Boardwalk Real Estate Investment Trust

TSX:BEI.UN

Earnings Call Analysis

Boardwalk Ramps Up FFO Guidance Amid Growth

Boardwalk's internal discipline and robust financial management led to noteworthy performance with a strong commitment to managing operational expenses despite inflationary pressures. The company reported a dazzling 96% of its mortgage portfolio being NHA-insured, securing lower-than-market financing rates and showcasing a staggering maturity schedule for better risk management. Liquidity remained amiable, with roughly $252 million available, reinforcing its flexible financial positioning. FFO per unit guidance for 2023 was elevated to $3.52 to $3.60, mirroring the firm's robust operating performance. Rental renovations and strategic acquisitions reflect Boardwalk's aggressive yet prudent capital deployment towards growth. The cash distribution is held firm at $1.17 per unit, amidst a landscape of impressive NOI growth and a commitment to transparency.

Strategic Mortgage Planning

Boardwalk's strategic approach to mortgages is showcased by a well-staggered maturity schedule, with about 96% of the mortgage balance being NHA-insured, providing access to lower-than-conventional financing rates. Despite the current interest rates being above the Trust's maturing rates, Boardwalk benefits from an interest coverage of 2.88% as well as a spread out maturity curve, mitigating renewal risks.

Financial Positioning and Liquidity

In 2023, the Trust achieved renewal and forward-locked financing of $327.2 million at an average rate of 4.5% and secured $72.5 million in new financings, with a particular acquisition being financed at 3.89%. Boardwalk boasts a robust liquidity position, with $56.4 million in cash and accessible financing, and an undrawn $196 million operating line, totaling around $252 million. This liquidity supports a flexible financial stance.

Capital Deployment and Value-Add Initiatives

Boardwalk's cash flow retention strategy enhances capital for growth investments, such as value-add programs and new developments, boosting leverage ratios. There's a focus on improving common areas and amenities, anticipating the completion of 11 renovations in 2023, affecting 60% of total suites. They are also converting non-rental spaces to rental units, pursuing the addition of up to 57 new units in Alberta to meet market demands.

Valuation and Growth Potential

Boardwalk presents a compelling investment at its current trading price, implying a value of $194,000 per apartment door, which compares favorably to external market transactions. The Net Estimated Value (NEV) has risen, in line with strong NOI growth, estimated at around $82 per trust unit or $216,000 per apartment door, well below the escalating rental costs.

Trading Price and Earnings Valuation

The Trust's units trade at an attractive 4.9% cap rate, reflecting a forward cap rate in the mid-5s due to double-digit NOI growth. This provides a significant spread over current mortgage rates and offers an exceptional value proposition along with avenues for robust earnings growth.

Financial Guidance and Performance

Boardwalk's performance with strong revenue and tight operational expenses has led to a revised and uplifted 2023 FFO per unit guidance of $3.52 to $3.60. This guidance takes into account the continuing strong NOI performance and surpassing expectations from acquisitions and developments.

Distribution Strategy

Reflecting the trust's growing cash flow, Boardwalk's Board of Trustees has maintained a monthly cash distribution of $1.17 per unit, equating to an annualized rate. They prioritize a low payout ratio, enabling reinvestment and growth opportunities. Distributions are reviewed quarterly for potential increases in line with financial performance.

Sustainability and Public Disclosure

Boardwalk's dedication to sustainability practices is underscored by an improved GRESB score of 71, leading to a top-ranking in public disclosure among peers. This achievement is a testament to the trust's commitment to transparent and responsible governance.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, ladies and gentlemen, and welcome to the Boardwalk Real Estate Investment Trust Third Quarter 2023 Earnings Call. [Operator Instructions] This call is being recorded on November 8, 2023.I would now like to turn the conference over to Mr. Eric Bowers, VP of Finance and Investor Relations. Please go ahead, sir.

[John Bowers, executive]

Thank you, Laura, and welcome to the Boardwalk REIT 2023 Third Quarter Results Conference Call. With me here today are Sam Kolias, Chief Executive Officer; James Ha, President; Lisa Smandych, Chief Financial Officer; and Samantha Kolias-Gunn, Senior Vice President of Corporate Development and Governance. Please note that this call is being broadly distributed by way of webcast. If you have not already done so, please visit us at bwalk.com/investors, where you will find a link to today's presentation as well as PDF files of the Trust financial statements and MD&A.Starting on Slide 2, we would like to remind our listeners that certain statements in this call and presentation may be considered forward-looking statements. Although the expectations set forth in such statements are based on reasonable assumptions, Boardwalk's future operation and its actual performance may differ materially from those in any forward-looking statements. Additional information that could cause actual results to differ materially from these statements are detailed in Boardwalk's publicly filed documents.I would like to now turn the call over to Sam Kolias.

[James Ha, executive]

Thank you, Eric, and welcome everyone to our Q3 2023 conference call. Starting on Slide 4, our strong performance with our GAAP and non-GAAP measures of FFO per unit, net asset value, and unit holder equity seen an increase from the same quarter of the prior year or September 30, 2022. And profits seen decreased quarter-over-quarter due to reduced fair value adjustments.Slide 5, our culture from our humble beginnings in 1984, our resident members are at the top of our organization. Our leaders put our team first and our team puts our resident members first. Guided by the golden rule, we have a peak performing customer service culture that creates exceptional results.I would like to now pass it over to Samantha Kolias-Gunn.

[Samantha Kolias-Gunn, executive]

Thank you so much, Sam. Slide 6. Our strategy to create value for our stakeholders begins with our people. We are so grateful for our extraordinary team and family, who continue to innovate and deliver our places, homes for our resident members, where love always lives.Our strategic focuses are best in class organic growth from our strategic decision made several years ago to implement a distribution policy which maximizes free cash flow, reinvestment back into our communities, leverages our proven team and platform to deliver the best service and value to our resident members, which results in optimized NOI growth. When we pair all of this with the improvement in apartment rental market fundamentals in our core markets on a solid foundation on some of the most affordable rents in Canada, we are well positioned to continue to deliver best-in-class organic growth.Concretive Capital Recycling focuses on opportunistic investment into acquisitions, dispositions, development, and investment into our own high-quality existing portfolio with a tactical unit buyback, when appropriate, to also increase free cash flow, compelling value from our strategic decision to diversify our product offering into 3 distinct brands. Affordable Living, Enhanced Value Community, and Affordable Luxury Lifestyle. This strategic decision, combined with our maximizing of free cash flow and reinvestment back into our communities, has positioned Boardwalk as a leader in multi-family community providers with growing free cash flow.Our solid financial foundation provides flexibility on our balance sheet with a minimum distribution policy which maximizes available capital from our growing funds from operations for reinvestments back into our communities. With our laddered mortgage renewal approach and CMHC-insurance on 96% of our financings, this continues to provide us stability and access to low-cost mortgage capital with reduced renewal risk.Slide 7, we are delivering leading growth. Boardwalk's existing exposure to strong rental demand, non-price controlled markets, with record immigration, significant organic growth as Alberta has some of the most affordable rental rates in the country, with limited new supply versus demand from both international and inter-provincial migration.Our solid financial foundation and partnership with CMHC allows us to provide some of the most affordable rents in Canada. With rising interest rates making homeownership more expensive and rising construction costs, all widening the gap between our replacement cost of our assets and our current valuation.Construction levels in our core markets remain low relative to anticipated household formation with record high immigration into our core Alberta market. All of our apartment rental fundamentals continue to improve with higher revenues as a result of our significant improvement and inflationary adjustments, coupled with essentially no new incentives on new and renewing leases. All of our markets have near 99% occupancy and strong apartment rental fundamentals.Slide 8 shows the significant magnitude and scale on a historic level of continued all-time record-high immigration into our largest region, Alberta, from both interprovincial and international migrants calling Alberta Home. This significant migration reflects the affordability that Alberta provides relative to other provinces, coupled with significant job vacancies. Our federal government recently reaffirmed the same permanent resident target for next year and into 2026.Slide 9 shows interprovincial migration sources into Alberta for current year 2016 and 2006. Most interprovincial migrants are coming from Ontario and Quebec, with a big increase from BC, reflecting a migration into more affordable housing in Alberta from higher housing costs in Ontario and BC.Slide 10 shows strong overall employment growth in Alberta, along with how diversified new jobs are helping with the diversification of the Alberta economy.Slide 11 shows Alberta's leading economic growth from high commodity prices resulting in budget surpluses that will go towards debt repayment and savings contributions for future investments. Smaller debts will also result in smaller interest costs for our Alberta government.Slide 12, some headlines that reflect a diversifying economy for Alberta. Alberta's economy remains strong. In addition, there are many major projects under development in the province of Alberta, which will further promote more job opportunities in the future.Slide 13 shows our large presence in affordable and non-price controlled markets, with Alberta and Saskatchewan representing 62.1% and 10.3% of our portfolio, respectively. Boardwalk has the highest Canadian concentration of non-price controlled apartments amongst our public REIT peers. Boardwalk's current mark-to-market, which includes the reduction of incentives, averages $177 per suite and equates to approximately a $69.9 million revenue opportunity.Slide 14 shows our high affordability, as defined by CMHC, in our core Edmonton and Calgary markets, with rents well below 30% of median rental household income. To the right of the affordability chart is a graph which shows occupied rents in Alberta are still tracking below both Alberta and Canadian CPI indexed inflation. There remains a significant gap between occupied rents and the changeover consumer price index over the last 8 years. Boardwalk rents continue to provide exceptional value versus consumer price index over the last 8 years.Slide 15 shows a graph on the left which shows significant imbalance between strong demand or immigration versus supply or new builds in the yellow, black, and gray with demand or migration accelerating further in our core Edmonton and Calgary marketplaces far outstripping new supply. To the right a graph showing how high construction costs remain along persistent higher interest rates.Slide 16 shows high occupancy now close to 99% as a result of strong apartment rental fundamentals and our leading diversified product offering in all our key markets. Move-outs versus last year are also dropping as our retention and value proposition continues to increase. It is important to compare same month over previous month last year because of seasonality.Slide 17 shows our key operational metrics with high occupancy, lower incentives, higher occupied rents, resulting in higher revenues for the quarter, reflecting our key strategic decisions made to maximize free cash flow and diversify our product offering, yielding significant financial performance.Slide 18 shows steady net new and renewal rental rates within our resident-friendly centric renewal rate band, keeping our retention high, our turnover and expenses low. Year-over-year, we have seen a significant improvement. Existing lease spreads or renewals are strategically moderated to keep providing resident-friendly affordable housing options in our core markets while lowering our costs and steadying operational results. A win-win for all our stakeholders. Slide 19 shows a growing 2.6% sequential quarterly revenue gain, an increase from 2.3% in the previous quarter.We would like to now pass the call on to Lisa Smandych who will provide us with an overview of our portfolio performance and balance sheet. Lisa?

[Lisa Smandych, executive]

Thank you, Samantha. Moving to Slide 20. For Q3 2023, same property net operating income increased by 12.1% as compared to Q3 2022 with revenue growth of 8.9%. For the 9 months ended September 30, 2023, same property net operating income increased by 12.7% with revenue growth of 8.6%.Edmonton, the Trust's largest market, saw revenue growth accelerate to 9.6% in Q3 2023 and 9.3% for the 9 months ended September 30, 2023, as compared to Q3 2022 and the 9 months ended September 30, 2022, respectively. Operating expenses increased by 3.6% in Q3 2023 and 2.7% for the 9 months ended September 30, 2023. primarily the result of increased wages and salaries, repairs and maintenance, and utilities as a result of higher rates. The team remains committed to ensuring focus and discipline when managing controllable operating expenses.Slide 21, administration costs increased by $2 million in Q3 2023 as compared to Q3 2022, while also increasing $900,000 as compared to Q2 2023. This increase was mainly driven by inflationary wage adjustments at the beginning of 2023 as well as larger bonus accruals recorded in Q3 2023 as a result of the Trust's financial performance. Deferred unit-based compensation increased due to the increase in the number of participants as well as the cost of the program.Slide 22 illustrates Boardwalk's mortgage maturity schedule. Our mortgages are well staggered with approximately 96% of our mortgage balance carrying NHA-insurance through the Canada Mortgage and Housing Corporation. This insurance remains in effect for the full amortization of the mortgage and in addition to carrying the Government of Canada's backing, provides access to financing at rates lower than conventional mortgages, with a current estimated 5-year and 10-year CMHC rate of 4.7%.The current interest rates are above the Trust's maturing rates, the Trust's maturity curve remains staggered, reducing the renewal amount in any particular year. Lastly, the Trust has an interest coverage of 2.88% in the current quarter.Slide 23 summarizes our 2023 mortgage program. Overall, we have renewed or forward-locked $327.2 million, as well as secured $72.5 million in new financing at an average rate of 4.5% and an average term of 7 years. Included in these financings is $106 million of conventional mortgage financing, which we renewed on shorter terms to allow for them to be replaced with CMHC financing upon next renewal.In addition, the Trust obtained $46.5 million of CMHC financing at 3.89% and a 7-year term for its acquisition of The Vue in Victoria, British Columbia. 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 $56.4 million in cash and subsequently funded financing, as well as an undrawn $196 million operating line. This approximate $252 million in liquidity provides the trust with a flexible financial position.Slide 24 illustrates the Trust estimated fair value of its investment properties, excluding adjustments for IFRS 16, which totaled $7.4 billion as of September 30, 2023, as compared to $6.8 billion as of December 31, 2022. The increase in overall fair value is the result of increases in market rent at select sites and communities as market fundamentals improved, as well as the Victoria acquisition, while being slightly offset by an increase to capitalization rates as discussed on the next slide. Current estimated fair value of approximately $216,000 per apartment door remains below replacement cost.Moving to Slide 25. In consultation with our external appraisers, the capitalization rates or cap rates used in determining Q3 2023 fair value were increased from both Q2 2023 and Q4 2022. Upward adjustments were made to the Trust's Ontario and Quebec assets as well as Calgary and Edmonton to reflect the higher interest rate environment. As it does every quarter, the Trust will continue to review completed asset sales transactions and market reports to determine if adjustments to cap rates are necessary. Most recent published cap rate reports suggest that the cap rates being utilized by the Trust for calculating fair value are within their estimated ranges.I would now like to turn the call to James Ha to highlight our capital allocation, developments, and the Trust's exceptional value. James?

[James Ha, executive]

Thank you, Lisa. Our maximum cash flow retention strategy remains key to our ability to opportunistically invest and compound returns for our stakeholders. As a result, our growing cash flow is increasing our available capital deployment towards growth, while also further improving our leverage. We continue to seek opportunities for growth with our focus today on our value-add capital improvement program, sourcing strategic and accretive acquisitions, and continuing our new development in undersupplied housing markets.For the quarter, we are pleased to share an update on our capital deployment starting on Slide 26, which provides an update to our progress on our value-add, repositioning, and renovation program. Our common area and amenity renovations have positioned our communities to offer the best value, service and experience to our resident members and are a key contributor to Boardwalk's success in both competitive as well as strong market conditions.For 2023, our team is on pace to complete 11 common area and amenity renovations resulting in over 60% of our total suites benefiting from our repositioning program. In addition, our suite renovation program continues to be opportunistically used to improve and enhance our offering for residents. Our existing vertically integrated platform provides us with the unique ability to quickly and cost-effectively complete these renovations. With limited availability and the current strong demand for housing, our ability to reduce days vacants are a significant differentiator of our Boardwalk communities.With low availability in our markets, an additional initiative we are undertaking is the conversion of existing storage and administrative spaces in our communities into rental suites.This initiative aligns with our platform optimization and to date we have added 17 units to the market. By investing in small renovations to turn suites from administrative use, back into rentable units, we will add much-needed additional housing in our community. We are currently under construction for an additional 6 units and are in the early stages of assessing feasibility on up to an additional 57 units in Alberta.On Slide 27, we provide an update to our ongoing development pipeline that housing and supply constrained markets. We're pleased to share that the lease up of the first tower of our 45 Railroad development is complete with 100% occupancy and at rental rates at the upper end of our original expectation.The second tower has now received occupancy permit is progressing through leasing with a total of 56 or 1/3 of the units already rented to date. This project was delivered on time and on budget, and we are projecting a development yield at the upper end of our forecasted range. Our Victoria development pipeline presents an opportunity for the Trust to contribute new housing units while also creating strong value for our stakeholders. Aspire is our first of 3 developments in Victoria.We are progressing on completing our foundations for this 234-unit development, which is located adjacent to our existing Aurora Community that remains fully occupied. This development will continue to scale our Victoria presence alongside our existing communities, which includes our recently disclosed acquisition of The Vue, which closed at the end of April.Switching to our current valuation, Slide 28, highlights the exceptional value that Boardwalk's Trust units represents at our trading price, which implies a value of approximately $194,000 per apartment door. This compares favorably to the substantive transactions that have occurred in the external market.Though our estimated cap rates are higher, reflecting the higher cost of mortgage financing, our NEV has increased alongside our strong NOI growth and is estimated to be approximately $82 per trust unit, which equates to just $216,000 per apartment door. And represents an exceptional opportunity relative to market pricing and remains well below the increasing cost of rent.On Slide 29, Boardwalk's trading price equates to an attractive 4.9% cap rate on our trailing NOI. With our double-digit NOI growth, the forward cap rate at this price is in the mid-5s and provides a significant spread to the current cost of mortgage capital and transactional cap rates in private markets. With favorable fundamentals, strong leasing trends, and leading NOI growth, our current valuation represents exceptional value alongside our strong runway for earnings growth.Our updated guidance outlook reflects these strong trends and are highlighted on Slide 30. Boardwalk's third quarter operating performance continued to be strong. Revenue growth was toward the upper end of our expectation with near full occupancy and strong leasing spreads. Operating expenses were on the low end of our expectations with our optimization efforts, ongoing and non-controllable expenses such as utilities coming in at the low end of our prior expectations. This has allowed us to increase the bottom end and tighten our same-property NOI growth range to 12.5% to 14% growth for the year.As the strong same-property NOI performance compounds into the fourth quarter, our recent acquisitions and developments are also outperforming our expectations. Interest rates, though higher, are well within our forecast band. Interest earned on cash is above our expectations, and our G&A optimizations have assisted us in allowing a translation to a forecasted double-digit growth rate for FFO per unit.For the year, the Trust is tightening and upwardly revising our 2023 FFO per unit guidance to $3.52 to $3.60 per trust unit. Our team is committed to leading in transparency and will continue to update our stakeholders in the event of any change in conditions that may materially impact our forecast.On Slide 31, our Board of Trustees has confirmed our monthly cash distribution of $1.17 per trust unit on an annualized basis for the next 3 months. Our distributions have increased alongside our growing cash flow while maintaining our industry low payout ratio, providing significant cash flow, reinvestment, and positioning Boardwalk with ample capital for growth. As is customary, the Trust will review any necessary regular distribution increase to meet our minimum requirement and adjust accordingly with our fourth quarter results.Lastly, on Slide 32, we are proud to share our continued improvement to our GRESB score, which highlights our focus and continual progress towards leading sustainability stewardship. Our GRESB score of 71 is an improvement from last year, and we are proud to have been ranked first amongst our peer group in public disclosure. Thank you to our Boardwalk team and all our stakeholders for accomplishing this amazing recognition.This concludes the formal portion of our presentation, and we would be happy to answer any questions. Lara?

[Operator]

[Operator Instructions] We have our first question coming from the line of Jonathan Kelcher from TD Cowen.

[Jonathan Kelcher, analyst]

First question just on market rent growth. How do you see that trending into 2024, and how long do you think it can keep sort of its same pace going?

[James Ha, executive]

Jonathan, it's James. Market rent growth has been quite consistent certainly a way to track that would be with our leasing spreads. As we've talked about, we are strategically moderating the pace of adjustments with those market rent adjustments. And to-date, we have been accomplishing leasing spreads inside of that targeted range, specifically in Alberta, between 10% to 15%. As Samantha had pointed out in her prepared remarks, affordability continues to be the best in the country right here in Alberta. And so we believe that this approach is going to create a longer runway for us with these continued market rent adjustments.

[Jonathan Kelcher, analyst]

Okay. And then I guess just on the same property expenses, the growth in Edmonton was on the expense side was a lot lower than your other larger markets. Can you maybe give a little bit of color on that? And how you expect that to trend into next year?

[Lisa Smandych, executive]

Sure. Jonathan, it's Lisa. Edmonton, as this group would know, they really benefited from our platform optimization program. So the way that optimization specifically looked at when we had associates lead the organization, did we need to replace positions, so we really managed with turnover going down and occupancy going up, could we maximize or optimize our platform. And so the benefits you're seeing on that Edmonton expense side is directly related to that platform optimization.The other market is just not having such a large presence, didn't have the same opportunity for the expense savings, but still would have seen some through that optimization. So moving into 2024, the timeline, I guess, of the optimization will be what impacts 2024 results. And so it sort of would have happened through the year, largely at the beginning of the year. So you might expect more inflationary side adjustments as we look at 2024.

[Jonathan Kelcher, analyst]

Okay. So basically, you've got the full, or mostly the full benefits of it right now, and then 2024 should just be more inflation type growth? Is that the way to think about it?

[Lisa Smandych, executive]

Yes. Maybe a little bit of benefit trickles into Q1 of 2024, but then yes, it would move more towards inflationary. Don't get us wrong, though. We're always going to look to see how can we continue to optimize that platform, evaluating those headcounts while also looking at technology and other opportunities to ensure we keep those expenses as low as we can.

[Operator]

Our next question comes from the line of Mario Saric from Scotiabank.

[Mario Saric, analyst]

One or the first question is just on capital allocation. I may have missed it, but it looks like you may have removed your uses and sources of capital, that little matrix that you put in the presentation a couple of quarters ago. So I'm just curious to see whether the positioning of the various use and sources of capital have changed. Specifically, with your free cash flow today, what is looking like the most attractive risk-adjusted return in terms of deployment?

[James Ha, executive]

Mario, it's James. No change to the view of those sources and uses. Certainly, as our stakeholders will know, we certainly place a priority and have a business model that focuses on growing free cash flow. That is the cheapest form of capital and that's allowing us to make capital allocation decisions each and every day. As we pointed out in our prepared remarks, we're continuing to focus on reinvesting back into our portfolio where we can develop great yields from repositioning, rebranding, and renovating suites where appropriate. All that said, we continue to have cash on our balance sheet as well, and Lisa reminds us that we're earning great interest rates for having that cash on the balance sheet, and so we're also looking at opportunities to deploy towards the creative acquisitions when those opportunities do come. So certainly, no significant change to our view on those sources and uses, Mario. In addition to that, because there hasn't really been any changes, we've been speaking to it in our prepared remarks.

[Mario Saric, analyst]

Okay. And then just on the accretive acquisitions, how would you characterize the environment today versus 3 months ago in terms of opportunities to transact that valuation that make sense?

[James Ha, executive]

I think, interest rates where they were even a month ago, we saw interest rates on the CMHC front north of 5%. [Technical Difficulty] Sorry. Sorry. Are we cutting out, Mario?

[Mario Saric, analyst]

You did briefly, but you're back.

[James Ha, executive]

Okay, perfect.

[Mario Saric, analyst]

Last thing I heard was north of 5%.

[James Ha, executive]

Yes, so interest rates, pardon me we're north of 5% not that long ago on a CMHC front, and we certainly saw fewer transactions, even listings come up at that juncture. Today, we see interest rates on the CMHC front sub 5%. As Lisa pointed out with our discussions with appraisers and even with our own fair value and estimates of cap rates, for us, we're using a 5% cap rate within our own portfolio. With interest rates coming off, certainly we believe that that's going to start to perhaps unlock some opportunities in the transaction market. But to-date, even characterizing today versus 3 months, which was your original question, not a lot of activity still to-date. And so from our standpoint, though, we believe that that's what's going to create that opportunity for us in sourcing those accretive opportunities.

[Mario Saric, analyst]

Some of your peers are more focused on new construction, some more focused on value-add. How would you characterize your acquisition appetite in terms of the type of product that you're most interested in?

[James Ha, executive]

Mario it's Sam, and what we're always looking to allocate into is what's going to create the most value. We have an exceptional capability to repurpose, rebrand, and reposition existing communities. And we've demonstrated that significant value creation with our own communities. And so we've got in-house capability, vertical integration that allows us to quickly re-transform older communities. So that's a huge source of value creation and the biggest source of how we've created the most amount of value over the last several years.The new construction we've created significant value with as well. with our construction partners, and that will continue to be an avenue of value creation, but not as significant as what we've seen with our organic growth. The market is a much higher interest rate market, especially for builders right now who are using variable rate financing that typically is close to double digits. That's creating a lot of pressure on the developers and much greater incentive to sell and be more flexible on when these new developments are sold versus holding on to and refinancing out of like the past with lower interest rates. Most realize this already, but we're seeing more opportunity come to us as a result of the higher borrowing cost developers are having to pay to finish the development. And so it's really important for developers to sell sooner versus later to realize the internal rates of returns or hurdle rates that there's they've set many years ago or a couple of years ago before the project was under construction. So we're seeing opportunities with higher overall cap rates as everybody's seeing higher cap rates.We love higher cap rates. Why? Because it's higher free cash flow, higher returns and a much quicker payback as well. So we're seeing an environment more traditional as to when we really grew rapidly in our start -- initial 10, 20year period of growth. That's the same environment we're in now, or similar, with higher cap rates, higher returns, and higher paybacks. So it's a lot more exciting time for us because it's back to the future, higher returns.

[Mario Saric, analyst]

Okay. Just one follow-up on that. So the acquisitions are the development opportunity that you see, how do you think about the balance sheet today in terms of your Debt-to-GBV or your debt-to-EBITDA, however you want to answer it? Are you interested or are you open to increasing leverage a little bit to fund some of these acquisitions? Is funding of acquisitions or transactions predicated on selling some assets or does equity financing kind of play a role into the opportunities that you see going forward?

[James Ha, executive]

Back to the future, again, when we first started as a private company and even a public company, we reinvested 100% of our free cash flow, and we're pretty close to that now at 70%, Mario. So our biggest source is free cash flow. That a proven track record of how we grew from 16 units to close to 40,000 units with very, very little equity issuance over that period. The balance sheet, we always like to strengthen. And using debt now is more expensive so it's less preferable, and is the reason why we would transact more and see more transactions and focus in on our non-core assets that are not going to perform as much as the new acquisitions or development opportunities that we're in. And so we're looking more to recycling our capital and high-grading our assets, and more importantly, high-grading our free cash flow.And everything that we're looking at, we're asking, how is that going to increase our free cash flow? And the more free cash flow we generate, obviously, the more capital we have at hand. That's at a very low cost that we can continue generating even more free cash flow. And so that really is our focus is, again, back to the future and using free cash flow focus. The least expensive source of capital that we can reinvest back into our communities, our acquisitions, our development programs, and continue to create the best product, service, and value for our residents at the very end of the day.

[Mario Saric, analyst]

Well, that's really helpful, Sam. My last one, just really quickly, I know the story is transitioning more towards a market-run growth story as opposed to incentive burn-off. But just from a modeling perspective, the incentives have been coming down about an average of $10 a suite per quarter, give or take a couple of dollars. Is that type of burn-off a reasonable expectation through the end of 2024 such that the existing $35, $36 incentive per suite average essentially comes down to zero by later next year?

[James Ha, executive]

That is a reasonable expectation, Mario. Again, the trends that we're seeing here to-date are continuing in the marketplace. We can speak to new and renewal spreads on a forward basis as our team is negotiating and having these discussions with our residents and we're continuing to see a similar pace within our targeted range, which would imply a similar incentive burn off trend as you were suggesting, Mario.

[Operator]

Our next question comes from the line of Kyle Stanley from Desjardin.

[Kyle Stanley, analyst]

Maybe just building on your OpEx outlook commentary from earlier, based on everything you're seeing on the OpEx side, as well as on the leasing demand front as we head into year-end, I know maybe a bit early, but anything to suggest you see a material slowdown in organic growth in 2024?

[Lisa Smandych, executive]

From an operating expense side point or from NOI? Sorry, just making sure.

[Kyle Stanley, analyst]

Yes, more from an NOI perspective. I mean, obviously taking into account what you just said on OpEx, I think was fairly positive. But I'm just -- when you bake it all together, what are you thinking on the NOI growth front?

[Lisa Smandych, executive]

Yes, overall, Kyle, we certainly, certainly expect that we are going to see some positive NOI growth when we move into 2024. I think James shared some color sort of when answering Jonathan's question about where we're seeing with revenue from an expense standpoint. You're correct. We certainly look at managing those controllable expenses at this juncture, specific from an NOI expense category. We don't anticipate any sort of -- we would anticipate normal inflationary type adjustments when we're looking at expenses for 2024. So yes, overall, NOI growth is expected when we think of 2024.

[Kyle Stanley, analyst]

Okay. Probably not a material slowdown from the strong growth we've seen this year, which is great. Next question, a bit of a broader question, but Our focus has primarily been on Alberta over the last several quarters and obviously rightfully so, just given the strength, but operating results in Saskatchewan have also been really strong as of late. So I'm just wondering, can you talk about your thoughts on the portfolio in Saskatchewan, maybe the contributors to that growth, what's driving it? And your outlook maybe with regards to leasing demand rental growth in the markets that you're in?

[James Ha, executive]

Kyle, it's Sam, and Saskatchewan is our inspiration and our first peak performer and strongest team and results for the longest period of time. Why? Saskatchewan's team, again, we stand on big shoulders and leadership is exceptional and extraordinary, and started to produce exceptional results with a very big focus on retention and high occupancy. All the things we're seeing in all our markets right now, we saw in Saskatchewan a while ago. Saskatchewan, the affordability is even higher than Alberta, the most affordable place, and we're happy you're bringing Saskatchewan up, and our team's tickled pink, that we're talking about Saskatchewan right now as our team listens to our calls, because it's an exceptional place to live.And we're seeing extraordinary demand, far outpaced supply. And what we saw in Saskatchewan with respect to high demand for food, high demand for resources, all the things our planet and we need, high demand because affordability has to be in front of energy and food just as much as housing. And so that's what we're really seeing, a big demand for affordable food and energy of which Saskatchewan is a big contributor to those 2 other essential products and services that we all rely on. And we're seeing exceptional growth and will for many years to come. We completed our Board meeting. We're hearing about the low cost of production of essential resources like potash came up in our boardroom and the capacity to produce that with old production that's been developed very costly to produce these resources and because we've got a huge advantage of the infrastructure that is already producing that, the cost of increasing that production because of inflation is costing even more now. And so we've got a big advantage that we're producing what our world and planet needs more affordably than anybody else is. And so we've got a long ways to go and a big runway because of all the essential resources and food that we have that our world is increasingly needing.So that's, sorry, a long answer to that question, but it's a reflection of how we feel about our future and how it's reflected in economic reports by economists in our particular region, we absolutely are at the best place at the best time. And we see that happening for quite a while going forward, just because of the geopolitical events that we're seeing, and the interruption of these essential resources and products that we're seeing. And so we're in a great -- we're in the best spot.

[Operator]

We have our next question coming from the line of Mike Markidis from BMO.

[Michael Markidis, analyst]

Just on the Railroad, congrats on the recent success so far and for delivering the project on time and on budget. Can you remind us what the total cost basis for development is?

[James Ha, executive]

Approximately $150 million, but that--

[Lisa Smandych, executive]

I think it's closer to $200 million.

[James Ha, executive]

$200 million?

[Lisa Smandych, executive]

Yes.

[James Ha, executive]

Between $150 million and $200 million?

[Lisa Smandych, executive]

Yes.

[Michael Markidis, analyst]

Okay. And is that at 100% or Boardwalk centers?

[James Ha, executive]

That's at 100%.

[Michael Markidis, analyst]

100%. So I guess there's construction debt on that project. When do you think you'll be in a position to take that out?

[James Ha, executive]

Mike, it's James here. We're in conversation with our lender in terms of the best opportunity for that. Certainly, CMHC, transitioning that over to CMHC would be a priority for us. Good news is that lease up is going really well on Tower 2. We're already a third of the way through Tower 2, and so the quicker that we can lease that up, the quicker we can transition that over to a CMHC insured loan. Ideally, we can see that occur sometime over the next quarter or 2.

[Michael Markidis, analyst]

And I guess just, I'm not too familiar with your partner, I believe it's Redwood. I guess they look to be more of a developer than as opposed to a long-term owner of rental assets. Do you have any thoughts in terms of is there a plan for them to exit this asset once it's stabilized or is it expected to be a long-term hold with the partnership continue as is for a longer time?

[James Ha, executive]

Our partnership here with Redwood and we certainly don't want to don't want to speak for them, but similar to our other partnerships this is a long-term hold for both parties shoulder-to-shoulder where we are creating long-term value with this asset.

[Michael Markidis, analyst]

Great quarter.

[Operator]

We have our next question coming from the line of Jimmy Chen from RBC.

[J. Chen, analyst]

If you look at the leasing activity in the quarter in Alberta as an example, how do the new lease rents compare with the renewal rents? Not the spread, but the absolute rents. Are they about the same or are the renewal rents lagging the new rents by quite a bit?

[James Ha, executive]

Hey Jimmy, it's James. New lease rents are slightly higher. I mean, certainly when we look at lease spreads, new lease spreads are higher as a result, but they're not materially different. It's not like our more price-controlled markets where there are big differences between new leases versus renewals. In our Alberta and Saskatchewan market, there is a slight difference. on that aggregate rent for new leases, but the differential is nowhere near what it is in non-price-controlled markets, or pardon me, price-controlled markets.

[J. Chen, analyst]

Okay. And so then a follow-up on the rent growth comment that you made for next year. So is it that you think that next year the spreads that you're currently seeing, the 7% to 9% in renewals, the 10% to 15% on new, you think that's sustainable at about the same pace next year, despite the base being higher, or can you remind me again what you said there?

[James Ha, executive]

Yes, I mean, look, our approach of focusing on retention is lowering our operating costs. It's sustainable for our residents. It's allowing us to, frankly, maximize and optimize our NOI. On the new lease front, this target of 10% to 15%, we certainly believe it is sustainable because as Samantha had in her earlier remarks, affordability continues to be some of the best here in the country. And so when we look at supply and demand fundamentals, we certainly believe that there is a long runway here for rental rate growth and adjustments.

[James Ha, executive]

Jimmy, Slide 35, Q3 in total, were at 2,382 move-outs this year. Q3 last year were at 2,839. So we've made this adjustment as low as possible at that 8%, 9%, and we saw a pretty significant drop in move-outs and a much higher retention. Why? There's nowhere else to go. So what is the market rent, is the question when there's no vacancy. How is that determined? When we don't have vacant units, other than the brand-new units, there's vacancy in brand new units, and they're typically between $2,000 and $3,000 a month, depending if it's a 1 or 2 bedroom apartment. And that's a vacant unit somebody could move into easily today, and that's really the availability that we're seeing.But for existing affordable apartments, we're all being very responsible and taking the long road and the resident-friendly approach road to minimize our adjustments as much as we possibly can to keep our affordability advantage, keep our brands and our retention high and satisfaction high, and it's working, delivering great results too. It really, really is a win-win-win. And we see this happening, and sustainable is a key word. And we see this being sustainable over the next 2, 3 years. And it's impossible to predict the future, because we don't know what the future is. But we're, as everybody can feel and hear, we're confident about the sustainability of our results.

[Operator]

We have our next question coming from the line of Sairam Srinivas from Cormark.

[Sairam Srinivas, analyst]

Apologies, if this has already been asked before and has been answered, but I was just wondering in terms of the broader dynamics in terms of the macro announcements of GST and other favorable announcements on the housing front, are you seeing a shift in sentiment from developers and people in the market towards purpose-built rental versus built-to-sell?

[James Ha, executive]

Sai, it's James. I can start on this. Certainly we applaud our government's shift towards starting to incentivize the supply side of this housing shortage that we have. I think certainly in markets like Alberta, where there is a provincial portion of that GST, I think that incrementally will help. But at the end of the day, sadly, interest costs, as Sam pointed out earlier, are still quite high. Construction costs are still continuing to increase. And so we believe we will start to see some additional supply response given that improved news. However, we have not seen it yet. To-date, it's just, sadly, as Sam pointed out, it's tough to pencil, tough to pencil development on the purposeful rental site. I don't know, Sam, if you want to add on the GST front.

[James Ha, executive]

It's great news and great proven public policy that creates affordability. And we always like to reaffirm, and we can never remind everybody, the law of supply and demand is not a theory. It's a law. When we reduce the price and the taxes of anything, we reduce the cost of it and increase the affordability and increase the supply of it. And so we applaud our policymakers for making the right move to create more affordable housing for all Canadians. And this is a great big first step.It's like Neil Armstrong's big quote, small step for man, but one big step for mankind. It really is a big step for affordability, and in the right direction. And we have to continue to move in that direction with our public policy and reduce taxes on something we need more of, and that's housing. And so we're so happy to see that. That's a big kudos to our government and our policymakers. And you know what, we need more of it, that is for sure.And it's good to see for all Canadians this move. And we believe the right move going forward will continue to happen because we trust in our relationships and our policymakers in making the best decision when we all have the best information and we all work together. And this is a reflection of how that does work. When we do work together, share the information, what works, the right decisions, the best decisions are always made.

[Sairam Srinivas, analyst]

Just really combining this comment of the difficulty with math with, Sam, your comment earlier about recycling, are there some markets where you feel which are easier or maybe more lucrative to operate as a purpose-built rental market versus others, and you probably consider lightening up in some markets versus entering some others?

[James Ha, executive]

We're really a competitive market housing provider and that's where we're seeing the best, most affordable rents and the best, biggest opportunities to create value. It is in a marketplace like Alberta and Saskatchewan where we can do what we do best, that's build, that's operate and deliver housing because it's a competitive marketplace that we're in.And we believe being in a competitive marketplace is the best place to be. And so that's going to continue to be our focus is in competitive marketplaces. That includes, by the way, brand newly built communities in Ontario, for example, that are competitive and are provided by market participants because of the regulation that's different for new supply than it is on existing supply. And so it can be in a regulated market that's not with new supply. And so yes, we still feel and see and are producing the best results in our core markets and see that for the foreseeable future, though.

[Operator]

We have your next question coming from the line of Dean Wilkinson from CIBC.

[Dean Wilkinson, analyst]

Sam, last quarter, we kind of spoke a little about individual condo investors coming into the market and we're seeing an influx of listings in the GTA. How's that dynamic look there? And are you still sort of seeing upward pressure on those individual units? And is that kind of putting some more pressure to the upside on the asking rents there that, I guess, ultimately filters through to your product as well?

[James Ha, executive]

Well, it's certainly creating more supply and we remind everybody and refer to the Canada Mortgage and Housing site that housing is a continuum, and there's a great graphic on affordable housing and how any new supply benefits everybody. Why? Because if there's a resident in an affordable unit and a promotion happens, that resident moves into a more expensive unit, that more expensive unit, same thing happens, and that resident in the more expensive unit moves into a brand-new condo that's more expensive, say, and the condo owners get promotions and move into a new home.And so, the continuum helps increase supply. So any new supply, regardless of where it is in the continuum, is a positive for everybody because it's all interlinked. And so overall, it's essential we build more supply.And it's essential we have public policy that lets developers do what developers do, build.What we're seeing in the United States right now, we saw in Alberta deemed the oversupply. Developers will build until there's too much building and supply. That's what developers do. And that creates affordability. And we're seeing in the United States, rents flatten out. Why? Because there's so much new supply. And so our competitive market works. It's not perfect. It's not instinct. But it works a whole lot better than regulations. That's 100% as what the evidence clearly shows. And so we're happy to see condominiums pick up. Why? Because they're really affordable.We toured a site a couple weeks ago at the university, and one of the developers is sharing their pre-sailing condos in the northwest where we built Brio, for example, at $700 a foot for a wood frame condominium. That's incredible compared to what we built Brio for. We've created a lot of value. That's exciting. And those $700 foot condos in the University are really affordable compared to the $1 million, $1.5 million bungalows that are selling in Brentwood and are surrounded in the University of Calgary. So everything is relative and the condominiums are definitely seeing an increase in price, but we're also seeing an increase or continue actually a steady amount of build because it's tough to get trades. It's tough to increase construction capacity is what still is the challenge because it's tough to find carpenters and trades people are still hard to find and we have to promote our trades and increase that supply.And in immigration policy, we're seeing a lot of construction and trades come in. We're hiring, and a lot of the new immigrants are working at our sites, renovating new siding. We're at one of our communities in Edmonton and met with a lot of our Ukrainian brothers from other mothers that were helping us rebuild our siding there. And so lots of carpenters and skilled people coming in from Ukraine is what we're seeing, and so we're really happy that we are figuring out how to increase supply, but not fast enough, but that's one thing that we have to all work on.

[Dean Wilkinson, analyst]

Yes, it's never fast enough, is it? I guess the 9 most dangerous words in the English language are still, I'm from the government and I'm here to help.

[James Ha, executive]

We have to remember, Dean, we the people, for the people, by the people, of the people. We are the government. We have to remember that. We have to all work together, but --

[Dean Wilkinson, analyst]

That we do.

[Operator]

There are no further questions at this time. I'd now like to turn the call back over to Mr. Sam Kolias for final closing comments.

[James Ha, executive]

Thank you, Laura. As always, if there are any further questions or comments, please do not hesitate to contact us. With gratitude, we'd like to thank our extraordinary team, loyal residents, CMHC, our lenders, our unit holders, and all our stakeholders. It really is all about our people, whose huge shoulders we continue to stand on, and as leaders, we continue to do everything we can to support continued growth and are extraordinary. We really can't thank our extraordinary team and great leaders enough. We're pleased with our improving results on a foundation of exceptional value, service, and experience. We continue to provide our resident members, our investors, and all our stakeholders.Home is where our heart is, our heart is where our family is, and our family is where love always lives. Welcome home to love always. Our future is family. What can be more important when choosing where to call home. Thank you again, everyone, for joining us this morning. We honor all our fallen heroes during this remembrance, and lest we forget the life sacrifice for the freedom we all have. God bless us, and now more than ever, grant us all peace.

[Operator]

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