Boardwalk Real Estate Investment Trust

TSX:BEI.UN

Earnings Call Transcript 2019-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 Thursday, August 15, 2019. And I would now like to turn the conference over to James Ha. Please go ahead.

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

Thank you, Joanna, and welcome to the Boardwalk REIT 2019 Second 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 Corporate Development; and Lisa Smandych, our Chief Accounting Officer. Note that this call is being broadly disseminated by way of webcast. If you've not already done so, please visit bwalk.com/investors 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. We'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. At the 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 another solid quarter in 2019, delivering 13.3% FFO per unit growth for the second quarter and 14.8% for the first half of the year. This marks our fifth consecutive quarter of FFO growth with continued positive momentum as rental market fundamentals in our core Alberta markets continue to improve and our team continues to deliver exceptional service, product and experience. Total revenue growth was 4.6% for both the 3 and 6 months of 2019. As we continue to focus in on peak performance, we believe Boardwalk offers exceptional value, which currently trades at a significant discount to our IFRS NAV and recent sales transactions. At $42 Trust unit, the implied value of Boardwalk's high-quality overall portfolio equates to approximately $149,000 per apartment door. Boardwalk has recently sold a noncore asset in Saskatoon for $150,000 per apartment door, allowing us to access equity at well above our IFRS equivalent unit price. Recent transactions in Calgary and Edmonton have averaged 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 rental market fundamentals continue to improve and balance. Major refining, upgrading and oil transportation investments were made earlier in the year, along with the approval of the Trans Mountain pipeline in the recent quarter. 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 the strong demand for rentals. Fort McMurray remains in a soft rental market. Red Deer continues to see significant improvement as a result of our successful value-add investment in this region. Calgary rental fundamentals remains ahead of Edmonton, which continues to make measured gains. Improving rental market fundamentals continue in our core Edmonton and Calgary markets as we are in the middle of our stronger summer season. Our focus on a carrying peak performance culture, along with significant value-add capital investment made earlier in Calgary, has produced an NOI gain of 8.9% and reflects a successful strategy of our value-add product diversification, which is delivering significant gains in NOI. We continue to apply our value-add lessons into our Edmonton market with much lower costs or better gains in NOI this year. In the first 6 months of this year, NOI in Edmonton grew by 4.2%. Our Saskatchewan region continues to remain in a softer rental market, with green shoots of higher occupancy and revenue. We are focusing in on targeted value-add capital improvements and increasing our 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 0.2%. Slide 5 highlights a number of positive economic trends supportive of rental demand in Alberta. Some highlights include: Continued positive net migration; positive labor growth year-over-year, despite lumpy June's positive numbers and July's negative numbers; economic diversification with increased AI investment in Alberta, so you may see rental market fundamentals improving and increasing affordability for the renter demographic. The Alberta economy continues to evolve, and we are finding new and innovative ways to deliver performance and increase our market share in this different economy. Slide 6 shows our strategy of reengineering our corporate culture and team to deliver the best product, service and experience, building on our brand. Our 3 sources of growth are: Organic value-add; brand diversification; expansion, recycling, high-grading and geographically diversifying; building upon our solid financial foundation further, which in turn, produces unitholder value. I'd like to now turn the call over to Roberto Geremia. Rob?

[Roberto A. Geremia, President]

Thanks, Sam. As is shown on Slide 7, Boardwalk delivered another solid growth quarter. For the second quarter, the Trust posted FFO and AFFO growth of 13% and 16%, respectively. And for the first half of the year, FFO grew by 15%, with AFFO growth of almost 18%. On a same-property basis, the Trust continued to report NOI growth in excess of 5%, both for the current quarter and on a year-to-date basis. More detail on this will be provided in the upcoming slides. Moving on to Slide 8. Boardwalk's rental and renewals continue to show strong growth. Overall, Boardwalk lease renewals and new lease increases continue to be in line with our overall target range of between 4% to 8%. The decline noted in the overall portfolio for July is directly related to the renewals in Québec. Renewals in this province are heavily weighted in the month of July as compared to the rest of the portfolio. As these renewals are subject to rent adjustment restriction, the impact was a short-term reduction in the Trust's overall renewal rate for July, which will correct itself in the upcoming months. Our overall new leases continued to show above 5% growth on the entire portfolio. Consistent with our overall strategy, our focus in the summer months is on increasing our occupancy levels, and reported renewal rates are in line with our internal expectations, which have traditionally been lower in summer months and increasing as we go forward into the fall rental season. Slide 9 shows more detail on Boardwalk's stabilized portfolio. Boardwalk's Alberta portfolio for the current quarter reported NOI growth in excess of 8.4%, slightly above the 8.1% our Ontario portfolio posted. Our Saskatchewan portfolio is beginning to show improvement but was subject to an extraordinary cost resulting from a flood at one of our buildings, which drove reported increase in the expenses in this region. Slide 10 shows Boardwalk's quarterly sequential revenue growth. Once again, current quarter results continued the overall trend posting growth in excess of 1%. Q2 reported growth of 1.3% as compared to the previous quarter. Slide 11 focuses on key revenue metrics. Overall, occupancy levels are well above 96%, while our occupied rents continue to rise. Vacancy loss was consistent with prior quarters, however, we saw a material reduction in overall incentives. And on an average incentive outstanding, we saw this drop by over 5% in Q2 as compared to Q1. Boardwalk continues to target its value-added investment program to increase the overall experience offered to our existing resident members. We continue to look for ways to deliver these programs in more efficient and cost-effective ways. Slides 12 and 13 highlight 2 of these value-added projects. Slide 12 shows an investment of $215,000 we made at Whitehall Square, a 600-unit apartment complex community located in Edmonton, Alberta. Upon completion of this project, we adjusted overall rents on 345 high-rise units at this site, which were directly impacted by this renovation by as little as $20 per month, showing an estimated annualized stabilized return in excess of 38%. Slide 13 is another example of a more modest investment of $51,000 made on one of our living communities in Edmonton. Upon completion of this project, we adjusted market rents on all 91 units by only $10 per month; and on stabilized basis, are expecting an annualized return over 21%. Boardwalk is very selective in the amount and level of investment it is making in each of its communities. Each investment is based on a specific situation that exists at the -- each community. We believe there are a number of additional communities within our portfolio where renovations at these more modest levels will result in returns, as we have noted. It is our intention to continue with this program in a measured basis. Let's turn to call over to Lisa Russell now who will discuss -- update us on our development program. Lisa?

[Elizabeth A. Russell]

Thank you, Rob. On Slide 14, we are pleased to announce the unconditional sale of Chancellor Gate, a 138 noncore low-rise asset in Saskatoon. The sale price of $20.7 million equates to $150,000 per door, which is a premium to the IFRS value the Trust recorded for the asset. This transaction is expected to close mid-September. The sale of noncore assets at a premium to the Trust's IFRS value and recycling towards higher-quality assets with superior returns provides an excellent source of equity capital for the Trust to high-grade and geographically diversify its portfolio. On Slide 15, and in line with our goals to geographically diversify over the long term, we are pleased to announce the continuation of our strategic partnership with RioCan through a 50% joint venture interest in a new mixed-use development in the GTA. The site is well located and in established community in Mississauga, Ontario, a high-growth, undersupplied rental market where current market vacancy is below 1% with limited purpose-built rental units currently under construction. The median price for a single detached home has risen to just under $1 million, highlighting the rising cost of home ownership. Plans submitted for rezoning included 25- and 16-story mixed-use development, totaling an estimated 470 residential units. In the preliminary design, the residential units are connected by a retail podium and 3 levels of underground parking. This development will be located on a discrete portion of land at RioCan's Sandalwood Square shopping center and provide premium rental housing in a transit-oriented location along Hurontario Street near Square One Shopping Center with easy access onto the 401, 403 and 407 Highways. The LRT line is expected to open in 2022. RioCan and Boardwalk are in the early stages of creating development plans, and subject to zoning approval and confirmation of total buildable area, the total purchase price for the Trust's 50% interest is $14.9 million or $80 per square foot buildable. Zoning approval for this development is anticipated in early 2020, which coincides with the completion of Brio, RioCan and Boardwalk's first joint venture development in Calgary. This will be Boardwalk's second development in the Greater Toronto Area. Both Mississauga and our Brampton development are located in the Peel Region, which is forecasted to be one of the fastest growing regions in Ontario. Slide 16 provides an update on our current development. Brio is a premium 12-story concrete 162-unit mixed-use project that is being developed in partnership with RioCan. The exterior envelope is generally complete, with landscaping expected to be completed before winter. The interior is progressing rapidly, with painting and finishing well underway. Occupancy is estimated to be Q2 2020, which is a seasonally optimal leasing period. 45 Railroad, which is located in the Peel Region, is a mixed-use development consisting of 25- and 27-story concrete towers connected by 3-story podium with approximately 11,000 square feet of retail space. This development is located near Downtown Brampton and directly across from the GO Transit station. Shoring is now complete, foundation slabs, concrete forming and pours have commenced on P3 Level. Estimated construction completion of Tower 1 and Tower 2 to be 2022 and 2023, respectively, with stabilization of the entire development occurring in 2024. CMHC is reporting approximately 1% vacancy in this market. Brampton is also seeing a high barrier of entry into homeownership, with a median single-detached house price close to $810,000. Timing of Boardwalk's current development projects are well staggered. Brio in Calgary is anticipated to be completed in Q2 2020, allowing the Trust to transition resources and capital to Sandalwood Square in Mississauga, with current estimated construction likely to commence in late 2020 or early 2021. 45 Railroad in Brampton remains on schedule for completion in 2022 and 2023. I would now like to turn the call over to William Wong.

[William Wong, Chief Financial Officer]

Thank you, Lisa. Slide 17 highlights Boardwalk's liquidity position at the end of the second quarter. Defined here as cash on hand, committed up financing subsequent to the quarter end, plus the Trust's line of credit. Boardwalk's liquidity of approximately $234 million represents 8% of the Trust's total debt. Debt net of cash was 48% of June 30 reported asset value. Boardwalk's interest-service coverage based on a rolling 4-quarter basis improved to 2.7x. Slide 18 shows Boardwalk's mortgage summary since the start of the 2019 year. As the slide shows, the Trust has renewed or forward-locked approximately $443 million of maturing mortgages or 84% of matured -- or maturing mortgages for the year, at a weighted average interest rate of 3.1%, while extending the term maturity to 8 years. Included is a November 2019 single mortgage on the Trust's 3,100 unit Nun's Island portfolio at a new rate of 3.27%, with a term of 8 years. Boardwalk has also added close to $81 million of new financing at a weighted average interest rate of 2.77% for close to 7 years. Current 5- and 10-year's CMHC interest rates continued to decline from 2.3% and 2.5%, respectively, to approximately 2.2% to 2.1%, currently. The next slide shows Boardwalk's announced distribution for the next 3 months. Continuing with the strategy of capital allocation optimization, for August, September and October record dates, Boardwalk is maintaining its distribution of $0.0834 per Trust unit, which equates to an annualized basis of $1 per Trust unit. I will now like to turn the presentation back to Sam Kolias for his closing commentary and remarks. Sam?

[Sam Kolias, Chairman & CEO]

Thank you, William. Moving on to Slide 20. Our results in the first half of 2019 were on the top end of our original expectations. We are reiterating our Stabilized Building NOI growth guidance of between 4% to 9%. However, our increasing the bottom end of our FFO guidance from $2.35 to $2.45 per Trust unit. Additionally, we are raising the upper end of our FFO guidance from $2.50 to $2.52 per Trust unit. Our resulting AFFO range has been revised to $1.98 to $2.05 per Trust unit. We are increasing our development investment from $44 million to $55 million to include the most recent addition of our new RioCan JV in Mississauga. Including on Slide 21. We are proud of the progress and accomplishments our team has made since coming from what has been a multi-decade cycle low of exceptional rental affordability and value. Our recent financial results reflect our newer engineered culture and brand, and our residents are rewarding us with higher retention, higher occupancy and higher rental revenues. Our team is always innovating and looking for new ways to improve our operating efficiency and maximize our returns. In turn, we are delivering improving results and establishing a new track record of growth. Our outlook is positive as affordability underpins our core Alberta markets, with rental rates currently equivalent to approximately $1.35 per square foot. Migration and population growth is continuing in Alberta, while new supplies remain fairly balanced. Our resident-friendly strategy of providing the best product, service and experience as well as sustainable rental rate adjustments through improving rental market conditions has set Boardwalk apart as we strive for multiple years of organic growth. This concludes our formal part of our presentation. And we would like to kindly ask our operator, Joanna, to now open our conference call to questions, please.

[Operator]

[Operator Instructions] And the first question is from Mike Markidis of Desjardins.

[Michael Markidis, Real Estate Analyst]

Congratulations on the very strong quarter. Just looking at your new guidance, it would seem, to me at least, that you guys are maintaining a fairly optimistic view because if I just look at your first half of this year and multiply it by 2, I would get to the midpoint of your guidance. Is there something specific that's keeping you maybe cautious about the outlook specifically? Or is there something onetime in the current quarter that I'm missing?

[Roberto A. Geremia, President]

Mike, it's Rob. No, I think when we originally did our NOI guidance range, we were very optimistic on the top end and conservative on the bottom end, too. So what we looked at again, ran all the variables over again, threw all the variables in there, so there's really nothing in there that we thought -- it's going to be very difficult and -- but achievable for us to get the high end of our guidance range given the fact that we're at 5% for the first 6 months. But there are some things lining up for us that gives us an opportunity to actually hit that high end as well, too. So no, we're not expecting anything -- any big surprises into the last half of the year, at this point in time. We are a little bit cautious with respect to Q4 utilities. That's always one that you never know for sure about, but we built that risk factor in as well too.

[Michael Markidis, Real Estate Analyst]

Okay. On the G&A side of things, you had pretty significant sequential decline this quarter. I know that's one that's been sort of lumpy just with the reallocation of expenses going to the new asset manager model, et cetera, et cetera. So going forward, would the current quarter be a good run rate? Or is there still some adjustment to be felt?

[Roberto A. Geremia, President]

Well, I think there'll probably be a little bit of adjustment going forward but I think what's happened with the G&A number is, we've really spent a lot of time the last 6 to 12 months trying to fine-tune the system to make it better and we're starting to really see the benefits right now of that. So I'm always cautious to say that's a run rate moving forward because there's always a different pay period or a time but we are seeing and witnessing a material reduction in that category particularly and that's been factored into our guidance as well.

[Michael Markidis, Real Estate Analyst]

Okay. I guess stated alternately, I mean, obviously there can be things that ebb and flow but is the streamlining finished? Or do you still have further, sort of, more efficiencies to gain?

[Sam Kolias, Chairman & CEO]

Mike, we're constantly looking for ways to improve our efficiencies, and we have to give all our credit to our team because we ask our team who's on the job all the time and who knows where the savings are better than we do, and we really do have to give credit to our team because that's a question we ask continuously of everybody, "where can we continue to improve because we can always get better?" And our team continues to find ways to improve our efficiencies, lower our costs, while maintaining our great service, products and experience. There's lots of innovative and creative ways to cut costs now, while maintaining our service levels and experience. And so we're very excited with the innovation and creativity that our team is really working hard on to remove friction in administrative processes and to increase efficiencies with new, innovative ways and using new tools that are available to us to do just that. So that's going to continue going forward. We're constantly working on ways to improve, and we're working on a lot of exciting ways to do that.

[Michael Markidis, Real Estate Analyst]

Okay. Great. Last one for me before I turn it back, just on your minimum distribution/maximum re-investment policy. Just given where your results are trending, where do you guys see yourself in terms of your tax situation and potential trajectory of the distribution as we move forward?

[Sam Kolias, Chairman & CEO]

We're managing that very carefully, and we don't see any kind of surprises on.

[William Wong, Chief Financial Officer]

Yes. And -- this is William. We're always looking at our distribution policy on a quarter-by-quarter basis, and we'll be refining that as we move forward.

[Roberto A. Geremia, President]

We have -- just there's a bit to it, Mike, as well. So we looked at 2019 given our results today and stress tested based over that. We will provide 2020 guidance, we'll obviously provide you distribution update as well too. But we're very happy with where we are. And we're -- well, again, we'll stress -- we have one more quarter, we will be stress-testing it again in Q4 just to make sure we are not off somewhere.

[Operator]

Your next question is from Dean Wilkinson of CIBC.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Just looking at the rent changes on the prior leases in Alberta, the last couple of months, looks like your renewal rents came in a little better than the new. Is that just a function of less incentives for tenants that are rolling over versus bringing new bodies in? Or is there some other dynamic, kind of, going on there?

[Roberto A. Geremia, President]

It's a combination of both, Dean. We're -- it's a combination of -- we are passing on the new costs on our renovation program also to the new and renewing customers as well, too, while we are measuring it against the current market conditions. So they will ebb and flow a bit between the 2 on regular basis, so they really aren't consistent. But I think the important point we're trying to get here is, traditionally in the summer months, we are -- we do see a slowdown and retention increases just because we really focus heavily on occupancy and when we go into our real strong rental months, being the fall, we want to be as full as possible. So we have even more pricing power, both on renewals and on new leases for the rest of the year.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

And does some of that feed into sort of your back-to-back turns and not losing as much time on that or...

[Sam Kolias, Chairman & CEO]

Dean, it's Sam. And the back-to-backs are improving, which reflects our successful renovation program, especially with our curb appeal, experience centers and common area renovation programs that are really increasing the curb appeal and the demand of our communities. And as a result, we're seeing higher back-to-backs, but we're also engineering a more smooth, sustainable recovery with respect to our rental revenue in that. Our targets are between 4% and 8%, and we've got goalposts now for each and every community where there's clear -- a clear direction as to where we want to end up each and every month. And so we have to, again, give all the credit to our team because the ball's going in between the goalposts, and that's between the 4% and 8%. So our team continues to score positive growth going forward and providing us with much better results. So that's the approach we're taking. And again, it's very measured, it's engineered, it's gradual, and it's very resident-friendly.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

That is something to be said for your interior designer, right?

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

A lot to be said.

[Sam Kolias, Chairman & CEO]

We give her all the credit.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Yes. Well, there you go. I had to let her have that one. Just...

[Sam Kolias, Chairman & CEO]

She's listening, Dean.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Yes, I don't doubt that. On the issue of the joint ventures, and, I mean, it's good to see you, sort of, partnering up again with your same joint venture partner on that Sandalwood deal. Have you had a larger discussion with them seeing how your expansion target seem to be somewhat aligned as to maybe a larger portfolio approach to that joint venture? Or is that something that's probably just going to still be more one-offs and you would roll one into the other? Or could you see something a little bigger coming from that relationship?

[Sam Kolias, Chairman & CEO]

We started many years ago with breakfast really with Eddy Sonshine, and our goal from the first breakfast, a few years ago was to be RioCan's best partner, period and vice versa on Eddie and Jonathan's and the whole RioCan team, we have to really credit for being amazing partners, and that's really been our primary focus where we create value for one another. And that, we believe will be a more -- a strategic way to determine what we're going to do in the future. We are really excited with the results of the Brio. We shopped a couple of brand-new developments yesterday, actually and the day before and last week, where 1 of the 400 units that was brought onto the market a few months ago, it's 85% rented at rental levels close to $3 a square foot. There was a new community that just came on the market in June, a block away from our head office, so it's no excuse as not to shop that community and that's already 40% rented. And so we're so pleased to see the rental market improve in Calgary and Edmonton as well the new Insignia community that we built or that we bought that was just built, we're seeing exceptional lease up opportunities as well and great demand from new product and newly repositioned and value-add product as well. And so we're very pleased with how things are going with our new development, and we're excited to complete Brio and start a new development with RioCan. And we're going to take it day by day. And the more value we create, the more success we have. I'm sure that's the best way to take our partnership and the approach, and we'll see what the future holds as a result of that approach.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

That's good. I mean it's a good partnership. So hopefully something that continues to grow.

[Sam Kolias, Chairman & CEO]

It is.

[Operator]

Your next question is from Jonathan Kelcher of TD Securities.

[Jonathan Kelcher, Analyst]

Just turning back to Slide 8. I would estimate that overall, looks like you're about 3% in July and I know 4% to 8% is the goal. Do you think -- and I get that the summer months are a little weaker. Do you think that you guys can get there at least to the low end of that for Q3?

[Roberto A. Geremia, President]

Yes. Jon, this is Rob. I think the 2.4% you're seeing there for July, the key issue there is Québec. And in particular, we had a probably -- on the renewal side, almost 40% to 50% of our renewals were from the Québec market. It -- traditionally, July is the big renewal month and the move-out month in Québec, to the point where our team goes crazy for a couple of days because there's so much going on. If you weight adjust that for the rest of the portfolio, you'll see we'll be well above that and well within our target range. So we tried to highlight that and my note is if you -- if we strip off the Québec portion, remember on renewals in Québec, it's rent controlled. You don't have a lot of stuff that you can do above the guideline controls there. So that really drew it down. If we were adjusted for that you would have seen -- you would have probably seen it again but look at just the Alberta on the left-hand side, it was 4% and 4.9%, when you compare that to the 5.3% we had on the new leases on the entire portfolio, our renewals will probably be above the 4.9% you see in Alberta. So once we adjust that, that's the key point. Number two is, we're heading in out of the summer months down into our stronger rental months in the fall, so we anticipate, and we've seen this in the past over a number of years, our renewal rates and our new lease rates increase dramatically as well too. So again, back to that 4% to 8% range, once we have occupancy levels higher than they are today, even stronger, it even gives us more pricing power. So -- but again to Sam's point, which is very, very key, we're targeting the 4% to the 8%. We're going to be very customer friendly. But yet, we're very happy with that range as well, too.

[Jonathan Kelcher, Analyst]

Okay. So it does sound like you can get there for -- at least the low end there for Q3?

[Roberto A. Geremia, President]

Yes. We think if the -- again, if you stripped out Québec -- and that's sort of a one-month thing, I guess, Québec will go back to where regular -- where it is now.

[Jonathan Kelcher, Analyst]

Yes. And then overall, it should be -- it should at least hit the low end even with Québec in there.

[Roberto A. Geremia, President]

We are well above the low end, to be honest with you, and on Total. But once we've adjusted for the occupancy pickup we know we're going to get in the summer and the strong rental Q3 we usually normally have as well too.

[Jonathan Kelcher, Analyst]

Okay. Where do you see incentives trending the next couple of quarters? They are down nicely quarter-over-quarter this -- in Q2.

[Sam Kolias, Chairman & CEO]

Jonathan, a good question. We again, look at incentives as just part of the way we manage our revenue. And so we want to emphasize and stress that our revenue targets are between 4% and 8%, and how we get there is a multitude of options and levers, and incentive reduction is one of those. We've started to share the amazing value that -- and they -- and the deal and partnership we have with TELUS with our residents and we pass along exceptional value for Internet and cable services to our residents and are recovering those costs and that's another great source of revenue. Many of our communities were now asking for a very small parking fee, to recover our landscaping expenses and the expenses that we need to invest back in our parking lots and parkades and landscape. And so that's another source of revenue that we're realizing -- is an opportunity that we haven't really in the past. And we're really looking at each and every community with an asset management approach. We compare it with the entire community and all our competitors, and we reverse engineer the best performance for each and every community that we work with our entire team to be able to accomplish and make sure that each and every community is operating at its optimum potential.

[Jonathan Kelcher, Analyst]

Okay. That's helpful. And then the last one for me. Just on the operating costs slide particularly. In Alberta, I'm sure you saw your peers reported pretty elevated costs yesterday in Alberta. Can you maybe just walk us through what you're seeing? And if -- I believe Q3 is typically the changeover in property tax so maybe give us a little bit of guidance on that?

[Roberto A. Geremia, President]

That's correct, Jonathan. On the property tax side, July 1 is when the new number actually hit, so we are anticipating an increase of about 3% to 4%. But we'll be -- the good point is, with James leading our property tax, we're actually expecting to come in below budget this year, so we're going to be happy on that. So yes, there will be some upward pressure in the latter half of the year on property taxes. On the costing side, to be honest, I can't under-emphasize what Sam said, our team is coming up with ways to save costs, to do stuff that we could never think of, and they've just come up with new strategies and new ways to do it. And all of the stuff we've invested over the years, the last couple of years, are really starting to pay off now. Like so the lower turnover cost because we renovated 2 years ago, the fact that we're doing lobbies and pushing in all the other stuff, it's -- we're making them more cost-effective to maintain even. So it's really not one issue that's lowering costs, it's all of these put together. Our rental and renewal specialist is doing a phenomenal job, keeping our turnover down yet still getting the 4% to 8% growth on the bottom line, on top line revenues as well too. So we are very proud of what they're doing. I -- we continue to -- there probably will also be some upward pressure on some of our operating costs going into Q3, we understand that. But in general, we are trending in the right direction. And we'll continue to look for even more savings.

[Operator]

Your next question is from Mario Saric of Scotiabank.

[Mario Saric, Analyst]

I think if we're learning anything this morning, it's that your slide deck will go from 69 slides to probably about 5. At least that...

[Roberto A. Geremia, President]

Sorry, Mario, we can't hear you. Sorry. Can you...

[Mario Saric, Analyst]

Sorry, is that better?

[Roberto A. Geremia, President]

Yes. Thank you.

[Mario Saric, Analyst]

Yes, I was saying, I think if we can learn anything from this morning, it's that your slide deck can go from 69 slides probably to about 5, with a focus on Slide 8 in particular, so I'll go there as well. On the renewals and the rentals, do you have last year's equivalent numbers for May, June and July?

[Roberto A. Geremia, President]

We do actually have them. I think last year is a little bit of an anomaly year to focus on but what we did see last year on renewals and I'm going off -- I just got them yesterday, we were roughly where we are today on the renewals but when we saw October, November and December spike up to -- closer to the high end of renewal range. But as in just for last year, if I can go back a couple of years, I see the same kind of trends.

[Mario Saric, Analyst]

Okay. I'm just trying to understand the trend that we saw in May, June, July. I know and you also did in your opening commentary...

[Roberto A. Geremia, President]

Yes, it is. If I Strip out the Québec impact of July what the number will be. I will get that number and try to do something with it. But you'll see, I'm pretty confident to say that if we strip that renewal number out -- and if you look at the, I guess, Sam mentioned on the sequential revenue in Québec, being a little lower than our average, I think, that you're going to see that number come up in total. So again, focus on occupancy is the key but we're not -- we're still within our 4% to 8% range.

[Mario Saric, Analyst]

Yes, I'm sorry. I was thinking more on Alberta in particular. So like when I look at the trend line of the bars in May, June and July this year, I guess, you're saying that you saw similar trend and not necessarily last year but overall, you typically see that trend. And then if you were to add August, September, October to this chart, going forward, I guess, you're highlighting these bars are expected to increase over the next 3 months as opposed to staying where they are today?

[Sam Kolias, Chairman & CEO]

So Mario, last second quarter, we were much more optimistic with respect to reducing our incentives, and we reduced our incentives much more last year in the second quarter as a result of the tightened vacancy and much higher occupancy that we were tracking towards the April, May and June months. And so we learned last summer that we have to take a more measured and engineered approach with respect to the reduction of the incentives and this is where we introduced the goalposts that are very measured and gradual throughout the entire period -- throughout the entire summer. And so we took a much more measured and engineered gradual approach this summer, and it was engineered and purposeful that way because we looked at our data and the volatility that we created last summer as a result of reducing our incentives too quickly and too much. And so this year, we've taken a much more measured and gradual approach. And this year, we're up significantly in Alberta in occupancy and our vacancy loss is significantly less in Alberta this time, this year versus last year. And so we're already seeing the positive effects of increased occupancy, increased -- renewals and retention is something we're really focusing in on, and again, we have to stress, we are balancing out the benefits of the Net Promoter Score and measuring our resident's satisfaction with the economics of doing that as well because there is a balance between making a resident happy and staying in business at the same time. And so we have to balance that, and we have to continue to grow and be profitable because that's essential to continue to provide great service, products and experience to our residents. So we explain that exactly to all our residents during the renewal process. We're still flexible though because some of our residents are on fixed income and they listen to our calls. And so we continue to be very flexible with residents that aren't on fixed incomes and are not getting raises. Like we always have, since 1999, we've been very resident-focused and self-regulated. And so we see the stresses and the importance of a home is paramount. And so it's personal, and we work with everybody and together, work on mutual agreements on renewals and so far so good. We're so happy and thrilled with our team and approach and our service to our residents, which is really producing great, stable results.

[Mario Saric, Analyst]

Okay. Maybe shifting to Slide 10 of the call and focusing on the sequential revenue growth, particularly in Edmonton. I mean you saw a very nice uptick going to 1.8% from 0.2% in Q1. And then the same quarter last year, I think it was 1.4%. So you're up even relative to last year. You're spending a bit more capital in Edmonton making a difference to the product as the products showed really well in our July property tour. I was just wondering, high level, how much of the 1.8% would you say is kind of a return on that capital spend versus the natural market tightening?

[Sam Kolias, Chairman & CEO]

Most of it is return on that capital spend. There is absolute direct correlation with our high grading of our common areas, lobbies, experience centers, and the huge investment we made 2 years ago and a year or 2 and 3 years ago, where we really ramped up, and we're investing significantly in our interior units. And so we've got ample supply of phenomenal product and then some of the showings that I tag along and learn how to be a phenomenal leasing associate from our guru leasers, I personally see a potential resident expression of joy when they walk into a brand -- newly renovated kitchen with new flooring and that is real testament as to the success we have in the investment, in the significant investments we've made in our product quality. It's really, really showing, and we are absolutely gaining market share. There is no question about that. In the market research and shops that we do, we are absolutely doing better than our competitors as a result of our renovation program and especially our reengineering of our culture. There is a different buzz in our communities and it's a phenomenal vibe and feel. And when everybody's happy and having a good time, it's a much different culture and atmosphere and it's really helping with our rentals and building a phenomenal community and place to live. So we're just thrilled. Again, we just can't give enough credit to our team for rising to the occasion and coming up with great new ways of increasing retention and occupancy and reducing our incentives, as a result. Because value is exceptional, especially in Alberta with what we've invested in. It really is exceptional value. As we noted earlier, $1.35 on average a square foot is exceptional rent per square foot. We haven't seen that kind of exceptional value proposition for Alberta renters for decades. So we're obviously very, very happy.

[Mario Saric, Analyst]

Absolutely. so Sam, you mentioned, beginning of the year, you're taking market share, the occupancy came down a little bit year-over-year on a same-store basis. And so would it be fair to say that the broader market is seeing a bit more occupancy erosion than that? Or is some of that occupancy decline year-over-year just related to kind of the capital spend?

[Sam Kolias, Chairman & CEO]

Overall, the market's gaining in occupancy and the vacancy overall is dropping. Where we're seeing vacancy drop is in the new supply significantly. There's significant absorption in the new supply. Then in the newly renovated and repositioned value-add product, significant improvements in occupancy. And where we're seeing vacancy, to be quite honest is -- perfect example is Regina, where we need to focus in on, and we are working on Regina and Saskatoon. The brand-new communities we built in Regina are almost entirely full. Perfect example in a very competitive tough market where new supply reigns and great product quality reigns, and service. And where we're seeing a lower occupancy is in the communities that we are working on, as we speak. We're taking our eyedropper, where we apply eyedropper amounts of capital in the perfect place and the amount to maximize the return of that capital and to turn around that community and maximize that and increase that occupancy and reduce those incentives as a result of the very calculated capital spend that we're doing now versus what we were doing 2, 3 years ago.

[Mario Saric, Analyst]

Okay. My last question, just really quickly on the guidance. It's up about 2.5% on FFO at the midpoint. You left your same-property NOI guidance intact of 4% to 9%. It sounds based on kind of the press release and the commentary, the revenues are going towards the top end of the range and the cost are coming in maybe a little bit below on the property tax side, for example. So when you look at the guidance being intact of 4% to 9%, within that range, I guess, today relative to 3 months ago is the expectation for the same property NOI to be higher than it was before?

[Roberto A. Geremia, President]

Yes, it's Rob. Yes, so we are shifting up the curve for sure on that one as well. And couple of the other variables though as even if you notice, we already -- we are getting close to the 9% in our Alberta portfolio already for the first half of the year. So just maintaining that alone is going to push the curve overall on all there as well, too. Also, we have to remember that in the Alberta portfolio, we have a big savings, which is no more carbon tax for the last half of the year in Alberta. That actually adds about $1 million to our NOI alone adjusting for that. We have not -- again, we're not sure of 2020 yet because until the elections come up, we won't know. But we do know now for sure that there is no carbon tax for the last half of the year. So that has a positive impact for sure.

[Mario Saric, Analyst]

Right. So would the carbon tax savings be in the 4% to 9%?

[Roberto A. Geremia, President]

Yes. Yes. And again, we shifted up the curve on -- originally, we were in the 5%, 5.5% range for the year. We've shifted up the curve on that as well now, too.

[Operator]

Your next question is from Brendon Abrams of Canaccord Genuity.

[Brendon Abrams, Analyst of Real Estate]

Just taking a look here at your Ontario portfolio. I mean we don't talk a lot about it, almost 10% of total suite. It looks like the mark-to-market or gain to lease opportunities, it's growing and it's now above $10 million. Just curious in terms of where the turnover is in this segment of your portfolio and how quickly do you think you can fully capture this opportunity?

[Roberto A. Geremia, President]

Brendon, it's Rob. Very good point there. Yes, the mark-to-market is quite large there. We're actually seeing lower turnover than we have in the past. The spread is getting higher and higher but we are getting, with our renovated product, to be honest, a turnover of 30% to 35% rental increases on those but the number is not increasing. That's a part of a challenge, I think, the whole Ontario market has, as on legacy assets -- is the mark-to-market is very, very large. But as it gets larger and larger, your turnover is going to get lower and lower on an overall basis as well too. So -- and we're also seeing the same turnover occur year-over-year. So the same customer who is moving over versus the new one is full mark-to-market. So I don't have a crystal bar on how long will it take us to get the full mark-to-market on the portfolio. I think it's going to be a little longer than we anticipated. But we -- the good news is, what is turning over, we're getting substantial increases and we're also doing renovations to those suites for the long-term sustainability of that income flow as well.

[Brendon Abrams, Analyst of Real Estate]

Okay. So roughly speaking, I mean, where would you peg turnover in your Ontario portfolio? Would it be...

[Roberto A. Geremia, President]

15%.

[Brendon Abrams, Analyst of Real Estate]

Okay. And just turning gears here. On the disposition side, the last 2 assets you've sold in Saskatoon, both premiums to IFRS, about $150,000 per door. Just considering the kind of strong valuation that you've been able to get, is there a thinking or thought process around kind of accelerating this program and to free up more capital to redeploy elsewhere?

[Elizabeth A. Russell]

Yes. We actually -- our -- what we do is we look at each and every asset, and we are culling the portfolio constantly. But we do not have any direction to sell anything further for 2019. And again, if you go back historically, we have sold from time to time but it's on a one-off opportunity-driven spot.

[Brendon Abrams, Analyst of Real Estate]

Okay. And just last question for me before I turn it over. Maybe I missed it in the disclosures but the projected stabilized cap rate for Brio, just wondering if you have an update there or -- and now that you are much further along in the project?

[Elizabeth A. Russell]

Okay. So we are working right now on a pre-leasing program with RioCan. And we'll be able to give you a further update as we move forward. But as we're -- over the next 6 to 9 months, we are going to be narrowing it down. I guess the good news is we are seeing Calgary getting improving overall. And as Sam has indicated earlier, the new purpose-built rental is seeing higher rents. And -- so it's a really fast-moving market right now on the -- with the new purpose-built development. So again, we'll give you an update next quarter after we work through this with our partners.

[Operator]

Your next question is from Matt Kornack of National Bank.

[Matt Kornack, Analyst]

You mentioned your eyedropper that you're dispersing capital with, and then -- and we've seen it in the numbers in terms of CapEx coming down. I know Edmonton was sort of the next destination for some of that capital and obviously, the larger portfolio there. Should we expect that you'll be able to maintain the sort of total CapEx not maintenance but total CapEx figures?

[Roberto A. Geremia, President]

It's Rob. Yes, you're right. Edmonton is the biggest portfolio. As Sam mentioned, we haven't put enough detail into yet. Although, if you look at our brand of diversification, Edmonton has a large number of living brands. So our -- it's going to be a focused, kind of a smaller, more moderate renovation program. So on an absolute basis, it will be lower but on a per door basis, it's going to be great. But I can't -- I think Sam's words are exactly right. We're using the eyedropper to make sure that we can get the returns, we can do all this stuff here with that. And if you look at the slide, on the Prominence Place slide there, again, that's the kind of renovation we can anticipate at the living communities brand that we're having. Again, very nice, looks really good, really appreciative and the balance and right adjustment we need to get really good returns is not that great, but we are getting it.

[Matt Kornack, Analyst]

Okay. So it sounds like current levels, at least on a per suite basis across the portfolio, are indicative. I mean if you go back into the 2011 to '16 era, you were probably at about $2,500 a suite in terms of total CapEx. But -- and now I think it's around $3,500 or do you anticipate that you'll eventually trend back down towards where you were historically?

[Roberto A. Geremia, President]

We'll trend back down because as Sam mentioned, we invested heavily upfront in a lot of the units and they're recycling above, again, so we will to reinvest in those as well too. Our design and operations teams have done a phenomenal job lowering costs even on those particular categories as well, which is key. But we're -- it's going to be very opportunity driven and based.

[Sam Kolias, Chairman & CEO]

Matt, one of the great benefits of this investment that we've made is the product material quality. In the flooring, for example, we're placing carpets that we would have to replace every 5, 10 years with lifetime guaranteed and backed product. That's flood proof too, which is a big, big plus. And so we've seen this flooring, it's scratch-proof and very durable and it's going to be last a lot longer and it's so much faster to turn an apartment with this flooring than a carpet steam used to be. And the newness of that floor, over many turns, is really impressive. And so that's another reason why we expect to see savings down the road because we've made significant investment upfront to significantly improve the material that we're using. And as a result, improve the durability over the long run, and it's a great longer-term investment that we'll see benefits over many, many years.

[Matt Kornack, Analyst]

Okay. That makes sense. And with regards to the balance sheet, you guys are being a little bit more efficient in terms of not holding huge cash balances as you had in -- at some points in the past. But with regards to up financing on the mortgage front, I think most of this year has been dealt with. There's a few mortgages where I don't think you've disclosed what the new mortgage will be. But what is the opportunity there? And obviously, given where the 10-year bond yield is at this point, are you going to be able to extract some mortgage up financing?

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

Matt, it's James. Yes, there is an opportunity there. We're -- based on our original budget, we likely will do somewhere between $10 million and $30 million of up financing in the last quarter of this year. But as you pointed out, I mean, we're doing 10-year money right now at about 2.1%, 2.2%. So there is a -- there continues to be a good positive mark-to-market on those renewals.

[Sam Kolias, Chairman & CEO]

Matt, it's Sam. The real big primary source of capital, free cash flow. That's where we're really focusing in on, where we're going to get our primary source of free capital cash flow -- capital. And just to give you an example, at $1.35 a square foot, if you apply even $0.70 on our 20 million -- 29 million, 28 million square feet, that's significant amount of additional free cash flow. And that's why we reengineered our distribution policy to enable us access to the most economic source of cash flow, and that's free cash flow. And there's a couple of public companies and I, God bless Bob Dylan, he's a perfect example of what happens with free cash flow even in a highly concentrated Alberta market. We've got to look at that because when we were public and in -- and retaining all of our cash flow, that's absolutely when we delivered the highest growth per unit in any kind of measurement period. And so there really are original public structure and Main Street public structure are really good case examples of how effective free cash flow is. And that really is the primary goal and focus going forward, is free cash flow and generating and maximizing that. And that's the plan.Thank you, everyone. We'd like to end this call now by thanking our amazing team, loyal residents and all our stakeholders. We are pleased with the improving rental market fundamentals, the exceptional value we continue to provide both our residents and investors and for the continued great service from all our team. Thank you.

[Operator]

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