Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

James Ha – IR

Sam Kolias – CEO & Chairman

Roberto Geremia – President

William Wong – CFO

William Chidley – SVP, Corporate Development

Analysts

Jonathan Kelcher – TD Securities

Mario Saric – Scotia Capital

Michael Smith – Macquarie Research Equities

Frederic Blondeau - Dundee Capital Markets

Jimmy Shan – GMP Securities

Neil Downey – RBC Capital Markets

Alex Avery – CIBC World Markets

Boardwalk Real Estate Investment Trust (OTCPK:BOWFF) Q3 2013 Earnings Conference Call November 15, 2013 11:00 AM ET

Operator

Good morning, my name is Sharon and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Boardwalk Real Estate Investment Trust Third Quarter Results Conference Call. (Operator Instructions)

Thank you. Mr. James Ha, Director of Finance, you may begin your conference.

James Ha

Thank you, Sharon and welcome to the Boardwalk REIT 2013 third 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 third quarter results; fundamentals of the multi-family market; a review of the Trust's financial and operational performance including an update on development activity; portfolio highlights; operational review and analysis; financial overview; and lastly, an outlook and our 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 on a solid third quarter for the Trust.

Starting on slide 4, some financial highlights for the three months and the third quarter of 2013 include total rental revenue of $116.1 million, an increase of 5% from the same period last year; NOI of $74.7 million, up 6.4% from the same period last year; funds from operations of $45 million, an increase of 14.1% from last year; FFO per unit of $0.86 on a diluted basis, up 14.7%; and adjusted funds from operation per unit, which includes an estimated $475 per apartment unit maintenance capital per year, up $0.78, up 14.7%.

Some financial highlights for the three months, year-to-date 2013 includes total rental revenue of $344.4 million, an increase of 5% from the same period last year; NOI of $217.6 million, up 5.1% from the same period last year; funds from operations of $126.7 million, an increase of 13.2% from last year; FFO per unit of $2.42 on a diluted basis, up 13.1%; and adjusted funds from operation per unit, which includes an estimated $475 per apartment unit maintenance capital per year, up $2.18, up 14.1%.

Some portfolio highlights on Slide 5 include overall occupancy for the third quarter of 2013 was up 25 basis points to 98.35% from 98.1% in the same period last year, but down slightly from the last quarter. Monthly average occupied rent realized period ending for the third quarter, which includes ancillary income was $1,115 per apartment unit, up $48 from the $1,067 per apartment unit in the same period last year and up slightly from last quarter.

Our same property performance for the third quarter, rental revenues increased by 4.9% in the three months of the third quarter and 5% in the nine months. Overall, operating cost increased by 1.6% in the three months of the third quarter and 4.9% in the nine months. Total NOI increased by 6.7% in the three months of the third quarter and 5.1% in the nine months.

As Slide 6 illustrates, our rental revenues were cyclical in nature. In the third quarter of 2013, Calgary and Edmonton continue to be in a period of higher occupancy coupled with increased rents and lower incentives. Saskatchewan has moved to reflect supply of newly constructed rental apartment resulting in slightly lower occupancy levels and some incentives being introduced to optimize occupancy level. Higher occupancy has allowed us to increase rents in our Calgary and Edmonton core markets on a broad basis during the third quarter.

Moving on to slide 7, there still remains a significant gap between economic rent required for new rental construction and condominium home ownership Alberta and Saskatchewan. Please note the quality of condos is typically higher and it should be kept in mind when reviewing this chart.

Slides 8, 9 and 10 detail our net operating income optimization strategy and revenue strategy and highlights the Trust's strategic balance between customer service, occupancy levels, market rents and operating costs, with customer service and occupancy being the primary focus. Regardless of where the Trust’s markets are during the aforementioned revenue cycles Boardwalk believes that continued focus on high occupancy, increased retention and our constant focus on customer service and quality is the key to providing the most stable long-term sustainable revenues and net operating income. Increased retention and lower turnover reduces costs and increases net operating income.

Boardwalk's customer friendly self-imposed rent control and the elimination of rental increases for customers that can prove financial hardship continue to drive higher occupancy, build goodwill and stronger community.

Slide 11, shows our focus on quality and service is being rewarded by higher occupancy and lower turnover. Slide 12, shows our average customer stay is increasing, reflecting more of our customers who are calling Boardwalk home. Truly feel like home, where else would you want to live.

Slide 13, 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 of the last quarter, the Trust's average occupied rents have increased by $13 per apartment unit since the last quarter and by $48 per apartment units since last year. This trend remains positive. Trend is spread between occupied and market rent is up slightly this quarter from last quarter.

As shown on Slide 14, the Trust continues to have a favorable mark-to-market with the average loss-to-lease totaling $33 per apartment unit per month, up by $4 from the previous quarter. An illustration of the effect of a $25 increase or decrease to rents on FFO is shown on Slide 15. Assuming that occupancy levels and operating costs remain the same, a $25 adjustment to rents will increase or decrease the Trust's FFO by approximately $0.20 per unit. The effect of an increase in expenses is also illustrated on this slide. Each 1% increase in expenses decreases the FFO per unit by approximately $0.03 using 2012 annualized expense.

The chart on slide 16, demonstrates occupancy versus availability. Our occupancy for the third quarter was up year-over-year. Availability has decreased year-over-year and increased slightly quarter-over-quarter. Availability below zero reflects rentals that will be occupied in future months. We believe that occupancy of 97% or higher reflects Boardwalk rental price.

Slide 17, reflects demand, i.e., rentals as compared to supply or also known as move-outs, and ties into our occupancy. In the third quarter move-outs have decreased along with rentals, while maintaining a stable occupancy for the quarter.

Slide 18 illustrates vacancy loss and incentives. Incentives decreased slightly relative to last quarter and are lower when compared to the same three month period last year. Vacancy loss increased slightly.

Slide 19 shows the results of the Trust customer move-outs surveys. At the end of the third quarter, turnover was down by 6.5%. Move-outs to purchase new homes are up 1.2%. New housing is a significant alternative and our continued focus on building goodwill, quality and service are all essential.

Skips have dropped by 27.8%, 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 5.4%.

Slide 20 and 21, show moderating economy going forward for Alberta and Saskatchewan. Multi-family starts are decreasing for Alberta and Saskatchewan for 2013, with single detached starts decreasing in 2013 in Saskatchewan.

Slide 22 illustrates the most recent unemployment statistics in Alberta and Saskatchewan, both provinces unemployment rate continues to be low.

Slide 23 illustrates the average weekly earnings as of the third quarter. 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 24 and 25, 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 26 shows the breakdown of major project investment in Alberta, which totals $195.8 billion as of October 2013. We continue to maintain the long-term capital being invested in Alberta as a leading indicator to future demand for housing.

As show by slide 27, 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 recently dipped for some producers announced in May.

As depicted by slide 28 and 29, the Alberta housing market has stabilized with single-family home prices in Edmonton and Calgary flat-to-down slightly.

As depicted by Slide 30, the average residential sale price in both Regina and Saskatoon are down slightly and flat. Saskatchewan remains one of the few markets with year-over-year home price growth.

Slide 31 illustrates implied cap rates in relation to our unit price. Over a two year period, 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 on the private market. Stock markets continue to be volatile.

The slide includes the IFRS fair value rental revenue and expenses used to calculate implied cap rates on a per unit basis and compares the Trust valuation, nets up $2.74 of cash per unit. We are pleased to see the legislation amending the SIP rules passed earlier this year and is now law that clarify the treatment of revenue from sale.

We are reviewing and marketing the potential sale of non-core assets which may fund our normal core this year a bit another value add opportunity. Our current public market evaluation continues to represent exceptional value when considered against the current replacement cost of the consumer housing offerings like condominium ownership and current evaluations of private market transaction.

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

William Chidley

Thank you, Sam. Despite of the recent increase in interest rates, cap rates remain of low level. Given the recent decline in our Trust unit price, we are exploring the possibility of selling non-core assets and using the net proceeds for various value-add opportunities. In August we lifted our three British Columbia properties totaling 632 units, we received multiple bids and are currently in the process of finalizing a conditional purchase and sale agreement for this portfolio. We should be able to update the market with further details at the year-end conference call in February.

The next slide shows a rendering of Spruce Ridge Gardens of 109 units, four story elevated woodframe Calgary project with concrete underground parking. The other three photos show the buildings in its current state of completion.

Moving on to slide 34, at Spruce Ridge Gardens, we executed a fixed price construction contract commenced construction in July 2012. Subject to minor deficiency, the project is complete and an occupancy permit has been issued by the city. We expect to receive the development completion permit within a week or two. Marketing of the project has commenced with initial occupancy expected in December.

The project is on budget with estimated final cost to be $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 a rental subsidy grant from the provincial government for approximately $7.5 million.

In return for the grant, we are required to keep grants at 10% below CMHC average rents for 20 years on 54 of the units. We have estimated the stabilized cap rate including a price value of the land at 6.1%.

Moving on to slide 35, this slide highlights our other development opportunities. In Regina at Pines of Normanview, we received approval from the Regina City Council on November 6, to build five woodframe buildings totaling 364 units. Earliest construction start of the 79 units first phase would be spring of 2014, subject to economics at that time. In Calgary, a traffic impact assessment was completed and the resulting application was submitted to permit up to 200 additional units of Sarcee Trail Place. In Edmonton, a traffic impact assessment was also completed for our Viking Arms site, which supports our rezoning application to build up to 312 additional units.

We currently have two major sites in Calgary and one in Regina that we consider strong candidates for master planning. These sites could substantially higher density but would require substantial demolition.

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

William Wong

Thank you, Bill. Slide 36 shows the computation of FFO for the three and nine months ended September 30, 2013, versus the same period last year. And as calculated from profits as shown on our consolidated statement of comprehensive income prepared in accordance with IFRS.

Reported funds from operations or FFO, our performance measures not defined by IFRS, but that better reports the overall operational performance of real estate entity for the current quarter was $45 million, up 14.1% from the amount reported in the same period last year and on a per unit basis increased by 14.7% from $0.75 to $0.86. The increase was primarily driven by organic rental revenue growth and lower financing costs. For the nine months ended, FFO was $126.7 million and FFO per unit on a diluted basis was $2.46, in both cases up approximately 13% from the same period last year.

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

The next slide, Slide 37 shows a reconciliation on a per unit basis of FFO for the three and nine months ended September 30, 2013, and the FFO amounts reported in Q3 of 2012. As the slide shows, NOI growth from our stabilized properties and a decrease in financing cost contributed $0.09 and $0.04 to FFO growth for the current quarter compared to the same period in the prior year, and $0.21 and $0.12 respectively for the nine months of 2013 compared to the prior year. For that three and nine months of occurring year, FFO was negatively impacted by higher administration cost of $0.02 and $0.05 respectively due mainly to higher wages and salaries for our property management personnel.

Slide 38 shows an overall review of rental operation performance for the current quarter and first nine months of the year as shown in our income statement. Revenue including ancillary rental income like condominium for the current quarter was higher by approximately $5.5 million or 5% 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 nine months of 2013 revenue was high by approximately $16.5 million or 5% compared to 2012.

Total rental expenses for the current quarter increased by approximately $1 million or 2.5% from $40 million to $41 million, primarily due to higher utilities and property taxes, and for the nine months ended increased approximately $6 million or 4.9% compared to the same period in 2012, again, due primarily to higher utilities and Property taxes.

Utilities were higher due to higher natural gas and water and sewer cost. Property taxes were higher due to higher property tax assessments particularly in the Western Canada regions in which we operate.

The net result is that overall net operating income or NOI for the current quarter increased by approximately $4.5 million or 6.4% compared to the same quarter in 2012. NOI for the nine months ended September 30, 2013, was approximately $10.6 million or 5.1% higher than the same period in the prior year. Operating margin at 64% for the current quarter and 63% for the first nine months of the year remained unchanged from the same period in the prior year.

Slide 39 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 and 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 relates 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 $386 per suite on R&M and on-site personnel costs and capitalized approximately $631 per suite on stabilized investment property improvements. In addition, Boardwalk expensed approximately $1.6 million or $47 per suite on PP&E. For the first nine months of the year, $1,170 per suite was expensed on R&M and on-site personnel cost and $1,484 per apartment was spent on stabilized investment property improvements.

Slide 40 shows the breakdown of our operational capital improvements and capital asset additions for the first nine months of 2013. For the nine months ended September 30, 2013, the Trust reinvested back into its portfolio a total of close to $58 million comprised of $52 million for stabilized investment properties, and $6 million in PP&E compared to a total of $61 million for the same period in 2012. The largest category of capital investment was in the area of building improvement.

Including in the amount to reflect Boardwalk's internal capital improvement program is approximately $13.1 million of allocated on-site wages and salaries and certain parts and supplies compared to $14.5 million for the first nine months of 2012. Not included in the pie chart for the first nine months of the current year, Boardwalk invested $12.5 million in development compared to $1.3 million for the same period in 2012.

As slide 41 shows, total overall admin costs, which includes operating and corporate G&A for the current quarter of 2013 were $13.5 million or an increase of $600,000 or approximately 5% from $12.9 million for the same period last year. The increase was due primarily to higher salaries and wages for our property management personnel. For the first nine months of 2013, total admin costs were approximately $41 million compared to $39 million for the same period in 2012 or an increase of approximately 4%.

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

Roberto Geremia

Thanks, William. Slide 42 and 43 focus on our stabilized portfolio. At September 30, 2013, Boardwalk's entire apartment portfolio was classified as stabilized. For the third quarter, revenue on these properties increased by 4.9% as compared to the same period last year with operating cost increasing by 1.6% resulting in an NOI increase of 6.7%.

Reported operating cost increases in Fort McMurray were mainly the result of increased on site wages and building security. For the nine months revenue increased 5% with operating expenses increasing by 4.9% resulting in an NOI increase of 5.1%.

Slide 43 shows the sequential revenue of our stabilized properties over the last four quarters, the third quarter showed an increase of 0.8% over previous periods.

Slide 44 shows the Trust strong liquidity position, with a $143 million of cash, additional $5 million in committed secured financing scheduled to close in the fourth quarter and undrawn secured borrowing facility, Trust's total liquidity is approximately $344 million, which represents 15% total debt outstanding at the end of the quarter. Boardwalk's debt as a percentage of reported investment property asset value was 38% after adjustments for cash.

Slide 45 reports the Trust's debt maturity schedule at September 30, 2013. In April of 2013 we have witnessed significant increase in the underlying Government of Canada five and ten years bonds. At September 30, the Trust's overall weighted average in place interest rate of 3.48% is actually very close to the current interest rate charges on ten year NHA-insured mortgage loans of 3.5% but still well above the five year posted rate of 2.7%. Boardwalk’s remaining amortization on these insured loans are in excess to 30 years.

Slide 46 provides the reader with an estimate of our current mortgage underwriting valuations. Boardwalk's balance sheet continues to be considerably leveraged at 42% after deducting our cash on hand.

Slides 47 and 48 provide additional detail on Boardwalk's mortgage portfolio. A special note is that over 3,000 units currently have no outstanding mortgage encumbrances.

At slide 48 shows the Trust's interest coverage on a four quarter rolling basis has increased to over 3x, the highest in our reported history. Boardwalk's secured mortgage portfolio is over 99% insured under the current NHA insurance program. These insurance are too 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 currently are approximately 85 to 100 basis points over the corresponding underlying 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 30 to 40 years. The insurance is transferable to other approved vendors on term maturity.

Slide 49 provides a summary of our 2013 mortgage maturities. As we are nearing the end of 2013, we have completed our 2013 financing program. Based on these results, we estimate that the annualized savings on these renewals will be approximately $5 million. In addition we have extended the term maturity on these loans to over 8 years and we have placed the insuring weighted average interest rate of 4.45% with the significantly lowered 2.79%.

Slide 50 focuses on Boardwalk's investment property valuation calculations. As these graphs shows, since Q3 2012, the Trust stabilized portfolio of fair value continues to increase. At the end of Q3 2013, the Trust's investment assets have reported fair market value of $5.8 billion.

The reported increase in the last few quarters has been mainly the result of increases in estimated NOI as we have not seen any change in recorded market capitalization rates as it's noted on Slide 51.

Slide 52 highlights the capitalization rates used in determining the fair value of our investment assets. Overall, the weighted average capitalization rate used in determination of the fair value was 5.47% at September 30, the same rate reported at the end of the previous quarter.

Slide 53 details the two key variables in 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 54, Boardwalk's 2013 forecast. As its customary on a quarterly basis the Trust would use these financial guidance provided. This review includes the comparison of actual results those anticipated, as well as the review of all key variables used to determine these forecast. Based on this review, the Trust has determined an adjustment to report 2013 guidance as warranted.

Our revised guidance for fiscal 2013 for FFO is $3.10 to $3.20 and for AFFO is $2.78 to $2.88. The noted change is mainly driven by stronger anticipated stabilized building performance and as such we've adjusted our stabilized building NOI growth rate to 3% to 5% from the original 1% to 4%.

Slide 55 provides additional details on Boardwalk 2013 capital expenditures. We anticipate investing approximately $92 million in our existing stabilized building. However, we have reduced our 2013 development project by approximately $8 million emulation to your investment and Pines of Normanview in Regina and Saskatchewan. As Bill noted, the earliest start to this project is in spring 2014 and at that time we will continue to make the determination of the economic conditions we are continuing with the project.

Moving on to Slide 56, Boardwalk's distributions. As its customary at each board meeting, the trustees review the Trust's unit holders' distributions. At this meeting, the trustees have elected to maintain the existing distribution level of $1.98 on an annualized basis or $16.5 paid out monthly. It should be highlighted that since January 2012, the Trust has increased its distributions by a total of 10% while it continues to grow its core FFO and highlights our willingness to picking to share our growth with our unit holders. The amount reported noted on this slide are the distributions for the upcoming three months.

Moving on slide 57 to the Boardwalk's 2014 forecast. With prior years, at Boardwalk, the Trust releases the next year's financial guidance as part of the Q3 disclosure. As it is noted, for fiscal 2014, we anticipate an FFO range of between $3.25 to 3.45 and AFFO forecast between $2.93 to $3.13. Our key assumptions include no new apartment acquisitions, dispositions, stabilized buildings’ NOI should increase as compared to prior year between 1% to 4%. We have maintained our internal estimation on the amount of capital referred to as maintenance capital at $475 per apartment per year.

As for our existing assets, we are anticipating a total for 2014 capital budget to be approximately $94 million. In addition, we have approved a budget of approximately $1 million to be allocated to the development area. Included in this are anticipated costs to further investigate additional development to sites within our portfolio.

Our 2014 development budget specifically excludes the development cost of Pines of Normanview however, we will continue to proceed with the drawings and costing of this project. One these are obtained and we have determined that the economic environment of that time is strong, we will update our developers accordingly in this project.

This concludes our formal part of our presentation. We'd open it up now for questions. Sharon?

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Jonathan Kelcher from TD Securities. Your line is open.

Jonathan Kelcher – TD Securities

Congrats on a good quarter.

Sam Kolias

Thank you.

Jonathan Kelcher – TD Securities

First I want to circle to the NCIB. I am curious as to why you guys have been somewhat active this past quarter with your share price dipping down into the mid 50s?

Sam Kolias

Jonathan, this is Sam. We have always believed that equity buyback should be funded by equity capital and I am matching a capital and so we have in the past sold out that and released equity capital and that in the past has been the source of purchasing back equity and we are very comfortable and happy with our get to market cap and believe the less debt we have, the better we are off and that’s why we are not funding our normal core this year business with debt capital and increasing our debt leverage to do so.

Jonathan Kelcher – TD Securities

Okay. So will it be a fair assumption if you sell, it sounds like you are going to sell these three properties in BC that you would use the proceeds for your NCIB if share price remains sort of in the range of this right now?

Sam Kolias

In the past, we have done that and how we look at our investment and equity capital is what will realize everybody the most return and create the most value. So yes, it happens, everything changes Jonathan and we can predict the future and I have learnt that and so if in the future we determine that is the best use of the capital like we did in the past we will absolutely use some of that capital to buyback our unit. Now we have always been very balanced in our strategy and balanced is a way to mitigate our cloudy ability to predict the future and so we continue taking the balanced approach with our investment and what we do with our capital like we have in the past, we believe we will continue to succeed regardless of what transpires going forward because we will essentially be doing all of the above on the balanced basis instead of heading in one particular investment strategy and ignoring the other one that could be creating more value because we are not sure what the future is going to be.

Jonathan Kelcher – TD Securities

Okay. And secondly just, just maybe a little bit more color on the Regina development, is it what would you need to see for you to have -- to give the go ahead on that in the spring of next year?

William Chidley

Hi Jonathan, it’s Bill. As Rob mentioned the next step for us and we have commissioned working grants and that will allow us to tender the project and get very specific cost on the project and at that time which would probably -- by the time that’s completed we are probably close to the spring and then will have to assess the current market conditions at that time. By doing the drawings we are in a much better position to assess obviously the cost which can be volatile.

Jonathan Kelcher – TD Securities

Okay. Thanks. I will turn it back.

Sam Kolias

Thanks Jonathan.

Operator

Your next question comes from Mario Saric from Scotia Bank, your line is open.

Mario Saric – Scotia Capital

Maybe just on the a capital deployment front, you’ve been achieving some bigger returns on redevelopment projects in your portfolio now but, specifically when you look into 2014 are there any specific projects on that front where you do you think you can still achieve kind of returns in 10% plus range?

Roberto Geremia

Mario, it’s Rob. Yes, there are, there are modern value added projects that we have now, as we’re repositioning and the answer to that is no, but we are finding now is that the more value as customer service can provide the more customers going to pay for that service. So I’ll spread between current rate and CMAC rates need to widen, so we are very happy with that, so we are constantly looking for raised, upgrade the portfolio and have that again be the -- like most like new product in the market whichever is driving forward.

Mario Saric – Scotia Capital

Okay. I presume that would be one kind of user capital that would compete with a potential buyback?

Roberto Geremia

That’s right as Sam mentioned the balance across also includes where is the best return for the allocation is capital and as you noted, we are getting extremely strong returns in the value added capital that we are putting in. So we know obviously can consideration as well to an allocation if there is – and as the others go through BC.

Mario Saric – Scotia Capital

Okay. And just on the revised guidance for 2013 it looks like it implies a Q4 of anywhere between $0.68 to $0.78 which seems kind of low. Is there anything that we should be aware of specifically relating to Q4?

Roberto Geremia

The biggest variable on Q4 is weather and we are starting to get some hints that our recent portfolio is going to be the subject to large utility increases. We are seeing lot of increases in cash with respect to garbage collection and that kind of stuff. And if you get a snap of coal for a couple of weeks of actually impacting that is pretty strong so that's the one variable that's extremely difficult in Q4 and Q1 to try to become as accurate as possible that’s where the variable are.

Mario Saric – Scotia Capital

Okay. And then maybe just shifting gears to your guided 1% to 4% in property in 2014, can you give us maybe bit more color on what's driving the revenue component of that whether it's [Indiscernible] or is it primarily rent growth?

Roberto Geremia

It's both. I think we are seeing still tight market generally across the country, but we also are driving value to our customers which again they are going to dip and increase and pay more for that as well too. So our strategy of focusing on occupancy levels and maintaining a lower turnover ratio is looking extremely well right now, as we are still getting almost the equivalent amount of rental increase on our renewal as we are in new rental. So it's actually being more profitable than we thought it would be.

Mario Saric – Scotia Capital

Okay. And maybe a hard question to answer but what type of utility cost growth are you baking into your – into the midpoint of the year, organic growth guidance?

Roberto Geremia

That is, we normally try to guide on total expense category and there are – on a total expense area we are looking about 6% roughly looking at the midpoint of our guidance there but it's difficult to break it up. But it is fair to say that utilities will be north of that that’s we are just getting anyways.

Mario Saric – Scotia Capital

Okay. That's great. Thank you.

Sam Kolias

Thanks.

Operator

Your next question comes from Michael Smith from Macquarie Research Equity. Your line is open.

Michael Smith – Macquarie Research Equities

I just wanted to talk about your first development project. I guess, you are getting occupancy, your leasing for occupancy in December. When do you think will hit some stabilization in terms of occupancy?

Sam Kolias

It's hard to predict. We think it probably take three to six months to lease it up. This is not a – it's a strong leasing market right now but it's a bad seasonal time to be leasing. So –

Roberto Geremia

Having a first open house there, I think, I just added in when scheduled for Calgary so we will see where our turn out is. I think the quality of the product and it's been a long time we have seen new projects in the market particularly in that area. So we are anticipating strong demand but again we will sit back and see.

Michael Smith – Macquarie Research Equities

Well, three to six months?

Roberto Geremia

It could be a lot less than that it could – as Bill said lot of the issues becomes also on good pre-lease to get our rating going and take couple of month to that -- so hopefully less.

William Chidley

Some of the limitations Michael are there, are only two elevators will power to move in 109 people in 30 days even if we rented it all up, it would be mayhem. It’s a logistic whole lot challenge as well, Michael we want to make sure we provide the best quality and service, we are not moving in everybody and they are fighting over elevators and over stressing our brand new community which would be a negative experience for everybody. That probably is the biggest challenge of all making sure. We get deficiencies fixed as well. There is always deficiencies in any newly constructed project too and all those little things make a big difference especially when residents move in. We are going to find the deficiencies with the residents moving in versus us going suite by suite on an empty suite trying to figure out what the deficiencies are. Residents will be using the appliances and the taps and the heat and all that and there is going to be a lot more eyes to be able to identify these deficiencies. Well, four of our logistical thing, Michael, is that like everyone rented fall at once, we could do that yes, but it would be a pretty upsetting experience for everybody.

Michael Smith – Macquarie Research Equities

Okay. I know that makes sense. Are you happy the way it's gone so far?

William Chidley

Yes, very. We are absolutely very happy with the power dealings gone and pleased with the timing, very happy with the construction and our contractors. They have done a wonderful job to deliver this on time on budget. It's quite an accomplishment especially in this construction market that we are in and yes, we are all very happy with the rental market right now, is on our side as well. Yes, I think things have gone so well we want to stay grounded off on this experience and realize that despite our efforts and everybody's efforts, the market has been on our side too. So it's all – it’s a continuous learning experience that has taught us a lot and we are fine tuning our blue prints for the next design on the lessons we have learned and continue to build the experience.

Michael Smith – Macquarie Research Equities

Okay. Just switching gears to the Pines of Normanview, so for the first phase, the first setting nine unit building, based -- I know you have to tighten up your numbers, but based on -- can I assume that based on what you think it will cost and what you think you could rent on based on today that you would go ahead?

William Wong

Well really, As I mentioned before until you do construction numbers, it can be a fair amount of variability and as matter of fact the preliminary numbers that we gotten have had wide variance in terms of constructions for example. And that we are type at market that’s probably spring is five, six months away it’s hard to predict. We really like to wait to at the facts are at the time the decision has to be made.

Roberto Geremia

It’s Rob, on the rent and the rental site and the revenue side too that’s already interested as well to, isn’t really a strong now in Virginia as it was in the past. We are seeing more construction, more supply condominiums, and some rental out there so. The costs obviously could be variable but that’s the one that illustrates that revenue sides. On this spring we will have a better idea of this spring that particular market as well and willingness to accept the bulk market rents for brand new construction.

Michael Smith – Macquarie Research Equities

Look it sounds like you’re less confident then you are in the past?

Sam Kolias

Yes, we have a concern with the rental market in Virginia and in the last few months Michael that’s correct. The immigrations very strong and what’s really surprising is so as the new supply and so last thing we want to do is add to already enough supply or more than enough supply. And that’s actually a big advantage we have thinking about it is being in the market already gives us a huge advantage would what’s really going on in the rental market. And so that is the tool that we are going to use and not ignore because if we ignore our own statistics and data we are not really creating the maximum value for everybody.

Michael Smith – Macquarie Research Equities

It seems to me that you know we have entered a new era where a purpose-built rental apartments is becoming more frequent, there is more building into catch one bird as well, not only from other lease, but from pension funds private. Are you concerned about that it sounds like you’re --?

Sam Kolias

Always that actually is the biggest risk of any new development, too much new development. We've seen that in the past with great real estate companies being taken down with too much supply and that is absolutely the biggest risk of new development. And we are very acutely aware of that risk and grateful that we have the presence in the market that we are building to be able to help us prevent adding supply that’s not necessary and going to be properly absorbed.

Michael Smith – Macquarie Research Equities

It seems that you would have a bit of an advantage since you’re far along on these projects and you already own a land is it a matter of okay there is only room for so much development it’s either you or somebody else and if it somebody else then the kind of opportunity is lost or delayed for some time?

Sam Kolias

I would say it would be delayed for some time.

Michael Smith – Macquarie Research Equities

Okay and for your -- to switching gears for your guidance, what natural gas assumption are you making?

Roberto Geremia

What we assume approximately natural gas going up, it’s one of the more higher -- little more significant increase, I’d probably say around 10%.

Michael Smith – Macquarie Research Equities

What from current levels natural gas up 10%?

Roberto Geremia

Yes, all in cost they got to be careful with that one because the input cost only like third or quarter, little more than third of the actual cost, you have a fee and everything associated with it, not to moving seen last little while is the municipalities have been actually reducing the fees in between. So it means, it was much – it’s a natural gas price but it’s also the cost and then fees in between and cause some problems too.

Michael Smith – Macquarie Research Equities

Thank you.

Sam Kolias

Thank you, Michael.

Operator

Your next question comes from Frederic Blondeau from Dundee Capital Markets. Your line is open.

Frederic Blondeau - Dundee Capital Markets

Good morning, thank you. I just wanted to follow up on Jonathan’s question last quarter you mentioned that you were looking to dispose 102 units building in month end, but then you’re 2014 guidance have no acquisitions and disposition. I was just wondering what we could expect on that front?

Sam Kolias

Well, on that one we chose and actually focus on BC sales at this point. We may go into the market with 102 units at Edmonton property, but right now we have chosen to focus on the BC sales it’s a major transaction.

Frederic Blondeau - Dundee Capital Markets

Okay.

Roberto Geremia

We will update the guidance, once we have confirmed unconditional sales on these properties and how we’re going to allocate the proceeds accordingly we will obviously update the market on next couple of quarters conference calls on the impact of these.

Frederic Blondeau - Dundee Capital Markets

Okay, thank you.

Sam Kolias

Thanks.

Operator

Your next question comes from Jimmy Shan from GMP Securities, your line is open.

Jimmy Shan – GMP Securities

Good morning. I want to just talk about market rent for a second. Last time we saw market this tight in Alberta I think there were a number of smaller operators pushing rights quite aggressively. I guess, I’m just wondering, what are you seeing them doing these days?

Roberto Geremia

Jimmy, its Rob. I think the run we had here particularly in Alberta. I would refer a lot of those smaller owners pushing rents, economic evictions. They were really focusing on trying to get customers out of their place so they can kind of convert these things. The Alberta government has changed the rules on that they can't do it as easily more as like. You will not see states run you had been probably will not see that kind of pressure the underlying long-term land were never that aggressive on the rental level. So we are not seeing that kind of pressure I think, the customers out there right now are smart, they know what’s going on, they understand the availability as well too. So you never feel the necessity. So we are not seeing that I’m aware of any material adjustments and that we saw a couple of those in Virginia and Saskatchewan in the last six or eight months and then the association came together to develop program of self rental control as well to, it’s been very effective.

Jimmy Shan – GMP Securities

Okay, fair enough. And so I know you don’t have a crystal ball, but you have good visibility on the market, so just curious where do you see market rents and cognitive momentum moving over the next 12 months?

Roberto Geremia

Well, if you look at our focused look one of our guidance we’re looking at 3% to 5% revenue growth in the next period of time across the portfolio, so in traditionally [Indiscernible] may be little bit heavier than that, but end up in that category.

Jimmy Shan – GMP Securities

Sure. But is that just marking the rent-to-market up today or is that are you actually forecasting that the market will be moving upwards?

Roberto Geremia

It’s both.

Jimmy Shan – GMP Securities

Okay.

Sam Kolias

Jimmy, if you look at market rents over three decade period like we did. Markets rents essentially do one of two things. If you smoothen the actual adjustments you get essentially and adjustments of rents that almost exactly mirror CPI. Or if you leave rents flat for four or five years and assuming that CPI is 3% per year that would be 12% to 15% and so that has happened in the past where rents have gone nowhere for four or five years and then at all at once they are adjusted between 10% or 15% that’s the painful way of adjusting prices for any consumer. So even though the market may suggest right now rents can go up higher over a long period of time they follow and track CPI. So believe in the long-term can create a value over long-term and doing what best for our customers, which we believe will do what’s best for all our stakeholders.

And so, making these smaller adjustments even though the market may reflect that adjustments can be higher is better a long-term approach if that’s more sustainable and better for everybody over, over again the long-term that this volatility that in the past when we adjusted more aggressively, we were based with higher turnovers, higher expenses, higher dissatisfaction and lower NOI as a result anyways and so this is why we are changing our approach this time around Jimmy good observation.

Jimmy Shan – GMP Securities

I completely understand that and I was just curious though what your competitors or your small competitors maybe doing. I don’t know what you guys are doing?

Sam Kolias

Everybody watches what we do and we believe our influences is positive in the market overall and as industry members, we are big believer of self regulation and there is a landlord that’s inexperienced or newer landlord out there that’s making a big increase. We call them up and share our experience and try to help everybody in the industry which we believe will help ourselves as well. And share with them our experience over the last 30 years is to take the longer term approach and you know that for everybody succeeds, everybody does better and we recommend everybody to do the same. That's what really happened in Saskatoon there is a landlord that took the much more traditional and aggressive approach and we had a chat and the increased went from I think $200 or $300 down to $50- $75 something like that. So it was the positive outcome for both the customers, the landlord, the entire community. Applauded our efforts for doing that and keeping the industry positive for renters because we are here for the long run.

Jimmy Shan – GMP Securities

Thank you.

Sam Kolias

Thanks, Jimmy.

Operator

The next question comes from Neil Downey from RBC Capital Markets. Your line is open.

Neil Downey – RBC Capital Markets

Good morning.

Sam Kolias

Good morning.

Neil Downey – RBC Capital Markets

One question for Bill, I believe that three assets on the west coast all has get on them. Will I be in the range if I estimate that there was $55 million to $65 million equity in those buildings or how actually I think about that?

William Wong

To catch the first price, the equity side there is – it is about $62 million to get on those particular assets. That is stated but depending on the purchase pricing we won’t comment on that particular area now.

Neil Downey – RBC Capital Markets

Thank you.

Sam Kolias

Thanks Neil.

Operator

Next question comes from Alex Avery from CIBC. Your line is open.

Alex Avery – CIBC World Markets

In your presentation, I guess highlighted the fact that your average term of tenancy is increasing and I think probably increasing at an accelerating pace over the last couple of years, but I was just wondering on that topic have you run any math or are you able to quantify what the cost versus benefit equation would be in terms of turnover costs and transitional vacancy versus the investment that you made in the communities to make them generate longer term tenancies?

Roberto Geremia

Yes, we actually have and what we have determined is the turnover cost base level for now with a significant amount of upgrade around $2000 all in. so what we really focused on is every week we get the report that shows new rental rates versus rest of renewal rates. So we are looking for a spread that will give us north of 12% to 50% return on spread of those and what we are seeing is that the customer who is renewing his rent need to pay almost as much as new customer moving in any ways. There is no motivation for us to try to block a better ways in increasing turnover to force bigger market adjustment on these areas. We think converting the job I think keeping our mark-to-market as close and reasonable as we can and increasing both at the same time.

Alex Avery – CIBC World Markets

And that math would be based on just the direct cost not things that you can't quantify easily right where the building from people moving in and out and tenant disruption and those types of thing.

Roberto Geremia

That’s correct. There are also little factor, we are really good at doing back to back and with no vacancy lost in that particular unit. If you add that back to an additional month of vacancy loss that could as much as $1,500 additional on top of that. But our team has done a very, very good job and the demand that we have there right now with respect to back to back is extremely high. So I want to include that up. I will just include the direct estimated input cost of turning unit and getting ready for our new customers.

Alex Avery – CIBC World Markets

Okay and then just one small question on the recently completed development, the units that have the subsidized or the subsidy I guess it's not the subsidy the reduced discount to market rent, when market rents increase, are there any restrictions on increasing those discounted rents or do those rents simply maintain a discount to market on a static basis?

Sam Kolias

They move on an annual basis. It's a function of the – we make an application each year and they move on a annual basis. Those rents go up – as rents go up.

Alex Avery – CIBC World Markets

But they could go up at the same paces as other things I guess off of a smaller base?

Sam Kolias

Yes. It’s based at 10% less than the average market rent for the city of Calgary, same as city market rent and that’s the jump that’s every year.

Alex Avery – CIBC World Markets

Okay, that’s great. Thank you.

Sam Kolias

You are welcome.

Operator

We have no further questions at this time. I will turn the call over to the presenters.

James Ha

Thanks Sharon. A copy of this webcast will remain available on our website www. boarwalkreit.com, where you'll also find our contact information should you have any further questions. Thank you again for joining us this morning. This now concludes our call.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Boardwalk's CEO Discusses Q3 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts