Boardwalk Real Estate Investment Trust

TSX:BEI.UN

Earnings Call Transcript 2017-Q4

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

Thank you, Sharon, and welcome to the Boardwalk REIT 2017 Fourth Quarter Results Conference Call. With me here today is Sam Kolias, Chief Executive Officer; Rob Geremia, President; William Wong, Chief Financial Officer; and Lisa Russell, Senior Vice President of Acquisition and Development.Note that this call is being broadly disseminated by way of webcast. If you haven't done so already, please visit boardwalkreit.com, where you will find a link to today's presentation as well as PDF files of the trust's financial statements, MD&A as well as supplemental information package.Starting on Slide 2. I'd like to remind our listeners that certain statements in this call and presentation may be considered forward-looking statements. Although the trust believes that 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 the earnings press release and in other publicly filed documents, including Boardwalk REIT's annual report, annual information form and quarterly reports.Moving on to Slide 3. Our topics of discussion for this morning will include: a macroeconomic update; our strategic progress; an investment update; financial highlights; operational review, including our renovation program; and lastly, our financial guidance update. At the conclusion of today's presentation, we will be opening up the phone lines for questions.I would like to now turn the call over to Sam Kolias.

[Sam Kolias, Chairman & CEO]

Thank you, James, and thank you, everyone, for joining us this morning.Beginning on Slide 4. Some financial highlights for the fourth quarter 2017 include: total rental revenue of $106.3 million, an increase of 0.2% from the same period last year; total NOI of $54.7 million, down 3.1% from the same period last year; funds from operation of $26.7 million, a decrease of 9.6% from Q4 2016; an FFO per unit of $0.53 on a diluted basis, down 8.6% from last year; and adjusted funds from operation per unit, which includes an estimated $655 per unit of maintenance capital, of $0.41 for the fourth quarter of 2017, down 18%.Moving on to Slide 5. Economic reports reflect Alberta continues to improve, resulting in the rental market moving towards a balance between supply and demand, with higher occupancies. Economic forecast for the province remain positive for GDP growth, employment growth and in-migration growth. Continued delays in pipeline construction are tempering the economic recovery. The Keystone XL pipeline, along with the Trans Mountain pipeline, have received federal approvals but are being delayed with outstanding disputes. The completion of these 2 pipelines will significantly improve both national and provincial economies. The Calgary and Edmonton markets are showing strong signs of recovery and are nearing a state of balance between supply and demand. Grande Prairie is almost fully occupied, with a strong demand for rentals being seen in this region. Fort McMurray is also showing signs of a recovery in rental market, with occupancy rising. We have called these smaller rental markets our canaries in a coal mine for our Calgary and Edmonton rental markets in the past. These smaller markets have historically been accurate leading indicators for our primary Calgary and Edmonton rental markets. A significant indicator is the amount of [ PGG adds ]. Both Calgary and Edmonton are seeing significant month-over-month drops in the amount of adds for rental.Our Saskatchewan region remains in a soft rental market, with a slower recovery taking place in the province. Ontario's growth continues to improve. The market continues to be in a strong rental market cycle, with new construction increasing. In April 2017, the Ontario government introduced legislation that would expand rent control to all rental units. Previously, rent control in Ontario applied only to rental units constructed before November 1, 1991. The new legislation will not have a material impact on Boardwalk as our Ontario properties were built prior to November 1, 1991. Slide 6 illustrates a leading indicator for future rental demand significantly improving with the substantial improvement of Alberta job vacancies. Slide 7 illustrates the diversifying Alberta economy and downward trend to the unemployment rate. Slide 8 illustrates both interprovincial and international migration are positive for Alberta, with Alberta posting a positive interprovincial migration print for the first time since Q2 2015. In-migration is another indicator of future rental demand as a significant number of new migrants become renters.Slide 9 illustrates CMHC has forecasted rent stabilization in the next 2 years as the average vacancy rate declines in both Calgary and Edmonton, our core rental markets. Slide 10 summarizes an improving Alberta economy, with positive macroeconomic fundamentals up: a drop in the unemployment rate in January from 8.7% to 7%; overall employment increased by 45,000 jobs; job vacancies, availability have increased steadily to 39,000 jobs in the most recent month's report. World oil prices are forecasted to be above $60 a barrel for 2018, though tempered with continued delays to complete pipeline capacity, which has resulted in a negative spread between Alberta and WTI oil prices. Continued positive migration to Alberta continues to increase demand for our rentals.Slide 11 shows both our per unit average incentive and our total incentive. Per unit incentives have decreased since the beginning of the year. And with our increased occupancy, total incentives have increased as we have rented more units. Slide 12 illustrates the result of our occupancy focus. We are seeing a rising trend in revenues with significant gains in occupancy that is more than offsetting new incentives from newly rented units. We will continue to focus on maximizing occupancy to the target shown on Slide 13. By reducing vacancy to 3% or less, we are well positioned to reduce incentives and continue to recapture revenue.Slide 14 illustrates we are now seeing a positive growth trend emerge, with our sequential revenue Q4 versus Q3 showing a positive 0.9% for the quarter. All regions have posted positive sequential revenue growth. And as noted earlier, Grande Prairie has shown a 7.4% revenue gain quarter-over-quarter as it has approached almost full occupancy. With portfolio occupancy approaching 97%, incentives can then be reduced, improving our revenue gains even further.Slide 15 provides a summary of our short- and long-term strategic approach. In the near term, we continue to focus on occupancy gains allowing for reductions in incentives. With 12-month leases and 1/12 of our leases are units turning over every month, there is a significant short-term opportunity to increase revenues. Both vacancy and incentives account for approximately $70 million or $1.40 per unit of FFO potential. Over the long term, we will continue to focus on brand diversity with our Boardwalk Living brand of affordable value, our Boardwalk Communities brand with enhanced value and our Boardwalk Lifestyle brand with affordable luxury. We will invest more on improving our asset management plans for each and every community to fully optimize our capital allocation and value creation. Over the next 10 to 15 years, our new minimum distribution policy will allow us to invest in strategic locations with significant NAV growth potential and increase our geographic diversification to a future target portfolio of 50% west and 50% east, each in high-growth, undersupplied markets. We will continue to strive to maintain a conservative balance sheet, carefully allocating capital towards NAV growth opportunities. Our secured debt that is over 99% insured by CMHC allows us to renew our mortgages at the lowest possible interest rates, reflecting a government-backed rating in place for the entire amortization of our loan.I'd like to now turn the call over to Lisa Russell to discuss our development and acquisition opportunities. Lisa?

[Elizabeth A. Russell]

Thank you, Sam. Slide 16 provides a summary of our projects over the past year. In 2017, we began construction on the third phase of our Pines Edge community, a 4-story, elevated wood-frame building in Regina. In addition, Boardwalk, in partnership with RioCan, closed on and began the construction of Brio, which is a 12-story concrete high-rise building in Calgary. In December of 2017, Boardwalk divested a noncore asset, known formerly as Boardwalk Estates in Regina. The next few slides provide further details on these transactions.Slide 17 provides an update on our Pines Edge community. We remain on schedule with our lease-up of Phase 2, with current occupancy of approximately 45%, and anticipate an estimated yield of 6.25% to 6.75%. In June 2017, we began construction of Phase 3. Total cost of this phase is estimated to be approximately $13.2 million or $186,000 per door, an increase from the prior phase, mainly due to escalating construction costs and an increased provincial sales tax.Slide 18 provides an update on Brio, a premium, 162 mixed-use development site in partnership with RioCan. The site is exceptionally located in Northwest Calgary along the LRT line. Building permits have been approved and construction have commenced by way of excavation and shoring. We estimate occupancy to be in early 2020.Slide 19 highlights our sale of a 641-unit portfolio in Regina, which closed in December of 2017. The asset consists of 48 stand-alone walk-up buildings and transacted for $71.6 million. The sale included the assumption of an existing mortgage as well as the inclusion of a VTB on terms that match the existing first mortgage. The VTB terms were offered to balance the immediate capital requirements within this portfolio. The sale is in line with Boardwalk's strategic goal of high-grading its portfolio by selling noncore assets and investing in new developments such as our Pines Edge community in Regina.Slide 20 provides our estimate for market cap rates in Boardwalk's existing markets. Cap rates for well-located, better-quality buildings continue to remain low as demand for multifamily real estate remains high. Our Western Canadian development opportunities on excess land remain high, with over 4,400 apartment units in our current development pipeline, equating to approximately 4.4 million buildable square feet, as shown on Slide 21. These sites are in various stages of planning and approval and represent an opportunity for the trust to high-grade and enhance our portfolio's asset value.An example of this is shown on Slide 22, which provides renderings of Duo, which will be built on excess land at Sarcee Trail Place in Calgary. We have submitted a development permit for 2 15-story towers totaling 229 units, with a connected 2-level underground parkade. We anticipate the DP process to take approximately 7 to 9 months for approval. We will determine the economic viability of the development once our DP is approved. We continue to be active in our core markets of Calgary and Edmonton and, in addition, continue to develop relationships with various potential partners to acquire and/or develop communities in key growth markets such as Toronto and Ottawa. We will provide updates as opportunities progress.I would now like to turn the call over to William Wong. William?

[William Wong, Chief Financial Officer]

Thank you, Lisa. Slide 23 shows Boardwalk's investment property fair value at December 31, 2017, was $5.69 billion compared to $5.77 billion at the end of Q3 and $5.61 billion at the end of 2016, a decrease of $80 million and an increase of $80 million, respectively. Current year-end fair value now includes our 2018 budgeted expenses, with higher utilities and property taxes projected for the year, and takes into account our disposition of the 641-unit Boardwalk Estates for $71.6 million.Same-property fair value remained relatively flat while unstabilized properties decreased slightly from Q3. Development and new acquisitions accounted for approximately $198 million of invested property fair value. Weighted average cap rate at December 31, 2017, was 5.29% versus 5.38% at the end of 2016.The next slide, Slide 24, presents Boardwalk's implied net asset value calculation and includes the IFRS fair value revenue and expenses used in the calculation. Net asset value under IFRS is calculated to be $60.37 per diluted trust unit, inclusive of $1.40 in cash. This equates to approximately 171 -- sorry, this equates to approximately $171,000 per door compared to $145,000 per door based on our trust unit trading price of $42, a discount to implied NAV of 30%. Current trust units are trading at a significant discount to NAV and offers exceptional value when considered against net asset value using transaction in the marketplace, replacement costs, other consumer housing options like condominium ownership and current valuations on private market transactions.Slide 25 shows a per unit reconciliation of FFO for the current quarter and full year of 2017 from the FFO per unit amount reported for the same period in 2016. A reconciliation of FFO to profit as shown on Boardwalk's condensed consolidated financial statements can be found in the appendix of today's presentation.The decline in NOI from our stabilized properties negatively impacted FFO per unit. This was partially offset by a $0.02 and $0.09 gain, respectively, on our unstabilized properties for the 3 and 12 months ended December 31, 2017. Administration negatively impacted FFO per unit by $0.03 for the 12 months as a result of an increase in sales and customer service personnel.We are seeing a positive trend in our rental performance on a sequential basis both in occupancy levels and the occupied rental rates, demonstrating a turning point in the Alberta and Saskatchewan market rental cycle and a demand for renovated suites as they are completed. Higher on-site wages and salaries also negatively impacted the results as the trust invested in additional personnel as part of its renovation, upgrading and high level -- higher-level customer service initiatives. Rental expenses were higher due to higher utility expense, including the Alberta carbon tax levy, advertising, building R&M and parts and supplies.The next slide, Slide 26, shows the breakdown of capital Boardwalk reinvests back into its properties for the 3 and 12 months ended December 31, 2017. Capital invested in Boardwalk's investment property excluding development and PP&E was $1,527 per apartment suite in the current quarter and $5,731 per apartment suite for the year. Over the past 10 years, Boardwalk has invested over $1 billion in capital improvements on its property portfolio.The chart to the right also shows Boardwalk's operational capital investments for the 2017 year. Building exterior -- appliances and suite renovations and upgrades comprised 71% of operational capital investment or approximately $167 million of operational CapEx spending, a reflection of Boardwalk's new repositioning and rebranding strategic initiative. To date, the trust has seen success on its repositioning, rebranding and upgrading strategy. Newly renovated units are rented -- renting on completion and at rental rates that are significantly higher than the trust's unrenovated suites. Occupied rent has reversed its negative trajectory starting in July, and occupancy has started to trend upwards starting in August. Boardwalk's first focus is on decreasing vacancies and availability of apartment units. Once full occupancy is achieved, the trust would then be well positioned to reduce -- start reducing incentives.Slide 27 shows our estimate of maintenance CapEx reserve for 2018. Utilizing a 3-year rolling average, 2018 maintenance CapEx is calculated to be $695 per suite per year compared to $655 for 2017.I would now like to turn the presentation over to Rob Geremia. Rob?

[Roberto A. Geremia, President]

Thanks, William. Moving on to Slide 28. In 2017, Boardwalk introduced 3 new brands, each targeting separate markets, ranging from affordable value to affordable luxury. Each of these existing -- each of our existing buildings were reviewed based on a number of criteria and assigned to their corresponding brand. Each of these brands have separate renovation guidelines based on the anticipated level of return.During 2017, the trust renovated over 3,000 apartment suites. For 2018, we are planning to reduce our suite renovations to between 1,000 and 2,000 while continuing to minimize the related transitional vacancy. Boardwalk has expanded its renovation program outside the specific suite into common areas and lobbies. As is noted on Slide 29 and 30, we are finding ways of renovating existing lobbies internally at significantly lower cost than if we were to outsource these. Both Flintridge and Boardwalk Heights are examples of this program.As we continue to work through our rebranding process, we are witnessing a positive impact that investment outside the suite adds to the overall return of the buildings.Moving on to Slide 31. As was noted during 2017, the trust renovated over 3,000 suites, spending approximately $80 million after adjusting for estimated costs of non-renovated suite rentals. These renovations generated an estimated return of 10.8%, well above the targeted 8%.Slide 32 reports Boardwalk's stabilized portfolio for the fourth quarter and full year of 2017. For the fourth quarter, Boardwalk stabilized revenue decreased slightly as compared to the same period in the prior year. Operating expenses increased by 5.4%, resulting in an NOI decrease of 6.2%. All these metrics have shown an improvement over the reported 12-month bumps. Boardwalk's liquidity continues to be strong. At December 31, 2017, the trust had access to an estimated $325 million of capital, as was shown on Slide 33. This represents approximately 12% of outstanding debt.Slide 34 reports the trust's debt maturity schedule. At December 31, the trust's overall weighted average in-place interest rate was 2.61%, and currently, the trust is obtaining NHA-insured mortgages at 2.9% and 3.2% on a 5- and 10-year term, respectively. Our mortgage maturity curve continues to be well balanced as we focus on extending mortgage terms while staggering future maturities. Boardwalk's remaining mortgage amortizations under these insured loans are in excess of 30 years.Slide 35 provides a reader within our estimate of current mortgage underwriting valuations. Boardwalk's balance sheet continues to be conservatively levered at 54% of the mortgage underwriting value after deducting our current cash portion. Of special note, the trust has almost 1,800 apartment units that have no mortgage encumbrances, which carry an estimated debt capacity of $189 million, an amount that's in addition to the $325 million of liquidity position.Slide 36 highlights our 2017 mortgage program. During the year, we've renewed a total of $289 million while adding an additional $69 million of new mortgages. We reduced the interest rate from 2.83% to 2.20% on an average of 5-year term on these mortgages. In addition, we added an additional $188 million of additional leverage for a rate of 1.7% for a 2-year term. The majority of this relates to our increased financing on our Nun's Island property in Montréal, Québec, which requires us to match the new mortgage to the existing mortgage maturities, which are scheduled to be renewed in 2 years.As is noted on Slide 37, we have begun our 2018 financing program. For 2018, we have a total of $204 million maturing, and to date, we have refinanced about $38 million of those at interest rates well below maturing rates. In addition, we've added an additional $54 million of new NHA-insured mortgages with rates averaging 2.92% for a 5-year term.Slide 38 discusses Boardwalk's 2018 financial forecast. Boardwalk's 2018 financial forecast for -- we are targeting an FFO range of between $2.15 to $2.35 and an AFFO range of $1.70 to $1.90. We anticipate stabilized NOI to improve between 2% and 7% as compared to the prior year. Boardwalk's operational capital budget for 2018 is targeted at $136 million, down substantially from the $201 million we invested in 2017. In addition, we are planning on investing $30 million on committed development projects. As we have in the past, it's our policy of the trust to review and update its financial guidance on a quarterly basis. Slide 39 discloses our distributions for the month of February through April. The monthly distribution is set at $0.0834 per month, consistent with our annual target of $1 per trust unit.This concludes the formal portion of our call. We'd like to open it up for questions now. Operator?

[Operator]

[Operator Instructions] Your first question comes from Jonathan Kelcher from TD Securities.

[Jonathan Kelcher, Analyst]

First question just on the guidance. I'm looking where your occupancy is right now, and I guess you're looking to be at 97% by midyear. Would it be fair to say that most of the 2% to 7% same-property NOI will be revenue driven?

[Roberto A. Geremia, President]

Yes. For the most part, we're anticipating more revenue growth than we are operating expenses. The challenge we're having, noncontrollable -- on expenses, the noncontrollable expenses, i.e. property taxes, insurance and utilities, there's upward pressure on those, and that's a relatively big portion of our expenses. The controllable ones, we're going to be able to do a better job on. So yes, we're experiencing -- we're expecting the revenue enhancements to well outpace that as well.

[Jonathan Kelcher, Analyst]

Okay, fair enough. And then just on the suite capital investments, how many units do you currently have under renovation right now?

[Roberto A. Geremia, President]

There's about 300 left over in the program and then an additional of 1,000 to 1,800 -- to 2,000 for 2018. But when I refer to 1,000 to 2,000, there will always be some carryover year-over-year. So the number in total will probably be -- we're, again, targeting, including the carryforward, 1,000 to 2,000.

[Jonathan Kelcher, Analyst]

Okay. And have you changed your -- you did pretty well at 11% or just under 11% last year. Have you -- what's your target on those now?

[Roberto A. Geremia, President]

Well, we're keeping the target around the same where we were before at 8%, but we're actually -- we're exceeding that. But we want to focus -- like an 8% return is a very, very strong rate of return as well, too. Wherever we get possible -- what we've changed basically is reallocating the capital and the renovation level to face -- fits inside the brand description as well, too. What we've found is like for the high-end stuff, we get really good returns on the full renovations, whereas the medium and lower, we get better returns on the medium size. So unlike 2017, when we basically tried to do all renovation in each category, there's more a focused renovation program we believe will get even better returns.

[Operator]

Your next question comes from Fred Blondeau from Echelon Wealth Partners.

[Frederic Blondeau, MD & Head of Real Estate Research]

In regards to Jonathan's questions in regards to the 2% to 7% same-store NOI growth guidance, it seems like Edmonton, Calgary and Saskatchewan's portfolio were still going through major challenges in Q4. I was wondering, how should we view the anticipated improvement on a quarterly basis?

[Roberto A. Geremia, President]

Fred, it's Rob. Well, the model again itself is an annualized model. But in general, we believe Q1 and Q2 will be a little more challenging. Q3 and Q4 will be our better comparables for a couple of reasons. One is our comparable numbers will be not as strong, but also on the fact that, that's giving us more time to get more momentum on the revenue side. So again, the 2% to 7% is an annualized basis. Don't try to divide it by 4 to get an equal because it won't work that way. But we do believe that's the range we're going to hit.

[Frederic Blondeau, MD & Head of Real Estate Research]

Got it. And -- yes, go ahead.

[Sam Kolias, Chairman & CEO]

Fred, sorry, the revenue is actually a big part of our gain this year because it's really, really tough for us to lower uncontrollable expenses that have gone up significantly, as our results show. So the occupancy, we are really close and may hit that 97% occupancy by the end of this month actually. So the numbers right now look very, very positive and, as we noted in the earlier slides, the [ GG adds ] are dropping significantly and the market is recovering faster. And part of that is we've increased our product quality and service as well. So we've accelerated the recovery in our portfolio, and the investment we made last year has significantly improved our occupancy numbers and our revenue potential. And so most of the gains are going to come from revenue, Fred.

[Frederic Blondeau, MD & Head of Real Estate Research]

Perfect. And I have one more question, if I may. Last quarter, you mentioned your goal to be 50% invested outside Alberta and Saskatchewan. I was wondering if you had any additional details or thoughts at this point on this matter and if you had any of these in your guidance.

[Elizabeth A. Russell]

Fred, yes. It's -- just to remind the listeners. It's a long-term plan, and we are working hard. We're seeing some really fantastic opportunities that we're really excited about. And when we can give more updates, we certainly will, but we are -- we're definitely doing a lot of upfront work at this point to, again, establish relationships and meet -- part of this is just finding again the right partners, the right opportunities. It's going to be a measured approach, but again, we're really excited with what -- where we're at right now.

[Sam Kolias, Chairman & CEO]

Fred, we are investing inordinate and significant time in our relationships. And so we are meeting a number of, potentially, key strategic partners that are firmly in place in high-growth, undersupplied markets with phenomenal land positions, phenomenal track record of development. And doing -- what we want to be doing going forward is developing new, very well located, undersupplied markets with strategic partners that have a proven track record, and that's the approach we're taking. And we are going to release, as soon as we get into formal agreements, those opportunities, but right now, they're not formalized.

[Operator]

Your next question comes from Mike Markidis from Desjardins.

[Michael Markidis, Real Estate Analyst]

I was hoping to just get a little bit more commentary on the incentives. So you're doing a good job driving the occupancy figure. Obviously, the incentive -- total amount of incentive is going to go up as you get more units online. But if we kind of just strip out the effect of the new leasing and just look at the renewals at the properties in place, how has that been trending? And how do you expect it to trend sort of throughout the rest of this year?

[Roberto A. Geremia, President]

Mike, it's Rob. Yes, that's a very good question. One of the key drivers is going to be, on renewal, how are you doing. We're sitting between 3% to 5% on renewals, net of effective incentives year-over-year as well, too. So as Sam mentioned, we are already starting to see incentives slow down. Our occupancy level is actually a little higher than we thought it would be at this point in time. That's a good thing. We'll see if it carries forward. We're hoping it is. But that is a key driver, is renewals. Again, we are in the market -- and even more importantly as the market is becoming more -- not perceptive, but accepting of the fact that they're going to get a lower incentive year-over-year.

[Sam Kolias, Chairman & CEO]

Mike, we toured a 400-unit brand-new development 3 weekends ago, and there was 1 vacant unit out of 400 units. And that brand-new development offered about 2 months to 3 months incentive on 18-month leases. With absolutely -- or essentially no vacancy in the brand-new unit, that was our biggest headwind. That now is, in that particular community, gone because 1 rental unit is not going to affect our supply. So the market changes very quickly both ways. We are in Internet time, so everybody looks at everybody's rent every minute of the day, and the market turns on a dime when it does stabilize. And so that's going to happen. We don't know exact time and date, but the trend is our friend and the wind is behind our back now, not ahead of us and a headwind. So we are in a firm, solid recovery.

[Michael Markidis, Real Estate Analyst]

Okay. And then, Rob, just going back to -- when you say sitting between 3% and 5% of renewals, that would just be the standard incentive off of the average monthly rent for 12 months?

[Roberto A. Geremia, President]

Yes. It compares the incentive that the customer got 12 months ago to his renewal incentive pace. In some cases -- every community is a little bit different. Some may have gotten larger incentives last year, smaller ones this year. So -- but at the end of the day, the trend is exactly the same. We're both -- we're seeing the increase on whatever level that was offered last year.

[Operator]

Your next question comes from Howard Leung from Veritas Investment.

[Howard Leung, Investment Analyst]

Just wanted to touch on value-added CapEx. In 2018, you budgeted $113 million. How much of that is suite capital?

[Roberto A. Geremia, President]

For 2018, sorry?

[Howard Leung, Investment Analyst]

Yes, for 2018

[Roberto A. Geremia, President]

Yes. That's around $50 million to $55 million, is the suite capital versus $107 million we spent last year.

[Howard Leung, Investment Analyst]

Okay. So it's almost half the amount?

[Roberto A. Geremia, President]

Yes. And as I mentioned, we're expanding the capital program. For 2017, we focused a lot more on the suite. 2018, we're going to pull a part of the suite capital number out and put it into the common areas and hallways to -- because we are seeing a better return or equal good return on the overall building by doing that as well.

[Howard Leung, Investment Analyst]

Do you also find that you're getting more efficient on the individual suite renovations compared to 2017?

[Roberto A. Geremia, President]

Yes, for 2 reasons. One is we got a little bit of history behind us now so we know a bit more what we're doing. The second reason is because we're focusing the renovations by category, not -- by brand, so not just doing a higher-level one. But -- yes, we're also sourcing a bunch more parts at much more effective cost levels. And we've also -- the last point is we've actually altered our spec as well, too, for the different kinds of products, so we are putting a lower-costing product in the more affordable version as well, too.

[Sam Kolias, Chairman & CEO]

Yes. Howard, as the budget reflects a 50% drop in CapEx and suite capital, that's a significant reflection of how much we've reduced our cost for our upgrades.

[Howard Leung, Investment Analyst]

Okay. No, that's good. Just given how attractive the suite renovations are, why not do more renovations using the more efficient -- now that they're more efficient per suite?

[Roberto A. Geremia, President]

One thing we've learned in the last 12 months, Howard, is we have to really focus demand and supply. So what we did the last 12 months, we actually oversupplied the market with a higher-quality product. As a result of that, it had a large impact on vacancy loss. So our plan is to go ahead with 1,000 to 2,000. If we get better returns than we're thinking, if we can manage vacancy loss better, we have no problem allocating more capital in that area as well. So we just want to go forward with a plan that we know we can achieve and returns we can get today.

[Howard Leung, Investment Analyst]

Okay. No, that's fair. Just wanted to touch on one more thing. On the customer service program that you used to kind of incentivize the employees, measuring them by Net Promoter Score, is there any -- it's kind of been a year out already. Is there any kind of feedback on it, given it's a work-in-progress program? Are you going to change anything about it? Any lessons [ coming from that ]?

[Sam Kolias, Chairman & CEO]

Howard, it's Sam. The feedback we're getting -- and particularly, in Calgary, we made a small tweak and changed some of the designations in our team members, and we're seeing a phenomenal response when there is an on-site manager that really has been promoted to a manager from a customer service representative and given much more autonomy and flexibility to drive customer satisfaction and solve solutions on the spot. Because a resident with a challenge coming to the rental office has direct contact with a manager with a manager title that we've just tweaked in Calgary, and this seems to have driven our Net Promoter Scores to over 50 in Calgary, which is one of the highest in the country. So resolving challenges very quickly drives Net Promoter Scores really high and, obviously, drives referrals and retention. We're seeing a significant drop in turnovers and residents moving out and a significant increase in retention as a result. And referrals are -- online as well. We've bought a new social media program that scours the Internet on every single social media post that's posted on us, and it delivers a daily report to us. And so many of our members expressed their satisfaction for the most part and disappointment on the social media front. And so we very quickly meet our residents as soon as those posts occur and do everything we can to resolve outstanding issues. So this has been shown and reflected in a significant increase in occupancy. And so far, so good. We believe it's a timeless principle. Provide residents with exceptional service and product quality and the results will reflect it.

[Howard Leung, Investment Analyst]

That's good to hear. It's driving up occupancy, and customers are happier. Given that, do you -- will there be any kind of margin effect because it's being used to incentivize employees?

[Roberto A. Geremia, President]

We do believe so. Like as Sam mentioned, one of the biggest benefits, we think, with a higher NPS score, with customer service satisfaction is we're getting lower overall turnover as well, too. And that's very effective in controlling costs. When you got no cost for a turnover on a renewal and the fact you're getting upward pressure on rent, that's a real win-win scenario for us. We haven't seen that for the last couple of years, so we're looking forward to that part of it as well, too.

[Sam Kolias, Chairman & CEO]

Howard, one thing that we are seeing a drop in is the reductions in security deposits. As our residents move out, we're being way more lenient. And if a stove is a little bit dirty or the carpet's a little bit dirty, we're saying, "You know what, you've been here for so many years, forget about it." So we are seeing a little bit more expense creep with respect to -- about $1 million over last year with respect to a reduction in security deposit reductions. If you look at the Internet and old negative posts, many of them were very unhappy residents that were deducted $50 or $100 or whatever that they were deducted and expressed how -- negative feelings they had on the Internet. And so we're seeing much less of those, and we're working really hard to get really positive results on move-out scores because every resident that moves out can be a net promoter. And the amount of forgiveness we provide a resident on move-outs will, we believe, come back tenfold. And that's why we believe the investment to forgo security deposit deductions in move-outs will more than come back to us in referral. That's one example where expenses do increase, and that's one of the controversies of Net Promoter Score companies that want to please the customer and increase expenses as a result. So we have to be very careful. And we balance our Net Promoter Score with our budgets and NOI per property and our margins as well. So it's a balanced scorecard, Howard.

[Operator]

Your next question comes from [Mark] [sic. Mario] Saric from Scotiabank.

[Mario Saric, Analyst]

Just coming back to the incentives and just to kind of clarify one more time, if high level, let's say, you're offering $100 a suite last year, Rob, you are 3% to 5%. So effectively what you're saying is if it was $100 per suite last year. This year the expectation is for it to be 95% to 97% on renewable.

[Roberto A. Geremia, President]

No. It's a net effect adjustment. So it's going to be roughly -- actually, even be higher than that as a percentage.

[Sam Kolias, Chairman & CEO]

Mario, quite simply, 1 month out of 12 is 8%. And so we were offering, were, 2 to 3 months, so that would be 16% to 24%. And so we are chopping that down to about 1 to 2 months from 2 to 3 months. So overall, our incentive for our new residents are, as the Internet reflects, between 1 and 2 months, and that's down from 2 or 3, which is between 8% and 16% down from 16% to 24%. On a renewal, essentially we're chopping of, on average, just less than 1 month incentive. That would be 5% per [indiscernible] . Again, one month is 8%, which is 1/12.

[Roberto A. Geremia, President]

That's going to be driven heavily by our occupancy levels because once you are able to have high occupancy and not offer or offer very, very low incentives on new move-ins, that's the biggest comparable you got from your existing customers. If they go to your webpage and say, "Okay, if I can move in to a new unit and get a bigger incentive, why aren't you offering it to me too." So once we were able to lower that number and the customer recognizes pretty fast that it's going to be unwind. Now we're being more than fair. We understand we're not going to be able to underwind these things in 1 month either, but we also have turnover and renewals every month. So as the market gets better and stronger, we can adjust our program on a monthly basis.

[Mario Saric, Analyst]

Got it. Okay. And then just -- I don't know if it's connected to it or not, but on Page 59 of the call presentation, you just highlighted your estimated market rents by city. Calgary, [I mean some] were down 1.7% quarter-over-quarter. Is there a driver behind that?

[Roberto A. Geremia, President]

I'm just bringing it up fast for you. Yes. It is quarter-over-quarter basis. Yes, it's Christmas. We do -- in December, we always do a large incentive/reduction program to motivate renewals, same as we did last year. So we do see usually at the year-end a slight reduction on occupied rents too.

[Sam Kolias, Chairman & CEO]

We've only offered the pre-Christmas December for the last 2 years. And as, again, vacancy drops, we will be reviewing that as well. Again, we realize our residents listen in to our conference calls. We want to assure all our residents that are listening into our conference calls, we are a resident-friendly community, first and foremost. And we're going to be very balanced in our negotiations and flexible and always consider and realize our residents are our most important stakeholder, because without them, we wouldn't be here. And so we have to always keep in mind our residents and be flexible and competitive and friendly. And we believe that will continue to produce exceptional results over the long term.

[Mario Saric, Analyst]

Got it. And maybe just coming back to your guidance, the 2% to 7%. Then would that reflect any market rent growth within the portfolio? Or is the revenue growth that you are referencing, which is really greater than 2% to 7% would be mostly a reduction in the incentives on the existing portfolio?

[Roberto A. Geremia, President]

The increase in market rents is going to be driven like it was in 2017 around market rate changes due to renovations. So on the renovation side, we still are going to adjust market rent upward to justify the return. But unless the market does get stronger, we're not anticipating a lot of unrenovated market rent increases.

[Sam Kolias, Chairman & CEO]

Mario, the biggest potential, as we noted earlier, is the incentive and vacancy, approximately $70 million in both of those. And so that, again, is our biggest focus is on reducing first and foremost our vacancy. And once our vacancy is reduced, we have even bigger opportunity to start reducing incentives, and again, in a resident-friendly fashion, of course.

[Mario Saric, Analyst]

Okay. My -- just my last question on the guidance, pertains to the margin. So whether you want to kind of reference the same property NOI margin at 52.8% in 2017 or the total 51.1%? How would -- how are margin expectations shaping up on a year-over-year basis on the $2.15 at the lower end of the FFO range versus the $2.35. What kind of margin...

[Roberto A. Geremia, President]

Again, an increase from the bottom end by about 0.75% to 1% increase in the top end of the range probably by 2%, 2.5%.

[Mario Saric, Analyst]

Sure, Rob. Can you repeat that one more time?

[Roberto A. Geremia, President]

At the bottom end of the range, probably around 1% increase in operating margins. Top end of the range is probably going to be 2.5% to 3% increase in margin -- operating margins, probably closer to 2%, 2.5%, yes, probably 2.5%.

[Mario Saric, Analyst]

Okay. That's the NOI margin that you referencing?

[Roberto A. Geremia, President]

That's correct. Yes.

[Operator]

Your next question comes from Heather Kirk from BMO Capital Markets.

[Heather C. Kirk, Former MD of Equity Research & Analyst]

Just turning to the funding side of the equation, what are your expectations for financings throughout 2018?

[Roberto A. Geremia, President]

We have a lot of capacity, Heather. Again, we have $325 million of existing liquidity and additional $189 million sitting there if we want to use it. What we're doing effectively is with the cut in the distribution last quarter as well because it is helping us a lot of the funding of the future of the development side of it as well. So we have lots of extra capacity that we're going to need. We don't -- it is also going to depend on the opportunities we see in -- for the rest of the year as well, too, as we supply some additional ideas. We have the capital do it if we think it's going to be accretive; if not, we won't.

[Sam Kolias, Chairman & CEO]

Sorry, Heather. Short answer, no, we do not have any plans for 2018, no.

[Heather C. Kirk, Former MD of Equity Research & Analyst]

So the $54 million that you've done today is...

[Roberto A. Geremia, President]

No. We're going to be doing more additional debt financing. Is your question about equity or debt?

[Heather C. Kirk, Former MD of Equity Research & Analyst]

No, it's about debt. It's just -- I mean, you haven't up-financed most of the mortgages that have rolled in the last, I guess, 6 to 12 months. But I've noticed that you -- it looks like you, post-quarter, levered up some of the unlevered. And I was just wondering whether we should expect more of that to become levered? Or if the intention was to just up-finance existing mortgages? And we're...

[Roberto A. Geremia, President]

We're obviously not quite sure on an asset-by-asset basis yet, but we will do. We do have a lot of options available to us that you noted, up-financing or using the existing. Also, we have stabilization of a couple of other assets that are still working too. We could also leverage up that as well too. So we don't want to commit ourselves to either of the 2 yet, but we'll look at opportunity-by-opportunity.

[Sam Kolias, Chairman & CEO]

Heather, in our discussions with you in the past, every dollar we drop on distribution, it increases our NAV per share instead of take it away. So in our conversation, we do remember that, and thank you for your inspiration to help us to cut that distribution and release another -- over $1 a share capital that we do not have to distribute anymore. Now we can retain and really has helped us create and invent a new future. And as Apple leadership once said, "The future belongs to those that invent it." And so we are inventing a brand-new future for us. We're very excited about our long-term opportunities, given our new minimum distribution, which allows us maximum reinvestment of our cash flow. And that's the lowest cost of capital, and that will create the greatest amount of NAV growth when we use our internally generated cash flow. That's why we're really focusing in on driving occupancy right to 98% and 99% and driving those incentives down and driving our cash flow up and our free cash flow up and using that capital internally to drive our NAV growth in new developments and acquisitions.

[Heather C. Kirk, Former MD of Equity Research & Analyst]

So as you see this traction, your cash flows are rising with higher occupancy and higher rents, what are your thoughts given that it seems like you're turning a corner here, in terms of the use of that capital on the sort of CapEx versus share buyback equation?

[Sam Kolias, Chairman & CEO]

We're not looking at share buybacks. We believe that's a short-term resulting option, and we want to maximize our investment in value enhancing and acquisition. Our -- and that is a very good question you present, Heather. Our returns on our value enhancing are very, very high, as our result show double digit, and where else are we going to get that kind of return. The opposite, though, is what we have missed in the past and really have learned in the past. There is more to value creation than FFO per unit, and that's appreciation. We have missed a significant amount of appreciation in undersupplied markets like Vancouver and Toronto. And going forward, we believe those markets will continue to provide significant appreciation opportunities that aren't necessarily going to show up in FFO per unit but they're definitely, we believe, in the long term going to show up in appreciation in NAV growth. And so this is where we are reinventing our future and going to create value and find and codevelop and acquire assets in these markets that are seeing exceptional appreciation and value.

[Heather C. Kirk, Former MD of Equity Research & Analyst]

And -- so just the final question on that note. Given that you're seeing some firming in terms of some of your core markets and the investment that you put into some of the assets, what are your thoughts on dispositions to fund some of that shift of the portfolio composition?

[Sam Kolias, Chairman & CEO]

We believe the best time to sell something is -- the old saying, "sell high, buy low." Right now, is a great phenomenal opportunity to buy low. We can't, but all our listeners and anybody that is looking at buying stocks can buy low. And so this is a great exceptional time to buy low. It's not the time to sell. But there are selective noncore assets that we will consider, and we can't say anything -- we're not looking at anything noncore at the moment. We're not really -- we don't have anything right now that we've identified as noncore.

[Operator]

Your next question comes from Dean Wilkinson from CIBC World Markets.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Sam, just had a question sort of conceptually around incentives. In past cycles, have you sort of seen them come on really quick and then take a long time to burn off?

[Sam Kolias, Chairman & CEO]

Yes. So in past cycles, and it was the global financial crisis, they came on really fast and furious. And if you look at our results back in 2009, 2010, they came on really fast and furious, and they went away in 3 months. And that's really what we were looking at when we were guiding over the last couple of years is the past global financial crisis, incentives really peeled off within about 3 months. The big difference, Dean, and this is what we've always said all along when we're asked what keeps us up at night, and what's our biggest risk, is new supply. And that's what really changed this time. There was an inordinate amount of new supply, and at the same time, there was a huge drop in jobs. It was, as we've said before, the perfect storm. And the last time we saw that was 33 years ago, and there wasn't very many of us around back then...

[Roberto A. Geremia, President]

Dean, just to add, general rule of thumb in a regular recovering economy is you can unwind 1 month free on a 12-month renewal. So if you're offering 2 months free, generally, you need 2 years to unwind it completely. Now even a 1 month reduction is 8% rough revenue growth year-over-year.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Okay. That's kind of where I was going with it. So if the market was sort of peaked out at 2 to 3, it could be conceivable that you may be 18 to 24 months in terms of the unwind of that?

[Sam Kolias, Chairman & CEO]

Yes. The leases -- again, what approach are we going to take, it's going to be resident friendly. Some other landlords, there is a brand-new apartment -- we're not going to name any names. And we surveyed that about a month ago, and they went from $500 incentives to 0 incentives, and a lot of their residents moved out. Some of them came and moved in with us. And so you got to -- we believe we have to take a resident-friendly approach, and we have to put ourselves in the shoes of our residents. And the shock of a 3-month incentive going to a 0-month incentive is going to be too hot, Dean. It's not because we can't do it or the market won't allow us to do it, it's because we want to take a long-term resident-friendly approach. And it's not because the potential doesn't exist inside our portfolio but it's because we're taking a different longer-term approach. Again, it's people before profits. And companies that put people before profits do really, really well, again, over the long term.

[Roberto A. Geremia, President]

And remember, Dean, we still -- even though we're down on turnover, we still turnover 40% to 45% of our portfolio. So if the market did get that strong, that quickly, all those incentives that were -- those that moved out, would evaporate overnight...

[Dean Mark Wilkinson, Director of Institutional Equity Research]

You could accelerate those, yes.

[Roberto A. Geremia, President]

Exactly. Exactly. So that's -- but again, but Sam's is saying one right. What we did -- part of the mistake we did in 2017 is we did not match renewals with new incentives offered to new customers. And that hurt us and hurt vacancy loss dramatically.

[Sam Kolias, Chairman & CEO]

Or lesson is what we like to call it. We are always learning.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Lessons usually hurt. So you'll always have a certain amount of incentives that you're going to run through then because you're not going to just sort of go straight to 0. You're running, call it, somewhere between 200 and 250 as an average incentive amount. It was as low as around $100 back in 2015. So would it be fair to think that over time you would sort of gravitate more towards back to that number, which would suggest that maybe half of that $40 million could be recapturable in the next 1 year or so.

[Roberto A. Geremia, President]

But Dean, you've also got to remember the fact that incentive valuation and vacancy loss are driven heavily by market rents. So if we push up market rents, it affects the actual number as well too. So what we have experienced is, our market rents go up, maybe your incentives are a little bit higher but your net way ahead.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

As a percent, right, yes.

[Roberto A. Geremia, President]

Right.

[Sam Kolias, Chairman & CEO]

Dean, going back into 2013, '14, you're in the single millions of dollars.

[Roberto A. Geremia, President]

I think $2 million was our lowest that we've ever hit.

[Sam Kolias, Chairman & CEO]

Yes, yes, yes. So it gets very, very low. And it has been very, very low, Dean. Again, as we've been sharing with everybody, incentives and vacancy are very cyclical. And they change -- this one has been the most significant change we have seen in 30-some years. But going forward, we are seeing and the results are reflecting a much more balanced market and market returning to a more typical vacancy of a couple percent and very low incentives.

[Operator]

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

[Matt Kornack, Analyst]

Quickly with regards to your employee base. Some of your peers with higher margins are looking to boost those to some extent by reducing their staffing and looking towards 3D online property tours. Just wondering how you view that? And how you view sort of the extra personnel that you brought online in the downturn? Whether we'll see that come off? It sounds like it's not a 2018 thing, but should we be looking for margin expansion into 2019? And also just wondering what your view is on sort of using technology in the leasing process?

[Sam Kolias, Chairman & CEO]

So Matt, it's Sam. And we like to remind all our listeners that some of our associates are listening in. So when it comes to talking about associates, in particular, about cuts, we are publicly going to say what we have shared with all our team is, we need our entire team to be focused in on the best service, and net promoter scores and transformational service for all our residents. We really, really need to be on top of our game more than ever, and we need 100% participation. The terminations we have made are associates that fail to meet this criteria. And a certain amount of characteristics, like very positive, very forgiving, very energetic, very passionate to deliver, very quick customer service and turn around. We're getting amazing resident responses with the word "wow." And we have to take that out, sorry for all the non-TD bank people out there. But as Clark has been a big mentor of ours and has coined the word "wow customer service." If we can get that word out of our residents, then we are doing the right thing. And so we are taking a different approach with our team. We are not freezing. We're not doing massive cuts or that. We're doing -- we're making sure we've got the best team possible. And we do have several contract positions. And again, there are contract positions, and we're going to -- and continue to work really hard on technology. We've got amazing people that, again, are the most important asset that are producing amazing technological advances, where we are developing, with third-party developers, like Uberizing of maintenance requests, digitization of all leases and applications. And we are in discussions with strategic major -- one of our strategic partners, let's be transparent, is TELUS. Because we offer free TELUS, and they've been a strategic partner of ours for quite a long time. And TELUS has spent $1 billion in Edmonton. It's the first fiber ring that they have completed in the -- [Next Tech] Kelowna in Canada. And the first multifamily assets that are being hooked up are our Boardwalk communities. And we are working with TELUS to look at very small test community of smart fridges, facial recognition entries, automated application and move-in procedures, all that security features, enhanced security, all these products. But again, it's a very small experiment, is what we're doing right now and working with TELUS on. It's, as some of our very, very long-term shareholders will recall, very similar to what we were trying to do 18 years ago and never realized the huge scale of what we were doing 18 years ago. But now with a much more broader acceptance of e-commerce and the infrastructure, where fiber optics is at our doorstep in Edmonton. And so the infrastructure is in place for these additional layered services that we're absolutely working on, again, with strategic partners that know more than we do, and together we can deliver it in a much better way.

[Matt Kornack, Analyst]

Fair enough. Just on the wage front as well, is it fair to say that even with the downturn and higher unemployment levels that wages for the most part in the service-providing industries and also in the construction industries remained fairly stable?

[Sam Kolias, Chairman & CEO]

They are actually continuing to go up. That's bad news for our expenses. The good news is though the cup is always half empty or full, Matt. The good news is the average wage in Alberta continues to be amongst the highest in the nation. And that, actually, is a huge plus for us on the revenue side, because affordability is the most it's ever been in about 30 years. For the first time in decades, Calgary shows up as one of our, if not, the most affordable city in Canada to live in. And that's a big, big plus. Because affordability, we believe, in our communities is the paramount most important factor.

[Roberto A. Geremia, President]

Matt, Sam is 100% correct. We have not seen any kind of decrease in pricing and wages, but what we have found is if you pay for them, you get a better quality person than you would have got 2 or 3 years ago because the quality of people are still available, but they're not going to take a discount.

[Sam Kolias, Chairman & CEO]

And we can actually find good quality associates, because in the past, 4 or 5 years ago, truck drivers were getting close to $200,000 a year driving trucks. And it was very, very difficult for us to compete with skilled labor 3 or 4 years ago. And that's why we've seen a huge increase in the quality of our product, because the quality of our labor has increased significantly, Matt. We would say the quality of our labor has increased much more than the amount of expenses. So that's where we're seeing the big benefit. And again, we invite everybody to come see our communities and the investment we have made in the renovations. We -- as our budget reflects, to cut our budget or [sweep] capital by 50%, so we are designing in Calgary and manufacturing in China. So -- it's a very similar playbook to other tech companies that do a lot of the designing locally but the manufacturing is offshore, and we are going directly to manufacturers. We've completed 2 trips and spent hours in the car driving to the small cities in China, where there is manufacturers of all the products that we need manufactured. And we've issued our first purchase order to a strategic partner in China. And we are really happy about that new strategic partnership. And we're going to continue to go to China and develop our partnerships with manufacturers direct. And that's why we hope our product suppliers locally are listening to the call and can provide us with more competitive prices as well, because we're always open and want to support our existing relationships always.

[Matt Kornack, Analyst]

Last question on my side, also, with regards to sort of the costs and the CapEx program. But are you starting to see turnover decrease and starting to see people stay in their apartment and not necessarily shop around?

[Sam Kolias, Chairman & CEO]

Significant reduction in turnover, Matt. And the other significant factor we're seeing is rising interest rates. Rising interest rates impact housing and condo affordability and also impact the access to mortgages, and qualifying for mortgage is getting tougher now. And so we continue to provide an exceptional product service and value compared to the increasing cost of home and condominium ownership. That's a really good point, Matt. Thank you.

[Operator]

At this time, I will turn the call over to the presenters.

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

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

[Operator]

This concludes today's conference call. You may now disconnect.