Killam Apartment REIT

TSX:KMP.UN

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Killam Apartment REIT Second Quarter 2018 Financial Results Conference Call. (Operator Instructions) Please note that this call is being recorded today, August 9, 2018 at 9 AM Eastern Time. I would now like to turn the meeting over to your host for today's call, Philip Fraser, President and Chief Executive Officer. Please go ahead, Mr. Fraser.

[Philip D. Fraser, President, CEO & Executive Trustee]

Hello. Thank you for joining Killam Apartment REIT's Q2 2018 Conference Call. I'm here today with Robert Richardson, Executive Vice President; Dale Noseworthy, Chief Financial Officer; Erin Cleveland, Vice President of Finance; and Nancy Alexander, Senior Director of Investor Relations. Slides to accompany today's call are available on the Investor Relations section of our website under Events and Presentations. I will now ask Nancy to read our cautionary statement.

[Nancy Alexander]

Thanks, Phil. This presentation contains forward-looking statements with respect to Killam Apartment REIT's operations, strategies, financial performance and conditions. The actual results and performance of Killam Apartment REIT could differ materially from those expressed or implied in such statements. These statements are qualified in their entirety by the inherent risks and uncertainties surrounding future expectations. Important factors that could cause actual results to differ materially from those expressed include, among other things, general economic and market factors, competition, changes in government regulations and factors described in the Risk Factors section of Killam's Annual Information Form and other securities and regulatory filings. This cautionary statement qualifies all forward-looking statements attributable to Killam and the persons acting on its behalf. Unless otherwise stated, all forward-looking statements are as of the date of this presentation and the parties have no obligation to update such statements.

[Philip D. Fraser, President, CEO & Executive Trustee]

Thank you, Nancy.I am pleased to report another strong quarter for Killam. We achieved several second quarter financial and operating all-time highs for Killam. The highest second quarter occupancy, the lowest debt to asset in our history and our continual improvement in our NOI margin to name a few. We have made headway on our strategic targets in the first half of the year as summarized on Slide 4.Based on strong top-line revenue growth, same-property NOI increased by 6% compared to Q2 2017 and 5.5% year-to-date. Following these results, we have revised our same-property NOI target for the year from 1% to 2% up to 3% to 5%.We purchased $124 million of properties in the first quarter, and subsequent to the end of Q2, we have acquired or committed to acquire another $51 million of properties. We expect to close a minimum of $225 million of acquisitions in 2018. Of the assets acquired or committed to date, 81% are located outside Atlantic Canada, and Killam expects to generate 27% of its NOI from Alberta and Ontario in 2018.Saginaw Park, our most recently completed development in Cambridge, opened in April and 74 of the 94 units are leased. The Alexander development in Halifax will open in September, and we expect to break ground at our Mississauga development later in the fourth quarter.I will now ask Dale to recap our financial results.

[Dale Noseworthy, Chief Financial Officer]

Thanks, Phil.Slide 5 shows our Q2 2018 and year-to-date financial results. Killam generated FFO per unit of $0.25, 8.7% higher than Q2 '17 . Year-to-date, we generated $0.45 in FFO per unit, an increase of 7.1%. Our strong same-property NOI growth and acquisitions contributed to the increase, partially offset by higher administration costs and an increase in the average number of units outstanding.AFFO per unit was up 5.3% in the quarter and 12.5% year-to-date. Same-property revenue was up 4.1% in both the quarter and year-to-date as illustrated on Slide 6.Overall, rental rate growth continues to trend higher. The 2.4% increase achieved in Q2 is the highest average rate increase in over 6 years, 20 basis points higher than Q1 and 80 basis points ahead of Q2 last year.During the first half of the year, we achieved 1.6% growth on renewals and 4.9% growth on unit turn. We've also decreased rental incentives down 20 basis points year-over-year.With this strong revenue trend, we have revised our revenue projections for the second half of 2018, contributing to our increased NOI guidance for the year. As shown on Slide 7, operating expenses were only 0.9% higher than Q2 2017 and up 1.9% for the first half of the year. The modest increases were driven by higher utility and fuel costs resulting from increases in both consumption and variable pricing during the heating season.Property tax expense remained relatively flat as we continue to appeal tax assessment increases whenever possible. Savings in general operating expenses were due to lower insurance costs and operating cost management initiatives. In total, Killam's same-property NOI margin improved by 110 basis points and 90 basis points for the quarter and year-to-date, respectively.Killam's key debt metrics are highlighted on Slide 8. Total debt as a percentage of total assets was 48.0%, 70 basis points lower than year-end. Our interest coverage ratio of 3.18x has increased over the past 4 years, and debt to EBITDA was 1.85x (sic) [ 10.85x ] at quarter end. This was impacted by the timing of recent acquisition and contributions from financings on our development. Normalized for annualized earnings from recent acquisitions and development, debt to normalized EBITDA is 10.2x.Slide 9 highlights our debt maturity profile, including average apartment mortgage rates by year versus prevailing CMHC-insured mortgage rates. Interest rates were lower on refinancing in the first half of 2018 and we expect to refinance apartment maturities in the second half of the year at rates lower than the weighted average interest rate on maturing debt of 3.76%.Beyond 2018, we anticipate higher interest rate on mortgage refinancing. We have laddered our debt maturities and reduced overall leverage to less than the exposure to rising interest rate.As shown on Slide 10, through acquisitions, development, capital investment and appreciation of existing properties, Killam's real estate portfolio has grown to $2.5 billion in value. We are acquiring and developing new high-quality assets in prime locations. This, along with strong market fundamentals, has translated into compressions in the weighted average cap rate of our portfolio, including a 15 basis point tightening since year-end. This decrease in cap rates, coupled with strong revenue growth, is reflected in $85 million of fair value gains so far in 2018.I'll now turn the call over to Robert, who will provide details on our operating performance this quarter.

[Robert G. Richardson, Executive VP & Trustee]

Thank you, Dale. Good morning, everyone.As shown on Slide 11, Killam continues to execute on its strategy to increase the value of our business, namely increasing our funds from operations and net asset value based on 3 key priorities: increase earnings from the existing portfolio; two, expand the portfolio and diversify geographically through accretive acquisitions with an emphasis on newer properties; and number three, the development of high-quality properties in Killam's core markets.I will focus on Killam's operating performance year-to-date and our key revenue and expense management initiatives before turning the call back to Philip to discuss our development pipeline and recent acquisitions.With Killam's existing portfolio of 15,000 apartment units, 5,200 MHC sites and our expanding commercial base, we are focused on maximizing unitholder value. Slide 12 highlights the key areas we concentrate on when we deliver creative and innovative programs to achieve our goals of FFO and NAV growth. Both top-line growth and expense management are priorities. But metrics that are more subjective such as superior customer service, technology gains and enhanced analytics are equally important and not overlooked.For the last 4 years, Killam has received a 90% tenant satisfaction rating from our annual tenant survey, which is independently managed by Corporate Research Associates. These results reflect the care and committed service delivered by our team of skilled employees each and every day.Killam's human resource and property management teams, working together, hire and retain excellent employees that understand Killam's core values and our focus on tenant satisfaction. Killam seeks continuous improvement and provides the tools to enable our staff to perform most efficiently by using leading technologies for leasing, property management and property maintenance.Slide 13 details Killam's strong same-property occupancy results for Q2 2018. Both our management and leasing teams in each market performed exemplary and continues to deliver record-high portfolio occupancy for the second quarter of 2018. Apart from 1 property in Calgary, all markets reported healthy occupancy increases.Note that Charlottetown continues to be fully occupied, with expectations that this trend will continue through 2019, given the higher rates of international immigration and very little new multi-residential supply in the [ PDI ] market.Overall, Killam reported consolidated same-property occupancy of 96.9% in Q2, a 90 basis point improvement from Q2 2017. Killam gets increasing rents on unit turns. Overall, we achieved a 4.9% average rental increase, a 160 basis point improvement versus year-to-date 2017.Market demand for quality rental units remains robust, and Killam's portfolio is well positioned to capture rental growth. In response to this opportunity, as highlighted on Slide 14, we have accelerated our suite unit repositioning program in 2018 to $3 million to $4 million and 20 units -- 200 units upgraded, up from $1 million invested and 43 units upgraded in 2017.Year-to-date 2018, 70 repositioned units are completed or underway with completed units yielding an average return on investment of 14% and an average monthly rental increase of $245. With 200 repositionings in 2018 and 300 repositionings planned for 2019, we expect to generate an aggregate of $1.5 million in revenue growth from the upgrades. Following a portfolio review, we have identified approximately 3,000 units for repositioning. Once completed, this is expected to translate into an estimated $9 million in additional annualized same-property revenue and approximately $170 million in increased net asset value. The average cost to re-positioning unit is expected to be approximately $20,000 or $60 million in total. Slide 15 through 19 highlight examples of the opportunities we are capturing this year at 30 various properties across our portfolio.Slide 16 shows our 1 Oak property in the Halifax area built in 1969. This [ mid-rise ] property has 146 units and overlooks a beautiful city park in Sullivan's Pond. The neighborhood is seeing an influx of millennials with many retail shops and restaurants locating nearby. A $23,000 investment with a focus on kitchen, bathroom and flooring upgrades results in an average monthly rental lift of $190 equating to a 40% return on investment.Slide 17 shows our Lorentz apartments in Moncton. A 102 units building that was also built in 1969, the average rents for two bedroom was only $750 per month. But with a $25,000 investment, we can earn rent of $415 per month more, yielding a 20% return on investments. Slide 18 highlights Tobin apartments in downtown Halifax, a 47-unit property built 25 years ago by heating kitchens, flooring and bathrooms for an average of $25,000 per unit. We moved rental rates $270 per month and generate a return on investment of 13%.Slide 19 shows our 199 units Silver Spear property in Mississauga. We identified the opportunity to increase returns at this property 2 to 3 years ago and have re-positioned 60 units to date, continuing to maximize value as units turn. Our average investment is $21,000 per unit, achieving a 30% average rental lift and a 24% return on investments. I must point out that Slide 19 does not highlight Killam's photography talents, whatsoever, as a renovated Silver Spear unit shows much better in person. And that is why these units once renovated turnover $400 per month in rental lift.All these properties show little-to-no vacancy, but we continue to re-position unit as they turn. Overall, we expect to achieve a monthly rental lift of $250 per month and returns on investment exceeding 12%. In conjunction with driving revenue growth, Killam is actively managing expenses to optimize net operating income. As shown on Slide 20. Killam is executing its five-year $25 million energy efficiency plans focused on energy saving such as installation of ultra-low flow toilets, LED lighting retrofit and heating systems utilizing condensing gas boilers and plant recommissionings.These projects help to mitigate the impact of expense increases from rising energy rates and other inflationary pressures. To date, we have invested approximately $6 million in energy projects and have achieved a 24% return essentially at four-year payback. Slide 21 highlights our commitment to advancing technology. Technology has been key to growing a traditionally state bricks and mortar business in the 21st century. Killam has embraced technology and invested in our online property management personnel enabling Killam to integrate new and innovative technologies as our business continuously evolve.All Killam employees have smartphones or tablets that enhance staff efficiencies, reduce paperwork, save time and money, and deliver faster response times to our tenant inquiries. We've rolled out mobile maintenance work orders, property inspection apps and are currently fully integrating our front-end online leasing marketing and customer relationships software. This gives us the ability to maximize rental opportunities further reduce vacancy and deliver the high quality of service that our prospects and tenants have come to expect.As well, having real-time access to this data is key to ensuring we can rapidly analyze our markets, tenants, prospects, vendors and better enable Killam to make informed and more accurate operating decisions. Our market fundamentals remain strong in our key markets. Slides 22 to 24 highlights the Halifax, New Brunswick and Ontario markets and all three markets performed very well in Q2 2018 generating excellent occupancy and NOI growth as shown.Killam's portfolio continues to perform very well and we are confident that we will deliver continued growth for the foreseeable future. I'll now hand you back to Philip to provide details on our acquisitions and new developments this quarter.

[Philip D. Fraser, President, CEO & Executive Trustee]

Thank you, Robert. Slide 25 details our acquisition activity year-to-date. Killam acquired $124 million in Q1 and subsequent to the end of Q2. We continue to expand our portfolio, another $51 million in accretive acquisitions in Ontario and Alberta, either acquired or committed, bringing the total to $175 million year-to-date. Slide 26 and 27 show our New Edmonton asset, the Vibe Lofts. That will close within the next couple of weeks. This asset is a new 6-storey 178-unit apartment building located just West to the Downtown Edmonton core. The $47 million purchase offers tenants condo quality finishes 10-foot ceilings throughout in a variety of in-house amenities, including a collaboration lounge, yoga studio, gym and roof-top patio.The average monthly rent is $1,444 at $2.35 per square foot and is currently 78% leased. Turning to Slides 28 and 29. Killam acquired a 10% interest in a 13.6 acre development site in Nolan Hill, a suburb in Northwest Calgary for $2 million. The site is zoned for 829 units. We have agreed to purchase the first phase of 233 units at a purchase price of $55 million when completed in 2020. We will be responsible for the lease-up of the buildings and take possession upon completion. The agreement also provides us with the first right to purchase the remaining three phases of the project.Slide 30 highlights seasonal image sea park that Killam purchased last month for $2 million. This is a 137 site, 22 acres seasonal property and is located in Carlton Place, Ontario, which is just adjacent to Killam's Lakewood Estates MHC allowing us to easily absorb the management of this property with our existing platform.On the development front, Saginaw Park as shown on Slides 31, 32 and 33 is now complete and we opened its doors to tenants in April. The 94 units, 7-storey development includes several design features that improve the tenant experience and promote efficiency. Examples include condo-quality kitchens, smart logs and separately metered water. We have recognized a $4.9 million fair value gains related to Saginaw Park, reflecting the value created from our development program.The building is currently 79% leased and is expected to be fully leased by the end of the year. We are excited about the upcoming completion of the Alexander development in Downtown Halifax. Details of The Alexander and progress photos are included on Slide 34. Killam has a 50% interest in the new Alexander development and expected to increase its ownership to 100% in the near future. The tower will be opened next month and we are already over 80% leased for the entire building. Progress is on track with the Frontier development in Ottawa, a project we're co-developing with RioCan, as detailed on Slide 35. The first phase of the 23-storey tower, 227-unit building will have geo-thermal heating and separately metered water, increasing our operating margins and reducing our environmental footprint.The building is on schedule to be completed in Q2 2019. A rendering of the second phase is shown on Slide 36 and we are in the design and approval stages for this project. Our next project shown on Slide 37 is Silver Spear 2, a 128 unit development in Mississauga, which is adjacent to our existing 199 unit building. The final approvals have been received and we will expect to break ground in December or early January of next year.Construction is expected to take 24 months with a $47.4 million budget, anticipated all cash yield of 5.25%. Slide 38 shows renderings of 163 unit building for our downtown Kitchener Land that was purchased in Q1. We are currently in the design phase and we'll be excited to start another project in the Kitchener Waterloo, Cambridge area.Finally , we continue to advance our development pipeline. A full list of our development pipeline is included on Slide 39. It is worth noting that 70% of the Killam's development future pipeline is outside of Atlantic Canada, as we continue to grow our presence in Ontario and Alberta. To finish, Q2 has been a very good quarter with strong operating and financial performance. Our focused strategy is leading to increased earnings, a stronger balance sheet, more geographical diversification in one of the highest quality apartment portfolios in Canada.This concludes the formal part of the presentation and we will now open up the call for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Mark Rothschild from Canaccord.

[Mark Rothschild, MD & Real Estate Analyst]

With the revised guidance for same-store NOI and the impressive numbers that you've had, how much of this was -- you may be -- being a little conservative earlier in the year or -- maybe what changed to -- in some of those Eastern Canada markets that the fundamentals have improved so much?

[Dale Noseworthy, Chief Financial Officer]

I'd say that -- two things. So one, perhaps we were a bit conservative starting the year. Having seen very impressive occupancy gains in the last couple of quarters, as we looked out, when we were -- it would have been doing the budgets last year, thinking it'd be hard to beat those again. But I'd say we talked about last quarter that with the strength that we're seeing, we're now saying that vacancy, even today, potentially has such an opportunity to go a little bit higher. So I think that that was part of it. As well, we have been more actively seeking higher rent increases, increasing our use of analytics and working with our property management team to help drive those higher increases on rents. So when we look at the rental growth, we know occupancy is better than we would have projected for the year-to-date and for the quarter, but the rental increases are as well and part of that's just actively managing that differently and looking, as Rob talked about with their repositionings as we're just getting going on that, I don't think that's driving the increases in a big way yet, but it's really changing our mindset in terms of what is -- what can we be getting from market rent with some more capital investment as well. And in addition, I mean the fundamentals remained strong, and New Brunswick is a prime example. And when we look more historically, New Brunswick had a [ tough patch ] for 4 years because of some -- starts came ahead of people back probably 5 or 6 years ago, just took a little while to lease that up. But where we are now in terms of vacancy in New Brunswick, it's back where we were just -- it's more in line with the norm except for that blip that we saw in the last 2 years. So I'd say that we're seeing strength across the markets because of all those factors together.

[Mark Rothschild, MD & Real Estate Analyst]

And you sort of started talking about this, and maybe this is a question for Rob, but you're getting some really good returns on the capital you're investing. To what extent can you expand that program and, if I don't need to get such high returns to justify the cost of additional capital to upgrade some properties? So are you looking at doing more of this or is this really the maximum amount that you see that makes sense?

[Robert G. Richardson, Executive VP & Trustee]

No, Mark. We do more. Our big limitation is occupancy, funny enough, in that we're virtually fully occupied at 97%, going to 98%. It's difficult to get our hands on some of the units. So we have to work around that. It's one of the big drivers. And then the other units on renewals, we will do work and we've done work, and we will move rents there as well.

[Dale Noseworthy, Chief Financial Officer]

And aside that, we've been spending more time in looking at the opportunities for the portfolio, I think that even in the last quarter or two, identified now 3,000 units that there are -- the opportunities are extensive when we look. And some properties that we wouldn't have originally had on the books in terms of repositionings, we are finding that those properties that are 20, some of the ones we showed, Tobin Street is a prime example, 20, 25 years old, we are seeing those very positive returns. So I think that the program--

[Philip D. Fraser, President, CEO & Executive Trustee]

Lorentz is a good example. So there is a property in Moncton, and moved the rents [ $400 ], okay? Tremendous lift. And investing something between $20,000 and $25,000 which is always, I always like to have a building with a very clean building, and this is an opportunity to reposition it completely.

[Operator]

Next question comes from the line of Jonathan Kelcher from TD Securities.

[Jonathan Kelcher, Analyst]

First on the Nolan Hill forward purchase agreement. What's the pro forma yield on that development?

[Robert G. Richardson, Executive VP & Trustee]

The first one will be about a [ 5 ] in the quarter.

[Jonathan Kelcher, Analyst]

Okay. And were you -- how involved in or were you involved in any of the design or the construction parameters on that?

[Philip D. Fraser, President, CEO & Executive Trustee]

We're heavily involved in it in terms of looking to sort of the minimal standards that we're looking for in terms of kitchen finishes, bathroom finishes. There is a standard from the product -- I mean our partner [ Slide-X ] there. But we are 10% owners and so we do have basically a lot of input at this stage.

[Jonathan Kelcher, Analyst]

And was that the thought process buying in the 10%?

[Philip D. Fraser, President, CEO & Executive Trustee]

Yes. So I mean, obviously it's like buying in and basically we've got to fund our 10% of this first phase. But we're getting it basically -- get 10% of the profit as well when it's sold to us.

[Jonathan Kelcher, Analyst]

And then just turning to acquisitions. You're now saying a minimum of $225 million. You're at $175 million, so I'm guessing that that means you guys have a pretty good pipeline for the back half of the year. Where are you seeing the most opportunities?

[Philip D. Fraser, President, CEO & Executive Trustee]

It's a good question, and the answer is that we're seeing a few opportunities we're looking at in Atlantic Canada. And again I was talking even last quarter about [ PDI ] and there's a few selective opportunities in New Brunswick. Obviously, we like the Southwest Ontario. I mean, Toronto is very, very rich relative to the -- where the pricing is today. But outside there, there is opportunities. And then, not surprisingly, there's opportunities both in Edmonton and Calgary. It's really across the board.

[Jonathan Kelcher, Analyst]

And that would be -- I'm guessing that'd be a mix of newer property and older property as well?

[Philip D. Fraser, President, CEO & Executive Trustee]

That's correct.

[Operator]

Your next question comes from the line of Dean Wilkinson from CIBC.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Rob, just circling back to the comment you made. It's difficult to get your hands on suites to do the renovations. Have you guys noticed, sort of with the burn-off of the incentives and where your occupancy levels are, any discernible trend in the amount of suite turns you're seeing? And would 32 to 35, your historical, be a number that we could expect going forward or is that grinding lower?

[Robert G. Richardson, Executive VP & Trustee]

Yes, you're right the [indiscernible] a little bit than what we're typically used to seeing, closer to 30, and I'd say 32 or 33. So it's a tight market, which is a good opportunity to move rents.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Is there anything you can do to -- I guess it's a tough question, try to get that number back up. I mean if people want to renew, they want to renew. You can push it as much as you can, but I guess this is something that everyone is facing in the markets at present they are.

[Robert G. Richardson, Executive VP & Trustee]

Right, and so -- but accepting that, we're still turning something like 4,500 units or so, right? I guess a third of the portfolio. And so there is opportunities. I don't want to overstate that we -- but that is one of the limitations. And I think everybody in the sector right now is facing it. It is the ability to unit back and get it renovated.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

That makes sense. That's it, my other questions have been answered. Thanks.

[Operator]

Next question comes from Kyle Stanley from Desjardins.

[Kyle Stanley, Associate]

I was just wondering if you could provide a bit more color -- disclosure on the positive impact from the property tax assessments we saw this quarter and maybe kind of how you're looking at that going forward.

[Erin Cleveland, Vice President of Finance]

Sure. Nancy, you want to take the first one.

[Nancy Alexander]

Yes. so Kyle, property taxes for same property, I would tell you that we would normalize for any big tax deals and stuff that we have. But overall, we have a pretty successful ongoing property tax assessment program. We're always appealing and looking at chances and opportunities to do so. So that's going on. So on a run rate basis, we're seeing that our assessment levels are -- our reassessments are offsetting any rise in property taxes. Halifax is pretty flat for the year. We are able to successfully offset that. New Brunswick, small increases.

[Kyle Stanley, Associate]

And I guess just the last one, I'm not sure if you're able to, but would you be able to disclose the cap rate on the recent Vibe transaction?

[Philip D. Fraser, President, CEO & Executive Trustee]

That is, on a pro forma basis, about 4.7%.

[Operator]

Your next question comes from the line of Matt Kornack from National Bank Financial.

[Matt Kornack, Analyst]

I'm not sure if you're going to be able to answer this, but -- and it's still early days in the new administration, but are there any rumblings in terms of changes under the conservative government in Ontario on rent control or anything along those lines at this point?

[Robert G. Richardson, Executive VP & Trustee]

Absolutely nothing. No.

[Matt Kornack, Analyst]

And as you look to rent growth 2.5% or so, it sounds like there is the opportunity to potentially push our rent to Canada and a lot of those markets are not rent controlled, to what extent are you sort of gaining goodwill by keeping rents on renewals lower than market rents would be and how do you roll that out over the next couple of years, you're taking it essentially over the 2-year period in terms of getting people to stay and not expending the CapEx, but they're getting rent lifts on those units?

[Robert G. Richardson, Executive VP & Trustee]

You're right, to highlight goodwill and matters in the marketplace, I think one of the big things we've been able to do this year is, it's a [indiscernible] and so when you see other costs rising in the market, when you look nationally how rents are moving, it makes it more palatable in our marketplace to see the rents go up, but historically we haven't moved as fast and there's some catch-up to be done and when you see one of the buildings in Halifax Moncton again, but it was $760 a month for two bedroom unit and heated and so there is ample opportunity. And so we're moving them through. The other thing that we've highlighted over the last number of years is that, not all vacancy is created equal, such that you might have a building with, say, 5% vacancy. The reality is that certain models are completely slow and maybe the vacancies are concentrated in one type and so communicating with our staff on-site and our leasing staff, we've highlighted that and said, we would expect that we can move those rents on those other units.And so we'd expect those to move up and that's working hard there and we're making progress with it. We're doing a fair bit internally to monitor that and to compensate our staff for moving the rent. So that's what we do.

[Matt Kornack, Analyst]

And I would assume maybe there has been some press recently on and I think it's Toronto Downtown specific, but AGI is being pushed back by tenants on a mass basis, I would assume given that your rent increases have been fairly reasonably haven't had any sort of those situations within the Ontario portfolio at this point?

[Robert G. Richardson, Executive VP & Trustee]

We have not.

[Matt Kornack, Analyst]

On the financing side, I mean you've spoken to the fact that interest rates are a bit above where your in-place levels are at this point in terms of the term, there's not much spread between 5 and 10-year government bond yields, I would assume the goal is to push out term at this point irrespective of the rate?

[Robert G. Richardson, Executive VP & Trustee]

Yes, that's true. Just like the pending purchase in Edmonton will be 10 years.

[Matt Kornack, Analyst]

Just one last question. With regards to the 3,000 units on 15,000, give us a sense of how much of the portfolio at this point is at sort of a new modern doesn't need any work type standards, because you have one of the newer portfolios with less CapEx involved in a lot of those units, wondering what portion of the portfolio you would consider at this point to be in modern sort of fully occupied stay?

[Nancy Alexander]

Let's say, it's interesting. When we look at our portfolio and when we look at actually unit and when we look at the newer product, it's probably 25% of our unit base, although that accounts for a much bigger piece of our NOI and our RevRec. So when we look at our portfolio overall from a -- so I think that probably ballparking it around 25% would be the [ SKU ] that we wouldn't be doing anything to and then there's opportunities, 3,000 we've identified are the ones where we really feel that we can move it in a kind of meaningful way looking at that target ROI of 10%.

[Robert G. Richardson, Executive VP & Trustee]

Another comment to that would be, I would hope that any building that we own that's less than 10 years. It would be in that category that is up to current standards and it doesn't really need renovations of any sort to increase the rents. And that's a fairly good piece of our portfolio as well.

[Philip D. Fraser, President, CEO & Executive Trustee]

We operate in a very competitive market in terms of new construction. So we've always maintained our asset scenario. Recently, we have had a chance to tour them and so they're in good shape. There is 3,000 we identify are the ones where we see the biggest opportunity for the investment, but across the board we do have the ability to move the rents based on the quality of the property already.

[Matt Kornack, Analyst]

And is it fair to say that in the amount of CapEx that you have to put in is less than some of your peers, because of the total CapEx spend on those units that you're looking to do and the returns are pretty good, but it's nowhere near the sort of significant CapEx profiles that are being rolled out in some of your peers to achieve returns that are less than (multiple speakers)?

[Robert G. Richardson, Executive VP & Trustee]

I think that speaks to the average age of our portfolio. It is that much newer. So therefore we do have that benefit. I also say -- I would say this, in Atlantic Canada, competitors sell within their rent control, so the people continue to maintain our assets or new assets were being built and then necessitated others in the marketplace up again and so we've always been on top of it and so our properties don't need as much.

[Operator]

[Operator Instructions] [ Ash McDowell ] from Laurentian Bank.

[Unknown Analyst]

Just on the Alberta market. I know it's not a big part of your portfolio, but if you could provide some color around the rental market there, it will be great?

[Robert G. Richardson, Executive VP & Trustee]

I would highlight everything for us -- our Tisbury and Waybury properties are really starting to gain significant traction in terms of leasing. So we're seeing that market stronger of the two main centers in Alberta. Everton seems to be leading in terms of its market, a little stronger, but we are confident in Calgary as well. So those markets are -- they're showing signs of lights and we're seeing rental increases, pretty happy about it.

[Operator]

There are no further questions at this time, I will now turn the call back to the presenters.

[Philip D. Fraser, President, CEO & Executive Trustee]

Once again, we'd like to thank everybody for listening in today and asking questions, and we look forward to being back here at the end of Q3 for our next conference call.

[Operator]

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