Good morning, ladies and gentlemen, and Welcome to the Killam Apartment REIT's fourth quarter 2018 financial results conference call. After the presentation, we will conduct a question and answer session. Instructions will be provided at that time. Please note, this call is being recorded today, February 13th, 2019, at ten o'clock 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. Thank you for joining Killam Apartment REIT's Q4 and year-end 2018 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 accompany 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 attributable to Killam and the persons acting on their 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 very strong year for Killam. We achieved net income of CAD 136 million compared to CAD 115 million in 2017, and earned funds from operations of CAD 0.94 per unit, a 4.4% increase from CAD 0.90 per unit in 2017. We realized historical high occupancy across our portfolio and achieved our largest year of acquisitions with CAD 315 million in assets acquired across the country. We were successful in achieving the majority of our strategic targets for the year, as summarized on slide four. Based on strong top-line revenue growth, same property NOI has increased by 5% compared to Q4 2017, and of 4.8% for the year, reaching the upper range of our same property NOI guidance for the year. We purchased CAD 113 million of properties in 2018, well in excess of our revised 2018 target of CAD 225 million.
Of the assets acquired, approximately 7% are located outside of Atlantic Canada. Killam generated 27% of its NOI from Alberta and Ontario in 2018. The Alexander, our most recent completed development in Halifax, opened in September and reached substantial completion in October. It is now 100% leased. In December, we acquired the remaining 50% ownership in The Alexander. I will now ask Dale to recap our financial results.
Thanks, Phil. Before covering the details of 2018, I'd like to recap Killam's growth over the past five years. A summary of Killam's financial performance for this period is included on slide five. Killam has achieved steady improvements in all its key financial metrics over this period. NOI has increased at a compound annual growth rate of 12.5%. FFO per unit has grown by a compound annual average of 6.8%. Killam has reduced its AFFO cover ratio to 84%. Leverage and liquidity have also improved, with debt to total assets trending downward and increased capital resources available to fund acquisitions and development growth. Year-end 2017 debt and liquidity results reflected a temporary increase in liquidity following the closing of the November 2017 equity raise and the subsequent acquisition of three properties in December 2017 without debt. Mortgages were placed on these assets in early 2018.
Debt to total assets of 49.8% presented at year-end 2018 are on a more sustainable basis. 2018 full-year results are also included on this slide. Killam generated FFO per unit of CAD 0.94, 4.4% growth from 2017. AFFO per unit was up 5.6% in the year. This was driven by increased earnings from strong same property results and contributions from recent acquisitions, partially offset by an increase in the average number of units outstanding and increased interest expense, including increased amortization of deferred financing costs. Amortization of deferred financing costs was up in 2018, and in Q4 specifically, due to the timing of recognition of CMHC premiums linked to refinanced mortgages. We've updated our accounting note on prepaid CMHC insurance premiums. CMHC premiums are amortized over the amortization period of each loan.
On refinancing, older unamortized premiums that don't relate to the new refinanced mortgage are written off in the period of the refinancing. Killam uses a mix of refinancing options with CMHC, often with previous CMHC insurance continuing to benefit all or a portion of the new mortgage on refinancing. There are times when we may maximize a mortgage on a financing and also begin a new amortization period. Under this scenario, although a portion of the original CMHC insurance premium may be applied as a credit to the new premium, a portion of the older premium that has not been fully amortized will be written off with the start of the new mortgage. During Q4, Killam expensed approximately CAD 1.8 million of CMHC-insured premiums related to previous refinancings.
As disclosed in the MD&A, we expect amortization of deferred financing costs to decrease to approximately CAD 2.5 million in 2019, compared to CAD 4.4 million in 2018. Partially offsetting the timing of recognition of deferred financing costs, Killam recorded CAD 1.1 million of revenue in Q4 related to the recognition of forgivable government loans used to fund affordable housing units, as noted on page 16 of the MD&A. Netting these two non-recurring entries, net income and FFO were reduced by approximately CAD 700,000 in Q4 and for the year. Highlights of Q4 operating results are included on slide six. Same-property revenue was 3.1% ahead of Q4 2017 due to strong leasing activity in Killam's core markets. Operating expenses were a modest 0.1% higher than Q4 2017. In total, Killam's same-property NOI increased 5% in Q4, and Killam generated FFO per unit of CAD 0.23, 4.5% ahead of Q4 2017.
Turning to slide seven and Killam's full-year results. Overall occupancy and rental rate growth continues to trend higher. The 2.7% increase in rents achieved this year is 90 basis points ahead of last year, and the highest average rent rate increase since 2012. We've also reduced rental incentives, which are down 43% year-over-year. Same-property expense growth is up 1.6% for the year, as shown on slide eight. Savings were realized in utility and heating costs due to lower natural gas prices in Ontario, as well as reduced consumption, as Killam benefits from efficiency projects installed in the last two years. These savings were offset by inflationary increases and timings of general operating expenses. Property tax expense remained relatively flat as rising property assessments were offset by successful tax assessment appeals. Killam's debt metrics are highlighted on slide nine.
Slide 10 highlights our debt maturity profile, including average apartment mortgage rates by year versus prevailing CMHC-insured mortgage rates. Killam benefited from lower interest rates on refinancings in 2018, but we expect to refinance apartment maturities in the next 12 months at slightly higher rates than the weighted average interest rate on maturing debt of 2.82%. We are using a combination of five and 10-year terms on debt refinancing, and to date, have been more heavily weighted to 10-year debt. Year-to-date, we have refinanced CAD 30 million of debt, representing 18% of re-refinancings for the year. We had a weighted average term of 8.1 years, sorry, and a weighted average rate of 3.08%.
As shown on slide 11, through acquisitions, developments, capital invest improvements, and appreciation of existing properties, Killam's real estate portfolio has grown to CAD 2.8 billion in value. This, along with strong fundamentals and cap rate compression, translated into CAD 135 million in fair value gains in 2018. I'll now turn the call over to Robert, who will provide details on our operating performance this quarter.
Thank you, Dale, and good morning, everyone. As shown on slide 12, Killam remains focused on increasing funds from operations and net asset value by executing on its three key strategies. Increasing earnings from the existing portfolio. Expanding the portfolio and diversifying geographically through accretive acquisitions, with an emphasis on newer properties. Thirdly, developing high-quality properties in Killam's core markets. I will focus on Killam's operating performance for 2018, along with our strategic revenue and expense management initiatives, before turning the call back to Philip to discuss our development pipeline and recent acquisitions. Killam's existing CAD 2.8 billion portfolio includes 15,900 apartment units, 5,400 rental sites, 37 manufactured home communities, and 500,000 sq ft of commercial space. We are committed to maximizing unit holder value. Slide 13 highlights the creative and innovative programs Killam employs to achieve its FFO and net asset value growth goals.
Top-line growth combined with expense management remains a key priority. Sorry, excuse me. Additional metrics that are more subjective, such as superior customer service, technology gains, and enhanced analytics, are also critically important. Killam seeks continuous improvement and provides the tools to enable its staff to perform efficiently. Slide 14 details Killam's strong same-property rental rate growth and property occupancy results by market for 2018. Following an impressive 2017 that posted higher than average rental rate growth and occupancy gains, Killam successfully maintained this momentum through 2018 to again deliver better year-over-year rental rate growth in all its core markets. Rental rate growth for new tenant leasing was up 5.3% year-over-year. A 190-basis point improvement over 2017. Rental rate growth for renewing tenants, which represents approximately two-thirds of our apartment portfolio, delivered an average rental rate gain of 1.7%, a 70-basis-point gain versus 2017.
Halifax, Killam's largest market, is one of four Killam markets that reported same-property rental rate increases of 7.4% or greater on new leasing, plus a better-than-2% improvement for renewing tenants. Overall, Killam's Management and Leasing team generated record-high occupancy for both the fourth quarter and full year 2018. Killam reported a 20- 160 basis-point improvement in all markets except for two. Both St. John's and Calgary continue to be impacted by low oil prices. Despite the fact that both St. John's and Calgary recorded occupancy dips of 120 basis points and 40 basis points respectively, both markets reported improvements in same-property net operating income, up 70 basis points for St. John's, and up a strong 5.1% for Calgary.
The chart at the bottom of slide 14 highlights that Charlottetown remains better than 99% occupied, and we expect this trend to continue given the higher rates of international immigration and very little new multi-residential supply in the PEI market. Overall, Killam reported consolidated same-property occupancy of 97.1% in 2018, 50 basis points better than 2017. 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 15, we accelerated our suite repositioning program in 2018 to CAD 3 million, successfully renovating 170 units. This represents an increase of CAD 2 million from the CAD 1 million invested to upgrade 47 units in 2017. The repositioned units completed in 2018 earned an average return on investment of 14%. This from average monthly rental rate increases of CAD 253.
We recognize the significant return opportunity from repositioning units, and we are accelerating this program. In 2019, we have budgeted 300+ repositionings and should generate an aggregate CAD 900,000 in additional NOI from these upgrades. An in-depth review of our almost 16,000 multifamily units identified 3,000 additional units for repositioning. We estimate we can complete work on the 3,000 units within six to seven years, and earn an estimated CAD 9 million in additional NOI. This CAD 9 million in additional earnings should translate into approximately CAD 170 million of organic net asset growth. The portfolio average cost to reposition a unit is approximately CAD 20,000, or a total of CAD 60 million to reposition these 3,000 units. Hand-in-hand with suite upgrades, we also completed upgrades to the related buildings' common areas, complementing the suite renovations and resulting in a more thoroughly repositioned property.
Slides 16 through 20 highlight examples of the type of unit and common area renovations completed in 2018 for 32 properties within our portfolio. As presented during the last two quarterly conference calls, today, we will highlight three new properties where we have performed upgrades. Slide 17 profiles our Garden Park property in Halifax. Built in 1980, this mid-rise building has 246 units and is located at the corner of Spring Garden Road and Cathedral Lane in the heart of downtown Halifax. Garden Park's excellent location supports the investment in updated higher-end units, and we've been doing this for the past three years. In 2018, a CAD 22,000 investment focused on kitchen, bathroom, and flooring upgrades generated an average rental rate increase of CAD 235 per month, equating to a 14% return on investment. As well, we updated Garden Park's main lobby entrance and gym, as shown on Slide 18.
Garden Park is well-positioned to remain competitive for the next 10 to 15 years. Slide 19 shows our 50-year-old Parker Street property in Dartmouth. This 239-unit mid-rise, mid-market asset is a case study in the value of investing CAD 21,000 in new kitchens, bathrooms, and flooring to earn average rental increases of 24%, or CAD 220 per month, to generate a return on investment of 13%. Our third property profile is on Slide 20, and highlights Spring Garden Terrace in Halifax. This 201-unit property has a prominent location on Spring Garden Road adjacent to Halifax Public Garden and is within walking distance to all urban amenities. Constructed 55 years ago, Spring Garden Terrace offers large rental suites and has excellent views of the city's South End skyline. Over the past five years, Killam has invested CAD 6.3 million to return this asset to its former prominence.
Upgrades include new balcony railings and glass panels, new windows and brickwork as required, an upgraded exterior entrance, including a new canopy, granite steps, and hand railings. With façade enhanced, more recently, we have been updating the corridor and common areas, along with the suites. An investment of CAD 18,000 per unit on kitchen, bathroom, yes, flooring, earned an increase in rental rates of CAD 230 per month, or 18%, for an overall 20% return on investment. Since each of these three properties has little to no vacancy, we reposition those units as they turn, and with experience, repositioned units are now offline an average of only 28 days. In conjunction with driving revenue growth, Killam manages expenses to further optimize Net Operating Income.
As shown on Slide 21, Killam is currently entering year three of its five-year, CAD 25 million energy efficiency plan focused on energy savings, such as the installation of ultra-low flow toilets, LED lighting retrofits, and heating system upgrades. These projects help mitigate the impact of expense increases. To date, we have invested approximately CAD 10 million in energy projects and have achieved a 20% return or a five-year payback. In 2019, we have 123 projects planned for a total investment of CAD 4.9 million, which should earn an estimated CAD 1.1 million of annualized savings for a 4.6-year payback. Slide 22 highlights Killam's focus on technology as we continue to leverage and develop our operating and financial platforms to help maximize growth and earnings. We employ leading-edge processes to better service and engage our residents, prospective tenants, employees, and suppliers.
Killam's investment in its property management platform, including the education of our skilled staff, enables Killam to integrate new and innovative technologies as our business continuously evolves. All Killam employees have smartphones or tablets that deliver faster response times to our tenants' inquiries, enhance staff efficiencies, and reduce paperwork, all saving time and money. We implemented mobile maintenance work orders, property inspection apps, and are currently fully integrating our front-end online leasing, marketing, and customer relationship software. On our Q3 conference call, we mentioned that we were in the pilot stage with our front-end CRM software and expect to be fully operational by the end of Q1 2019. We are well on our way with this target, and currently, we are at 47% of our portfolio online today. As slide 23 shows, this investment is benefiting all stakeholders.
The CRM tool will give Killam the ability to deliver the high-quality service our tenants and prospective tenants have come to expect and deserve as Killam maximizes rental opportunities and further reduces vacancy. We ensure our clients have the ability to book appointments and complete applications from the comfort of their home. With more of the data entry being driven by our tenant prospects, our leasing teams can focus on delivering exceptional customer service. As well, having real-time access to this data is key to ensuring Killam can rapidly analyze its markets and make informed and more accurate operating decisions. Already, as illustrated on slide 24, we're using analytics to make timely decisions regarding employee engagement, marketing sources, leasing conversion ratios, and traffic trends. 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 performed very well in 2018, delivering both excellent occupancy and NOI growth. Occupancy in the Maritime and Ontario markets remains strong, given increased immigration, economic growth, and home affordability constraints, especially in the GTA. We have included slides 36 to 38 in this presentation for additional information on our key markets. I'll now hand you back to Philip to provide an update on our recent acquisitions and new developments. Thank you.
Thank you, Robert. Slide 25 details our acquisition activity for the year. Nearly 70% of the capital deployed in 2018 was in Alberta and Ontario, as Killam continues to execute on its strategy of increasing the portion of NOI generated outside of the Atlantic Canada. Slide 26 charts the 2018 acquisitions by both segment and region. We acquired CAD 210 million, or approximately 750 units, in apartments across the country, with an average age of 18 months. Our CAD 80 million Westmount acquisition in Waterloo will be focused around the future multi-residential development opportunity of that property. CAD 4.7 million was spent on 2 MHC properties that we absorbed with our existing operating platform in Ontario and Nova Scotia. Lastly, Killam doubled its development pipeline in 2018 with CAD 27.7 million in land for future development in the Kitchener-Waterloo, Calgary, and Charlottetown markets.
As previously mentioned on the Q3 call, we purchased a new Edmonton asset, The Trio, in the last quarter of 2018, as shown on slide 27. This property consists of two four-story apartment buildings located in Northwest Calgary. The 158-unit property was acquired for a purchase price of CAD 39 million, representing an all-cash yield of 4.9%. The property is also located adjacent to Killam's recently announced 2% interest in the 13.6-acre Nolan Hill development. On the development front, we completed two developments in 2018. Saginaw Park, a 94-unit, seven-story building located in Cambridge, and The Alexander, a 240-unit building in downtown Halifax. Slide 28 illustrates the leasing activity for these two developments, and we are pleased to report both are 100% leased as of January 2019. Details of The Alexander and photos are included on slide 29.
Killam had a 50% interest in this project and increased its ownership to 100% in late December with the purchase of the remaining 50% interest for CAD 44.5 million. Progress is on track with our Frontier development in Ottawa, a project we are co-developing with RioCan, as detailed on slides 30 and 31. The first phase is a 23-story tower, 220-unit building with geothermal heating and separately metered water, increasing our operating margins and reducing our environmental footprint. The building is on schedule to be completed in Q2 of 2019. Pre-leasing started on December 28, 2018, with the tenant prospects that have filled out a pre-qualifying survey online. Formal marketing started last week, and the full campaign begins in early March with digital, social targeted ads, local billboards, transit, and Cineplex theater ads. We have 60 units pre-leased as of today.
We are in the design and approval stages for the second phase of this project, a 208-unit building, and expect a completion date for Q3 2021. We are excited to have broken ground on our new development in Charlottetown, PEI, in Q4. As shown on slide 32, 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 is CAD 20.8 million, with an anticipated all-cash yield of 5.6%. As shown on slide 33, 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 of 5.25%, approximately 175 basis point premium over the current market cap rate. Finally, we continue to advance our development pipeline. A full list of our development pipeline is included on Slide 34. 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 finish, 2018 has been a banner year for Killam on many fronts, with strong operating and financial performance. Our focused strategy is leading to increased earnings, a stronger balance sheet, more geographic diversification, and one of the highest quality apartment portfolios in Canada. In 2019, we will continue to grow the portfolio accretively, accelerate our suite renovation program, and execute on our energy efficiency plans and technology innovations. This concludes the formal part of the presentation. We will now open up the call for questions.
At this time, I would like to remind everyone, in order to ask a question, please press star then one on your telephone keypad. We'll pause for a brief moment to compile the Q&A roster. Your first question comes from Lorne Kalmar with TD Securities. Your line is open.
Thanks. Good morning.
Good morning.
Just quickly on the suite upgrade. Is Slide 16 the targeted properties for 2019, or are they in different markets?
Looking at it.
Oh, they're all different markets. Really, when we look at our targets, it's across the portfolio.
Okay.
Different provinces, different markets. Yeah. That's just an example.
That's just an example. A Nova Scotia example.
What are you guys targeting for this upcoming year?
There?
Yeah. Would a large be Halifax or Ontario, or?
It's really all over. If you look across our portfolio, we've got some happening across New Brunswick, St. John's as well.
Fredericton. Yeah.
London, Ontario. PEI. All over.
We would've worked on 37 properties last year, and so it'll be similar. It'll be a broad swipe of the portfolio.
Really, we're reaching out to our property managers to look to them for feedback within their properties where they think the opportunity lies, and that's been really successful so far.
What we've tended to do and what we'll continue to do is, as units turn, we do the big renovations. Nothing's offline, and it's across the portfolio.
Okay. Now turning to developments. I saw you guys push back a couple of the Alberta developments from last quarter. What was the rationale behind that, and will that impact sort of where you guys are looking for acquisitions going forward?
I think you're correct in assuming that we are. We're actually still going through all the sort of design and planning approval for Calgary. There is a sort of committed sort of pause on it relative to seeing where that market is going. Same with Edmonton. It doesn't preclude us really looking for good opportunities in the existing sort of acquisition sort of market. The development ones, we are sort of just slowing it down a bit and seeing where that part of the market is going. To answer the second part of that question is, we are still looking at existing properties, and depending on the opportunity, the pricing, and also gauging where we are with the current market conditions in Alberta.
Okay. Just quickly on the Frontier for phase II, who's the development manager on that project, or that phase of the project?
Well, I think it's both of us, but obviously RioCan was the lead on the first one.
Yeah.
We are both heavily involved in it, and it will be the same construction company overseeing it with the same architect.
Okay. Just finally, on the Halifax market, you guys had, I think, better metrics than you did in Ontario. Do you see yourself being able to push rent even further than the 3%+ you guys got this year?
It'll be similar, I think. I don't know if we can surpass this year's performance, it's a tight market here. There's lots going on, we like our chances. Yeah. We say that every year.
All right, guys. Thanks so much. I'll turn it back.
Your next question comes from Dean Wilkinson with CIBC. Your line is open.
Thanks. Morning, everybody.
Hi, Dean.
Morning Dean.
Phillip, question on the debt and as you look forward on that. Every time we turn around and we say interest rates are going up, they come back down again. You're looking at the 2019 maturities, you're probably flat to five-year. Is there a thought in, and I know that it elevates the risk, in maybe going shorter term on that and seeing what happens? Secondarily, when you look out to 2020, where there's probably a bigger gap, is there an ability to rate lock that right now? You're just at the whim of the market as it comes up.
Dale kind of handed out-
I'll just say that we're working closely to watch that trending and monitoring opportunities to potentially be able to lock that in, be it through hedging or rate locking with lenders. We have our eye on it. There are some we can lock in even a few weeks, a couple of months before, we're talking about that. We haven't executed on anything beyond kind of a shorter-term lock-in, we are exploring options.
I guess it's just a reality we're all facing, right? Rates are moving.
Right. Again, from any historical point of view, the spread between the five and the 10 is so small currently. Where rates were November, December, and where they are today, it still makes a lot of sense to look at that 10-year money versus even the five. It depends on the asset right now. It's something that we spend a lot of time on every asset you look at. Still, from the historical point of view, these are still very cheap rates.
Oh, for sure. I guess, maybe a secondary question to that is when you look at these assets that, the new ones you're building in Mississauga that would be valued probably at a three and a half cap, which is a number that five years ago we all would've probably thought is lunacy, but now that's the world. Would that be something that you would look at being a lot shorter term on a debt maturity just because, one, it's the spread and two, the ability to roll into higher rates, particularly given that, I guess that new build is not going to be rent controlled.
Yes. Again, you're going to try to build to a 5+ with still upside on the rents on a yearly basis for the next few years. If you can lock in, if you could somehow, depending on where it is, you got to float it through the construction phase, but depending on how fast you can get it over. That 10-year is still one of the sort of the strongest attractions in terms of locking in your debt.
Yeah. Okay. Fair enough. Just looking at the 2019 capital improvement budget. Let's call it CAD 57.5 as the midpoint of where you bracketed that. Would sort of CAD 14 of that similar to 2018 be sort of just the straight up maintenance CapEx at CAD 900 and change per unit or do you think that number changes?
No, I think that's a very good estimate on how it'll come out.
Okay. When we look at the remaining, call it CAD 43.5. I'm assuming that the return on that is probably going to be a little more back-end loaded. I guess the question I had is how much of that CAD 43.5 goes into the curb appeal and the building envelope upgrades, and do you get the same return on that, or should we be thinking of that CAD 43.5 maybe not coming in at a mid-teens kind of return, but maybe closer to sort of a 10%-12%?
Might go lower. Yeah. When you spread it out, I think some are going to be high, some are lower.
I think 10%-12% is a good estimate. We tend to want to always do a minimum of 10%, and we've been successful in that, but that's a good range.
Some are harder to measure when we're talking about recladding buildings, for example, where we're modernizing the look. To measure how much of our rental growth is linked to that versus suite reno and other things. It's hard to measure the return on some of those, especially when we're like about the curb appeal and actual return.
Yeah, no, that makes sense. Okay. I will hand it back. Thanks, everyone.
Thank you.
Your next question comes from Brad Sturgess with Industrial Alliance. Your line is open.
Hi there. Just in terms of the same property guidance of 3%-5%, the turnover rates did decline a little bit year-over-year. I guess within that guidance range, what are your expectations for turnover rates in 2019?
Potentially pretty similar. Even in terms of a change, I think any change is pretty small when we see about 33%-32%, if it gets down to 30%.
It's amazing how consistent it's been over the years, it's down a little bit, I don't see it changing materially. I think it's 30%-33%.
Okay. Specifically with St. John's, obviously the occupancy was a little bit, I guess, weaker year-over-year there, the market, at least according to CMHC, is starting to see some declines in the vacancy rates. Just if you can walk through maybe the dynamics you're seeing there in the market right now and maybe expectations for this year.
The news out of St. John's these days is there's a lot more offshore work on the go, and there's, I think it's the Orphan Basin, that's being a big push. Hebron's coming on, and they may have a record number of wells being drilled this summer. Things are looking better in the market for sure.
The other two factors are like, again, as we talked about, our change from a leasing perspective and how we're doing it. We're quite excited about the new leasing personnel or the new folks we have over in St. John's that will help drive up the occupancy. Plus, we have basically quite a capital focus on those assets this year as well.
Okay. An area of opportunity for sure. Lastly, just a target of CAD 100 million in acquisitions this year, taking a little bit more of a pause, I guess, on development opportunities in Alberta. Just walk through what you're seeing in terms of opportunities at the moment.
Good question. Going from west to east, there's still quite a bit of the new product that's available both in Calgary and Edmonton. It's just about trying to figure out where it really is relative to the purchase price. Then again, what is the actual asset in terms of its local sort of neighborhood, and what are the dynamics? There's product there if you're willing to buy it at this time. Ontario hasn't changed. It's very competitive. We got some opportunities that we're looking at, maybe some long shots, but most of our focus is on our own sort of development pipeline.
Again, if you can get it approved and get ready to build, it's pretty exciting from that point of view, from a growth point of view. It never really surprises me anymore, the opportunities that sort of are in all our local markets here with some pretty good sort of visibility on a couple of assets that make a lot of sense for us because of our location, our size, and proximity to where we own assets today. It's quite robust.
Okay. That's very clear. Thanks a lot. I'll turn it back.
Your next question comes from Mario Saric with Scotiabank. Your line is open.
Hi, thank you. I just wanted maybe to kind of build back into the same-store NOI targets, both for 2019 and then I guess the longer term that you disclosed. In terms of 2019, can you give us a sense in terms of how the revenue growth compares to the expected expense growth within that 3%-5%? Or maybe to ask differently, at the midpoint of, let's say 4%, are you expecting margin or further margin expansion in 2019?
I think that we do expect some improvement in margin in 2019. I think that top line could look pretty similar to, I think 2018 is a good kind of proxy for what we hope to be able to do. On the expense side, we have some opportunities for efficiencies. We also have some cost pressures and some of the initiatives we're taking on from a technology perspective and from a leasing perspective, those do add some cost. Factoring that in as well comes into play. I think somewhat similar to this year is, for what we're seeing today, a good starting point.
Okay. Then maybe on the longer-term side, what are some of the parameters that kind of go into that kind of 3% target? Is it kind of historical average? How did you get to the 3%?
Well, it's just I think for a long time we talked to and we recognized, based on the fundamentals. Now, should fundamentals shift wildly in the long term, that might change. Based on certainly, we will continue to drive revenue. When we look at expenses, there are inflationary pressures, and we would expect that to continue. Every year we're going to look for how to do things better. Property taxes, there's some in there that it's hard to know what's going to happen, right? We can do all the tax assessment reductions, go for them, but we don't always see them.
Insurance costs, there's things happen in the market that cause those to rise. We're going to be doing various initiatives to manage expenses, but recognizing that over time there are also pressures that are going to cause expenses to go up. I guess what we're trying to say is that we expect that all the initiatives we have underway to our growth expectations are higher than they were a few years ago.
Got it. Okay. I think, Robert, I think you mentioned that the rent growth on turn in Halifax was 7.4% for 2018. With that type of rent growth, what we're seeing in other parts of the market is there's an increasing concern about affordability, tenant affordability. Are you seeing any signs of kind of tenant affordability coming up within the portfolio today?
We're not feeling it. Our average rents, I can't remember exactly for Metro, but for Halifax. It's about around CAD 1,000, CAD 1,050. That's affordable. Across the portfolio, we would be very affordable. What's interesting, I think using Dartmouth as an example, we were able to move rents there CAD 220 a month on repositioned units and good uptake. There's an appetite in the market for units that are renovated. The way we have it in our buildings is we're doing it on turns. There's ones that are at lower rates of similar units, and there's ones that are higher rates. If you want a unit that's renovated, you can pay more for rent. I think we're addressing it across the board.
Okay. Just in terms of the CRM implementation, you highlighted that 47% of the portfolio is under the new system. I recognize that it's really early days, but has anything really kind of stuck out to you in terms of direct revenue drive coming from the 47% of the portfolio that you're seeing that you're not seeing in the other 53%?
Hey, Mario. It's Nancy. We are rolling live in the last five to six weeks, this is the very early stages. We're just going region by region. Ottawa is going live today. Things that we have seen, the data has really allowed us to see some opportunities to really see trends, really target sources and stuff like that, and try to make sure that we're maximizing our leasing hours and our opportunities like we hadn't seen before. It honestly, I would say, is very early to actually pinpoint and quantify trends that we've seen, but it's very exciting to see even early data of what we can do with it.
One thing I'd just like to add too, like Newfoundland, we were talking about Newfoundland, and that's one that's been live for a few weeks. To be able to see the detailed traffic in terms of number and calls and number of email showings and start to track that stuff where before it was delayed and more of a manual process for reporting that, now it's all being captured. Very quickly being able to see what campaigns, what marketing sources work, what's really driving that traffic. There's really good traffic too that allows that conversion leasing ratio and that close ratio to increase.
Got it. Okay. [inaudible].
Mario, that's a question that's right up Nancy's alley. She's a quants girl.
Thank you
She gets very excited about all those numbers coming in. I don't know how she can sleep at night these days. Mario, just as what Nancy said, one of the key points was the marketing source of where all the leads come from, and that is so important in terms of where you spend your marketing dollars. This is the sort of stuff that it's a lot of data to absorb, but it gives you such sort of clarity in terms of what you're doing, and it's pretty interesting. It's important.
The other interesting part of it is the hours. For our leasing staff, their hours are quite flexible, and they're younger, and I know they're enjoying it because I ask the question of them, but it enables us to address between 10 and seven, which is when the calls are coming in, whereas before, we kind of had a more centralized leasing activity that was kind of over at 5 o'clock. It didn't completely end.
Instead at night.
Yeah. Yeah. Yeah. 10:00- 7:00. Yeah, 10:00 in the morning to 7:00 at night. [ Telco], yeah. That's interesting, and I think it makes us better able to address those leasing inquiries.
Okay. Well, I'll make sure I'll ask the same question three months from now. Uh-huh.
Yep.
The last question maybe for Phil, just on the comment on the ease back on the construction in Alberta. Are you seeing any change in terms of attitude towards construction financing in the province?
We aren't. Again, for the projects that we're doing or planning to do out there, we wouldn't be at the stage to actually go and sort of say our typical sort of construction financing. I would like to believe that we would be a good risk relative to Schedule I banks to sort of give us construction for our developments.
Okay. Thank you.
Your next question comes from Michael Markidis with Desjardins. Your line is open.
Hi there. Good morning. Just following up on the comments you made on Alberta, Phil, and just putting a pause button on the developments that you have planned there. Would that have also changed at all, either your appetite or your pricing expectations on what you'd be willing to pay for a new build or a new acquisition of a new build, relative to, say, where you would've been three, six, nine months ago?
It's a good question. I don't know that I've really thought of it like that because, again, the purchases from last year were sort of at the time in the market, looking, competing against other buyers and being very happy to sort of buy the assets we did, especially the buy in Edmonton, where in the last two or three months, we've seen some pretty good leasing activity in the right direction in terms of finally leasing that up 100%. The slowdown really comes with what we thought and where the market was going in 2018 from a positive sort of trend that everything was getting better.
All of a sudden, again, kind of hitting a pause and a stop, where oil went down through November and December. Sort of the word still is that there could be a little bit more pain from a job creation/job sort of destruction in the next few months. That really has given us the pause to sit there and say, "You know what? We can wait. We can afford to wait," as opposed to really going 100%.
Okay. I guess extrapolating from that commentary on the development side, would that mean that your pricing on what you'd be willing to buy today would be a little bit higher in terms of the cap rate you'd be, or the lower price per door in terms of what you'd be looking to acquire?
Again, I don't think from a pure acquisition point of view, we're still trying to get the best price out of some of the sort of potential sellers, and it's just negotiation, and it depends on when we go in there and look at these assets and kind of see what they really are. I find it kind of hard to even answer that question exactly what you're asking, other than nothing's really changed on the acquisition front. It's a different sort of beast in itself in terms of the activity and the interest in Alberta. It's still quite strong.
Okay. I just noticed you guys have a couple small Ottawa property sales that you're going to close, it looks like in April. Did you guys have offhand the two properties or the number of units and the disposition metrics attached to those two sales?
Sorry, what was the last part of that question?
Disposition metrics, just in terms of price per door and disposition yield.
Price per door, I think it's CAD 14.8, and there's 135 units combined between the two of them. The sort of sale cap is about 4.6%.
Okay. Just last question from me before I turn it back. I know The Alexander was 100% leased by the end of the year. Just from a modeling perspective, do you guys have a sense of what the average in-place occupancy would've been for the quarter?
For Q4?
Q4, yeah.
End of the quarter?
No, well, just during the quarter. Just trying to model in the incremental contribution as we go forward.
It's probably.
You know what? People were moving in every single week.
At Alexander, 60% maybe for the quarter, like a little bit time.
Well, it ended 100% occupied.
We can get back to you on that.
Oh, okay. It's an occupied-
If you want the information on the call, we can check that out really quick.
Okay.
Yeah.
Sounds great. Thanks. That's it for me.
Thank you.
Your next question comes from Matt Kornack with National Bank Financial. Your line is open.
Hi, guys. Just to follow up on the Alexander while you're checking that information. Also, in terms of the capitalized interest, can you give us a sense as to when that would've come off? And also, were there any incentives offered in terms of lease-up that would've been expensed during the beginning? Just again, margins-wise, I know these projects can be negative NOI contributors in the beginning, and then obviously as they lease up, they contribute. That'd be helpful information as well.
And then question-wise, with regards to, just going back to the 7% turnover spread for Halifax, and maybe you can broaden this out to the rest of the portfolio as well. Driving that, I assume a portion of it is the suite renovation program. Could you give a sense as to what you're getting in terms of rent increases on turnover if you're just painting an apartment and sprucing it up, versus we know what the numbers are on the renovation program.
Well, let's get your Alexander questions first.
Okay.
You first had asked when did we stop capitalizing, so it would've been the end of September. For Q4, there's no capitalized-
Okay.
Interest associated with that. That would've been fully expensed. In terms of the average occupancy-
Which was Mike's question.
For Q4.
Was 78%.
78%. As economic. In terms of incentives, we did not offer incentives on the lease-up of The Alexander. We're just fully booking revenue less vacancy essentially.
Okay.
Its what hits the top line. Was there anything else on The Alexander?
I think that was it, yeah.
Yeah.
A question?
Oh, the rents. What are we getting?
Yeah. Without having the 170 units that we would've done renovations on.
It's really asset by asset.
That's such a small. You know what? For this rock, I'll pick it's all of six.
Yeah.
Those ones, while they were high, there just weren't that many of them when you think about it.
Point. Yeah
30% of 16 probably would be the new leasing aspect of it. That's 4,500 units for a round number. 100 and Yeah.
6%. Anyway.
I would say 6.5%.
I guess the question is renewal spreads, and I guess we're just talking about Halifax, and I only have the aggregate number, but those have moved up significantly as well. I mean, you're approaching 2% on renewals. Is there a view that you can push that renewal spread higher as well if you're getting that type of increase?
Yes. We think there is an opportunity to be able to move those renewal rates in the market we're operating in with occupancy as high as it is. Yes. We should be able to do that.
There's no CapEx or limited CapEx associated with that, so that's a pretty good
Rarely is it that there's no CapEx.
Fair.
There's limited CapEx. Sometimes it's paint, just to tidy up.
With regards to the funding of The Alexander, I guess one more question there. Is there a permanent mortgage in place on that property yet or not? I think if not, will it take out some of the construction financing that's still outstanding?
Sorry. Matt, the construction will get flipped to a takeout, and it's with CMHC as we speak.
Okay. Perfect. That's great. Thanks, [Ed].
Great. Thank you.
Again, it is star, then one on your telephone keypad to ask a question. Your next question comes from Yash Sangha with Laurentian Bank. Your line is open.
Good morning.
Good morning.
Have you disclosed your development budget for 2019 anywhere?
No, we haven't, because we're still working on that in terms of what we're actually going to end up doing.
Would you be able to give us a rough range?
Well, I guess when you look at cash flow, so are you looking to try to track cash flow specifically?
Well, just I'm trying to understand how much you're going to spend during the year on.
Yeah. I guess I asked for cash flow because, for Frontier for example, where we've got construction financing in place. We will have spend, but we've got construction financing to fund that.
That's the existing one.
The existing. No, that's what I meant. Yeah.
The potential list of them really is the existing one that we're doing, finishing up the Frontier over in P.E.I., where we put in our equity, and that's going in the ground now. There's probably, again, I don't have it in front of me, CAD 2 million or CAD 3 million more of cash before we'd start drawing on a construction facility. Then potentially, phase II, which will be, well, the equity is partly funded by the land that we own there in Ottawa with RioCan. There will be a bit of cash coming out of that for a few months. Then as we get Mississauga running, again, we own the land, so that's a good chunk of the equity.
Would it be roughly CAD 50 million?
How much?
CAD 50 million.
CAD 50 million?
Five Zero.
No.
That'd be too much?
Too high.
Okay.
I think it would be roughly no more than 15-20.
Of cash.
Of cash.
In terms of cash.
All right. Your commercial NOI, was there anything seasonal in Q4, or do you think that is a good run rate?
I think it is a good run rate because with Westmount, for example, now we have our new tenant at Westmount. Just to highlight on that, I don't know if you saw in the MD&A, we disclosed that we are doing some work on the grey market. We will see a temporary decrease in commercial revenue and NOI next year as we fit up part of that asset for some new tenants. We disclosed that we expect NOI, FFO relating after interest relating to that asset, to go down by about CAD 500,000 in 2019, and that's in anticipation of Rob maybe can provide some comments on that, but some good growth from some new tenant leasing and activity in that product. That's the one thing when you model out commercial, just be aware of that grey market, but there is some disclosure in the MD&A around that.
We have a tenant there that's vacating. It's 50,000 ft for a round number, they're paying CAD 9.32 a ft net, we're looking at new deals that are round number CAD 14. We have currently spoken for, of the 50,000 ft, we have 15,000 ft with another 12,000 ft looking very probable. We're making good headway on the leasing, we have lots of inquiries. We should be in good shape. We won't have it fully let by the end of 2019, but before the end of the year, I think we'll have 60%- 70% of it leased. Good activity.
Okay. Thank you. Just one last question. In your IFRS valuation, you disclose your apartments and MHC cap rates. What cap rate do you use for your commercial? I know it's a small percentage, but just want to.
Commercial, we tend to look more of a discounted cash flow metric. From a cap rate perspective, it's a half.
Again, one of them would've been just that year with an appraisal. That's well over three quarters of it.
You're right. Westmount's like our biggest piece.
Yeah.
Yeah.
All right. That's it for me. Thank you.
Thank you.
There are no further questions at this time. I will now turn the call back over to the presenters.
Thank you very much for listening and participating today, and we look forward to giving you an update in May for the first quarter results. Thank you.
This concludes today's conference call. You may now disconnect.