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Boardwalk Real Estate Investment Trust
Earnings Call Analysis
Q2-2024 Analysis
Boardwalk Real Estate Investment Trust
In Q2 2024, Boardwalk Real Estate Investment Trust (REIT) showcased impressive financial performance with a same-property net operating income (NOI) growth of 14.2% year-over-year and overall revenue growth of 9.5%. This reflects the company's strategic focus on sustainability and resident satisfaction, resulting in high occupancy rates and increased rental income.
A significant driver behind this growth has been the robust economic conditions in Alberta, Boardwalk's primary market. The province is experiencing record levels of interprovincial and international migration due to its diverse economy, job opportunities, and affordable housing options. With approximately 73% of their portfolio concentrated in Alberta and Saskatchewan, Boardwalk is well-positioned to leverage these favorable market dynamics.
Boardwalk has successfully reduced its leverage, with debt to total assets decreasing from 43.2% at the end of 2023 to 40.8% by June 2024. Additionally, the debt-to-EBITDA ratio improved from 11.02 to 10.75 during the same period. This reduction in leverage positions the company to enhance its cash flow, as reflected in their Funds from Operations (FFO) per unit, which reached $16.9.
Looking ahead, Boardwalk revised its financial guidance for 2024, expecting same-property NOI growth between 12.5% and 14.5%. The FFO per unit is forecasted to range from $4.11 to $4.23, indicating a strong momentum that investors can anticipate as the year progresses.
Operating expenses increased modestly by 1.6% in Q2 2024, largely attributed to inflation-driven wage adjustments and higher utility costs. However, the company has managed to keep overall growth in expenses below inflation, showcasing effective cost management practices.
Boardwalk is enhancing its operational efficiency through an AI-driven customer service platform. This implementation aims to automate many customer interactions, which is expected to reduce costs significantly in the future while improving service levels. In addition, they are investing in infrastructure, with 19 projects planned for 2024 to improve resident amenities.
The company is actively pursuing strategic acquisitions in its core markets, mainly focusing on Calgary due to sustained strong rent growth. Recently, Boardwalk announced several acquisitions, including two new developments that enhance its portfolio and align with their growth objectives.
The current market conditions reveal a significant supply-demand imbalance in Alberta, which is likely to push rental rates higher. Boardwalk's average mark-to-market rent indicates a substantial revenue opportunity of approximately $70.6 million, suggesting that continued rental growth is anticipated.
Boardwalk REIT stands out as a compelling investment opportunity due to its strong financial performance, effective cost management strategies, and a robust growth outlook supported by favorable market dynamics in Alberta. Investors can look forward to a promising future underpinned by sustainable organic growth and strategic expansion.
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Good afternoon, ladies and gentlemen, and welcome to the Boardwalk Real Estate Investment Trust Second Quarter 2024 Earnings Call. [Operator Instructions] This call is being recorded on July 31, 2024. I would now like to turn the conference over to Mr. Eric Bowers, VP of Finance and Investor Relations. Please go ahead.
Thank you, Ina, and welcome to the Boardwalk REIT 2024 second quarter results conference call. With me here today are Sam Kolias, Chief Executive Officer; James Ha, President; Lisa Smandych, our current Chief Financial Officer; Gregg Tinling, our incoming Chief Financial Officer; Samantha Kolias-Gunn, Senior VP of Corporate Development and Governance; and Samantha Adams, Senior VP of Investments.
We would like to acknowledge on behalf of Boardwalk, the treaties and traditional territories across our operations and express gratitude and respect for the land we are gathered on today, and we now know is Canada. We respect indigenous peoples and communities as the original stewards of this land. We come with respect to this land that we are on today for all the people who have and continue to reside here and the rich diversity of First Nation, Inuit and Métis peoples.
Before we get to our results, please note that this call is being broadly distributed by way of webcast. If you have 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 and quarterly report.
Starting on Slide 2, we would 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. I would like to now turn the call over to Sam Kolias.
Thank you, Eric, and welcome, everyone, to our Q2 2024 conference call and especially a very warm welcome to Gregg Tinling, our CFO as of August 1. Starting on Slide 4, our culture. From our humble beginnings 40 years ago in 1984, our resident members are at the top of our organization. Our leaders put our team first, our team puts our resident members first. Guided by the golden rule, we have a peak performing customer service culture that creates exceptional results as we can see on Slide 5.
Our continued strong performance with GAAP and non-GAAP measures, increasing from the same quarter last year, our same property net operating income growth has increased 14.2%. This quarter as well as our funds from operations per unit of 16.9%, with the exception of profit, which has decreased as a result of fair value adjustments. I would like to now pass it over to Samantha Kolias-Gunn.
Thank you so much, Sam, and congratulations to our team, our Boardwalk family as we continue to deliver leading results. Macroeconomic conditions are robust in our core markets as illustrated on Slide 6, demand remains strong. Alberta, our most significant market continues to report record high interprovincial and international migration as a result of the Alberta advantage to quote our Premier Danielle Smith.
What makes the Alberta advantage our diversifying economy, job opportunities, world-class educational programs that attract skilled talent, an exceptional quality of life and affordability. Alberta has some of the most affordable rental rates in the country that will continue to attract more prospective Albertans and Boardwalk resident members home. Please refer to our appendix for more data on the Alberta advantage.
Supply remains low relative to anticipated household formation as challenging development economics and labor shortages continue. We are working collaboratively with all levels of government and other stakeholders to encourage implementing proven public policy to help rebalance demand and supply over the longer term. We would like to now pass the call on to Greg Tinling and Lisa Smandych, who will provide us with an overview of our quarter results, strong balance sheet, fair value and ESG. Greg?
Thank you, Samantha. Slide 7 shows our key operational metrics with high occupancy, lower incentives and higher occupied rents, resulting in higher revenues for Q2 2024 compared to the same period a year ago. This is a reflection of our key strategic decisions made to maximize free cash flow and diversify our product offering, yielding significant financial performance.
Slide 8 highlights our FFO per unit and distribution growth. Boardwalk's minimum distribution policy or maximum cash flow retention policy resulted in an FFO pay-out ratio of 34.6% for Q2 2024. Our disciplined FFO pay-out ratio continues to allow us to fund our organic growth opportunity and reinvest it with cash flow.
Slide 9 illustrates our leverage reduction, highlighting our leverage metrics with respect to debt to total assets and debt to EBITDA. Boardwalk is naturally deleveraging, resulting in improved debt metrics, with debt to total assets at 40.8% at June 30, 2024, compared to 43.2% at December 31, 2023, and debt-to-EBITDA of 10.75 at June 30, 2024, compared to 11.02 at December 31, 2023.
Slide 10 shows strong steady leasing spreads on new and renewed leases within our self-regulated, resident-friendly centric model, keeping retention and referrals high and our turnover and expenses low. Year-over-year, we have seen a significant improvement.
Existing leasing spreads on renewals are strategically moderated to keep providing resident-friendly, affordable housing options in our core markets while lowering our costs and steadying operational results, a win-win for all our stakeholders.
Slide 11 shows continued strong and steady sequential rental revenue growth, including 2.3% growth in Q2 2024 compared to Q1 2024, a result of strong leasing spreads during a seasonally higher period from a leasing volume perspective.
Slide 12 highlights Boardwalk's large presence in affordable and nonprice controlled markets and with approximately 73% of our portfolio in Alberta and Saskatchewan, we are well positioned for sustainable organic growth. Boardwalk's current mark-to-market, which includes the reduction of incentives, averages $177 per suite and equates to an approximate $70.6 million revenue opportunity. With the current supply-demand imbalance, we anticipate market rents will continue to increase, resulting in a continued mark-to-market revenue opportunity.
Moving to Slide 13 for Q2 2024. Same-property net operating income increased by 14.2% as compared to Q2 2023, with revenue growth of 9.5%. For the 6 months ended June 30, 2024, same-property net operating income increased by 13.9% with revenue growth of 9.4%.
Alberta, the Trust's largest region saw a revenue growth of 10.8% in Q2 2024 and 11% for the 6 months ended June 30, 2024, as compared to Q2 2023 and the 6 months ended June 30, 2023, respectively. Operating expenses increased by 1.6% in Q2 2024 and 2.6% for the 6 months ended June 30, 2024, primarily due to higher wages and salaries as a result of inflationary adjustments at the beginning of the calendar year and higher utilities from an increase in utility rates. Team remains committed to ensuring focus and discipline when managing controllable operating expenses.
On Slide 14, administration costs increased just over $1.7 million as compared to Q2 2023 and increased $1.4 million compared to Q1 2024. The increase was driven by inflationary wage adjustments at the beginning of the year, an increase in software costs, including cybersecurity and new software to improve operating efficiencies as well as increases in professional services such as legal, tax and government relations.
Specific to Q2 2024 is approximately $100,000 for our new customer service platform while also incurring approximately $325,000 for the historic call center. Beginning September 2024, the Trust expects to only incur approximately $100,000 per quarter. Also, there were increased travel costs specific to Boardwalk participating in the homes of hope program, a cost of approximately $200,000.
Deferred unit-based compensation increased due to an increase in the number of participants as well as the cost of the program, noting that historically, the highest deferred unit-based compensation expense is in the second quarter. I would like to now pass the call on to Lisa Smandych, to discuss the Trust's financial foundation and ESG. Lisa?
Thank you, Gregg. Slide 15 illustrates Boardwalk's mortgage maturity schedule. Our mortgages are well staggered, with approximately 96% of our mortgage balance carrying NHA insurance through the Canada Mortgage and Housing Corporation. This insurance remains in effect for the full amortization of the mortgage, and in addition to carrying the government of Canada's backing, provides access to financing rates -- to financing at rates lower than conventional mortgages with the current estimated 5-year and 10-year CMHC rates of 3.85% and 4.5%, respectively. Though current interest rates are above the trust maturing rates, the trust maturity curve remains staggered, reducing the renewal amount in any particular year.
Lastly, the trust has an interest coverage of 2.86% in the current quarter. Slide 16 highlights our 2024 mortgage program. To date, we have renewed or forward loss $244.6 million at an average rate of 4.48% and an average term of 6 years. Current underwriting criteria in our most recent submissions to CMHC and our lenders has remained in line with our historically conservative estimates.
Moving to the right of the slide, we provide a summary of Boardwalk's available liquidity. The Trust is well positioned with approximately $120 million in cash and subsequently funded financings as well as an undrawn $196 million operating line. This approximate $316 million in liquidity provides the Trust with a flexible financial position. Furthermore, subsequent to June 30, 2024, Boardwalk added an additional $50 million demand facility to upsize our total capacity.
Our credit facility has remained unchanged since 2007 and given the cost of inflation in recent years, Boardwalk felt it was prudent to keep in mind with current asset values and position ourselves favorably for opportunistic, strategic and accretive acquisitions that may present themselves in the future.
Slide 17 illustrates the Trust estimated fair value of its investment properties. Excluding adjustments for IFRS 16, which totalled $8.2 billion as at June 30, 2024, as compared to $7.6 billion as of December 31, 2023. The increase in overall fair value is the result of increases in market rents of select sites and communities as market fundamentals improve as well as the acquisitions of the Circle and the Brenda apartments in Calgary, Alberta and Dawson Landing in Chestermere, Alberta, while being slightly offset by an increase to capitalization rates. Current estimated fair value of approximately $236,000 per apartment door remains below replacement cost.
In consultation with our external appraisers, the capitalization rates or CAPREIT used in determining Q2 2024 fair value were unchanged from Q1 2024, an increase from Q4 2023 from adjusted made to the Trust Ontario assets in London and Kitchener Waterloo, Cambridge markets. As it does every quarter, the Trust will continue to review completed asset sales transactions and market reports to determine if adjustments to CAPREIT are necessary. Most recent published CAPREIT reports suggest the CAPREIT being utilized by the Trust for calculating fair value are within their estimated ranges.
Slide 18 highlights our ESG initiatives. Using a disciplined capital allocation approach, we are focused on reducing emissions through reduced utilities consumption and therefore reducing utilities costs, while also promoting social and governance initiatives. We encourage our stakeholders to view our 2023 ESG report available on the Trust website. I would now like to turn the call to Samantha Adams to highlight our capital allocation and discuss the development pipeline. Samantha?
Thank you, Lisa. On Slide 19, as previously mentioned by Gregg, we continue to prudently deploy some of our free cash flow to repositioning and value-add capital improvements at our existing communities. We currently have 19 projects underway or planned in 2024, which include adding to or improving common area amenities, which will further enhance our revenue growth as well as resident satisfaction.
In addition to our common area projects, we are also continuing with our suite optimization program, which is the conversion of underutilized storage or administration spaces that can be converted to rental suites. Each project we undertake is evaluated individually, and we target at least an 8% return on cost, providing an accretive return on our capital.
On Slide 20, we are pleased to confirm that we have strategically allocated the net proceeds from the December 2023 equity raise to further support our growth and enhance the overall quality of our portfolio. As disclosed in Q1, we repaid our $57.2 million construction loan on 45 Railroad, which bore an interest rate of 6.6% and closed on the circle, a $77.6 million 295 suite community located in South Calgary.
This acquisition, which was a forward purchase, represents a stabilized cap rate of 5.75% or about $263,000 per suite. The Circle is currently unencumbered, which provides us with some additional balance sheet flexibility going forward. Most recently, we announced that we have a purchase agreement in place to acquire Elbow 5 Eight, which like to Circle is a forward purchase. Elbow 5 Eight is in the final stages of construction, and we anticipate closing in Q1 of 2025, subject to closing conditions. The property is a 255 suite, 6-story wood frame project very well located, about 15 minutes south of downtown Calgary and a 2-minute walk to Chinook Centre mall.
With a purchase price of $93 million, this represents a stabilized cap rate of 5.75%. While we anticipate stabilization to occur in Q4 of 2025, we are initiating a pre-leasing program later this quarter.
Dawson Landing is a 63 unit, 12 building newly constructed townhouse development located in Chestermere, a rapidly growing community located approximately 30 minutes east of Calgary. Comprised of 2 and 3 bedroom townhomes, Dawson Landing is well located within walking distance of many key amenities, including schools and retail. Our acquisition price of $26.3 million represents a cap rate of 5% and increases our exposure to the townhome rental asset class.
Slide 21 provides an update on our development pipeline. 45 Railroad is approaching the final stages of stabilization. The 2 rental towers are approximately 80% leased, and we are currently marketing the commercial space. This project was delivered on time and on budget, and we are projecting a stabilized yield within our forecasted range.
Our 3 Victoria area development projects continue to move forward. Aspire has a target occupancy of December 31, 2024, for Building 1. The framing for Building 2 is scheduled to commence this August and the estimated time line for completion is June 2025. The Aspire is progressing on budget and is located adjacent to our existing Aurora community, which will allow for greater operational efficiencies once completed.
The Marine and Island highway projects are in the preconstruction phase. We have completed tender drawings for the Marine and the tender results expected in September will determine project timing. On Island Highway, we have just received official rezoning, and we are working through next steps.
Marda Loop is our 1 acre land assembly in Calgary, located in the heart of one of the city's most desirable and amenity-rich neighborhoods. While currently in the preconstruction phase, our concept plan will feature the cost benefit of wood frame construction versus concrete as well as larger suites that we believe will provide a differentiated product in the Marda Loop node that will attract strong rental rates. I would now like to turn the call over to James Ha.
Thank you, Samantha. Starting on Slide 22, we have had a solid start to 2024 and are well positioned in our strategy and approach to create value for all our stakeholders. Our resident-friendly approach to moderate and sustainable rent adjustments in our own our nonprice controlled markets is resulting in strong leasing spreads and high occupancy, while also elongating our best-in-class organic growth trajectory.
As our free cash flow continues to grow, our unique strategy of minimum distributions is maximizing our available capital for reinvestment back into housing and has improved our balance sheet, providing increased flexibility for future opportunities, including investments in our own value-add improvement program as well as the acquisition and development of new communities to expand our portfolio on an accretive basis.
We believe executing on this growth approach will continue to create value for all our stakeholders, while our current valuation represents unique value in the public market and when compared to private market transactions.
Slide 23 provides an update to our 2024 financial guidance. With our strong performance in the first half of the year, continued strong leasing trends into the fall and measured cost control to date, we are updating our guidance to tighten the overall range for the balance of the year.
2024, we now anticipate same-property NOI growth to range between 12.5% and 14.5% and FFO per unit to range from $4.11 to $4.23. As always, we will update our guidance on a quarterly basis and as market conditions may warrant.
On Slide 24, we share an update on recent transactions that have occurred in our core markets. These transactions highlight the increasing investment activity and the value that Boardwalk trust unit ones represents relative to both transaction cap rates and on a per door basis.
Lastly, we know many of our team are listening into this call while preparing suites on a back-to-back basis with our month end today. We cannot thank our Boardwalk family and team enough for the over 200 units we will turn over today for our new resident members to move into tomorrow. Thank you to our team for providing communities that our resident members are proud to call home. We'd now like to open up the line for questions. Ina?
Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Frank Liu from BMO Capital Markets.
So since the launch of your strategic moderation of rents you have been able to hit the 7% to 9% target spread. Just wondering how long you think the current momentum will sustain and at what point you are likely to revisit target? I mean we see the MTM contractors slightly this quarter like would you reconsider your target and this strategy once, let's say, heads to mid-single digit.
It's Sam. And looking at Slide 42 in our appendix, our overall average rents in place for typically a two bedroom because that's our average size is $1,460 versus the Canadian average of about according to Rentals.ca, asking prices of $2,260. So we've got exceptional affordability and value in our product and service.
Of particular note is our largest region, Edmonton, which has an even lower average rent for an average two bedroom of about $1,416 and Rentals.ca on their June most recent report shows an average asking rent in Edmonton of $1,708. So we're really, really happy to be able to provide exceptional value and the difference between our in place rents and the rents on average in Canada are significant. And so the most important lesson we've learned is to continue to provide affordable housing.
And there's always a demand for affordable housing. And with that gap that we're seeing, with inflation that we're seeing and the cost of new construction that we're seeing, we see a great future for a win, win, win for our resident members, our unit holders and our associates and our communities. So we are seeing a very bright future and continue to -- because of the relative value that we continue to provide.
Got it. Thanks. And so you think this will be sustained -- and this will be sustainable like into 2025?
The number that's free. And given the relative rent that we have in place versus our competitors in the marketplace, that shows we've got quite a gap still, and we're going to continue to be flexible with our residents continue to be self-regulated because we agree regulation is good as long as its self-regulation. That's the best form of regulation. So yes, we -- because of the gap, see a number of years ahead of us that we'll continue to self-regulate, provide the best value and growth as well. That's that win, win, win that we are in a very great position to provide.
Thank you. That's encouraging to hear. And just want to switching gears to the operating expense side. The muted operating expense growth has contributed to a decent margin expansion this quarter. Do you have a sense on how property tax insurance are trending for the second half of this year and into 2025?
Yes. Hi, Frank. For insurance, we just recently went through our renewal and it went very well. We -- it's going to be lower than what we expected and lower than last year. And as for property taxes, we have received all of our final bills. So property taxes, we're looking at around 3.5% for the year. And overall, total rental expenses, we're looking at a 1% to 3% growth.
Got it. And then insurance, do you think it's like a 3% in that 3% range or?
It's just going to be lower than last year. I think we're looking at perhaps a 10% savings there.
Okay. Got it. So lastly, I want to catch up on the CapEx side. Your maintenance CapEx is tracking closely to your budget. Are the year-to-date value-add CapEx seems relatively lower to your budget. Is this just a function of lower turnover? And do you expect this to catch up in the second half of this year?
Hi, Frank, it's Lisa. You have it bang on. So it's a little bit driven by turnover, but more than anything, it's driven a bit by seasonality. We do find that the first 6 months of the year from a CapEx spend tends to be a little bit lower than that second half. Q3 is that prime CapEx spend period, especially for exterior projects in Canada.
We have seen -- yes, we have seen a decline in suite turnover and our suite CapEx would be slightly down, but not the same as what we saw last year. As you recall, last year, we were quite below our suite CapEx budget. This year, we're trending a little bit behind. Again, trying to make sure to pivot those dollars savings to other capital projects were possible. Yes. And so the intention is we should come close to that capital budget for 2024.
Got it. Thank you. I guess that's all for me. Congrats on another strong quarter. I'll turn it back. Thank you.
Frank. It's James here. While you brought up the topic of insurance, we really cannot thank our insurance team and our entire team enough for the great work that we're doing in ensuring that our residents have insurance policies and reducing all of our claims that resulted in that strong insurance decline that Gregg was speaking to. So thank you, thank you, thank you our whole team.
And your next question comes from the line of Jonathan Kelcher from TD Cowen.
First, just sticking with the insurance for one second, what sort of what percent of revenue is insurance costs usually?
Jonathan, insurance is roughly, let's just call it roughly $10 million to $11 million of expense.
Okay. Okay. That is helpful. That is helpful. And then just switching gears a little bit here and maybe get Samantha answer to questions. On acquisitions, where are you guys seeing the most opportunities right now?
Yes, we still see an incredible number of opportunities in our core markets. So Calgary specifically, I would say, where we're still seeing really strong rent growth. We're not exclusively focused on Calgary, obviously. We're keen to buy the best property, the best community in the best location that will continue to drive our amazing rent growth. And we're also looking at recycling out of some of our noncore assets. So that's all part of the plan. But I would say today, some of the best value is still in Calgary.
Okay. And then any other -- like if you're looking at Ontario, would that just be brand new stuff being away from rent-controlled assets?
Yes. I think that's fair to say that it really needs to be 2018 and newer. I mean, I would never say never, but I think for us moving into sort of the non-rent controlled environment in Ontario is the goal.
Okay. And then just on development, do you think your -- you guys will get in the ground on one of the three developments that you haven't started on in 2025?
It is -- yes, it is very likely.
Which one is most likely?
I think -- I can get back to you with more specifics, but I think the Marin is the most likely. That's the furthest along of the three.
And your next question comes from the line of Kyle Stanley from Desjardins.
Probably a bit less impactful for Boardwalk relative to some of the peers. I'm just curious on your thoughts for your outlook for third quarter leasing and the beginning of the school year. Obviously, this will be the first year of the foreign students [ Vitacap ]. So just curious on how that plays out.
Kyle, it's James. So far, as you know, we're leasing into August and even into September at this juncture, and we're continuing to see strength across our portfolio. You can see in the leasing spreads, we're continuing to -- we're anticipating to continue to be in that range. But when we look at availability, there really is limited availability across our portfolio. When we look at our university areas in Edmonton and in Calgary, both are experiencing limited availability at this juncture.
And so, from a foreign student or the nonpermanent resident cap, we're not seeing much impact today on the ground. But I'll remind everybody that for Alberta specifically, because there is a proportionate adjustment for those student visas, we actually anticipate Alberta to come out ahead with that adjustment. And so good news. As we look into fall, we're in a good position to continue on this elongated and moderated path that we've been speaking to.
Okay. Great. That makes sense. Maybe just kind of building on Frank's earlier line of questioning. But as we start to really focus in more on 2025 and the growth story there and likely beginning to really see the merits of your strategic moderation and exam gave some good color on expectations for leasing spreads. But kind of when you dial back, do we still see this opportunity for kind of mid- to high single-digit revenue growth into 2025 given maybe the demand dynamics you're seeing in the market today?
Kyle, it's James here again. Our whole strategy that started in 2023 on the strategic moderation was to develop and build very consistent and strong results. And so, you've seen that so far this year where our results are very much mirroring how we performed in 2023. And we're aiming to build the exact same for 2025. And so as Sam talked about in terms of affordability, in terms of our own strategic moderation, we are set up well to continue to deliver those similar results. When we look at development and we look at demand relative to supply or under construction, that continues to remain favorable. And so from a macro standpoint, we do think we are set up to deliver very similar results for 2025. But of course, we'll provide that formal guidance later in the year.
Kyle, it's Sam. And any provider of a product and service that provides exceptional value, exceptional experience and the best product quality and focuses on customers, which is resident members in our case, any provider of anything that focuses on that is going to be successful. And that's what we have to stress always when we get any inbound calls, especially from media that asks us what our focus is, and that's why we're always going to focus in on and refer everyone to Slide 4. Our resident members have residents make happy investors, happy associates make happy residents. And so that's really the formula and that creates a virtuous cycle of low turnovers, high referrals, and we've discussed this a lot before and great results. So, we really start with our residents first always.
Okay. Just last one. Looking at where the CMHC insured rate is today, especially on the 5-year, it looks like positive leverage on a going in basis is a lot more achievable maybe than it's been for a little while. What kind of impact do you think this has in the transaction market maybe in your core markets, but just broadly across the country, any hangover from deals that got pulled forward because of the capital gains inclusion? Just a broad question, I guess, on the transaction environment.
Kyle, maybe I can start here. Certainly, more of this more stable interest rate environment, as you've seen in our there has been incrementally more transaction activity even ourselves getting in front of the capital gains change with the closing of some of the acquisitions that we've previously announced. And so we certainly are expecting more activity out there. Samantha mentioned earlier, I think it was in response to Jonathan, we certainly are looking at opportunities to become more transactional and look at even our noncore assets as an opportunity to recycle capital.
And so, it's early days. Summers certainly going to be telling for this opportunity to see what occurs out there. But where else in Canada right now, can we see the strong rental growth that we're currently seeing, we're talking double-digit NOI growth -- and per our slide, you're seeing transactions generally with a hand or to your point with positive leverage. But as we know, as NOI grows by 10% or 15%, these 4.5 caps quickly turn into 5, which can turn into 5.5%, which we turn into 6. And really the place that we're seeing that is in Alberta and Saskatchewan.
And your next question comes from the line of Sairam Srinivas from Cormark.
Thank you, Alberta. Good afternoon, [indiscernible]. Just focusing on SaaS veins a market which we had a lot, but it's a market that has seen a giant of rent growth in the last couple of quarters. Can you probably give a bit of color in terms of what you're seeing in that market? And if this is a market that would probably see some amount of capital allocation like.
Looking at rental .ca and our discussions and all the credit codes to our Saskatchewan team because we really -- every month, we review results catch win or late. Wow, just month over month over month and years. And when we look at relative rents, where is there even more portal rent than Edmonton, that's Regina and Saskatoon. And so, the relative affordability is a huge factor.
Also, the leadership, the public policies, the diverse economy, agriculture, resources, rares, real entrepreneur growth mindset, premier-- again, it's really a great, great province and Saskatchewan's got what everybody in the world needs like Alberta. And so, we're really in a great spot being both these amazing provinces.
Sam, so is that market something you guys would be keen on growing in looking ahead in the next 12 months?
It's Samantha. Yes, absolutely. And I would say specifically in Saskatoon, we have looked at a few opportunities, the investment team has, and we continue to be strong believers in both Regina and Saskatoon.
And just probably going back on your comment on noncore assets that you could probably see divested over the next 12 months, are there specific markets which you feel you kind of reach a potential and probably you want to kind of get out of?
Well, we're not looking to exit this market, but we are looking at trading out of some of our noncore assets in Edmonton. But we're certainly not exiting the Edmonton market.
And your next question comes from the line of Mario Saric from Scotiabank.
Just the first question, just on your 100 basis point higher in property guidance boost this quarter for '24. Specifically, was it on higher-than-previously expected revenue or lower operating costs?
Mario, it would be a combination of both, I would say. So yes, revenue is certainly coming in at the higher end of our range, and that's sort of what we're forecasting when we look through the year. And then expected yes, we are the team in that discipline focused on savings and bad debt, advertising, insurance, repairs and maintenance. So, it would be a combination of the both.
And on the revenue side, is it more the occupancy holding up quite well or new or renewal spreads where you're doing it better than you thought?
Mario, it's James. The combination of both. And in addition to Lisa's point on our team doing an exceptional job in controlling comps, we had a great first half of the year on the utilities front as well. And so, when you put all of that together, that -- and in addition to the property tax finalization that Greg was speaking to earlier. All of that has provided us the confidence and conviction to tighten that guidance going forward.
Okay. Just on the expense side, the growth was 1.6% this quarter, it was 3.5% year-over-year in Q1. I think you talked about it being kind of 1% to 3% this year. I know 25% is a ways out, but if you're able to maintain occupancy where it stands today, and I'm not talking about property taxes or utilities to some extent, those are less controllable. When we think about your OpEx in '25. Is there a road map there where you can see similar type just with modest inflationary growth in '25 relative to '24?
Yes. I think, Mario, I mean we've always articulated that Boardwalk goal when it comes to managing expenses is to stay below inflation to your point. I think when we're looking at those controllable expenses in those tight markets, we would look for our expenses to be below inflation. So I guess, yes, looking 2025, if you take inflation and Boardwalk would likely to be a little bit below that would be the goal.
Got it. Okay. And then just last question on the 10% to 15% spread 7 to 9 on renewal. When you missed re-shop your competitors in your primary markets, would you say that competitor you're trying to push a similar range in terms of rental growth or is it slightly different?
Mario, for the most part, we're seeing pretty well similar ranges from most of our competition. There are all obviously exceptions to that on both sides. And those exceptions, we generally find coming from smaller owner operators who may have various mortgage or other cost impacts. And but for the most part, we're seeing most of our competition and our peers take a very similar approach in our core markets.
And your next question comes from the line of Jimmy Shan from RBC Capital Markets.
So 2 quick ones for me. When I look at the Q2 expense growth by region, Algerian Saskatchewan or stand out in terms of over-year decline. Can you remind me what the drivers were for those declines? And then secondly, on this new customer service platform, you've implemented versus the call center, can you explain that a little bit further?
Yes, I'll start with you from an expense perspective, certainly, Jimmy, when we're looking at Calgary and Edmonton, the savings come from similar areas. It's largely being driven by that insurance year-over-year. So, reminding ourselves that the first half of the year would have been the old insurance plan that came -- so we've now had 2 consecutive years, I guess, of insurance declines. In addition to that, we're seeing savings from bad debt advertising and a bit of prepared and maintenance. The areas where we're seeing cost pressure in actual results will be a little bit on the wages and salaries side and utilities, but more or less, it's being driven by advertising, bad debt, insurance and recurs and maintenance being lower in both Alberta and Saskatchewan.
Sorry, just to follow up on that. Is there anything specifically or unique about those 2 markets that would result in those savings being higher than the rest of the other regions?
I would just say the premise right now is when there's limited availability for people to move. So, advertising goes down and your turnover is going down and there's less availability. Bad debt, you are -- people are good at paying their rent. The affordability of our products enables people to be able to support that rent. So that's part of the bad debt decline.
Repairs and maintenance, again, that's going to fluctuate through all markets. Some markets will have a good repair and maintenance quarter versus others. So that one's a little bit less market specific. But overall, I think it's being driven largely just by a low availability and people being on top of so that we can spend up on advertising and people pay their rent. Your second question, if you could -- I think it was a customer service one, but can you just ask it again, so I make sure the answer correctly.
Yes. And you noted G&A, the customer service platform is going to result in some savings going forward. And I just wanted to know what that's about.
Yes. Maybe I'll start it off and then James can elaborate on this initiative a little bit. So currently, Boardwalk operates. We're moving basically to an AI driven customer service center so that those common questions as part of our 24/7 service program can be answered by a computer rather than an actual physical agents. And so that's largely where those savings are coming from. The quarter itself, we have -- as we transition, we basically have both up and running right now to make sure that there's no transition hiccups. But maybe, James, if you want to elaborate on that program?
Yes. We're really excited about this, Jimmy. This is the first real use of a virtual assistant or an AI platform where when we speak to our team and our leadership team who -- our customer service leadership team is really excited about it as well because if you think of the type of calls that we might get many of them as much as we would love and provide a platform for our resident members to input it virtually through our online platform. Many of them still like to call.
And so, if we can serve that without that call being transferred to an agent and it's gated virtually and taken care of virtually, we believe we can reduce call volumes that are actually handled by a person while maintaining, if not even exceeding our current service levels. And so, as you can see, there is a good savings that we are anticipating on a run rate basis with this new platform.
We've seen this AI really grow as we've kind of seated information over the last several months, and it's only going to get better. And so, we're really excited. I know you asked about the op costs for other areas. We're really excited to see where this AI can go going forward? Can we extend it past our call center? Can we extend it into calls that go into our residents and into our communities. And so, we're just at the leading edge of where this can go.
And your next question comes from the line of Gaurav Mathur from Green Street.
Now given the pace of acquisitions so far in the first half of the year and where your cost of capital is currently, are you thinking about dispositions in any form in the second half of the year, given that there is a strong appetite for multifamily assets, particularly in Alberta and across Canada.
Hi, it's Samantha speaking. Yes, we are currently contemplating some dispositions of some of our noncore assets in Edmonton. And the capital for us to redeploy into newer assets in some of our core markets.
That's great. And we can expect that in the second half of the year?
I believe so, yes.
Okay. And just last question. You've also highlighted the strength of the market on the call. Now as we look ahead, are there any pockets of weakness in the portfolio either now or in the future that you're keeping an eye on?
At this trencher, we're seeing pretty good strength across the portfolio. But again, I think a lot of that we have to give credit to our team and the moderation that we're taking. And as a result of that, it's resulting in very consistent growth and results. I think if we look at the affordability side, especially in our core markets. it's attracting Canadians and others who are moving to Canada. Samantha Cole has gun talked about in her prepared remarks. That's a huge part of the Alberta advantage. And I think we should probably at the Saskatchewan advantage to that as well. So, so far, Gaurav, we're continuing to see really strong fundamentals in the multifamily sector in Canada, especially for affordable quality.
And your next question comes from the line of Matt Kornack from National Bank Financial.
Sam, you've mentioned rental a few times and the rents relative to your portfolio, but you also provide market rent disclosure in your MD&A, but it sounds like those rentals that figures are probably closer to what the true market rent is. Is that a fair assessment? Maybe there's 35% mark-to-market opportunity in your Alberta markets, the main ones at this point.
The difference between asking rents for a renter and resident that's looking for a new home today is yes. That's the market, that's the average, and that's the differential in percentage, and it is significant. And that really drives our renewals, our satisfaction and lower cost as well because when we go through a renewal and we look at the market and show the huge relative value we continue to provide even with the adjustments that we are making.
And again, the one chart we have to go back to and look at is Slide 39, our discounts in the second quarter 2018 were $11.575 million for the quarter. This quarter, our discounts are $2.35 million. So, we have to remind everybody that most of these adjustments that we're seeing are really the elimination of discounts. And when we go back to 2015 to now, we're simply not even catching up to consumer price index.
So, we're just catching up to consumer price index, and we're still behind -- and so yes, we've got a long ways to go, but we're doing really well. We have. As we discussed, happy residents make happy results, happy associates making happy residents and is a virtuous circle that we've seen for many years going forward in being able to provide exceptional affordability and results. Both can go hand in hand.
Now that's fair. And I mean, we've seen nationally that rent has been well outstripping CPI. So presumably in Alberta where you're playing catch up. You've also got a step change on top of that in terms of the supply-demand imbalance that has established itself given the population growth dynamics in Calgary and Edmonton. So, I mean, I guess, how should we think of your internal kind of regulation process over time with regards to where inflation is. I mean, in time, obviously, that's come down to something closer to inflation. But what's the thought there?
Yes. That is what our average in-place rents reflect is the correlation between consumer price index and our average in price rents are very correlated. And that absolutely is why. We can't look at year-over-year in isolation and look at CPI last year versus rent growth last year, we've got to use that 8-, 9-year time period, Matt, because what the current year-over-year does not take in place are the discounts and the reduction in rents that took place several years ago that many on our call will remember, and we certainly do, that we have to keep on reminding everybody that's new to the call or residents that are late is we have to keep in mind the reductions in the discounts that were used that we're making up over this period as well.
So, the relativity is everything and especially the longer time horizon gives a more accurate picture of rent adjustments. And that's why we always refer to the longer x-axis 2015 to where we are now, but we're still behind.
And maybe a last question. I mean we've talked about REITs being part of the solution on the new supply front. You've purchased some newer assets. It sounds like they're waiting lists already essentially for those properties. Do you see being part of more transactions like that within your core markets? And how do you think of just pricing those in the context of pro forma rents relative to the cost of construction?
Yes. Matt, we certainly are looking for more opportunities like that. As you've seen most of our acquisitions over the last few years have been that type of acquisition where it is newer product where Boardwalk can come in, we can provide our value by leasing up enhancing the NOI in those assets. And so those are definitely the type of assets that our team is looking for, Samantha, feel free to elaborate here.
But on the development front, we'll remain consistent as well. And as Samantha talked about earlier, we have a project coming up in our pipeline that we will look to progress with and contribute to adding more housing into markets that needed the most in Canada.
And if I could just add in terms of the pro formas and the underwriting for development, we're very mindful of our approach to rents and where we want to be, and that all gets factored into our initial pro forma underwriting. You don't want to come out at the top end of the market is that is really not the space and want to plan.
And are you finding -- I know we toured an asset that you purchased on lease-up, you think there's material upside to the price that you've paid because you're taking a bit of the lease-up risk. Is CMHC ultimately giving credit for that because it's more on an income threshold in terms of the lending you can get. So you can actually extract more equity on financing that eventually? Or how should we think about that?
We've seen, Matt, and what's presented this opportunity for us to acquire newer builds on your assets? Is that for the most part, CMHC will finance based on current income is what we're finding. And so, for groups such as ourselves, where we can fund EB-5 with cash or equity and take on that risk. We're being rewarded with what we're estimating is a stabilized cap rate of 5.75% that is high, where as you see in that transaction summary, cap rates for that type of products certainly have a 4 handle on it. So even if you want to call it, $475 or 4.5, I mean that's the 125 or 150 basis points that will pick up through lease-up.
And so those are the type of heels that we love if we could find more and lots of those. We really do them all. And I know the teams are at work [indiscernible] looking for those type of opportunities.
And your next question comes from the line of Dean Wilkinson from CIBC.
Last to best. Just following on Matt's question there. How do you balance the acquisition metrics around looking at a newer asset that, say, has less CapEx versus buying, say, an older asset that you could bring up to a Boardwalk standard and maybe have a little more of the near-term growth trajectory given the mark-to-market differential. Just how do you think about that difference?
Dean, it's Sam, and good to hear from you. We're all in agreement that we focus in on a best acquisition value. And we are only looking for one acquisition wherever it is. It's got to be the best acquisition. And there's always -- in the entire marketplace one best acquisition or one best development. And we focused on at a time and prioritize the maximum total return and value creation on whichever acquisition we make or development, by the way, that we make.
So it's always about buying the best or building the best value community that we can see the most value creation that we can sell down the road for more and realize the maximum total return and free cash flow in our transactions, like some of the assets that we purchased that were newly development -- developed in Edmonton, for example, that we're looking at pairing with some of our value add that we created exceptional value on value-add, pairing these communities has great appeal to buyers, and it has great total return and free cash flow that we've released as a result of these noncore dispositions that we're looking at.
And of course, Dean, we're going to be looking at value add in Edmonton or anywhere that we can create with our value-add vertical design and in-house capital teams that have demonstrated exceptional capability in improving our communities from before and after pictures that in our appendix, again, shows extreme makeover. So, we've got exceptional opportunities in looking at older assets in our core markets in any market where we can create exceptional value in repositioning, especially repositioning exceptional location.
That's really what we've learned like our [ Canmore ] and Banc acquisitions, our university, repositioned and our university new development in Brio. Those are locations that decades approve they're the least cyclical locations, and there's always demand. We never really saw discounts in bounce for example. And that's a perfect example of what we're looking for is exceptional locations when we are looking at development or buying anything brand new. Real special communities and value.
That's great. Sam 40 years on and we're still learning, it's all about location, location, location.
And your last question comes from the line of Brad Sturges from Raymond James.
I'll keep it quick. Just one quick follow-up question. As you've identified, I guess, some potential asset sales in Edmonton, how do you think about the transaction activity going forward? Are you looking to tie acquisition opportunities with dispositions going forward? Or do you necessarily need lines on either bio sell side to transact at this point? Is it just more about the right opportunity and the right pricing going forward?
Brad, I think the answer is yes, to be honest with you. When the right opportunity comes along to sell out of a noncore asset and the price is right, back to Sam's comment, we would take it. But ideally, we line that up with an accretive strategic acquisition as well. So, the cash isn't sitting on the balance sheet for longer than absolutely necessary.
This is one of our differentiators as well, Brad, is having a super flexible balance sheet, right? We're retaining the most cash flow out there. We're growing that cash flow for reinvestment. We have rapidly improving balance sheet. And to Smith's point, we also have access to equity in the form of dispositions of noncore assets. And so, it's all of the above, Brad. It will be -- it will depend on the opportunities that exist, but that should be no surprise either. We've been quite consistent in terms of paring noncore assets and redeploying that into new acquisitions each year over the last several years, saved for the last couple where we've had some interest rate volatility.
I assume that the disposition program will be more of an ongoing program going forward. Is there anything beyond the Edmonton assets at this point? Or is that sort of the near-term sort of focus of that sort of recycling program?
I would say that it's a near-term focus for sure of the recycling program.
Yes, more asset-specific than it is...
Yes, not market-specific, but asset specific. And they happen to be in Edmonton at this time.
Yes. Is this more of an opportunistic program, I guess, is the way to think about it?
Correct.
That concludes our question-and-answer session. I will now hand the call back to Mr. Sam Kolias for any closing remarks.
Thank you, Ina. As always, if there are any further questions or comments, please do not hesitate to contact us. I take huge thank you to Lisa Smandych, for her 16 years of service, inspiration and leadership, we are so blessed to have her in our Boardwalk family forever and wish her well in her future.
With gratitude, we would like to thank our extraordinary team, loyal residents, CMHC or lenders and of course, our unitholders. It really is all about RBFS, our Boardwalk family forever, whose huge shoulders we stand. And as leaders, we continue to do everything we can to support continued growth and extraordinary.
We really can't thank our extraordinary team and great leaders enough. We are pleased with our improving results on a foundation of exceptional value service and experience we continue to provide our resident members, investors and all stakeholders. Home is where our heart is, our heart is where our family is and our family is where love always lives. Welcome home to love always, our future, its family, what can be more important when choosing where to call home.
Thank you again, everyone, for joining us this morning. God bless us now more than ever grants all peace, peace is the price.
Thank you. This concludes today's call. Thank you for participating. You may all disconnect.