Good morning, ladies and gentlemen, and welcome to the Killam Apartment REIT First Quarter 2019 financial results conference call. After the presentation, we will conduct a question and answer session. Instructions will be provided at that time. Please note that this call is being recorded today, May 2nd, 2019, at 9:00 A.M. Eastern Time. I would now like to turn the meeting over to your host for today's call, Philip Fraser, President and Chief Executive Officer. Please go ahead, Mr. Fraser.
Thank you. Good morning, and thank you for joining Killam Apartment REIT's Q1 2019 conference call. I am here today with Robert Richardson, Executive Vice President, Dale Noseworthy, Chief Financial Officer, Erin Cleveland, Vice President of Finance, and Nancy Alexander, Senior Director of Investor Relations and Performance Analytics. Slides to the company's today's call are available on the investor relations section of our website under events and presentations. I will now ask Nancy to read our cautionary statement.
Thanks, Phil. This presentation contains forward-looking statements with respect to Killam Apartment REIT and its operations, strategies, financial performance, and conditions. The actual results and performance of Killam Apartment REIT could differ materially from those expressed or implied in such statements. These statements are qualified in their entirety by the inherent risks and uncertainties surrounding future expectations. Important factors that could cause actual results to differ materially from those expressed include, among other things, general economic and market factors, competition, changes in government regulations, and factors described in the Risk Factors section of Killam's annual information form and other securities and regulatory filings. This cautionary statement qualifies all forward-looking statements attributed to Killam and the persons acting on its behalf. Unless otherwise stated, all forward-looking statements are as of the date of this presentation, and the parties have no obligation to update such statements.
Thank you, Nancy. I am pleased to report another solid operating and financial quarter for Killam. We achieved net income of CAD 27.1 million and earned funds from operations of CAD 0.21 per unit, a 5% increase from CAD 0.20 per unit in Q1 2018. We are on track to achieve our strategic targets for the year, as summarized on slide four. Based on strong top-line revenue growth and continuing management of expenses, same-property NOI increased by 4.3% compared to Q1 2018, which is in the range of our same-property NOI growth for the year. We have been very active on the acquisition front and have announced CAD 106 million of acquisitions in Toronto, Calgary, Charlottetown, and Fredericton so far this year.
Of the assets acquired, approximately 70% are located outside Atlantic Canada, we are expected to meet our target of earning a minimum of 30% of our 2019 NOI outside the Atlantic region. Our Ottawa development with RioCan REIT is on schedule to open June 1st and is over 54% pre-leased. Finally, in February, we raised CAD 86 million in equity, which allowed us to repay our credit facility and other debt, contributing to a reduction in Killam's debt levels, ending the quarter at a historic low of 46.4% of total assets. I will now ask Dale to recap our financial results.
Thanks, Phil. Slide five highlights our Q1 performance. Killam generated FFO per unit of CAD 0.21, 5% ahead of Q1 2018. This increase was primarily attributable to strong NOI growth from the same property portfolio, earnings from 2018 acquisitions, and contributions from two developments completed last year. Together, The Alexander and Saginaw Park contributed CAD 700,000 in FFO during Q1. These gains were partially offset by higher interest and administration costs and an 8.4% increase in the weighted average units outstanding. AFFO per unit was consistent with Q1 2018, primarily due to rounding. AFFO per unit was up 1.9% when taken to three decimal places. We are pleased with the performance of our same property portfolio. The trends of high occupancy and increasing rental rates we experienced throughout 2017 and 2018 are continuing. As illustrated on slide six, overall rental rate growth was up 2.9%, well ahead of last year.
We have achieved accelerating same-property rental rate growth for each of the last nine quarters. With higher rental rates, improved occupancy, and lower incentive offerings, Killam achieved above-average revenue growth in Q1 of 3.3%. Robert will provide further details on increasing rental rates later in the call. As shown on slide seven, operating expense increased only 1.9%. Fluctuations in the first quarter operating results are often tied to the cost of heating fuels, including natural gas and oil, coupled with variations in winter temperatures. As we have expected, natural gas expense was higher in Q1 than last year due to higher pricing in Nova Scotia and Ontario and higher consumption. It was approximately 15% colder in both Ontario and Atlantic Canada. A decrease in natural gas prices in New Brunswick partially offset the impact of these expense pressures.
The increase in gas was offset by lower electricity costs due to energy initiatives completed in 2018. Overall, utility costs were up a modest 1.4% in Q1. General operating expense and property taxes were both up 2.3% in the quarter and in line with our expectations. Killam's debt metrics are highlighted on slide eight. Total debt as a percentage of total assets was 46.4%, down from year-end, as Killam used the proceeds from the March equity raise to repay CAD 53 million outstanding on its credit facility, CAD 34 million on its construction line for The Alexander development, and CAD 2 million for variable rate debt. The repayment of The Alexander construction loan is short-term in nature, as a 10-year CMHC insured mortgage for The Alexander is expected to be funded this month, where we will realize a CAD 40 million net cash inflow to be used to fund growth.
We expect to see leverage increase pretty slightly after Q1. However, we continue to manage debt levels to below 50% and maintain our target of below 49% by the end of the year. Killam's interest coverage ratio was 3.17, and normalized debt to EBITDA decreased to 10.04. The improvement in normalized debt to EBITDA reflects the post-equity raise debt repayment. We saw a small downward tick in our interest coverage ratio due to the higher-than-normal balance on our line of credit during the last two quarters, which carries a higher interest rate than our mortgages. Slide nine highlights Killam's debt maturity profile, including average apartment mortgage rates by year versus prevailing CMHC insured mortgage rates. Approximately 85% of our apartment mortgages are CMHC insured, with a weighted average interest rate on all mortgage debt of 2.97%. The portfolio has a weighted average term maturity of 4.5 years.
Shown on slide 10, Killam continues to grow the total value of its investment properties through acquisitions, developments of new high-quality assets in prime locations within our core markets, and increasing the value of our existing portfolio. Killam's investment property portfolio was CAD 2.8 billion as at March 31st, and the weighted average cap rate of the apartment portfolio was 5.11%. A slight decrease in cap rates, along with NOI growth as a result of strong operating performance, was reflected in a CAD 27 million fair value gain on the investment property for the portfolio, sorry, for the quarter. I'll now turn the call over to Robert, who will provide details on our operating performance.
Thank you, Dale, and good morning, everyone. Shown on slides 11, Killam is focused on increasing the value of our business using three key strategies: increasing earnings from the existing portfolio, 2, expanding the portfolio and diversifying geographically through accretive acquisitions with an emphasis on newer properties, and 3rd, developing high-quality properties in Killam's core markets. I will focus on Killam's first quarter operating performance and key revenue and expense management initiatives before turning the call back to Philip to discuss recent acquisitions and our development pipeline. We are committed to maximizing unit holder value, Slide 12 highlights the creative and innovative programs Killam employs to achieve its funds from operations and net asset value growth goals. Top-line growth combined with expense management remains a key priority at Killam.
Additional metrics that are more subjective, such as superior customer service, technology gains, and enhanced analytics, also are critically important. Killam seeks continuous improvement and provides the tools that enable its staff to perform more efficiently. Slide 13 shows Killam's same-property rental growth and property occupancy results by market for Q1 2019. In addition to the strong occupancy already mentioned, we are pleased with our apartment portfolio average rental rate growth of 2.9%. Detailed on this slide, Killam has delivered impressive same-property rental growth in virtually all markets, with the exception of Edmonton. Saint John, New Brunswick was the standout for rental growth in Q1 2019, reporting a 4.4% rental growth gain. The GTA, Cambridge, Halifax, Ottawa, and Moncton markets' rents were up 3.3% or better this quarter.
Rental rate growth for new tenant leasing increased 5.1% for the quarter, a 10-basis point improvement over Q1 2018. Rental rate growth for renewing tenants, which represents approximately two-thirds of our apartment portfolio annually, delivered an average gain of 1.9%, the highest increase in over two years. Market demand for quality rental units continues undiminished, Killam's portfolio is well-positioned to capture additional rental rate growth. In response to this opportunity, as highlighted on slide 14, we are accelerating our suites repositioning program. In 2019, we have targeted 300-plus repositionings and should generate an aggregate CAD 1 million in additional net operating income from these upgrades. With 99 new repositions completed or underway during Q1, we are on our way to achieving this goal. Of the repositionings completed so far this year, the average monthly rental increase is CAD 266 per unit.
With an average investment of CAD 23,000 per unit, the return on investment for these repositionings averaged 14%. Slide 15 highlights the results for an upgraded and repositioned unit at our Spruce Grove property in Calgary, alongside pictures showing the unit prior to the upgrades. We have identified 3,000 additional units for repositioning and estimate we can complete this work within six to seven years and earn an estimated CAD 10 million in additional net operating income. This CAD 10 million in additional earnings should translate into approximately CAD 190 million in organic net asset growth. The portfolio average cost to reposition a unit is approximately CAD 20,000 for a total CAD 600 million investment to reposition these 3,000 units. In conjunction with driving revenue growth, we continue to execute on our energy efficiency strategy. We are in year three of our five-year, CAD 25 million energy efficiency plan focused on energy savings.
We are achieving returns of over 20%, improving our buildings, and doing the right thing for the environment. We are committed to reducing Killam's carbon intensity, and we measure this on an annual basis. As shown on slide 16, we've reduced our carbon intensity from 33.6 kilograms of carbon dioxide per sq ft in 2015 to 28.6 kilograms in 2018, a 17% reduction. We are targeting a further 300 basis point reduction in 2019. We've included two slides in today's presentation to highlight the types of projects we've completed at our properties and their impact on both expenses and carbon intensity. Slide 17 summarizes the results at Waterview Apartments in Halifax. Waterview is an 88-unit property we've owned since 2004. Over the last three years, we've invested CAD 92,000 at the property, installing low-flow toilets, boiler room overhauls, and common area LED lighting retrofits.
The dollar savings of CAD 20,000 per annum represents a 4.6-year payback on these projects, and we've measured a 12.4% decrease in carbon intensity at Waterview. Slide 18 is another example of energy-saving programs at Killam. Over the last four years, we've invested CAD 700,000 on various energy upgrades at Brentwood Apartments, a 240-unit, three-building property located in central Halifax. In addition to this energy-related work, Killam has also completed 150 unit repositionings at Brentwood, increasing monthly rental rates for these upgraded units by CAD 252 per month on average. In total, the energy and unit upgrades have increased Brentwood's net operating income by CAD 540,000 annually for over CAD 10 million in net asset value gains. Slide 19 includes a summary of energy efficiency projects for 2019, where we have 197 projects planned for a total investment of CAD 5 million. We should earn an estimated CAD 800,000 in annualized savings for a six-year payback.
Slide 20 highlights Killam's focus on technology. We continue to leverage and develop our operating and financial platforms to maximize growth and earnings. We employ leading-edge processes to better service and engage our residents, prospective tenants, employees, and suppliers. After mentioning the implementation of Killam's customer relationship management platform in past quarterly updates, we're happy to announce that we have completed the training of our staff and now have full coverage throughout our portfolio. Next up in our CRM process is to implement rental rate management software to optimize the best decisions on rent and occupancy as units are renewed or released. We expect to have the rent management software fully integrated over the next year. As slides 21 and 22 detail, this investment in technology is benefiting all stakeholders.
The CRM tool assists Killam so we may deliver the high-quality service our tenants and prospective tenants have come to expect and deserve, as Killam optimizes rental opportunities and further reduces vacancy. Clients have the ability to book appointments and complete applications from anywhere. With more of the data entry being driven by our tenant prospects, our leasing teams focus on delivering exceptional customer service. Having real-time access to this data is key to ensuring Killam can rapidly analyze its markets and make informed, and consequently more accurate, operating decisions. We've already used analytics to make timely decisions regarding employee engagement, marketing sources, leasing conversion ratios, and traffic trends. We look forward to sharing further insights from our increased use of data analytics from CRM over the next few quarters.
Before turning the call back to Philip, I want to quickly touch on the strong multi-residential fundamentals in our key markets. The Halifax, New Brunswick, and Ontario markets continue to perform very well in 2019, delivering both excellent occupancy and NOI growth. Occupancy in the Maritimes and Ontario markets remains strong given increased immigration, economic growth, and home affordability constraints, especially in the GTA. We have included slides 40 to 42 in this presentation for additional information on our key markets. I will now hand you back to Philip to provide an update on our recent acquisitions and new developments. Thank you.
Thank you, Robert. Slide 23 details our acquisition history. After a record year of acquisitions in 2018, 2019 started slowly in Q1. With CAD 105 million of acquisitions announced yesterday, we have now met our minimal acquisition target of CAD 100 million for the year, and we will look to acquire an additional CAD 50 million-CAD 75 million this year. Slide 24 and 25 show our pending acquisition of a 50% interest in the Charlottetown Mall in Charlottetown, PEI, from RioCan REIT. This 352,000-square-foot retail complex features a stabilized grocery anchor enclosed mall located on 32 acres in the heart of PEI's busiest retail node. Charlottetown Mall is the dominant shopping center in PEI and capitalizes on superior frontage, high traffic flows, and visibility on Charlottetown's busiest north-south intersection. This property is well-located, surrounded by other retail, residential neighborhoods, apartment complexes that we own, and the University of PEI.
The retail portion of the property will continue to be managed by RioCan after closing. This complex provides an attractive all-cash yield of 6.7% with multi-residential development potential. Current tenants include Atlantic Superstore, Sport Chek, Cineplex, H&M, Winners, Urban Planet, Bank of Montreal, and Dollarama, with national tenants representing 80% of the leased GLA. Excuse me. Killam and RioCan will work together to redevelop the retail operation by relocating tenants in the older portion of the mall to the newer section, providing room for residential development. As shown on slide 26, the large surface parking lot surrounding the mall offers a compelling future multi-residential opportunity. The current zoning and development bylaws allow for significant new retail and multi-residential development on the site.
The current zoning could accommodate the potential development of up to 300 units in approximately 100-unit buildings, four to five stories, as indicated in the red rectangles on the slide. The development may require the demolition of some of the underutilized portions of the existing mall. Slide 27 shows our recent purchase asset in Fredericton, which has been easily absorbed in our solid operating platform. It is a four-story new concrete apartment building containing 59 units and 48 underground parking stalls for a purchase price of CAD 8.1 million. The building was designed with the intention of catering to seniors, with a full-care senior facility directly next door to the building. The building is conveniently located in a developing neighborhood close to retailers including Walmart, Canadian Tire, and Atlantic Superstore. The all-cash yield is 5.8%, and the building is 100% leased.
Subsequent to quarter end, Killam has committed to acquiring from our partners the other 50% interest in two assets, Grid 5 in Calgary and Silver Spear in Mississauga, for CAD 69.5 million, as shown in slide 28. The purchase price of the apartments represents a cash cap rate of approximately 4.2% and is in line with Killam's IFRS fair values for the existing interest. This purchase is expected to close by the end of May 2019. The purchase also includes CAD 4 million for the remaining 50% interest in the development site that is adjacent to the Silver Spear asset in Mississauga. We are confident on the value creation opportunity from this development and will be pleased to own 100%. On the development front, we continue to expand our development knowledge and pre-leasing program.
Slide 30 illustrates the leasing activity for the two developments we completed in 2018 and the pre-leasing for the Frontier, which is scheduled to open in June 1st. We are pleased to report both Saginaw and The Alexander are 100% fully leased, and Frontier is already more than 54% pre-leased with four weeks until the opening. Slides 31 to 34 show additional pictures and details on the Frontier. Slide 35 shows the second phase of Gloucester City Centre development next to the Frontier. Site work has started on this project, a 208-unit building, and the expected completion is in late 2021. Construction is progressing on schedule with our Shorefront development in Charlottetown. The five-story building will contain 78 units with underground parking overlooking downtown Charlottetown on the waterfront. The average size of the units will be 1,020 sq ft, with amenities that include a gym, social room, and a library.
The project's budget of CAD 20.8 million will have an anticipated all-cash yield of 5.6%. As shown on Slide 37, Silver Spear 2, our 128-unit development in Mississauga, is expected to break ground in Q2 of this year. Construction will take 24 months with a CAD 49 million budget with an anticipated all-cash yield between 5%-5.25%, an approximate 175-basis point premium over the current market cap rate. We continue to advance our pipeline. A full list of our development pipeline is included on slide 38. It is worth noting that 70% of Killam's future development pipeline is outside Atlantic Canada as we continue to grow our presence in Ontario and Alberta. To conclude, the first quarter of 2019 has been strong, building off our successes in 2018. Both strong operating and financial performance is credited to our focused strategy.
We are increasing earnings while making a stronger balance sheet, growing geographically, ensuring we have one of the highest quality apartment portfolios in Canada. We look forward to reporting on our innovative ways to accelerate revenue growth and manage our operating expenses each quarter through 2019. This concludes the formal part of the presentation. We will now open up the call for questions.
At this time, I would like to advise everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad. Again, that is star, then the number 1 on your telephone keypad. If you would like to withdraw your question, you may press the pound key. Our first question comes from the line of Mark Rothschild with Canaccord. Your line is open.
Thanks. Good morning, everyone.
Good morning.
In regards to the Charlottetown acquisition, you did another deal like that in Toronto with retail, with a development opportunity. When you look at that property, what is the timing of potentially starting a residential development? The yield going in obviously is attractive relative to what you can get for most rental apartment properties, but what type of long-term return would you expect to see as you do a redevelopment there and develop residential?
Okay. Mark, I was listening as hard as I could. You have four questions in there. Which one do you want me to try to answer first?
How about the timing?
The timing, we really don't know. By the time we close on this, meet both sides of the partnership, we'll set a plan. I would say that the plan to do what we want to do on this asset is probably rolling out to two to five years.
Okay. The only other real question I had I'm sorry.
There's a bunch of things we're doing first, getting ready for these sites to be able to build.
Okay. I realize maybe it's too early to ask this, the only other real question I had on this property was what type of long-term return do you think is achievable through the development?
Straight up on the apartments?
Yes.
Mississauga. It will be similar to what we're doing just down the street there, at the Shorefront. We're still targeting well into five and a half on cost to build the apartments.
Okay. Moving on to something else. Edmonton, the rent slipped. The occupancy improved. Is that connected? Did you just lower rents to get the better occupancy? Is there something going on in that market, or is it that you see changing, or is it just maybe unique to the asset you own there?
We don't think it's fundamental. Those properties, Waverley and Tisdale, they've kind of gone up higher in occupancy, and they've come off a little bit. The market's in flux right now, we're confident long term it's a very strong location and a strong market. It'll be fine.
Okay, thanks. Lastly, in regards to your guidance for acquisitions for the year. When you talk about the amount that you're targeting for the rest of the year, is that based on what you see now, what you think is likely to be achieved, or just what you'd like to do, and if you can do more, all the better? Obviously, last year you exceeded what you thought you would do.
I think a lot of it has to do with what we're looking at right now, whether or not we can actually get some of these assets under contract and then closed by the end of the year. It's more of an active pipeline.
Okay, great. Thank you.
Thank you.
Thanks, Mark.
Your next question comes from the line of Jonathan Kelcher with TD Securities. Your line is open.
Thanks. Good morning.
Good morning.
First off, just on the deal you did with KingSett, is that something you contemplated at the beginning of the year, or is that something that just sort of came to you?
That is, it came to us in March.
Okay. That's why you still have the CAD 50 million-CAD 75 million of your original target in terms of acquisitions?
Yep, that would be part of it for sure.
Okay. Can you give maybe a little bit more of a breakdown, between what you're paying for each of the properties?
God, I don't have that right in front of me, but I would say what we paid for The easiest way to think about that is what we paid for Grid 5, which I remember because it was close to CAD 100 million.
It's a round number. Yes.
The next 50% is less than that. That's where it is, and most of the value has been, the upside has been on Mississauga.
Sorry, I missed that. Grid 5 was about the same value?
No, it was less. It wasn't the CAD 50 million that we had paid for our 50%. It's less, a few million bucks less, or I can't honestly remember. The other one is, there's lots of increase in value on Mississauga.
When we look at them combined, which is kind of how we're looking at it, when you look combined, however you're going to allocate, we actually expect to have a small fair value gain. The value that we're paying is slightly below what.
Yeah.
The value that we've got it on the books for or higher. I've got to think about that. Yeah. Very much in line.
The 4.2 cap rate. I guess you won't be getting excuse me, you won't be getting management fees on these properties anymore. How does that go into that 4.2 cap rate?
When we would've looked at that cap rate, that wouldn't have considered that. When we look at it from an accretion perspective, taking all of that into consideration, it's pretty much flat at the get-go, but we see more accretion in the future years because there's lots of growth potential. We're seeing NOI growth from Silver Spear is far exceeding what our average for the portfolio. Grid5, we expect to see some improvements there. I think that we would've taken fair value write-downs there a little while ago, and we're seeing that asset stabilized for the last year with some upside potential.
We can move rents. With higher occupancy, we can move rents, and they've come off a fair bit over the last three years.
Yes, that's right. Yeah.
Okay. Then just lastly, on just on slide 37, you have the project budget for Silver Spear at, I guess, we double CAD 49 million. In the footnote, you've got a total project cost of CAD 59 million.
50.
I don't have it 100% with me. It should be CAD 49 million.
Is that just a typo?
Oh, it's a typo.
Sorry. Okay. It's not land cause or anything.
It should be 49, if I can add.
Okay, thanks. I'll turn it back.
Our next question comes from the line of Mario Saric with Scotiabank. Your line is open.
Hi. Thanks. Good morning.
Mario
First off, I just wanted to highlight the useful information that you have in your call presentation. I think it's quite good, and it's quite helpful. Secondly, it feels like you're increasingly differentiating yourself with the pursuit of technology to advance the business, which is quite interesting. Just on that front, now that the CRM initiative is 100% complete and recognizing that it's kind of a multi-year process, what would you say has been the most tangible operating adjustment you've made as a result of the implementation of the technology? How long do you think it takes for the benefits of the implementation to really kind of make their way into the reported FFO, AFFO numbers?
Hi, Mario. The most tangible is the ability to monitor what's going on at the leasing agent level. The knowledge we have and the insight is almost immediate. When we see something flipping in the market, we've long had a saying around here that it's always about the people. What becomes evident when you look at the hard numbers is it really is about the people. When we see a market that's not performing as we had hoped, and you look into it's about not responding to inquiries because the markets are strong, and what's different, in order to be successful, you have to be on the inquiries. It's getting that hard data that confirms what we've long thought, but now we can actually monitor it.
It identifies those other candidates we have on our leasing team and identifies the ones that are able to process and achieve higher results, and then enables us to make changes so that we can spread that approach throughout the entire company. It is quite amazing to see. The other thing that's pretty important these days is it's providing us with the ability for part of our staff on the leasing side to work more remotely. It's not necessary for them to be here. As a consequence, what they do is the hours are more flexible, and that matters because inquiries don't come in at 8:00 A.M., and they don't stop at 5:00 P.M. The ability to have our people dispersed and being able to work varied hours is also beneficial. We're seeing the gains almost immediately. Nancy, would you add anything?
Yeah. That sounds great, Rob. Just adding to that, too, Mario, it's like Rob was saying, it is allowing us to manage by exception. With the leasing agents, being able to make those decisions around the efficiency of them, around the response times, the conversion ratio, about how we are setting working hours when this task occurs. Also around how we're spending our marketing and advertising Canadian dollars. We can look at that daily and see the marketing sources and what leads that's bringing in, the quality of leads, and able to dial it up and dial it down by property. Making sure that we're not getting bombarded with traffic and properties that are already occupied for the next few months and being able to do that.
It is getting our leasing agents, who it's a focus here on the customer service, making the administration process definitely less cumbersome and more efficient. Again, the data's already allowing us to manage by exception.
I think I'll just add, too, one thing we've started to do is allow coverage from different regions for other areas. For example, PEI, where we are full and very strong leasing staff, where we're seeing a lot more inquiries. In order to make sure we get back to inquiries quickly, with this system, we can have leasing agents, for example, in PEI covering inquiries in Calgary and in Edmonton, and being able to track that and share that information, which in the past, we were not doing very much of that. We're just starting to explore the potential there, but that is something real, and it's very powerful to be able to maximize the use of our staff nationally, to be able to field inquiries.
Got it. Okay. From a financial impact, like your 2019 same property NOI guidance of 3% to 5%, would it reflect any operational synergies, revenue maximization from the CRM implementation, or would that be additive to it? I'm just trying to understand from a timeline perspective when you think that can start to-
I think it might be a little bit more after this year. One thing that we have added with the change in technology is our approach to leasing in terms of the number of leasing agents that we have had, and having more dedicated professional leasing agents that are actually showing the units as well. Working a little bit differently with our resident managers, who in the past would've been doing most of the showings. We've increased our leasing agents at the same time. I think that we do expect to see top-line growth. In the short, we're absorbing some more leasing staff this year with some of these changes to how we're approaching leasing, which I think that is going to more than offset those additional costs.
I think that that power of all of the changes we're making, I think we will really start to see the net impact beyond 2019.
2019 is really a foundation year.
Yep
That we have the data, have the processes, and the efficiencies in place, then we can layer on making sure that we're maximizing our opportunities in the market, both on rental rate increases and occupancy.
The word they would use in a manufacturing business is commissioning. This year is the commissioning, is us getting our systems running. What we've seen so far, we're quite pleased with, and we're making rapid headway. I think Dale and Nancy are correct that this year was probably going to be relatively flat, but it does set us up quite nicely going forward.
Understood. Okay. Two more questions, one on Ottawa and then one on Halifax. At the Frontier in Ottawa, I noted that the target rent was up 7.5% quarter-over-quarter to about CAD 250 a square foot. Is this specific to the building, or is the broader Ottawa market surprising you to the upside?
The gains at Frontier are unique to Frontier. We're seeing gains across the board in Ottawa, but not to the extent we're seeing them at the Frontier.
Okay. Last question just on Halifax. The same property rent growth was strong again at 3.4%. Phil and Roy, you've been in Halifax for a long time operating. How would you describe your confidence level in future rent growth, at this point in Halifax today versus your history in the market?
Yeah
What would be the one kind of event that in hindsight, would prove that your confidence is either too high or too low going forward?
I'll start out with that. Yeah, we remain confident in the market. Our average rent in this market is just under CAD 1,100. We're very affordable across the board. We have some through the range, and some rents would be north of CAD 2,000, and some are CAD 850. We have 5,800 units. We're able to address the market through the range, and that works well for us, and it works well for our tenants. The second half of your question in terms of I don't quite know what you meant by the question. You want to repeat it?
Sure. Let's say, you're confident that you'll see 5% rent growth going forward over the long term, in Halifax. When you look at events that could either make that 5%, 7%, or 2%, I guess what are the things that make you the most excited about the market going forward, and what's the thing that keeps you up at night?
Government keeps me up at night. Everybody around the table would know that. Just more policies are the things that get me a little excited. On the upside, for us, 2008 would've been a year when we reported 8% growth in NOI. When the market gets tight, people stay where they are, and they're not building new houses. They're not moving out. They're not moving around. In a tight market like that, when things get harder, that tends to work for us. The demographics in this region are supporting what's going on, and that being on both ends, the younger and the older. I have two children who really have no big aspirations to own property. They're happy to rent. I think that holds true for a lot in the millennial age. That's good.
Then we have retirees that are looking at it as an option. I think we're probably collectively surprised a bit at the amount of uptake we had at The Alexander from an older clientele who want to live an urban lifestyle. That's great. Across the board, we're seeing good uptake and the fundamentals are strong and our rents are still not. When you think of what it costs to own a home, our rents are very, very modest.
Yeah. Mario, another way to sort of try to answer that is just that it's not just Halifax, it's every market we're in. It's easier to think about what could go wrong, what's the downside of these markets. We do know as long-term operators that if the country itself went into a very long, pronounced recession, people still need a place to live. We've got a very solid base to start with. Obviously, the future, what we see today in terms of the upside would be slowed down quite a bit. As long as this country has the sort of the current economic conditions, which is really, there is job creation, there's population increase with new Canadians. Those are the two things that we continue to look at.
Halifax has been strong because of the increase in population, increase in new Canadians that have moved into this part of the country. Relative to Toronto, still small from a relative number. Same with PEI right now. There still is increase in population. With that come the jobs. If there's jobs and more people, you've got a lot of the ingredients that you need to have a good outlook.
Okay. No, thanks for that.
Your next question comes from the line of Michael Markidis with Desjardins Capital Markets. Your line is open.
Hi, everyone. Just having a couple of small things here. On the Ottawa disposition, I don't know if you mentioned it, but could you disclose the cap rate on that sale, please?
That was below five.
Okay.
It was between four and 3/4.
Okay.
Selkirk and Mayfield. The name of them that we go by is Selkirk and Mayfield.
Okay. Just out of curiosity, was that more specific to those two properties, or is it more in response to something that you're seeing in Ottawa generally that you're not that fond of?
No, it would've been, again, we would've picked those up with a little bit of a portfolio, a small one. They came with it. All things being equal, we just think that we can sort of recycle that capital. We get asked that question a lot with sort of investor meetings and stuff. If we can sort of take a gain, take that capital, and put it back into either new acquisitions or a development program, we just thought it was a prudent thing to do.
Okay, great. Now the acquisition of the 50% interest in Grid 5, let's understand how that works. Silver Spear, you're obviously getting access to the development. I think last year you guys did a deal involving some land around Grid 5, and I was just curious if now owning 100% of the asset in Calgary affects that land assembly in any way.
Well, it does in the sense that I think that we'll have a plan with that being Killam and our other two partners, and most likely we won't be proceeding with the development of that in the future.
Won't be proceeding?
Yeah.
Okay. If you're not going to be proceeding with that development, I'm just getting a sense, so you mean the development itself will not get off the ground?
We're talking about selling the land.
Okay, perfect. That's what I was getting at. All right, great. Just lastly, a technical question here. The increase on rent on the turnover that you disclosed, does that include the impact of the rent uptick on suite repositioning?
Yes, it does.
It does. Okay. That's it for me. Thank you.
Yeah. All right. Thank you.
Your next question comes from the line of Matt Kornack with National Bank Financial. Your line is open.
Good morning. Quickly on Brewery Market, with regards to the CAD 500,000 that comes off as a result of the redevelopment of that, will you include that in same property NOI, or will it be allocated as a sort of development asset? Or at least that component of the property?
You know what? The Brewery's actually been out of same property for the last-
Okay.
With all the changes that have been happening with The Alexander, that will stay out likely until, I guess it'll be probably 2021, right? Because we'll need comparable years. Yeah.
Okay. It has no impact on your guidance then with regards to same property NOI.
On same property, no.
Okay. That's good. With regards to expenses, most of them were pretty tame in terms of moves, and I think seasonality had to do with some of it. The ones that stuck out to me on the same property portfolio were Halifax and Ottawa. Halifax being up 7.3% and Ottawa down 9%. Is there anything one time, I mean, obviously, I can't imagine you're expecting expenses to increase by that much for the duration of the year in Halifax, or decrease by that amount in Ottawa. Do you know what would've driven those differences?
Gas was certainly a factor in Halifax. Nova Scotia was one area where we would've seen one of the higher increases in gas quarter-over-quarter. Timing of some R&Ms, just that timing makes a difference. Not all of it is timing, but certainly some of it is timing. In Ottawa, we saw some energy savings in some of the energy initiatives we did in terms of LED lighting and other last year. We would've seen some savings there, we did see as well as some efficiencies on the gas side. Ottawa was one area where we did see a little bit more attractive year-over-year on the gas.
Security's another one where we last quarter, Q1 of last year, one of the assets, I believe it's one of the ones we're selling actually had some higher security costs, which we didn't have this quarter. All of those things came together to result in some good savings in Ottawa from an expense standpoint. Not necessarily reflective of what we'll see going forward in Ottawa either.
The energy savings will be sustainable, I guess, going into future quarters, although with less energy costs outside of the winter.
Absolutely.
I noticed that MHC, you kept your fair value fairly steady quarter-over-quarter, even though there were some precedent transactions that maybe could have justified a higher number there.
We'll discuss. Thank you.
Your thoughts. It's just a timing.
I think that's an area in Q2 where we'll be spending a little bit more time, certainly recognizing that there's been a big transaction in the market that would suggest that our values are much lower than what perhaps the market would pay for those types of assets. We need to do a little bit of work to get the right support to make sure that any increase has the right support. Yeah.
Fair enough. Last question with regards to, it's small in terms of the overall portfolio, but this expansion into some retail assets with redevelopment. Is the goal to sort of get a funding arbitrage in that you'd take out higher LTVs on your multifamily assets and then keep those unencumbered? I don't know if the RioCan asset was already encumbered. Just interested in your financing strategy for those type of assets, given that they would be conventional mortgages. I think MHC, there's an opportunity there maybe as well.
Terry. Go ahead.
I was going to say, you're right that with our larger retail asset in Waterloo unencumbered. The plan is to have the PEI one unencumbered as well.
Yes, we would do the arbitrage there. We do that with our MHCs as well. We tend to do that on those.
Okay. Fair enough. That's great. Thanks, guys.
Your next question comes from the line of Brad Sturges with iA Securities. Your line is open.
Hi, good morning.
Good morning.
Hi, Brad.
I guess now with the Waterloo, Westmount Place, and Charlottetown Mall, with these transactions, is that creating, I guess, a more inbound interest in exploring intensification opportunities from other commercial landlords? How would that pipeline tend to look right now?
Well, I think that for one, we never really received that many more after buying Westmount, where we just announced this yesterday. I think it might be a little bit too early for that. Again, they're both kind of different in terms of what we see in terms of the long-term future or the upside on the retail portion of both. One, the Westmount would've been relatively stable with the land already there and just working the whole rezoning of the multifamily with longer term leases. The opportunity we just announced is more about, there's lots of different things we're going to be looking at to improve the retail as well as doing the multifamily. Completely different. The same, hopefully, result will be that there's a lot of value created in both of these assets.
Within your development pipeline, obviously there's been some increased exposure to Charlottetown for a development opportunity. Within Atlantic Canada, are there other markets, given some of the rent growth you're seeing, where development could be more of an option or something you're looking to get more exposure to within the region?
You know what? If you look at it, obviously Halifax is still a market that we see almost a lot of opportunities, either on the development side or the existing product that we could look to buy. We're looking at that as well. New Brunswick has been surprisingly strong. The opportunities are relatively limited in that province, but we're continuing to look. We just bought something for the first time in a couple of years. Newfoundland would be, again, a little bit sort of soft. We have a commitment to put money into our portfolio to reposition it this year. The answer is really, for whatever we're doing in Atlantic Canada, we're spending a lot more time, in Ontario and Alberta in terms of the future opportunities.
There are limited opportunities.
Lastly, maybe just in terms of overall development exposure, has there been any change in thoughts in terms of the ideal target exposure that you'd like to have on the balance sheet at any given time?
You know what? Still, the max that we've been running is probably like CAD 100 million, which is quite small relative to our base. On a flow of what we can get out the door and what we can start, that's roughly what we see in the next two or three years. That's about it. If we could someday get up to 500 units a year completion, that would be a target, we're a long ways away from that. It's a lot of work to get this stuff up and running.
Yeah. Okay, great. Thank you.
Thank you.
Your next question comes from the line of Dean Wilkinson with CIBC. Your line is open.
Thanks. Hey, everyone.
Hi, Dean.
Hi, Dean.
Phil, it looks like you're getting younger.
Oh.
I just wanted that to sink in. You and me both. Looking at the development activity, the age of the new acquisitions that you've done over the past two years, how has that impacted the average age of the portfolio? It looks like it is getting younger. Where would that sit today, say, relative to where it was two, three years ago?
Nancy, you want to answer that? I know you know it.
Yeah, no, it is helping. It's helping maintain it as everything gets older each year. Last year we went from average age of 28 to 27 years. It is. It also helped last year the CAD 350 million acquisitions. Everything was new, built in the last two, three years as well.
Okay. Given the development activity, it's kind of like we go forward a year, you get to pull a year back off of it. It's the curious case-
Yeah
of Benjamin Button. Would that also drive into the maintenance CapEx as a percentage of your total spend continuing to probably trend down? Because the maintenance on the stuff that is less than 10 years old is obviously a lot less than the older stuff. Would that also be a trend that we could probably see going forward? Where do you think that that would go to? You were 43%, 44%. Last year you came in 34%. Could that get down into the 20s, or do you think low 30s is probably where that stabilizes?
Yeah, I don't see it as a portfolio going that low. The odd new building can pull that off, especially some of the stuff we're doing now with the geothermal and then with the sub-metering of water. You can see it kind of go below 30%. For the most part, I think the range is going to be in the low 30s for the portfolio would be fantastic.
Okay, that's great. That's it for me. Thanks, everyone.
Thank you.
This is a reminder. If you would like to ask a question, please press star then the number one on your telephone keypad. Your next question comes from the line of Yash Sankpal with Laurentian Bank. Your line is open.
Good morning.
Hi, Yash.
Good morning.
Just one question. If you could add more color to your Alberta market, what you're seeing there. You mentioned that the market is in flux, and also the rationale behind the sale of that development parcel in Edmonton.
Okay. That's a good question. I think that when we look out. What we see in terms of the ability to buy in that marketplace, there's a lot of product, whether it's old or new. There continues to be a lot of new product that's coming out of the ground in both cities. When we've gone up, and what wasn't asked here today or this morning was, the other asset we have for sale is our land in Edmonton that we have under agreement.
When we look at it's a bit of a retreat in terms of strategy, but I think it's the right one, where if we can buy at costs that are less than what we can actually build from our pricing, then why would we spend the time at this sort of period in the cycle to build when we can quickly buy something and the product is very good to being acceptable. From our point of view, we are selling the land in Edmonton. In terms of what wasn't sort of planned this year was the sort of the KingSett/ AIMCo sort of partnership. There comes another opportunity of, do we get our money back from the land that we had next to Grid 5 and just move on, concentrate on what we own.
We will own over 1,000 units in Alberta, and look to acquire either the second half of this year or in 2020.
Do you expect cap rates to go up? Are you seeing any of those trends there?
In what market?
Both Calgary and Edmonton. Where are the cap rates headed?
A good question. I think I would say in the last year, they've been relatively flat. Again, some of the sort of the better assets, if you were to go and try to do a purchase of them, we were looking at some stuff in Edmonton. They're down into the four and a half, and at this point, we weren't willing to do it.
Right. Okay. That's it for me. Thank you.
Great. Thank you very much.
There are no further questions at this time. I turn the call back to our presenters.
Thank you very much for listening and participating today at our conference call. We look forward to being back here at the end of the second quarter. Thank you.
This concludes today's conference call. You may now disconnect.