strong in terms of reducing those incentives. Is it simply a timing observation insofar as the incentives really started coming off in July, or is there something else?
Correct, Mario. The incentives we've seen drop by an average of a month, which is just under CAD 100 per unit, just started to happen in July. That's because of the occupancy that we realized after the second quarter. Also, it's a reflection of a stronger rental season in the summers that we typically experience as well. There's a current much higher drop in incentives, and this is why we wanted to share with everybody the current incentives that we're offering in the third quarter that we're currently in are more than certainly the second quarter and the first.
Mario, we gave you July to July comparisons for a reason, because Sam's exactly right. Demand will vary by month, but usually year-over-year, the demand's the same.
As you can see from a year ago July to where we are now, there's been a significant improvement in the market in general.
Got it. Right. That CAD 1.16 a month, we should see a pretty substantial decline in that.
Well, we will. Again, it will take time because as these leases roll over slowly, you're making up CAD 100, let's just say on average, but it takes a while to accumulate versus the total portfolio to really make a material impact. It does have a snowball effect as you roll forward.
Okay. Just turning to the margin, I think, Rob, you mentioned an expectation for continued improvement with kind of the revenue increase going straight to the bottom line. In Q2, your margin was up 300 basis points. I think that was the first year-over-year increase since Q2 of 2015, so in almost three years. Presumably you can't control the weather, which contributed, let's say 50 or 70 basis points to that 300 basis point year-over-year increase. Given what you're seeing today, is the remainder of that year-over-year margin growth sustainable through Q1 of 2019?
Well, for the rest of 2018, we do believe it is. That's built into our guidance target, and that's why we actually. Based on the results for the first six months, that we bumped upward our lower end of our guidance, and that's changed the low end of the NOI growth range as well, too. Yeah. I think the big part of the strength in the margins has been the revenue growth and our ability to fill up our occupancy levels. We do anticipate a continued strong upward margin growth. It's sustainable 2019. We'll give you an update again when we provide 2019 guidance on that.
Okay. My last question, just maybe for Sam, you talked about the supply growth in Calgary being 5% and Edmonton being 2%. How do you feel about the acceleration of supply potential today relative to three to six months ago?
Much, much better in that the big indicator is a drop in housing and condominiums. That's typically what happens is the total supply drops to balance the new demand. Homeownership has definitely dropped, and there's more propensity to rent as immigration typically focuses in on rental, not home buying. We're seeing a drop as per our appendix and our move-out surveys to move out to buy a new home or condo. We're seeing a pickup in rentals. Pretty consistent in a slower economy as well. Rentals do better in a slower economy. It's just clearing the housing and condominium inventory that was required. That's rebalancing as well with the builders dropping the new construction of houses and condominiums.
Got it. Okay. I guess we get the homeownership rates every five years or so. Anecdotally, when you talk about a greater propensity to rent in the province, Alberta historically has had one of the higher homeownership rates nationally. Can you give us any color in terms of what you're seeing on the margin?
Yeah, we're seeing in our communities a mixed demographic increase. We're seeing homeowners sell their homes that are middle to baby boom age and going to rentals. Of course, we're seeing millennials going to rentals as well. We're seeing a broad positive moving into rental housing versus homeownership across all demographic groups.
Great. I guess when those things get started, they're pretty structural in nature. Seems to be.
It is.
-the field at the time.
Yeah. It's much more difficult to qualify for a mortgage, that absolutely is a big, big factor as well. As well as cost of homeownership and condominium ownership is much higher. There's no question the value that a housing consumer realizes renting is much better right now than homeownership options, much more affordable, much more flexible. In this economy, flexibility is really important. There's a lot of advantages. We've got much nicer product, too. We've got with our diversified product offering, something for everybody.
Great. Thank you.
Thanks. Thank you.
Thank you. Your next question is from Jonathan Kelcher from TD Securities. Jonathan, please go ahead.
Thanks. Good morning.
Morning.
First, just on your occupancy, and I know it's still in your target range, but it did dip a little bit in July, and I guess down a little bit since April. Maybe give a little bit of color on that. Are you guys to the point where you're trying to push rents?
Jonathan, yes, we are. Historically, April, May, and June are our highest turnover months as well, too. You have to factor that in at the same time. Yet, on a year-over-year basis, we're seeing turnover down about 7%. Rentals actually are up by 3%. On an overall basis, it's coming in better than it did 12 months ago. Again, those were our higher turnover months. We're coming into now August, September, our big rental months. We're anticipating that to go back up again very shortly.
Okay. No issues getting above 97% by sort of end of the year?
We don't believe so. Unless something changes dramatically in the market, but given what we're seeing today, we're seeing the same trends that we saw three months ago.
Okay. Just on the G&A, it's been around CAD 9.3 million or so the first couple of quarters this year. Is that a good run rate going forward, or are there some one-time things in there? It's up fairly significantly versus last year.
There are some one-time things. I'd probably say maybe CAD 3.25 million of one-time targets, including some severance payouts. We are focusing now on our G&A to make sure that we're optimizing that as well at the same time. I think in the short term, it's a decent run rate, but we'll provide you much more guidance on that once 2019 begins.
Okay. Good quarter. Thanks a lot.
Thank you.
Thank you. Your next question is from Howard Leung from Veritas Investment Research. Howard, please go ahead.
Thank you. Good morning.
Morning, Howard.
I want to go over the incentives. It was discussed that starting in July, the renewals and also the new incentives offered are much lower. The absolute CAD of incentives in Q2, though, went up. Do you expect, given the policies are a little tighter now, maybe the absolute CAD would go down in the next couple quarters?
Yes. Yeah, we do expect that. Again, I'm on a constant cumulative effect of this. It'll have much more impact, say, 12 months from now than it does today. Yes, we do anticipate the absolute CAD value to start to decrease forward now.
Okay, great. Yeah. It'll just take time, I guess, as you were.
That's correct. You're making huge lumps on a lease-over-lease basis, but on a cumulative number based on our revenue, it'll take time for it to catch up.
Right. That makes sense. On the slide on the returns on the value-added capital, I wanted to know for the revenue there, the increase from the renovations and also the market strengthening revenue, that's on an annualized basis, and I guess that hasn't fully been absorbed into the results yet, right? That's just the new revenue anticipated from the renovations.
That's correct. We basically take the impact of making the change, annualize that impact, and give you the returns off that. In addition to that, we roll that into the IFRS valuation methodology, which again, is on an annualized basis. We do separate for you the difference between we believe is market strength and renovation strength.
Got it.
I think the two cannot be totally separated because as you develop better product and have lower occupancy, it will drive up cost. By default, the two are connected.
Right, they're related.
That's right.
For the market strengthening, how would you separate that? Is that just based on maybe CMHC data or market surveys?
No, it's based on our internal best estimates. We know our pricing strategy for renovations, so we do adjust market rents based on that pricing strategy. We compare at the end of the quarter to the total revenue adjustment. The net difference has to come from market surveys.
Okay. That makes sense. Thanks. I'll pass the line.
Thanks.
Thank you. Your next question is from Matt Kornack from National Bank Financial. Matt, please go ahead.
Hi, guys. Just going back to your operating expenses for the quarter, is it fair to look at this more on a 6-month basis versus a quarterly basis? If you look at the first 6 months of last year and the first 6 months of this year, it's fairly consistent from an OpEx standpoint. Just wondering if there's anything timing related in there. Looking through to the balance of this year, it was a bit higher last year in terms of OpEx. Would you assume that the sort of first half of the year is indicative of what would be OpEx for the second half?
I guess to your question is yes. I'd say yes for sure, look at the 6-month number, although I will caution a bit. In 2018, we did have some carryover in our costs from 2017 because the level of renovations and operations that we were doing at that time. Moving forward for the last half of the year, the big variable, as was mentioned previously, is utilities and the weather itself, too. I'd probably say we should see significant improvement. On the operational side, we should see Q2 do a lot better than or Q3 do a lot better than Q3 did last year. Again, the variables being the weather in Q4. I guess in general, Q1 is a heavier quarter for utilities generally than Q4 is as well.
Sure. No, I meant excluding it just on the.
Oh, as utilities?
Yeah.
Okay. If you exclude the utilities, the other variable that we're still working on is property taxes.
Right.
That's the one that we've seen some significant increase, particularly in Saskatchewan, but we're anticipating some savings in other areas. On the controllable costs, I think Q2 was a much better run rate than you saw with that.
Okay. The savings that you're getting from outsourcing some of, or insourcing some of the products that you're buying, that comes through, I guess, to some extent in R&M. Would there be something in terms of your CapEx profile as well? Because I would assume some of that's being capitalized.
It is. I think the biggest benefit on the CapEx side of doing it ourselves is it's actually below budget. We're doing a better quality product at a lower cost than we anticipated we'd be able to do. We're going to see overall valuation creation as a result of that net of the cost of doing it. Yes, we are seeing savings in R&M, too, because we're having our team do more of the work themselves. Over the last six months, we've been focusing on adding to our team experienced individuals that can do the work ourselves versus having to contract it out.
Just with regards to your same property NOI growth guidance, it's still a pretty broad range, and I know there are some intricacies because the second half of last year was obviously stronger on a relative basis. Wondering if you have a sense as to why you'd come in sort of at the low end versus the high end of the range there.
If you look at our guidance right now for the first half of the year, our average between the three and seven is 5%. For the first half of the year, our results show 4.6%, we're right on target with that. We're hoping to see a little bit more improvement in the second half of the year to move that number even up. We believe it'll still be within that guidance range.
On vacancy, and maybe it's unfair because you've done leasing and brought your vacancy number down, on the vacancy that you have now, would you anticipate having to give incentives on that still, or on vacant space, are we looking at sort of no incentives at this point?
It's a project-by-project basis. The only market right now where we're offering no incentives is San Francisco and Grande Prairie because the market itself is just so strong. Everywhere else has to have incentives as part of the marketing strategy. Again, the way we do it is community-by-community basis. If there's low vacancy in that building, you're going to see very low incentives in that building. If there's higher vacancy, you're going to see us roll into that as well, too. Incentives are a very strong marketing tool that we use, and it's helped us a lot.
Okay. In 2014, sort of pre the oil collapse, you didn't provide a market rent including incentives. At that point, were you offering any incentives? Hardly, I mean.
Yeah, I think we do have one slide where we show zero incentives almost in 2014. It's in our appendix, I believe.
Yeah, in 2014, In 2013, we did not have any incentives built in.
Is it your view, I guess today that market rent is above where it was in 2014 when you strip out incentives?
Yes. Incentive itself in general, yes. It'll be at or above the rate we're there now. It'll take us time to unwind the incentives to get the absolute number to where it was. Yeah, I think overall market rents. We are seeing actually market rent strengthen.
Okay, fair enough. Thanks, guys.
Thank you.
Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star followed by one. Your next question is from Yash Sankpal from Laurentian Bank. Yash, please go ahead.
Good morning.
Good morning.
Good morning.
I just want to focus on your Saskatchewan and Quebec portfolio. I see that for the Saskatchewan, your same property NOI margins were down 300 basis points. That is excluding the non-core portfolio. Just wondering what you're seeing there. Also, the Quebec portfolio kind of is going sideways, so maybe you could provide some color there.
Yeah. As we noted on the incentives, Saskatchewan has seen no improvement on the top revenue line growth. We were still offering the same incentives last year as we were this year. We haven't seen the same revenue recovery or demand recovery in Saskatchewan that we have saw on the rest of our portfolio. On the expense side, expenses are actually up. A lot of it's driven by property taxes on a year-over-year basis. As well too, we've seen significant increase in property taxes in our Saskatchewan portfolio. Quebec is doing okay. It's plugging along there at 1.5% for the year growth. It was targeting around there for the year. There are obviously limitations in Quebec with rent controls and ability to pass a lot of our costs on. Although we do go for above-market increases where applicable.
We're very happy with our Quebec portfolio. We believe it can continue to growing stronger. Saskatchewan, we are very much focusing on and looking at both sides of the coin. One is how do we get demand even higher in these particular properties, and also how do we lower or control our operating costs as well too? We are focusing on that one in particular.
Yash, there's been a significant amount of upgrades in Quebec. We'll see that go through in our numbers going forward because the suites that we have taken offline in Quebec as well and improved significantly have added more in our revenues. We will see that effect going forward, similar to what we've been experiencing here in Alberta. In Saskatchewan, there's an elevated amount of new supply that we're competing with a lot more new product in Saskatchewan. We are recircling and looking at our communities to upgrade because our locations are in established locations and better locations than the new supply. We believe taking the same approach in Saskatchewan as we did here in Alberta will improve those results in revenues going forward and recapture the demand for our better located, larger unit size communities.
Thank you. Just on Ontario, there also your same-store NOI growth is quite strong. Just wondering how much of that is coming from your suite renovation versus actual just-
The majority
stronger demand.
Yeah, the majority. Actually, we started the suite reno program in Quebec and Ontario three years ago.
Yeah.
Two or three years ago. The challenge with both Ontario and Quebec are very low turnovers because the in-place rents are so far below the market rent that very few residents move out because there's a big leap and difference if a resident does. That's why it's just a little bit more challenging and time-consuming to realize those revenues because of the low turnover that we do have in both those provinces.
You said the majority of that is from suite renovation?
Yes.
Yes. We're seeing significant increases in north of 20% in some cases on an Ontario turnover suite renovations.
Right. Okay. What about AGIs? What is your experience in that?
We do apply for them when we do common or area upgrades or building upgrades as well too. Part of the challenge is because the program itself has a pretty long amortization schedule, so it's more difficult to get the return you see, say, in Alberta versus this maybe the same level of renovations. Yes, when we're applying for them, we are getting them.
Right. The reason I ask is, there was an article yesterday talking about residents pushing back on these AGIs. Just, what's your view on that?
We haven't seen much pushback yet on that because I think the customer is seeing the value that we are putting into the building as well too. Yeah, to date, we have not seen a lot of pushback. Again, I think the AGI program is quite conservative as compared to other parts.
All right. That's it.
Yash, we're very flexible too, and we take each individual situation seriously, and it really depends on the individual. Our flexibility is something that we've had since 1999, and it really works because for some, an AGI increase is a big amount. We're flexible, we're sensitive to that, and we work something out.
All right.
That always is helpful.
Thank you.
Thanks, Yash.
Thank you.
Thank you. Your next question is from Neil Downey from RBC Capital Markets. Neil, please go ahead.
Oh, thank you. Good morning. I do think all of my questions have been answered, but it's great to see that those lobby renovations and new leasing offices are really making a difference. Thanks.
Thanks, Neil.
Thanks, Neil.
Thank you.
Thank you. Thank you. Your next question is from Dean Wilkinson from CIBC. Dean, please go ahead.
Thanks. Morning, everybody.
Morning.
Morning.
Morning.
I'd echo Neil's comments on his design choices in your lobbies.
Thank you.
I had nothing to do with picking them, trust me.
Yeah. Just on the development opportunities and tying that back into sort of your longer-term view.
Right.
It would perhaps appear that you're thinking maybe a little more development than acquisition in your growth plans outside of Western Canada. Would that perhaps be fair?
It certainly was, Dean, an accurate reflection. We are circling back now that we have got a new formula and diversified product offering. We are a lot more excited about legacy assets. If it was not our design team and our entire renovation and capital team's innovative and creative abilities, certainly we would be more focused in on new development where we can start with a blank canvas. We are so excited, and our product that we have repositioned has an amazing response from the community.
The other part about our communities and legacy assets is the established locations and the large suite sizes that are really unparalleled compared to new supply, which is typically really small unit sizes with large amenity packages, where we can offer both large unit sizes and large amenity packages by converting some of the suites to phenomenal amenities that our resident members are really excited about and are attracted to. So we can offer a product that is very unique at a very low cost because our cost basis for our apartments are a fraction lower than what it costs to build a brand-new apartment.
As a result, our returns are much, much higher, repositioning and reinvesting in our existing communities as our returns on our investments on our slides reflect much more exciting returns, near double-digit revenue gains, if not double digits, and then triple-digit NAV gains, which would be impossible in today's new development opportunities.
For sure. That 6 million sq ft, we should be thinking maybe perhaps a little farther out, as why build something to a 5 or 6 when you can-
Correct
turn a suite at 20%?
Exactly. That's absolutely the focus we want everybody really to focus in on is our biggest opportunity is repositioning and reinvesting in our communities and other legacy assets in other markets. Really strategic partnerships is something that we're continuing to work on. Lisa is very, very active in her travels and meeting with strategic partners that have assets in different regions that we can partner up with and vice versa, can partner up with our development opportunities here in the West and both provide one another with diversification that otherwise would be very difficult to do. Partnerships is something really exciting and something that we're going to continue to focus in on, as we've already demonstrated with our partnership with RioCan. We're looking at many other partnerships as we speak.
Okay, great. Then just looking at the mortgages, how are you sort of balancing the view between term and rate? You look at your near-term debt rolls and your sort of mid to low twos over the next couple of years. If you were to sort of stretch out to 10 years, you're looking at 330, even an incremental increase at a five-year. Are you sort of weighing off, let's take on a little more interest rate expense here to term this out, or do you think we're not looking at something where rates are really going to run away on you and perhaps rolling over for shorter terms might be something you're looking at?
Hey, Dean, it's James. The answer to your question is yes, pretty well across the board. All we know is that we really don't know on rates. The yield curve is pretty flat right now. As you note, the spread difference between five- and 10-year money really isn't there. Priority one has always been to ladder that maturity curve, try to flatten it as much as we can. Far this year, we've leaned towards the shorter end of that curve, the five-year end of it. That said, towards the latter part of this year, where roughly the bulk of our maturities are, we will be leaning towards the longer end of that curve.
It's a little bit of everything, and it's really a way for us to hedge our own maturity curve, because at the end of the day, all we know is that we really don't know.
Dean, just to add to James' comment there, the 2019 maturity looks big, but there's really one very big mortgage in there, the Nuns' Island portfolio mortgage.
That's on a land lease, the maximum we can do on Quebec is a five-year term on that one as well.
Okay.
Again, five years is still better than three, but we can't go a 10-year on that one even if we wanted to. It's more difficult to try to balance these terms and maturities off. A question of interest rates, we don't have the answer to that. We're just trying to balance this all out. With pros and cons. The good news about that is if rates go up, we can mark to market our rents every 12 months. If there's inflation, we should be able to catch up with some of that as well, too.
Yep. No, fair enough. Just a last one for me, just circling back to Jon's question about the bump up in the G&A. Was that an incremental amount that had been pulled from the property level, or is that just ramp up around marketing and some other stuff that you were-
A combination of both. We actually shifted the operational structure, we had more managers set up to help the focus, particularly in Southern Alberta. Yes, we spent a lot more money on call center where our call inquiries, and when I say call, I mean emails and inquiries, are up about 30% year-over-year, which is good news on the demand side. However, it costs some money to administer all that as well, too. In general, combined G&A year-over-year is still up.
Yep. No, okay. That sounds good. That's it for me. Thanks a lot, guys.
Thanks, Dean.
Thanks, Dean.
Thank you. There are no further questions at this time. Please proceed, James.
Thanks, Leonie. If you missed any portion of today's call, a copy of this webcast will be made available on our website. Again, it's boardwalkreit.com, where you'll also find our contact information should you have any further questions. Thank you again for joining us this morning. This now concludes our call.
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