Boardwalk Real Estate Investment Trust

TSX:BEI.UN

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Boardwalk Real Estate Investment Trust second quarter results conference call. [Operator Instructions] This call is being recorded on Monday, August 13, 2018. I would now like to turn the conference over to Mr. James Ha. Please go ahead.

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

Thank you, Leoni, and welcome to the Boardwalk REIT 2018 Second 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 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, our quarter highlights, a development 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.

[Sam Kolias, Chairman & CEO]

Thank you, James, and thank you, everyone, for joining us this morning. We are pleased to report on a solid second quarter of 2018. Beginning on Slide 4, we continue to see positive macroeconomic conditions in our core market of Alberta, with many of our leading indicators showing continued improvement. The stabilization in our rental market is continuing through the summer rental season and is highlighted previously -- as previously highlighted, our portfolio vacancy remains in balance and incentives are in the early stages of being reduced. The initial compounding impact of these improvements as part of our strategy has resulted in significant growth in revenue, which has further enhanced both our NOI and FFO. Two factors that materially drive these positive results are an improved occupancy and higher rent as the result of our front-loaded investment in suite and common area renovation and a further downward trend of our incentive. Many of our communities, where we were offering 1- to 3-month incentives this time last year, are now being leased with limited to no incentive. The compounding impact of incentive reduction as well as capturing higher rents from in-suite and common area renovation, will further bolster our recovery and growth. On Slide 5, we illustrate current rental fundamentals for each of the markets where we operate and their current state. Boardwalk strives to create value through all stages of the rental cycle. Approximately 60% of Boardwalk's portfolio is in Alberta, which has entered economic recovery and has entered into a balanced rental market. Economic reports continue to project a continued improving economy in Alberta, more specifically forecast for the province to remain positive for GDP growth, employment growth and in-migration growth. Keystone XL pipeline, along with the Trans Mountain pipeline, have received federal approval, and construction is estimated to begin this fall for Keystone XL and in 2019 for Trans Mountain. The completion of these 2 pipelines will significantly improve both national and provincial economy. Grande Prairie is bordering a strong rental market, almost fully occupied, with a strong demand for rental being seen in this region. Fort McMurray has had more of a muted response, with modest occupancy gains and revenue growth. We have called these smaller rental markets our canaries in the coal mine for our Calgary and Edmonton regions. These smaller markets have historically been accurate leading indicators for our primary Calgary and Edmonton rental market. As we will see in upcoming slides, Grande Prairie has posted a 60% net operating income gain. Both Calgary and Edmonton are now in a balanced rental market with a continued positive revenue growth trend.The Saskatchewan region remains in a soft rental market, with a slower recovery taking place in the province along with elevated levels of new supply. Ontario's growth continues to improve. The market continues to be in a strong rental market, with new construction increasing.Slide 6 illustrates the diversifying Alberta economy and strengthening of the labor market as the overall downward trend to the unemployment rate continues. As a leading indicator to employment trend, Alberta job vacancies have increased since last year, with the majority of employment in the goods producing sector, as the economy diversifies while still noting the increased amount of positive labor changes in the oil and gas sector as the economy improves.Slide 7. Alberta continues to see positive interprovincial and international migration, a positive as in-migration is another indicator of future rental demand as the significant number of new migrants become renters. Saskatchewan. Net international migration is continuing to increase while we see a decline in interprovincial migration. Slide 8 displays Alberta as the leader of projected regional economic performance in Canada. Slide 9 further illustrates the housing market in Calgary with lower homeownership and condo unit construction. However, a slight increase in rental unit construction, including our own 162 units currently under construction. There're approximately 2,000 purpose-built rental units underway. These 2,000 units represent approximately 5% of the total rental market, and we believe will be necessary over the next 12 to 24 months as demand for rental housing in Calgary, driven by net migration and affordability, continues to increase, as shown in our results today. Slide 10 outlines Edmonton's decreasing trend at condo and rental unit construction. Under construction in Edmonton is approximately 1,700 purpose-built apartment units, representing approximately 2% of the rental market. Slide 11 provides our progress on our vacancy target, as highlighted at the beginning of the year. We remain on trend and within our target range. Slide 12 provides a general snapshot of incentives offered for new rental compared to the same time last year. In July 2017, we were offering 1 to as much as 4 months of incentive on 12-month leases. As a comparison, this year, our incentive offers have reduced significantly to 0 to 2 months. With our resident-friendly approach, our target on renewals continues to be approximately a 1-month reduction on incentives from our resident-acquired units. Saskatchewan continues to be in a softer market, with limited- to no-incentive reduction from the same period last year. Slide 13 highlights the significant decrease in vacancy loss we have seen from last year and the early trend of total and average incentives beginning to decrease. It should be noted that approximately 1/12 of our leases are renewed every month and will have a cumulative positive impact on our results. This provides a significant revenue opportunity to recapture the 2017 fiscal year loss from incentives at $40 million or $0.80 FFO per unit and normalize our vacancy loss from $33 million in 2017 to half of this amount or $0.33 per unit, noting that there will naturally be vacancy loss even as the market returns to stabilization as optimal levels are around 2% or 98% project completion.Slide 14 further illustrates the positive impact of our focus on vacancy loss and incentives as rental revenue continues to increase. This slide is more of a rearview mirror of incentives as Slide 12 more depicts the sharper decline occurring in the third quarter we are already in today. As previously mentioned, increasing occupied rent is a result of reduced incentive as well as increased rents as a result of our suite renovation program. Slide 15 highlights the compounding impact of quarterly growth, which has led to a 3.7% stabilized revenue growth in Q2. All regions have posted positive sequential revenue growth. Slide 16 provides a summary of our financial highlights for the second quarter of 2018, which include total rental revenue of $108.4 million and same-store rental revenue of $106.8 million, an increase of 2.7% and 3.7%, respectively, from the same period last year. Total NOI of $59.1 million, up 8.6% from the same period last year. FFO per unit, up $0.60 on a diluted basis, up 11.1% from last year. And adjusted funds from operation per unit, which includes an estimated $695 per apartment unit of maintenance capital, up $0.49 at the second quarter of 2018, up 16.7%.Slide 17 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 and are continuing to see success in a recovery of revenue. Presently, this remains our largest opportunity. In addition, the front-loaded investments we have made in our product quality and service will continue to further enhance our results. With this foundation, we remain committed to growth in major centers, which will provide both NAV creation and future diversification amongst our portfolio in the long term. I'd like to now turn the call over to Lisa Russell to discuss our development and acquisition opportunity. Lisa?

[Elizabeth A. Russell]

Thank you, Sam. Slide 18 is a summary of our current projects. We completed construction on the third phase of our Pines Edge community in July of 2018. It is a 4-story, elevated, wood-framed building with a single-level, underground parkade in Regina. In addition, construction of Brio, a 12-story concrete high-rise building in Calgary, is well underway. Slide 19 provides an update on our Pines Edge community. We remain on schedule with a refresh of Phase 2 with current occupancy of approximately 92% and anticipate an estimated yield of 6.4%. Construction of Phase 3 began in June of 2017 and was completed in July 2018. Total cost of this phase is estimated to be approximately $13.2 million or $186,000 per door, an increase from the prior phase mainly due to escalated construction costs and in increased potential sales tax. The yield for this phase is estimated to range from 6% to 6.5%. Slide 20 provides an update on Brio, a premium, 162-unit, mixed-use development site in partnership with RioCan. The site is exceptionally located in Northern Calgary along the LRT Line and in close proximity to the University of Calgary, Foothills Hospital and McMahon Stadium. Construction commenced in January 2018. The 2-level underground parkade structure is post-grade and the above-grade [ plow ] and the chemical and electrical work are underway. The estimated occupancy could be in early 2020.Slide 21 provides our estimate for market cap rate in Boardwalk's existing markets. As indicated on this slide, sales transactions in London and Ontario indicate declining cap rates. Cap rates from well-located, better-quality buildings continued to remain low as demand for multifamily real estate remains high. Our Western Canadian development opportunities on excess land remain high, with over 4,400 apartment units equating to approximately 4.4 million buildable square feet, as shown on Slide 22. These sites are in various stages of planning and approval and represent an opportunity for the Trust to high-grade and enhance our portfolio of asset value. We recently completed an initial density study across our Ontario and Quebec portfolio, which identified an additional 1,600 apartment units totaling 1.6 million buildable square feet of potential new assets. We are in the early stages of prioritizing these opportunities. An example of this is shown on Slide 23. This is a rendering of Duo, which we built on excess land at Sarcee Trail Place in Calgary. We submitted the development permit for 2 15-story towers totaling 229 units with a connected 2-level underground parkade. Our development permit has now been approved and will be valid until July 2021. Timing of this development will be subject to market conditions. 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?

[William Wong, Chief Financial Officer]

Thank you, Lisa. Slide 24 shows Boardwalk's investment property fair value at the end of the current quarter at $5.84 billion compared to $5.78 billion at the end of the previous quarter and $5.69 billion at the end of 2017, a quarter-over-quarter increase of approximately $65 million, primarily on our stabilized property assets. Unstabilized property fair value increased slightly quarter-over-quarter due to higher occupancy at Pines Edge 2 and now total approximately $91 million of investment property fair value. Two properties, one in Calgary and one in Edmonton, were reclassified as stabilized during the current quarter. Weighted average cap rate at June 30, 2018, was 5.29%, unchanged from the previous quarter end and from December 31, 2017. Next slide, Slide 25, presents Boardwalk's implied net asset value calculation. That includes the IFRS fair value revenue and expenses used in the calculation. Net asset value under IFRS is calculated to be $62.22 per diluted Trust Unit, inclusive of $1.60 in cash. This equates to approximately $176,000 per door compared to $154,000 per door based on the Trust Unit trading price of $46, a discount to implied NAV per Trust Unit of 26%. Current Trust Units are trading at a significant discount to NAV. It 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 26 shows a per unit reconciliation of FFO for the current quarter and first 6 months of 2018 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. Stabilized and non-stabilized properties added $0.10 and $0.01, respectively, to FFO per unit for the current quarter. We are seeing a positive trend in our rental performance on a sequential basis in both occupancy levels and occupied rental rates, demonstrating a recovery in the Alberta market rental cycle and a demand for renovated suites as they are completed. Ontario's continued strong NOI growth also added to the positive performance. Administration was higher due to higher customer service wages and salaries, reflecting our continued enhancement to our resident numbers, service and experience as well as increased call center costs and higher travel costs. There were minimal severance costs in Q2 2018. Slide 27 shows a breakdown of capital Boardwalk reinvests back into its property for the 3 and 6 months ended June 30, 2018. Capital investment in Boardwalk's investment properties, excluding development and PP&E, was $725 per apartment suite in the current quarter and $1,577 for the first 6 months of the year. Over the past 10 years, Boardwalk has invested over $1 billion in capital improvements on its property portfolio. The chart to the right also shows Boardwalk's capital investment for the first half of 2018. Building exterior and suite renovations and upgrades, including Boardwalk's internal capital program, comprised 77% of capital investment or approximately $43.4 million, a reflection of Boardwalk's continued repositioning and rebranding strategic initiative. Boardwalk is starting to see certain regions reaching a balanced rental cycle and anticipates that we'll be able to start reducing costs or elevated incentives in the second half of the year. Maintenance CapEx reserve for the second quarter and first half of 2018 was $174 and $348 per suite, respectively. 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?

[Roberto A. Geremia, President]

Thanks, William. Moving onto Slide 28. Boardwalk continues to focus its investment based on its brands, which means from affordable to luxury. For 2018, we are targeting renovations on between 1,000 to 2,000 suites at various renovation levels. We have refined our process to minimize the related transitional costs while continuously upgrading the portfolio. Slide 29 highlights the different levels of suite renovations associated with our separate brands. In addition to the suite-specific renovations, we have expanded this program to include common areas and lobbies. As is shown on Slide 30, renovations in these areas for the most part are being performed by our in-house teams, with costs coming in significantly lower than had we outsourced these projects to third-party contractors. As with suite renovations, lobbies and common areas are upgraded in accordance with brand renovation guidelines. Moving on to Slide 31. For the first half of 2018, the Trust invested $52.3 million back into its buildings. Simple returns continued to be strong, ranging from 12.5% to 22.6% on value-added capital and 11% to 17.6% of total capital invested. We had total asset creation -- value creation on these renovations, and they were 400%. Slide 32 reports Boardwalk's stabilized portfolio for the second quarter of 2018 as well as on a year-to-date basis. For the second quarter, our revenue continued to improve, particularly in Alberta, which posted a revenue increase of 4.6%. Overall, revenue was up 3.7%. We continue to work on reducing our controllable operating costs. This focus has shown a reduction in overall operating expenses -- were down 2.1% in the quarter, resulting in NOI increasing by 8.8% for the quarter. On a year-to-date basis, revenue increased by 3%, with operating costs increasing by 1.1% and NOI increasing by 4.6%.Slide 33 reports the Trust's mark-to-market on occupied rents. Overall, there is approximately $36 positive spread between market and in-place rents. On an annualized basis, this is estimated to be $14 million just for existing vacancies. If we were to strip out the current incentives, which we believe will unwind over time as the market begins to get stronger, the increase would be $152 or $58 million on an annualized basis. Boardwalk's liquidity continues to be strong. At June 30, 2018, the Trust had an access to an estimated $281 million of available capital, as is shown on Slide 34. This represents approximately 10% of total debt outstanding. Slide 35 reports the Trust's total debt maturity schedule. On June 30, the Trust's overall weighted average in-place interest rate was 2.61%. Currently, the Trust is obtaining NHA-insured mortgages at 3% and 3.3% on 5- and 10-year terms, respectively. Our maturity curve continues to be well-balanced, and we continue to focus on extending mortgage terms while staggering future maturities. Boardwalk's remaining mortgage amortizations under these insured loans is still in excess of 30 years. And Boardwalk's 4-quarter rolling interest coverage ratio continues to be strong at 2.64x. Slide 36 provides the reader with our estimate of current mortgage underwriting valuations. Boardwalk's balance sheet continues to be conservatively levered at 53% of mortgage underwriting value after divesting our current cash position. Of special note, the Trust has almost 1,300 apartment units that have no mortgage encumbrances, which carry an estimated debt capacity of $126 million, an amount that is in addition to the $281 million previously noted. Slide 37 highlights our 2018 mortgage financing program. During 2018, we have $201 million of maturing mortgages. To date, we have renewed $93 million of these while up-financing an additional $23.4 million. The new reported interest rate of 2.86% 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 unlevered properties, bringing the full array to date to almost $78 million. Moving on to Slide 38, Boardwalk's 2018 financial forecast. As we have in the past, it's our policy of the Trust to review and update financial guidance on a quarterly basis and, when necessary, make any unwarranted revisions. Based on this review of the key input variables, we are increasing our reported lower end of our financial guidance from $2.15 to $2.20. The new FFO range is now $2.20 to $2.35 as compared to $2.15 to $2.35. A similar adjustment has been made to our 2018 AFFO guidance, increasing the lower end range to $1.75 from $1.70 while maintaining the high end of the range. We have also increased our target stabilized NOI range from 2% to 7% to 3% to 7%. Boardwalk's -- our property capital budget for 2018 continues to be targeted at $136 million with an additional $30 million to be invested on community development projects. The improvement this quarter in our financial results was within our expectations and in line with the trends the Trust has been seeing since the beginning of the year. Revenue continues to grow with the optimization of our occupancy, modernization of existing incentives and increased returns on invested capital improvements. We anticipate our operating margins to continue to improve. Many of the operating costs associated with multifamily real estates are static regardless of periods of cyclicality. As our core market -- as Alberta enters its early stages of cyclical growth, the majority of incremental revenue is anticipated to flow directly to NOI. The Trust remains committed to the modernization of the potential of our team to reflect our culture of a peak team of peak performers. The Trust will continue to evaluate its controllable operating expenses. Slide 39 reports the Trust's distributions for the months of August through October of 2018. The monthly distribution is set at $0.0834 or $0.0834 per month, consistent with the annual target of $1 per Trust Unit. This concludes the formal part of our presentation. We'd like to open it up now for questions. Leoni?

[Operator]

[Operator Instructions] Your first question is from Fred Blondeau from Echelon Wealth.

[Frederic Blondeau, MD & Head of Real Estate Research]

Two quick questions for me. Could you remind us what's your expected yield on Brentwood and whether or not your views have changed on the yield since the beginning of the year?

[Elizabeth A. Russell]

So right now, it's pretty early in the stages to give out a cap rate. We know we run a very conservative pro forma. And at this point, as we get closer to the construction and through occupancy, we can give you more information at that time.

[Frederic Blondeau, MD & Head of Real Estate Research]

Okay. That's fair. And I guess the same question on these 6,000 apartment units development opportunity. Could you remind us what's your expected yield on these?

[Elizabeth A. Russell]

So at this point, again, it's pretty early in the process. So similar to the 4,400 units that we have across Alberta, we have just recently completed the densification study in Ontario and Québec, which we are looking at potentially another 1,600 units. So again, as the development and opportunities be prioritized and determined, we'll definitely look forward to giving you updates.

[Sam Kolias, Chairman & CEO]

Fred, you bring up great questions. The potential is in the future, and it really pales in comparison to the significant opportunity we have in reducing spend. We want to keep everybody focused in on the biggest prize, which is the recovery of our revenue, and that's our biggest opportunity to drive NOI and our margin and our FFO much, much higher. So that's really what our primary opportunity is right now and our primary focus. And that's why the biggest yields, as well, are on our common area and suite upgrades. There's a double-digit and even triple-digit return on NAV growth in investing in our existing communities. And that's where we want everybody to focus more to be on because that's really the significant opportunity we have.

[Operator]

Your next question is from Mario Saric from Scotiabank.

[Mario Saric, Analyst]

I wanted to just come back to the incentives. So it looks like you're down about $2 per suite per month quarter-over-quarter to $116 per month per suite. The tone of the disclosure, including Slide 12 in the presentation, sounds very strong in terms of reducing those incentives. So is it simply a timing observation so far as the incentives really start coming off in July? Or is there something else...

[Sam Kolias, Chairman & CEO]

All right, Mario. The incentives, we've seen drop by an average of a month, which is just under $100 per unit, just started to happen in July. And that's because of the occupancy that we realized after the second quarter. And also, it's a reflection of a stronger rental season in the summer that we typically experience as well. So there's a current much higher drop in incentives. And this is why we wanted to share with everybody the current incentives that we're offering in the third quarter that we're currently in are on more than certainly the second quarter and the first.

[Roberto A. Geremia, President]

And we gave you July to July comparisons for a reason because Sam is exactly right. Demand will vary by month. But usually if year-over-year, the demands are the same. So as you can see from a year ago July to where we are now, there's been a significant improvement in the market in general.

[Mario Saric, Analyst]

All right. So that at $116 a month, we should see a pretty substantial decline in that?

[Roberto A. Geremia, President]

Well, we will. But again, it will take time because as these leases rolled over slowly, if you're making up $100, let's just say, on average, but it takes a while to accumulate versus the told and untold portfolio, it doesn't really make material impact. But it does have a snowball effect as you roll forward.

[Mario Saric, Analyst]

Okay. And then just turning to the margin. I think Rob, you mentioned an expectation for continued improvement with kind of the revenue increase orchestrated at the bottom line. In Q2, your margin was up 300 basis points. I think that was the first year-over-year increase since Q2 of 2015, so on almost 3 years. Presumably, you can't control the weather, which contributed, let's say, 50 or 70 basis points to that 300 basis point year-over-year increase. But given what you're seeing today, is the remainder of that year-over-year margin growth sustainable through Q1 of '19?

[Roberto A. Geremia, President]

For the rest of 2018, we do believe it is, and that's built into our guidance target, and that's why we included actually -- the base in the results for the first 6 that we bumped upward our lower end of our guidance. And that's what changed the low end of the NOI growth range as well, too. So yes. But I think the big part of the strength in shrinking the margins has been the revenue growth and our ability to fill up our occupancy level. So we do anticipate a continued strongward upward margin growth. And if it's sustainable in 2019, we will give you an update again when we provide 2019 guidance on that.

[Mario Saric, Analyst]

Okay. And my last question just maybe for, Sam, you talked about the supply growth in Calgary being 5% and Edmonton being 2%. How do you feel about the acceleration of the supply potential today relative to 3 to 6 months ago?

[Sam Kolias, Chairman & CEO]

That's much, much better in that the big indicator is a drop in housing and condominiums. And that's typically what happens is the total supply dropped to balance the new demand. And homeownership has definitely dropped, and there's more propensity to rent as in-migration typically focuses in on rental, not home buying. So we're seeing a drop as per our appendix. And our move-out surveys to move out to buy a new home or condo. And we're seeing a pickup in rentals. Pretty consistent in a slower economy as well. Rentals do better in a slower economy. Just clearing the housing and condominium inventory that was required, and that's rebalancing as well, with the builders dropping the new construction of houses and condominiums.

[Mario Saric, Analyst]

Got it. Okay. And I guess we got the homeownership rate every 5 years or so. But anecdotally, when you talk about the greater propensity to rent in the province, and Alberta historically had one of the higher homeownership rates nationally, can you give us any color in terms on what you're seeing on the margin?

[Sam Kolias, Chairman & CEO]

Yes, we're seeing on our communities mixed demographic increase. We're seeing homeowners sell their homes that are middle- to baby-boom age and going to rentals. And of course, we're seeing millennials going through rentals as well. And so we're seeing a broad, positive moving into rental housing versus homeownership across all demographic groups.

[Mario Saric, Analyst]

Certainly, I guess when most things get started, they're pretty structural in nature. So it seems to be [ you're building supply ].

[Sam Kolias, Chairman & CEO]

Yes. The new mortgage rules are definitely having a significant impact on this, so it's much more difficult to qualify for a mortgage. And so that absolutely is a big, big factor as well, as well as cost of homeownership and condominium ownership is much higher. And so there's no question, the value that a housing consumer realizes renting is much better right now than a homeownership option, much more affordable, much more flexible. In this economy, flexibility is really important. So there is a lot of advantages, and we've got much nicer products, too. So we've got, with our diversified product offering, something for everybody.

[Operator]

Your next question is from Jonathan Kelcher from TD Securities.

[Jonathan Kelcher, Analyst]

First, just on your occupancy and also on your target range, but it did dip a little bit in July and, I guess, down a little bit since April. Maybe give a little bit of color on that. Are you guys to the point where you're trying to push rents?

[Roberto A. Geremia, President]

Jon, it's Rob. Yes, we are. But historically, April, May and June are our highest turnover months as well, too. So you have to factor that in at the same time. But yet, on a year-over-year basis, we're seeing turnover down about 7% and rentals actually are up by 3%. So on an overall basis, it's coming in better than it did 12 months ago. But again, those were our higher turnover months. We're coming into now August, September our big rental months. So we're anticipating that to go back up again very shortly.

[Jonathan Kelcher, Analyst]

Okay. So you have no issues getting above 97% by sort of end of the year?

[Roberto A. Geremia, President]

We don't believe so. We're targeting -- unless something changes dramatically in the market. But given what we're seeing today, we're seeing the same trends that we saw 3 months ago.

[Jonathan Kelcher, Analyst]

Okay. And then just on the G&A. It's been around -- it's $9.3 million or so in the first couple of quarters this year. Is that a good run rate going forward? Or is -- is there some onetime things in there? It's up fairly significantly versus last year.

[Roberto A. Geremia, President]

There are some onetime things. I'd probably say, of maybe 3 quarters, there's only going to have onetime targets, including looking for severance payouts. We are focusing now on our G&A to make sure that we are optimizing that as well at the same time. So I think in the short term, it's a decent run rate, but we'll provide you much more guidance on -- that what it does in '19.

[Operator]

Your next question is from Howard Leung from Veritas Investment Research.

[Howard Leung, Investment Analyst]

I want to go over the incentives. So it was discussed that starting in July, the renewal rent, also the new incentives offered are much lower. The absolute dollar incentives in Q2, though, went up. So do you expect, given the policy there is a little tighter now, maybe the absolute dollars would go down in the next couple of quarters?

[Roberto A. Geremia, President]

Yes, it's Rob. Yes, we do expect that. Again, I'm on constantly cumulative [ effect ]. It'll have much more impact, say, 12 months from now than it does today. But yes, we do anticipate the absolute dollar value to start to decrease for now.

[Howard Leung, Investment Analyst]

Okay. Great. Yes, it will just take time, I guess, as you were discussing?

[Roberto A. Geremia, President]

That's correct. That's correct. And you're making huge lumps on a lease-over-lease basis. But on a cumulative number for -- or rather, based on our revenue, it'll take time for it to catch up.

[Howard Leung, Investment Analyst]

Right, right. That makes sense. And then on the slide on the returns on the value-added capital, I wanted to know for the revenue there, a decrease from the renovations and also the market strength in revenue, is that -- that's on an annualized basis, and I guess that hasn't fully been absorbed into the results yet, right? So that's just the new revenue anticipated from these renovations?

[Roberto A. Geremia, President]

That's correct. So we do think the impacts of making the change annualized, that impact will give you the returns off that. And then in addition to that, we can roll that into the IFRS valuation methodology, which again is on an annualized basis. But we do separate for you the difference between legally as market strength and renovation strength. But I think the 2 cannot be totally separated because as you develop better product and have a lower occupancy, it will drive up costs. So by default, the 2 are connected.

[Howard Leung, Investment Analyst]

Right. They're related. And the market strengthening, is that, how would you separate that? Is that just based on maybe CMEC data or market data?

[Roberto A. Geremia, President]

No, it's based on our internal best estimates. So we know our pricing strategy for renovation, so we do adjust market rents based on that pricing strategy. And then when we compare at the end of the quarter the total renovation -- the total revenue adjustment -- the net difference has to come from market rents.

[Operator]

Your next question is from Matt Kornack from National Bank Financial.

[Matt Kornack, Analyst]

Just going back to your operating expenses for the quarter. Is it fair to look at this more on a 6-month basis versus a quarterly basis? Because if you look at the first 6 months of last year and the first 6 months of this year, it's fairly consistent from an OpEx standpoint. Just wondering if there's anything timing related in there. And then looking through to the balance of this year, it was a bit higher last year in terms of OpEx. Would you assume that the sort of first half of the year is indicative of what would be OpEx for the second half?

[Roberto A. Geremia, President]

I guess to answer your question is, yes, I'd say yes, for sure. Look at the 6-month number. Although I will caution a bit. In 2018, we did have this carryover in our costs from 2017 because the level of renovation is an operation that we were doing at that time. Moving forward for the last half of the year, the big variable, as was mentioned previously, is utilities and the weather itself, too. So it's a little bit -- I'd probably say, we should see significant improvement. Like on the operational side, we should see Q2 do a lot better than -- or Q3 do a lot better than Q3 did last year. But again, the variables being the weather in Q4's. But I guess in general, Q1 is a heavier quarter for utilities and generally, I think Q4 is, as well.

[Matt Kornack, Analyst]

Sure. And I meant excluding it, just on the...

[Roberto A. Geremia, President]

Oh, exclude utilities? Oh, okay. If you exclude the utilities, the other variable that we're still working on is property taxes. That's the one that we've seen some significant increase particularly in Saskatchewan, but we're anticipating some savings in other areas. On the controllable costs, I think Q2 was a much better run rate than you saw in the past.

[Matt Kornack, Analyst]

So the savings that you're getting from outsourcing, some of -- or in-sourcing some of the products that you're buying, that comes through, I guess, to some extent in R&M. And then would there be something in terms of your CapEx profile as well because I would assume some of that's being capitalized?

[Roberto A. Geremia, President]

It is. And the biggest benefit on the CapEx side is doing it ourselves is actually below budget. We're doing a better quality product at a lower cost, and we anticipated we'd be able to. So we're going to see overall valuation creation as a result of that net of the cost of doing it. And yes, we are seeing savings in R&M, too, because we're having our team do more of the work themselves. And over the last 6 months, we've been focusing on adding to our team experienced individuals that can do the work ourselves versus having to contract it out.

[Matt Kornack, Analyst]

And then just with regards to your same-property NOI growth guidance. I mean, it's still a pretty broad range, and I know there's some intricacies because the second half of last year was obviously stronger on a relative basis. But wondering if you have a sense as to why you'd come in sort of at the low end versus the high end of the range there.

[Roberto A. Geremia, President]

Well, if you look at our guidance right now for the first half of the -- our average between the 3 and 7 is 5%. So for the first half of the year, our results show 4.6%, so we're right on target with that. So we're hoping to see a little bit more improvement in the second half of the year to move that number even up, but it will be -- we believe it'll still be within that guidance range.

[Matt Kornack, Analyst]

And then on vacancy -- and maybe it's unfair because you've done leasing and brought your vacancy number down. But on the vacancy that you have now, would you anticipate having to give incentives on that still? Or on vacant space, are we looking at sort of no incentives at this point?

[Roberto A. Geremia, President]

It's a project-by-project basis, but the only market right now where we're offering no incentives are [ San Mesa's ] Grande Prairie because the market itself is just so strong. Everywhere else has to have incentives as part of the marketing strategy. But again, the way we do it is community-by-community basis. So if there's low vacancy in that building, you're going to see very low incentives in that building. If there's higher vacancy, you're going to see us roll into that as well, too. Incentives are a very strong marketing tool that we use, and it's helped us a lot.

[Matt Kornack, Analyst]

Okay. And in 2014 sort of pre-the-oil collapse, you didn't provide a market rent, including incentives. But at that point, were you offering any incentives?

[Sam Kolias, Chairman & CEO]

Hardly any.

[Roberto A. Geremia, President]

Yes, I think we do have one slide where we show 0 incentives almost in 2014 or it's in our appendix, I believe. Yes, in 2014 and '13, we did not have any incentives built in.

[Matt Kornack, Analyst]

So is it your view, I guess, today that market rents is above where it was in 2014 when you strip out incentives?

[Roberto A. Geremia, President]

Yes. Incentives -- itself in general, yes. It will be at or above the range of where they are now. It will take us time to unwind the incentives because the absolute number -- to where it was. But yes, I think overall market rents -- and we are seeing actually market rent strengthened.

[Operator]

[Operator Instructions] Your next question is from Yash Sankpal from Laurentian Bank.

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

I just want to focus on your Saskatchewan and Québec portfolio. I see that for the Saskatchewan, you are saying property NOI margins were down 300 bps, so that is excluding the noncore portfolio. So just wondering what you're seeing there. And also the Québec portfolio kind of is going sideways, so maybe you could provide some color there.

[Roberto A. Geremia, President]

Yes. And as we noted on the incentives, Saskatchewan has seen no improvement on the revenue -- top revenue line flowing through. We're still offering the same incentives last year as we were this year. So we haven't seen the same revenue recovery or demand recovery in Saskatchewan that we have -- saw on the rest of our portfolio. On the expense side, yes, expenses are actually up. A lot of it's driven by property taxes on a year-over-year basis. As well, too, we've seen significant increase in property taxes in our Saskatchewan portfolio. Québec is doing okay. It's plugging along there at 1.5%-for-the-year growth. It was targeting around there for the year. There are obviously limitation in Québec with rent controls and ability to pass a lot of your costs on, although we do go for above-market increases where applicable. We're very happy with our Québec portfolio, and we believe it will continue to grow even stronger. Saskatchewan, we are very much focusing on and looking at both sides of the coin. One is how do we get demand even higher in these particular properties and also but how do we lower or control our operating costs as well, too. So we are focusing on that one in particular.

[Sam Kolias, Chairman & CEO]

Yash, there's been a significant amount of upgrades in Québec, so we'll see that go through in our numbers going forward because the weeks that we have taken offline in Québec as well and improved significantly have added more in our revenues. And so we will see that effect going forward similar to what we've been experiencing here in Alberta. In Saskatchewan, there's an elevated amount of new supply that we're competing with a lot more new products in Saskatchewan. And so we are recircling and looking at our communities to upgrade because our locations are in established locations and better locations than in new supply. And we believe taking the same approach in Saskatchewan as we did here in Alberta will improve both results and revenues going forward and recapture the demand for our better-located, larger-unit-sized communities.

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

And just on Ontario, there also, your same-store NOI growth is quite strong. Just wondering how much of that is coming from your suite renovation versus actual just growth in demand.

[Sam Kolias, Chairman & CEO]

The majority. We're -- actually, we started the suite rental program in Québec and Ontario 3 years ago, 3 years ago. The challenge with both Ontario and Québec are very low turnover because the in-place rents are so far below the market rent that very few residents move out because there's a bit leap and difference if the resident does. And that's why it's just a little bit more challenging and time-consuming to realize those revenues because of the low turnover that we do have in both those processes.

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

So you said the majority of that is from suite renovation?

[Sam Kolias, Chairman & CEO]

Yes.

[Roberto A. Geremia, President]

Yes. We're seeing significant increases in north of 20% in some cases in Ontario turnover suite renovations.

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

Right. Okay. And what about the AGIs? Like, what did you experience in that?

[Roberto A. Geremia, President]

We do apply for them when we do common or area upgrades or building upgrades as well, too. It's part of the challenges because the program itself has a pretty long amortization schedule, so it's more difficult to get the returns you see, say, in Alberta versus [ this means it's ] the same level of renovations. But yes, we're applying for them and we are getting them.

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

Right. The reason I ask is there was an article yesterday talking about residents pushing back on these AGIs. So just what's your view on that?

[Roberto A. Geremia, President]

We haven't seen much in pushback yet on that because I think the customer has seen the value that we are putting into the building as well, too. But yes, to date, we have not seen a lot of pushback. Again, I think the AGI program is quite conservative as compared to other parts.

[Sam Kolias, Chairman & CEO]

Yes, we're very flexible, too. And we take each individual situation seriously, and it really depends on the individual. And our flexibility is something that we've had since 1999, and it really worked because for some, an AGI increase is a big amount. And so we're flexible. We're sensitive to that, and we'll work something out. And that always is helpful.

[Operator]

Your next question is from Neil Downey from RBC Capital Markets.

[Neil William Edward Downey]

I do think all of my questions have been answered, but it's great to see that those lobby renovations and new leasing offices are really making a difference.

[Operator]

Your next question is from Dean Wilkinson from CIBC.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Just on the development opportunities and like tying that back into sort of your longer-term view, it would perhaps appear that you're thinking maybe a little more development than acquisition in your growth plans outside of Western Canada. Would that perhaps be fair?

[Sam Kolias, Chairman & CEO]

It certainly was, Dean, and an accurate reflection, but we're circling back. Now that we've got a new formula and diversified product offering, we're a lot more excited about legacy assets. And if it wasn't our design team and our entire renovation and capital team's innovative and creative abilities, certainly, we would be more focusing in on new development, where we can start with a blank canvas. But we're so excited, and our product that we've repositioned has an amazing response from the community. And the other part about our communities and legacy assets is the established locations and the large suite sizes that are really unparalleled compared to new supply, which is typically really small unit sizes with large amenity packages. Well, we can offer both large unit sizes and large amenity packages by converting some of the suites to phenomenal amenities that our resident members are really excited about and are attracted to. And so we can offer a product that's very unique at a very low cost because our cost basis for our apartments are a fraction lower than what it costs to build a brand-new apartment. And as a result, our returns are much, much higher, repositioning and reinvesting in our existing communities, as our returns on our investments -- on our slide reflect. Much more exciting returns, near double-digit revenue gains, if not double digit, and then triple-digit NAV gains, which would be impossible in today's new development opportunities.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

For sure. So that 6 million square feet, we should be thinking maybe perhaps a little farther out as -- why build something to a 5 or 6 when you can turn it to something like a 20%.

[Sam Kolias, Chairman & CEO]

Correct. Exactly. That's absolutely the focus we want everybody really to focus in on is our biggest opportunity is repositioning and reinvesting in our communities and the other legacy assets in other markets. And really strategic partnerships is something that we're continuing to work on. Lisa is very, very active in her travels and meeting with strategic partners that have assets in different regions that we can partner up with and vice versa can partner up with our development opportunities here in the West and both provide one another with diversification that otherwise would be very difficult to do. So partnerships is something really, really exciting and something we're going to continue to focus in on, as we've already demonstrated with our partnership for RioCan. We're looking at many other partnerships as we speak.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Okay. Great. And then just looking at the mortgages. How are you sort of balancing the view between term and rates? You look at your near-term debt rolls and you're sort of mid to low 2s over the next couple of years. If you were to sort of stretch out to 10 years, you're looking at 3 30, even an incremental increase at a 5-year. Are you sort of weighing off -- let's take on a little more interest rate expense here to term this out? Or do you think we're not looking at something where rates are really going to run away on you and perhaps rolling over for shorter terms might be something you're looking at?

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

Dean, it's James. The answer to your question is yes, pretty well across the board. I mean, all we know is that we really don't know on rates. The yield curve is pretty flat right now. And as you know, the spread difference between 5- and 10-year money really isn't there. Priority 1 has always been to ladder that maturity curve, so try to flatten it as much as we can. So far this year, we've leaned towards the shorter end of that curve, so the 5-year end of it. That said, towards the latter part of this year, where roughly the bulk of our maturities are, we will be leaning towards the longer end of that curve. So it's a little bit of everything, and it's really a way for us to hedge our own maturity curve because at the end of the day, all we know is that we really don't know.

[Roberto A. Geremia, President]

And Dean, just to add to James' comment there, the 2019 maturity looks big, but there's really 1 very big mortgage in there, the [ Nun Valen ] portfolio mortgage, and that's on a land lease. So the maximum we can do it -- because that has a 5-year term on that one as well. So again, 5 years is still better than 3, but we can't go a 10-year on that one even if we wanted to. So it's more difficult to try to balance these terms and maturities out. Your question of interest rates, we don't have the answer to that. So we're just trying to balance this all out with pros and cons. The good news about that is if rates go up, we can mark-to-market our rents every 12 months. So if there's inflation, we should be able to catch up to some of that as well, too.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Okay. Well, fair enough. And just the last one for me, just circling back to Jon's question about the bump-up in the G&A. Was that an incremental amount that had been pulled from the property level? Or is that just ramp-up around marketing and some other stuff that you're interested in?

[Roberto A. Geremia, President]

A combination of both. We actually shifted the operational structure, so we had more managers set up to help to focus [ between ] Southern Alberta. And then yes, we spent a lot more money on call center, where our call inquiries -- and when I say call, I mean, emails -- and inquiries are up about 30% year-over-year, which is good news on the demand side. However, you have to -- it costs some money to administer all that as well, too. So in general, G&A -- combined G&A year-over-year is still up.

[Operator]

Thank you. There are no further questions at this time. Please proceed, James.

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

Thanks, Leoni. If you missed any portion of today's call, a copy of this webcast will be made available on our website again at boardwalkreit.com, where you'll also find our contact information should you have any further questions? Thank you again for joining us this morning. This now concludes our call.

[Operator]

Ladies and gentlemen, this concludes your conference call today. We thank you for participating and ask that you please disconnect your lines.