Boardwalk Real Estate Investment Trust

TSX:BEI.UN

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Boardwalk Real Estate Investment Trust Third Quarter 2021 Earnings Conference Call. [Operator Instructions] This call is being recorded on November 12, 2021. I would now like to turn the conference over to Mr. Eric Bowers. Please go ahead.

[Eric Bowers]

Thank you, Pam. Good morning, and welcome to the Boardwalk REIT 2021 Third Quarter Results Conference Call. With me here today are Sam Kolias, Chief Executive Officer; Lisa Smandych, Chief Financial Officer; James Ha, Vice President of Finance and Investor Relations; and Rick Anda, Head of Acquisitions. Please note that this call is being broadly disseminated 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 supplemental information package. 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. With that, I would like to now turn the call over to Sam Kolias.

[Sam Kolias, Chairman & CEO]

Thank you, Eric, and welcome, everyone, to our Q3 conference call. Starting on Slide 4. Today, we are in the right place at the right time with an exciting growth trajectory. Boardwalk's existing exposure to high growth on regulated markets compared with strategic opportunistic acquisitions will deliver additional stability, high grading, diversity and translate into continued FFO accretion and increased total shareholder return. The following macroeconomic fundamentals are key drivers: significant discount to an increasing replacement cost of our assets, significant organic growth as Alberta and Saskatchewan have some of the most affordable rental rates in the country, limited supplies as construction levels remain low relative to historical levels, strong demand with increased immigration, and a low-cost source of capital to execute accretive acquisitions. Slide 5. Our strategy to continue to create value for our stakeholders begins with our people. We are positioned with an amazing team and are so proud of everyone of our team members who innovate and deliver our places of homes for our resident members. In turn, this leads to leading earnings performance, which we believe will continue to result in strong total returns for our stakeholders. Our strategic focuses are: significant organic growth from utilizing our proven platform that focuses on operational excellence to optimize NOI growth. When we pair this with the current improvement in apartment rental market fundamentals, we are well positioned to accelerate on our organic growth trend. Accretive capital recycling focuses on opportunistic investment into acquisitions, development and investment into our high-quality existing portfolio with a tactical unit buyback. These opportunistic investments, combined with our operational optimization have positioned Boardwalk for increasing asset values within Boardwalk's diversified and high-quality multifamily portfolio. Our solid financial foundation provides flexibility on our balance sheet with our growing free cash flow and with CMHC insurance on 98% and our financings, which provide access to low-cost financing and reduced renewal risk. Slide 6. Our strategy continues to deliver strong results with our Q3 FFO of $0.79 per unit, up 6.8% versus last year. We are increasing our full year guidance to a range of $2.89 to $2.95 FFO per unit. This equates to a 4-year compounded annual growth rate of over 8%. Slide 7 shows strong economic momentum with job and wage growth from the most recent statistics Canada release. Alberta saw significantly improved 7.6% unemployment rate. With the national recovery of employment, Boardwalk's current mark-to-market, which includes the reduction of incentives, averages $144 per month and equates to a significant $55 million in revenue opportunity. Just a $25 adjustment in our average occupied rents across our portfolio equates to approximately $0.20 in FFO per unit on an annualized basis. Slide 8. In addition to the positive impact that higher commodity prices are providing to our Western Canadian markets, there has been a steady stream of investment and job-creating announcements from the emerging technology and clean energy sectors. As of the most recent data, over 90,000 jobs are now vacant and available in Alberta, which is approximately 50% growth in job vacancy since April this year. Adding vacant job numbers to current employment numbers is a record number of jobs for Alberta. Alberta leads the nation in economic GDP growth projections. Slide 9. Our markets and portfolio provide some of the most affordable rents in Canada when comparing to average income. In addition, average projected population growth in our markets are outpacing new supply leading to strong apartment rental and housing market fundamentals. Slide 10 shows our retention is increasing with decreasing turnover and a steady occupancy of approximately 96%. As per our appendix, Slide 41, we are seeing more move-ins from out of town as more Canadians move back to Alberta and Saskatchewan. Slide 11 show our key operational metrics with actual occupancy of approximately 96%. Incentives are dropping. Occupied rent is increasing. Vacancy loss is decreasing, resulting in higher revenues. Slide 12 shows a strong trend of improving net rental rates for both new leases and renewals with our total portfolio new and renewal leases moving into a positive 1.4% and 2.3% updated for this October. The positive new and renewal leasing spreads reflect the growing strength in our apartment rental fundamentals, positioning us to capture our significant mark-to-market opportunity. We would like to now pass the call on to Lisa Smandych, who will provide us with an overview of our portfolio performance, operating margins, balance sheet and repositioning results. Lisa?

[Lisa Smandych, Chief Financial Officer]

Thank you, Sam. Moving to Slide 13. We've experienced continued revenue momentum with sequential revenue growth of 0.8% in Q3 2021 as compared to Q2 2021. Our core Alberta markets are experiencing sequential revenue growth in line with our Ontario and Quebec portfolio. With strong occupancy and net effective rents increasing, we expect this positive sequential revenue growth to continue. Our Q3 2021 operating results reflect positive NOI growth in all our major markets, with the exception of Quebec. In Quebec, same-property NOI growth was slightly negative. However, when excluding the seniors community L'Astre, which is currently being repositioned to a conventional multifamily asset, same property NOI growth was 1% in Quebec. Looking at Q4 2021, we anticipate positive NOI growth year-over-year. However, with increased gas prices, utilities could be higher on our 25% nonhedged portion. With the potential increase in noncontrollable costs, we remain focused on managing our controllable expenses. On Slide 14, the Trust remains disciplined and focused on managing its controllable expenses despite increases in noncontrollable costs. This discipline has resulted in declining controllable expenses year-over-year, and when coupled with our revenue growth potential, will allow margins to continue to improve. Inflationary pressures may be a potential headwind for expense management, however, will positively influence revenue growth. Slide 15 illustrates Boardwalk's mortgage maturity schedule. Our mortgages are well staggered, with approximately 98% 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 low-cost financing with the current estimated 5-year CMHC rate of 2.2%. With current rates below the Trust's maturing rates, mortgage financing continues to be a low cost of capital available to the Trust. Slide 16 summarizes our progress on our 2021 mortgage maturities. To date, we have renewed or forward-locked approximately 94% of our 2021 mortgage maturities as well as secured $152.6 million in new financing at low interest rates. 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 $78 million in cash and subsequently funded financings as well as an undrawn $199 million operating line. This approximate $278 million in liquidity provides the Trust with a flexible financial position as well as providing the ability to take advantage of opportunities as they present themselves. Slide 17. The Trust debt metrics continue to improve with an interest coverage of 2.90 in the current quarter. This continuous improvement is the result of strong financial performance led by cash flow growth, coupled with low cost of debt financing. Slide 18 illustrates the Trust's estimated fair value of its investment properties, which totaled $6.3 billion as at September 30, 2021 when including new acquisitions and development as compared to $5.9 billion at December 31, 2020. The increase in overall fair value is largely the result of decreasing cap rates. Recent market transactions and discussions with our external appraisers supported cap rate compression of 25 basis points in the majority of our Western Canadian markets, with the exception of Northern Alberta and Red Deer. With our Ontario portfolio, we have recognized cap rate compression of 50 basis points throughout 2021. Our Quebec portfolio, which includes our land leased assets, experienced cap rate compression of 25 to 50 basis points. Current estimated fair value of approximately 80 -- $185,000 per door remains significantly below replacement cost. Slide 19 provides a summary of the recycling of cash flow towards value-add improvements. To date, we have completed approximately 28% of total suite improvements while aiming to complete 47% of our total portfolio, common areas and amenity spaces by the end of 2021. Our focus is to continue to deliver the best product, optimizing our capital allocation for our value-add program to our targeted resident member demographic so we can continue to provide the most exceptional elevated experience at an affordable price. The result is increased market demand, exceptional value and appealing returns with sustainable market rent adjustments. Slide 20 illustrates our stabilized renovation returns for Oak Hill Estates located in Calgary, Alberta and Taylor Heights in Red Deer, Alberta, with returns of 10% and 15%, respectively, which have exceeded our internal hurdle rate of 8%. Our renovations continue to garner positive resident member testimonials, driving referrals and higher occupancy. I would now like to turn the call to Rick Anda to discuss our recent acquisitions and dispositions. Rick?

[Richard A. Anda, Head of Acquisitions]

Thank you, Lisa. Year-to-date, Boardwalk has opportunistically invested $72 million to acquire 2 communities highlighted on Slide 21. Both Mountainview Estates in Banff and Aurora in Victoria were acquired earlier this year and are performing above our expectations. Boardwalk is currently in discussions with the municipality of Banff to review the opportunity to utilize the excess land located on the site to develop more housing for this undersupplied market. Aurora also continues to operate at full occupancy and provides a base of operation for Boardwalk in the city. Victoria is a market that the Trust continues to be active in sourcing accretive and opportunistic opportunities to expand. Slide 22 provides a brief update on our active development pipeline. Our Brampton development continues to progress on time and on budget with anticipated delivery of the first tower of the 365-unit marquee community in the fall of 2022. Our recently renamed Aspire development is directly adjacent to our Aurora acquisition in Victoria, and now has a submitted development permit. We continue to progress on entitlements at our second development in the Victoria area named The Marin. Slide 23 provides a summary and update of our active capital recycling through the sale of noncore assets. In addition to the 2 noncore sales the Trust has completed year-to-date in Edmonton, Boardwalk has agreed to sell our 50% interest in the Sandalwood development site in Mississauga. Both RioCan and we agreed to have that the highest and best use of this site was for the development of condominiums. With Boardwalk's development strategy focused on creating value through the long-term ownership and operation of multifamily rental communities, Boardwalk was pleased to create a new relationship with Marlin Spring, who has acquired our interest. With the success of our Brio project in Calgary, we are looking forward to our next potential project with RioCan. I would like to pass the call on to James Ha to discuss our capital allocation.

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

Thank you, Rick. In our team's effort to continue to lead in transparency, Slide 24 provides our stakeholders with our current view of capital sources and uses. From a capital source standpoint, we believe that our growing internally generated cash flow, low-cost CMHC and conventional mortgage financing as well as equity from noncore asset dispositions currently represents the most attractive source capital. These sources can be used to fund attractive and accretive capital allocation opportunities such as our continued focus on platform innovation and investment in our own high-quality portfolio at a discount to intrinsic value, our disciplined value-add capital improvement program, new development, and opportunistic acquisitions. As Sam mentioned earlier, we remain committed to deploying capital toward our goal of leading earnings and NAV growth per unit. Management will continue to update its view of capital sources and uses on a regular basis and as market conditions change. Slide 25 provides detail on the exceptional value that Boardwalk's current trust units represent. Boardwalk's current trading price of $53 implies a value of approximately $168,000 per apartment door and compares favorably to both our own and other recent apartment transactions. We continue to seek transactions in our core markets that compare to Boardwalk's most affordable Living brand assets. Our NAV of $64 per trust unit, equating to $185,000 per apartment door, represents an exceptional opportunity relative to market pricing and remains well below the increase in cost of replacement. Utilizing trailing 12-month property NOI on Slide 26, Boardwalk's current trading price equates to an attractive 4.9% cap rate and is a significant spread to the cost of available mortgage capital as well as recent capitalization rates seen in transactions in our markets. With continued sequential revenue and NOI growth in Boardwalk's portfolio, these cap rates represent an attractive option and the potential for the Trust to tactically invest in our own high-quality portfolio. Slide 27 provides an update to our 2021 financial guidance. Since our reintroduction of guidance earlier this year, we have seen apartment fundamentals continue to improve. And with our team's strong execution, our operating and financial results have been better than originally expected. The Trust is revising upwards its same-property NOI growth guidance, highlighted by a 2% to 4.5% growth range for the second half of 2021. In addition, FFO per unit guidance has been revised upwards to range from $2.89 to $2.95 per trust unit. The trust is confident in its forecast for the balance of the year. However, please note that a rapid change in conditions may cause these estimates to change. Our Boardwalk team is committed to leading in transparency and will update its stakeholders in the event of any changing conditions that may materially impact our forecast. On Slide 28, the trust continues to have an industry low payout ratio, providing significant cash flow reinvestment, positioning Boardwalk with ample capital for growth. Our Board of Trustees regularly reviews our distribution and with the runway for FFO growth in our core portfolio, we are well positioned to return to sustainable distribution increases to our unitholders on an annual basis. Lastly, on Slide 29, we are pleased to share the results of our recent GRESB assessment. Our score of 69 is a significant improvement from our base score of 47 from a year ago. We continue to scale our past initiatives as well as incorporate new ESG innovations into our operating platform and are proud to have been recognized earlier this month by the Calgary Residential Rental Association with 6 awards, including one for industry leadership and environmental excellence. We look forward to updating our stakeholders on our progress in the coming quarters and with our 2022 ESG report. We would like to now open up the phone line for questions. Pam?

[Operator]

[Operator Instructions] Your first question comes from Matt Kornack with National Bank Financial.

[Matt Kornack, Analyst]

First off, we don't speak about Quebec very often, but I just wanted a quick update on the Nun's Island portfolio. It looked like there was a bit of a dip in occupancy this quarter, but then it rebounded subsequently. Was that just transitory in nature or is anything in particular?

[Sam Kolias, Chairman & CEO]

It's transitory. It's seasonal as well. The big rush in rentals is, as most know, July 1. And so it's still very solid. We are continuing our renovation program at Nun's Island and all of Quebec. And we offer exceptional product and value service for the market, and we have good results in line with now our results in our core markets, so it continues to deliver great sequential revenue. And as Per Lisa mentioned, our Quebec City, L'Astre, is going through repositioning to regular rental community from a seniors project, so -- or community.

[Matt Kornack, Analyst]

Yes, yes, yes.I saw that one. So that property is about 40% occupied, 44% occupied. What is the timing on that repositioning program there?

[Sam Kolias, Chairman & CEO]

12 months is what our goal is.

[Matt Kornack, Analyst]

And then on the financing side, the spread between sort of 5- and 10-year bond yields has compressed a bit here. Would you anticipate looking at longer-term renewals on mortgages that are coming due at this point? Or sticking with 5-year renewals?

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

Hey, Matt, it's James here. You're 100% right, watching current 5 to 10 spread, we've seen a nice compression on that over the past several weeks. As always, our priority with our mortgage schedule is to ensure we have a nice laddered maturity curve. Fortunately, for 2021, we had a nice gap year in 2026 and was able to take advantage of the sweet spot in the market that we saw for 2021, which was 5-year money. I think, going forward, you'll see us take advantage of opportunities when it comes to individual mortgage pricing. As you know, we're in the market each and every month and would anticipate that we do a good combination of 5-, 6-, 7-, 10-year money next year.

[Matt Kornack, Analyst]

Okay. That makes sense. And then obviously, there was a pretty substantial change to the positive with regards to your rent spreads in Alberta, but generated across portfolio as well. How should we look at it? I mean you're in a nonrent controlled market, so there's a degree of yield management between occupancy and rent growth. But it seems like you're at a point where you're willing to push a little bit on the rent front, less concerned on occupancy. Is that a fair point? And how should we think of that in the context of sort of rent incentives and occupancy for the balance of the year but also heading into next year as well?

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

Hey, Matt, it's James here again. I would say, from an occupancy standpoint, we're very happy with our current occupancy position going into more of a seasonal slowdown period here. Sitting around 96% really positions us well heading into the winter months. I think if we look at our leasing activity so far for the month of November, it's been quite positive. We've had low turnover. Rentals are -- have been quite strong for the first 12 days of this month. And so from an occupancy standpoint, we're well positioned there. From a leasing standpoint, to your point, Matt, we've seen that inflection across our portfolio. As we talked about last August, we've already -- we had already seen the early-stage trends of that in most of our markets. Today, we're seeing it in most -- in the majority of our markets in terms of positive new leasing spreads. Renewals continue to be positive. I think we're really set up well to reduce those incentives and continue that trend that you're seeing here today.

[Matt Kornack, Analyst]

Okay. Great. And last one, a little bit more technical, and it's been a bit more volatile. But on the property tax front, just quarter-to-quarter, is there sort of your winning appeals, and that's why it would have come down this quarter versus last year? Or has there been a sort of change in tax policy generally?

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

Yes. Fortunately, and we anticipated this earlier in the year, Matt, property taxes, our city councils here in Alberta have been quite pleasant for us, the residential space and the residential sector. And so as we know, the first half of our payments, and it's a bit of a nuance in terms of property tax payments through the monthly payment programs in each municipality. But the first half of this year had reflected similar property tax increases that we had last year. And so the second half of this year, as a result of effective overpayment in the first half, we've seen that decline for the third quarter. The third quarter was fairly clean, looks like that will be very close to our property tax number for the fourth quarter. And as we look forward to next year, we do anticipate a little more information from our city councils in terms of what that property tax could look like in the coming weeks.

[Matt Kornack, Analyst]

Okay. Perfect. Got to add another $1 million to my Q4 NOI.

[Operator]

[Operator Instructions] Your next question comes from Mario Saric with Scotiabank.

[Mario Saric, Analyst]

I thought Slide 24 was a good slide that you introduced in the supplemental. So we'll just focus on that for a second. The high risk-adjusted return quadrant with large opportunity that you highlighted. Based on today, how would you rank those 4 in terms of attractiveness?

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

Mario, it's James. Yes, I would say all 4 represent great opportunities. It really depends on the opportunities individually as they present themselves. I mean, right now, we highlight the NCIB as a new initiative and something that we haven't had for the last 4 or 5 years. I think, today, if you look at our trading price today of $53, it equates to about $165,000 per apartment door. If you look at the transactions that we highlight in Slide 26 and 27, we're seeing prices in the apartment markets that are significantly higher than that. And so the best apartment deals right now are potentially through our buyback here at $53.

[Mario Saric, Analyst]

Okay. And then in terms of the fair value uptick in Quebec, in particular, some of the kind of industry-wide report didn't really show much quarter-over-quarter change in cap rates in Quebec, so I'm just curious in terms of what the catalyst was for the large fair value gain. Was it just simply catching up to what's happened in the province for the past 3 to 6 months? I know you've talked about potentially excess land in the province for Boardwalk that you're surfacing. So I'm just curious in terms of what drove that change?

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

Hi, Mario, it's James. Yes, to your point, our appraisers and our fair value methodology does require transactions. It is backwards looking. The cap rate compression that you saw this quarter was on the recommendation of our external appraisers. To your point, it certainly does reflect some of the activity that we've seen over the past several months. As you note, the cap rate reductions that we have taken this quarter have been in some of our markets. I would say, across all of our markets, we continue to see higher valuations in apartments. We continue to see lower cap rates, and we continue to see the opportunity for higher operating income. And so that fair value adjustment is really a reflection of what's been going on in the market so far and on a backward-looking basis.

[Mario Saric, Analyst]

Okay. And my last question just pertains to the recent municipal elections in Calgary and Edmonton. Anything in particular from a Boardwalk perspective that you think will fundamentally shift on the pre-change strategy or earnings in the next 12 months in terms of policy shift?

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

I would say, Mario -- it's James again. For us here, our municipal elections, it doesn't really change our outlook. We've had great discussions with a lot of the candidates as well. And at the end of the day, housing, affordable housing, especially, is an important necessity in all of our cities. And we do have some great partnerships with many of our municipalities and the importance of affordable housing continues to be top of mind, and we are significant contributors to that and want to continue to be significant contributors to that.

[Sam Kolias, Chairman & CEO]

Just to add on, James, our recent announcement that we've heard, Amazon Web Services coming to Calgary and our new mayor is very keen on continuing our economic diversification as well as championing our clean energy leadership that our producers are leading the world in producing clean energy. And so it's actually very positive and fits in with the direction that we've already been going with the great leadership of our premier as well. Big projects in hydrogen have been announced and net zero carbon capture projects. A lot of investment has been announced. Billions of dollars have been recently announced. That's really a reflection of the thousands and thousands of additional jobs being created and the GDP forecast that, again, lead the nation as a result.

[Mario Saric, Analyst]

And then you mentioned, with respect to the property tax discussion, you may get a bit more color in the next couple of weeks. But based on your kind of preliminary discussions with the various candidates prior to the election, do you foresee any meaningful change in property tax strategy in your city?

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

As of right now, Mario, we're not hearing anything outside of what normal expectations would be at this juncture.

[Operator]

Your next question comes from Matt Logan with RBC.

[Matt Logan, Analyst]

Just wanted to follow up on some of the post-quarter leasing velocity. Certainly, it seems to be trending positively. And with a view to perhaps maintaining occupancy in and around the 96% level, how does that relate to incentives? I mean they were down about 3% sequentially. Do you think that trend of incentive burn-off will accelerate in Q4?

[Sam Kolias, Chairman & CEO]

Matt, it's Sam. And we are seeing incentive reductions between the 5% and 10% level. And we want to stress, we are flexible. We continue to be resident-centric and our retention results is a great reflection of the efforts that we have made to maximize retention and minimize turnover. Turnover is costly, and as a result, we gain much more in retaining an existing resident and being flexible and catering to the needs of our residents than any other strategy. And so we are definitely seeing things for the first time. And some may have missed, in the first 7 days of November in our multiple listing sales, we saw, for the first time in our life, 99% sales-to-listing ratio, and that's a first time in our life observation. So there are significant real-time data that reflects a significant movement into our province. There's discussions with builders. Our premier cited the other day, our builders cannot build homes fast enough for the migration coming from Ontario back to Alberta, and that was mentioned by our premier a week or 2 ago. And so we are seeing some real-time population movement and our economy is changing by the moment in a positive direction.

[Matt Logan, Analyst]

Absolutely. You can certainly see that in your slide deck on Page 41. When you think about that incentive burn off, does that still translate into high single-digit to low double-digit organic growth next year?

[Sam Kolias, Chairman & CEO]

Well, Matt, when we assume a 4% and we're tracking approximately 1% sequential revenue, which translates into 4% top line with a margin that's approaching 60%, that essentially equates into an 8% NOI, less a 2% increase or 3% increase in expenses, which is, again, a 60% margin would translate into NOI of approximately 6% to 7% and an FFO, yes, up double digit because of the financial leverage into the double-digit 12% range.

[Matt Logan, Analyst]

Great color. And maybe just one last question for me. Sam, you've seen a number of cycles in Alberta. Certainly, things are on the upswing. What is different about Alberta and Boardwalk today versus prior cycles?

[Sam Kolias, Chairman & CEO]

Our economy is much more diversified than it's ever, ever been in our lifetime. We have, by necessity, which is the mother of invention, been forced to look for other sources of jobs and other industries and diversified companies. And we have to give all the credit to our government leaders in all levels. That focus is clearly seeing the fruits today, especially with a torrid amount of announcements the last couple of weeks. That is absolutely a fruit of many, many years of tireless work by not just our government leaders, but by our municipal business development groups and our population here that is always looking at ways to improve the jobs and bring economic stimulus to our western regions. And so we have to give a lot of credit to a lot of big shoulders we're standing on today. And so going forward, our economy is much more diversified. Our producers are leading the world in producing clean energy. Everybody -- everything is energy, as we all want to or not remember in physics. And so we're seeing a much more progressive economy. And going forward, we're seeing a very, very bright future for a very long, long time.

[Operator]

Your next question comes from Dean Wilkinson with CIBC.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

This might be for James. James, when you're looking at the potential for share buybacks and the capital that you've got committed for development and just regular spend, how do you look at the balance sheet vis-a-vis where you would go with leverage in terms of borrowing at that low rate to buy back shares? Like what's the threshold that you'd be willing to take that up to?

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

Hey, Dean, it's James. So from an allocation standpoint, we cannot reiterate enough how our approach in terms of being opportunistic with all of our allocation opportunities. We're going to evaluate every opportunity that presents itself. From a leverage standpoint, with the benefit of CMHC insurance, we're very comfortable at our current leverage levels. I think going forward for buyback, again, we'll be opportunistic with that allocation opportunity. One great place in terms of accessing sources of capital has been our noncore asset dispositions. I mean we are -- we're able to gain equity from these noncore asset dispositions and recycle that capital towards allocation growth opportunities such as stock buyback, as you mentioned.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Okay. So we should be thinking then any potential stock buyback would be on a leverage-neutral basis?

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

Dependent on the opportunity, Dean. Again, we're going to be opportunistic, right? We have great sources of capital, and we have great places to allocate it, yes. It will depend on the opportunity.

[Sam Kolias, Chairman & CEO]

Thank you, Dean, it's Sam. And we have a maximum free cash flow distribution policy and our free cash flow is growing significantly. And as we've seen in many great business cases, free cash flow grows on a compounded exponential basis, and that's the reason we love our maximization of free cash flow, the absolute least expensive access to capital of all stacks. Thanks, Dean, again.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Body in motion, right?

[Sam Kolias, Chairman & CEO]

You got it. Thank you.

[Operator]

Your next question comes from Michael Markidis with Desjardins Capital Markets.

[Michael Markidis, Real Estate Analyst]

Just one question from my perspective, just given your maximum cash flow strategy seems to lend itself well to development and there's 1 property under construction now, which has been under construction for some time, 2 future developments with timing TBD. Maybe just chat with us or give us some color in terms of how much larger you think the development pipeline could get? And what's your appetite for growing that further is?

[Sam Kolias, Chairman & CEO]

Just a quick math. It's Sam, Michael, and our quick math is 5% of our total assets are under development. And we approximate that will create approximately 10% NAV growth. And so that pretty well is the quick math around our development program today.

[Michael Markidis, Real Estate Analyst]

That's where you're at today? Okay. With the expected spend on all the stuff that's shown on the slide? Or just with the railroad project?

[Sam Kolias, Chairman & CEO]

Correct. That's correct. 5% and our expected gain will be a 10% addition to our NAV.

[Michael Markidis, Real Estate Analyst]

Okay. So I should take that to mean that you're not going to expand on it materially until maybe perhaps the railroad?

[Sam Kolias, Chairman & CEO]

Today, that's what it is. I want to emphasize, today, that's what it is. And the key word, opportunistic. We are very opportunistic and are going back to our roots of being very opportunistic to create the maximum value.

[Operator]

There are no further questions at this time. Please proceed.

[Sam Kolias, Chairman & CEO]

Thank you, operator. As always, if there are any further questions or comments, please do not hesitate to contact us. With gratitude, we would like to thank our amazing team of heroes, our great leaders, loyal residents, CMHC, our lenders, our unitholders and all our stakeholders. It really is all about our people whose huge shoulders we stand in as leaders, we continue to do everything we can to support continued growth in extraordinary. We really can't thank our amazing team and great leaders enough, especially for our recent recognition in our environmental sustainability and governance efforts and GRESB score. We are pleased with our improving results on a foundation of exceptional value we continue to provide our resident members, our investors and all our stakeholders. Our home is much more than a place or a location. Our future is family, where love always lives. What can be more important when choosing where to call home. Thank you again, everyone, for joining us this morning and God bless.

[Operator]

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