Boardwalk Real Estate Investment Trust's (BOWFF) CEO Sam Kolias on Q4 2015 Results - Earnings Call Transcript

| About: Boardwalk Real (BOWFF)

Boardwalk Real Estate Investment Trust (OTCPK:BOWFF) Q4 2015 Earnings Conference Call February 19, 2016 11:00 AM ET

Executives

James Ha – Director of Finance and Investor Relations

Sam Kolias – Chief Executive Officer

Roberto Geremia – President

William Wong – Chief Financial Officer

William Chidley – Senior Vice President of Corporate Development

Analysts

Michael Markidis – Desjardin Capital Markets

Frédéric Blondeau – Dundee Capital Markets

Jonathan Kelcher – TD Securities

Mario Saric – Scotia Bank

Alex Avery – CIBC

Jimmy Shan – GMP Securities

Mark Rothschild – Canaccord

Matt Kornack – National Bank Financial

Operator

Good morning. My name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Boardwalk Real Estate Investment Trust Fourth Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

James Ha, Director of Finance and Investor Relations, you may begin your conference.

James Ha

Thank you, Chris. And welcome to the Boardwalk REIT 2015 fourth 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 boardwalkreit.com where you will find the link to today's presentation as well as PDF files of the Trust's financial statements, management discussion and analysis, as well as supplemental information package.

Starting on slide 2, I'd like to remind our listeners that certain statements in this call and presentation may be considered forward-looking statements. Although the Trust believes that the expectations set forth in such statements are based on reasonable assumptions, Boardwalk's future operation and it's 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 earning press release and in other publicly filed documents including Boardwalk's recent annual report, annual information forms and quarterly reports.

Moving on to slide 3, your topics of discussions for this morning will include a review of Boardwalk's current valuation and strategic initiatives, a financial overview, an acquisition and development updates, liquidity and financing highlights along with our operational approach, and lastly, our quarterly guidance update.

At the conclusion of today's 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 fourth quarter for the Trust.

Starting on slide 4, some financial highlights for three months in the fourth quarter and 12 months for 2015 include total rental revenue of $115.7 million and $476.1 million, a decrease of 3.5% and increase of 0.6% respectively from the same period last year. Please note the decrease is mostly result of the sale of our winter portfolio.

Total NOI at $70.9 million and $ 294.7 million, down 3.4% and up 1.1% from the same period last year. Please note again the decrease in NOI is the result of the sale of our winter portfolio. Funds from operations, a $44.2 million and $184.9 million, an increase of 1.2% and 5.1% from last year. FFO per unit up $0.086 and $3.56 on a diluted basis, up 2.4% and 5.6% from last year. And adjusted fund from operation per unit which includes an estimated $500 per a firming unit of maintenance capital per year, up $0.78 for the three months ended December 31, 2015 and $3.23 for the 12 months ended December 31, 2015, up 2.6% and 5.9% respectively.

Moving on to slide 5. Despite the solid financial performance Boardwalk has accomplished to date, the Trust unit price has more resembled prevailing price of oil as opposed to that of the most affordable form of residential real estate. Boardwalk continues to deliver stable NOI and growing FFO as a result of its unique operating strategy of focusing and optimizing NOI to high occupancy levels and superior customer service.

As slide 6 shows, Boardwalk has consistently and substantially grown its FFO through the various economic cycles seen in the past. Slide 7 illustrates the implied net asset value of Boardwalk portfolio and includes the IFRS fair value revenue and expenses used to calculate implied cap rates on a per share basis and compares the Trust valuation net of $4.62 of cash per unit and cap rates in relation to our unit brand.

Please note, that the $4.62 of cash does not reflect the special distribution of a dollar that was distributed back in January of this year. The markets remain volatile and our current public market valuation continue to represent exceptional opportunity when considered against NAV, replacement cost, other consumer housing options like condominium ownership and current valuations on historic private market transaction.

Slide 8, depicts the affordability of rental housing relative to home ownership. With rental accommodation providing the most affordable form of housing in Canada, we anticipate continued strong demand for Boardwalk community.

Slide 9, charts average two-bedroom rent in Alberta as reported by CMHC on average West Texas Intermediate prices. As noted, despite several downturns in the oil market and during times of period of low oil prices, Alberta rent continue to increase.

Slide 10, compares WTI prices to vacancy levels in Alberta as reported by CMHC. As noted, while increases to vacancy levels occurred during other oil price decline, however, as shown on slide 11, Boardwalk's unique, self-regulated and NOI optimization strategic approach which focuses in part on high occupancy has allowed Boardwalk to sustain low vacancy which has consistently beat the market. A special note is our most recent fiscal 2015 year where Boardwalk was able to beat the market vacancy rate by over 400 basis points. This is a testament to our best-in-class operating team.

On slide 12, we like to take this opportunity to share our strategic initiative to create further value for our stakeholders. First, with the FFO growth, we were able to produce in 2015. The Trust will be increasing its regular distribution by 10.3% to $2.25 per Trust unit on annualized basis beginning February 2016 distribution.

Second, the Trust is now targeting to acquire 800 to 1,200 apartment units in 2016. We continue to monitor the acquisition market for accretive opportunities and potentially seen opportunity to acquire newly constructed multifamily community.

Third, the Trust is accelerating its development pipeline. With the current low cost of debt capital and potential decrease to construction cost, the Trust is in a position to begin more development projects.

Fourth, the Trust has increased its allocation towards its existing normal course issuer bid. Given the significant dislocation between the Trust unit price and its net asset value, we believe there's a unique opportunity to allocate additional capital towards an investment in our own portfolio.

Lastly, Boardwalk will continue to focus on its brands and organic growth opportunities, as evidenced by our 2015 financial results and continued stability in growth. Despite economic contraction, we believe Boardwalk's self-regulated operating strategy of focusing in on optimizing NOIs through high occupancy and unparalleled customer service will continue to provide continued stability and growth for all stakeholders. We are excited about our ability to capitalize on our brands' best-in-class operating team to create value from these new and accretive opportunity. I'd now like to pass the call on to William Wong, who will provide further details on our fourth quarter financial results. William?

William Wong

Thank you, Sam. Slide 13 shows a reconciliation on a per unit basis of fund from operations or FFO for the 3 to 12 months ended December 31, 2015 from the FFO per unit amount reported in 2014. A reconciliation of FFO to Boardwalk's consolidated financial statements can be found in the appendix of today's presentation.

As the slide shows, financing and admin cost savings, as well as our Trust Unit buyback program each contributed $0.02 to our FFO per unit growth for the current quarter. This was partially tempered by a $0.01 loss on our stabilized net operating income or NOI, and as we said, FFO per unit loss as a result of our Windsor portfolio sale.

For the full year ended December 31, 2015, stabilized NOI growth and financing savings contributed $0.10 and $0.14, respectively to our FFO growth while our Trust Unit buyback contributed $0.02. This was partially tempered by higher administration of $0.01, and a loss of $0.06 of FFO on sold properties. Administration was higher partially as a result of the retirement of one of our executives at the end of the third quarter.

Next slide, slide 14 shows Boardwalk's rental statistics on a quarterly basis for the current year. As noted, market rent has declined somewhat from a peak of $1,204 in March of 2015 as the Trust proactively decreased market rents in Alberta to execute on its strategy of maintaining high occupancy levels. Occupied rents at $1,159 achieved in December of 2015 was still higher year-over-year compared to the $770 in the same period in the prior year.

Boardwalk will continue to actively manage the key variables in its rental revenue strategy, namely market rents, suite-specific incentives and occupancy levels to maximize NOI during this current period of low oil price.

Next two slides, slides 15 and 16 focuses on our stabilized portfolio performance. At December 31, 2015, Boardwalk's entire apartment portfolio consisting of 32,947 units was classified as stabilized. For the fourth quarter, revenue on these properties marginally declined by 0.1% as compared to the same period last year with operating cost increasing slightly by 0.7%. This resulted in an NOI decrease of 0.6%.

For the full year of 2015, stabilized revenue increased by 1.8%, while operating expenses increased by 1.7%, resulting in an NOI increase of 1.8%. As is noted on the chart, insignificant increase in the expense is noted in Saskatchewan was the result of increased utility expense primarily as a result of the inclusion of a new cost-related to TV and Internet, as part of the rental products offered in Saskatchewan.

Although our Fort McMurray portfolio represents a little more than 1% of our overall NOI, the weakness in this market has required us to significantly discount our rents, to keep ahead of lower market occupancy level. The previous quarter also showed as Saskatchewan increase in property taxes and property-specific security costs further impacting before NOI for Fort McMurray. Fourth quarter operating cost for Grande Prairie were higher as a result of higher repair, maintenance and promotional cost.

Slide 16 shows the sequential revenue on our stabilized properties over the last four quarters. The fourth quarter reported a slight decrease of 0.7% compared to the third quarter of 2015.

The next slide, slide 17, shows the breakdown of Boardwalk's total market rev between rental revenue realized, vacancy losses and suite-specific incentives on a quarterly basis for 2015. In highlight, there are three key variables in our rental revenue strategy, namely market rent, suite-specific incentives and occupancy levels.

Slide 18 provides a breakdown of our operational capital improvement and capital asset additions for the 12 months of 2015. Excluding development cost, the Trust's reinvested back into its portfolio a total of $88.7 million comprised of $80.2 million for investment property improvement and $8.5 million in property, plant and equipment compared to a total of $87.4 million for the same period in 2014. Including the amount to reflect Boardwalk's internal capital program is approximately $17.9 million of allocated onsite wages and salaries and certain parts and supplies compared to $16.7 million for 2014.

Not included in the pie chart for the 12 months of 2015, Boardwalk invested $10.7 million in development compared to $2 million for the same period in 2014 as well as $3.2 million in acquisition, primary for the Nun's Island office and warehouse purchased earlier in the year. An increase in development costs was primarily the result of completing our 79-unit building in Regina, Saskatchewan called Pines Edge.

Slide 19 shows total overall and main costs which includes operating and corporate G&A for the full year of 2015 were $56.8 million, an increase of $0.4 million or approximately 0.7% from the $56.4 million for the same period in the prior year. The increase was due primarily to the retirement of one of our executives at the end of the third quarter.

Slides 20 and 21 highlight Boardwalk's investment property fair value calculation. As slide 20 shows, Boardwalk's reported fair value at December 31, 2015 on its investment properties was $5.54 billion, approximately $70 million higher than the reported amount at the end of Q3, but $140 million lower than the amount reported last year on the same property basis. Sequentially, the Trust's fair value has increased relative to the third quarter as a result of market rent increase in some of Trust's Alberta community in the fourth quarter of 2015, and continued capitalization rates compression in the Trust's Montreal region during fiscal 2015.

In determining the fair value of our investment asset, a number of variables are taken into account, some of which are based on actual estimated costs and others that are based on market standardization. One of the key end points that is used to determine the reported market revenue is the current level of the market rent in the Trust's property portfolio. As was previously noted, Boardwalk's strategy in the weaker market is to adjust rents to maintain higher occupancy level.

The results of this, coupled with our estimated increase in certain operating cost in 2016 has resulted in estimated NOI fair value determination of $297 million as at December 31, 2015 compared to $310 million from the prior year as noted on slide 21.

Slide 22 highlights the capitalization rate used in determining the fair value of Boardwalk's investment property. Overall, the weighted average cap rate used in the determination on fair values was 5.38% as of December 31, 2015, slightly lower than the 5.41% reported at the end of the third quarter and the 5.48% reported for the prior year. The lower weighted average cap rate was primarily driven by cap rate compression into much of our regions.

I would now like to turn the presentation over to Bill Chidley. Bill?

William Chidley

Thank you, William. Low interest rates continue to fuel investor appetite for apartments, and cap rates remain at low levels. We have set a target of 800 to 1,200 units to be acquired in 2016, and we are currently in various stages of negotiation on a number of properties.

Moving on to the next slide. We closed the sale of our 1,685-unit Windsor portfolio on September 10, 2015. As a result of this sale, a special distribution of CAD 1 per trust unit to unitholders on record, December 31, 2015 was paid on January 15, 2016.

Moving on to slide 25. Pines Edge is the first phase of our new development, consisting of 79 units, and it's located on our existing property, Pines of Normanview in Regina. This 4-storey wood frame, elevator building, has one level of underground parking. There are 13 one-bedrooms and 66 two-bedrooms, of which 60 have two baths.

Moving on to the next slide. We took possession of this first phase, January 29, 2016. The cost was $13.4 million or $170,000 per door, which equates to $170 per square foot buildable and $199 per square foot rentable, below our budgeted cost. We are estimating the stabilized cap rate range to be 6.5% to 7% excluding land.

Moving on to slide 27, we are moving forward with the development of Phase 2 and 3 with anticipated start dates in Q2 and Q3 of 2016. Both buildings will be four-story wood frame with two elevators and a single level of underground parkade. Phase 2 is identical to the 79 unit Phase 1 building or Phase 3 of the 71 unit building providing 13-1 bedrooms, and 58-2 bedrooms. These two phases will total 150 units. Tendering and predevelopment is currently under way. Construction is anticipated to be 14 months for each building, and occupancy is anticipated beginning Q3 2017. Moving on to the next slide.

This slide highlights some of our other development opportunities. At our Viking Arms site in Edmonton, we have developed a concept plan for an additional 312 units and two concrete point towers. We are proceeding with DP level drawings, which will allow us to complete our preliminary tender to determine the economic viability and timing of moving the project forward.

Also in Edmonton, we own an existing community of 1,175 units on approximately 38 acres of land known as West Edmonton Village, an initial concept plan has been developed to increase density of a site by replacing approximately 112 townhouse units on 12 acres of land, with up to 950 units of 4-storey wood frame products. Zoning is in place to allow us for this use and construction could begin as early as mid-2017. The next slide describes additional development opportunities in Calgary and Regina. In Calgary, we have completed DP drawings on a 226-unit, 2-point tower projects and we are currently in the preliminary tender stages. We anticipate having preliminary costing in the next few weeks, which will allow us to determine economic viability of the project.

If feasible, construction could begin by summer 2017. Wascana Park Estates is a 33-acre parcel land in an urban environment in Regina. We have developed a master plan and we are currently discussing the implementation with the city. The master plan includes high-rise, mid-rise, and the low-rise build forms. The current zoning in place allows for additional density of low-rise and mid-rise building, subject to a discretionary use development permit. We could begin construction on the low-rise portion of the master plan as early as spring 2017. The low-rise basis will total approximately 900 units in 12 buildings.

I would now like to turn it over to Rob Geremia. Rob?

Roberto Geremia

Thanks, Bill. As is shown on slide 30, Boardwalk liquidity position is incredibly strong. With a base liquidity of $384 million and an additional estimated $415 million being available by – due to the end of 2017, our total liquidity is close to $840 million and all this being available on historical low interest rate. We are well positioned to take advantage of the new strategic opportunity.

Slide 31, reports the Trust's total debt maturity schedule. At December 31, 2015, the Trust overall weighted average in place interest rate were [indiscernible], a rate that is approximately 80 basis points above current NHA insured tenure rates of 2.2%. And 150 basis points of our current five-year rate of 1.5%. Our mortgage maturity curve is well balanced, and we will focus on mortgage term to further assist in this normalizing of this curve. Boardwalk's remaining mortgage amortization under these insurance loans is an excess of 30 years.

Slide 32 shows the Trust interest coverage ratio on a four-quarter rolling basis, and it seems to increase. At over 3.64 times is our highest in our reported history. Boardwalk's secured mortgage portfolio is over 99% insured under the current government of Canada NHA Insurance program. We use this insurance as two unique and distinct benefits and assist to address in a two distinct financing risks, this being interest rate risk and renewal risk.

With respect to interest rate risk, NHA insurance provides us with very advantageous interest rates. With this insurance, we are able to obtain a very competitive interest rate, which are currently approximately 95 to 110 basis points over the corresponding government of Canada benchmark bond. Renewal risk is a substantially reduced with this insurance in that once obtained, it is good for the entire amortization mortgage, which in most cases is 30 to 40 years. The insurance is transferrable to other approved lenders on to their maturity.

Slide 33 provides the reader with our estimate of our current mortgage underwriting valuation. Boardwalk's balance sheet needs to be conservatively levered at 45% after deducting our current cash portion. Of special note is over 1,500 apartment units currently have no outstanding mortgage [indiscernible]. At no time in our reported history as Boardwalk ever had access to low cost of financing and the ability to access these sponsors to take advantage of the trust.

Slide 34 focuses on the Trust's net operating income strategy. Our focus – our strategy focuses on the customer, and by providing the best value products and an unprecedented level of service, while managing operating efficiency [indiscernible] market trends.

On slide 35 highlights, the three key variables in our strategy; market rent, occupancy and selective suite incentives. The [indiscernible] of this allows us to focus on recording the best possible net operating income.

Slide 36 addresses our two basic operational approach which are dependent on market condition. In strong market, our focus is on optimizing market rents while maintaining a high level of occupancy. While in weaker markets, the focus is on adjusting rent to meet the existing demand while maintaining our high standard level of service. In either case, the focus is on the customer and their predicament.

Slide 37 documents the Trust's customer turnover and related occupancy levels. Our turnover levels continue to be low as resident members stay with us longer as is shown on slide 38 with an average resident member stay of over 3.7 years.

Moving on to slide 39, Boardwalk's financial forecast 2016. Consistent with prior periods, on a quarterly basis, the Trust reviews reported financial guidance. This review consists mainly of comparing the actual reported results to those assumptions used in determining the reported guidance. We have made two significant changes to our 2016 reported guidance. The first is we are increasing our property acquisition target to a range of 800 to 1,200 apartment units in 2016. And based in our success of Phase 1 of Pines development, we are advancing our development plans for Phase 2 and Phase 3 at the same location in Regina to commence in 2016.

At this time, we have not included any additional FFO or AFFO on these investments as the timing of these investments during the year are uncertain. We have maintained our 2016 reported FFO and AFFO guidance which are recorded to range from $3.40 to $3.60 and $3.06 to $3.26, respectively.

Slide 40 highlights the Trust's capital expenditures on both existing and development projects. We are anticipating to invest approximately $90 million in our existing portfolio with an additional investment of $12.4 million in our calibrated development program. This reported increase in the development capital that's directly related to the accelerated development program in [indiscernible].

Slide 41 highlights the Boardwalk's normal course issuer bid. Under the chart's current NCIB, the Trust can purchase a total of $3.8 million shares available in public market. During 2015, a total 740,800 of these units were required for cancellation. The average price of these units was $50.10, which appears to be active on current NCIB.

Slide 42 highlights Boardwalk's distribution. On a quarterly basis, the Board of Trustees reviews distribution levels of the Trust. Based on this review, the Board of Trustees have approved a 10.3% increase in the trust regular distributions to an annual impact of $2.25 on an annualized basis. The distributions and their respective dates are highlighted on the table.

This concludes the formal process of our call and I'd like to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Mike Markidis with Desjardin Capital Markets. Your line is open.

Michael Markidis

Hi. Thanks and good morning. Just with respect to the acquisitions, I was just hoping you guys could give us a little bit more color in terms of what you're thinking there I guess if we look back historically you really – the philosophies has been – the market has been too expensive to buy and now you're introducing an acquisition target. So, I'm just curious what's changed and if you could give us a little bit more color in terms of geographies that you're targeting.

Sam Kolias

I can say unique time and our constant focus is on improving and building a better brand and we never believe we are ever there and we ever have to put up a brand. Lately, there's been some opportunities that are coming up in newer and newly developed rental communities that we believe are in line and will complement our goals to build a better brand and be able to reduce the average HMR portfolio by buying newly and newer rental community. And so, this is a unique opportunity that we're seeing and we're very excited and this is why we're changing our guidance for acquisition because we are containing some unique opportunities out there. That's aligned with our building a better brand.

Roberto Geremia

Mike, so if I can comment there. In the past, you're right, we haven't been aggressive a lot on buying. The part of the reason why is its most of the older products out there we were looking at had kind of deferred capital in it. And we adjusted for that our price didn't become as competitive. As Sam, mentioned, the new parts we are looking at, it doesn't have a deferred capital in it. Well, obviously, the price seems more aggressive.

Michael Markidis

Okay. And I guess with new supply coming in in certain key markets is that creating a little bit of, I guess, angst or worry on behalf of some of these developers? And maybe creating a better opportunity for you to acquire on an average cost per suite basis?

Roberto Geremia

Well, the challenges of operating a rental community are completely different than developing condominiums. And so, yes, the developers of these rental communities, historically, have developed to sell condominiums. They have very little experience with the operations of rental communities. And now more challenging times, it's really important to have a great brand, have a great team and be able to have the most amount of experience in a rental operations. So, yes, we believe that that is a factor.

Michael Markidis

Okay. And you may want to punt this question but can you care to specify what geographies you might be targeting?

Roberto Geremia

Well, we're looking in a number of markets. But, we're also – well exceptionally, that includes the developers.

Michael Markidis

Okay. And just last question on the acquisition piece. If you did throw out 800 to 1,200 units as a potential acquisition target, can you just frame up a range of potential price per foot or suite we should be looking at in terms of a dollar value of acquisition?

Sam Kolias

No. Since we're in the middle of negotiating, we prefer not to get specific about that.

Michael Markidis

Okay. Last question before I turn it back. Just with respect to the balance sheet specifically, it certainly seems with the initiatives you guys are announcing that there's maybe a bit of a few change in terms of your willingness to push the leverage up from a very low level. And I'm just wondering if you could give a little bit more color on that. You're being the high-38s today, ultimately as you look forward, what's sort of your plan in terms of taking the leverage up on the balance sheet?

Sam Kolias

Well I thought, it’s going to be ready to move forward, but we've never seen rates this low in our history either as well. We have had extremely conservative balance sheet in the 30s. So, if you did, based on the liquidity sheet we provide you guys, if we add a new asset to that level, which again was quite aggressive, you're still just north of 50% loan to value.

And remember, all our debts are backed by the government of Canada. So renewal risk did not bear any more for that sake. But it's going to be a measured approach. By no means are we doing this all tomorrow or the next day. We're going to look for opportunities. We're going to allocate capital in different areas, and we're going to just as time we move forward as well, too.

But we want to pride the market some kind of guidance of what we're looking at in determining these loans.

Michael Markidis

Okay. That's very helpful. Thanks. I'll turn it back.

Operator

The next question is from Frédéric Blondeau with Dundee Capital Markets. Your line is open.

Frédéric Blondeau

Thanks, and good morning.

Roberto Geremia

Good morning.

Frédéric Blondeau

I was just wondering if you were projecting any asset sales in 2016, and what would be the timing and if you had a geographic strategy in that regard?

Sam Kolias

Frédéric, it's Sam. And no, we're not projecting any more sales in 2016. We're happy with the disposition in Windsor. It was a great transaction for both parties and allows us to focus more on our existing, more core marketplaces. And so, we're very pleased with the rest of our portfolio. We believe we're well-positioned to create value for everybody going forward with our existing portfolio.

Frédéric Blondeau

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

Sam Kolias

Thank you, Frédéric.

Operator

The next question is from Jonathan Kelcher with TD Securities. Your line is open.

Jonathan Kelcher

Thanks. Good morning.

Sam Kolias

Good morning.

William Wong

Good morning.

Jonathan Kelcher

Just turning to the development, and I know it's obviously early days. But how is Phase 1 of Normanview is doing in terms of lease up?

Sam Kolias

It's actually doing well, Jonathan. It's only opened a couple of weeks ago, and we have 11 suites occupied, and more applications pending. And we're achieving ramps that are higher than we have put in our pro forma.

Jonathan Kelcher

Okay. And is that what gave you the confidence to go ahead with Phase 2 and Phase 3?

Sam Kolias

Two things. One, yes. We're pleased with the – with how we're doing on the rental side, and we're also pleased that we have achieved a lower cost than we originally anticipated.

Jonathan Kelcher

Okay. That leads into my next question. Would – could we assume a similar costing as Phase 1 for Phase 2 and Phase 3?

Sam Kolias

Yes. I think that would be very reasonable. We haven't tendered it yet. We're in the middle of tendering the project, but we're getting quite comfortable with our wood frame model. We have 79 unit templates that we have experienced with and we fully expect that we'll be able to do at least this well with the costing on Phase 1.

Jonathan Kelcher

Okay. Have you looked at any development opportunities outside of Western Canada?

Sam Kolias

With our excess density here in Alberta and we tended to focus on Alberta and Saskatchewan.

Jonathan Kelcher

Great. How about JV opportunities with some of the mixed use projects that are popping up?

Sam Kolias

We're always looking at building a better relationship, and we believe our greatest assets is our people and our relationship [indiscernible] that our people stand on and so we're always looking in ways to create synergies with other potential and perspective joint venture partners that would create value for both us – that's about it not being realized right now without potential joint venture. So yeah, we're always exploring opportunities and ways we can create value. And whether that's with others or just on our own, it's something that we've always done and will continue to do.

Jonathan Kelcher

Okay. Thanks. I'll turn it back.

Sam Kolias

Thank you.

Operator

The next question is from Mario Saric with Scotia Bank. Your line is open.

Mario Saric

Hi. Good morning. I still think if you could you just maybe touch on the distribution increase in the NCIB, so just on the increase, it's a very sizeable increase and when I look at growth in 2015 versus 2014 on an FFO basis which deals roughly mid-single digit and your guidance for 2016 is flattish or so a year-over-year basis. Is it fair to say that the big increase kind of truly reflect the board based that a trough in the fundamental is visible, and arguably, that trough in terms of occupancy erosion or rent erosion isn't nearly as bad as what the market's reflecting in your unit price?

Roberto Geremia

Hi, Mario. It's Rob. I think that part of that – I think that more important than anything else is our history has shown us that our assets sort of stabilize even through tough times. In our previous distributions that were obviously, argumentably split somewhat low, were supplemented in the past by distribution – due to special distribution and sales of assets. But we feel that we're showing our numbers quite strong. Our board is very comfortable with the numbers we're getting. We've reviewed our guidance again. Obviously, we do that every quarter, and change it. Our payout ratio was very low, and we also have to take into consideration tax. Because as we move forward, our tax are well positioned, the depreciation that we use for tax is going smaller and smaller, therefore, we have to distribute it more anyways. So, putting that all together, the board is very comfortable on increasing the distribution and sustainability and distribution before.

Mario Saric

Okay. And then just maybe with respect to the fundamentals, the market that was pretty stable quarter-to-quarter in Alberta. In Q3, it was down roughly 5% or so. It's a hard question to answer, because it is a moving target. But can you give us a sense in terms of whether you think those market rents have stabilized in Alberta at this stage?

Roberto Geremia

Well, it's very early in the year. We're seeing some stability in the market as we speak right now. As you show from the slide from our occupancy level, they continue to be not only below what they were at year-end, but [indiscernible] a little better. Rent has actually moved up a little bit. But again, part of that is because we saw the downturn. We did an aggressive move down to catch up fast, we wouldn't get caught up in the vacancies.

Now, we're seeing our – on obviously, on a smaller basis, rent stabilizing roughly a little bit. But I don't want to say that we seem to drop but what I will do say is we're very strong and sound. We got a great team in place across the country, but particularly in Alberta, and Saskatchewan they did a phenomenal job for us. Given the market characteristics, we're seeing ourselves being able to attract customers from other owners as well to given the level of service that we do offer and they're seeing the value that we do create. So, in our point of view, it's great. We think we're seeing some stability here now. But I don't want to hold us to that until the year goes on a little farther.

Mario Saric

Okay. And then, just turning to the NCIB, you made the comment that you're looking to increase resources through the NCIB. So, you're doing a couple of different things, like, you're looking at acquisitions, arguably, you're looking to expand your development pipeline, you're putting money into your buildings. So, these are all things that you talked about in the past in terms of being potential, uses of those capital. How would the NCIB at the current unit price stack up in terms of a priority versus those other three uses of capital?

Roberto Geremia

Well, it is a priority. If you remember recently, when we [indiscernible] the NCIB this year, the comment was where do you use the equity from the Windsor sale to an equity for equity swap. Now, we still have a lot of money left from that Windsor sale. So, that will continue to be funded that way. But in addition to that, we are going to add more debt capital as we noted, if we see the stock price maintain levels that do not increase substantially in the near future.

You'll see us be more aggressive than we have in the past, in that particular area. Now, again, back to your comment about we're doing a lot of everything. That's exactly right. Our intention is to keep moving forward on all these different strategies and alter our allocation of capital on an ongoing basis. But if, obviously, if prices stay in the range they are right now and our stock price, it's difficult to argue that that isn't the best allocation of capital as we speak today.

Mario Saric

Okay. And then, I guess last question with respect to the financing that you highlighted including the financing of unencumbered assets in 2016 combined probably roughly, at CAD 290 million or so. If you weren't seeing acquisition opportunities or if you weren't as aggressive on the share buyback, would you still be looking to raise that amount of capital in 2016? I'm just trying to understand how defensive of a move it is versus being offensive?

Roberto Geremia

Yeah. We debate that a lot here as well because given the fact the rates are so low today versus in the third they have, but, no, we probably wouldn't nearly lever up aggressively and sort of budget cash in our balance sheet. If we didn't think we saw opportunities that are light kind of at the end of tunnel for those. Again, most of these, or a lot of these but we time this as the year goes on as well to. So that'll give us time to better view the economy, better view what's going on, ability to have more chance to look at the opportunities that are there on the development side. So, we just want to prepare our balance sheet to take advantage. We can do that with actually, I will actually pull the trigger today. So we have a lot of access to those funds when we need them and not carry the weight on our balance sheet in the short-term.

Mario Saric

Got it. Great. Thank you.

Roberto Geremia

Thanks.

Operator

The next question is from Alex Avery with CIBC. Your line is open.

Alex Avery

Thank you. Just wondering to the extent that you find your 800 to 1,200 units, how do you contemplate financing those kind of acquisitions?

Sam Kolias

I think depending on the units, where they are, where they're located, the state of the occupancy of a particular building we're stabilizing a particular building. In the most part, we're going into this thing, and we're going to leverage our existing balance sheet to acquire these assets. Stabilize them and then we'll have the ability to go back and leverage them as well on top thereof.

Alex Avery

So, when you say leverage your existing balance sheet, would you be deploying cash into the acquisition or...

Sam Kolias

Yeah. A combination of all the above. Some cash, some additional mortgage financing. As you can see we have about $180 million of cash after the distribution in October. And then, we have a lot of credit available to us. We have unlevered assets. And then we have existing maturing mortgages. We have a bunch of stages that we can attack at different times.

So, I guess the answer to your question is it depends. Depends on the opportunity that comes up that day, but the important thing is we do have to access to the liquidity and we'll knock some of the terms up to liquidity to the asset and balance sheet category. Category will do as well, too.

Roberto Geremia

We always want to do what will maximize all stakeholder value. So, we look at the most accretive and auction that maximizes the value for all stakeholders. And that's our priority. And that changes depending on the opportunities. So, it's really difficult for us to determine what that allocation is going to be, given the opportunity and what are the unit prices going to be this quarter.

Mario Saric

Okay. And then just in terms of your incentive use. Are there specific markets where you're more aggressive with the incentives today versus perhaps last quarter and perhaps other markets where you're pulling back a bit?

Sam Kolias

No. My first response to the beginning of your question would have been probably yes. It's gradual, but in that's in the same way it's been for the last 12 months. There's nothing to do there. I'd probably say we're being less aggressive in Alberta now with the exception of Grande Prairie and Fort McMurray. But in our major markets in Calgary and Edmonton, no, we've actually slowed down the use of incentives in those markets.

Mario Saric

Okay. And then just on Fort McMurray. It looked like they had some improvement in occupancy but a decline in revenue. I was wondering if perhaps you'd implemented some rent reductions on in-place tenants.

Sam Kolias

Yeah. It is a very, very small part of our portfolio, less than 1%. But you are right. It's a very, very difficult market up there, very price sensitive, where obviously job security is a big issue up there. So, our team is working very hard but they are adjusting rents, no argument there. Albeit, Fort McMurray has high base rent sale even after the reductions as compared to rest of Alberta. But yes, it's a very difficult time. But the good news is, that kind of difficulty so far is not fulfilling over to the rest of Alberta in Calgary and Edmonton. So we're not seeing the same pressure we're seeing in Fort McMurray really anywhere else [indiscernible].

Mario Saric

And as you noted, it's on the material part of your portfolio.

Sam Kolias

Yes.

Mario Saric

But there are no other markets where you're implementing that kind of proactive...

Sam Kolias

No. Our Eastern Canada portfolio is doing quite well. It has been very stable. It's – we're not doing any difference today than we did 12 months ago.

Mario Saric

Okay. That's great. Thank you very much.

Sam Kolias

Thanks.

Operator

The next question is from Jimmy Shan with GMP Securities. Your line is open.

Jimmy Shan

Yeah, thanks. So just in terms of your occupancy performance in Calgary and Edmonton. What would you say are the sort of the top two or three things that you're doing so differently from your competitors that allows you to outperform by such a wide margin?

Sam Kolias

Jimmy, its Sam. We are seeing unprecedented resident member response time. Our team really has gone above and beyond and it's responding to resident request and concerns, renewals, all of the above in unprecedented real quick response time.

So, the resident member experiences, the community experiences, the communities that we're building, really, the experience that our residents are going through is better than it's ever, ever been. And so that, we believe is a driving factor and always has been in our industry. One of the weakest and worst economies we were in for a very long time was, in winter, Ontario, which is across the river from Detroit. And we prove there over a very, very difficult long economic slump that we could create value even in a very difficult economy.

There is always demand for value, quality and unprecedented service. And in a difficult, challenging economy, there's only two places that service and product providers can place themselves, first or last. And we like to be first in all economies, and our team has continued to play first with respect to quality value and service that's unprecedented. And this is clearly showing through our results.

William Wong

Just to add to that point, I think [indiscernible] four or five years without being pushed too aggressively. But I think we've built up a lot of goodwill with our resident member base that result of that moving through this [indiscernible] it's occurring so far that we thought it would. There'll be much more customer loyalty. You love the value. They're still getting yields, I guess, still getting renewals at very low increases or flat increases, but [indiscernible] the highest quality level of service. One thing Jim makes it all the time is the good time to cycle when we see people who leave us start coming back. And we're starting resident members who left us a few months ago for lower rent find out pretty fast, they didn’t know [indiscernible] to be than the real value that we can offer. So, we're starting to see that flow back in which is a really good sign for our internal basis where customers who recognize real value are coming back.

Jimmy Shan

Right, because – yeah, because the degree of your performance and I'll take even your – in slide 11, I don't think you've experienced that level of performance. So would you say though, given your comments then that over the next few quarters that I presume a lot of competitors will start to try to catch up and offer more incentives. And – like – is there a point which where we're going to start to see that gap close and how do you see that play out?

Sam Kolias

We're not seeing that. We've already booked our February revenues. We already know what are January's revenues. The two-thirds of the first quarter is already in place and we're actually seeing revenue starting to climb again in the first two months of the first quarter. So, we're very competitive. We've got unparalleled value quality service that – what Rob brings up is a very good point. We took a completely different approach in the last economic expansion where we kept rent for new residence at low levels as well. Prior to 2007, we would ask for market rents and achieve economic rent.

And so back in the last few years of expansion, our market rents were actually lower than economic rents that we could achieve if we took the free market approach and realized higher rents like our competitors did. And so, our market rents were actually lower than the economic rents that we could realize and our competitors were already realizing. So, our competitors they were gaining on us in realizing higher revenues. And over the last 30 years, we realized the rents essentially trap consumer price index. So we can take two routes for that half. We can go to more conservative and steady, stable route where in a good and a weak economy. We keep those rents at consumer price level period. Our competitors think that they can beat that trend, and we tried that ourselves in the past and it failed.

And our competitors are learning the same things we learned 10, 20 years ago, that nobody's above the market. And rents essentially, over the long-term trap consumer price index. So, we've taken a different approach. A very stable and very resident friendly approach. Our residents have realized very affordable and acceptable rental increases during economic expansion. And now – and we've always offered incentive in good and bad times, we've always been flexible to our residents. And it's taken a real residents focused approached. And when we treat our residents well, we get that in return in a weaker economy.

Jimmy Shan

Makes sense. Just turning to the opportunities you're seeing on the newly developed communities. Where those be assets there that are still require lease up, and so you're taking some level of lease at risk and that's what sort of making the economics level more interesting to you? Is that how I should think about it?

Sam Kolias

That's correct. That's what's providing us with the value creation opportunity that there is some – at least have risk that the builders aren't really – we'll put it another way, we're in a better position to take advantage of it.

Roberto Geremia

Right. If you look at our appendix and reasons for move out – our number one reason for move out now is Boardwalk Residents transferring into another Boardwalk community. So, we've got a huge goodwill and customer base that wants to move back in with us. And then our new rentals in Regina for example, roughly 50%. Our existing Boardwalk residents that normally, would perhaps go to a condominium or buy a newer home. And as the result of our product offering with a new product, they're choosing to come back and continue renting with us in a newer community.

And so we've got a great customer base that's typically moving into a newer condominium or a home. And now, we're offering an alternative to that in a newly built and/or acquired community where we can give that extra option where we couldn't before to our existing residents and continue retaining existing residents.

And so, that's what we're seeing as an extra benefit and advantage we have with our large resident member base versus our competitors that don't have that large customer resident base and foundation of goodwill.

Jimmy Shan

Okay. Okay. That's great. Thanks, guys.

Roberto Geremia

Thank you, too.

Operator

The next question is from Mark Rothschild with Canaccord. Your line is open.

Mark Rothschild

Hi. Good morning.

Sam Kolias

Good morning.

Roberto Geremia

Good morning.

Mark Rothschild

Just following up on – you’ve sort of answered this with Alex and touched on this fluids maybe but in regards to the incentives, obviously, the occupancy rate is high and you have been utilizing incentives to maximize that, and you've outperformed the markets. Do you expect that you will need to keep a higher than average level of incentives over the remainder of this year to maintain that high level of occupancy? Or do you think that maybe it's going to stop – it's going to be a little bit easier to maybe the spring or summer is just too early to answer that?

Sam Kolias

It's quiet early to answer that. Our preliminary thought process is that it's going to real tough first six months, and the second six months are going to be a little better. Mainly because our comparables for the first six months in 2015 were quite strong too. But it is really quite early in the cycle that – the good point, as I kind of mentioned is we're seeing some preliminary numbers come in, we're not having to offer the same level of incentive. Spring turnover may cause an additional pressure there with [indiscernible] itself.

The good news is it's February and it's generally a tough time to rent and we're matching quite well. All be in Alberta and Saskatchewan got quite nice weather, so there are a lot of other impacts that face that well too, but I can't underplay the importance of our team and their ability to just get on top of showing and rentals and get on to a greater way and have this meet the customer's needs right there and don't let them get out of [indiscernible]. That is quite – and particularly in markets where we are right now where demand is not outpacing supply, that's where you have to be strong and have and have a great team in place.

Mark Rothschild

Okay. My other question. Looking at your presentation, you disclosed, the operating expenses to your guidance have gone down actually, I think it's like $4 million, $5 million, so your NOI expectation for the midpoint of guidance has gone up, but yet your guidance range on a per unit basis is the same. So, what am I missing there?

Sam Kolias

It hasn't really gone up. We were doing our IFRS valuation review. We were finding that – doing the valuation itself when we outsource it is actually a building by building, asset by asset valuation methodology. We were preparing it against our internal NOI, what we found was it is in our total vertical integration. We were including expenses in that -yeah, which we've always do expense in the P&L anyways that wouldn't be there if you're doing an IFRS valuation methodologies. We just base we pull those out, so that's about $5 million.

So, the actual number operationally has not changed at all, because when we do our FFO guidance, our NOI guidance we include those part of the comparables year-over-year when you want to come – this is why here is meant to compare against IFRS by which it was doing back to any of those cost then at all.

Mark Rothschild

Okay. I didn't follow that completely but I guess I'll follow-up...

Sam Kolias

I'll follow up with you, Mark. It's just basically – our integration system itself costs about $5 million to operate which IFRS looks at it when we did the valuation methodology that takes into account.

Mark Rothschild

Okay. Thank you very much.

Operator

The next question is from Matt Kornack with National Bank Financial. Your line is open.

Matt Kornack

Hi, guys. Just turning back to the tax consideration with regards to distribution increase. Do you think the acquisition and development plan that you guys have set for us will provide enough of sort of pool of capital that will alleviate some of those pressures on the tax fronts or have do you view that?

William Chidley

Well, it will. Depending how fast the program goes forward, how – what's the cost of the program is and the timing of it, it will have additional depreciation and additional interest expenses and royalty moving forward as well and shelters and lot of it. But – that being said, we're not visible – we're not buying assets just to get tax basis. We're buying assets because they're [indiscernible] good opportunities for us to do things as well as do - but yeah, obviously tax is being a trusted issue and we have to take into account.

Matt Kornack

Okay. Fair enough. And all those things being equal, assuming you kept the existing portfolio, would then have to at least distribute more to offset the potential taxable issue?

William Chidley

Yeah. Our internal shows that 2016 probably enough, for 2017 we probably would have to increase by default, anyways.

Matt Kornack

Okay. Interesting.

William Chidley

But not at the same levels that we've increased here, but we're going to do that.

Matt Kornack

Fair enough. And then just quickly, you mentioned 95 basis points to 100 basis points in terms of mortgage spreads which I think are fairly consistent with where they've been for a while. Are the banks, their lenders starting to keep a little bit more for themselves given rates have gone on the downside or using the spread holding fairly entirely?

Sam Kolias

They're holding it. I think it's quite historically when the bonds have gotten this lower and close this low spread increase and they get to the banks cost of capital leverage.

Matt Kornack

Yeah.

Sam Kolias

So, it's well, but all of them but more important thing is the all-in rate for the law that we've never ever seen before.

Matt Kornack

Sure.

Sam Kolias

So that, we kind of focus on that, but yeah, we do anticipate when bonds at [indiscernible] below 1% for a better time there, yeah, but never been heard of it going that low historically. So, at those rates, we did not expect spreads to stay tight.

Matt Kornack

Okay. Fair enough. Thanks guys.

Sam Kolias

Thank you.

Operator

[Operator Instructions] The next question is from Michael Markidis with Desjardins Capital Markets. Your line is open.

Michael Markidis

Thanks. Actually my follow up has been answered but Rob if you could follow up with me offline on that issue or just discuss with Mark on that [indiscernible] that'll be great. Thank you.

Sam Kolias

Sure.

Operator

And I'm currently showing no further questions in the queue at this time. I'll turn the call back over to the presenters.

James Ha

Thanks Chris. If you missed any portion of today's call, a copy of this webcast will be made available on our website, boardwalkreit.com, where you 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

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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