Boardwalk Real Estate Investment Trust

TSX:BEI.UN

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen and welcome to Boardwalk Real Estate Investment Trust First Quarter Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, May 16, 2019. I would now like to turn the conference over to James Ha. Please go ahead, sir.

[James Ha, Vice President of Finance & Investor Relations]

Thank you, Leone, and welcome to our First Quarter Results Conference Call. With me here today is Sam Kolias, Chief Executive Officer; Rob Geremia, President; William Wong, Chief Financial Officer; Lisa Russell, Senior Vice President of Acquisition and Development; and Lisa Smandych, our Chief Accounting Officer. 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 financial statements, MD&A as well as supplemental information package. Starting on Slide 2, we'd like to remind our listeners that certain statements on this call and presentation may be considered forward-looking statements. Although the expectations set forth in such statements are based on reasonable assumptions, Boardwalk's future 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. At conclusion of today's presentation, we will be opening up the phone lines for questions. I'd like to now turn the call over to Sam Kolias.

[Sam Kolias, Chairman & CEO]

Thank you, James, and thank you, everyone for joining us this morning. Starting on Slide 3. We are pleased to report on a solid start to 2019, delivering 16.7% FFO per unit trust growth, our fourth consecutive quarter of FFO growth, with continued positive momentum as market fundamentals -- as our core Alberta markets continue to improve. For the first quarter of 2019, same property revenue and NOI grew by 3.6% and 5.3%, respectively. Including the continued progress and stabilization of our new asset acquisitions and development, total revenue growth was 4.5%, while Total NOI growth was 7.1% on apples-to-apples basis. As our team continues to focus in on peak performance, we believe Boardwalk offers exceptional value with currently trades at a significant discount to our IFRS NAV and recent sales transactions. At $39, for Trust unit, at the price yesterday, the implied value of Boardwalk's high-quality overall portfolio equates to approximately $144,000 per apartment door. Boardwalk has recently sold a noncore asset in Saskatoon for $148,000 per apartment door, allowing us to access equity at over $60 IFRS unit price. Recent transactions in Calgary and Edmonton average over $200,000 a door. Further replacement costs are significantly higher than these apartment trading prices. Our exceptional value provides for a unique opportunity for our partners and stakeholders as we continue to focus in on delivering solid growth. On Slide 4, we illustrate current rental market fundamentals for each of the markets where we operate. Boardwalk strives to create value through all stages of the rental market cycle. Approximately 60% of Boardwalk's portfolio is in Alberta, where the rental market fundamentals continue to improve and balance. Major refining, upgrading and oil transportation investments were made in the last quarter. In addition, Albertans recently welcomed a new conservative government and are confident that our newly elected officials will position Alberta very competitively going forward. The Alberta economy continues to diversify along with increased international migration continuing to increase the population and demand of housing. Grande Prairie is already seeing benefits from an improved economy and continues to move into a strong rental market, almost fully occupied with a strong demand for rentals. Fort McMurray remains in a soft rental market with the Western Canadian Select differential recovery. Red Deer has seen significant improvement in recent months, contributing over 38% NOI growth this quarter. Calgary rental fundamentals are ahead of Edmonton, which is rebalancing and moving toward improving rental market fundamentals as we head into the stronger spring summer seasons. Our focus on a peak performance culture, along with significant capital investment made earlier in Calgary, has produced an NOI gain of 8.4% and reflects a successful strategy of our product diversification, which is delivering significant gains in NOI. We are applying these lessons into our Edmonton market with much lower cost for better gains in NOI this year. In the first 3 months of this year, NOI grew by 4% in Edmonton. Our Saskatchewan region continues to remain in a softer rental market, with green shoots of higher occupancy. We are focusing in on improving operating efficiencies, which should provide a positive NOI growth in the foreseeable future. Ontario continues to deliver solid results as we increase investment and adjust our pricing to market levels in order to better position and compete with new supply. Québec rental market fundamentals have improved and our sequential revenue for the last quarter has increased by 1.2% and is positioned for better results as we have reduced expenses, increased occupancy and rental revenue. Slide 5 highlights a number of positive economic supportive trends of rental demand in Alberta. Some highlights include, continued positive net migration, labor growth, economic diversification with increased AI investment in Alberta, CMHC rental market fundamentals improving and increasing affordability for the renter demographic. The Alberta economy continues to evolve, and we are finding new ways to deliver performance in this different economy. Slide 6 displays positive traction on revenue increases in Alberta as well as throughout our portfolio towards the later part of the first quarter. Of note, net effect of increases on rental, on renewal rates are in the mid- to high single digits. Our focus on the best product quality service and experience has allowed us to proactively negotiate retention and renewal increases each month. Our net effect of increases on new rentals has trended upward since the beginning of the year and has well positioned both Boardwalk and the broader market for the seasonally stronger spring and summer rental season. Moving on to Slide 7, our focus on occupancy in the winter months have led to 110 basis point improvement since the beginning of the year, up to nearly 97%. Our occupied rents continue to rise at $1,139, well below average household incomes and represent exceptional affordability, a key indicator which most accurately correlates to future rental growth opportunity and underpins our ability to reduce incentives, which have per unit continued to decrease and are beginning to see the cumulative impact on total incentives. Slide 8 provides a summary of our strategy. Over the next several years and priority number 1 remains the recapture of our revenue from this cyclical trough and to deliver on organic growth. This represents a significant opportunity as our incentive reductions and increases in revenues gather momentum. Our brand diversification has provided outsized returns and performance in our Calgary market where we began this program over 2 years ago. We are applying our lessons in increasing our focus in our Edmonton market, which is much bigger in scale. Our lessons learned in Calgary will allow us to stretch our capital dollars much further in Edmonton, realizing much better results. Fine-tuning our strategy, creating a scarcity of renovated units in all our markets will allow us to further enhance our returns from our brand diversification investments. Increased geographic diversification over the next decade will reduce volatility further while remaining optimistic toward high grading our Western Canadian portfolio. A strong balance sheet and a maximum reinvestment of cash flow supports an external growth strategy, maximizing our net asset value. I'd like now to now turn the call over to Lisa Russell. Lisa?

[Elizabeth A. Russell]

Thank you, Sam. Starting on Slide 9, we are pleased to announce the transactions that high-grades Boardwalk's portfolio. The Trust acquired Insignia Tower, a newly constructed 124 unit concrete high-rise building in Edmonton for $35.8 million, equating to $289,000 per door before transaction costs. Insignia Tower is well located in Southwest Edmonton in the established and desirable community of Windermere, with properties in close proximity to stores, restaurants, parks, schools, golf courses and an extensive network of walking paths. All 124 units in Insignia Tower are large two-bedrooms, 2 bathroom suites that are 910 square feet on average. These units feature luxury specifications such as floor-to-ceiling windows, premium flooring, stainless steel appliances and quartz countertops. The acquisition and leasing of the building began in April of 2019, we are exceeding leasing projections with 22% of the building leased at rental rates above internal expectations. The Trust estimates the stabilized capitalization rate of the asset to range from 4.5% to 5%. Of the subsequent to the first quarter of 2019, the Trust agreed to the sale of St. James Place, a 140 unit, wood-frame low-rise asset located in Saskatoon for total proceeds of $20.7 million or $148,000 per door, a premium to the Trust IFRS value. This sales transaction is expected to close on May 28, 2019. The sale of noncore assets at a premium to the Trust IFRS value and recycling towards higher quality assets with superior returns provides an excellent source of equity capital for the Trust to high-grade its portfolio. Slide 10 provides an update on our 2 joint venture developments. Brio is a premium 12 story, concrete 162 unit mixed-use project that is being developed in partnership with RioCan. The structure is complete, the exterior window wall system is close to completion and the interior partition framing, mechanical, electrical and dry wall installations are all well underway and at various levels of completion. There were some revisions made to the interior suite design of specifications, which has extended the construction schedule. Occupancy is now estimated to occur in Q2 2020, which is an optimal leasing period based on historic -- historical seasonality. 45 Railroad Street is a mixed-use development consisting of a 25 and 27 story concrete tower, connected by a 3-story podium with approximately 11,000 square feet of retail space. It is located near Downtown Brampton and directly across from the GO Transit station. This development is in partnership with Redwood Properties, who will act as a development partner and Boardwalk will act on behalf of the partnership as the operating partner once construction is complete. Shoring and excavation work began in mid-January. Shoring is now nearly -- is now nearing completion and bulk excavation is progressing well. Estimated construction completion of Tower 1 and Tower 2 to be 2022 and 2023 respectively, with stabilization of the entire development occurring in 2024. We also continue to move through the early stages of rezoning, development concepts and massing on select development opportunities on excess land across our portfolio primarily focusing on the supply constrained markets of Ontario and Québec. We remain opportunistic in seeking opportunities that diversify and/or high-grades our existing portfolio. I would now like to turn the call over to William Wong.

[William Wong, Chief Financial Officer]

Thank you, Lisa. Slide 11 is a summary of our revenue, NOI, FFO and AFFO achieved for the first quarter of 2019. Current quarter overall and same-store rental revenue was $111.9 million and $110.3 million, respectively, an increase of 4.5% and 3.6% from the same period last year. Total and same-store NOI increased 13.6% and 5.3%, respectively, compared to the same period in the prior year, to $59.9 million and $58.9 million. For the first quarter of 2019, FFO and AFFO were $28.2 million and $22.3 million respectively, compared to $24.3 million and $18.5 million in Q1 of 2018, an increase of 16.2% and 20.1%. FFO and AFFO per unit for the current quarter was $0.56 and $0.44, respectively, an increase of 16.7% and 22.2% compared to the same period last year. The next slide, Slide 12, provides a snapshot of Boardwalk's liquidity. Boardwalk had over $263 million in liquidity at the end of the current quarter plus $31 million coming from a 2017 VTB due later this year. Liquidity as a percentage of total debt was approximately 9% and debt net of cash was 48% of reported asset value. Interest coverage continues to improve to 2.69x at the end of the current quarter. A summary of Boardwalk's mortgages is provided on Slide 13. Of the approximately 532 mortgages -- 532 million of mortgages maturing in 2019, Boardwalk has renewed or forward locked $385 million or over 72% of 2019 maturing mortgages at a weighted average interest rate of 3.19% for terms averaging close to 8 years. The $312 million mortgage maturing in November represents 1 mortgage on Boardwalk's Nun’s Island property, which was forward-locked at a rate of 3.27% for a term of 8 years. To date, Boardwalk has also added close to $66 million of new financing at a weighted average interest rate of 2.85% for 6 years. I would now like to turn the presentation over to Rob Geremia. Rob?

[Roberto A. Geremia, President]

Thanks, William. Boardwalk continues to look for ways to achieve superior returns while investing back into our existing communities. The Trust property investment program has been expanded outside of the specific suite renovation plan and now includes lobbies, hallways and amenity areas and appropriate external upgrades. Although we've continued to achieve above-average returns on our Suite renovations, we have found that we are able to add to these returns with additional investments outside of the suites. These investments completed on a cost-effective basis due to the combined use of internal and external contractors are delivering double-digit investment returns. Slide 14 and 15 highlight 2 recent projects our in-house capital teams have undertook. Both communities are located in Calgary and focused on creating experienced centers designed to provide warm and inviting experience to existing and potential resident members. In the case of Pine Ridge, we expanded the project to include lobbies, hallways and the laundry room. Upon completing of these projects, in both cases, we were able to adjust market rents on all suites by $10, which will result in a significant double-digit return on an annualized basis. Slide 16 shows Boardwalk's quarterly sequential revenue growth. Once again, current quarter results continue an overall trend posting growth of 1% as compared to the previous quarter. Slide 17 reports on Boardwalk's stabilized portfolio for the first quarter of 2019. For the first quarter, revenue continued to improve, particularly in Alberta, which posted a revenue growth of 4.1%, overall revenue grew by 3.6%. The Trust stabilized net operating income grew by 5.3%, with the strongest growth again reported in Alberta, which posted a 7% growth. It should be noted that these amounts have been adjusted to reflect the new asset management model of -- asset management operating model the Trust introduced in the latter part of 2018. Slide 18 shows the review of the Trust 2019 financial guidance. 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 where necessary make any warranted revisions. Based on our review of the key input variables and taking into account the first quarter results, which were in line with our internal range expectations, we are reconfirming our reported 2019 guidance of an FFO range per Trust unit of between $2.35 to $2.50 and an AFFO range of $1.88 to $2.03. To accomplish this, we expect stabilized NOI growth to be between 4% to 9%. The Trust will continue with its property improvement program investing between $95 million and $122 million on existing projects depending on anticipated returns. In addition, we -- our new development investment will be consistent with the amount shown. Slide 19 reports the Trust distribution. Boardwalk's minimum distribution policy allows the Trust to reinvest free cash flow back into value-added opportunities. For the months of May through July 2019, our monthly distribution is set at $0.0.0834 per month consistent with our annual target of $1 per Trust unit. This concludes the formal part of our call and just prior to opening the call up for questions, just let me remind everyone to keep questions to a maximum of 2 please, just to ensure that we can get as many questions as possible on the line. We would like to open the phone lines up now for questions. Leone?

[Operator]

[Operator Instructions]Your first question is from Jonathan Kelcher from TD Securities.

[Jonathan Kelcher, Analyst]

First question, just on the disposition in Saskatoon. What was the cap rate on that?

[Elizabeth A. Russell]

So, Jonathan, the stabilized cap rate is around a 5% at -- based on sale price.

[Jonathan Kelcher, Analyst]

Okay. And, was the property stabilized?

[Elizabeth A. Russell]

We were still working on -- there were some incentives and some vacancies, so it's going to -- it's going through stabilization right now.

[Jonathan Kelcher, Analyst]

Okay, so fair to say that the cap rate on in-place NOI would be sub-5% on that?

[Elizabeth A. Russell]

Correct.

[Jonathan Kelcher, Analyst]

Okay. Was this a one-off deal or are there other assets that you -- non-core assets that you might be looking to sell this year? Like did they approach you? Or how did the deal work?

[Elizabeth A. Russell]

Yes, it's another group, another partnership that we over the years have met. And in line with our strategy, we're always looking to sell noncore assets and recycle the cash flow into geographically diversification or high-grading our portfolio. So it's very opportunity driven on the sale. So we'll see what happens in the next remaining portion of the year.

[Operator]

Your next question is from Brendon Abrams from Canaccord Genuity.

[Brendon Abrams, Analyst of Real Estate]

Now that we're I guess effectively halfway through Q2, can you just provide some color perhaps on leasing, specifically in Edmonton and Calgary where incentive usages on new leases and kind of what reduction you're seeing on existing leases?

[Sam Kolias, Chairman & CEO]

It's Sam. I'd like to ask everybody to go back to Slide 6 and we're on track for reducing 1 month of incentives out of the 2 and 3 and on track for reducing our incentives over the next 2 to 3 years. We want to be disciplined in doing this. We want to continue to offer exceptional value and stay resident focused. At the same time, balance with performance that we've delivered this quarter as well. So we're really happy to be able to, going forward provide both. Great value for our renters, our more significant stakeholder and great result for our unitholder and investor stakeholders as well. So this unwinding of the incentives will create exceptional growth over the next several years.

[Brendon Abrams, Analyst of Real Estate]

Okay. So you would say so far in Q2, it's been -- leasing trends have been consistent with Q1?

[Sam Kolias, Chairman & CEO]

For Slide 6, it's actually better. It's improved in the new rentals now that our occupancy is higher, we're going into the spring and summer peak seasons and so the incentives for new have dropped and that's what Slide 6 represents. Our incentives for both new and renewals have dropped around 6% to 9% -- or 6% to 8%, which is roughly 1 month, 1 divided by 12 is about 8%. So it's roughly a reduction of 1 month of incentives in the second quarter is that what we're seeing in both new and renewals. So that last month in the first quarter as Slide 6 shows and in April shows a pickup in reduction in incentives for new rentals.

[Brendon Abrams, Analyst of Real Estate]

Okay. And then just in terms of capital allocation and unit buyback, I mean, it appears that you're in an environment where fundamentals are improving. There's a significant disconnect at least between the unit price and IFRS values and ample liquidity on the balance sheet. How do you think about unit buybacks in the context of overall capital allocation? Obviously there's competing uses for those dollars in terms of high-grading the portfolio, but maybe you could provide -- just provide some color on where you stand on that and what it would take I guess to shift your mindset?

[Sam Kolias, Chairman & CEO]

Go ahead, William.

[William Wong, Chief Financial Officer]

Hi, Brendon, this is William. We really believe that the deployment of our proceeds and our capital can best be used towards opportunistic acquisitions. Our development opportunities that we see and diversification, which we believe will lead to higher sustainable FFO growth and long-term value creation for our unitholders. In the short term, we continue to build value by just focusing on our organic growth, including the recapture of renter revenue during the past downturn. So that's really where we see best our capital allocation efficiency and then going forward in the near future.

[Sam Kolias, Chairman & CEO]

Brendon, we also want to reiterate, we're constantly looking at how we allocate capital, always. We had a very extensive discussion at our Board meeting about the allocation of capital and unit buyback is always a consideration as we consider all options and how we can best allocate our capital to maximize our FFO growth for both the long and the short term, and we stress the long and short term because it's important that we focus in on both. That's 1 big lesson we learnt over the last cycle downturn is how important our long strategy is to counter the cyclicality of regions like we're in, in Western Canada, and so we've got ways to go to diversify our portfolio. We've made great strides and we're really happy with our strategic partners and joint ventures that we're in to accomplish that geographic diversity and so that was a major focus of ours, which we're delivering and again we're always looking at the unit buyback as a source of allocating our capital, and we'll continue to do that going forward.

[Operator]

Your next question is from Mike Markidis from Desjardins.

[Michael Markidis, Real Estate Analyst]

Thanks for the charts on Slide 6. I think that's really interesting. Just looking at your sequential -- and I mean looking at your 1Q versus your 4Q, in-place rents -- occupied rents, I should say, for Edmonton and Calgary. They were both flat sequentially. I realized it would be a little bit of a mix impact there perhaps in the units that were occupied but I'm just trying to reconcile that with the increase that you're seeing on the new and renewal rents.

[Roberto A. Geremia, President]

You're referring to Slide 16, correct?

[Michael Markidis, Real Estate Analyst]

Sorry, no. Well, Slide 6, I was just looking at your new and renewal rent change. And I was just looking at the sequential change in your occupied rents in Edmonton and Calgary were flat.

[Roberto A. Geremia, President]

Well if you look on Slide 16, which gives you a breakup by city as well too, we see sequential revenue versus Q4, for Calgary was up 2.2%; Edmonton was up 0.2%. So we're seeing Calgary as a stronger market right now than Edmonton. We are about a year behind in Edmonton than we are in Calgary for a variety of reasons. But I think -- let's step back a bit and look at the whole approach -- of approach to revenue and our revenue optimization strategy of balancing off market rents occupancy and incentives and taking a holistic approach to that. As you mentioned on Slide 6 shows that it really does -- when you balance these altogether, really does show the strong single-digit, high single digit growth. As what's interesting is if you take a look at our -- if you strip out just the pure renewals in our portfolio which is really a nice number to look at because it doesn't include any new renovations to the suites or any material mark-to-market, what you find is, we're unwinding incentives at about 12% to 15%. So it's really moving the right way. But I guess, to hit your question head-on, yes, Edmonton is a little bit behind Calgary but we are showing the growth and the strength overall as well.

[Michael Markidis, Real Estate Analyst]

Okay. Okay. And then my second question, hopefully I can keep to just 2 -- 1 question here. Just trying to get a sense of -- you guys had a tremendous amount of cost. I mean obviously there was an allocation change this quarter but sequentially there was a tremendous amount of cost that came out of your system, and I know you guys had some onetime items last quarter, which you had identified for us. When thinking about this change to the asset management model is -- were you running the 2 systems in tandem throughout 2018 and do you sort of flip a switch in 2019 and that allowed you to sort of remove a lot of duplication that you were carrying in 2018? Or we're just trying to get a sense of how the sequential change could be so dramatic.

[Roberto A. Geremia, President]

That was a big part of it. We were demo-ing a program in Calgary, which was a good sized portfolio but not the entire portfolio. We wanted to work on all the bugs in that. But if we look at the 2019 numbers versus '18 numbers, operating expense is roughly $3 million better than they were last year at this time. About half of that, the new asset management model, which would move down to the admin line, but the other half really was operating efficiently as we found in the last little period of time and layer on top of all the change that we made over the last 12 months, are really starting to come into effect right now, so we have lower wage and salaries, we have lower repairs and maintenance, so on an overall effective basis we're really hitting the ground running at full speed now. So there's a number of areas where we're seeing cost effectiveness and cost savings.

[Michael Markidis, Real Estate Analyst]

So is the year-over-year savings you're seeing, do you believe that's sustainable going forward?

[Roberto A. Geremia, President]

Well, look, for the rest of this year, we believe it will be but remember once the model, half of the savings we did see this year were because of the reallocation in the new model. So 12 months from now, we won't have that issue anymore. So...

[Michael Markidis, Real Estate Analyst]

Yes. I understand that. I guess what I'm getting at is just the total impact, right? Like NOI versus G&A, I think we can get around that, just the total savings that we're seeing. Do you believe that that's sustainable going forward?

[Roberto A. Geremia, President]

We do for the rest of this year, yes.

[Operator]

Your next question is from Mario Saric from Scotiabank.

[Mario Saric, Analyst]

I'll also return back to the popular Slide 6. The improvement by months from January to April on the new leasing in particular, is that a function of a strengthening market or seasonality?

[Sam Kolias, Chairman & CEO]

Mario, it's Sam. It's a function of improved rental fundamentals. Absolutely we are seeing strengthened rental fundamentals, not just our South but our competitors too, Main Street reported a big drop in vacancy and other private landlords and discussions we're having are reporting significant drops in vacancy and incentives. And so the rental market fundamentals are absolutely without question improving. They are improving for both good and sad reasons. Good reasons, our population is increasing significantly and our jobs are increasing as well. Sad reasons, the jobs, the pay isn't the greatest and it actually favors rentals as a result and also there's still some job losses and there's just still some reorganizations that are taking place in our Alberta market and sadly some folks have to move from homes or ownership to rentals. And so those are both the good and the sad reasons why the rental fundamentals are improving. We're also seeing significant improvement in our market share in particular because of our brand diversification and our huge investment first and foremost in our team, we have to give all the credit to our team. We've reengineered our culture, and we've balanced our resident satisfaction. We get it's super important to keep our residents happy but it's super important to deliver great results too. So our reengineered culture of peak performance and balancing that customer satisfaction with performance is critical and key. We're seeing that as we speak and again, we have to give all the credit to our team for delivering both exceptional resident scores because our Net Promoter Score continues to rise and is over 60%, which is exceptional and our financial performance is now kicking in and rising as well. So we're doing both and so we're just so proud of our team for delivering these results and rising to the occasion of both keeping, which is a very tough call and order, our residents and shareholders are happy. That's a tough combination to keep happy.

[Roberto A. Geremia, President]

And just to add to that, Mario, I think we're really benefiting from the fact we invested over the last couple of years in our buildings, in our suites, and it's really coming to fruition now because suites that are trending over have already been renovated. And there -- so there's very little downtime. So we're really able to leverage off that as well.

[Mario Saric, Analyst]

Okay, so high-level, I guess, last quarter, I think Sam, you commented kind of a target 4% to 8% rent increase, i.e., half a month to a month in terms of reduction, so again high-level, as we sit here today, it sounds like that 4% to 8%, the target is kind of closer to 8% going forward. Is that a fair way to describe the quarter-over-quarter change?

[Roberto A. Geremia, President]

I think it will be a bit seasonal on that. We're still in the range 4% to 8% and also we don't want to underestimate the fact that our investments outside the suite are really leveraging off and then as well too allowing us to move rents, and we're moving occupied as well as unoccupied rents at the same time. So really -- that is still the range, there will be seasonality, we're not going to -- we've seen that in the past, and we will see it again but we believe -- we do believe the trend in overall should be again in that 4% to 9% range.

[Mario Saric, Analyst]

My second question, I think Sam, you highlighted the performance culture. I was just hoping you could walk through that, just those 51 Net Promoter Score. And how that correlates to the 0 to 10% -- or 0 to 10 scale that you highlighted, so does that really mean -- or does it mean that 5.1 out of 10 respondents would recommend Boardwalk to family members? I'm just trying to understand how those 2 numbers are correlated and then the question would be, is there enough data history to be able to correlate that score to say, NOI margin improvement or revenue growth going forward.

[Roberto A. Geremia, President]

Mario, the Net Promoter Score is not quite simply a 1 and a 10. It's actually a promoter versus detractor kind of calculation. So it's a plus and a negative. So you can't simply say it's a 5.1 -- a 60 or 51 and we have been as high as 61 in more recent months, is actually an incredibly strong score which many multinationals like Microsoft are in that range. Moving forward, yes, we do believe there will be a strong correlation longer-term in the NPS score and customer service and overall operating margins. We are seeing that customers are willing to pay a little more for better quality service. We did survey our customers and one of the big things that came back on the survey was quality of service and security. So we really are focusing our service on that, and we're getting great reviews. So I don't really have a stat with respect to real estate specifically on NPS score relating directly to margin growth, but what we are seeing is our customers are staying longer. We're seeing our renewal rates go up, our customers are happier than have been before and they're willing to pay more on renewals when they see more money coming back into the suite. So I think it all works together to make it happen and we are very proud of our team and the service they are providing.

[Sam Kolias, Chairman & CEO]

Mario, we have about 10 key measurable objectives and one of those is Net Promoter Score and the others is occupancy, the retention rates, the success in bringing in showings and closing showings and rental success, NOI is part of it. We are increasing our financial literacy significantly, and we are using graphics and colors to share our financial performance with our entire team. So it's easier to look at our financials as a picture and colors and when our teams and our sites see green, that's a good color. And when they see yellow or red, that needs to be fixed and in our key performance metrics that are graphical, it brings the entire goals to the entire team and company and that's part of the reengineering of our culture to look at data, financial results, and literacy throughout the entire organization. So we are all on the same page with respect to our measurable objectives that we have to meet and/or exceed. There is no option but success. That's the culture we have now.

[Mario Saric, Analyst]

You highlighted that the target is to have the NPS at 51 for this year. Is there a longer-term target that you're striving for?

[Sam Kolias, Chairman & CEO]

World-class companies and that's really what we are gauging ourselves at, the World class brands. Brand is a big nebulous word and it's something that we're spending a lot of time on building and looking and learning from other world-class branded companies and their Net Promoter Scores are over 60. Ours at the moment is over 60 -- 61. So we're really proud of our team for really focusing in on our resident satisfaction, and we are asking our residents where is all our rentals coming from and where is the number 1 source? And we keep hearing the same answer: referrals, referrals, referrals. That's what happens when residents are super happy. They pound on the table and they say you got to rent at Boardwalk, don't think of renting anywhere else, and when we have any problems with anyone of our residents, they remind us, "hey, I referred all my family and friends to Boardwalk, I've got a problem because I know you're going to solve it, " and when we do have a challenge we solve it, and we will recover quickly because we realize the importance of recovery and the importance of keeping everybody happy. We also realize the importance of balancing that with financial performance because we need that to continue to provide the exceptional product quality service and experience to our residents.

[Operator]

[Operator Instructions] Your next question is from Matt Kornack from National Bank.

[Matt Kornack, Analyst]

Just wanted to quickly clarify some of the accounting items in the quarter. With regards to the operating cost number that you've reported, and I think Mike sort of hinted at this. But is that -- that $25 million, is that sort of a good run rate to use net of the IFRS 16 adjustment and the asset management approach and then by the same token, the $10 million of G&A, is that a good run rate? And then also furthermore, the $933,000 of interest expense and the $895,000 of principal, should we carry those forward? I'm just trying to think of the ongoing FFO impact of both those changes.

[Roberto A. Geremia, President]

On the operating cost side, yes, I think the big fluctuations occur on property taxes and in utilities. So we separate those. On the operating cost side, yes, they're fairly reasonable run rates. I think we've done the majority of what we're going to do and then carrying it forward should be quite close. On the interest expense side, yes, we're constantly looking at that and reviewing that and yes, the principal paydown is about the same every quarter. So yes, that should be a good run rate as well too.

[Matt Kornack, Analyst]

Okay. And when we look at NAV, I guess, if we use the liability that you now have on the balance sheet but keep those adjustments in NOI. Are we fully capturing the difference in NOI in that value?

[Roberto A. Geremia, President]

With the exception of leases, the lease number is different now but and if you're comparing to our number as compared to the IFRS valuation incentives are in the number as well too. So you have to adjust for that as well.

[Matt Kornack, Analyst]

Okay. No I'm just thinking, if just in terms of the operating lease structure versus what was being expensed previously. So I guess it's $1.3 million a quarter that was in operating cost that's now not there but I think you have now $100 million liability, so is that the rough math, if I include the liability?

[William Wong, Chief Financial Officer]

It is. It's $110 million of lease liability that is coming through in March. And the interest expense, the financing component of the lease is roughly about [ $900,000 ] to $1 million and the principal is around $895,000.

[Matt Kornack, Analyst]

And then the last question, with regards to the cap rate on acquisition, can you provide any further detail on that?

[Elizabeth A. Russell]

So yes, we're guiding towards the 4.5% to 5% and again, just to reiterate, we're exceeding expectations on our rents to date, and we've really started -- just started, we took occupancy April 1, and so we're just pulling out the whole strategy right now, and we are definitely very pleased with the track so far at 22%.

[Operator]

Your next question is from Dean Wilkinson from CIBC.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Sam, you should probably name your next building Slide 6, because everyone wants to be there. So on that, just looking at that chart, what would the percentage breakdown of sort of new leases versus renewals? I mean it looks like in Q1, the portfolio return was about 2.5%, so I guess I could impute that. What would be the renewal of -- as a percentage of the portfolio have been?

[Roberto A. Geremia, President]

It seems likely around 60%, 65%. Our return over each month is fairly consistent. We can get you the exact number but it would likely fall in that 60% to 65% range.

[Sam Kolias, Chairman & CEO]

We are seeing higher retention and a drop in move-outs, consistent...

[Dean Mark Wilkinson, Director of Institutional Equity Research]

That was the next sort of the follow on question to that. And that is a trend that you would expect to sort of continue sort of with that blue line increasing and the redline probably stabilizing as we go through the rest of the year?

[Sam Kolias, Chairman & CEO]

And also rental fundamentals improving as well. It's consistent with that too.

[Roberto A. Geremia, President]

It's all the above for sure.

[Operator]

Your next question is from Yash Sankpal from Laurentian Bank.

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

I was wondering if you could talk a little bit more about your Edmonton market. What you are experiencing at the market and the new supply situation there?

[Sam Kolias, Chairman & CEO]

The Edmonton market is very similar to Calgary last year. So it's very similar market in which we're seeing great response when we do reposition the common areas. What we learned in Calgary is it's better to start with the common areas and first impressions are essential. And so when we do upgrade our common areas in Edmonton, we're seeing great response and higher occupancy, and we are also learning the importance of the scarcity of fully renovated units, and so we're being much more prudent with respect to the supply of renovated units and the location of fully renovated units. We're finding great success with partial renovations and repositioning common areas. And that's much less capital cost than what we learned in Calgary over the last couple of years, and so Edmonton is a much bigger market, and so we are seeing much better response with respect to that in the communities that we're -- we're very, very busy, we got to give Edmonton all the credit for really going all out with these common areas. Our team is really going all out delivering these common areas and rebranding of our communities, and working super, super hard, and realizing phenomenal results. This month, Edmonton, big shout out to team Edmonton for -- the rentals this month are unbelievable, outpacing even Calgary. And so we believe our rebranding and repositioning is having a big effect. We are seeing condominium developers change their clothing into rental developers and calling themselves rental developers and so we're seeing a big drop in condos. We are seeing a big drop in housing, new housing starts, and we're just seeing the finishing off of condos that really are called rentals now in this marketplace. And so we are seeing less excitement about building new or lot of talk about building new rentals, but we're just not seeing a lot of evidence of a whole lot more rentals coming on stream, simply because the rents just are not supportive of new rentals yet. And so the market is absorbing. Whatever is coming onto the marketplace because the rental fundamentals are improving in the Edmonton as well, our entire market and surveys reflect less incentives in Edmonton as well and higher occupancy, but again, it's just not as strong, for instance the back to back rentals are not as strong in Edmonton as they are in Calgary, and we still have some communities in Edmonton with higher than target vacancy in the off peak capacity locations. And so Edmonton is probably a year away from where Calgary is.

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

Right. One of your peers has decided to not go ahead with or at least slow down their development projects in Alberta, whereas you are willing to take on projects that are not fully leased. So just wondering what -- how you think about it. What other people are not seeing that you're seeing?

[Sam Kolias, Chairman & CEO]

Exceptional value. The concrete high-rise that we purchased, what we're seeing and what we're trying to do is high-grade our portfolio. And so we are selling our noncore assets, recycling and high grading into brand-new. The brand-new empty apartment just over 100 suites, we are way ahead of schedule of renting it. First month, we are super happy with the velocity of that. We should be full rented by September. We budgeted for entire year absorption, and we are using way less incentives and we're getting much higher revenues while we're getting great response from a lot of our residents, believe it or not that want to move up and into brand-new concrete, high-rise concrete. There's a lot more demand for that. The consumer is very, very sophisticated with respect to concrete versus wood and the soundproofing benefits of concrete and the location of this, really exceptional location, phenomenal amenities right across the street, cinemas, fitness, restaurants, just -- and the airport. Airports, distribution sheds and beds is the new theme and distribution super, super important and the Edmonton International Airport is a huge employer and distribution we find is going to become bigger and bigger as industrial moves to retail. Clicks become more bricks in industrial. And bricks become more clicks. The big war on Amazon versus Walmart and the mergers of both those and how we position ourselves right in the middle of that phenomena, that's taken place of repositioning of industrial into retail and retail into industrial and that location in particular is right in the middle of that phenomena.

[Operator]

Our final question is from Troy MacLean from BMO Capital Markets.

[Troy Raymond MacLean, Analyst]

Just on the Insignia property you bought in Edmonton. How would the $289,000 purchase price, how would that compare to replacement cost?

[Elizabeth A. Russell]

Well, that's why it's such an exciting opportunity. We actually think it's really at or below replacement cost at this point. So that was the opportunity that we saw. And again, it's between the location, the schools, it's just -- it's a prime location and the costs were in line. It was a great opportunity long term.

[Troy Raymond MacLean, Analyst]

So the rents being offered to lease up the building, how would they compare to maybe where markets at and then once you get the building stabilized in the next couple of years, how much room for rent growth would there be on turnover or on renewal?

[Elizabeth A. Russell]

Well there's not a lot of new supply in the south end of Edmonton and it's really hard to predict a few years out on forecasting rents. Again, it's meeting -- it's exceeding our expectations by $100, $150 right now on average on based off of our proforma.

[Sam Kolias, Chairman & CEO]

Rents, Troy, are just over $2 a square foot and that's really affordable and really low. Typically, rents or proformas for new concrete are over $3 a square foot. So going forward and in the future it isn't unreasonable to expect $3 a square foot, which is 50% higher than the $2 a square foot or just around the $2 a square foot that we're getting right now. So we believe there's exceptional growth opportunity going forward in that community.

[Operator]

Mr. Ha, please proceed with closing remarks.

[James Ha, Vice President of Finance & Investor Relations]

Thanks, Leone. As a reminder, Boardwalk will be hosting its annual Investor Days on July 8 and 9, during the Calgary stampede, and this year, we'll feature both the Calgary and Edmonton property tour. Please contact us if you'd like more information or have any questions. We look forward to seeing everyone in July. Thank you again for joining us this morning. This now concludes our call.

[Operator]

Ladies and gentlemen, thank you for participating today. Enjoy the rest of your day.