Boardwalk Real Estate Investment Trust

TSX:BEI.UN

Earnings Call Transcript 2022-Q4

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Boardwalk Real Estate Investment Trust Fourth Quarter 2022 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] Also note that the call is being recorded on Friday, February 24, 2023.

And I would like to turn the conference over to Eric Bowers. Please go ahead, sir.

[Eric Bowers, VP, Finance & IR]

Thank you, Sylvie, and welcome to the Boardwalk REIT 2022 fourth quarter results conference call. With me here today are Sam Kolias, Chief Executive Officer; James Ha, President; and Lisa Smandych, Chief Financial Officer. Please note that this call is being broadly disseminated by way of webcast. If you've not already done so, please visit bwalk.com/investors, where you will find a link to today's presentation, as well as PDF files of the Trust's financial statements, MD&A, and supplemental information package.

Starting on Slide 2, we would like to remind our listeners that certain statements in this call and presentation may be considered forward-looking statements. Although the expectations set forth in such statements are based on reasonable assumptions, Boardwalk's future operation and its actual performance may differ materially from those in any forward-looking statements. Additional information that could cause actual results to differ materially from these statements are detailed in Boardwalk's publicly filed documents.

I would like to now turn the call over to Sam Kolias.

[Sam Kolias, CEO]

Thank you, Eric, and welcome, everyone to our Q4 2022 conference call.

Starting on Slide 4, our performance with our GAAP and non-GAAP measures of FFO per unit, net asset value, and unit holder equity and fair value of investment properties all seen an increase from the prior year, with the exception of profit as a result of non-cash accounting adjustments for fair value relative to the prior year. Slide 5, Our 2022 FFO per unit growth is at 6.5% from the prior year, reflecting stronger apartment rental fundamentals in our core markets.

Slide 6. Our strategy to create value for our stakeholders begins with our people. We are so grateful for our extraordinary team who continues to innovate and deliver our places, home for our resident members. In turn, this leads to leading earnings performance, which we believe will continue to result in strong total returns for all our stakeholders. Our strategic focuses are significant organic growth from utilizing our proven platform that focuses on operational excellence to optimize NOI growth. When we pair this with the current improvement in apartment rental market fundamentals on a solid foundation of some of the most affordable rents in Canada, we are well positioned to continue to accelerate on our organic growth trend.

Accretive capital recycling focuses on opportunistic investment into acquisitions, developments, and investment into our own high-quality existing portfolio with a tactical unit buyback when appropriate. These opportunistic investments combined with our operational optimization have positioned Boardwalk for increasing asset values within Boardwalk's diversified and high-quality multifamily portfolio. Our solid financial foundation provides flexibility on our balance sheet with our growing free cash flow and with CMHC insurance on 96% of our financings, which provides access to low-cost mortgage capital with reduced renewal risk.

Slide 7. We are delivering solid growth. Boardwalk's existing exposure to strong rental demand non-price controlled markets with record immigration significant organic growth as Alberta and Saskatchewan have some of the most affordable rental rates in the country with limited new supply versus demand from both international and interprovincial migration. Rising interest rates making homeownership more expensive and rising construction costs are all widening the gap between our replacement cost of our assets and our current evaluation.

Construction levels in our core markets remain low relative to anticipated household formation. Our largest market Edmonton is now over 98% occupancy contributing to our solid performance. Apartment rental fundamentals continue to improve with higher revenues as a result of inflationary adjustments coupled with essentially no new incentives on new and renewal leases. All our markets now have high occupancy and strong apartment rental fundamentals.

Slide 8 shows an all-time record high in migration into our largest region, Alberta from both interprovincial and international migrants calling Alberta home. This migration reflects the affordability that Alberta provides relative to other provinces, coupled with higher job vacancies. Slide 9 shows record total employed in Alberta along with how diversified new jobs are helping with the diversification of the Alberta economy.

Slide 10 shows some headlines that reflect a diversifying economy for Alberta. Some economists predict Alberta will avoid recession. 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 11 shows our large presence in affordable and non-price controlled markets, with Alberta and Saskatchewan representing 62.4% and 10.4% of our portfolio, respectively. Boardwalk's current mark-to-market, which includes the reduction of incentives averages $138 per suite and equates to approximately $54 million in revenue opportunity. Slide 12 shows occupied rents in Alberta are at a similar level in Q3 2015. There remains a significant gap between occupied rents and the changeover consumer price index over the last eight years.

Slide 13 shows our high affordability in our core Edmonton and Calgary markets with rents well below 30% of medium rental household income. This slide also shows how high demand is with elevated migration in our core markets versus low relative new supply.

Slide 14 shows high occupancy as a result of strong apartment rental fundamentals in all our key markets. Move-outs versus last year are also dropping as our retention increases. Slide 15 shows our key operational metrics with high occupancy, lower incentives, higher occupied rents, resulting in an acceleration of revenues for the quarter and year.

Slide 16 shows steady net new and renewal rental rates. Year-over-year we have seen a significant improvement. New lease spreads are strategically moderated to keep providing resident-friendly affordable housing options in our core markets, while steadying operational results, a win-win for all our stakeholders.

Slide 17 shows a 2.2% sequential quarterly revenue gain consistent with the 2.3% and 2.2% from the last two quarters, reflecting strong apartment rental fundamentals through our winter season for all our markets.

We would like to now pass the call on to Lisa Smandych, who will provide us with an overview of our portfolio performance, balance sheet, and repositioning results. Lisa?

[Lisa Smandych, CFO]

Thank you, Sam. Moving to Slide 18. For Q4 2022 same property net operating income increased by 5.9% as compared to Q4 2021 with revenue growth of 6.7%. Edmonton, the Trust's largest markets saw revenue increased by 6.2% in Q4 2022 as compared to Q4 2021. Operating expenses increased by 8% in Q4 2022, primarily the result of increased wages and salaries, utilities, and property taxes. These increased costs were a result of increased wages and salaries for a premium paid to landscaping associates during the winter months, as well as increased utility costs as a result of our contract renewals for natural gas and electricity. For the year ended December 31, 2022, same property net operating incomes increased by 3.8% as compared to the prior year. Positive revenue growth in all provinces was offset by an increase in operating expenses, largely the result of inflationary increases in costs.

Slide 19. Consistent with prior years, in fiscal 2022 with high inflation and cost pressures, the Trust remained disciplined and focused on managing its controllable expenses despite increases in non-controllable costs resulting in a flat margin year-over-year for the entire Boardwalk portfolio. As the Trust looks forward, management is projecting strong margin improvement, as revenue growth accelerates and the Trust remains disciplined with its expense management.

Slide 20 illustrates Boardwalk's mortgage maturity schedule. Our mortgages are well staggered with approximately 96% of our mortgage balance carrying an [NET] (ph) insurance to 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 lower rates than conventional mortgages with the current estimated five-year and 10-year CMHC rates of 4.25% and 4%, respectively.

Though current interest rates are above the Trust's maturing rates, the Trust maturity curve remains staggered reducing the renewal amount in any particular year. Despite increases in interest rates, mortgage financing continues to be a low cost of capital available to the Trust. Lastly, the Trust has an interest coverage of 2.94 in the current quarter.

Slide 21 summarizes our 2022 mortgage program. Overall, we renewed $460 million as well as secured $300 million in new financing at an average rate of 3.4% and an average term of five years. As previously disclosed, included in the renewal amount was the conversion of our Brio construction loan into the CMHC insured mortgage. Current underwriting criteria in our most recent submissions to CMHC and our lenders has remained in line with our historically conservative estimates.

Slide 22 summarizes our 2023 mortgage maturities. Overall, we have renewed our forward-locked 9.6% of our 2023 mortgage maturities, while also securing $7.4 million in financing. Of the $42.2 million we renewed, $28.2 million represents conventional mortgages. The Trust was able to obtain attractive pricing from the lender for this conventional debt. Moving to the right of the slide, we provide a summary of Boardwalk's available liquidity. The Trust is well positioned with approximately $60 million in cash and subsequently funded financings, as well as an undrawn $196 million operating line. This approximate $256 million in liquidity provides the Trust with a flexible financial position.

Slide 23 illustrates the Trust estimated fair value of its investment properties. Excluding adjustments for IFRS-16, which totaled $6.8 billion as at December 31, 2022 as compared to $6.4 billion as at December 31, 2021. When excluding acquisitions of $0.2 billion, and capital investment of $0.1 billion, the remaining slight increase in overall fair value as a result of increases in market rents as select sites and communities as market fundamentals improve. The current estimated fair value of approximately $199,000 per apartment door remains well below replacement cost.

Moving to Slide 24. In consultation with our external appraisers, the capitalization rates or cap rates used in determining Q4 2022 fair value were unchanged from Q4 2021. 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 CAPREIT reports from both CBRE and Altis suggest that the cap rates being utilized by the Trust to protect [indiscernible] fair value are within their estimated ranges. In addition, the Trust cap rates used in estimating fair value remained at a positive spread to interest rates.

Slide 25 provides a summary of the recycling of cash flow towards value-add improvements. We have completed approximately 32% of total suite improvements while also completing 54% of our total portfolio common areas and amenity spaces by the end of fiscal 2022. Our focus is to continue to deliver the best product optimizing our capital allocation for our value add program to our targeted resident member demographic. So we can continue to provide the most exceptional elevated experience at an affordable price. The result has increased market demand, exceptional value, and appealing returns with sustainable market rent adjustments.

Slide 26 illustrates our stabilized renovation return for Southpointe Plaza located in Regina, Saskatchewan. With a return of 15%, which exceeded our internal hurdle rate of 8%. Our renovations continue to garner positive Resident Member testimonials, driving referrals and higher occupancy.

I would now like to turn the call to James Ha to highlight our acquisitions developments and the Trust's exceptional value. James?

[James Ha, President]

Thank you, Lisa. Starting on Slide 27. We highlight the accretive acquisitions that were made throughout the year. In 2022, Boardwalk acquired 458 suites across strong rental markets, which added to our clustering strategy, while also high-grading our portfolio. Each acquisition has integrated into our platform and our focus on customer service and product quality has resulted in thriving communities where we are proud to serve and provide the residents, our residents the place we call home.

On slide 28, we provide an update to our ongoing development pipeline to add much needed housing in supply constrained markets. Currently under lease up is the first tower of our 365-unit development called 45 Railroad. The first tower features 176 units and received occupancy permit in the fourth quarter of 2022. In our first four months of leasing, we have rented 45% of our total suites at rental rates above our original expectations. Our team continues to progress on construction of the second tower and is scheduled for delivery in the fourth quarter of 2023. This project remains on time and on budget.

Our Victoria development pipeline presents a scaled opportunity for the Trust to add and contribute housing units, while also creating strong value for our stakeholders. Aspire is our first of three developments in Victoria. Excavation is underway at this first development for this 234 units, which is located adjacent to our existing Aurora Community that remains fully occupied with strong rental demand for any units that become available.

Slide 29 provides our stakeholders with our current and relative view on sources and uses of capital. For sources of capital, our strategy of retaining cash flow through our minimum distribution policy provides Boardwalk with maximum flexibility and growing internally generated cash flow. CMHC mortgage financing, though higher in costs than a year ago also continues to represent an attractive source on a relative basis. Each of these capital sources can be utilized to fund opportunities such as our Value Add Capital Improvement Program and investment in our own high-quality portfolio through our NCIB, strategic and accretive acquisitions and new developments in undersupplied housing markets.

Since the re-inception of our NCIB in November of 2021, Boardwalk has purchased and canceled over 875,000 Trust units at an average price of approximately $52 per Trust unit. This equates to an investment of over $45 million and we continue to view this as an attractive use of capital, especially when recycling proceeds from non-core asset sales. Our team will continue to update our view of capital sources and uses, on a relative and regular basis.

Slide 30 highlights the exceptional value that Boardwalk's Trust Units represent at our current trading price that implies a value of approximately $180,000 per apartment door. This compares favorably to the fewer but substantive transactions that have occurred in the external market. Our NAV of $71 per Trust unit equates to $199,000 per apartment door and represents an exceptional opportunity relative to market pricing and remains well below the increasing cost of replacement.

On Slide 31. Boardwalk's current trading price equates to an attractive 4.9% cap rate on our trailing NOI and provides a significant spread to the current cost of mortgage capital and transactional cap rates in private markets. With our strong leasing trends and accelerating NOI growth in our portfolio, this cap rate represents exceptional value and growth for our stakeholders.

Moving on to Slide 32. And as we reflect on our 2022 performance, we are pleased to finish our year with 3.8% same property NOI growth and FFO per unit of $3.13, in line with our revised guidance and also in line with our original guidance despite the headwinds that increased volatility in many of our cost items. We cannot thank our entire Boardwalk team enough for everyone's efforts in delivering our product and service of exceptional and affordable housing to our Resident Members and for their continued commitment to innovation and efficiency in our operations. Our acceleration of operating performance in the second half of 2022 has positioned Boardwalk well for continued strong growth into 2023.

This is reflected in the introduction of our guidance on Slide 33. As shown on the slide, strong revenue growth and continued discipline on controllable expenses are projected to result in SP NOI growth to range from 8.5% to 12.5% for fiscal 2023. This strong NOI growth is anticipated to increase FFO per unit to range from $3.25 and $3.45 per Trust unit. And more than offset higher interest rates in mortgage renewals that have occurred last year and those anticipated for 2023. Our Boardwalk team is committed to leading in transparency and we'll continue to update our stakeholders in the event of any change in conditions that may materially impact our forecast.

With this and on Slide 34, our Board of Trustees has confirmed an 8.3% increase to our monthly cash distribution to $1.17 per Trust unit on an annualized basis. Our distributions have increased by 17% in the last two years and aligns with our growing cash flow, while maintaining our industry-low payout ratio providing significant cash flow reinvestment and positioning Boardwalk with ample capital for growth.

Lastly, on Slide 35, we are excited to share an update on our continued ESG commitment with our fourth annual ESG and 2022 Annual Report in the coming weeks. We look forward to sharing a fulsome update on how Boardwalk is putting the [wheat] (ph) into ESG.

This concludes the formal portion of our presentation and we'd now like to open up the phone line for questions. Sylvie?

[Operator]

Thank you, sir. [Operator Instructions] And your first question will be from Jonathan Kelcher at TD Securities. Please go ahead.

[Jonathan Kelcher, TD Securities]

Thanks. Good afternoon. First question just on the Q4 same-property expenses that up 8% and I know you talked a little bit about it, but maybe give us a little bit more color on what really grow that?

[Lisa Smandych, CFO]

Yes. Hi, Jonathan. It's Lisa. So to consistent bear with my speaking notes, we -- as we had anticipated, we did see an increase in our utility's costs when we compare Q4 2022 to Q4 2021. That was primarily a function of those contracts we spoke to that rolled off. So we had an electricity contract renew in Alberta as well as some of our gas contracts in Saskatchewan, so that was a piece of it. The other side did come a little bit from the wages and salaries where we have offered our landscaping and associates a premium for the winter months. That was really a part of helping with our snow removal program and just ensuring we have sort of all hands on deck for that. And so those were the primary -- those are the two drivers and a little bit property taxes year-over-year.

[Jonathan Kelcher, TD Securities]

Okay. So it sounds like most of that would flow into Q1 as well then?

[Lisa Smandych, CFO]

We will see some of it in Q1. Yeah. And that's been considered in our guidance range.

[Jonathan Kelcher, TD Securities]

Okay and then just on the strong growth in renewals in Alberta in January at 8%. Like, should we think about that as basically just eliminating incentives on the renewals or are you pushing a little bit more than that?

[James Ha, President]

Hey, Jonathan, it's James. Certainly producing incentives continues to be the biggest opportunities that we have here today. What we are seeing is, continued strong housing fundamentals and we are seeing the market start to see increases in market rents as well, ourselves included at a sustainable pace. As you look through for anybody who tracks our rents on our website, we are seeing some steady market rent adjustments that have recently just occurred. And so we're seeing both of those occur and that's what's really driving the revenue growth here, Jonathan is the catch-up in the extremely affordable rents that we have here in Alberta through incentive reductions that it's happening quickly as well as the market rent growth.

[Jonathan Kelcher, TD Securities]

Okay. And do you think that sort of 8.5%, 9% total revenue growth for Alberta, do you think you can carry that through most of -- most of 2023, is that what's sort of driving the 10% same property NOI growth?

[Sam Kolias, CEO]

Yeah. It’ll be the combination of both, so Jonathan as we're seeing with our sequential revenue growth and we printed 2% plus three quarters in a row. Looking at our leasing spreads, we're certainly continuing to track that direction. And so, we're optimistic as Lisa pointed out. That strong SP NOI growth guidance that we have certainly which feature require continued strong revenue growth with which we're confident in delivering.

[Jonathan Kelcher, TD Securities]

Okay, thanks. I'll turn it back.

[Operator]

Thank you. Next question will be from Mike Markidis at BMO Capital Markets. Please go ahead.

[Mike Markidis, BMO Capital Markets]

Hi there. Thanks for taking my questions. First off, just wanted to circle back to the comment on, I think it was one of your slides, just talking about margin expansion from here. It was a pretty strong statement and I'm sure of it long-term. Maybe you could just comment in terms of what you're expecting in 2023 versus 2022?

[Lisa Smandych, CFO]

Yeah. Hi Mike, it's Lisa again. I think, coupled with the conversation we just had about that revenue opportunity. So we do feel that when we move into 2023, largely that revenue opportunities what's going to lead to the short-term margin expansion, specifically to 2023. As we move, we will continue to be disciplined on the expense side and looking at our platform innovation and how we can optimize our platform, but specific to 2023, that revenue side is certainly what will leave that margin expansion.

[Mike Markidis, BMO Capital Markets]

Okay, thank you. That's helpful. Quick one here. Just on Railroad. Good leasing momentum. Do you happen to have off the top of your head the average rent per foot?

[James Ha, President]

Just over $3, Mike.

[Mike Markidis, BMO Capital Markets]

Okay. $3. Thanks. And then just last one for me. More of a high-level question. Just touching back on your sources of and cost of capital that costs are a lot higher. I think you're at 425 or 430 on five-year debt and your stock at $49 at an implied cap on a trailing basis. So maybe it would be arguably $47-ish on a forward basis. So I know we're not there yet and it's, you're dealing in absolutes but when does that -- when does that -- if we were to see the cost of the implied cap rate in your stock go below that, how would you guys still be thinking about sources of capital and cost?

[James Ha, President]

Mike, yeah, I think, just to clarify, I think that would go the other way, with the growth that we have $49 on a trailing basis [Multiple Speakers]

[Mike Markidis, BMO Capital Markets]

Yes, thank you.

[James Ha, President]

But I think -- I think I know where you're going with the question. And at the end of the day, the most important part of our capital backed strategy is our minimum distribution policy and the growing cash flow, right? We are unique and a key differentiator of our business is that minimum distribution policy or also known as a maximum cash flow retention policy. And so that provides us the flexibility in capital to take advantage of opportunities that may present themselves.

CMHC debt and the challenge with sharing our view on capital sources and uses, that has to be relative as well. And so, yes, the cost of CMHC financing has increased from this time last year. But it still remains lower than the cost of other sources of capital as you point out. At the end of the day for us as we think about potential uses of capital, we're looking for great opportunities that are accretive to those sources.

So hopefully that provides a little bit of insight into how we think about potential opportunities and where those deployment opportunities come. Today it will reiterate this though there the biggest opportunity is double-digit same-property NOI growth in our organic portfolio as per our guidance and that is where we are 100% focused today.

[Mike Markidis, BMO Capital Markets]

Great. Thanks very much. I'll turn back.

[Operator]

Thank you. Next question will be from Gaurav Mathur at iA Capital Markets. Please go ahead.

[Gaurav Mathur, iA Capital Markets]

Thanks you, and good afternoon, everyone. Just one thing on the same-property NOI growth, would you be able to provide your thoughts on turnover rates and how you're thinking about that versus what -- when you're comparing it to 2022?

[James Ha, President]

Hey, Gaurav. It's James here again. Turnover rates, I mean one of the unique again differentiators of our portfolio and our geographies is that, 70% of our portfolio is non-price controlled, right? And so as a result of that, historically we do have higher turnover in our markets relative to regulated markets. Again, one of the downsides of rent regulation in the marketplace. But even with that, we have seen a 20% to 30% decline in internal orders over the last several months. Fortunately for us, we do focus in on our resident friendly policy and are very flexible with our residents in terms of our lease renewals always. But with that, despite -- included in that is that decline in turnover that we are seeing pretty well across the country.

[Gaurav Mathur, iA Capital Markets]

Okay, great. And just very quickly on that. As you are seeing rental growth across the portfolio, is that meaningfully sort of changing your rental income ratio for the tenants or is that mostly within the historical norms?

[James Ha, President]

Hey, Gaurav. [indiscernible] provide a slide on that, and if we just jump over to Slide 13. Our largest and core markets. This is relative -- shows rental rates relative to average renters' household incomes. And you will find there that our core and largest markets in Alberta continue to be the most affordable in the country. And so, the good news today as we look at the job vacancies and job availabilities and we look at income data, we continue to see inflationary growth there as well. And so despite the strong spreads that we're getting through incentive reductions and now through market rent increases, affordability continues to be high here in Alberta. And so from an affordability standpoint, I think there no better place to be and that's a huge reason why we're seeing the outsized migration we are [indiscernible].

[Sam Kolias, CEO]

[indiscernible] Sam Kolias. And we really have to stress our best-case example of Alberta Saskatchewan and policymakers keeping our market free is absolutely the reason we have the most affordable rents in the country. Three markets produce that most competition, that most choices for renters, and that most affordable rents as a result. We really, really have to all remember that as voters that are responsible to a vote in place policymakers that create policies, that create more affordable housing for all Canadians is super important to keep that in mind.

[Gaurav Mathur, iA Capital Markets]

Great, thank you. And just the last question here. When you think about capital allocation decisions going forward, is there a pecking order between the acquisition pipeline development and the use of the NCIB?

[James Ha, President]

Hey, Gaurav. It's James. Great question. We consider capital allocation decisions every single day. We're analyzing and assessing the market. We're watching our equity valuation in the public market as well. And looking at where to best place that capital. I'd say, stay tuned as you've seen with our track record. We are quite disciplined in terms of how and where we're allocating capital. We are looking for the best places to create value for stakeholders. And so, we'll continue to assess and look for unique acquisitions like we did in 2022. At the same time, we also have the opportunity to take advantage of discounted stock that has an amazing growth profile going forward.

And so stay tuned. We'll keep everybody updated, but we'll assess this each and every day and keep everybody posted with our quarterly results.

[Gaurav Mathur, iA Capital Markets]

Fantastic. Thank you for the color. I will turn it back to the operator.

[Operator]

Thank you. Next question will be from Jimmy Chen at RBC Capital Markets. Please go ahead.

[Jimmy Chen, RBC Capital Markets]

Thanks. So, just wondering if you could talk a bit about the investment market after pricing cap rate trends. I did just notice on your Slide 30, you've got Chelsea Estates there, a close in Calgary, just looked like the price has come down a decent amount. I just wonder if you could talk in general or maybe specifically about that asset as well?

[James Ha, President]

Hey, Jimmy. Yeah, Chelsea Estate was a great acquisition. We know the purchaser well. That transaction was actually negotiated several months ago, in the summer. The transaction was -- the asset was tied up before it actually got to the market. Again, great acquisition. When we look at the sweet mix for that building, they are smaller units than what we have in comparable areas, and a sweet mix that is more geared towards ones and twos. But I'd say that's a great acquisition.

When we look at other transactions that have also occurred. If you look through that slide, Slide 30. There have been fewer, but there are substantive transactions that if we look and compare that relative to our NAV and then discussions with our appraisers presents quite well for NAV.

[Sam Kolias, CEO]

Jimmy, it's Sam Kolias. It's really important to keep in mind the quickly changing NOIs in our Edmonton and Calgary communities as a result of vacancy essentially disappearing along with incentives. This is going to significantly affect and improve net operating incomes. When it -- when the net operating income improved significantly, keeping cap rates at a high 5% is going to see significantly higher sales as a result of significantly higher net operating incomes. So this is taking place as we speak. Buyers look at net operating income on a trailing basis. So it's going to improve over the next several quarters. We're going to see significant NOI improvements in all communities across Alberta as a resulting significant improving sales that will allow our purchasers to access higher mortgage amounts with significant increases in NOI. And so we're seeing this change very quickly as we speak and we'll be seeing that in sales in the upcoming quarters as well.

[Jimmy Chen, RBC Capital Markets]

Right. So are you getting the sense that these people are trying to get ahead of the NOI growth and are you getting the sense that there is a little bit more interest in the market today because of the very reason you just mentioned?

[Sam Kolias, CEO]

There is notable more interest in the market and community providers are seeing a big improvements in NOIs. And so there is this growing bid asks spread as a result, the awareness that our market has significantly improved and so expectations are going to be higher for sellers and buyers are going to have to step up reflecting the improved apartment rental fundamentals, NOIs, and evaluations that follow through.

[Jimmy Chen, RBC Capital Markets]

Okay. And then just a follow-up on the guidance. So in terms of the revenue growth, I think, based on your comment, it sounds like you would contemplate removal of incentives, but also a little bit of market rent growth, is that fair? I guess the top end of the guidance would imply that you're seeing a bit of market rent growth.

[James Ha, President]

We are absolutely seeing market rent growth, Jimmy, that has -- that has started as well.

[Jimmy Chen, RBC Capital Markets]

Okay. And that is in your guidance?

[James Ha, President]

That's correct.

[Jimmy Chen, RBC Capital Markets]

Okay. Okay, thank you.

[Operator]

[Operator Instructions] And your next question will be from Matt Kornack at National Bank Financial. Please go ahead.

[Matt Kornack, National Bank Financial]

Hey, guys. With regards to CapEx, the 2023 budget, I mean it's a marginal increase over 2022 but given your commentary around turnover coming down and also tighter market conditions, do you have a sense as to whether that will in time trend lower or what is -- what does the allocation at this point for that value add capital?

[Lisa Smandych, CFO]

Hi, Matt. It's Lisa. So yeah, you are correct. When we looked at our 2023 capital budget, there is a slightly decreased capital -- sorry, [indiscernible] capital and a little bit for wage. Where the primary focus will be for the 2023 capital budget is largely looking at projects that were really help overall NOI growth, so we're looking at things that will bring a lot of operating expense efficiencies, energy efficiency, so looking at some of those ESG initiatives, as well as just the continuing strength of our repositioning program. So where that repositioning and common areas can bring us rates of return higher than even what we're seeing in the market, that will be the focus. But largely driven, I would say it's from sort of an ESG and operating expense savings point of view.

[Matt Kornack, National Bank Financial]

Okay, perfect. That's helpful. And then with regards to supply deliveries, maybe if you could speak to kind of where deliveries are at this point for stuff that may have been started when interest rates were low, and you have a market that would probably be more inclined to see a little bit of supply, given how strong the fundamentals are, but obviously interest rates are high, and it's hard to make performance work on anything real estate wise these days. But can you give us a sense as to how you see supply kind of trending in Calgary and Edmonton?

[James Ha, President]

Great question, Matt. We do publish and to share housing CMHC under construction data, it's in our Appendix Slide 47 for Edmonton and Calgary specifically. And as you'll see there, we are seeing an increase in purpose-built rental starts slightly. I mean, you're coming off of quite a low based on that. But we're seeing an almost exact proportionate decline on the condominium side. And so if we look at total housing under supply, it has increased a touch in terms of under construction. Those deliveries, generally speaking, single-family homes can get delivered in four months or less, but as we know, condominiums or purpose built rental often take two to three years to build. We cannot build that fast enough. I mean foot population growth that we have and you saw that in the most recent quarter, over 50,000 people in Alberta. We are quickly seeing any excess inventory get mopped up here.

And so with the big immigration targets that we have national here huge attractive demographics and standard of living that we have here in Alberta. That's attracting new migrants here as well. We would anticipate fundamentals to remain quite strong and healthy in our core Alberta housing.

[Sam Kolias, CEO]

And Matt, it’s Sam. The higher interest rates are making it very, very difficult to justify any new supply going forward. And so that is a limiting factor along with housing and the higher cost of renewals and the variable rates that many, many homeowners are facing on interest rate renewals some homeowners are seeing mortgage costs go up by 100% and we're seeing homeowners sell and come back to the rental more affordable housing option.

And so we're seeing demand pickup locally as well, because of the high interest rates having an effect on affordability and new supply and construction of both not only homes and condominiums, but new rentals as well. The price point as well of new development when they are coming online certainly are different price rate than our average product. We do have our lifestyle product that provides even more affordability relative to that price point, but when compared to our living and communities brands, again, we continue to offer the most affordable and exceptional housing for Albertsons in Canadians.

[Matt Kornack, National Bank Financial]

Sorry. Go ahead.

[James Ha, President]

[Multiple Speaker] Your turn Sam.

[Sam Kolias, CEO]

We really want to point out the improvements that we're making in our common areas and our beautiful people that are creating beautiful spaces, we just can't emphasize how much of a huge difference this is making in our market share and the demand for our communities and the feedback we're hearing from our Resident Members and new leads as well really reflect the lead that we are in, as a result of the incredible work that our design and in-house vertically integrated construction teams together are creating spaces that are like new at far below new rental rates.

And so we're extremely competitive and provide beautiful communities at super affordable rate. So we are really, really grateful for our team and everything our team is doing in this area, and we're seeing it in our results and our bottom lines increasing as a result of our great efforts. Go ahead [indiscernible]

[Matt Kornack, National Bank Financial]

Yeah, I think we impute something like less than a $1.50 a square foot for rents for your portfolio in terms of, I mean, even low rise stick-built type purpose-built rental, could you give us a sense like you can't deliver anything that where it would make sense at that rent level, I presume in any market across Canada.

[James Ha, President]

No. To Sam’s point, I mean, the cost of construction on wood frame plus interest costs and carrying costs. I mean we need rents that are much higher than that.

[Matt Kornack, National Bank Financial]

Fair enough. Okay, thanks guys.

[Sam Kolias, CEO]

Thank you so much. Matt.

[Operator]

Thank you. Next question will be from Dean Wilkinson at CIBC. Please go ahead.

[Dean Wilkinson, CIBC]

Thanks. Hi, everyone. Just looking at your debt maturities, it looks like you went a little shorter-term on the $42 million that came up in January. How are you guys thinking about sort of the remainder of the year looking at rate versus term? And are you sort of purposefully say looking at a shorter term with a view that rates might be a little more favorable two, three years out.

[James Ha, President]

Hi, Dean, it’s James. I can touch on that. As Lisa pointed out in her prepared remarks, those were unique, those certainly aren't going to be the [indiscernible] balance of our maturities. Two of those mortgages were conventional mortgages specifically in [indiscernible], we're actually just going through the process of a technical renewal on our lease -- land lease that's there, that is actually now complete. And so that gives us the opportunity to go to CMHC, but given that that maturity occurred in January, there was a good opportunity with our lending partner there who had attractive pricing on the short end of the curve for us to take advantage of a little bit shorter duration there, knowing that we'd like to move that over to CMHC. And so, we'd say for the balance of our maturities this year, I think that's going to be more of the exception. As we know in our apartment space here in Canada, the most liquid terms are five and 10. And going forward, similar to what we do each year, number one priority is to create that nice ladder and our mortgage maturity curve and we'll continue to do that for 2023.

[Dean Wilkinson, CIBC]

Great. Sam, I could not agree with you more on the issue of the rent controls and free markets and all of the good things that come with that. Do you have any risk of a fear that given what you're being able to achieve on renewals that perhaps some elements of the provincial government start beating the drum on looking at rent control or is that just no touch kind of situation.

[Sam Kolias, CEO]

The evidence is very clear and our policymakers get all the credit for keeping our markets free and having the most affordable housing and rentals in the country as a result. And so, it's success, we are getting success and policies that over the last several decades have provided the most affordable place to live in Canada. And so, everything that we hear -- the truth sets us free, it gets out and best case examples really help and getting that information out and keep spreading the truth. And that works best, that provides the most affordable housing. The more we spread the truth, the better for all Canadians and that's what we're working tirelessly doing is putting together data and best cases and keeping our past success in mind front and center. So we can continue to have policies that will continue to provide great affordable places to live for Canadians.

And so, yes, we really can't spread this information enough and we've got to continue to put facts forward and look at the past and see what works and make sure our voters and we the people recognized what's best and make sure that we are voting for policymakers and leaders that reflect the data and best case examples so that we can continue to move forward, where we're party agnostic and for policy that works, and we're politically agnostic as well where we think policies are more important for all of us to focus on versus politics. And we're focusing in on people and supporting people, not particular parties that support great policy. So we're people and policy focused and that's what we really all have to be as voters to be quite honest and focusing on people that promote good policies for all Canadians.

[Dean Wilkinson, CIBC]

Got it. Thanks. I appreciate it.

[Sam Kolias, CEO]

Thank you so much, Dean.

[Operator]

Next question will be from Mario Saric at Scotiabank Please go ahead.

[Mario Saric, Scotiabank]

Hey, good morning. Just circling back to the guidance, I now we talked about kind of the topline and expenses, but are you kind of willing and able to kind of break down the 12.5% same-store NOI guidance by same-store revenue and same-store expense? Is there a meaningful difference between those two?

[James Ha, President]

Why don't we start with the expenses. That's –

[Lisa Smandych, CFO]

Yes. So overall, Mario, we can share that from an expense perspective, when we're looking at Total Rental Expenses, so all of them combined. I would suggest that the guidance range would say, those expenses will probably be between 4% to 5%. So, maybe slightly lower than 4% and slightly lower than 5%, but overall, that 4% to 5% would be what that range would consider.

[Sam Kolias, CEO]

Good news with our Edmonton policymakers announcing a more equitable property tax for multifamily communities, recognizing multifamily communities provide the most affordability. for the most vulnerable residents [Edmontoniance] (ph) and so we have to give a big shout out to our Edmonton policymakers municipally that voted down adjustments to property taxes for multifamily communities and that was a good news and reflects that our policymakers are looking at what creates more affordable housing and implementing it into property taxation as well.

[James Ha, President]

And just to expand on that. If anybody has missed it. City Council in Edmonton has voted and opted to eliminate the other residential tax rate, which is a premium tax rate that was applied to apartments relative to single-family housing. And so, that will -- that benefit will occur over the next five years and ensure that the city remains competitive to other municipalities, as well as helps ensure rents remain affordable within that city. And so that is a benefit for the property tax line, that is going to be spread over the next five years. It doesn't sound like it's going to start this year. And to Lisa’s point, 4% to 5% across all expense items will continue to tighten that as time goes on and as we work through the year.

But, Mario that gives you an indication of kind of how we're thinking about revenue as well with the 8.5% to 12.5% same-store NOI guidance. And again, you can kind of see it with our leasing spreads and current occupancy to see what that revenue build shapes out to.

[Mario Saric, Scotiabank]

Great. That's very good color. Thank you for that. And then, like, when we're looking at the 8.5% to 12.5%, it seems like you're pretty comfortable with the expense side of things. So is it fair to say that those continuation of the leasing spreads that you're seeing now. That's the primary wildcards or factor that's driving the 400 basis point gap between the low end and the high.

[James Ha, President]

I mean, it's a combination of both. I mean, expenses as we all learned in 2022 more volatility exist and that volatility continues to persist into 2023. And so, certainly this early in the year. want to provide room on either sides that we can certainly meet our expectations, both internally and externally.

[Sam Kolias, CEO]

Mario, it's Sam Kolias. What might be helpful and is helpful for everyone is two widen perspective. And to go back to the third quarter of 2015 and look at where consumer price index and our rents were back seven years ago. Going forward, our rents are 25% below. We haven't kept up with inflation over the last seven years. So adjusting those are catching up to just consumer price index requires more than a 25% adjustment which we will not do quickly and we will absolutely do gradually and we will continue to be flexible. But over those seven years, we can look back and say our rental rates have essentially tracked inflation and grown single, low-single digit percentage as a percentage of our 2015 rents.

And so, over a longer perspective brands really follow consumer price index. And so, we're really in a catch up mode. And as a result, we continue to provide exceptional affordability because our rents are so far below the consumer price index that we've seen since 2015. So we have exceptional affordability and room for adjustment and really catch-up over the next several years.

[Mario Saric, Scotiabank]

Got it. Okay. and then just one last one, maybe Sam, going back to your comment on notable market interest in Alberta assets. Some of your peers have highlighted a pretty strong preference for buying new products or new construction as opposed to old. In terms of your comment, are you seeing an equal amount of demand for older product that perhaps has built in incentives that people are trying to get ahead of or is it largely kind of focused on the new constructions?

[Sam Kolias, CEO]

We're seeing demand from local community providers and sales and purchases from more local providers, simply because our view and perspective as local providers, gives us a much bigger insight as to the growth opportunities here in the west versus other geographic regions right now. So right now, it's more local demand and talking with realtors yesterday, there is a lot more interest from some other buyers as well. More inbound inquiries, we'll wait and see as far as the sales and transactions that take place over the next few quarters. We do see higher net operating income producing higher sales per unit going forward, simply because of the math and also the growth potential as well.

Our growth and our in-place rents are so much lower than other regions, it really is hard to find rents below $2,000 for a two bedroom in Canada right now. And so, we as well have replacement cost delta between our sales prices and replacement costs and we're building [Rockup] (ph) in Victoria for $400,000 a unit. And we're seeing sale that below $200,000 a door, around $200,000 a door, that’s 50% below replacement costs. And so that gap is more meaningful in the West than it is another region. And so, all those factors will and are resulting in higher expectations, which will result in higher transaction prices here in the future, near future.

[Mario Saric, Scotiabank]

But I guess the one differentiation Alberta is -- the benefit of new construction elsewhere doesn't include rent control, right. So you can charge what you want, or what the market will bear on both turnover and renewal, that's not necessarily the case in Alberta. So when you -- hypothetically if you're allocating capital to Alberta going forward in terms of external growth, what do you see as a better value today buying existing product or new construction.

[Sam Kolias, CEO]

We're seeing the biggest opportunity of what we heard earlier. Our average rent per square foot as a $1.50. We're seeing walk up between $2.50 and $2.75 and then concrete at $3 plus. And so we're better is there growth opportunities with respect to rent at a $1.50 a square foot, roughly half of what it requires of new construction. When better growth is there than Alberta, that is the question, we're asking, because we're having a real hard time finding anywhere that's better than what we have right now right here.

[Mario Saric, Scotiabank]

Okay. That's it from me. Thank you.

[James Ha, President]

Thank you so much, Mario.

[Operator]

Thank you. And at this time we have no further questions registered. So I will turn the call back over to Sam Kolias.

[Sam Kolias, CEO]

Thank you so much, Sylvie. 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 stand and as leaders, we continue to do everything we can to support continued growth and extraordinary. We really can't thank our extraordinary team and great leaders enough. We are pleased with our improving results on a foundation of exceptional value, service and experience we continue to provide our Resident Members our investors and all our stakeholders. Welcome home to love always. Our future is family. We can be more -- what can be more important when choosing where to call home.

Thank you again everyone for joining us this morning. God bless us and grant us all piece.

[Operator]

Thank you, sir. Ladies, ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines. Have a good weekend.