Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Boardwalk Real Estate Investment Trust First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, you may press the pound key. I would now like to turn the call over to Mr. James Ha. Please go ahead.
Thank you, Amy, and welcome to the Boardwalk REIT 2018 First 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 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 and presentation may be considered forward-looking statements. Although the trust believes that the expectations set forth in such statements are based on reasonable assumptions, Boardwalk's future operation and its actual performance may differ materially from those in any forward-looking statements.
Additional information that could cause actual results to differ materially from these statements are detailed in Boardwalk's publicly filed documents. Moving on to slide three, our topics of discussion for this morning will include a macroeconomic update, quarterly highlights, an investment 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.
Thanks, James, and thank you, everyone, for joining us this morning. Beginning on slide four, some financial highlights for the first quarter 2018 include total rental revenue of CAD 107.1 million and same-store rental revenue of CAD 104 million, an increase of 1.5% and 1.7%, respectively, from the same period last year. Total NOI at CAD 52.4 million, down 0.5% from the same period last year. Funds from operation of CAD 24.3 million, a decrease of 5.3% from Q1 2017. FFO per unit of CAD 0.48 on a diluted basis, down 5.9% from last year. Adjusted funds from operation per unit, which includes an estimated CAD 695 per apartment unit of maintenance capital of CAD 0.36 for the first quarter of 2018, down 14.3%. Moving on to slide five, rental market fundamentals newly and illustrated on a progressive line representing the various stages in a rental cycle.
Note there is continual movement towards a balanced market. Boardwalk strives to create value through all stages of the rental cycle. Approximately 60% of Boardwalk portfolio is in Alberta, which is showing strong signs of recovery, moving towards a balanced rental market as occupancies continue to increase. Economic reports continue to project an improving economy in Alberta. More specifically, forecasts for the province remain positive for GDP growth, employment growth, and in-migration growth. Continued delays in pipeline construction have tempered the economic recovery. The Keystone XL Pipeline, along with the Trans Mountain Pipeline, have received federal approval, and construction is estimated to begin this fall on 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 fully occupied with a strong demand for rentals being seen in this region.
Fort McMurray is also showing signs of recovering rental markets with occupancy rising. We've called these smaller rental markets our canaries in the coal mine for our Calgary and Edmonton rental markets in the past. 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 31.9% net operating income gain. Both Calgary and Edmonton are now in positive revenue growth trends. Our 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 continued to improve. The market continues to be in strong rental market cycle 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 includes both inter-provincial and international migration, positive for Alberta. Seasonally, Q4 has the lowest migration. However, the trend continues to be positive. In-migration is another indicator of future rental demand as a significant number of new migrants become renters. Slide eight illustrates information received from the Alberta Treasury Board and Finance that Alberta has finally emerged from one of the worst recessions, and in 2019, the economy will shift from recovery to expansion.
Slide nine summarizes an improving Alberta economy with positive macroeconomic fundamentals, continued positive gain in total employment, drop in unemployment rate, job vacancies availability increasing, continued positive migration, GDP growth expected to enter a period of expansion in 2019 and beyond, with world oil prices forecasted to be above CAD 70 a barrel for 2019 and beyond. Slide 10 shows a significant reduction in vacancy loss, which in April reached 3.3%, and near the low end of our target of 3%-5%. This reflects the outcome of our occupancy focus, positioning ourselves well to reduce incentives and continue to recapture revenue. We have targeted a further reduced vacancy range for the second half of the year of between 2%-4%. Slide 11 illustrates a rising trend in revenue as occupancy climbs. As we had anticipated, average incentives per unit remained flat.
total incentives increased as more units were rented. As our occupancy reaches a balanced market level of 3%, we have begun to reduce incentives for both new and renewing residents. Last year's vacancy incentives totaled over CAD 70 million or approximately CAD 1.40 per trust unit. Slide 12 illustrates the results of this occupancy focus. The reduction of vacancy loss has resulted in higher revenue. This trend has been positive for the last couple of quarters. We are positioned to continue to recapture and grow revenue by reducing incentives and capitalizing on our front-loaded investments in suite and building upgrades. Slide 13 illustrates this positive growth trend with our sequential revenue Q1 versus Q4, showing a positive 1.8% for the quarter. Almost all regions have posted positive sequential revenue growth.
With portfolio occupancy approaching 97%, even during a seasonally slower time of year, incentives can now be reduced, improving our revenue gains even further going into the busier summer and fall rental season. Slide 14 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. We have seen success in the recapture of revenue as we continue to increase occupancy. Over the next couple of years, this remains our largest opportunity as we are now well-positioned to reduce incentives. In addition, the front-loaded investments we have made in our product quality and service will further enhance our results. With the foundation we now have, we remain committed to growth in major centers, which will provide both NAV creation and a diversification amongst our portfolio.
I'd like to now turn the call over to Lisa Russell to discuss our development and acquisition opportunities. Lisa?
Thank you, Sam. Slide 15 is a summary of our current projects. We continue construction on the third phase of our Pines Edge community, a four-story elevator wood frame building in Regina. In addition, construction of Brio, a 12-story concrete high-rise building in Calgary, is well underway. Slide 16 provides an update on our Pines Edge community. We remain on schedule with our lease-up of phase 2, with current occupancy of approximately 90%, and anticipate an estimated yield of 6.25%-6.75%. We began construction of phase 3 in June of 2017. 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 increased provincial sales tax. Slide 17 provides an update on Brio, a premium 162-unit mixed-use development site in partnership with RioCan.
The site is exceptionally well-located in Northwest Calgary along the LRT line. Construction commenced in January 2018. Excavation, shoring, initial foundations, and crane installation is complete. Work on the foundation and subgrade structure has commenced. We estimate occupancy to be in early 2020. Slide 18 provides an estimate for market Cap rates in Boardwalk's existing markets. 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 in our current development pipeline, equating to approximately 4.4 million buildable sq ft, as shown on slide 19. These sites are in various stages of planning and approval and represent an opportunity for the trust to high-grade and enhance our portfolio asset value.
In addition to these, we are currently identifying potential excess density opportunities within our Eastern Canada portfolio, we'll provide a summary of these in the near future. An example of this is shown on slide 20. This is a rendering of Duel, which we 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. We anticipate the receipt of a development permit by the end of 2018. We will determine the economic viability of the development once our DP is approved. 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 21 shows Boardwalk's investment property fair value at the end of the current quarter was CAD 5.78 billion, compared to CAD 5.69 billion at the end of 2017, an increase of CAD 90 million primarily on our stabilized property assets. Unstabilized property fair value remained relatively flat quarter-over-quarter at approximately CAD 198 million of investment property fair value. Weighted average Cap rate at March 31st, 2018, was 5.29%, unchanged from December 31st, 2017.
Next slide 22, represents 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 61.25 per diluted trust unit, inclusive of CAD 1.76 in cash. This equates to approximately CAD 174,000 per door, compared to CAD 153,000 per door, based on a trust unit trading price of CAD 46, a discount to implied NAV of 25%. Current trust units are trading at a significant discount to NAV and offers exceptional value when considered against net asset value, recent transactions in the marketplace, replacement cost, other consumer housing options like condominium ownership, and current valuations on private market transactions. Slide 23 shows a per-unit reconciliation of FFO for the current quarter from the FFO per unit amount reported for the same period 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. The decline in NOI from our stabilized properties and from the sale of the 641-unit Boardwalk Estates portfolio in May 2017 was offset by a CAD 0.02 gain on our unstabilized properties for the current period. We are seeing a positive trend in our rental performance on a sequential basis in both occupancy levels and occupied rental rates, demonstrating a turning point in the Alberta and Saskatchewan market rental cycle and a demand for renovated suites as they are completed. Higher rental revenue was offset by higher on-site wages and salaries, advertising, and R&M. Administration was higher due to higher wages and salaries, reflecting our continued emphasis on customer service. Severance costs negatively impacted FFO per unit by CAD 0.01.
Slide 24 shows a breakdown of capital Boardwalk reinvests back into its property for the three months ended March 31st, 2018. Capital invested in Boardwalk's investment properties, excluding development and PP&E, was CAD 852 per apartment suite in the current quarter. Over the past 10 years, Boardwalk has invested over CAD 1 billion in capital improvements on its property portfolio. The slide to the right also shows Boardwalk's capital investments for the first three months of 2018. Building exterior and suite renovations and upgrades, including Boardwalk's internal capital program, comprise 77% of capital investments or approximately CAD 25 million, a reflection of Boardwalk's continued repositioning and rebranding strategic initiative. Boardwalk's first focus is on decreasing vacancies and the availability of apartment units. Once full occupancy is achieved, the trust will be well-positioned to reduce incentives. Maintenance CapEx reserved for the first quarter of 2018 was CAD 174 per suite.
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 25. In 2017, Boardwalk introduced three new corporate brands, each targeting a separate market from affordable to luxury. Each of these brands have separate renovation guidelines based on the needs of the target segment and anticipated level of returns. In 2017, the Trust renovated over 3,000 apartment suites. For 2018, we have reduced our renovation target to between 1 to 2,000, while continuing to minimize the related transitional vacancy. Slide 26 highlights the different levels of suite renovations associated with these brands. In addition to the suite renovations, we've expanded this program to include common areas and lobbies. As is shown on slide 27, renovations in these areas, for the most part, are being performed by our in-house teams, with costs coming in significantly lower than had the work been performed by exterior contractors.
Lobbies and common areas are upgraded in accordance with our brand renovation guidelines. Moving on to slide 28. For the first quarter, the Trust renovated approximately 450 suites, representing approximately 20% of the suites that turned over during this period. The majority of these renovations were categorized as partial renovations, with full renovations being implemented when required and if targeted returns could be achieved. The highest level of renovation turnkey have been targeted to only our lifestyle conversion properties. Returns noted on value-added capital in our community and living brands have ranged between 21% and 27%. As is noted, the lower-than-average returns reported on the lifestyle properties reflects the fact that we are required to invest upfront in these projects before adjusting market rent expectations. Once completed and we go through the restabilization of these properties, we are anticipating returns consistent with the other brands.
Slide 29 highlights our most recent addition to our luxury brand. On May 5th, 2018, Boardwalk held the grand opening of Broadway Centre, located just off downtown Calgary on 17th Avenue Southwest in the entertainment district. Slide 30 reports on Boardwalk's stabilized portfolio for the first quarter of 2018. Overall revenue continues to be improved, particularly in Alberta. On an overall basis, revenue is up 1.7%. We continue to work on reducing our controllable operating costs and anticipate further improvements throughout the year. Overall operating costs increased by 4.2%, resulting in an NOI decrease of 0.5%. Slide 31 reports the Trust mark-to-market on occupied rents. Overall, there's a CAD 35 positive spread between market and in-place rents, and on an annualized basis, it's estimated to be below CAD 13 million. Boardwalk's liquidity continues to be strong.
At March 31st, 2018, the Trust had access to an estimated CAD 313 million of available capital, as is shown on Slide 32. This represents approximately 12% of outstanding debt. Slide 33 reports the Trust's total debt maturity schedule. The Trust's overall weighted average in-place interest rate is 2.6%. Currently, the Trust's obtaining NHA-insured mortgages at 3% and 3.3% on five- and 10-year terms, respectively. Our overall maturity curve continues to be well-balanced as we focus on extending mortgage terms while staggering future maturities. Boardwalk's remaining mortgage amortization is under these insured loans in excess of 30 years. Slide 34 provides the reader with our estimate of current mortgage underwriting valuations. Boardwalk's balance sheet continues to be considerably levered at 53% under written value after deducting our current cash portion.
A special note, the Trust has approximately 1,300 apartment units that have no mortgage encumbrances, which carry an estimated debt capacity of CAD 127 million, an amount that is in addition to the Trust's CAD 313 million in liquidity position. Slide 35 highlights our 2018 financing program. During 2018, we have CAD 202 million of maturing mortgages. To date, we have renewed CAD 87 million of these, while up-financing an additional CAD 23 million. The new reported interest rate of 2.88%, 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 unencumbered properties, bringing our total raise to date to almost CAD 78 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 when necessary, make any warranted revisions. For 2018, we are reconfirming our previously announced financial guidance of an FFO range of between CAD 250 and CAD 235, and an AFFO range of between CAD 170 to CAD 190. We are anticipating stabilized building NOI to improve between 2% and 7% as compared to the prior year on an annualized basis. Boardwalk's property capital budget for 2018 is targeted at CAD 136 million. In addition, we are planning to invest CAD 30 million in committed development projects. Slide 37 reports our distributions for the months of May to July 2018. The monthly distribution is set at CAD 0.0834 per month, consistent with our annual target of CAD 1 per trust unit. This concludes the formal part of our presentation.
I would like to open it up for questions now. Amy?
At this time, if you would like to ask a question, please go ahead and press star, then the number one on your telephone keypad. Again, in order to ask a question, press star, then the number one on your telephone keypad. Your first question today comes from the line of Dean Wilkinson of CIBC World Markets. Your line is open.
Thanks. Morning, everybody.
Morning.
Just a couple clarification questions from me. On the occupancy and where that's moved from, that 97%, that is specific to the stabilized, sort of excluding those five assets that you haven't owned for the two-year period?
That's correct. Although a lot of our unstabilized are ahead of schedule, in general, yeah, it's more of a stabilized building focus than it is unstabilized.
Okay. Those five buildings, the 826 units currently at 90%. Because I think you bought those back in 2016 on average. Will they fold into the sort of the stabilized math sometime this year?
Yes. I believe it will be third or fourth quarter. Second half of the third.
Q3.
Yeah.
Q3.
Yeah. I think some in August, we don't put some in August. Yeah, by the Q3, they should all be in the stabilized numbers.
Okay. We will just have a clean look at the entire thing.
Yeah. The good news is those buildings actually are filling up faster than we anticipated at this point in time as well too. Once they become stabilized, I think we are going to see the occupancy levels there consistent with our stabilized numbers.
That was my next question then. The whole portfolio at that point should be running kind of in your targeted sort of 3% vacancy range then.
That's our strategy, yes.
Okay, perfect. Just when looking at the sequential revenue, the CAD 1.8, it looks like a bigger portion of that came from the ancillary revenues, that look like they were up sort of sequentially about 10%. Was that move specific to something in particular, or would that CAD 1.7-ish of ancillary revenues be kind of the run rate given where the occupancy levels sit right now?
I think your latter point is more consistent. We're looking at a higher run rate on ancillary revenue. We are pulling in more auxiliary revenue. Although, albeit as compared to rental revenue, it isn't even close. There is more coming in on that. We are actually looking at renegotiating some other areas leases on particular, like telephone towers and that as well too, to see if we can actually get more additional revenue out of that. It's mostly coming out of that, yes.
I think it's higher occupancy, there's higher use of laundry machines. That's consistent with the coin revenue.
Right. No.
That totally makes sense. Then just the last one for me is just sort of with the increased cost in the quarter, obviously the snow removal goes away. At least we hope it does as we go through Q2 and Q3. Let's not count on that. The other expenses that came just sort of from R&M and marketing and that, would you expect that they kind of continue to run perhaps at a little bit of an elevated level, or do you think that those come down as well?
No, I think we're going to see a downward trend. Our strategy for the entire year was to focus on reducing operating costs, you can't just do it overnight. We are focusing on having our team do even more and be stronger at that, and thus we're reducing overall costs as well.
Dean, with higher occupancy, we need much less advertising. We need much less workload. The workflow has reduced significantly with the significant reduction of empty suites and significant reduction on turnover as well, and the significant reduction of renovation as well. Our workload is dropping significantly. Our contractors have seen a significant drop, and we have reduced our headcount by about 5% already.
All right. That would imply, I guess, that in Q2, we probably start to see the same property NOI metrics picking up then.
That's the anticipated. Again, our annual target is 2%-7%, you'll have to see a pickup for sure in Q2, Q3, and Q4 to be able to achieve those.
To get that margin, yeah.
If you get to that comparison, when we looked at our numbers for Q1 results versus our internal expectations, they were within guidelines, so therefore there's no need for us to change anything else.
Okay, perfect. That's it for me. I'll hand it back to Amy. Thanks a lot, everyone.
Thanks, Dean.
Thanks.
Your next question comes from the line of Jonathan Kelcher of TD Securities. Your line is open.
Thanks. Good morning.
Morning.
Morning.
Just sort of closing out on Dean's questions there on the operating margins. When do you think you'll begin to see a year-over-year improvement in operating margins? Is that something we can look for in Q2?
We're hoping Q2. Q3 for sure, we're hoping Q2 we'll start to see that. In general, revenues were higher than we anticipated. Expenses were a little bit higher than we anticipated, too, overall operating margins were in line with what we had forecasted for the quarter. We are seeing, again, the real positive side is the overall revenue is higher than we anticipated. We're able to get into there faster. As Sam mentioned, occupancies filling up faster than we thought. We're seeing an increased demand for the product, which is a very positive sign.
Okay. Do you think Sorry.
Sorry. Jonathan, the revenue increase is really important because it's compounding and exponential. Every month it's increasing significantly, then when you annualize every month and every quarter, that makes a significant difference. It takes a while for that to work itself in, just like it took a while for incentives and rents to reduce. The opposite is happening in a positive way now with revenues rising, with occupancy rising, then revenues rising even further with reduction in incentives. It's going to be quite significant going forward as it compounds and annualizes.
Okay. Just finishing off on margins. Do you think you can get back to, on an annual basis, the levels you were at-
No doubt
in 2013, 2014?
No doubt.
Yeah, we can. It won't be simply by getting revenues back to that level. I mean, revenues will have to be higher because obviously our operating costs per basis, even on a non-controllable, were higher than they were in 2013 anyway. With this kind of strength moving forward, we think revenues will be higher than they were back in those days within a foreseeable couple of years.
Historically, Jonathan, we have seen these margins in the East of about 50%. The margins have flip-flopped because our economies are really opposite. Now, with energy costs rising, interest rates are rising. We're not rent controlled, and we are a very unique hedge against rising energy and interest rates. The opposite is taking place as we speak, and our margins will recover as historically they have always recovered. When we get to these low levels, it takes time for occupancy to go back up, and then our revenues to recover. After the market is rebalanced, we then realize consumer price index increases, and that's what helps us get back to the typical margins of 60%-65%.
Let me just add one more point, Jonathan. What we're finding is on our renovation program, those suites that are renovated are actually operating at higher operating margins than the standard. As we slowly go through the portfolio and continue to renovate it, assuming, again, the demand and the pricing is there, and our returns are available, that also will assist in increasing operating margins.
Okay. Secondly on the incentives. I guess they are starting to come down on a per-unit basis. Is that fair to say from what I got from your comments?
Yes. I think on an overall basis, we are starting to see them turn and work their way down on a per-unit basis on overall, yes.
Just looking at ads, and this is really the marketplace. We are moving from two to three months incentives to one to two months incentives. Every one month divided by 12 months is 8%. We are essentially seeing market-wide in ourselves about an 8% gain on a reduction of incentives month-to-month as we renew.
That is a key point because most customers who renew their leases first and foremost look at our website and find out what we are offering to new customers.
Right.
You don't have much pricing power on renewals when they see they can get, let's say, a better price as a new customer coming in. Again, as those are reducing more and more, we have more pricing power with occupied units as well too.
In the fall, Jonathan, we expect with the much busier seasonal demand of the fall and where we're at, we're at balanced market right now. The market has shifted to a balanced market with a 3% vacancy. In the fall, we expect that to get below 3% and incentives to get to zero months-one month. That'll be the further 8% gain.
Okay. Do you think the CAD 11.4 million of incentives you had in Q1 is the top number, and it starts to come down in Q2?
It is dropping as we speak, market-wide as the CGAs reflect, and also in our renewals too. Yeah, it is dropping.
It'll take time to burn off, I think the good part is, to be honest with you, incentives are a little higher than we thought in Q1, vacancy loss was a lot lower than we thought as well too. Now that we're at that level, as we show you, we do have some ability to do that. Again, with a customer-friendly forecast, we're still going to be able to unwind these over a reasonable period of time but still get good returns.
Okay. Thanks. I'll turn it back.
Thanks, Jonathan.
Your next question comes from the line of Howard Leung of Veritas Investment Research. Your line is open.
Good morning, and thank you.
Good morning, Howard.
Just wanted to ask about the renovations. I think it was mentioned that there's 450 suites renovated this quarter. Does that mean that you're stating that you'll be renovating closer to the higher end of the 1,000 to 2,000 suites guided, or is it more like it's more renovations in Q1 and nothing after that?
It will vary. I can't really give you a number right now because until we know which suites are turning over in which month, you really can't dictate what the percentages are going to be. Historically, in Q1 it's a reasonable number. We'll have a higher Q2 number, I think for sure, because we have a higher turnover rate in Q2. We've got a slower in Q3 and Q4. The CAD 1,000 to CAD 2,000 still continues to be our target, but I don't want to simply annualize the first quarter and say, "Okay, we're there yet." We are striving to keep within that target. The really good news is we're getting the best returns on the lower level of renovations or our partials, which make up for 80% of our renovation program. The suite gets ready fast and everything else. The market likes it.
It looks really, really good. When you combine that with our program of upgrading lobbies and hallways, we're seeing actually almost the strongest returns in that renovation category.
Which is good because it also costs you less per suite. It seems like compared to last year's renovations, it seems like the cost per suite has come down significantly.
It's come down dramatically, and I think we call it around here in 2017. We did a lot of R&D on our renovation program to see what was the ultimate balance moving forward.
Well, we're resourcing our parts. We're getting much better prices from our suppliers. We're going offshore. It's important to pick the right partners offshore. It's just about getting more competition and more choices and optionality when it comes to our parts and our labor. We are seeing significant savings as a result of our team's effort, and we give our team all the credit for significantly reducing our costs and finding new suppliers and reducing costs from existing suppliers that are becoming a lot more competitive because we have more choice.
We're doing it quicker. We're actually completing it quicker.
Yeah. Another tick.
Sounds great. Just kind of the other side of the coin there, the debt to EBITDA, you guys have been drawing down, taking on more debt to fund the renovations. Is there a number, debt to EBITDA wise, that you'd be starting to be uncomfortable with? Even though the renovation returns are good, it looks like your mortgage renewal rates as well, the amount of interest you can get are bottoming out. Just wanted to know your thoughts on, is there a limit, or is there not really a limit?
Well, Howard, the good news is that debt to EBITDA will be dropping as our NOI recovers with the recovering revenue and the reduction of vacancy and incentives. We would like to see it below 10 again like it was, and we have no reason to believe that it won't get below 10 over the next year to two years.
Okay.
Particularly as we unwind the incentives. There's a lot of money sitting there in incentives, and that's very positive. It's dollar for dollar EBITDA, all that incentive money.
Right. Yeah. As that unwinds, it's going to flow straight to EBITDA.
Correct.
Right.
Right. Just related to the incentives, how many of your leases now, I guess especially in Western Canada, are month to month, and how has that amount changed since last year?
It's actually come down. Those on month to month pay full market rent. In order to get an incentive in our portfolio, you had to lock the lease. We've seen that number come down, but it's being offset by the fact that we're unwinding incentives as well too on the existing customers. That's usually what happens in a down market when they get a lot of significant pricing. As the market gets better and tighter, we'll see more people go back to market or month to month, which is pure market.
Right. I guess during like in 2013, 2014, what was the proportion of month to month as a percentage of total, I guess, in Western Canada?
Well, it was quite high because really you can only give rental increases twice a year anyway, so it didn't matter if you were locked into a lease or month to month. It was actually quite high. The only big difference between month to month and locking in is commitment.
Right.
When there really is no incentive on the market 12-month versus the pure market, a lot of customers then decide to say, "Well, I'd rather have the flexibility of if I want to move, I can move quicker than have to buy out my lease.
Okay. Just one last one. The management circular discussed the compensation. I think the focus is now shifting on to same-store NOI as opposed to FFO per unit. I think it's good to focus on operations. Is it also concerns that given that interest rate cycles are higher, it's tightening now and the debt's growing, should the view also focus on kind of interest expense and debt control?
Well, it's a combination of more than one category. It's FFO, it's NOI. It's NOI margins as well too, that we are looking at. We've built a more comprehensive program that just doesn't focus on one number anymore, but also focuses in on stuff like Net Promoter Score, which is customer service measures. It's much more of a well-rounded comp plan than it was in the past.
Okay. Great. Thanks, guys. I'll pass the line.
Thanks, Howard.
Your next question comes from the line of Matt Kornack of National Bank Financial. Your line is open.
Thanks. Wondering if you can speak to the occupancy gains you've had and whether you're beating the market at this point. If so, where are you winning those tenants from? Do you think the competition will start to adjust accordingly?
Matt, we have been behind the low-price providers, where some landlords have chosen to reduce and discount their rents, and they are showing very high occupancy in the last two or three quarters, actually. Landlords that have significantly reduced their rents have filled up quicker than we have. We have focused in on a qualitative approach where we have, as we have said and completed last year, a significant renovation program. We focused in on increasing quality of our product, our service, and our experience, our rents are higher than our competition, our occupancy now is reaching the low-price competitors. Now that the low-price competitors are at full occupancy or near full occupancy, our occupancy has recovered. The remaining vacant units are really the ones that are inferior and of less quality.
There is less demand for the cheaper, less quality apartment units. There's a limit and a propensity to how low your rents can go if your product is not of a certain quality. The vacancy now is really showing up in the non-renovated and poor-kept communities. That's typically what happens in a recovering market. In a fully recovered market, even the poor product quality will be filled as well. They're really the last apartments that will be filled.
Have you-
Our product.
Oops, sorry. Go ahead.
That's why we've invested so much to make sure we're not in that category.
Okay. Have you seen with some of the sort of condo-type product that's flipped into rental, have you seen those guys start to push rents and completely get rid of incentives, or are they still maintaining aggressive leasing?
No, we're seeing much less of them. Most of them are full. We're not seeing these desperate new condominium investor owners that have one or two units vacant that are having a hard time renting them, so they deeply discount them. We're not seeing those on Kijiji. I call them Dutch auction, as Bob Dhillon, our competitor, would call them. We're seeing them absorbed and not in the market anymore. That is a very positive sign. Of course, the discounted newer condominiums are going to be rented first, then they are at or near full occupancy, so we hardly see them anymore on Kijiji. The other thing that we're seeing on Kijiji is a significant drop. Every month, there's a significant drop of available rentals on Kijiji. That's a really positive sign. That's reflecting the overall market moving towards balance as well.
In the GTA, in Vancouver for sure, it seems like there's been cost escalation on construction. In your projects in Calgary and in Saskatchewan, have you seen cost escalations on input costs or-
Yeah.
-are they fairly stable?
Matt, I'm so happy you brought that up because we're seeing cost escalation everywhere. It doesn't matter where you are. If you're in Calgary or in Vancouver, Toronto, it costs the same to build. The price per door of our apartments is so low still compared to replacement cost. We provide exceptional value to buy apartments at deeply discounted prices to replacement costs. That's a really, really good question. Super important because our valuation is still very deeply discounted compared to what we're seeing. In our RioCan joint venture, our costs have risen about 5%, maybe 10% from where we started. Yeah, absolutely. Everybody's seeing significant cost escalation to replace and rebuild apartments.
Really, the only and the best value left is our apartments and the deeply discounted cost of all housing, really, in our region, which is really attracting new migrants that are looking for affordable housing and places to live with a good lifestyle and quality of life. Very reasonable, affordable price. That's a big, big factor as to why our population is increasing and we're attracting folks that have left back to our provinces because of the affordability factor.
Kudos to our development team because they are still on budget even given these upscale costings. They did a very good job, or are doing a very good job forward estimating costs on what we're running our models to.
Interesting. Maybe not a concern for Alberta at this point. You guys are non-rent-controlled, but with regards to your Eastern Canada portfolio, the government seems very focused on affordable housing. They seem to be willing now to throw some money and land at the issue. Do you think that's going to be enough to sort of provide some supply in Eastern and Central Canada?
It's a start, Matt, providing affordable housing is essential. We just came back from N.Y. and talked to a lot of folks in N.Y., especially the hood folks and the folks that are in the subsidized housing, there's inclusionary zoning. It's up to 30% now in N.Y. State, it seems to be creating a peaceful redevelopment and gentrifying atmosphere. We understand inclusionary zoning is being included now in Toronto in the tighter housing markets, we can't see that staying at that low amount. We can only see it rise as the essential need to provide everybody with housing is there to maintain a great, positive community for everybody. We're extremely affordable on our end. We've got about 20% of our average income is used for rental.
We flip-flop, Matt, from the most expensive housing in the country to the least expensive housing in the country. Again, there's a big regional shift in the U.S. from the more expensive states of N.Y. and California to the less expensive states of Texas, for example. That's what we're seeing here in Alberta as well as Saskatchewan, with folks leaving and coming back from the more expensive regions back into more affordable regions like ours.
Quick question on the debt maturity profile and just looking, I guess it's on slide 34, where you provide the amount of financing that you'd get, it's a bit of a higher LTV that you're looking for in 2019, it's a fairly sizable amount of maturities. Is it your view that you'd get that full amount? CMHC, I assume their underwriting has remained fairly conservative. Then on the flip side, as you look at interest rates, you've gone a bit shorter on the curve, should we expect to continue to see that? Will you go longer given that there's not much spread now between the five and 10-year on the Government of Canada side?
To answer your first part of your question is, yeah, I think CMHC is still quite conservative in their underwriting. We've seen some movement on cap rates with them downward, in general, I consider them to be still quite conservative. On the maturity curve moving outward, we're always looking to balance that out. There will be some opportunity. We look at each individual property, is looked at in isolation. We price it out with different terms to see which part of the market is the hotspot or sweet spot of the market. Given the fact that all NHA-insured renewal risk is basically zero, you're really just playing the interest rate risk. Even if we do go shorter, what you still have to recall is our average lease term is 12 months, that even a five-year short-year term results in a five turn of our lease.
If there is inflation in the market resulting in higher interest rates, rents will go up too, and we have five turns to catch that up.
Okay, great. Thanks, Rob.
Thanks.
Your next question comes from the line of Mario Saric of Scotia Capital. Your line is open.
Hi, good morning.
Morning, Mario.
I wanted to maybe dive into a bit more detail on the operating margins because I think that's one thing that really there is a bit of variability or divergence in kind of where that margin may be able to go over time. Yeah, I just wanted to confirm that your, I think you mentioned this last call, but in your guidance, I think, Rob, you mentioned that the low end reflects a 52% margin, high end about 53%. Is that?
Yeah, annualized. Yes.
Annualized. Yeah.
Q1 and Q4 are always your heavy quarters on account of expense items. Utilities during the winter are always higher. Actually, Q1 tends to be your tightest margin or lowest margin just because of that factor. Then you layer on 2018, we did have a longer than anticipated winter, which we did see consumption up. Although we did budget for the new carbon tax, we used more volume than we thought, therefore, we're paying more carbon tax than we thought, too.
Okay. Then in your commentary, you kind of indicated that revenue was a bit higher than you thought, which presumably is being driven by the occupancy, and then expenses were a bit higher than you thought too. Is the higher expense solely attributable to the higher occupancy, or did you see a bit more cost pressure in other areas where you didn't anticipate?
Higher expense, Mario, mostly attributed to the lower occupancy last year and the difficulty in timing. We just finished Christmas season in the last quarter, so the first quarter is just after Christmas, and it takes time for us to make adjustments to our expenses. So it's just a timing issue. Now that our occupancy is much, much higher, our expenses will reflect a much less need to advertise, a much less need to renovate and turn over. It's just a lot less work when we're fully occupied than there is when we've got 6%-7% vacancy.
Q1 2017 did not represent our peak costing either. We were still actually ramping up in some categories. We saw Q2 and Q3 costs actually even higher. Now we're on the other end of the curve moving downward now. Again, it's going to take some time. We want to do this in a balanced nature as well. I can't under-emphasize that what Sam was mentioning is once you have higher occupancy, you have a lot more tools. Advertising is a good example. When you have high vacancy or higher vacancy, you need to blitz your advertising to get as many people in the door as you possibly can. Now that we're seeing there, we'll start to slowly phase that downward. Not out, but phase it downward to allow us to make up some costs there.
It's almost like it looks like we're over the hump heading downward, and we're starting to pick up some speed.
Right. When you think longer term, I think you mentioned the expectation to get back to the 13%-14% margin. Just speaking in generality, if the expectation over this business cycle is for just argument's sake, let's say it's 100 basis points of margin expansion. During previous corrections or recoveries, do you typically see 25 basis points of that 100 in the first year, then kind of 25 in year two and so on? How does the trajectory of the margins recovery typically take place?
It's quite significant, actually. This is something that we have to be very aware of because, again, in the past it's been significant. It's very important, though, for us to be measured in our adjustments because we recognize there is a free market in Alberta because we self-regulate and are responsible as a group of multifamily providers. Even though the market will allow us to make more significant adjustments, again, we have to always remember our most important stakeholder is our resident members, and our reputation is the most important thing we have. We really have to always be aware of that and focusing on our residents, and what's best for our residents will be what's best for us in the long run. Again, that long run comes up over and over and over, and that's what's so difficult to focus in on being public.
We recognize short-term performance is really critical and essential, and we will continue to focus in and maximize our short-term performance. We have to do it, though, in a measured way and be responsible to our community of tens of thousands of resident members and our broader community as well to show that we are responsible in providing multifamily communities for Canadians.
This recovery is going to be obviously longer than the last couple that we saw. The previous recovery, we were able to increase margins dramatically because market rents still went up quickly. It's going to be a slower gradual process. The biggest margin promoter is going to be unwinding those incentives. As we do that, we're going to see margins expand nicely. If I go back and look at my operating costs versus, say, 2018 versus 2013, really, it was the uncontrollable costs that we've seen major increases in utilities, major increases in property taxes. That's my original comment about we're going to see more than just revenue needs to not only recover to where it was in 2013. It has to exceed that. That's why we're so motivated by the renovation program because we are getting better margins on those properties.
Right. Okay. Yeah, that makes sense. Maybe speaking on the incentives, if I look at slide 31 of the presentation, I just wanted to say thank you for the revised disclosure this quarter. I think it really provides a better sense in terms of where the incentives lie on a per-market basis. If we get a bit more granular, the difference effectively is CAD 118 per month in incentives. It seems like that was maybe flat quarter-over-quarter, so there wasn't a substantial decline in the incentives this quarter. In your guidance, how should we think about, Sam, I think you qualitatively kind of highlighted two to three months going from one to two to zero to one over the term of the year.
How should we think about that CAD 118 in your guidance at the low end and the high end of the range this year? Where does that number go to?
I think that's a good question. I don't really have the answer on top of my head right now. I think it's a combined combination of vacancy loss and incentive to get our targets, not just that. Let me go back and take a look at that in more granular. We'll get back to you on that one, Mario.
Mario, the one thing that we've always focused in on is the bottom line, NOI, and that's really what's critical because there are so many line items included in the expense line items, and more importantly, the revenue line item. We take a broad view, and we ask our team to deliver on our bottom line, and our guidance is for our NOI between 2% and 7%. That's really what we're focusing in on, and we're asking our whole team to deliver that in all of the above categories, both in the revenue and expense categories. It's really impossible for us to provide detailed guidance for any one of those line items above the NOI. We can sure provide it very accurately historically, other than last year.
That was very odd last year, and we've seen a black swan last year of economic and the year before economic correction. Barring a black swan, we've been historically extremely accurate on our NOI guidance. We believe this year we will deliver a very accurate NOI in between that guidance range because we've got a lot of levers and line items to be able to do that with. We've got lots of optionality, and we're very confident that we'll be able to deliver that.
Okay. My last question, just on the G&A, it ticked up a little bit quarter-over-quarter, even excluding the CAD 0.4 million of, let's say, non-recurring costs. It's kind of running at 8.5% of revenue. That's up very modestly quarter-over-quarter, even with the higher revenue in Q1 versus Q4. How should we think about that G&A as a percentage of revenue?
Well, once you strip out the severance costs, which is also included in your G&A, it should be around that same similar run rate, hopefully a little bit lower as we move forward, but probably in that area somewhere.
Roughly about CAD 9 million a quarter would be a reasonable number.
Yeah.
Okay. Thanks, guys. Thank you.
Thanks.
Thanks, Mario.
Your last question in queue for now is Mr. Neil Downey of RBC Capital Markets. Your line is open.
Hi, good morning, everyone. Pleased to be called mister. Just following up a little bit on one of Mario's questions. The vacancy loss in Q1, I know you depict that number graphically, but do you actually disclose what the, I'll call the gross CAD value is for the quarter? Secondly, what assumed, I'll call it stabilized occupancy, do you use in deriving that calculation?
I think it's in the supplemental. I think there's a detailed number in the supplemental, fine, Neil, on that one. Are you looking for the vacancy loss assumption for 2018? Is that what you're trying to
Yes.
Rather than giving a number, we're targeting, as we mentioned, a continuous decrease. As Sam mentioned in his comments, we're actually targeting lower than we originally forecasted for. I think 2.5% is going to be our vacancy target for the latter half of this year. If you factor in the 3.3%, say for the first half year, closer to about 2.8%-3% for the year.
Neil, the difficulty is there's a lot of moving parts, and that's really why we, again, continue to stress the importance of focusing in on NOI. We're happy to talk about the individual moving parts, like the vacancy, and disclose that in our supplemental, and talk about how they work in tandem, and how they're all interrelated, and how the optionality works for our team and we to deliver on a better NOI.
I can't underemphasize the impact of the margins on renovation suites, because what ends up happening is you bump market rents, obviously, you have to give an incentive. The incentive actually is a little higher on a dollar value than the other one would be. However, your net is up. I don't really like to just separate these lines and say, let's just forecast line by line and get a guide to each of those. Sam's exactly right. There's a lot of moving parts, one can outplay the other, and that's what we saw in Q1. Our vacancy loss pick up outplayed an incentive increase, that's where the gain came from. At the end of the day, it was a positive gain.
Yeah. No, understood. I wasn't trying to go down that road. I was, I guess, really just trying to understand what stabilized vacancy you assume when you derive that vacancy loss calculation. Do you assume 2% vacancy or 2.5% or-
Well, the vacancy loss is actually actual. It's based on the actual suite that's vacant at market rent.
Right. Okay.
It's a physical vacancy that we actually give you. It will tie into your vacancy loss net of incentives.
Okay. Maybe stated alternately, to capture that vacancy loss, do you have to have every suite occupied?
Yes.
Right. I guess really that's where I was going. Is it theoretical calculations?
Yeah. We call it 2.5%-3% is our long-term target. We've been as low as 1% vacancy in our history.
Right.
Given our current strategy of continuous renovations, I don't think we can get down to there for quite a while. I'd probably say 2%-2.5% is much more of a stabilized full occupancy number.
Right. Okay, perfect. That's exactly where I was trying to go.
Okay. Sorry.
Thank you. As it relates to the branding initiative and the brand diversification, in your MD&A, you do talk about what your suite mix will look like by Boardwalk Lifestyle Communities and the Living brand once fully completed, I believe is the way you described that. How do we think about the portfolio by brand diversification today? Or is that something you don't really think about because it's going to take you some time to get there?
We're actually thinking a lot more about that and focusing and increasing our resources on asset management. We're thinking a lot about that, Neil. Each and every community, we're diving into on a both macro and micro basis and seeing what the short- and long-term potential of each and every community will be. We are just starting really to do that, finishing our initial templates of our asset management plans in our initial communities, and we'll be doing it for all 200 and some communities that we have to ensure we're maximizing both short- and long-term value creation for all our stakeholders.
Okay. Thank you very much, Sam.
Thanks, Neil. Thank you.
You do have one further question from the line of Michael Markidis of Desjardins Capital Markets. Your line is open.
Hey, guys. Just on your great traction on the occupancy side, and you did bring down your target to 2%-4%, but just given where you are today at 3.3% and the target to get down to sort of 2.5%, let's call it, on a stabilized basis once you get rid of the remaining vacancy of the portfolio. I'm just curious with respect to the 2%-4% target then for 2H 2018, just what would cause you to back up and get back up to 4% in the second half of this year, given the trends you're seeing in the market?
Well, what would have to happen is we have to see a change in demand that we're not seeing today. There would have to be. We're ahead of schedule. We have a lower turnover than we did last year. We have increased rentals from where we were last year. It has to be almost a change in demand, which we're not seeing any sign of just yet today.
It's really just an element of conservatism as opposed to what you're seeing in terms of a potential backup at this point in time.
Well, remember, we're going through right now our high turnover season. Give us until the end of the quarter, and then we'll know for sure once we've gone through this high turnover season, then we go into our heavy rental season being September. If we come out of our high turnover season within that target range or below it, we are very well set up to finish the year even lower than that.
Okay. Then just on the personnel charge that hit the G&A, was that solely within G&A, or was there any element of that that was in the op cost as well?
No, we separated it into corporate G&A because it's really a restructuring charge versus an operational site charge.
Okay, presumably some of those restructuring initiatives would also reduce the op cost.
Oh, they would. They're all from op costs, but the charge to pay out on top of the salary requirement went through corporate.
Then it just sounds like you guys have a little bit more that might come through the system this year.
Yes.
Would that be contemplated in your guidance range, or is it not material enough to
Oh, yes. It's within the range. We're probably looking at CAD 0.01-CAD 0.02 more.
Okay.
Again, this whole strategy here is to do this gradually and not try to just create a big reserve and go through. We want to do it properly, gradually, and as the company gets stronger, become leaner.
Okay, that's fair. Just lastly, I know it's been early days, but Sam, you said you've been spending a lot of time, at least the last time we chatted, going into other markets and sort of sowing the seeds for your future growth. I know NOI maximization is priority number 1, but just wondering if you could give us a sense of how that initiative's going in terms of reentering and looking at forming those strategic partnerships for developments in other markets right now.
I'm glad you brought that up, in that the most important thing, even more important than properties, is people. Our partnerships are really critical, and we're very happy with our partnership with RioCan, and we are expanding that, and we're doing everything to be the best partner anybody can have. Going forward, the book, "How Google Works" is very inspirational because that book emphasizes how important people are. Our industry as a whole, and the real estate industry, has been focusing on properties a whole lot more than people. The average wage and salary in our industry overall is much lower than that of the tech industry, which is really the people industry. We recognize the importance of people. That is truly the most important asset.
Our partners going forward will be ones that will provide us with lifetime experience in different markets that we don't have. They'll provide us lifetime relationships that they have for constructing and developing. They'll provide us with lifetime experience with managing in different regions that we've never managed in. Again, a people-focused approach. We believe when we're surrounded with the best people, peak performers, we will be able to provide the best performance and value creation going forward. That's really what we're focusing in on. It's a real playbook taken from the tech guys that are really all about people.
Okay. Do you expect to have anything?
Yeah
new for the rest of this year?
Absolutely, yes. We are really excited about our relationships and all the new friends we have. We have a lot of new friends, and to give Lisa, our Senior VP, all the credit, because she is impossible to say no to. Thank you to Lisa, who's with us, and our entire team, really. Our acquisition team is just going all out. Our design team, our entire team really is raising the bar and rising to the occasion, and I'm so proud of everybody.
Okay, that's great. Thanks very much.
Thank you.
Thank you.
There are no further questions in queue at this time. I turn the call back to Mr. Ha for any closing remarks.
Thanks, Amy. As a reminder, we will be hosting our annual Investor Days during the second week of July here in Calgary. Invitations will be sent next week. Please visit our website for our contact information if you have any further questions. Thank you again for joining us this morning. This now concludes our call.
This concludes today's conference call. You may now disconnect.