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Executives

James Ha - Investor Relations

Sam Kolias - Chief Executive Officer and Chairman

Roberto Geremia - President

William Wong - Chief Financial Officer

William Chidley - Senior Vice President, Corporate Development

Analysts

Heather Kirk - BMO Capital Markets

Michael Smith - Macquarie

Alex Avery - CIBC

Boardwalk Real Estat (OTCPK:BOWFF) Q2 2013 Earnings Call August 15, 2013 11:00 AM ET

Operator

At this time, I would like to welcome everyone to the Boardwalk Real Estate Investment Trust's second quarter results conference call. (Operator Instructions) James Ha, you may begin your conference.

James Ha

Welcome to the Boardwalk REIT 2013 second quarter results conference call. With me here today is Sam Kolias, Chief Executive Officer; Rob Geremia, President; William Wong, Chief Financial Officer; and Bill Chidley, Senior Vice President of Corporate Development. Please note that this call is being broadly disseminated by way of webcast.

If you haven't done so already, please visit www.boardwalkreit.com, where you will find a link to today's presentation as well as PDF files of the Trust's financial statement, management discussion and analysis, as well as supplemental information package.

Staring on Slide 2, I'd like to remind our listeners that certain statements in this call and presentation maybe considered forward-looking statements within the meaning of existing securities laws. Although the Trust believes that the expectations set forth in such statements are based on reasonable assumptions, Boardwalk's future operation and its actual performance may differ materially from those in any forward-looking statements.

Additional information that could cause actual results to differ materially from these statements are detailed in the earnings press release and in other publicly filed documents, including Boardwalk REIT's Annual Report, annual information form and quarterly reports.

Moving on to Slide 3, our topics of discussion for this morning will be; highlights of the Trust's second quarter results; fundamentals of the multi-family market; a review of the Trust's financial and operational performance, including an update on acquisition, disposition and development activity; portfolio highlights; operational review and analysis; financial overview; and lastly, an outlook and quarterly guidance update. At the conclusion of today's formal presentation, we will be opening up the phone lines for questions.

I'd like to now turn the call over to Sam Kolias.

Sam Kolias

Thank you, James, and thank you everyone for joining us this morning. We are pleased to report our solid second quarter for the Trust.

Starting on Slide 4, some financial highlights for the three months and the second quarter of 2013 include rental revenue of $115.1 million, an increase of 5.4% from the same period last year; NOI of $73.2 million, up 4.1% from the same period last year; funds from operations of $42.6 million, an increase of 11.2% from last year; and FFO per unit of $0.81 on a diluted basis, up 11%; and adjusted funds from operation per unit, which includes an estimated $475 per apartment unit maintenance capital per year, up $0.73, up 10.6%.

Some financial highlights for the six months, year-to-date 2013 includes total rental revenue of $228.3 million, an increase of 5.1% from the same period last year; NOI of $142.9 million, up 4.4% from the same period last year; funds from operations of $81.8 million, an increase of 12.7% from last year; FFO per unit of $1.56 on a diluted basis, up 12.2%; and adjusted funds from operation per unit, which includes an estimated $475 per apartment unit maintenance capital per year, up $1.40, up 12.9%.

Some portfolio highlights on Slide 5 includes overall occupancy for the second quarter of 2013 was up 42 basis points to 98.6% from 98.18% in the same period last year. Monthly average occupied rent realized period ending for the second quarter, which includes ancillary income, was $1,102 per apartment unit, up $47 from the $1,055 per apartment unit for same period last year.

Our same property performance for the second quarter, rental revenues increased by 5.4% in three months for the second quarter and 5.1% in six months. Overall, operating cost increased by 7.8% in three months for the second quarter and 6.5% in six months. Total NOI increased by 4.1% in three months for the second quarter and 4.2% in the six months.

As Slide 6 illustrates, our rental revenues are cyclical in nature. In the second quarter of 2013, all of our large markets have entered into a period of higher occupancy coupled with increased rents and lower incentives. Higher occupancy has allowed us to increase rents in our core markets on a broad basis during the second quarter.

Moving on to Slide 7, despite Saskatchewan being at the top of the rental revenue cycle in the previous slides, there still remains a significant gap between the economic rents acquired for new rental construction and condominium homeownership. This is similar to our rental markets in Calgary and Edmonton. Please note the quality of condos is typically higher and it should be kept in mind when reviewing this chart.

Slides 8 and 9 detail our revenue strategy and highlights the Trust's strategic balance of supply and demand. Regardless of where the Trust markets are during the aforementioned revenue cycles, Boardwalk believes that continued focus on high occupancy and our constant focus on customer service and quality is the key to providing the most stable long-term sustainable revenues. Boardwalk's customer friendly self-imposed rent control and the elimination of rental increases for customers that can prove financial hardship continue to drive high occupancy, build goodwill and stronger community.

Slide 10, shows our focus on quality and services being rewarded by higher occupancy and lower turnover. Lower turnovers help to reduce turnover expenses and improve their NOI. Slide 11, shows our average customers days increasing, reflecting more of our customers who are calling Boardwalk home. Truly feel like home, where else would you want to.

Slide 12, highlights the increase in both the Trust's occupied and market rents relative to our last fiscal quarter three months ago. During the last month in last quarter, the Trust's average occupied rents has increased by $14 per apartment unit since the last quarter and by $47 per apartment units since last year. This trend remains positive. Trends of the spread between mark-to-market rents were down slightly, as a result of the realization of market rents into occupied rents.

As shown on Slide 13, the Trust continues to have a favorable mark-to-market with the average loss-to-lease totaling $29 per apartment unit per month, down by $1 from the previous quarter as market rents continue to be realized into occupied rents.

An illustration of the effect of a $25 increase to rents on FFO is shown on Slide 14. Assuming that occupancy levels and operating costs remain the same, a $25 increase to rents would increase the Trust's FFO by approximately $0.20 per unit.

The chart on Slide 15, demonstrates occupancy versus availability. Our occupancy for the second quarter was up year-over-year. Availability has decreased year-over-year and quarter-over-quarter. Availability below zero reflects rental that will be occupied in future months. We believe that occupancy of 97% or higher reflects Boardwalk rental price.

Slide 16, reflects demand, i.e., rentals as compared to supply or also known as move-outs, and ties into our occupancy. In the second quarter move-outs have increased with rentals, while maintaining a stable occupancy for the quarter and a slight seasonal drop to the month of July in some vacancy in Edmonton, as a result of the Oak Tower fire.

Slide 17 illustrates vacancy loss and incentives. Incentives continue to decrease relative to last quarter and are lower when compared to the same three month period last year. Both incentive and vacancy loss continue to trend downward and is a positive sign that continue traction to be seen on rental.

Slide 18 show the results of the Trust customer move-outs. At the end of the second quarter, turnover was down by 7.7%. Move-outs to purchase new homes were down 2.6%. New housing is a significant alternative and our continued focus on building goodwill, quality and service are all essential.

Skips have dropped by 13.3%, reflecting an improvement in screening and market-wide lower vacancy. Transfer to another Boardwalk apartment remains one of the largest reasons to move-outs, which indicate that we are succeeding in retaining our customers. Rent too expensive has decreased by 10.8%.

Slide 19 and 20, show moderating economy going forward for Alberta and Saskatchewan. Multi-family starts are decreasing for Alberta and Saskatchewan for 2013, with single-family detached starts decreasing in 2013 in Saskatchewan.

Slide 21 illustrates the most recent unemployment statistics in Alberta and Saskatchewan, both provinces unemployment rate continues to be low.

Slide 22 illustrates the average weekly earnings as of Q2. Alberta workers continue to earn the highest wages in the country with average weekly earnings increasing year-over-year. All other provinces also saw a positive wage growth for the same period.

Slides 23 and 24, show the most recent migration numbers for Alberta and Saskatchewan. Alberta's growth rate was surprisingly high in the last quarter, with fewer housing starts to meet this healthy migration market, vacancy continues to be low. Saskatchewan's international migration continues to be the biggest source of migration and more in line with last year's numbers.

Slide 25 shows the breakdown of major project investment in Alberta, which total $201.2 billion as of June 2013. We continue to monitor the long-term capital to be invested in Alberta as a leading indicator to future demand for housing.

Slide 26, land sale revenue for the province of Alberta relating to petroleum and natural gas has slowed versus last year's record pace. Capital expenditure program, as a result of lower Western Canadian select pricing is mixed, with some larger producers increasing capital expenditures during the year. Crude prices have since increased a positive for the Alberta economy.

As depicted by Slide 27 and 28, the Alberta housing market has stabilized with single-family home prices in Edmonton and Calgary flat-to-up slightly. As depicted by Slide 29, the average residential sale price in both Regina and Saskatoon are down slightly. Saskatoon remains one of the few markets with year-over-year home price growth.

Slide 30 illustrates implied cap rates in relation to our unit price. Year-over-year, the public REIT market appreciation has narrowed the gap between the implied cap rate represented by our current unit price and the cap rate that quality assets are selling out in the private market. Stock markets continue to be volatile as we have seen, more particularly in the last few months.

The slide includes the IFRS fair value rental revenue and expenses used to calculate implied cap rates on a per share basis and compared to Trust valuation, nets up $2.70 of cash per unit. We are pleased to see the legislation amending the SIP rules has now passed and is now law that clarify the treatment of revenue from them.

We're reviewing potential sale of non-core assets to fund our Normal Course Issuer Bid and other potential value-add opportunities as per our previous and current press releases. Our current public market valuation continues to represent exceptional value when considered against current replacement costs, other consumer housing options like condominium ownership and current valuation from private market transactions.

I would now like to pass the call on to Bill Chidley, who will provide more details on our newest project.

William Chidley

Thank you, Sam. Relatively the low interest rates, availability of financing combined with the strong institutional private investor interest in apartments continues to keep cap rates low. As mentioned, given the recent decline in our Trust unit price, we are exploring the possibility of selling non-core assets and using the net proceeds to purchase our Trust units.

Moving on to Slide 32. This slide shows the rendering of Spruce Ridge Gardens, a 109 units, four storey, elevator, woodframe Calgary project with concrete underground parking. The other three photos, shows the current construction activity on this site.

Moving on to Slide 33. At Spruce Ridge Gardens, we executed a fixed price construction contract and commenced construction in July 2012. Framing and roof are complete with the windows and doors in place. Siding and masonry along with site work such as paving and grading are underway. On the interior, work is in progress on suites elevators and the mechanical and electrical systems.

We continue to anticipate completion of the project by the fall of this year.

The project continues on budget and is expected to cost $175,000 per door, which equates to $184 per square foot buildable and $221 per square foot rentable. Land value is approximately $39,000 per door. We have rental subsidy grant from the provincial government for $7.5 million. In return to the grant, they require to keep the rents at 10% below CMHC average rents for 20 years on 54 of the units. We are estimating the stabilized cap rate including the price value of the land to be approximately 6.1%.

Moving on to Slide 34. This slide highlights our other development opportunities. In Regina, at Pines of Normanview, we have completed the conceptual design for woodframe five building project totaling 371 units. We submitted a discretionary use application and are in discussions with city planners. We hope to be before Planning Commission and City Council this fall. Earliest construction start would be the spring of 2014.

In Calgary, we have retained an architect to explore design alternatives and rezone our sites at Sarcee Trail Place. Rezoning application will be submitted shortly.

In Edmonton, we have retained an architect to explore design alternatives on our Viking Arms site. A draft rezoning application was submitted to the city to initiate discussions. We currently have two major sites in Calgary and one in Regina that we consider strong candidate for master planning. These sites could achieve much higher density, but would require substantial demolition.

I would now like to turn the call over to William Wong.

William Wong

Thank you, Bill. Slide 35 shows a detailed computation of FFO for the three and six months ended June 30, 2013, versus the same the last year. And as calculated from profit as shown on our consolidated statement of comprehensive income prepared in accordance with IFRS.

Reported funds from operations or FFO, our performance measure is not defined by IFRS, but by better reports the overall operational performance of real estate entities for the current quarter was up $42.6, up 11.2% from the amount reported in the same period last year and on a per unit basis increased by 11% from $0.73 to $0.81. The increase was primarily driven by organic rental revenue growth and lower financing costs.

For the six months ended FFO of $81.8 million and FFO per unit on a diluted basis was $1.56, up 15% and 12% respectively from the same period last year.

As in previous reported periods, management has adjusted the calculation of FFO with the fair value adjustment on investment properties, the LP B units and a deferred unit-based compensation as well as the distributions that was made on LP B units.

The next slide, Slide 36 shows our reconciliation on a per units bases of FFO for the three and six months ended June 30, 2013, from the FFO amounts reported in Q2 2012. As the slide shows, NOI growth from our stabilized properties and the decrease in financing costs contributed $0.06 and $0.04 to FFO growth for the current quarter and for the same period in the prior year, and $0.11 and $0.08 for the first half of 2013 compared to 2012.

Slide 37 shows an overall review of rental operation performance for the current quarter and first half of the year as shown in our income statement. Revenue including ancillary rental income for the current quarter was higher by approximately $6 million or 5.4% compared to the same period in the prior year, primarily due to higher average rental rates and lower incentives while maintaining higher occupancy levels. For the first six months of 2013 revenue was higher by approximately $11 million or 5.1% compared to 2012.

Total rental expenses for the current quarter increased by approximately $3 million or 7.7% and $39 million to $42 million, primarily due to higher utilities and property taxes and higher on-site salaries and wages, and for the first half of the year increased approximately $5 million or 6.2% compared with the same period of 2012. Utilities were higher due to higher natural gas prices and water and sewer cost. Property taxes were higher due to higher property tax assessments across all regions.

The net result is that overall net operating income or NOI for the current quarter increased by approximately $2.9 million or 4.1% compared to the same quarter in 2012. NOI for the six months ended June 30, 2013, was approximately $6.1 million or 4.4% higher than the same period in the prior year. Operating margin at 64% for the current quarter and 53% for the first half of the year remained unchanged in the same period in the prior year.

Slide 38 shows a breakdown of capital. We reinvest back into our investment property portfolio. This capital investment is categorized between repairs and maintenance, on-site maintenance personnel cost, maintenance capital, stabilizing and value enhancing capital investments and property plant and equipment purchases or PP&E.

Repairs and maintenance and on-site maintenance personnel costs are expensed when incurred that they are regular and ordinary expenditures necessary to maintain the operating condition of a property in the short-term.

Maintenance capital investment is capitalized and relate to maintaining the existing earnings capacity of our property portfolio. Stabilizing and value enhancing capital and PP&E expenditures, which are more discretionary in nature are capitalized and focuses on increasing the productivity and/or earning capacity of our properties.

For the current quarter of 2013, Boardwalk invested and expensed an average of $413 per suite with R&M and on-site personnel costs and capitalized approximately $502 per suite on stabilized investment property improvements. In addition, Boardwalk expanded approximately $1.5 million or $41 per suite on a PP&E.

Slide 39 shows the breakdown of our project capital improvements and capitalized asset additions for the first six months of 2013. For the six months ended June 30, 2013, the Trust reinvested back into its portfolio, a total of $40 million compared to approximately $30.1 million for stabilized investment properties, $6 million for development and $3.9 million in PP&E compared to a total of $34.8 million for the same period in 2012.

Including new amount to reflect Boardwalk's internal capital improvement program is approximately $9 million of allocated on-site wages and salaries and certain parts and supplies compared to $9.7 million for the first half of 2012.

Slide 40 shows, total overall admin costs, which includes operating and corporate G&A, for the current quarter were $13.7 million, an increase of $200,000 or approximately 1% and 1.5% compared to $2.5 million for the same period last year. The increase was due primarily to higher wages and salaries for our property management personnel.

For the first half of 2013, total admin costs were approximately $27 million compared to $26 million for the same period in the prior year, an increase of approximately 4%.

I would now like to turn the presentation over Rob Geremia.

Roberto Geremia

Thanks, William. Slide 41 and 42 focus on our stabilized portfolio. At June 30, 2013, Boardwalk's entire apartment portfolio of 35,277 units where classified as stabilized. For the second quarter, revenue on these properties increased by 5.4% as compared to the same period last year with operating cost increasing by 7.8% resulting in an NOI increase of 4.1%.

Reported operating cost increases in Alberta were mainly the result of increases in reported natural gas prices that in the comparable period were considerably lower. In Quebec, reported cost increases were mainly the result of the timing of selective operating expenses as compared to the prior year. We expect this to normalize itself as the year progresses. On a six month basis, the revenue increased by 5.1%, resulting in an NOI increase of 4.3%.

Slide 42 shows the sequential revenue of our stabilized properties over the last four quarters, second quarter show a substantial increase over the prior previous periods.

Slide 43 shows the Trust strong liquid, with a $141 million in cash, additional $20 million in committed secured financing scheduled to close in the third quarter and undrawn secured borrowing facility, Trust's total liquidity is an excess of $356 million, which represents 15% of total debt outstanding at the end of the quarter. Boardwalk's debt as a percentage of reported investment property asset value was 39% after adjustments to cap.

Slide 44 reports the Trust's debt maturity scheduled at June 30, 2013. Even though, over the past number of weeks we have seen the underlying Government of Canada Bonds increased, with the weighted average in place rate of 3.48% that continues to be substantial positive interest mark-to-market on our debt portfolio. Current CMHC five and ten year term rates are estimated to be 2.6% and 3.3% respectively.

Slide 45 provides an estimate of current mortgage underwriting valuations. Boardwalk's balance sheet continues to be considerably leveraged at 44% after deducting our cash on hand.

Slides 46 and 47 provide additional detail on Boardwalk's mortgage portfolio. Of special note, is over 3,000 units currently have no outstanding mortgage encumbrances.

In addition to the Trust's interest coverage on a four quarter rolling basis is increased to just under 3 times, the highest in our reported history. Boardwalk's secured mortgage portfolio is over 99% insured under the current NHA insurance program. With this insurance, it has two unique and distinct benefits and a system addressing the two distinct financing risks, these being interest rate and renewal risks.

With respect to interest rate risks, the NHA insurance provides us the benefit of very advantageous interest rates. With this insurance we are able to obtain very competitive interest rates, which are currently are approximately 85 basis points to 100 basis points over the corresponding Government of Canada benchmark bond.

Renewal risk is substantially reduced with this insurance and that once obtained it is good for the entire amortization of the mortgage, which in most cases is between 30 to 40 years. The insurance is transferable to other approved lenders on term maturity.

Slide 48 provides additional details on Boardwalk's 2013 mortgage maturities. Although, the year is far from over, we have virtually completed our financing program for fiscal 2013. To date, we have either completed or committed almost $219 million of maturing mortgages, while adding an additional $30 million in our financing.

We have extended the term maturity on these loans to over eight years and replaced the maturing weighted average to straight up 4.45% with the significantly lower rate of 2.79%. The estimated annualized savings of these renewals is approximately $5 million.

Slide 49 focuses on Boardwalk's investment property fair value calculations. As these graphs shows, since Q2 2012, the Trust stabilized portfolio of fair value has increased. At the end of Q2 2013, the Trust's investment assets have reported fair market value of $5.6 billion.

The reported increase in the last few quarters was mainly the result of increases in estimated NOI as we have not seen much change in from our capitalization rates as it's noted on Slide 50.

Slide 51, how is the capitalization rate used in the determination of fair value of these noted investment properties. Overall, the weighted average capitalization rate used in determination of the fair value was 5.47% at June 30, 2013, the same rate reported at the end of the Q1 2013.

Slide 52 details the two key variables in the determination of these estimates, net operating income and capitalization rates. As is noted, a slight shift either negatively or positively in these estimates could materially affect the reported amount.

Moving on Slide 53, Boardwalk's 2013 financial forecast. As it's customary on a quarterly basis the Trust would use the financial guidance provided. Review includes the comparison of actual results those participated, as well as the review of the key variables used to determine these forecast. Based on this review, the Trust has determined an adjustment to reported 2013 guidance as warranted.

Our revised guidance for fiscal 2013 for FFO is $3.05 to $3.20 and for AFFO is $2.73 to $2.88. The noted change is mainly driven by strong and anticipated stabilized building performance and as such we've adjusted our forecast to stabilize building NOI growth for 2013 to 2% to 5% as compared to the original 1% to 4%.

Slide 54 provides additional details on Boardwalk expected 2013 capital expenditures. We anticipate to invest approximately $91 million in our existing assets and with an additional $21 million earmarked for development projects.

Moving on to Slide 55, Boardwalk's distributions. As it's customary at each board meeting, the trustees review Trust's units and holders' distributions. At this meeting, the trustees have decided to maintain the existing distribution level of $1.98 on an annualized basis or $0.165 on a monthly basis.

It should be highlighted that since our reported results on June 30, 2012, the Trust has increased its distributions at total of 6.4% on an annualized basis. This compares to our FFO growth of 12.7% over the same period, once again, highlighting our willingness to continue to share our growth with our unitholders. The amount reported on this slide, are the distributions for the upcoming three periods.

This concludes our formal part of our presentation. We'd like to open up the lines now for questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your next question comes from Heather Kirk with BMO Capital Markets.

Heather Kirk - BMO Capital Markets

You've certainly pushed the occupancy levels to very high levels. And you state that 97 is the stabilized level. I just would like to get your thoughts on how you view sort of generating the same revenue, maybe at higher vacancy and how that trade-off? Would there be potential to drive the revenues higher by pushing rents a little bit more at lower occupancy and what, or whether you're really focused on full occupancy?

Roberto Geremia

What we've found over the years, and I guess, the general comment to your question overall is, yes, maybe we could push rents more as we don't have more vacancy. We don't believe that will result in better overall revenue management. But even more importantly is the fact that we focus on NOI. And that's the key. What we're finding turnover is very costly and the spread that we're getting now between in-place market rents on turnover and in-place market rents on renewal is not that great.

So to have a customer leave and have a new person come in actually costs quite a bit of money to turn that suite over again. We've again, shifted our focus and that most of revenue programs out there are exactly that revenue programs. Our focus isn't just revenue, its NOI and total return on that investment asset. And we've done that shift over the last couple of years, and it does appear to be working very well.

Heather Kirk - BMO Capital Markets

So what was the spread be just in general in terms of that differential between the in-place versus the turnover?

Roberto Geremia

Well, right now, on turnover we're getting about 3% and 3.5% on a new lease, and we're probably getting about 2% on the renewal. So the only one point or maybe 2% difference in rent on a basis of $1,000, where a turnover probably costs, it takes $2,000, actually to renovate this suite turned over again. So until that spread is significantly wider, you're better to keep to your customers as long as possible and keep the vacancy numbers as low as possible.

Heather Kirk - BMO Capital Markets

In terms of the asset there, can you just provide us an update whether you put stuff on the market, what kind of a cap rate you'd be expecting in the quantum that maybe you'll be looking or whether you have identified a quantum for the next 12 months in terms of what you'd like to sell?

William Wong

We really haven't identified that quantum just yet. We're in the process of determining which non-core asset should be sold. The only asset currently being marketed is 102 units property in Edmonton. We had expected in the next, little while, next few weeks or certainly the next couple of months, we will have more assets on the markets. But at this point we haven't specifically finalized the determination which non-core assets we're thinking of selling.

And we're not at this point or really wouldn't want to speculate on what the actual cap rate will be on the assets that we expected to sell. I mean, important to understand this is not a fire sale and we're only going to sell out which we feel we have a better use for the proceeds, and so that's where we are in the process now of finalizing that list of assets.

Heather Kirk - BMO Capital Markets

Talk a little bit about the NCIB as the use of proceeds and whether at these levels you would buy back irrespective of whether you sell any assets and use your liquidity. I think last quarter you indicated that it was really more tied to asset sales.

Roberto Geremia

You are correct. When we did the press release with the NCIB, the focus of the press release was on the fact that we thought it was an opportunity in the market to sell some quality assets and buy some shares back. Yes, so these places we still do believe that art is there. However, we are not comfortable to lever our balance sheet upon debt in short-term to buy the stock back just to close these deals in a few months. So our focus will be lets get the cash in hand and let's see what the real market cap rate is for these assets. And if it is accretive on that basis, we will be using a significant portion of those net proceeds to help assist in that program.

Heather Kirk - BMO Capital Markets

We will not be buying back stock in these levels?

William Chidley

Yes. We would, once we have the cash in the bank from the equity sales, but we do not feel comfortable even that $56 levering up the balance sheet to buy stock back.

Operator

Your next question comes from Michael Smith with Macquarie

Michael Smith - Macquarie

I want to ask question about your developments. For Viking Arms, I see in your presentation you submitted a draft application to rezone the site. I'm just wondering, how many units does that rezoning application contain?

William Chidley

Well, actually, the rezoning application would be for a macro. I think it's just over 312 units that the application would, if accepted as submitted, would allow 312 additional units. We have not yet actually finalized a design. We're simply looking for an increase in the zoning capacity on the site. It would be up to 312 additions.

Michael Smith - Macquarie

And you haven't finalized the design?

William Chidley

No we haven't. So much of that depends on the economics. Whether it would be woodframe, whether it would be concrete, and what the rents at the time is. It's hard to say just what the optimal it might be that we would develop fewer units at this point, but for a higher return. But right now we'd like to have the ability depending if all the different draws a line in terms of market rents and construction cost to build up to this 312.

Michael Smith - Macquarie

And if I look from aerial of that property, you've got a vacant piece of land and you've also got some, looks like some tennis courts. Where would the density go? Would it go on both or just the one?

William Chidley

On Viking, we don't have tennis courts. You might be thinking of Sarcee.

Michael Smith - Macquarie

So it's hard to tell from the aerial.

William Chidley

That's the parkade, I think, you're looking at. It would be on vacant land. There'd be no demolition contemplated in Viking or in Sarcee for that part.

Michael Smith - Macquarie

So you would just go on that vacant piece.

William Chidley

Yes. There are actually two spots are largest part of the parkade.

Michael Smith - Macquarie

And for Sarcee, I know you have approval for something like a 100, but you're looking to increase that to I think it's somewhere around 300 or slightly less?

William Chidley

Right now, we haven't submitted the application, but we think it will be for 200 additional. Once again, permissive, we might build less, but depending on the economics and final design. But it's for 200 additional units.

Michael Smith - Macquarie

200 additionally?

William Wong

Yes. That's right, once again, no demolition. And in that case, it would be where the tennis courts are in part.

Michael Smith - Macquarie

And the city as I understand it wants you to build more density, the issue is really just traffic and the neighbors, is that correct?

William Wong

Well, I think it's fair to say that the city planning is encouraging, more rental density, as a general rule. But there's always the issue of community issues and traffic is in every case, a legitimate concern. But we do have a traffic impact study, for example, for Sarcee that certainly says that 200 units would not cause a traffic problem.

Michael Smith - Macquarie

And just switching gears, the timing the Quebec expenses came were higher than normal and I think in your comments you said that they were sort of seasonal in nature and they should normalize. I wonder if you could just expand on that.

Roberto Geremia

My comment on that one was that Alberta, the big increase in cost in Alberta was natural gas prices. They went from about $1.75, $1.76 last year, which is extremely cheap gas in the last five or ten years, to over $3 now. Now $3 is not really actually that higher of a number, but it's almost doubling from what it was last year. So we did see that on piece. And my comments on Quebec was most of that increase was the result of timing.

So for example, last year we normally would do a regular boiler meeting and inspections. Those were done in Q2. Last year they were done in Q3. So that was my comment. If we normalize and in average if you look for the full year, we should see that increase go back to normalize itself as we go through.

Michael Smith - Macquarie

So you might see Quebec as a positive same property NOI growth?

Roberto Geremia

That's quiet possible going into the third and fourth quarter because this particularly drove the expense, change year-over-year this quarter it was specifically that. There was no real massive increase in any other category.

Michael Smith - Macquarie

And then just finally, can you comment on the changes going on CMHC, do you anticipate any changes at all?

William Wong

We at CMHC and our banks, no, we're not expecting for the apartment rental industry to see any changes. So no, not as far as we have asked or are aware. So the answer is no.

Operator

You next question comes from Alex Avery with CIBC.

Alex Avery - CIBC

Actually, all of my questions have been answered.

William Wong

That's our mission.

Operator

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

James Ha

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

Operator

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

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