Q4 2022 Boardwalk Real Estate Investment Trust Earnings Call
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.
Any time during this call you'll be quiet needed assistance. Please press star zero for the operator.
Note that the call is being recorded on Friday February 24th 2023, and I would like to turn the conference over to Eric Powers. Please go ahead Sir.
Thank you Sylvia and welcome to the Boardwalk right 2022 fourth quarter results Conference call with me here today are Sam Coleus, Chief Executive Officer, James Hall, President and Lee said, Spanish 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 the walk dot com slash 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 two 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 boardwalks future operations and its actual performance may differ materially from those in any form.
Looking statements additional information that could cause actual results to differ materially from these statements are detailed in boardwalks publicly filed documents I would like to now turn the call over to Sam called Yes. Thank you, Eric and welcome everyone to our Q4 2022 conference call starting on.
On slide four our performance with our GAAP and non-GAAP measures that Apple per unit net asset value and unit holder equity in fair value of investment properties, all seen an increase from the prior year with the exception of profit as a result of noncash accounting adjustments for fair value relative to the prior year.
Slide five our 2022 at that vote for unit growth is at six 5% from the prior year, reflecting stronger apartment rental fundamentals in our core markets.
Slide six 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 homes for our residents 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 focus is our significant organic growth from utilizing our proven platforms that focuses on operational excellence to optimize NOI growth.
When we pair this with the current improvement in apartment rental market fundamentals on our 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 development and investment into our own high quality existing portfolio with the tactical unit buybacks when appropriate.
These opportunistic investments combined with our operational optimization have positioned boardwalk for increasing asset values within boardwalks diversified and high quality multifamily portfolio.
Our solid financial foundation provides flexibility on our balance sheet with our growing free cash flow and with CMA Z insurance on 96% of our financings, which provides access to low cost markets capital, which reduced renewal risk.
Slide seven we are delivering solid growth.
It walks existing exposure to strong rental demand non price controls market with record immigration significant organic growth as Alberta in Saskatchewan and have some of the most affordable rental rates in the country with limited new supply versus demand from both international and enter.
Provincial 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 continued to improve with higher revenues as a result of inflationary adjustments coupled with essentially no new incentives on new.
And renewal leases.
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All of our markets now have high occupancy and strong apartment rental fundamentals.
Slide eight shows an all time record high in migration into our largest region, Alberta from both inter provincial and international migrants, calling Alberta home. This migration reflects the affordability that Alberta provides relative to other provinces coupled with.
Higher job vacancies.
Slide nine shows record total employed in Alberta, along with how diversified new jobs are helping with the diversification.
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 controls markets without burden, Saskatchewan, representing 62, 4% and 10, 4% of our portfolio respectfully.
Boardwalks current mark to market, which includes the reduction of incentives.
Average is $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 grants and the change over consumer price index over the last eight years.
Slide 13 shows our high affordability in our core Edmonton and Calgary market with rents well below 30% of medium rental household income.
This slide also also shows how high demand, yes, 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 has a 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 residents friendly affordable housing options in our core markets while steadying.
<unk> operational results.
Win win for all our stakeholders.
Slide 17 shows a 2.2% sequential quarterly revenue gain consistent with the two three and two 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 onto leases manage who will provide us with an overview of our portfolio performance balance sheet and repositioning results Lisa.
Thank you Sam moving to slide 18 for Q4 2022 same property net operating income increased by five 9% as compared to Q4 2021 with revenue growth of six 7% Edmonton. The trust largest market saw revenue increased by six point too.
<unk> 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 premium paid to landscaping associates during the winter months as well as increased utility costs as a result of our call.
<unk> renewals for natural gas and electricity.
For the year ended December 31, 2022 same property net operating income increased by three 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 managed margin improvement as revenue growth accelerates and the trust remains disciplined with its expense management.
Slide 20 illustrates boardwalks mortgage maturity schedule, our mortgages are well staggered with approximately 96% of our mortgage balance carrying in each a 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 CME C rate of 4.25% and 4% respectively.
The current interest rates are above the trust maturing rates the trust maturity curve remains staggered reducing them 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 three 4% and an average term of five years as previously disclosed included in the renewable amount what is the conversion of our brio construction loan into.
CME C insured mortgage current underwriting criteria in our most recent submission to see me C 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 locks nine 6% of our 2023 mortgage maturities, while also securing $7 4 million and up financing of the $42 2 million, we renewed $28 2 million represents conventional mortgages the true.
<unk> was able to obtain attractive pricing from the lender for this conventional debt move.
Moving to the right of the slide we provide a summary of boardwalks available liquidity. The trust is well positioned with approximately $60 million in cash and subsequently funded financing as well as an Undrawn 196 million dollar 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 Ifr 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 point 2 billion in capital investment.
A point 1 billion the remaining slight increase in overall fair about value as a result of increases in market rents at select sites and communities as market fundamentals improve.
Current estimated fair value of approximately 199000 per apartment door remains well below replacement cost.
Moving to slide 24 in consultation with our external appraisers, the capitalization rates or cap rate 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 or nessus.
Sorry.
Most recent published cap rate reports from both CBRE and Altice suggested the cap rates being utilized by the trust to protect getting fair value are within their estimated range. It's in addition, the truck cap rates using estimated 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 in many amenity spaces by the end of fiscal 2022.
Our focus is to continue to deliver the best products optimizing our capital allocation for our value add program to our targeted resident member demographic. So we can continue to provide the most exceptional elevated experience at an affordable price. The result is increased market demands exceptional value and appealing returns with sustainable market rent.
<unk>.
Slide 26 illustrates our stabilized renovation return for South point 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 Heart to heart.
Our acquisitions developments and the trust exceptional value James.
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 are residents. The places 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 forty-five Railroad.
The first tower features a 176 units and received occupancy permit in the fourth quarter of 2022.
And 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 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 a minimum distribution policy provides boardwalk with maximum flexibility and growing internally generated cash flow.
C <unk> C mortgage financing they'll hiring 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 NCI be strategic and accretive acquisitions, and new development and under supply of housing markets.
Since the re inception of our N CIB in November of 2021 Boardwalk is purchased and canceled over 875000 and 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 noncore 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 boardwalks trust units represent at our current trading price that implies a value of approximately $180000 per apartment door disc.
This compares favorably to the fewer but substantive transactions that have occurred in the external market.
Our LTV of $71 per trust unit equates to 199000 per apartment tour and represents an exceptional opportunity relative to market pricing and remains well below the increasing cost of replacement.
On slide 31, boardwalks current trading price equates to an attractive four 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 three 8% same property NOI growth and <unk> per unit of $3.13 in line with our revised guidance and also in line with our original guidance. Despite the headwinds that it that increased volatility in many of our cost.
Items.
We cannot thank our entire boardwalks him enough for everyones efforts in delivering our product and service are 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 S. P. NOI growth to range from Eaton, a half to 12, 5% for fiscal 2023.
This strong NOI growth is anticipated to increase <unk> per unit to range from $3 25, and $3 45 per trust unit and more than offset higher interest rates and mortgage renewals that have occurred last year and those anticipated for 2023.
Boardwalk team is committed to leading and transparency and we'll continue to update our stakeholders in the event of any changing conditions that may materially impact our forecast.
With this and on Slide 34, our board of Trustees has confirmed an eight 3% increase to our monthly cash distributions 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 in 2022 annual report in the coming weeks, we look forward to sharing a fulsome update on how boardwalk is putting the week into ESG.
This concludes the formal portion of our presentation and we'd now like to open up the phone line for questions. Sylvia. Thank you, Sir ladies and gentlemen, if you would like to ask a question. Please press star followed by one on you touched on the column you will then hear a tweet on prompt acknowledging your request and if you would like to withdraw from the question queue. Please press star.
Followed by two and if you're using a speaker phone we ask that you. Please lift the handset before pressing any of the case once again press star one now if you do have any questions.
And your first question will be from Jonathan <unk> of TD Securities. Please go ahead.
Thanks. Good afternoon first question just on the.
Q4 same property.
Expenses up 8% and I know you talked a little bit about it, but maybe give us a little bit more color on what really drove that.
Yes, hi, Jonathan its lease exit sort of consistent there with my speaking notes.
We as we had anticipated we did see an increase in our utilities costs. When you compare Q4 2022 to Q4 2021 and that was primarily a function of those contracts we spoke to that rolled off.
Electricity contract for new 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 is 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 prime rate those are the two drivers and a little bit property taxes year over year.
Okay. So it.
It sounds like most of that would flow into Q1 as well but.
We will see some of it in Q1 yeah.
And that's been considered in our guidance range.
Okay, and then just on the strong growth in renewals and in Alberta and in January at 8%.
Like should we think about that as basically just eliminating incentives on the renewals or.
Or are you pushing a little bit more than that.
Hey, Jonathan it's James certainly reducing incentives and continues to be the biggest opportunity that we have here today. What we are seeing is continued strong housing fundamentals and we are seeing the market start to.
The increases in market rents as well ourselves included at a sustainable pace.
You know 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 is happening quickly as well as market rent growth.
Okay, and do you think that sort of.
859% total revenue growth Pearl or do you think you can carry that through most of most of the 2023 is that what sort of driving the 10% same property NOI growth.
Yes, it will be the combination of both so Jonathan as we're seeing with our sequential revenue growth I mean, we've printed two plus percent three quarters in a row.
Looking at our leasing spreads were certainly continuing to track that direction and so we're optimistic as Lisa pointed out.
That strong.
S. P NOI growth guidance that we have certainly which feature and require continued strong revenue growth with which we're confident in delivery.
Okay. Thanks, I'll turn it back.
Thank you next question will be from Mike <unk> at BMO capital markets. Please go ahead.
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 that statement and I I'm sure of it long term maybe you can just comment in terms of what you are expecting 2023 versus 2022.
Yeah, Hi, Mike at least 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 opportunity is what's going to lead to that the short term margin expansion specifically to 2023 as we move we will continue to be disciplined on the expense side.
Looking at our platform innovation and how we can optimize our platform and specific to 'twenty to 'twenty three that revenue side is certainly what will lead that margin expansion.
Okay. Thank you that's helpful.
Quick one here just on railroad I'm good leasing momentum do you happen to have off the top of your head the average.
Rent per foot.
Just over $3 Mike.
Okay $3. Thanks, and then just last one for me more of a high level question.
Touching back on your sources of AR.
And cost of capital.
Costs were a lot higher I think you were at 425 or 430 on.
<unk> five year debt and your.
Your stock for nine at an implied cap on a trailing basis. So maybe it would be arguably four seven Ms. Shorn up 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 caution the implied cap rate on your stock.
Go below that how would you guys still be thinking about sources of capital and cost.
Hey, Mike Yeah.
Just just to clarify I think that that would go the other way right with the growth that we have four nine on a trailing basis Oh, yes. Thank you try to.
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 strategy as our minimum distribution policy and the growing cash flow.
We are unique.
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.
So you may see that in the the challenge with.
<unk> are sharing our view on capital sources and uses is that it has to be relative as well and so yes. The cost of CMA Sea financing has increased from this time last year.
But it still remains lower than our 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 will reiterate this though because 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% focus today.
Great.
Thanks, very much I'll turn it back.
Thank you next question will be from Gaurav Masa.
<unk> capital markets. Please go ahead.
Thank you and good afternoon, everyone.
Just hoping the same property NOI growth would you be able to provide your thoughts on telenor, where rates and how you're thinking about that.
What you know when you're comparing a declining corny too.
Tango rabbits, 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 control 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 downs downsides of rent.
Rent regulation in the marketplace, but you'll even even with that we have seen a 20% to 30% decline internal orders over the last several months.
Fortunately for us were.
Focusing 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.
Okay, Great and just.
Very quickly on that.
Are you seeing rental.
Growth across the portfolio is that meaningfully.
Changing our rent to income ratio for dependent or is that mostly within historical norms.
Hey, Gaurav.
Good news, we provide a slide on that and if we just jump over to slide 13, our largest in core markets and this is relative shows rental rates relative to average renters household incomes and you know when you'll find there that are core and largest markets in Alberta continues to be the most affordable in the country.
And so you know 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 from an affordability standpoint, I think there's no better place to be and that's a huge reason why we are seeing the outsized migration, we are to our province.
Gaurav is intact.
Sam Coleus, and we really have to stress our best case example, Alberta, Saskatchewan and policymakers keeping our market free is absolutely gets reason we have the most affordable rents in the country free markets produce zalm most competition.
Most choices for renters and the most affordable rents as a result, we really really have to all remember that as borders that are responsible to a vote in place policymakers that Cree policies that create more affordable housing for all Canadians, it's super important to keep that in mind.
Great. Thank you and just the last question here.
Your line of thinking about capital allocation decisions going forward.
Is there a pecking order between the acquisition pipeline development and the use of the NTIA.
Hey, Gaurav, it's James.
Great question, where we consider capital allocation decisions every single day.
You know, we're 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 will 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.
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 them keep everybody posted with our quarterly results.
Fantastic. Thank you for the color I'll turn it back to the operator.
Thank you next question will be from Jimmy Chen at RBC capital markets. Please go ahead.
So just wondering if you could talk a bit about the investment market.
The pricing cap rate trends are.
I just noticed on your slide 30, you've got Celski as states there at close in Calgary, just looked like the prices come down a decent amount there and just wondering if you could talk in general or maybe specifically by that asset as well.
Hey, Jimmy Yes, Chelsea a stage was a it was a great acquisition, we know we know the purchaser well.
Yeah, that's that transaction was actually negotiated several months ago into summer.
Okay.
The transaction was the asset was tied up before it actually got to the market.
Yeah, Great acquisition, when we look at the Sweet mix for that building are smaller units than what we have in comparable areas and a sweet mix that is more geared towards <unk>.
One's in tubes.
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 had been fewer but there are a substantive transactions that you know if we when we look and compare that relative to already be in discussions with our appraisers.
<unk> presents quite well for us.
Jimmy It's Sam call is it's really important to keep in mind.
Quickly changing annualize 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 were.
And when the net operating income improved significantly keeping cap rates at a high 5% is going to see significantly higher.
<unk> 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 and we're going to see significant NOI improvements in all communities across Alberta.
<unk> has a resulting.
Significant improving our sales that will allow our purchasers to access higher mortgage amounts with significant increases in NOI and so where we're seeing this change very quickly as we speak and we'll be seeing that in sales in the in the upcoming.
The quarters as well.
Right. So are you getting the sense that there's.
People are trying to get ahead of the NOI growth in a year.
You get into sense, if there is a little bit more interest in the market today because of the very reason that you just mentioned.
Sure. There is notable more interest in the market and and community providers are seeing a big improvement in NOI and so there. There's this growing bid ask spread as a result of the <unk>.
Wariness 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 N O wise and evaluations that follows through.
Okay.
And then just to follow up on the on the guidance. So in terms of the revenue growth.
Based on your comment it sounds like.
You would contemplate the removal of incentives, but also a little bit of market rent growth is that is that fair. So I guess the top end of our guidance.
It would imply that you're seeing a bit of market rent growth.
We are absolutely seeing market rent growth Jimmy that has that has started as well okay and that is that is in your guidance.
That's correct okay.
Okay. Thank you.
Thank you Amy.
As a reminder, ladies and gentlemen, if you wish to ask a question. Please press star followed by one on your Touchtone phone.
And your next question will be from Matt Cornick at National Bank Financial. Please go ahead.
Hey, guys.
With regards to Capex 2023 budget I mean, it's a <unk>.
<unk> will 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.
Yeah, Hi, Matt It's Lisa So yeah, you are correct when we when we looked at our 2023 capital budget. There is a a slightly.
Slightly decreased capital.
Seed capital and a little bit for wage where the primary focus will be after the 2023 capital budget is largely looking at projects that were really helped the 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 reposition.
Program, so where that repositioning in common areas can bring us.
Right rates of return higher than even what we're seeing in the market that'll be the focus.
Z driven I would say from sort of an ESG and operating expense savings point of view.
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 and when interest rates were low and.
You have a market.
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 pro forma work on anything real estate wise. These days, but can you give us a sense as to.
How you see supply kind of trending and in Calgary and Edmonton.
Yes, Great question, Matt we are we do publish and share.
Housing female see under construction data, it's in our appendix slide 47 for Edmonton and Calgary, specifically in your eyes Youll see there we are seeing an increase in purpose built rental starts slightly I mean, youre coming off of quite a low base 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 you. It has increased a touch for in terms of under construction. Those deliveries generally speaking you know single family homes can get delivered in 12 months or less but as we know condominiums are purposeful rental often take two to three years to build we cannot build.
That fast enough population.
Population growth that we have and you saw that in most recent quarter are 50000 people in Alberta.
We're quickly seeing any excess inventory get mopped up here and so you know with with the big immigration targets that we have national year, a 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 and our in our core Alberta housing markets and Mad at Sam coal as 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 costs of renewals in 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 so we're we're seeing demand pickup locally as well because of the high interest rates.
In effect on affordability in new supply and construction of both not only homes and condominiums, but new rentals as well.
Price point as well of new development when when they are coming online certainly are a 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 in our community. These brands again, we continue to offer the most affordable and exceptional house.
Four O burdens.
Okay.
Yes.
Sorry, sorry go ahead.
Yeah.
[laughter] your turns that [laughter].
We really want to point out the improvements that we're making on our common areas.
And.
Our our beautiful people that are that are creating beautiful spaces.
We just cant emphasize how much of a huge difference this is making in our market share in the demand for our communities and the feedback we're hearing from our resident members and.
New leads as well.
Really reflect the.
The lead that we are in as a result of the.
The incredible work that that our design and in house vertically integrated construction teams together are creating.
Spaces that are like new at far below a new rental rates and so we're extremely competitive and provide beautiful beautiful communities at super affordable rate. So we.
We are 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.
Our great efforts.
Go ahead, Matt.
I think we impute something like less than a dollar and 50 a square foot for rents for your portfolio in terms of I mean, even though rise stick built type.
Purpose built rental it could you give us a sense like you cant deliver anything that where it would make sense that that rent level I presume in any market across Canada.
No. It just sounds point I mean, the cost of construction on wood frame plus interest costs and carrying costs.
Rents that are much higher than that.
Fair enough.
Okay. Thanks, guys.
Thank you so much Matt.
Thank you next question will be from Dean Wilkinson at CIBC. Please go ahead.
Hi, everyone.
Just looking at your debt maturities.
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 to three years out.
Hey, Deane, it's James could catch on that as Lisa pointed out in her prepared remarks, those were unique those certainly arent going to be the norm for the balance of our maturities two of those mortgages, where conventional mortgages specifically in Banff, where we're actually just going through the process of a technical renewal on our lease.
Land lease that's there.
That is actually a complete and so that gives us the opportunity to go to see may see 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 same HC and so.
We would 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 you know going forward similar to what we do each year number one priority is to create that nice ladder on our mortgage maturity curve and we'll continue to do that for 2020.
Great.
Sam I could not a 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 give them, what you're being able to achieve on our renewals.
That perhaps are.
Some elements of the provincial government start beating the drum on on looking at rent control or is that just a.
No touch kind of situation.
Yes.
Evidence is very clear.
And our policymakers get all the credit for keeping our market spree and having the most affordable housing and rentals in the country as a result, and so its success begetting success and policies that over the last several decades have provided the most.
Portable places to live in Canada, and so everything that we hear.
The truth sets us free.
It gets out and best case examples are really really help.
And getting that information out and keep spreading the truth and that.
That works best that provides the most powerful housing the more we spread the truth the better for all Canadians and that's what we're working tirelessly doing is is.
Putting together data and best cases, and keeping our 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.
For Canadians and so yeah, we we really really can't spread disinformation enough and we've got to continue to.
Put put facts forward and look at the past and see what works and make sure.
Our our voters and we the people are.
Recognize what's what's best and and make sure that we're voting for policymakers and leaders that that that reflect the data and best case. Examples. So that we can continue to move forward, where we're party agnostic and where we're at for policy that works.
And and.
There were political.
We're politically agnostic as well, where we think policies are more important for all of us to focus on versus politics, and and we're focusing in on people and supporting people are.
Not not particular parties that support great policy, so where people and policy focused and that's what we really all have to be as voters to be quite honest.
Focusing on people that promote good policies for all Canadians.
And if they get it.
Thanks I appreciate it.
Thank you so much team.
Next question will be from Mario Sarak at Scotia Bank. Please go ahead.
Hey, good morning.
Just a quick sorry.
Coming back to the guidance I know you've talked about kind of the top line and the expenses, but are you kind of willing enable 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.
Why don't we start with the expenses that's.
So overall I'm area, 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 would probably be between 4% to 5%, so maybe slightly lower than four and slightly lower than five but overall that 4% to 5% would be what that range would consider.
A good news with our Edmonton policymakers announcing a more equitable property tax for multifamily communities recognizing multifamily communities to provide the most affordability for the most vulnerable residents in and had been Tony <unk> and so we.
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.
What what creates more affordable housing and implementing it into property taxation as well and just to expand on that if anybody's missed at a city council in Edmonton.
Has voting 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'll.
That benefit will occur over the next five years and ensure that.
The city remains competitive.
Two are there 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 until leases point.
4% to 5% across all expense items will continue to tighten that as as time goes on and as we work through the year, but Mario I mean that gives you an indication of kind of how we're thinking about revenue is always half to 12, 5% same store NOI guidance and again, you can kind of see it with their with our leasing spreads and current occupancy did you see with that.
New build shapes up too.
Great.
Very good color. Thank you for that and then when we're looking at the eight to 12 and a half.
It seems like you're pretty comfortable with.
The expense side of thing so is it fair to say that those continuation of the leasing spreads that you're seeing now that's the primary wildcard or factor that's driving the 400 basis point gap between the low end and the high end.
Maybe it's a combination of both I mean expenses as we as we all learned in 2022.
More volatility exists and that volatility continues to persist into 2023, and so you know certainly at this early in the year want.
I want to provide.
Room on either side, so that we can certainly meet our expectations, both internally and externally.
Mario It's Sam Coleus, what might be helpful. And is helpful. For everyone is to 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 are.
That's our 25% below we haven't kept up with inflation over the last seven years. So so.
Just seeing 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.
<unk> percentage as a percentage of our 2015, our rents and so on.
Over over a longer perspective rents really it follow consumer price index, and and and so we're really in the 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 have seen since 2015, so yeah, we we have exceptional affordability.
And.
Room for adjustment in really catch up over the next several years.
Okay, and then just one last one maybe going back to your comment on <unk>.
Notable market interest.
Alberta.
Sucks.
Some of your peers have highlighted a pretty strong preference for buying new product new construction as opposed to old.
In terms of your comment are you seeing an equal amount of demand for older product.
<unk> has built and incentives that people are trying to get ahead of.
Or is it largely kind of focus on the new construction.
We're seeing demand from local community providers and end sales and purchases for more local.
Providers simply because our view and perspective.
Local providers.
That's a much bigger insight as to the growth opportunities are here in the west.
Versus other geographic regions right now so.
Demand and.
Talking with Realtors yesterday.
Theres a lot more interest from.
From other buyers as well.
More inbound inquiries.
Well, we'll wait and see as far as the sales and.
Transactions that take place over the next few quarters, we 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 really is hard to find rents below $2000 for a two bedroom in Canada right now.
And so we we as well have replacement costs down.
Delta between our sale prices and replacement costs, we're building walk up in Victoria for $400000, a unit and we're seeing sales at below 200000, a door around 200000, a door that 50% below replacement costs and so.
That gap is more meaningful in the west than it is another regions and so all of those factors will and are resulting in higher expectations, which will result in higher transaction.
Prices are here in the future near future.
But I guess, I guess, one differentiation and Alberta.
The benefit of new construction elsewhere.
Elsewhere. It doesn't include rent control.
You can charge, what you want or what the market will bear on both turnover renewal thats not necessarily the case in Alberta.
So look when you hypothetically, if you're allocating capital.
Two Alberta going forward in terms of external growth, what do you see as a better value.
Today buying existing product or new construction.
We're seeing the biggest opportunity.
What.
We heard earlier, our average rent per square foot as $1.50, we're seeing walk up between $2 50.
And 275, 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.
New construction were better growth is there then Alberta that 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.
Okay.
That's it for me thank you.
Thank you so much Mario.
Thank you and at this time, we have no further questions registered so I will turn the call back over to Sam <unk>.
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 CMA sea, our lenders our unit holders and all of our stakeholders. It really is all about.
Are 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're pleased with our improving results on a foundation of exceptional value service.
And experience we continue to provide our resident members our investors and all our stakeholders 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.
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.
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