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Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Boardwalk Real Estate Investment Trust First Quarter Results Conference Call. [Operator Instructions]I would now like to turn the call over to Mr. James Ha. Please go ahead.
Thank you, Amy, and welcome to the Boardwalk REIT 2018 First Quarter Results Conference Call. With me here today is Sam Kolias, Chief Executive Officer; Rob Geremia, President; William Wong, Chief Financial Officer; and Lisa Russell, Senior Vice President of Acquisition and Development.Note that this call is being broadly disseminated by way of webcast. If you haven't done so already, please visit boardwalkreit.com, where you will find a link to today's presentation as well as PDF files of the trust's financial statements, MD&A as well as supplemental information package.Starting on Slide 2, I'd like to remind our listeners that certain statements in this call and presentation may be considered forward-looking statements. Although the trust believes that the expectations set forth in such statements are based on reasonable assumptions, Boardwalk's future operation and its actual performance may differ materially from those in any forward-looking statements. Additional information that could cause actual results to differ materially from these statements are detailed in Boardwalk's publicly filed documents.Moving on to Slide 3, our topics of discussion for this morning will include a macroeconomic update, quarterly highlights and investment update, financial highlights, operational review including our renovation program and lastly, our financial guidance update.I'd like to now turn the call over to Sam Kolias.
Thanks, James, and thank you, everyone, for joining us this morning. Beginning on Slide 4, some financial highlights for the first quarter 2018 include: total rental revenue of $107.1 million and same-store rental revenue of $104 million, an increase of 1.5% and 1.7%, respectively, from the same period last year. Total NOI at $52.4 million, down 0.5% from the same period last year. Funds from operation of $24.3 million, a decrease of 5.3% from Q1 2017. FFO per unit of $0.48 on a diluted basis, down 5.9% from last year, and adjusted funds from operation per unit, which includes an estimated $695 per apartment unit of maintenance capital of $0.36 for the first quarter of 2018, down 14.3%.Moving on to Slide 5. Rental market fundamentals newly and have illustrated on a progressive line representing a myriad of stages in the rental cycle. Note there is continual movement towards a balanced market. Boardwalk strives to create value through all stages of the rental cycle. Approximately 6% -- [ 60% ] of Boardwalk portfolio is in Alberta, which is showing strong signs of recovery moving towards a balanced rental market as occupancies continue to increase. Economic reports continue to project an improving economy in Alberta, more specifically forecast for the province to remain positive for GDP growth, employment growth and in-migration growth. Continued delays in pipeline construction have tampered the economic recovery. The Keystone XL pipeline, along with the Trans Mountain pipeline, have received federal approval and construction is estimated to begin this fall on Keystone XL in -- and in 2019 for Trans Mountain. The completion of these 2 pipelines will significantly improve both national and provincial economy.Grande Prairie is fully occupied with a strong demand for rentals being seen in this region. Fort McMurray is also showing signs of recovery in rental market with occupancy rising. We've called these smaller rental markets our canaries in the coal mine for our Calgary and Edmonton rental markets in the past. These smaller markets have historically been accurate leading indicators for our primary Calgary and Edmonton rental markets. As we will see in the upcoming slides, Grande Prairie has posted a 31.9% net operating income gain. Both Calgary and Edmonton are now in positive revenue growth trend. Our Saskatchewan region remains in the soft rental market with a slower recovery taking place in the province, along with elevated levels of new supply. Ontario's growth continues to improve. The market continues to be in a strong rental market cycle with new construction increasing.Slide 6 illustrates the diversifying Alberta economy and strengthening of the labor market as the overall downward trend, should the unemployment rate continue. As the leading indicator to employment trends, Alberta jobs vacancies have increased since last year with the majority of employment in the goods-producing sector as the economy diversifies while still noting the increased amount of positive labor changes in the oil and gas sector as the economy improve. Slide 7 includes both interprovincial and international migration positive for Alberta. Seasonally, Q4 has the lowest migration. However, the trend continues to be positive. In-migration is another indicator of future rental demand as a significant number of new migrants become renters.Slide 8 illustrates information received from the Alberta Treasury Board and Finance that Alberta has finally emerged from one of the worst recessions, and in 2019, the economy will shift from recovery to expansion.Slide 9 summarizes an improving Alberta economy with positive macroeconomic fundamentals of continued positive gain in total employment, dropping unemployment rate, job vacancies availability increasing, continued positive migration, GDP growth expected to enter a period of expansion in 2019 and beyond with world oil prices forecasted to be about $70 a barrel for 2019 and beyond.Slide 10 shows a significant reduction in vacancy loss, which in April reached 3.3% and near the low end of our target of 3% to 5%. This reflects the outcome of our occupancy focus positioning ourselves well to reduce incentive and continue to recapture revenue. We have targeted a further reduced vacancy range for the second half of the year of between 2% to 4%.Slide 11 illustrates a rising trend in revenue with occupancy climb. As we have anticipated, average incentives per unit remained flat. However, total incentives increased as more units were rented. As our occupancy reaches a balanced market level of 3%, we have begun to reduce incentives for both new and renewing residents. Last year's vacancy incentives totaled over $70 million or approximately $1.40 per Trust Unit.Slide 12 illustrates the results of this occupancy focus. The reduction of vacancy loss has resulted in higher revenue. This trend has been positive for the last couple of quarters and we are positioned to continue to recapture and grow revenue by reducing incentives and capitalizing on our frontloaded investments in suite and buildings upgrade.Slide 13 illustrates this positive growth trend with our sequential revenue Q1 versus Q4 showing a positive 1.8% for the quarter. Almost all regions have posted positive sequential revenue growth. With portfolio occupancy approaching 97% even during a seasonally slower time of year, incentives can now be reduced, improving our revenue gains even further going into the busier summer and fall rental season.Slide 14 provides a summary of Boardwalk's strategy to maximize NOI and net asset value. In the near term, we remain focused on the recapture of NOI within our existing core portfolio. We have seen success in the recapture of revenue as we continued to increase occupancy. Over the next couple of years, this remains our largest opportunity as we are now well positioned to reduce incentives.In addition, the frontloaded investments we have made in our product quality and service will further enhance our result. With the foundation we now have, we remain committed to growth in major centers, which will provide both NAV creation and a diversification amongst our portfolio.I'd like to now turn the call over to Lisa Russell to discuss our development and acquisition opportunity. Lisa?
Thank you, Sam. Slide 15 is a summary of our current projects. We continue construction on the third phase of our Pines Edge community, a 4-story elevated wood frame building in Regina. In addition, construction of Brio, a 12-story concrete high-rise building in Calgary is well underway.Slide 16 provides an update on our Pines Edge community. We remain on schedule with our lease up of Phase II with current occupancy of approximately 90% and anticipate an estimated yield of 6.25 to 6.75. We began construction of Phase III in June of 2017. Total cost of space -- of this space is estimated to be approximately $13.2 million or $186,000 per door, an increase from the prior phase mainly due to escalating construction costs and an increased provincial sales tax. Slide 17 provides an update on Brio, a premium 162-unit mixed-use development site in partnership with RioCan. The site is exceptionally well-located in Northwest Calgary along the other 2 lines. Construction commenced in January 2018. Excavation, shoring, initial foundation and crane installation is complete. Work on the foundation and sub grade structure has commenced. We estimate occupancy to be in early 2020. Slide 18 provides an estimate from market cap rates in Boardwalk's existing markets. Cap rates for well-located better quality buildings continue to remain low as demand for multifamily real estate remains high. Our Western Canadian development opportunities on excess land remained high with over 4,400 apartment units in our current development pipeline equating to approximately 4.4 million buildable square feet, as shown on Slide 19. These sites are in various stages of planning and approval and represent an opportunity for the Trust to high-grade and enhance our portfolio's asset value. In addition to these, we are currently identifying potential excess density opportunities within our Eastern Canada portfolio and will provide a summary of these in the near future.An example of this is shown on Slide 20. This is a rendering of Duo, which we built on excess land at Sarcee Trail Place in Calgary. We submitted a development permit for 2 15-story towers totaling 229 units with a connected 2-level underground parkade. We anticipate that receipt of the development permit by the end of 2018. We will determine the economic viability of the development once our DP is approved.We continue to be active in our core markets of Calgary and Edmonton, and in addition, continue to develop relationships with various potential partners to acquire and/or develop communities in major growth markets. We will provide updates as opportunities progress.I would now like to turn the call over to William Wong. William?
Thank you, Lisa. Slide 21 shows Boardwalk's investment property fair value at the end of the current quarter was $5.78 billion compared to $5.69 billion at the end of 2017, an increase of $90 million primarily on our stabilized property assets. Unstabilized property fair value remained relatively flat quarter-over-quarter at approximately $198 million of investment property fair value. Weighted average cap rate at March 31, 2018, was 5.29%, unchanged from December 31, 2017.Next Slide, Slide 22, represents Boardwalk's implied net asset value calculation and includes the IFRS fair value revenue and expenses used in the calculation. Net asset value under IFRS is calculated to be $61.25 per diluted trust unit, inclusive of $1.76 in cash. This equates to approximately $174,000 per door compared to $153,000 per door based on a Trust unit trading price of $46, a discount to implied NAV of 25%. Current Trust units are trading at a significant discount to NAV and offers exceptional value when considered against net asset value, recent transactions in the marketplace, replacement costs, other consumer housing options like condominium ownership and current valuations on private market transactions.Slide 23 shows a per unit reconciliation of FFO for the current quarter from the FFO per unit amount reported for the same period in 2017. A reconciliation of FFO to profit, as shown on Boardwalk's condensed consolidated financial statement, can be found in the appendix of today's presentation.The decline in NOI from our stabilized properties as in the sale of the 641-unit Boardwalk Estates portfolio in May 2017 was offset by a $0.02 gain on our unstabilized properties for the concurrent period. We are seeing a positive trend in our rental performance on a sequential basis in both occupancy levels and occupied rental rates, demonstrating a turning point in the Alberta and Saskatchewan market rental cycle and a demand for renovated suites as they are completed. Higher rental revenue was offset by higher on-site wages and salaries, advertising and R&M. Administration was higher due to higher wages and salaries, reflecting our continued emphasis on customer service. Severance costs negatively impacted FFO per unit by $0.01.Slide 24 shows a breakdown of capital Boardwalk reinvest back into its property for the 2 months ended March 31, 2018. Capital invested in Boardwalk's investment properties, excluding development and PP&E, was $852 per apartment Suite in the current quarter.Over the past 10 years, Boardwalk has invested over $1 billion in capital improvements on its property portfolio. The slide to the right also shows Boardwalk's capital investments for the first 3 months of 2018. Building exterior and Suite renovations and upgrades, including Boardwalk's internal capital program, comprised 77% of capital investments or approximately $25 million, a reflection of Boardwalk's continued repositioning and rebranding strategic initiative.Boardwalk's first focus is on decreasing vacancy and the availability of apartment units. Once full occupancy is achieved, the Trust will be well positioned to reduce incentive. Maintenance CapEx reserve for the first quarter of 2018 was $174 per suite. Utilizing a 3-year rolling average, 2018 maintenance CapEx is calculated to be $695 per suite per year compared to $655 for 2017.I would now like to turn the presentation over to Rob Geremia. Rob?
Thanks, William. Moving on to Slide 25. In 2017, Boardwalk introduced 3 new corporate brands, each targeting a separate market from affordable to luxury. Each of these brands have separate renovation guidelines based on the needs of the target segment and anticipated level of returns.In 2017, the Trust renovated over 3,000 apartment suites. For 2018, we have reduced our renovation target to between 1,000 to 2,000 while continuing to minimize the related transitional vacancy.Slide 26 highlights the different levels of Suite renovations associated with these brands. In addition to the suite renovations, we've expanded this program to include common areas and lobbies. As is shown on Slide 27, renovations in these areas, for the most part, are being performed by in-house teams with costs coming in significantly lower than that -- than had the work been performed by exterior contractors. Lobbies and common areas are upgraded in the quarters with our brand renovation guidelines.Moving on to Slide 28. From the first quarter, the Trust renovated approximately 450 suites, representing approximately 20% of the suites that trend over during this period. The majority of these renovations were categorized as partial renovations with full renovations being implemented when required and if targeted returns could be achieved. A highest level of renovation turnkey have been targeted to only our lifestyle conversion properties, returns noted on value-added capital in our community and living brands have averaged a range between 21% and 27%. As is noted, the lower than average returns reported on the lifestyle properties reflects the fact that we're required to invest upfront in these projects before adjusting market rent expectations. Once completed and we go through the restabilization of these properties, we are anticipating returns consistent with the other brands.Slide 29 highlights our most recent addition to our luxury brand. On May 5, 2018, Boardwalk held the grand opening of Broadway Center, located just off Downtown Calgary and 17th Avenue Southwest in the Entertainment District.Slide 30 reports on Boardwalk's stabilized portfolio for the first quarter of 2018. Overall revenue continues to be improved, particularly in Alberta. On an overall basis, revenue was up 1.7%. We continue to work on reducing our controllable operating costs and anticipate further improvement throughout the year. Overall operating costs increased by 4.2%, resulting in an NOI decrease of 0.5%.Slide 31 reports the Trust mark-to-market on occupied rents. Overall, there's a $35 positive spread between market in place rents and on an annualized basis it's estimated to be above $13 million. Boardwalk's liquidity continues to be strong. At March 31, 2018, Trust had access to an estimated $313 million of available capital, as is shown on Slide 32. This represents approximately 12% of outstanding debt.Slide 33 reports the Trust's total debt maturity schedule. Trust's overall weighted average in-place interest rate is 2.6%. Currently, the Trust's obtaining NHA insured mortgages at 3% and 3.3% on 5- and 10-year terms, respectively. Our overall maturity curve continues to be well-balanced as we focus on extending mortgage terms while staggering future maturities. Boardwalk's remaining mortgage amortizations under these insured loans is in excess of 30 years.Slide 34 provides the reader with our estimate of current mortgage underwriting valuations. Boardwalk's balance sheet continues to be conservatively levered at 53% underwritten value after deducting our current cash portion. Of special note, Trust has approximately 1,300 apartment units that have no mortgage encumbrances, which carry an estimated debt capacity of $127 million, an amount that is in addition to the Trust $313 million of liquidity position.Slide 35 highlights our 2018 financing program. During 2018, we have $202 million of maturing mortgages. To date, we have renewed $87 million of these, while up financing an additional $23 million. The reported -- the new reported interest rate of 2.88% is slightly better than the maturing 2.91%. The weighted average renewal term is 5 years. In addition, we have added $54 million from previously unencumbered properties, bringing our total raise to date to almost $78 million.Moving on to Slide 36, Boardwalk's 2018 financial forecast. As we have in the past, it is a policy of the Trust to review and update its financial guidance on a quarterly basis and when necessary, make any warranted divisions.For 2018, we are reconfirming our previously announced financial guidance of an FFO range of between $2.15 to $2.35 and an AFFO range of between $1.70 to $1.90. We are anticipating stabilized building NOI to improve between 2% and 7% as compared to the prior year on its annualized basis. Boardwalk's property capital budget for 2018 is targeted at $136 million. In addition, we are planning to invest $30 million in committed development projects.Slide 37 reports our distributions for the month of May to July 2018. The monthly distribution is set at $0.834 per month consistent with our annual target of $1 per Trust units.This concludes the formal part of our presentation, and we'd like to open it up for questions now. Amy?
[Operator Instructions] Your first question today comes from the line of Dean Wilkinson of CIBC World Markets.
Just a couple of clarification questions from me. On the occupancy and where that's moved from, that 97%, that is specific to the stabilized, sort of excluding those 5 sort of assets that you haven't owned for the 2-year period?
That's correct. Focusing and although a lot of our unstabilized are ahead of schedule. But in general, yes, it's more of a stabilized building focus than an unstabilized.
Okay. And then the -- so those 5 buildings, the 826 units currently at 90%. When would they, because I think you bought those back in 2016 on average. Will they fold into the sort of stabilized math sometime this year?
Yes. I believe it'll be third or fourth quarter -- or second half of the third...
Yes, Q3.
Q3.
Yes, this in August -- somewhere in August. But yes, by end of Q3, this should all be in stabilized numbers.
Okay, so then we'll just have a clean look at the entire thing.
And the good news is those buildings actually are filling up faster than we anticipated at this point in time as well, too. So once they become stabilized, I think we're going to see the occupancy levels that are consistent with our stabilized properties.
Okay. That was my next question then, and so the whole portfolio at that point should be running kind of in your targeted sort of 3% vacancy range then?
That's our strategy, yes, yes.
Okay, perfect. And then just when looking at this -- the sequential revenue, the $1.8 million, it looks like a bigger portion of that came from the ancillary revenues that looked like they were up sort of sequentially about 10%. Was that move specific to something in particular? Or would that $1.7 million-ish of ancillary revenues be kind the run rate given where the occupancy levels are right now?
I think you [indiscernible] portfolio is more consistent. Yes, we're looking at a higher run rate, including revenue. We are pulling in more auxiliary revenue, albeit as compared to rental revenue is even close. But there is more coming in and now we're actually looking at renegotiating some other areas, leases on, particularly, like telephone towers and that as well to see if we can actually get more additional revenue out of that, but it's mostly coming out of that, yes.
Higher occupancy, there's higher use of laundry machines. So that's consistent with the coin revenue.
Right, right. That totally makes sense. And then just a last one from me is just sort of with the increased costs in the quarter, obviously, the snow removal goes away, at least we hope it does, as we go through Q2 and Q3. Let's not count on that. The other expenses that came just sort of from R&M and marketing and that, would you expect that they kind of continue to run perhaps at a little bit of an elevated level? Or do you think that those come down as well?
No, I think we're going to see a downward trend. Our strategy for the entire year was to focus on reducing operating costs, but you can't just do it overnight. So we are focusing on having our team do even more, and be stronger at that and then thus, reducing overall cost as well.
Dean, with higher occupancy, we need much less advertising. We need much less workload. And the workflow has reduced significantly with significant reduction of empty suites and significant reduction on turnover at the moment. And there's a significant deduction of renovation as well. So our workflow, it is dropping significantly. Our contractors have seen a significant drop and we have reduced our headcount by about 5% already.
All right. So that would imply, I guess, in Q2, we probably start to see the same property NOI metrics picking up then?
That's the anticipated. Again, our annual target of 2% to 7%, so you'll have to see a pickup for sure in Q2, Q3 and Q4 to be able to achieve those.
To get that market.
To get to that comparison, we looked at our numbers from Q1 results versus our internal expectations, they are within guidelines. So therefore, there's no need for us to change anything else.
You next question comes from the line of Jonathan Kelcher of TD Securities.
Just sort of closing out on Dean's questions there on the operating margins. When do you think you'll begin to see a year-over-year improvement in operating margins? Is that something we can look for in Q2?
We're hoping Q2, Q3 for sure, but we're hoping Q2 will start to see that. In general, revenues were higher than we anticipated. Expenses were a little bit higher than we anticipated too but overall, our operating margins were in line with what we had forecasted for the quarter. But we are seeing again, the -- the real positive side is the overall revenue is higher than we anticipated. So we're able to get into their faster. As I mentioned, occupancy is coming up faster than we thought, so we're seeing increased demand for the product, which is a very positive sign.
Okay. Do you think you -- sorry?
Sorry, Jonathan, the revenue increase is really important because it's compounding and exponential for us. Every month, it's increasing significantly. And then when you annualize every month and every quarter, that makes a significant difference, so it takes a while for that to work itself in just like it took a while for incentives and rents to reduce. So the opposite is happening in a positive way now with rents, revenues rising with occupancy rising. And then revenues rising even further with reduction in G&A expenses. So it's going to be quite significant going forward as the compound gets annualized.
Okay. And then just finishing off on margins. Do you think you ever -- well, you can get back to on an annual basis, the levels you were at...
No doubt, no doubt.
In 2013/2014?
No doubt.
Yes, we can. It'll be -- it won't be simply by getting revenues back to that level, the revenues will have to be higher because obviously our operating cost per basis, even on a noncontrollable, were higher than they were in 2013 anyways. So we do it -- with this kind of strength moving forward, we think revenues will be higher than they were back in those days within a foreseeable couple of years.
Historically, Jonathan, we have seen these margins in the east up about 50%. And so the margins have flip-flopped because our economies are really opposite. Now with energy costs rising, interest rates are rising, we're not rent controlled. And we are a very unique hedge against rising energy and interest rates. And so the opposite it's taking place as we speak and our margins will recover as historically, they have always recovered. When we get to these low levels, it takes time for occupancy to go back up. And then our revenues to recover. And then after the market is rebalanced, we then realize consumer price index increases. And that's what helped us get back to the typical margins of 60%, 65%.
Let me just add one more point, Jonathan. What we're finding is on our renovation program, those which are renovated are actually operating at higher operating margins than the standard. So as we slowly go through the portfolio and continue to renovate it assuming, again, the demand -- and the pricing is there and the returns are available, that also will assist in increasing operating margins.
Okay. And then just secondly, on the incentives. I guess, they're starting to come down on a per-unit basis. Is that fair to say from what I got from your comments?
Yes, I think on an overall basis, we are starting to see them turn and go and work their way down on a per-unit basis on overall. Yes.
So just looking at ads and this is really the marketplace. We're moving from 2 to 3 months incentives to 1 to 2 months incentives. Every 1 month divided by 12 months is 8%. So we're essentially seeing market-wide and ourselves about an 8% gain on the reduction of incentive month-to-month as we renew.
And then I referred at the key point because most customers who renew their leases first and foremost, look at our website and find out what we're offering to new customers. So you don't have much pricing power on renewals when they see that you can get, to say, a better price as a new customer coming in. But again, as those are -- we're seeing more and more, we have more pricing power with occupied units as well, too.
In the fall, Jonathan, we expect with the much busier seasonal demand of the fall and where we're at, we're at balance to market right now. The market has shifted to a balanced market with the 3% vacancy. So in the fall, we expect that to get below 3%. And incentives to get to 0 months to 1 month. So that will be a further 8% gain as well.
Okay. So do you think the $11.4 million of incentives you had in Q1 is kind of -- it's a top number that starts to come down in Q2?
It is. It is dropping, as we speak, market wide. And the Kijiji ads to reflect and also in our renewals too. Yes, it is dropping.
Again I'll take time to burn off. But I think that the good part is, honestly, as I said, it's a little higher than we thought in Q1, but vacancy loss is a lot lower than we thought as well too. So now that we're at that level we show you, we do have some ability to do that now again or the customer friendly forecast, we're still going to be able to unwind these over a reasonable period of time, but still get good returns.
Your next question comes from the line of Howard Leung of Veritas Investment Research.
Just wanted to ask with the renovations. I think it was mentioned that this 450 suites renovated this quarter. Does that mean that you're anticipating that you'd be renovating closer to the higher end of the 1,000 to 2,000 suites guided? Or is it more like it's more renovations in Q1 and less in the rest?
It will vary. I can't really give you a number right now, because until we know which suites are turning over in which month, you really can't dictate what that percentage is going to be. Historically, in Q1, it's a reasonable number. Now we'll have a higher Q2 number if I think for sure because we have a higher turnover rate in Q2 with this slower in Q3 and Q4. But 1,000 to 2,000 still continues to be our target. But I don't want to simply analyze the first quarter and say, okay, we're there yet. But we're striving to keep within that target. Now the really good news is we're getting the best returns on the lower level of renovations or a partial, which make up for 80% of our renovation program. The suite gets ready faster than anything else. The market likes it and looks really, really good and when you combine that with our program of upgrading lobbies and hallways, we're seeing actually almost the strongest returns in that renovation category.
Which is good because it also costs you less per suite. It seems like it's compared to last year's renovation, it seems like the cost per suite is down significantly.
It's come down dramatically. I think we call it around here in 2017, as we did a lot of R&D on our renovation program to see what was the ultimate balance moving forward.
We're resourcing our parts. We're getting much prices from our suppliers. We're going offshore, it's important to pick the right partners offshore, it's just about getting more competition and more choices and optionality when it comes to our hard tender labor. And we are seeing significant savings as a result of our teams efforts and we give our team all the credit for significantly reducing our costs and finding new suppliers and reducing costs from existing suppliers that are becoming a lot more competitive because we have more choices.
We're doing it quicker. We're actually completing that.
Great. And so just kind of the other side of the coin there. You know the debt-to-EBITDA, you guys have been drawing down, taking on more debt to fund renovations. Is there a number that EBITDA-wise that you'd be starting to be uncomfortable with? You know the renovation returns are good. It looks like your mortgage renewal rates as well. They're kind of -- the amount of interest savings you get are bottoming out. So just wanted to know your thoughts on is there a limit or is there not really a limit?
Well, Howard, the good news is that, that EBITDA will be dropping as our NOI recovers with the recovering revenue and reduction of vacancy incentives. So we would like to see it below 10 again like it was. And we have no reason to believe that it won't get below 10 over the next year to 2 years.
Typically as in 1:1 incentives, I guess, there's a lot of money sitting there in incentives. There's a very positive. It's dollar-for-dollar EBITDA, all that incentive money.
Right, right. Yes, so that unwinds the -- it's going to flow straight to EBITDA?
Correct, correct.
Right.
And just really the incentive, like how many of your leases now I guess especially in Western Canada are month-to-month and how has that amount changed since last year?
It's actually come down because those on month-to-month pay full market rents, those are -- that were getting -- in order to get incentives in our portfolio you had to get to a locked in lease. So we've seen that number come down. But it's been offset by the fact that we're unwinding incentives as well too on the existing customers. So -- and actually, I think what happens in down market when they can get a lot of lease and pricing. As the market gets better and tighter, we'll see more people go back to market -- month-to-month, which is pure market.
Right. And I guess during the, like in '13, '14 what was the proportion of month-to-month percentage of total, I guess, in Western Canada?
Well, it was quite high because really they only give rental increases twice a year anyways, so it didn't matter if you were locked into a lease or month-to-month. So it was actually quite high. The difference, again, the only difference between month-to-month and locked in lease is commitment. And when there really is no incentive on the market 12-months versus the pure market, most -- a lot of customers then decide to say well, I'd rather have the flexibility of, if I want to move, I can move quicker than I have to battle my lease.
Okay. And just one last one. The management circular to discuss the compensation and I think the focus is now shifting on to same-store NOI [put] to FFO per unit. If that -- I think it's good to focus on operations. But as it also concerns that given that interest rate cycles are higher, it's tightening now and the debt flowing, should there be also focus on kind of interest expense and debt control?
Well, it's a combination of more than one category. It's FFO. It's NOI. It's NOI margin as well to that we're looking at, so we've built a more comprehensive program that just doesn't focus on one number anymore but also focuses on some stuff like Net Promoter Score, which is customer service measures. So it's much more of a well-rounded comp plan than it was in the past.
Your next question comes from the line of Matt Kornack of National Bank Financial.
Wondering if you can speak to the occupancy gains you've had and whether you're beating the market at this point. And if so, where are you winning those tenants from and do you think the competition will start to adjust accordingly?
So Matt, we have -- have been behind the low-price provider, where some landlords have chosen to reduce discounts or rents, and they are showing very high occupancy in the last 2 or 3 quarters actually. So landlords that have significantly reduced their rents have filled up quicker than we have. And that we have focused in on a qualitative approach where we have, as we have said and completed last year, a significant renovation program. We focused in on increasing quality of our product. Our service and our experience. And so our rents are higher than our competition and our occupancy now is reaching the low-price competitors. Now that's a low-price competitors are at full occupancy or near full occupancy, our occupancy has recovered. And then the remaining vacant units are really the ones that are inferior and of less quality. There is less demand for the cheaper, less quality apartment unit. So there is a limit and propensity to how low your rents can go if your product is not at a certain quality. And so the vacancy now is really showing up as the nonrenovated and poor kept communities. And that's typically what happens in a recovering market. And in the fully recovered market, even the poor product quality will be filled as well. They're really the last apartments that will be filled. And that's it -- on product, yes.
Sorry, go ahead.
And that's why we've invested so much to make sure we're not in that category.
Okay. And have you seen with some of the sort of condo type product that slipped into rental? Have you seen those guys start to push rents and completely get rid of incentives or are they still maintaining aggressively leasing?
No, we're seeing much less of them. And most of them are full. And we're not seeing these debt spread new condominium investor owners that have 1 or 2 units vacant that are having a hard time renting them, so they deeply discount them. We're not seeing those on Kijiji, they call it the Dutch auctioneers as Bob Dylan, our competitor would call them, and we're seeing them absorbed and not in the market anymore. So that -- it's a very positive. And of course, the discounted new condominiums are going to be rented first than they are in the fast or near full occupancy. So we hardly see them anymore on Kijiji. The other thing that we're seeing on Kijiji is a significant drop. Every month there is a significant drop of available rental among Kijiji and that's a really positive sign that's reflecting the overall markets will be towards balance as well.
And in the GPA in Vancouver, for sure it seems like there's been cost escalation on construction. In your projects, in Calgary and Saskatchewan, have you seen cost escalations on input costs? Are they fairly stable?
Matt, I'm so happy about that because we're seeing cost escalation everywhere. Doesn't matter where you're, if you're in Calgary or in Vancouver, Toronto across the same to build and so the price per door of our apartments is so low still compared to replacement cost. And so we provide exceptional value to buy apartments at deeply, deeply discounted prices to replacement cost. And that's a really, really good question, super important because our valuation is still very deeply discounted compared to what we're seeing. And our RioCan joint venture our costs have risen about 5%, maybe 10% from where we've started. And so yes, absolutely, everybody seeing significant cost escalation to replace and rebuild apartment. The really only -- and the best value left is our apartment and the deeply discounted cost of all housing really in our region, which is really attracting new migrants that are looking for affordable housing and places to live with a good lifestyle and quality of life at a very reasonable, affordable price. So that's a big, big factor into why our population is increasing and we're attracting folks that have left back to our provinces because of the affordability factor.
And kudos to our development team business as they've been -- they're still on budget given these upscale costing. So they did a good job and are doing a very good job towards estimated cost and we're running our models, too.
Interesting. Maybe not a concern for Alberta at this point and you guys are non-rent controlled. But with regards to your Eastern Canada portfolio, the government seems very focused on affordable housing. They seem to be willing now to throw some money in land that the issue. Do you think that's going to be enough to sort of provide some supply in Eastern and Central Canada?
It's a start, Matt. And providing affordable housing is essential. We just came back from New York and talked to a lot of folks in New York, especially the hood folks and the folks that are in the subsidized housing. And there is inclusionary zoning. It's up to 30% now in New York State, and it seems to be creating a peaceful, redevelopment and gentrifying atmosphere. So we understand inclusionary zoning is being included now in Toronto in the tighter housing markets, and we can't see that staying at that low amount. We can only see it rise as the essential need to provide everybody with housing there to maintain a great positive community for everybody. So we're extremely affordable at high end. We've got about 20% of our average income is huge for rental. And so we flip-flopped that from the most expensive housing in the country into the least expensive housing in the country. And again, there's a big regional shift in the U.S. from the more expensive states in New York and California into the less expensive states of Texas, for example. And that's what we're seeing here in Alberta as well in Saskatchewan with folks leaving and coming back from the more expensive regions back into more affordable regions like ours.
Good. Quick question on the debt maturity profile and just looking, I guess, it's on Slide 34, where you provide the amount of up financing that you get. And it's a bit of a higher LTV that you're looking for in 2019 and it's a fairly sizable amount of maturities. Is your view that you'd get that full amount in CMHC I assume their underwriting has remained fairly conservative? And then on the flip side, as you look at interest rates, you've gone a bit shorter on the curve? And should we expect to continue to see that or will you go longer given that there's a bit of, I mean, there's not much spread now between the 5- and 10-year on the government of Canada side?
To answer your first part of your question is, yes, I mean CMHC is still quite conservative in their underwriting. We're seeing some movement on cap rates with them, downward, but in general, I consider them to be still quite conservative. On the maturity curve moving out, we're always looking to balance that out and there'll be some opportunity but look each individual properties looked at isolation, we priced it out with different terms to see which part of the market is the hot part or sweet part of the market, given the fact that all NHA insured, renewal risk is basically 0. So we were just playing in the interest rate risk. And even if we do shorter, I will just also recall, our average lease term is 12 months, so that even a 5-year, short year term results in a 5 churn of our lease. So if there is inflation in the market resulting in higher interest rates, rents will go up, too, and we have 5 churns to catch that up.
Your next question comes from the line of Mario Saric of Scotia Capital.
I wanted to maybe dive into a bit more detail on the operating margin because I think that's one thing that really -- there is a bit of variability or divergence in where that margin may be able to go over time. So I just want to confirm that your -- I think you mentioned this in your last call. But in your guidance, I think, Rob, you mentioned that the low end reflects a 52% margin, high end, well at 53%, is that...
Yes, annualized, yes. Q1 and Q4 are always heavy quarters, I think, on the expense and utilities during the winter, but always higher. So Q1, actually Q1 tends to be our tightest margin, our lowest margin because of that factor, then you layer on 2018, we did have a longer-than-anticipated winter, which we did see consumption of -- although we get budget for the new carbon tax, we used more volume than we, therefore, we're paying more carbon tax than we thought to.
Okay. And then in your commentary, you kind of indicated that revenue was a bit higher than you thought, which presumably is being driven by the occupancy and then expenses are a bit higher than you thought, too. Does the higher expense solely attributable to the higher occupancy? Or did you see a bit more cost pressure in other areas where you didn't anticipate?
Higher expense, Mario, is mostly attributed to the lower occupancy last year and the difficulty in timing. We just finished Christmas season in the last quarter. So the first quarter is just after Christmas and it takes time for us to make adjustments to our expenses. And so it's just a timing issue. And now that our occupancy is much, much higher, our expenses will reflect a much less need to advertise, much less need to renovate and turnover. It's just a lot less work when we're fully occupied and there is when we've got 6%, 7% vacancy.
And Q1 2017 did not represent our peak costing, either. We were still actually ramping up in some categories. So we saw Q2 and Q3 costs actually even higher. So -- and we're -- now we're on the other end of the curve moving downward. Now, again, it's going to take some time, we want to do this in the balanced nature as well. But I can't under emphasized that what Sam was mentioning once you have higher occupancy, have a lot more too, so [Auburn] is a good example, when you high vacancy or higher vacancy, you need to blitz your advertising to get as many people in the door as you can possibly can. So now that we're seeing there, we'll start to slowly phase that downward, not all, but face it downward to allow us to make up some costs there. It's almost like we -- it looks like we're over the hump heading downward and starting to pick up some speed.
Right. So I guess, when you think longer term, I think you mentioned the expectations get back to '13, '14 margin. Just speaking in generality, if the expectation over kind of this business cycle is for, just argument sake, let's say, it's a 100 basis points of margin expansion, during previous corrections or recovery, you typically see a 25 basis points of that 100 in the first year and then kind of 25 in year 2? How does the trajectory of the margin recovery typically take place?
It's quite significant actually. And this is something that we have to be very aware of because, again, in the past, it's been significant. It's very important though for us to be measured in our adjustments because we recognize that there is a premarket in Alberta because we self-regulate and are responsible as a group of multifamily provider. So even though the market will allow us to make more significant adjustments than we have always, always remember, our most important stakeholder is our resident member. And our reputation is the most important thing we have, and so we really have to always be aware of that and focusing on our residents and what's best for our residents will be what's best for us in the long run. And again, that long run comes up over and over and over. That's what so difficult to focus in on being public. And we recognize short-term performance is really critical and essential, and will continue to focus in and maximize our short-term performance. We have to do it, though, in a measured way and be responsible to our community of tens of thousands of resident members in a broader community as well to show that we are responsible in providing multifamily communities for Canadians.
And this recovery is going to be, obviously, the longer than the last couple that we saw. So we're not -- the previous recovery, we were able to increase margins dramatically as market rents still went up quickly. So there's going to be a slower, gradual process but the biggest margin promoter is going to be unwinding incentives. So and as we do that, we're going to see margins expand nicely. If I go back and look at my operating costs versus, say, 2017 versus 2013, really, it was the uncontrollable costs that we've seen major increases in utility, major increases in property taxes. So my original comment about we're going to need to see more than just revenue not only to come where it was, whereas '13 has to exceed that and that's why we're so motivated about the renovation program because we are getting better margins on those properties.
Right. Okay. Yes, that makes sense. So maybe speaking on the incentives, if I look at Slide 31 of the presentation, I just wanted to say thank you for the revised disclosure this quarter. I think it really provides a better sense in terms of where the incentives lie on a per-market basis. If we get a bit more granular, the difference effectively is the $118 per month in incentives. And my -- it seems like that was maybe flat quarter-over-quarter. So there wasn't a substantial decline in the incentives this quarter. In your guidance, how should we think about, Sam, I think you qualitatively kind of highlighted 2-months to 3-months going to 1-months to 2-months to 0-months to 1-month. So is there sort of one over the term of the year. But how should we think about that $118 in your guidance at the low end and the high end of the range this year? Where does that number going to?
That's a good question, I don't really have the answer on top of my head right now. But I could give you -- it's a combined combination of vacancy loss and incentives target not just that. Let me go back and take a look at that more granular and get back to you on that one, Mario.
Mario, the one thing that we've always focused in on is the bottom line and NOI, and that's really what's critical. Because there are so many line items included in the expense line items and more importantly, the revenue line items. And so we take a broad view and we ask our team to deliver on our bottom line in our guidance for NOI between 2% and 7%, and that's really what we're focusing in on and we're asking our whole team to deliver that in all of the above categories, both in the revenue and expense category. And so it's really impossible for us to provide detailed guidance for any one of those line items, above the NOI. But we can sure provide it very accurately and historically other than the last year, that was very odd last year. And we've seen a Black Swan last year of economic in the years before of economic correction. So barring of Black Swan, we've been historically extremely accurate on our NOI guidance. And we believe this year, we will deliver a very accurate NOI in between that guidance range because we've got a lot of levers and line items to be able to do that with. We've got lots of optionality and we're very confident that we'll be able to deliver that.
Okay. My last question just on the G&A, it picked up a little bit quarter-over-quarter, even excluding the $0.4 million of, let's say, nonrecurring costs. So it's kind of running at 8.5% of revenue. That's up very modestly quarter-over-quarter even with the higher revenue in Q1 versus Q4. How should we think about that kind of G&A as a percentage of revenue?
Well, once you strip out the severance costs, which is also included in your G&A, it should be around that same similar run rate. Hopefully, a little bit lower as we move forward, but probably in that area somewhere.
So roughly about $9 million a quarter would be a reasonable number?
Well, yes, yes.
And your last question in queue for now is Mr. Neil Downey of RBC Capital Markets.
Maybe just following up a little bit on one of Mario's questions. The vacancy loss in Q1, I know you depict that number graphically. But do you actually disclose what the, I'll call, the gross dollar value is for the quarter? And secondly, what assumed, I'll call it, stabilized occupancy do you use in deriving that calculation?
So I think it's in the supplemental. Yes, there is the detailed number in the supplemental, you can find Neil on that one. And what assumption we're using for -- looking for the vacancy loss assumption for 2018, is that what you're trying to...
Yes.
Rather than give you a number, we're targeting by the -- as we mentioned, a continuous decrease. And as Sam mentioned, in his comments, we're actually targeting lower than we originally forecasted for. So I think 2.5% is going to be our vacancy target for the latter half of this year. And then if you factor in the 3.3%, say for the first half, you're closer to about 2.0% to 3% for the year.
Neil, the difficulty is with a lot of moving parts and that's really why we, again, continued to stress the importance of focusing on NOI, but we're happy to talk about the individual moving parts like the vacancy and disclose that in our supplemental and talk about how they work in tandem and now they're all interrelated and how the optionality works for our team and we to deliver on a better NOI.
And I cannot underemphasize the impact of the margins on renovations we've seen. What ends up happening as you bump market rents, but you're -- honestly you have to give an incentive. The incentive actually is little higher on dollar value than the other one would be, however, your net is up. So it isn't -- like I don't really like to just separate these lines and say, let's just forecast line-by-line and get a guide to each of those. Sam's exactly right, there's a lot of moving parts and one can outplay the other as we saw in Q1. Our vacancy loss pickup outplayed incentive increases, and that's where our -- really the gain came from, but then, again, it was a positive gain.
Yes. And I know I understood. I wasn't trying to go down that road, I was, I guess, really just trying to understand what stabilized vacancy you assume when you derive that vacancy loss calculation. So do you assume 2% vacancy or 2.5% or...
Well, the vacancy loss is actually actual, it's not -- it's based on the actual suite that's vacant at market rent. So it's a physical vacancy that we actually give you is the real we tie -- we'll tie into your vacancy loss, net of incentives.
Okay. So maybe stated alternately to capture that vacancy loss, do you have to have every suite occupied?
Yes.
Right. So -- and I guess, really that's where I was going, is it a theoretical calculation.
Oh, yes, we call it 2.5% to 3% is our long-term target. We've been as high -- as low as 1% vacancy in our history. However, given our current strategy of continuous renovations, I don't think we can get down to there for quite a while. I'd probably say 2%, 2.5% much more of a stabilized full occupancy number.
Right, okay. Perfect. That exactly where I was trying to go. And as it relates to the branding initiative and the brand diversification. In your MD&A, you do talk about what your suite mix will look like by Boardwalk lifestyle communities and the living brand once fully completed, I believe, is the way you described that. So how do we think about the portfolio by brand diversification today? Or is that something you just -- you don't really think about because it's going to take you some time to get there?
We're actually thinking a lot more about that and focusing and increasing our resources on asset management. And so we're thinking a lot about that. And each and every community we're diving into on a both macro and micro-basis and seeing what the short- and long-term potential of each and every community will be. And so we are just starting really to do that, finishing our initial templates of our asset management plans in our initial communities, and we'll be doing it for all 200 and some communities that we have to ensure we're maximizing both short- and long-term value creation for all our stakeholders.
And you do have one further question from the line of Mike Markidis of Desjardin Capital Markets.
Just on your great, great traction on the occupancy side and you did bring down your targets 2% to 4%. But I just -- given where you are today at 3.3% and your target to get down to sort of 2.5%, let's call it, on a stabilized basis once you get rid of the sort of the remaining vacancy of the portfolio. I'm just curious with respect to the 2% to 4% target then for 2H '18, so what would cause you to back up and get back up to 4% in the second half of this year given the trends you're seeing in the market?
Well, what we have to have is we have to see a change in demand that we're not seeing today. There have to be -- so we're ahead of schedule. We have a lower turnover than we did last year. We have increased rentals from where we were last year. So it has to be able to change in demand, which we're not seeing any sign of yet today.
So it's really just an element of conservatism as opposed to what you're seeing in terms of potential backup at this time?
Well, remember, we're going through right now our high turnover season. So we have -- give us until the end of the quarter and then we'll know for sure once we've gone through the high turnover season and then we go into our heavy rental season being September. So if we come out of our high turnover season, within that target range or below it, we are very well set up to finish the year even lower than that.
Okay. And then just on the personnel charge that hit the G&A, was that solely within G&A? Or was there any element of that, that was in the op cost as well?
No, we separated into corporate G&A because it's really a restructuring charge versus an operational side charge.
Okay. But presumably, some of those restructuring initiatives would also reduce the op cost?
Oh, they would. They're all from op costs, but the charge to payout on top of the salary requirements was in corporate.
Okay. And then it just sounds like you guys have a little bit more that might come through at the system this year.
Yes, yes.
Would that be contemplated in your guidance range? Or is it not material enough?
So yes, so within the range. If you're probably still looking at $0.01 to $0.02 or more. Again, the whole strategy here is to do this gradually and not try to create a big reserve and go through it. We want to do it properly, gradually and as the company get stronger, become more lean.
Okay, that's fair. And just lastly. I know it's been early days. But Sam, you said you've been spending a lot of time, at least the last time we chatted, going into other markets and sort of sowing the seeds for your future growth. And I know NOI maximization is priority #1. But just wondering can you give us a sense of how that initiative is going in terms of reentering and looking at forming those strategic partnerships for developments in other markets right now?
I'm glad you brought that up in that the most important thing, even more important than properties and people. And so our partnerships are really critical. And we're very happy with our partnership with RioCan. And we are expanding that. And we're doing everything to be the best partner anybody can have. And going forward, the book, how Google works, is very inspirational because that book emphasizes how important people are. Our industry as a whole, and the real estate industry, has been focusing on properties, probably lot more than people and the average wage and salary in our industry overall is much lower than that of the tech industry, which is really the people industry. So we recognize the importance of people. That is truly the most important asset. And our partners going forward will be ones that will provide us with lifetime experience in different markets that we don't have. They'll provide us lifetime relationships that they have for constructing and developing. They'll provide us with lifetime experience with managing in different regions that we've never managed in. And again, a people-focused approach. We believe when we're surrounded with the best people peak performers, we will be able to provide the best performance and value creation going forward. And that's really what we're focusing. I know it's a real playbook taking some to tech guys that are really all about people.
Okay. And do you expect to have anything...
Yes.
Like new this -- the rest of this year?
Yes, absolutely. We are really, really excited about our relationships and all the new friends we have. We have a lot of new friends. And to give Lisa, our Senior VP, all the credit because she is impossible to say no to. So thank you to Lisa, who's with us. And our entire team, really, our acquisition team is just going all out, our design team, our entire team, really, is raising the bar and rising to the occasion and I'm so proud of everybody.
And there are no further questions in queue at this time. I turn the call back to Mr. Ha for any closing remarks.
Thanks, Amy. As a reminder, we will be hosting our Annual Investor Day during the second week of July here in Calgary. Invitations will be sent next week. Please visit our website or our contact information if you have any further questions. Thank you again for joining us this morning. This now concludes our conference.
This concludes today's conference call. You may now disconnect.