Boardwalk Real Estate Investment Trust

TSX:BEI.UN

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Boardwalk Real Estate Investment Trust Third Quarter Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, November 15, 2018. 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's 2018 Third Quarter Results Conference Call. With me here today is Sam Kolias, Chief Executive Officer; Rob Geremia, President; William Wong, Chief Financial Officer; and Lisa Russell, Senior Vice President of Acquisition and Development.Note that this call is being broadly disseminated by way of webcast. If you haven't done so already, please visit boardwalkreit.com, where you will find a link to today's presentation as well as PDF files of the trust's financial statements, MD&A as well as supplemental information package.Starting on Slide 2. I'd like to remind our listeners that certain statements in this call and presentation may be considered forward-looking statements. Although the expectations set forth in such statements are based on reasonable assumptions, Boardwalk's future operation and its actual performance may differ materially from those in any forward-looking statement. Additional information that could cause actual results to differ materially from these statements are detailed in Boardwalk's publicly filed documents.Moving on to Slide 3, our topics of discussion for this morning will include quarter highlights; an economic update; acquisition update; financial highlights; operational review, including our renovation program; and lastly, our financial guidance update. As a reminder, 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. We are pleased to report on another solid quarter in 2018. Slide 4 provides a summary of our financial highlights for this third quarter, which includes: total same-store rental revenue of $108.4 million, an increase of 4.3% from the same period last year; and an increase of 3.1% on total rental revenue; same-store NOI of $59.6 million, up 6.5%; and total NOI of $58.5 million, up 7.6% from the same period last year. Please note total NOI is lower than same-store NOI due to new development coming onstream with high initial vacancy and shared warehouse distribution and operational cost; FFO per unit of $0.59 on a diluted basis, up 11.3% from last year; and adjusted funds from operations per unit, which includes an estimated $695 per apartment unit of maintenance capital, of $0.47 for the third quarter of 2018, up 9.3%. Slide 5 shows an FFO reconciliation for the year-over-year 3- and 9-month periods, gains of $0.07 and $0.18 for 3 and 9 months from increased stabilized property NOI, $0.01 and $0.03 losses from sale of properties and $0.02 and $0.03 adjustments associated with severance and legal fees, resulting in $0.59 and $1.67 for the 3- and 9-month period. Moving on to Slide 6. Despite further delays in pipeline approvals in both Canada and most recently, in the U.S.A. with Keystone XL, we continue to see positive macroeconomic conditions in our core market of Alberta, with many of the leading economic indicators showing continued improvement. Job vacancies continue to rise, a leading employment indicator. Many of these jobs are lower paying and part time, which increases the demand for more affordable housing. As per the most recent CMHC forecast, vacancies dropped, reflecting an increased demand for affordability. Vacancy for the quarter increased slightly with revenues increasing as incentives drop. The net result was revenue, NOI and FFO making another positive gain for the quarter. Our upfront investment in brand diversity, improved product quality, service and experience with a more balanced and targeted investment approach to value-add opportunities increases our performance. On Slide 7, 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 cycle. Approximately 60% of Boardwalk's portfolio is in Alberta, which continues to improve and balance. Two major setbacks occurred during this quarter: the negative court decisions which are delaying both the Trans Mountain and Keystone XL pipelines, furthering the significant discount for Western Canadian Select crude. Despite these 2 major setbacks, our team is delivering stronger results. On the positive, Imperial Oil announced the go-ahead of the $2.6 billion Aspen mine, along with the go-ahead of LNG Canada project pegged at approximately $40 billion investment. Grande Prairie is already seeing benefit from an improved economy and continues to move into a stronger rental market, almost fully occupied, with a strong demand for rental. Fort McMurray saw a softened rental market with the Western Canadian Select differential at an all-time high and an increase in competition as more single-family homes were reconstructed and delivered during the summer. We call these smaller rental markets our canaries in the coal mine for our Calgary and Edmonton rental market in the past and reflect an evolving economy that is essentially mixed. As we will see in upcoming slides Grande Prairie has posted a 45% net operating income gain. Fort McMurray is down slightly at 2.7%. Both Calgary and Edmonton are now in a balanced rental market with a continued positive revenue growth trend. With more capital investment in Calgary, NOI gained 18.6%, reflecting how our new strategy is succeeding, delivering significant gains even in a more competitive rental market. Our Saskatchewan region softened gains in the most recent quarter, with Saskatoon moving into a more balanced supply and demand. Our focus on increased product quality, service and experience are being well received in this region as well. Ontario continues to deliver solid results as we increased investment to deliver even more product quality, service and experience in this market, better positioning to compete with new supply. Slide 8 illustrates the positive trends in job vacancy, a leading economic indicator, along with more jobs being created, reflecting the Alberta economy continues to diversify. Slide 9 illustrates both interprovincial and international migration continue to be positive for Alberta. In-migration is another indicator of future rental demand as a significant number of new migrants become renters. Saskatchewan net intraprovincial migration has continued to increase while we see a decline in interprovincial migration. Slide 10 displays Alberta as the leader of projected regional economic performance in Canada. Slide 11 illustrates the flattening of units under construction as MLS sales data is weak and home and condo sales drop. Higher interest rates and tougher mortgage qualifying rules continue to help the rental market. Rental construction remains elevated, so offset with lower house and condo completion. Including our own 162 units currently under construction with RioCan in Calgary, there are approximately 2,000 purpose-built rental units underway. These 2,000 units represent approximately 5% of the total rental market. Increasing job vacancies and positive in-migration trends will help us grow [the business].Slide 12 outlines Edmonton's decreasing trend of condo and rental unit construction. Under construction in Edmonton is approximately 1,700 purpose-built apartment units, representing approximately 2% of the rental market. Slide 13 provides our progress on our vacancy targets as highlighted at the beginning of the year. We are slightly above our target as a result of reducing our incentives. Our vacancy in October decreased, reversing the trend. We are keenly focused on both keeping vacancy down while decreasing incentives. Slide 14 shows a current snapshot of incentive offers for new rental. Compared to the same time last year, in October 2017, we were offering 1 to as many of 4 months of incentives on 12-month leases. As a comparison, this year, our incentive offers have reduced significantly to 0 to 2 months. With our resident-friendly approach, our target on renewals continues to be approximately a 1-month reduction on incentive from our resident-acquired units. Slide 15 highlights the significant decrease in vacancy loss we have seen from last year and our continued trend of total and average incentive decreased. It should be noted that approximately 1/12 of our leases are renewed every month and will have a continued cumulative positive impact on our results. This provides a significant revenue opportunity to recapture the 2017 fiscal year loss from incentives of $40 million or $0.80 FFO per unit and normalize our vacancy loss from $33 million in 2017 to half of this amount or $0.33 per unit, resulting in a significant revenue [opportunity]. Slide 16 further illustrates the positive impact of our focus on vacancy loss and dropping incentives as rental revenue continues to increase, increasing occupied rents as a result of reduced incentives as well as increased rents as a result of our suite renovation program. Slide 17 provides a summary of Boardwalk's strategy to maximize NOI and net asset value. In the near term, we remain focused on the recapture of NOI within our existing core portfolio and are continuing to see success in the recovery of revenue. Over the next couple of years, this remains our largest opportunity. In addition, the front-loaded investments we have made in increasing our product quality, service and experience, along with more strategic capital spending, will further enhance our results, increasing our market share. Increased geographic diversification over the next decade will reduce volatility further. Strong balance sheet foundation provides capital for our strategic plans as we remain committed to delivering outsized NOI growth for unitholders and better quality product, service, experience and value for our resident members, which provide enhanced NAV creation. We remain active in our core markets and, as reflected in our financial results so far this year, are in the early stages of a rental market recovery in Alberta.I'd like to now turn the call over to Lisa Russell to share details on an opportunistic acquisition we have made in Calgary. Lisa?

[Elizabeth A. Russell]

Thank you, Sam. We are proud to announce the acquisition of a 299-unit portfolio in Calgary. As shown on Slide 18, these properties are in prime locations which provide both a significant mark-to-market opportunity on in-place rents while also adding further operating efficiencies given their proximity to our existing communities. We are scheduled to close on this portfolio on the 27th of November and intend to fund this acquisition with existing liquidity. Based on the current in-place rental rates, we estimate the as-is cap rate to be approximately 4% and will be immediately accretive to our FFO. As the trust optimizes the cash flow from these new communities by increasing net rental rates and gaining operating efficiencies with our other nearby communities, we anticipate the yield on this acquisition to grow to a stabilized cap rate range of 4.5% to 5%, resulting in significant net asset value creation. This is an example of an opportunistic acquisition within our core market which provides growth, high-grades our portfolio and is a value-add opportunity in the early stages of a rental market improvement in Alberta. Slide 19 is a summary of our current development projects as well as our internal development opportunities. We completed restructuring on the third phase of our Pines Edge community in July of 2018. In addition, construction of Brio is well underway. Our Western Canadian development opportunities on excess land remains high, with over 4,400 apartment units equating to approximately 4.4 million buildable square feet. These sites are in various stages of planning and approvals and represent an opportunity for the trust to high-grade and enhance our portfolio's asset value. An initial density study across our Ontario and Québec portfolio identified an additional 1,600 apartment units, totaling 1.6 million buildable square feet as potential new assets. We are in early stages of prioritizing these opportunities. Slide 20 provides an update on our Pines Edge community. We have completed our lease-up of Phase 2 with current occupancy of approximately 99% and anticipate an estimated yield of 6.4%. Phase 3, a 4-story [elevatored] wood frame building with a single-level underground parkade in Regina, was completed in July. Total cost of this phase is estimated to be approximately $13.2 million or $186,000 per door, an increase from the prior phase mainly due to escalated construction costs and an increased provincial sales tax. The yield for this phase is estimated to range from 6% to 6.5%. Currently, this phase is approximately 50% leased. Slide 21 provides an update on Brio, a premium 12-story concrete 162-unit mixed-use development in partnership with RioCan. The site is exceptionally located in Northwest Calgary along the LRT line and in close proximity to the University of Calgary, Foothill Hospital and McMahon Stadium. Construction commenced in January of 2018. We are currently forming the fifth and sixth levels with mechanical and electrical work underway. window, wall, exterior padding is set to begin in December. We estimate occupancy to be in early 2020. Slide 22 provides our estimate for market cap rates in Boardwalk's existing markets. Cap rates for stabilized, well-located, better quality buildings continue to remain low as demand for multifamily real estate remains high. Slide 23 is a rendering of Duo, which will be built on excess land at Sarcee Trail Place in Calgary. We submitted a development permit for 2 15-story towers totaling 229 units with a connected 2-level underground parkade. Our development permit has now been approved and will be valid until July 2021. Timing of this development will be subject to market conditions. We continue to be active in our core markets of Calgary and Edmonton and in addition, continue to develop relationships with various potential partners to acquire and/or develop communities in major growth markets. We will provide updates as opportunities progress. I would now like to turn the call over to William Wong. William?

[William Wong, Chief Financial Officer]

Thank you, Lisa. Slide 24 shows Boardwalk's investment property fair value at the end of the current quarter was $5.91 billion compared to $5.84 billion at the end of the previous quarter and $5.69 billion at the end of 2017, a quarter-over-quarter increase of $70 million primarily on our stabilized property assets. Unstabilized property fair value totaled $30.5 million as of September 30, 2018, primarily consisting of 2 development projects in Regina, Pine Edge 2 and Pine Edge 3. Two properties in Edmonton were reclassified as stabilized during the current quarter. Weighted average cap rate at the end of the current quarter was 5.29%, unchanged from Q1 and Q2 and from December 31, 2017. The next slide, Slide 25, presents Boardwalk's implied net asset value calculation and includes the IFRS fair value revenue and expenses used in the calculation. Net asset value under IFRS is calculated to be $63.05 per diluted trust unit, inclusive of $0.09 in cash. This equates to approximately $178,000 per door compared to $158,000 per door based on the trust unit trading price of $49, a discount to implied NAV per trust unit of 22%. Current trust units are trading at a significant discount to NAV and offers exceptional value when considered against net asset value, recent transactions in the marketplace, replacement costs, other consumer housing options like condominium ownership and current valuations on private market transaction. Slide 26 shows the breakdown of capital Boardwalk reinvests back into its properties for the 3 and 9 months ended September 30, 2018. Capital invested in Boardwalk's investment properties, excluding development and PP&E, was $995 per apartment suite in the current quarter and $2,571 for the first 9 months of the year. The chart to the right also shows Boardwalk's capital investments by major categories for the first 9 months of 2018. Building exteriors and suite renovations and upgrades, including Boardwalk's internal capital program, comprised approximately 80% of capital investment or approximately $72.8 million, a reflection of Boardwalk's continued repositioning and rebranding strategic initiative.Boardwalk is starting to see certain regions reaching a balanced rental cycle and has adopted a measured approach of reducing elevated incentives on a property-by-property basis. Maintenance CapEx reserve for the third quarter and first 9 months of 2018 was $174 and $521 per suite, respectively. Utilizing a 3-year rolling average, 2018 maintenance CapEx is calculated to be $695 per suite per year compared to $655 for the prior year.Slide 27 shows Boardwalk's total G&A for the first 9 months of 2018. Combining operating and corporate, total G&A was $49.8 million compared to $46 million for the same period in the prior year. Included in G&A was approximately $1.7 million related to severance costs and legal fees. Boardwalk continues to review all administration, including the rationalizing of staff levels from over 1,800 in October of last year to approximately 1,700 at the end of October of this year. Additional severance costs will be forthcoming in the fourth quarter, setting Boardwalk up for more efficiency in 2019. I would now like to turn the presentation over to Rob Geremia. Rob?

[Roberto A. Geremia, President]

Thanks, William. Moving on to Slide 28. Boardwalk continues to focus on its brand-based strategic capital investments. Our brands range from affordable to luxury. For 2018, we are targeting renovations of between 1,000 to 2,000 suites at various renovation levels. We refined our process to minimize the related transitional costs while continuously upgrading the portfolio. For the 9 months of 2018, the trust has invested $85.2 million back into its buildings and has delivered superior returns. Simple returns continued to be strong, ranging from 10.7% to 25% on value-added capital and between 9.7% and 21% on total capital invested. It is our intent to continue this program moving forward on a measured pace in the upcoming years. Slide 29, of course, the trust's stabilized property sequential revenue analysis. Q3 continued to be positive as we continue to build on previous quarters. Slide 30 reports Boardwalk's stabilized portfolio for the third quarter of 2018 as well as on a year-to-date basis. For the third quarter, revenue continued to improve, particularly in Alberta, which posted revenue increase of 5.8%, and with a slight increase in Alberta's operating cost resulting in an NOI increase of 10.5%. Overall, for the quarter, revenue was up by 4.3% with overall NOI increasing by 6.5%. Of special note, the increase in reported property expenses for Q3 in Edmonton was the result of a significant increase in property taxes in the range of 22%. This was the result of the 2018 assessment. On an annualized basis, it is anticipated this increase will be limited to about 8%. However, due to the timing of the payment schedule, a significant catch-up was reported in Q3. On a 9-month basis, overall revenue increased 3.7%, resulting in an NOI growth rate as compared to prior year of 5.6%. Slide 31 reports the trust's mark to market on unoccupied rents. Overall, there was approximately $39 of positive spread between market and in-place rents, adjusting for existing incentives. On an annualized basis, this is estimated to be $15 million once adjusted for existing vacancies. If we were to strip out all current incentives, which we believe will unwind over time, the mark to market would increase to $150 or $57 million on an annualized basis. Boardwalk's liquidity continues to be strong. At September 30, 2018, the trust had access to an estimated $300 million of available capital, as is shown on Slide 32. This represents approximately 11% of total debt outstanding. Slide 33 reports the trust's total debt maturity schedule. On September 30, the trust's overall weighted average in-place interest rate was 2.61%. Currently, the trust is obtaining NHA-insured mortgages at 3.3% and 3.4% on 5- and 10-year terms, respectively. Our mortgage maturity curve continues to be well balanced, and we continue to focus on extending mortgage terms while staggering future maturities. Boardwalk's remaining mortgage amortizations under these insured loans is in excess of 30 years. And Boardwalk's fourth quarter rolling interest coverage ratio continues to be strong at 2.68x.Slide 34 provides the reader with our estimated current mortgage underwriting valuations. Boardwalk's balance sheet continues to be conservatively levered at 52% of mortgage underwritten value after deducting our current cash portion. Of special note, the trust has over 1,300 apartment units that have no mortgage encumberances, which carry an estimated debt capacity of $136 million, an amount that is in addition to the trust's $300 million liquidity position. Slide 35 highlights our 2018 mortgage financing program. During 2018, we have $201 million in maturing mortgages, and to date, we have renewed $157 million of these while up-financing additional $54 million. The new reported rate of 3% and the weighted average renewal term is 5 years. In addition, we have added $54 million from previously unlevered properties, so bringing the total raised for the year-to-date of almost $109 million. Moving on to Slide 36, Boardwalk's 2018 financial forecast. As we have in the past, it is the policy of the trust to review and update its financial guidance on a quarterly basis and where necessary, make warranted revisions. Based on this review of the key input variables, we are reducing the high end of our FFO and AFFO reported amounts from $2.35 and $1.90 to $2.30 and $1.85, respectively. Please note that we have not adjusted these numbers for the noted onetime charges we reported -- previously reported. In addition to this, we have adjusted our stabilized NOI growth expected range to be between 4.5% and 6%. Boardwalk's property capital budget for 2018 continues to be targeted at $136 million with an additional $30 million to be invested on committed development projects. Adjusting for the noted onetime charges, our reported results for the quarter were in line with our internal expectations. As revenue continues to grow with the optimization of our occupancy, the modernization of existing -- moderation of existing incentives and increased returns on invested capital improvements, we anticipate our operating margin to continue to improve. Many of the operating costs associated with multifamily real estate are fixed regardless of the periods of cycle. As our core market of Alberta enters early stages of recovery, the majority of the incremental revenue is anticipated to flow directly to net operating income. The trust remains committed to creating a culture of a team of peak performers. The trust will continue to evaluate its controllable operating expenses. Slide 37 reports our distributions for the months of November 2018 to January 2019. The monthly distribution is set at $0.0834 per month, consistent with our annual target of $1 per trust unit. This concludes the formal part of our presentation, and we'd like to open it up for questions. Operator?

[Operator]

[Operator Instructions] And your first question is from Jonathan Kelcher from TD.

[Jonathan Kelcher, Analyst]

First question is on incentives. They are basically flat, I guess, quarter-to-quarter. When should we start to see them begin to burn off in a meaningful way?

[Roberto A. Geremia, President]

Jonathan, it's Rob. Yes, actually, they are -- we saw in the summer, we thought [we saw them] peeling off nicely and then it slowed down. So we anticipate for the rest of this year, for sure, we're going to be focusing on occupancy levels. So we don't anticipate them to increase much. We don't anticipate also them to decrease during this period of time. So we think it's going to probably be mid of next year where we're starting to see that slowly -- or start to unwind in a more accelerated pace than we are right now. The good news is on our renewals, we actually are able to unwind a little faster than we thought we are. And that will have a cumulative effect going forward as well, too.

[Sam Kolias, Chairman & CEO]

Jonathan, it's Sam. The 1 month that we're gaining on renewals is essentially approximately 8%. So that's really what we're gaining on our renewals. And 1/12 of our leases mature every month, so we are seeing about 8% gain on our renewals.

[Jonathan Kelcher, Analyst]

Okay. But shouldn't -- like 1 month is also 1/3 of the incentives that you're offering, too, correct?

[Sam Kolias, Chairman & CEO]

Correct.

[Roberto A. Geremia, President]

Yes, but it does vary by project. So the range that we're providing on that slide is an extreme range, from 0 all the way to 2 months in some cases. So it will vary project by project and in renewal as well. We are finding, in some cases, where a customer is very satisfied with our service and quality of product and we are able to offer less incentives on a renewal than even on a new rental. So it really will vary.

[Sam Kolias, Chairman & CEO]

In Grande Prairie, the incentives are from 3 months to 0 months. And that's why the Grande Prairie NOI is up 45%. So it really depends on the community. And in Calgary and Edmonton right now, we're seeing about -- an increase in premium.

[Jonathan Kelcher, Analyst]

Okay. And then just secondly on the occupancy. It did dip a little bit in the quarter. When -- do you still think you can get to 97%? And how long do you think that will take?

[Sam Kolias, Chairman & CEO]

We're trending higher as we speak. And occupancy in our rentals for October were much higher, as we noted in the conference slides, than they were in September, so we're gaining traction again. And the trend is our friend, and so we're moving up on the occupancy trends as we speak. And we're hoping, by the end of this month, November, we're going to get close to 97%.

[Operator]

Your next question is from Mike Markidis from Desjardins.

[Michael Markidis, Real Estate Analyst]

So just wanted to make sure I understand what you said last in response to Jonathan's question. So the focus now is more on the occupancy side. So from a total dollar basis, the incentives probably will stay relatively flat over the next couple of quarters and then you're starting to see that peel off in -- next year. Is that fair a statement ?

[Roberto A. Geremia, President]

Yes. That's a fair statement. The focus right now for all our teams is occupancy getting up as high as we possibly can because the higher you get it as the market improves, the faster you'll be able to unwind incentives. A prime example, as Sam mentioned, is Grande Prairie, so we saw that. Red Deer as well saw some strength -- strong numbers there as well. So we originally thought we'd be able to unwind a little faster than we are. But however, we're still happy with our growth, and focusing -- but as Sam mentioned, we can't underestimate this. We still -- all of our leases churn every 12 months. So even if we have 40% churn, I mean, 60% is still renewing. So if we can get that strong renewal number moving forward, we're going to have some good growth.

[Michael Markidis, Real Estate Analyst]

Okay. And how would the market be, I guess, today relative to where you were, say, 6 months ago? Because it looks like you're holding the line on incentives but then the occupancy is going up, so I'm just trying to get a sense of the level of competitive activity you're seeing from your peers.

[Sam Kolias, Chairman & CEO]

Canada Mortgage and Housing Corporation just released their forecast vacancy, and it's lower for both Calgary and Edmonton by about 100 to 150 basis points. So we are seeing an improved rental market, and that's a reflection of harder qualifying mortgage requirement and lower-paying jobs and part-time jobs. So the mixed economy and evolving economy that we have and we described is actually increasing the amount of more affordable housing and coming through in the broader rental market fundamentals, too.

[Michael Markidis, Real Estate Analyst]

Okay. And I guess, going forward, safe to say that the interplay between incentives and occupancy are -- it's going to be -- I don't want to call it an experiment, but suffice to say it's reasonable to see a little bit of give and take on quarters going forward.

[Sam Kolias, Chairman & CEO]

Well, this is really what's happening, Mike. So when we look at the current incentives right now of between 0 and 2 months, they're definitely less than 3 months. And so last year, they were 3. So on our renewals, we're going from 3 to 2. And so the existing residents are getting the better yield than some of our new residents. And that's really what our goal is, is to give our existing or loyal and long-term residents a better deal. And so we're seeing that drop, but the drop is slow because only 1/12 of our leases come due every month. And so that's increasing our revenue as we speak. The incentives on our new are less than what they were last year by about 1 month as well. And so we've got this 6% to 8% total revenue for Alberta gain that we're seeing, and that's 60% of our portfolio. And as a result, we had a 4.3% overall increase in revenue from that.

[Michael Markidis, Real Estate Analyst]

Okay. And last one for me, just noticed that Calgary, for sure, Grande Prairie looked really good sequentially on the stabilized revenue side. Edmonton seemed to slow down quite substantially. I was just wondering if you could expand on what you're seeing in that market particularly.

[Sam Kolias, Chairman & CEO]

So in Calgary, as our property [matures] over the last couple of years, we really focused Calgary in the improved product quality, service and experience. And the investments we made in Calgary was much higher. We're now accelerating that investment in Edmonton. And so that is -- it's something that's been very, very successful in Calgary, and it is actually helping us in being successful in Edmonton. The one setback in Edmonton was our 22% increase in property tax that we had to make this quarter because the assessments were much higher than they were last year. So our expenses in Edmonton took a hit because of the huge increases in property taxes. We're not expecting 22% increase in property taxes going forward. And so this will help, along with our investments that we're making. It's much more efficient. We're being much more measured and creative and innovative with respect to our common areas and our investment in our apartments in that the scalability of our improvement is something that's really helping us. So we're able to compete with our diversified brands in the really competitive price market because price is really important, and we're able to provide other options that are more suitable for renters that want better quality product, service and experience and are willing to pay more for that. So we're just scaling that in Edmonton, as we speak. And as a result, we believe the results in Edmonton will reflect that going forward because we've got a proven formula of delivering performance and increased revenues, NOI and FFO in a really tough competitive market because of our approach to our brand diversification and the scalability of the offering we have for a more -- a wide range of renters that are looking for all of the above, price and product quality.

[Michael Markidis, Real Estate Analyst]

Okay. And just given the size of the Edmonton portfolio relative to Calgary, would it be safe or would it be a fair assessment to think that we could see CapEx trend back up again next year? I think...

[Roberto A. Geremia, President]

No, I think -- well, again, we'll provide guidance on the capital spending in next quarter, year-end numbers. We're very happy with the pace. One thing we did learn in 2017 is you don't go too fast if we -- because you can be your own worst enemy on pricing. So we're -- preliminary discussion is around the same pace. But again, we'll update you in February on our targets for 2019 capital spending.

[Operator]

Next question is from Dean Wilkinson of CIBC.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Rob, I think we've talked about the 2019 debt before. A big chunk of that is all wrapped up in the Nun's Island stuff. Is that right?

[Roberto A. Geremia, President]

That's correct, yes.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

And that's -- is that in November?

[Roberto A. Geremia, President]

Yes, it's in November. And the challenge with Nun's Island is more -- it's on a lease. And under Québec law, we can't go any longer than 5 years on the renewal terms. So you'll see us targeting the 5-year term,[ but that's always] maturing. No problem with the valuation, no problem with the renewal. It'll be just be a matter of time [before we lock the pricing involved].

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Okay. So I -- it's probably too early to sort of get indicative pricing on that, right?

[Roberto A. Geremia, President]

Well, it is. If you notice, the pricing on the CMHC product right now is it's curving really, really tight, only 3.3% and 3.4% between 5- and 10-year money, so it's really getting tight there. So as we get closer, again, we can't do 10-year money there. But you'll see us, for sure, probably target the 5-year -- in that range.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

All right. So you're somewhere north of -- let's assume rates don't fluctuate from here, big assumption. That's rolling off at about a 2.1%. Is that correct?

[Sam Kolias, Chairman & CEO]

2.2%.

[Roberto A. Geremia, President]

2.2%, yes. It's quite enough.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

2.2%?

[Roberto A. Geremia, President]

Yes. And so there'll be a bit of an uptick on the interest rate on the renewal for sure. Yes, there is.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

There's an uptick on that, okay. And what was the total amount of that $500 million...

[Roberto A. Geremia, President]

$300 million.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

It's $300 million, that's so -- okay...

[Roberto A. Geremia, President]

Yes. But the good news is our Québec portfolio is showing some good revenue growth as well, too. So on lease renewals, we're going to be able to get that back on the revenue side, too.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Right, right. But we won't really see the increased interest expense flow through, I guess, then until more like 2020?

[Roberto A. Geremia, President]

Yes, that's correct. It will -- because it's November of 2019, there won't be -- very little impact on '19, but more impact on '20.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

More impact on '20. Yes, that makes sense. And then just a question on the distribution. So given where you are and the recovery that you've come through and where earnings are, does it look like the current $1 amount for 2019 would be sufficient to meet the requirement to pay out all of the taxable income? And I guess in another way, how much is -- do you think it's enough to drive capital?

[Roberto A. Geremia, President]

Well, that's a very good question, Dean. We always, every quarter, William runs the numbers to see what our return of capital versus the income portion of the distribution is. And based on the most recent numbers for Q3, we're seeing it about 50%. We do have 50% return of capital still. Our policy is only to distribute what we have to distribute because when you're getting rates of return north, in some cases it's 25% on our invested capital, that's the best place to place your capital. So on the short term, we're going to see ourselves doing that. As we continue to improve, as things get better in the long run, we obviously will have to review that again and see how much we have to distribute.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

All right. So that'll probably come with the 2019 guidance then, I would expect.

[Roberto A. Geremia, President]

Right.

[Operator]

Your next question is from Howard Leung from Veritas.

[Howard Leung, Investment Analyst]

I want to touch on occupancies. I think on the call, you've mentioned that rent rolls are looking a little better in October. I just thought in the supplemental that Calgary and Edmonton though, look like their occupancies are down slightly just for the month of October. So is that expected to kind of uptick back?

[Sam Kolias, Chairman & CEO]

Could you repeat that last point, Howard, please?

[Howard Leung, Investment Analyst]

Oh, sorry. Yes. Just in the supplemental, there's like city-by-city occupancy disclosures, and just saw for the month of October that they'd kind of -- both come down to 94% occupied. So I wanted to see your thoughts on kind of the rest of the year.

[Sam Kolias, Chairman & CEO]

Okay. Right. So in October, we rented more than our moveout, which will affect November. And so we saw a higher occupancy as the result in November. So you're not -- October is actually September result.

[Roberto A. Geremia, President]

Right. The number you're seeing is the very first of the next month, which is the previous month's rental horizon.

[Sam Kolias, Chairman & CEO]

Correct. So that's a month behind.

[Howard Leung, Investment Analyst]

All right. I see. Okay, so it actually is...

[Roberto A. Geremia, President]

Yes. That's also where it trends up.

[Sam Kolias, Chairman & CEO]

Yes. We are seeing, like this month, we're at about 500 rentals and we've got about 800 moveouts, and we're at the middle of the month. And we typically rent more in the back half than we do in the first half of the month. So everybody is aware, Howard, how important high occupancy is. And so we have -- many of our communities are over 98%. And so we're asking all our teams, "How do we get every single one of our communities over 98%?" That's the question we're asking everybody. And together, we will figure out a way.

[Howard Leung, Investment Analyst]

Okay, okay. No, that makes sense. And then in the incentive spending, I think there was an update last quarter in Q2, in the presentation, that Calgary was 0 to 1-month of incentives offered to new leases. And then this presentation, I noticed it was back to 0 to 2. Any major adjustments you had to make there or just...

[Sam Kolias, Chairman & CEO]

I think yes. Again, that captures the 2 -- capture some communities with higher availability. And so we have to stress that it is community-by-community and unit type, and so we're just capturing a wide range when we're showing that. But the drop in incentive is very marginable. So we don't want everybody to use magnifying glasses to see the trend in incentives going down. And so that's why, conservatively, we say it's less. But technically, the incentives drop. They have dropped. And so it's a debate whether you want to look at the curve, that result's slowly dropping because it can be stressed. Our leases are coming due at 12 every month, and that's why it looked slow and the graph looked flat. But they are dropping and it's cumulative. It's compounding. And so we're going to see a more pronounced drop in our incentives in another or 2 quarters because then, the comparable year-to-year will be more pronounced. That's all. The slope of the curve will deepen downward as every month goes by. And that's what's so difficult to see in the graph of incentives today is we're just starting to see the drop in incentives and it's only at 12 every month. And so the slope is just starting to decline. But in realtime, the slope is declining about, as we said, 8% a month, on 8% of our portfolio, so 8% of 8% is 1.5%. So it's just compounding that's going to help us, and we're going to see a steepening slope on that incentive graph in the next quarter or 2.

[Howard Leung, Investment Analyst]

Right. So you expect that pace to accelerate and -- in a year for sure, it will -- all of the [incentives] will roll off?

[Sam Kolias, Chairman & CEO]

That's correct. Right. Trend's your friend, and we're just starting to see that flow change. But because it's in realtime, you're not going to see it on the graph. The graph looks flat.

[Howard Leung, Investment Analyst]

Okay. No, that's helpful. And then in the -- kind of the IFRS NAV that you guys calculate, I saw there was a note saying that you make the assumption for revenues that they're kind of forecast market revenues with 3% to 5% vacancy. When you're applying those forecast market revenues, are they net of incentives? Or are they just -- that's the market revenues that, I guess...

[William Wong, Chief Financial Officer]

Market revenues.

[Sam Kolias, Chairman & CEO]

Yes. There's not -- It does not include any incentives.

[William Wong, Chief Financial Officer]

How we've adjusted for the short-term incentive program is we've actually ticked up vacancy by market just to adjust for the short-term impact of that rather than taking incentives.

[Howard Leung, Investment Analyst]

Okay. Got it, got it. So the vacancies will be moved but the incentives -- there will be no incentives for the IFRS.

[Roberto A. Geremia, President]

That's right. You won't -- we'll be using 4% instead of 3% in the market you'd normally use 3% there for example.

[Howard Leung, Investment Analyst]

Right, right. And then also it mentioned that there's -- you guys use the industry standard for the expenses. Is that industry standard, I guess, because property taxes and stuff have gone up, but the standard will keep up with that? Or is that more...

[Roberto A. Geremia, President]

Well, the standard is just for non-actuals, so it doesn't include property taxes. They are always actual, utilities are always actual as well, too. It's just sort of the operating cost standardization, not the other 2 categories. Those are always actual.

[Howard Leung, Investment Analyst]

Right. And if there's standard, is that kind of before you hired all those associates, I think, last year?

[Roberto A. Geremia, President]

Well, standard is based on industry standards versus how we actually operate. So then that's sort of the way they value it because they want to compare apples-to-apples between buildings. So they just standardize on a valuation methodology how a building would operate.

[Howard Leung, Investment Analyst]

Right, right. What the typical margins are and that.

[Roberto A. Geremia, President]

Well, not so much the margins, just -- particularly, expense-by-expense. So for example, advertising has got a standardized costing, R&M's got a standardized costing. For the most part, again the larger number ones being utilities and property tax, they're always actual.

[Operator]

You next question comes from Mario Saric from Scotiabank.

[Mario Saric, Analyst]

Just maybe coming back to the sequential revenue, the 30 basis points of quarter-over-quarter growth. I think, Rob, you mentioned that internally the quarter met forecast. How did that 30 basis points compare to expectations?

[Roberto A. Geremia, President]

We're actually right on target. Our overall revenues are very close to where we thought they would be. But we did actually look at our numbers, we [exit that -- we had a strong win]. We internally expected a stronger second half, and we are seeing that. So yes, we were very close on that number as well, too.

[Mario Saric, Analyst]

Okay. And then in reference to the incentives, I guess, the comment was made there was a bit of a slow down after a pretty decent start to the summer. What do you think caused that slow down?

[Sam Kolias, Chairman & CEO]

Well, the rate of change and that going from 3 months incentives to 0 months incentives was just too much for the market at that particular time. And so if you -- it just looks too big of a move for Calgary and Edmonton in the overall rental market, and our cities are still over 3% on average. And so the trend on market-wide declines in vacancy is our brand. And when we see a 3% or less market-wide vacancy, just like we are in Grand Prairie, then we can see, like we are in Grand Prairie, 0 incentives on renewals down from 2 and 3 months. And so that's what we've seen in Grand Prairie because that market has recovered before any other market in Alberta. And trend is our friend, we're seeing that in our core markets. And by next year, we believe we're going to get close to that 3% market-wide vacancy.

[Mario Saric, Analyst]

Okay. And then I think, Sam, at the onset of the call, you referenced to setback during the quarter in Keystone, and I guess subsequent to the quarter, and Trans Mountain. How do you think about those 2 projects in relation to the impact on increases in demand, rental demand?

[Sam Kolias, Chairman & CEO]

So we're -- there's a positive for every negative. And obviously, the negative is a continued muted job creation from the oil and gas sectors. The positive is the natural gas price, which is going up in the LNG project, which is a really huge project. And we're seeing employment come back as a result of the LNG project. So that is an offset to the oil negativity. We have, on a positive, seen more diversified jobs being created, driving around. If you look at the dashboard in Alberta, economic dashboard, you'll see more new businesses created over the last 2 years than the prior 2 years before that. So there's a lot of entrepreneurs and new companies that are setting up here in Calgary. Calgary ranks as one of the top livable cities in the world and we rank very, very high. If you get tired waiting in a car in traffic in Toronto and tired of commuting for 2 hours, check out Calgary and the commute times here, and it's great. And with the mountains, the lifestyles in Alberta. Edmonton is one of the hubs of artificial intelligence. Very few people realize that. And so we've got huge schools here. We're very focused on investing in educating coders and technology students and attracting students here in our market, which is a way to attract companies that need knowledge workers. And so necessity is the mother of invention, and we're really seeing some positive successes from our Economic Development Board, both in Calgary and Edmonton, our city, province, and our feds actually are helping us. So there's positives for every negative, and we are seeing the positives. And the longer that oil stays low, the more diversified our economy is going to be by necessity. And so that's the offset to the low oil price. We do believe the pipelines will get built. It's just a matter of when, not if, the differential of the economic benefit for Canada is just too far great not to see those pipelines build through. And so we believe, over time, that will happen. Everybody is disappointed at the delays and the decisions of the court with respect to those pipelines. But necessity is the mother of invention and we're finding ways to deliver growth and create value in a mixed economy. And the question is how do we produce value and growth in this economy because there's no other option.

[Mario Saric, Analyst]

Great. Is it overly simplistic to say that the substantial reduction in the incentives requires at least some clarity or resolution on the 2 pipelines?

[Sam Kolias, Chairman & CEO]

No, absolutely not. If you look at the late '80s, Mario, we have the same similar economy with respect to oil, going from bad to worse. So if you look at the late '80s CMHC data and oil went from bad to worse, actually, rents went up. Why did rents go up in that economic period? Because of affordability and the increase in demand for affordability. House sales, home ownership, condo ownership is getting a lot tougher to access, and that helped us, and that is helping us. It's a good news/bad news sort of thing. The weaker economy sadly is helping rental because there's more demand for affordable housing. And that's the good and bad news with respect to our improving rental market. Rental market has been contrary to the oil market. In the late '80s, if you look at the CMHC data versus the West Texas price is an example of that. We're seeing that as we speak. We're seeing an improvement rental market on the heels of a mix decline. We can't say the economy -- like the economy is mixed. There are positives to this economy as well as the negatives with respect to the differential oil [-- the pipeline is doing]. And so it is a mixed economy and it is producing jobs. And again, we stress, the jobs are less paying, they're part-time and playing into higher demand for affordable housing is becoming more than essential requirement, not an option.

[Mario Saric, Analyst]

Okay. Maybe just 2 more questions on my end, one for Rob. Rob, you mentioned kind of accelerating renovation activity in Edmonton similar to what was experienced in Calgary. Is that in response to any change in supply growth expectations in the market?

[Roberto A. Geremia, President]

No, it's actually a response to returns. We're getting really very strong returns on the investments that we're making. But again, I want to re-highlight that it's -- part of the strength in the returns is the fact that we're doing it on a measured pace and we're not flooding the market with quality [as part of this well, too]. As we saw in Calgary, that actually drove prices down farther. So on a measured pace moving forward, and just by default because Edmonton's the larger portfolio, you're going to see more renovations going on in Edmonton with the expectation, again, of better returns.

[Mario Saric, Analyst]

Got it. There's no -- internally, there's no concerns of accelerating supply growth in Edmonton?

[Roberto A. Geremia, President]

No, because we're just upgrading our existing stock. And as a result of the market itself that wants better value, wants better quality and service, we're just meeting that need head on right now.

[Mario Saric, Analyst]

Right, okay. My last question just relates to kind of the margin and the increase in the property tax in Edmonton was a bit of a surprise, as you mentioned. In the past, you've talked about getting back to previous kind of peak margins, which were kind of in the kind low to mid-60s. Last year, you were at around 51%. This year, give or take, you may come in at closer to 53% here. So how should we think about whether that low-60 margin is still achievable? And how long it may take to get there given kind of perhaps some of the higher-than-expected property tax increases that you absorbed?

[Sam Kolias, Chairman & CEO]

Mario, the expenses are fixed. And so there -- right now, about 50-some percent is our margin, 40-some percent are expenses. The incentives are between 8% and 24%. And so if you look at the average of, let's say, 12%, you add that to 52% or 53%, you'll get back into the 2.

[Roberto A. Geremia, President]

That's the driver, is it -- when the incentives burn off, you're going to see margins grow quickly.

[Sam Kolias, Chairman & CEO]

We, in Ontario, for many, many years, saw margins that we're at right now. And as soon as revenues picked up into the double-digits, the margins in Ontario picked up as well and shot back up over 60%. So revenue was the key and that's the biggest driver in our industry, and that's how we continue to make up our margins. The one big variable everybody has to be focusing on, our average rent per square foot are around $1.25 a square foot. So we're really an exceptional value proposition to providing affordable housing in the marketplace. These rents can go, like they have in Ontario for [each] project, product over $2 a square foot. And that's a substantial amount of revenue opportunity, and that's still just over $2 per square foot. And far below $3 to $4, that's typically expected in the performance for new build. And we're seeing $4 to $5 per square foot in some parts in Toronto. Fort McMurray used to have rents at $2,300, $2,400 a month or $3.50 a foot. So these rents are volatile and they can swing and recover quickly when the rental market recovers. And we're seeing the trend of the rental market recovery, and that's due -- and reflecting the increase in affordable housing and mixed economy. So we're -- we're seeing and delivering positive results despite the economic situation that we find ourselves in.

[Operator]

And your next question is from Brendon Abrams from Canaccord.

[Brendon Abrams, Analyst of Real Estate]

Just turning to Slide 29, the sequential revenue growth. I mean, obviously, it's been positive for the quarter. But it looks as though the pace has decelerated over the last 3 quarters. Do you -- how do you guys think -- look at this? And do you think we've kind of hit a new kind of stabilize normal here after bouncing off the bottom? Or do you expect this trend to maybe reverse?

[Sam Kolias, Chairman & CEO]

So the biggest gains we made was in occupancy, and we came up 100, 200 basis points in occupancy. So of course, quarter-over-quarter, that's going to be reflected in our quarter-over-quarter numbers. And so -- and especially year-over-year, gains are going to be even higher because of this occupancy gain. We still have that occupancy gain opportunity being around 96%. We definitely can get back up to 97% and we're going to really work hard to get it to 98%. So we can recapture an accelerated and outsized revenue gain in the next quarter or 2 by focusing in on occupancy and taking the pedal off a little bit on the drop in incentives for our new residents. Instead of 0 months, once we can increase to that to the 1 and to the 2, which is less than the 3 and it keeps, on the other end, incentives going down. So we can see some increased revenue gains over the next quarter or 2 simply because of the occupancy opportunity that we still have to move upward.

[Brendon Abrams, Analyst of Real Estate]

Right. Okay, And then just turning to same-property NOI. I just wanted to get your views. I mean, it's been pretty strong, both for the quarter and year-to-date, 5%, 6%, let's call it. How much do you guys attribute this to kind of your repositioning program and the capital invested over the last 2 years, which has been significant? Or -- and how much just to general market conditions?

[Sam Kolias, Chairman & CEO]

It's both. Good point. The general market is improving. And what we're seeing is an accelerated improvement in our occupancy and NOI gains, in particular, Calgary is a great example where we focused on improvements and experimented with Calgary, and we're really happy with the results. The experiment turned out to be very positive, and that's why we're scaling it out to all our regions. It's now our tried, tested, proven tactic to improve our -- not just our units, but our common areas and lobbies and leasing offices, which we redefined as experiences. And so we're really, as my wife describes it, taken a holistic approach to the -- a resident experience right from the get-go, right from the curve into the home, the residential home. And so this holistic approach is really working in Calgary, and we're seeing it with outsized NOI growth, given the experiment and the testing that we did in Calgary proving to be very positive and effective. The key is choice. And that's really what we've learned, is its important to offer both the low price because most residents come in with the choice of low price. And then they look at what's available for a higher price and say "You know what, it's just like all of us when we go shopping for a new car or home or whatever, it starts at a base price. And we say, okay, that's great. But I'd like this extra and that extra." And so the extras add up and we move up the rental value chain. And we offer some things for more rental -- renter consumers. And so that's really, really working really, really well. And we're going to do it in all other regions, and we're doing it especially in Ontario now and Québec. We're really keenly aware of how important it is to always improve our product quality, service and experience in value proposition always. And that's -- we're always asking everybody, [indiscernible] how do we get better, provide greater value to our residents. And as a result, we realized greater growth in our revenues. The bottom line is [industry revenue].

[Brendon Abrams, Analyst of Real Estate]

Right, okay. And then just turning to the portfolio acquisition in Calgary. Looks like you guys are maintaining kind of your long-term diversification strategy. How did -- how does that come into play when you're making acquisition decisions in the near, short-term given this would increase your operating exposure, obviously?

[Elizabeth A. Russell]

Yes, we recognize that does increase our Calgary core markets. It's a relatively small portfolio, and it is -- it was an opportunity that we are very familiar with these assets. And given the mark-to-market that we saw, the well-maintained quality of this portfolio, it's a one-time acquisition. We still have our eye on the long-term strategy that we have announced last year.

[Sam Kolias, Chairman & CEO]

The really appealing and unique part about this acquisition is it's accretive at get-go. Very, very difficult to purchase anything today that's accretive at get-go. And so that is another great reason. We went ahead with this acquisition and it's immaculately kept. It's a block away from our head office and just a block away from our other really well-kept community, and across the street from one in the Southwest. The locations are exceptional and it's really difficult to replace these locations and the state that these communities have been preserved and kept up is exceptional. So there are really exceptional opportunities to allow us to high grade our portfolio and part of our strategic plan is to high grade our portfolio everywhere. And so it's part of our asset management focus that we're really increasing. These acquisitions are allowing us to high grade our assets here in Calgary. And we'll be continuing to pair off other assets going forward that are more suitable for other owners, that just are not as suitable for us. And so we're going to continue to recycle our portfolio and our capital, and this works really well in the units.

[Brendon Abrams, Analyst of Real Estate]

Okay. And the last question for me before I turn it back. Just taking a look at Slide 49, the moveout incentive survey. I don't want to read too much into this, but there's a big jump on a percentage basis for the reason being rent is too expensive. So I'm just wondering how you guys are viewing kind of the roll-off in incentives and increasing rents while still kind of balancing kind of retention?

[Sam Kolias, Chairman & CEO]

So the amount of increase due to rent being it -- too expensive is approximately 50 residents. From 2016, it's actually dropped by about 50 residents, and 2017 was a really exceptional low rent year. And so 50 residents in the quarter, we don't really believe it's a significant amount. But we do look at every reason seriously, and we do have our entire team to be flexible always, period. We really strive to help our residents in these unique situations and always try to work out a win-win situation to get that back down and trending back down. Sadly, there are, in this mixed economy, some tough situations and residents are going through constant change. And that was shown in the slight uptick of our [skips] as well, slightly up. And so, absolutely, that's a reflection of a mixed economy where one focused [goals] is going through some tough situations, and others are finding new jobs and the new jobs that are being created. So we're really keenly aware of that and that's why we're very flexible and we're going to try to keep those moveouts manageable.

[Operator]

That concludes today's Q&A session. I will now turn it back over for closing comments.

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

Thanks, Joanna. If you missed any portion of today's call, a copy of this webcast will remain available on our website, again, it's boardwalkreit.com, where you will also find our contact information should you have any further questions. Thank you again for joining us this morning, and this now concludes our call.

[Operator]

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