Boardwalk Real Estate Investment Trust's (BOWFF) CEO Sam Kolias ...

Posted: 13 Nov 2015 02:29 PM PST

Executives

James Ha - Investor Relations

Sam Kolias - Chief Executive Officer

William Wong - Chief Financial Officer

Bill Chidley - Senior Vice President, Corporate Development

Rob Geremia - President

Analysts

Jonathan Kelcher - TD Securities

Frederic Blondeau - Dundee Capital Markets

Mario Saric - Scotiabank

Alex Avery - CIBC World Markets

Michael Markidis - Desjardins Capital Markets

Jimmy Khing Shan - GMP Securities

Heather Kirk - BMO Capital Markets

Matt Kornack - National Bank Financial

Boardwalk Real Estate Investment Trust (OTCPK:BOWFF) Q3 2015 Results Earnings Conference Call November 13, 2015 11:00 AM ET

Operator

Good morning, ladies and gentlemen. My name is Aaron and I'll be your operator today. At this time, I'd like to welcome everyone to the Boardwalk Real Estate Investment Trust Third Quarter Results Conference Call. [Operator Instructions]

I'd like to turn the call over to Mr. James Ha. Mr. Ha, you may begin your call.

James Ha

Thank you, Aaron, and welcome to the Boardwalk REIT 2015 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.

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 a 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 its actual performance may differ materially from those in any forward-looking statement. 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 forms and quarterly reports.

Moving on to slide 3, our topics of discussion for this morning will include highlights of the REIT's third quarter results, current fundamentals of the multi-family market, a review of the Trust's financial and operational performance, an acquisition, disposition and development update, operation review and analysis, financial overview and lastly, an outlook and 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 steady third quarter for the Trust. Starting on slide 4, some financial highlights for the three months in the third quarter and nine months of 2015 include total rental revenue of $119.7 million and $360.5 million, an increase of 0.7% and 2% respectively from the same period last year. NOI of $74.9 million and $223.8 million, down 1% and up 2.6% from the same periods last year.

Funds from operations are $47.6 million and $140.6 million, an increase of 1.7% and 6.4% from last year. FFO per unit of $0.92 and $2.70 on a diluted basis, up 2.2% and 7.1% from last year and adjusted funds from operations per unit which includes an estimated $500 per unit of maintenance capital per year of $0.83 for the three months ended September 30, 2015 and $2.46 for the nine months ended September 30, 2015, up 1.2% and 7.4% respectively.

Some portfolio highlights on slide 5 include overall occupancy for the second (sic) [third] quarter of 2015 was down 131 basis points to 96.69% from 98% in the same period last year. The monthly average occupied rent realized period ending for the third quarter which includes ancillary income was $1,199 per apartment unit, up $39 from $1,160 per apartment unit in the same period last year.

Our same property third quarter performance for the three and nine months ended September 30, 2015 is as follows: rental revenues increased by 1.4% and 2.3%, overall operating cost increased by 3.8% and 2% and total NOI increased by 0.2% and 2.5%.

As slide 6 illustrates, our rental revenues are cyclical in nature. As pictured on the slide, the revenue cycle oscillates between a softer market with rising vacancy, increasing incentives and a decrease in rental rates to a balanced market with selective incentives, lower vacancy and a balance in supply and demand to a strong rental market with increasing rental rates, lower availability and very few incentives.

In the third quarter of 2015, Boardwalk witnessed softer demand for rentals across its major markets. Occupancy levels have decreased slightly, yet continue to remain high. Although vacancy has increased slightly, suite-specific incentives are up and rental rate growth is moderating.

The Edmonton and Calgary markets have stayed in a period of balance and continued moderately positive growth. Revenues continue to climb although vacancy has increased slightly. With lower oil prices for a longer period, CMHC has recently announced higher market vacancy rates above 3%, which reflects a surplus of rental units Boardwalk's core Calgary and Edmonton regions. We will continue to monitor all our communities and make adjustments accordingly to maximize occupancy levels and revenue.

The Saskatchewan, Fort McMurray and Grande Prairie markets remain in the softer part of the rental cycle, resulting in both a decrease in occupancy and increase in incentives in these areas. Boardwalk continues to focus on customer service and lease renewals offering incentives to mitigate the decline in occupancy in these areas. Fort McMurray is 1% of our portfolio. The Ontario and Quebec markets are essentially flat even with continued lower resource prices, a lower Canadian dollar and lower borrowing costs.

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

Slides 8, 9 and 10 explains 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 cycle, 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-regulated rent control and the elimination of rental increases for customers that can prove financial hardship continue to drive higher occupancy, build goodwill and a stronger community.

Slide 11 shows our focus on quality and services being rewarded by higher occupancy and lower turnovers. Year-over-year, turnovers increased slightly and occupancy decreased slightly.

Slide 12 shows our average customer stay remaining stable at just over 3.5 years, reflecting more of our customers who are calling Boardwalk home. If you truly feel at home, where else would you want to live?

Slide 13 highlights the increase in occupied rent and decrease in market rent relative to our last fiscal quarter three months ago. While the continued increase in average occupied rents has been a positive driver to revenue, we have proactively decreased market rent in select units and select communities in both Calgary and Edmonton to maximize occupancy.

During the last month of the last quarter, the Trust average occupied rent has increased by $16 per apartment unit and by $39 per apartment unit since last year. This trend remains positive. The trend is a spread between occupied and market rents have decreased from the previous quarter reflecting a portion of market rents realized in occupied rents and a softening of the Alberta and Saskatchewan rental markets.

As shown on slide 14, the Trust has a negative mark-to-market which is the result of lowering of market rents in the Alberta market to temper the increasing vacancy, keeping occupancy higher consistent with our NOI optimization strategy. The average loss to lease totaled $30 per apartment, a negative $30 per apartment unit per month.

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 rent would 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 2014 annualized operating expenses.

The chart on slide 16 demonstrates occupancy versus availability. Our occupancy for the third quarter was slightly lower, while our availability also increased slightly. We believe that occupancy of 97% or higher reflects Boardwalk rental price bottom.

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 increased more than new rentals resulting in lower occupancy levels, reflecting a softer rental market.

Slide 18 illustrates vacancy loss and incentives. Incentives and vacancy continue to increase reflecting softer Alberta and Saskatchewan markets.

Slide 19 shows the results of the Trust customer move out surveys. For the third quarter, turnover was up 3.1% relative to the same period last year. Purchasing a new home remains a top reason for move outs and has not changed year-over-year. New housing is a significant alternative and our continued focus on building goodwill, quality and service are all essential. In the third quarter, there was also a 19.3% increase in work-related move outs, a 14.2% increase in larger accommodation which may reflect more doubling up and skips up 7.9%, all reflecting a softer [indiscernible].

Interestingly, there is a drop of 1.5% in moving in moving in with others. Rent too expensive has decreased by 5.8%, which showed the positive impact of our decreasing market rental rates. Transfers within Boardwalk has increased 25.2%, reflecting many residents continuing to choose Boardwalk as their home.

Slides 20 and 21 show a softening economy going forward for Alberta and Saskatchewan. Multi-family starts are forecasted to decrease slightly for Alberta and Saskatchewan in 2015 compared to the elevated levels in 2014. Single detached starts in Alberta and Saskatchewan are also starting to trend downward for 2015. Forecasted net migration remains positive, but has significantly slowed. Reduced Boardwalk call volume also reflects this trend.

Slide 22 illustrates the most recent unemployment statistics in Alberta and Saskatchewan. Both provinces' unemployment rates have increased compared to the same period last year, however, remained below the Canadian average.

Slide 23 illustrates average weekly earnings as of the third quarter. Alberta workers continue to earn the highest wages in the country, however, average weekly earnings decreased year-over-year. Saskatchewan also saw a decrease in weekly earnings. All other provinces saw positive wage growth for the same period with the exception of BC which has stayed the same.

Slides 24 and 25 show the most recent migration numbers for Alberta and Saskatchewan. Migration for both Saskatchewan and Alberta are dropped significantly since the previous year. With the weaker economy and more supply of multi-family units both forecasted for 2015 in Alberta, the rental market supply and demand statistics reflect the movement to a softer rental market. Saskatchewan's international migration has increased over the last reporting period and inner-provincial migration has moved to the negative.

Slide 16 (sic) [26] shows the breakdown of major project investments in Alberta which totaled $196.5 billion as of October 2015, down $1.9 billion over last quarter, reflecting shelf upgrader projects. We continue to monitor the long-term capital being invested in Alberta as a leading indicator to future demand for housing.

As shown by slide 27, land sale revenue for the province of Alberta relating to petroleum natural gas continues to slow versus last year. Natural gas and oil prices have fallen and continue to be low and the Canadian dollar is weaker, which is positive for oil and gas producers who export oil and gas in US dollars.

As depicted by slides 28 and 29, the Alberta housing market has slowed over the last quarter, with single family home prices in Edmonton and Calgary down and condo prices down slightly as well.

As depicted by slide 30, the average residential sale price is decreasing in Saskatoon and Regina.

Slide 31 illustrates implied cap rates in relation to our unit price. Over the last quarter, our public market valuation has dropped resulting in a widened gap between the implied cap rate represented by our current unit price and the cap rate that quality assets have historically sold at on the private market. The stock and bond markets continue to be volatile.

The slide includes the IFRS fair value rental revenues and expenses used to calculate implied cap rates on a per share basis and compares the Trust valuation net of $4.82 of cash per unit. Please note that the $4.82 cash does not reflect the upcoming special distribution of $1.

We continue to review our portfolio. Our current public market valuation continues to represent exceptional value when considered against current replacement costs, other consumer housing options like condominium ownership and current valuations on historic private market transactions.

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

Bill Chidley

Thank you, Sam. Low interest rates continue to fuel investor appetite for apartments, cap rates for well located; better quality properties remain at low levels. Our recent portfolio sale in Montreal has indicated that cap rates in the city have declined.

Moving on to slide 33, we closed on the sale of our 1,685 units Windsor portfolio on September 10, 2015. As a result of this sale, a special distribution of $1 per Trust unit to unitholders on record December 31, 2015 will be paid on January 15, 2016.

Moving on to the next slide, the first phase of our development Pines Edge consists of 79 units located on our existing property Pines of Normanview in Regina. This four storey, wood frame, elevatored building will have one level of underground parking. There are 13 one bedroom and 66 two bedrooms, of which 60 have two baths.

Moving on to the next slide, the anticipated completion of this phase 1 is Q1 of 2016, and is expected to cost approximately $14.1 million or $178,000 per door which equates to $179 per square foot buildable and $209 per square foot rentable. We are estimating the stabilized cap rate to range between 6% and 6.5%, excluding land. Including the appraised land value of approximately $12,000 per door, the cap rate would be reduced by about 40 basis points. We have factored in some market rent decline in this analysis, reflecting the possibility of continued market weakness.

Moving on to the next slide, this slide highlights our other development opportunities. In Calgary, a rezoning application was approved by City Council to build 200 additional units at Sarcee Trail Place. We are exploring a concept plan for two point towers and phasing the development. Once we receive detailed drawings, we will assess the economic viability of this project.

In Edmonton, at Viking Arms, we received approval from City Council for the RA9 zoning. The city is currently working on a text amendment to increase the FAR on all RA9 zones to 5FAR which would allow us to build 312 additional units on this site. City planners expect this text amendment to be ratified by City Council.

We have identified two major master plan sites, one in Calgary and another in Regina. In Calgary, we have submitted an application to the city to rezone this site in Calgary. And in Regina, we continue to invest [to get the] possibility of rezoning to substantially increase density. Both of these sites currently have limited excess land and would require substantial demolition.

I would now like to turn it over to William Wong. William?

William Wong

Thank you, Bill. Slide 37 shows the calculation of FFO for the three and nine months ended September 30, 2015 versus the same periods in the prior year. It is calculated using profits from continuing operations as shown on our consolidated statement of comprehensive income.

Reported funds from operations, or FFO, a performance measure not defined by IFRS but that better reports the overall operational performance of real estate entities for the current quarter was $47.6 million, up 1.7% from the amount reported in the same period last year and on a per unit basis increased by 2.2% from $0.90 to $0.92. Higher rental revenue growth in Calgary and Edmonton and lower financing costs contributed to the increased FFO and FFO per unit for the quarter.

For the nine months ended, FFO was $140.6 million compared to $132.1 million for the same period last year, an increase of 6.4%. On a per unit basis, FFO was $2.70, up 7.1% from the $2.52 for the same period in the prior year, due to higher revenue and NOI in Alberta and Ontario, lower utility cost and lower interest cost. Lower utility cost was attributable to the milder winter in the earlier part of the year.

The next slide, slide 38, shows our reconciliation on a per unit basis of FFO for the three and nine months ended September 30, 2015, from the FFO per unit amount reported in 2014. As the slide shows, a decrease in financing cost contributed $0.04 to FFO per unit growth for the current quarter, partially tempered by higher administration as a result of an accrual for the retirement of one of our executives. Note, about $0.01 of FFO [was lost] in September as a result of the sale of Windsor. This was offset by a property tax adjustment related to our BC portfolio sold in 2014.

For the nine months ended September 30, 2015, NOI growth and financing cost savings contributed $0.12 each to our FFO growth, partially tempered by higher administration of $0.03 and the loss of $0.03 of FFO on sold properties. In addition to the retirement accrual mentioned previously, administration was also higher as a result of associate transition payment.

Slide 39 provides an overall review of rental operation performance for the current quarter and the first nine months as shown in our income statement. For the current quarter, total rental revenue from continuing operations for the current quarter was slightly higher by approximately $0.8 million or 0.7%, compared to the same period in the prior year, primarily due to higher average rental rates in Calgary and Edmonton and Ontario. Although occupancy levels have slipped 131 basis points year-over-year, the Trust remains focused on maintaining high occupancy levels and keeping our suite still.

Total rental expenses for the current quarter increased by approximately $1.6 million or 3.6% from $43.2 million to $44.8 million, primarily due to higher property taxes and utility expenses. Utilities were higher due primarily to Saskatchewan's cable and internet costs, higher natural gas distribution charges in Quebec and higher water and sewer expense.

Property taxes were higher by approximately $288,000 or 3.7% due to higher property tax assessments. The net result is that overall net operating income, or NOI, for the current quarter decreased $749,000 or 1% compared to the same quarter in 2014. Operating margin at 62.6% for the current quarter decreased slightly from the 63.6% for the same period in the prior year.

The next slide, slide 40, shows our breakdown of capital we reinvest back into our investment property portfolio. This capital investment is categorized between repairs and maintenance, on-site maintenance, personnel costs, maintenance capital, stabilizing and value enhancing capital investment and property, plant and equipment purchases or PP&E.

For the third quarter of 2015, Boardwalk invested in expense an average of $416 per suite on R&M and on site personnel costs and capitalized approximately $684 per suite on investment property improvement. Investment property improvements are further broken down between estimated maintenance CapEx at $125 per suite and value enhancing improvements at $559 per suite. In addition, Boardwalk expended approximately $1.5 million or $44 per suite on PP&E.

Year-to-date, Boardwalk invested in expense an average of $1,240 per suite on R&M and on-site personnel costs, capitalized approximately $1,624 per suite on investment property improvements and expended approximately $5 million on PP&E.

Slide 41 shows a breakdown of our operational capital improvements and capital asset additions for the first nine months of 2015. Excluding development costs, the Trust reinvested back into its portfolio a total of $61.1 million, comprised of $56.1 million for its investment property improvements and $ 5 million in PP&E, compared to a total of $58.4 million for the same period in 2014.

Included in the amounts that reflect Boardwalk's internal capital program is approximately $13.2 million of allocated on-site wages and salaries in certain parts and supplies, compared to $12.8 million for 2014. Not included in the pie chart for the first nine months of 2015, Boardwalk invested $8.9 million in development compared to $0.3 million for the same period in 2014, as well as $3.3 million in acquisitions, primarily for the Nun's Island Office and Warehouse purchased earlier in the year.

As slide 42 shows, total overall admin costs, which includes operating and corporate G&A, for the first nine months of 2015 were $43.1 million, an increase of $2.5 million or approximately 6% from the $40.6 million for the same period last year. The increase was due primarily to salaries and wage cost inflation, higher profit sharing accrual and the accrual for the retirement of one of our executives.

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

Rob Geremia

Thanks, William. Slide 43 and 44 focus on our stabilized portfolio. At September 30, 2015, with the exception of the newly developed 109 unit complex in Calgary, Boardwalk's entire apartment portfolio was classified as stabilized. For the third quarter, revenue on these properties increased by 1.4% as compared to the same period last year, with operating costs increasing by 3.8%, resulting in an NOI increase of 0.2%.

For the nine months of 2015, stabilized revenues increased by 2.3%, while operating expenses increased by 2%, resulting in an NOI increase of 2.5%. As noted on the chart, the significant increase in expenses reported in Saskatchewan was the result of increased utility prices as well as the inclusion of a new cost related to the inclusion of TV and internet as part of our rental product in Saskatchewan.

Although our apartment rent portfolio only represents 1.1% of our overall NOI [indiscernible] has required us significantly discount our rent to keep ahead of lower market occupancy levels. In addition, this quarter saw a substantial increase in both property taxes and property-specific security cost further impacting negatively our quarter NOI.

Slide 44 shows the sequential revenue on our stabilized properties over the last four quarters. The third quarter reported a slight decrease of 0.1% when compared to the second quarter of 2015.

Slide 45 documents the Trust's continued strong liquidity position. With $250 million of cash at September 30, an additional $18 million of committed subsequent financings and $196 million in existing line of credit, the Trust has $464 million of available liquidity. This represents 20% of total debt outstanding at the end of the quarter. Boardwalk's debt as a percentage of reported investment property asset value was 38% after adjusting for cash.

Slide 46 reports the Trust's total debt maturity schedule at the end of the third quarter. Although overall interest rates continue to be close to historical lows, since the end of the third quarter, we have witnessed the government of Canada benchmark bond increase about 30 basis points. Prior to the end of the third quarter, the Trust had either renewed or forward-locked all maturing mortgages for 2015 at rates that are substantially below their reported maturing interest rates.

At September 30, the Trust's overall weighted average in place interest rate was 3.08%, a rate that is 58 basis points above the current NHA insured 10-year rates of 2.5% and 128 basis points above the current five-year rate of 1.8%. Of particular note, is that for fiscal 2016, the Trust has over $250 million coming due at rates that are 150 basis points above existing 10-year rates. Boardwalk's remaining mortgage insurance amortization under these insured loans is in excess of 30 years.

Slide 47 provides the reader with our estimate of our current mortgage underwriting valuations. Boardwalk's balance sheet continues to be conservatively levered at 42% after deducting our current cash position. Of special note, is over 1,500 apartment units currently have no outstanding mortgage encumbrances.

Slides 49 provide additional detail on Boardwalk's mortgage portfolio. Slide 48 shows the Trust's interest coverage on a four quarter rolling basis continues to increase to over 3.59 times, the highest in our reported history. Boardwalk's secured mortgage portfolio is over 99% insured under the current NHA insurance program. The use of this insurance has two unique and distinct benefits and assists in addressing the two distinct financing risks: these being interest rates and renewal risk.

With respect to interest rate risk, the NHA insurance provides us the benefit of very advantageous interest rates. With this insurance, we are able to obtain very competitive interest rates which are currently at approximately 75 basis points to 90 basis points over the corresponding government of Canada's benchmark bonds.

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

Slide 49 provides a summary of our 2015 mortgage maturities. During the year, the Trust renewed over $423 million of maturing mortgages that had a weighted average maturing interest rate of 3.67%, with new mortgages reporting a new interest rate of 2.16%, with an average maturity term of seven years. In addition, [indiscernible] maturing mortgages to a tone of $155 million at the same low rate of 2.16% for the same seven year terms. It is estimated that the annualized interest rate savings on the renewed mortgages principle is approximately $6.5 million.

Slide 51 and 52 focus on Boardwalk's investment property fair value calculation. Slide 50 shows Boardwalk's reported fair value at September 30, 2015, on its investment properties, was $5.5 billion, approximately $200 million below the reported amount at the end of Q2. In determining the fair value of our investment assets, we are required to take into account a number of variables, some of these of which are based on our actual estimate cost and other costs are priced on market standardization. One of the key inputs that is used to determine the reported market revenues are the current levels of market rents in our portfolio.

As was previously noted, our strategy in weaker markets is to be aggressive on adjusting rents to maintain higher occupancy levels. Unfortunately, in the development of fair value estimates, one of the key market assumptions that is used is the portfolio occupancy levels will be based on an industry standard of 95% to 97%. The result of this coupled with our estimated increase in operating costs for 2016 has resulted in an estimated NOI for fair value determination of $295.4 million, as noted on slide 51.

Slide 52 highlights the capitalization rates used in determining the fair value of these noted investment properties on a more detailed basis. Overall, the weighted average capitalization rate used in the determination of the fair value was 5.41% at September 30, slightly lower than the amount reported at the end of the second quarter.

Slide 53 details the two key variables in the determination of these estimates, net operating income and capitalization rates. As is noted, a slight shift either negatively or positively on these estimates could materially impact the reported amount.

Slide 54 highlights Boardwalk's normal course issuer bid. During the Trust's 2014 NCIB, the Trust acquired a total of 472,100 of Boardwalk Trust units for cancellation on the open market. The average price of these units was $67.01. The funding of the 2014 NCIB was allocated from a portion of the proceeds generated from the sale of our BC assets. The cap rate on this sale was significantly lower than the implied cap rate on our Trust unit price at the time of acquisition.

Boardwalk's 2015 current NCIB to the end of October 2015 has seen the Trust purchase for cancellation a total 265,700 trust units at an average price of $54.45. The capital recourses to fund this bid has come from the excess capital release of our recent sale of our Windsor portfolio, which was sold at a significantly low cap rate than our currently implied public market cap rate based on our current trading price. We're beginning to be active on our current NCIB.

Moving on to slide 55, Boardwalk's 2015 financial forecast. Consistent with prior periods, on a quarterly basis, the Trust reviews reported financial guidance. This review consists mainly of comparing the actual reported results with the assumptions used in determining our reported guidance. Based on this review, which includes the impact of the sale of our Windsor portfolio in September 2015, we are adjusting our FFO guidance range to $3.53 to $3.58 from $3.48 to $3.62and our AFFO guidance range of $3.20 to $3.25 from $3.15 to $3.29.

We're also adjusting our expectations for NOI growth on stabilized properties to between 1% to 3% from the 1% to 4% previously announced. All other key assumptions remain unchanged and are as follows: no new acquisitions or dispositions during the forecast period, the development project in Regina will not be completed in 2015 and as such will have no financial impact on the reported results.

Moving on to slide 56 to 59, which is our forecasted capital budget for fiscal 2015. Slide 56 reports our capital expenditures both on a budget and actual basis for 2015. Our full year operational capital budget was set at $98.8 million with an additional development budget of $12.2 million, the majority of which relate to the cost of the development of the Pines project initiated in Regina. At the end of the third quarter, operational capital totaled $61.1 million, with development reported at $8.9 million.

Our Regina development project continues to be on time and on budget and also during the quarter the Trust was presented with an opportunity to acquire commercial building on Nun's Island in Montreal. Boardwalk [hasn't made a tender] at this property and this is where our office as well as our Montreal warehouse is located. This was not budgeted for, but to be honest with you, it has a strategic operational acquisition.

Slide 57 provides a break up of our 2015 capital is targeted [where it is to be targeted], with slide 58 showing a break up of where the operational capital is [indiscernible]. In addition, for your reference, slide 59 provides more detail on the determination of maintenance capital. On average, for larger capital projects such as new roofs or exterior upgrades, these are amortized over 12 years, while specific suite capital and our internal capital program are amortized over 3.5 years, which approximate the average customer stay at Boardwalk. For 2015, we anticipate maintenance capital to be approximately $500 per apartment unit or $16.4 million, after adjusting for the sale of the Windsor portfolio.

Moving on to slide 60, Boardwalk's distributions, as is customary, at each Board meeting the trustees review the Trust unitholder distributions. As a result of this review, the Board has determined to maintain its regular distribution at $0.17 per trust unit monthly or $2.04 on an annualized basis. In addition, due to the sale of Windsor, the Trust has determined that in addition to the regular monthly distribution, an additional special distribution is warranted in the amount of $1 per outstanding Trust unit. This amount will be paid to unitholders of record on December 31, 2015 and paid on January 15, 2016.

Moving on to slide 61, Boardwalk's 2016 financial forecast. Consistent with prior years at Boardwalk, the Trust releases its next year's financial guidance as part of Q3 disclosure. In the [indiscernible] we have tried to keep into account the existing market conditions of our core markets, while still focusing on our overall NOI strategy, and in particular focusing on the higher occupancy levels and adjusting rents quarterly.

Based on this, we're anticipating an FFO range of between $3.40 to $3.60, with an expected AFFO forecast range of $3.06 to $3.26. In determining these, our key assumptions include: no new acquisitions or dispositions during the forecast period, with the exception of 79 units for development project in Regina that is scheduled to be completed in the first quarter of 2016, no additional development projects will be completed during the year and stabilized building NOI will range from minus 2% to plus 2% as compared to the prior year.

Slide 62 documents our 2016 estimated capital expenditures. For 2016, the Trust has budgeted to invest a total of $90.3 million operational capital and an additional $2.8 million in development. As part of this budget, we have increased our maintenance capital estimate to $525 per apartment unit per year from $500 noted in 2015.

As is noted on this slide, over 80% of our operational capital is in the category of stabilizing and value added, an amount that continues to be subject to review and only invested in areas it will create additional value.

Slide 63 and 64 provide more detail of the 2016 anticipated capital budget. And slide 65 provides more detail in the determination of our estimated maintenance capital.

This concludes the formal part of our call. We'd like to open it up now for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Jonathan Kelcher from TD Securities.

Jonathan Kelcher

Just turning first to 2016 guidance, does that include any purchases on the NCIB?

William Wong

Yes, it does. We continue to purchase using the excess equity that we released in Windsor to buy the number of shares accordingly. So yes, it does.

Jonathan Kelcher

And after you pay – if you pay about $51 million, $52 million in the special distribution, that should leave around $60 million?

William Wong

In total, when we start the NCIB, that's correct. We've already spent some of that money already during the third quarter.

Jonathan Kelcher

And then just secondly on market rents, obviously your estimated market rents is down versus in place. Is that something that impacts mostly just new rentals or does is also have an impact when you're doing renewals?

Sam Kolias

It has an impact on both. For sure, obviously, it impacts the turnover suite itself. However, it does also impact renewals. Now, our experience on renewals has been that we don't have to give as much of an incentive or under our market rate adjustment as the current market vacant suite is, we watch much more aggressive on a vacant suite than we are on a renewal. That being said, we do negotiate on a one by one basis of the renewing customers to ensure that they're happy to want to stay as well too.

Jonathan Kelcher

And are you still seeing a lot of small increases in your renewals?

Sam Kolias

Depending which markets you are in, but particularly in Alberta, there are some where we are getting slight increases, but the majority are staying flat or getting a slight short-term incentive.

Jonathan Kelcher

And lastly just on the utility cost in Saskatchewan, could you remind us when you made that switch to include the internet and cable? Which quarter?

Sam Kolias

July of 2015 that kicked in.

Jonathan Kelcher

So there is two more quarters to go of it?

Sam Kolias

That's correct. And it should be on a same-store equalization basis, correct.

Operator

Your next question comes from the line of Frederic Blondeau from Dundee Capital Markets.

Frederic Blondeau

I was wondering at this point what are your views on non-core dispositions for next year?

Sam Kolias

At this point in time, Frederic, we don't have any plans to dispose any additional assets in our portfolio. That being said, everything is for sale for the right price. I think if you look at our Windsor transaction, that was not a market deal, it was simply a vendor proposed us with that price that we reviewed and both management and the board was happy with. So our forecast right now is to not sell any more next year, but that always being said at the right price and the right opportunity we will sell.

Frederic Blondeau

My second question is, I was just wondering if you had a look at the FDL portfolio in Montreal and what are your thoughts on it or on the transaction itself?

Bill Chidley

We certainly were aware of FDL portfolio and we did look at it. We have a policy of not commenting on transactions that we're not a party to.

Frederic Blondeau

But can you comment on the asset itself?

Bill Chidley

No. We really, as I said, have a policy of not commenting on other people's acquisition.

Operator

Your next question comes from the line of Mario Saric from Scotiabank.

Mario Saric

I have two questions, one pertaining to the guidance and then second question just in terms of cap rates. So on the first question, on the 2016 guidance, specifically the same property NOI negative 2% to positive 2%, could you break that down for us from a revenue and expense perspective? It sounds like the operating cost may see a bit more growth.

William Wong

In general, if you look at the NAV slide where we show you our estimated midpoint, we're anticipating probably flat revenue year, with maybe some pick up, I think that's part of the issue with Q2 by itself is, on the IFRS valuation, we're not seeing a pickup taking place. You'll notice there's quite a spread between the forecast 2016 revenue guidance and the IFRS revenue guidance. Our team believes they're going to be able to pick up some occupancy as well as some slight increase in rent, nothing material.

On the operating expense side, there's a couple of categories that we don't have a lot of control over, particularly property taxes, which we expected to increase year-over-year, which could be in excess of our revenue growth. And the other one is utilities as well, too, because that's a little bit weather dependent. We are starting to see savings on operational expense side, R&M and those categories, but at the end of the day, we are anticipating expenses to be up around 3% year-over-year and we are hoping to keep revenues in the 1% range on top. But again, it's still – it's not quite – we're not quite 100% confident to say revenues are going up for sure next year.

Mario Saric

Quarter-over-quarter, you reduced the market rent in Calgary and Edmonton by about 7% and 3%, respectively. When I go back and look at 2008 and 2009, it looks like the worst was something like 12% or so in Calgary and 4% to 5% in Edmonton. And I think in the past you've indicated Calgary maybe overshot in terms of rent corrections last time around. So within that guidance, it doesn't sound like you're reflecting any further deterioration in your expected market rent in those two cities?

Sam Kolias

That's our expectation. Now, we're going into this downturn in a much better place than we were in the last downturn. If I remember correctly, going into the last downturn, in Calgary we had about 5% or 6% vacancy already. So we were already behind it. Now, we're sitting at – and then going into this, we were sitting about 1%, 1.5% vacancy. So we don't have to be nearly as aggressive to date on discounting rent and/or incentives. So we're anticipating to be able to pick that up.

And we did, actually to be honest, our team is very aggressive in July, August and September, adjusting rents and keeping people happy and keeping people in there and it's been quite successful. But the impact has been, we've had the lower market rent. Our side has never been above being bigger than the market, but we have to follow the market and try to get ahead of it in all cases.

Mario Saric

So as it stands now, you don't anticipate further declines in the market rent given...?

Sam Kolias

In the short-term there possibly could, but if you look at our guidance on an overall basis, we are anticipating revenues to be flat and accelerating as the year goes on.

Mario Saric

And then just quickly on cap rates, so looking at where the share price or the unit price is trading today, I think the market is pricing in, in our view, some substantial NOI erosion and there maybe some cap rate expansion, cap rates for your Alberta portfolio were flat quarter-over-quarter. Once again, going back to 2008 and 2009, it didn't seem like cap rates moved very much because there was no transactions, but the perception was cap rates were moving higher. So the flat quarter-over-quarter cap rate moves this time, is it simply because there is no transactions materializing or in fact there is good enough demand in the market that if there were transactions that they would be executed cap rates haven't changed in the past 12 months?

Sam Kolias

I think first and foremost, we have to clarify it. We don't do the cap rates analysis ourselves, we have a third-party to give the cap rates that they see in the market. But the comment we did see in Alberta this quarter was exactly the same we saw in 2008 and 2009, there's nothing transacting. And so – may be spreading, but there is no need for a sale. So there really is no transaction happening at this time that will justify changing the cap rates. Again, it's identical which happened in 2008 and 2009.

Mario Saric

Maybe I will ask it a little bit differently, if you were to buy a well located asset in Calgary with good occupancy, good tenant base, would your expectation of the going in cap rate today be different than 12 months ago?

Sam Kolias

No, I think it's fair to say that it would be – cap rates would be the same simply because vendors will not sell, they're not pressed as they were – they're not pressed to sell, they're not forced to sell. So if something does sell in Calgary right now would sell at cap rates of a quarter ago or six months ago.

William Wong

Interest rates are lower now than they were in 2009 and 2009 too and we didn't see any transaction, there was nothing that came to the market that was distressed at that time and rates are even lower now than they were then. So obviously we'll keep looking, but we're not seeing anything come to the market like that.

Mario Saric

And you're not seeing any distress with some of your smaller peers, whether it's refinancing or...

Sam Kolias

No, our view is – and with this NHA insurance, we're all equal players in the game and there is adequate supply out there to fund a seller right now.

Operator

Your next question comes from the line of Alex Avery from CIBC World Markets.

Alex Avery

Just on your 2016 guidance, I was wondering what assumptions you had included for the Pines Edge development?

Sam Kolias

Our lease of it was six months in that project, but had 79 units [indiscernible] material impact on an overall basis anyway. But we do anticipate being completed in Q4, lease up probably within six months is our anticipation.

Alex Avery

And I would imagine given it's a brand new building, pretty attractive that you've already got lots of activity on that?

William Wong

We're about to start a marketing campaign in December to see what kind of demand we actually do get for it. We're expecting a slight difference [indiscernible] in Calgary, because when we introduced it to the market it was an incredibly good time, there was huge demand and prices actually exceeded our expectation. Right now, Regina is a weaker market. So we're interested to see how this brand new product with underground parking which is quite unique in that market is taken.

Alex Avery

And when you build a first phase of development, often there are synergies associated, which is continuing to move on to the next phase. How do you feel about the Pines Edge looking at the next phase?

Sam Kolias

When we start the next phase, it'll be a function of how our leasing proceeds on the first phase. If the leasing goes well, then we'll bid the second phase and see if the economics work. But the first question is how is leasing going on in the first phase.

Operator

Your next question comes from the line of Mike Markidis from Desjardins Capital Markets.

Michael Markidis

Just a quick question. I think you guys mentioned that for your guidance for next year, you're actually expecting revenue to be flat for the first little, maybe the first half of the year and then see it accelerating in the back half of the year a little bit or I guess going up a little bit, maybe you can just help us out and understand what's driving your outlook for bit of an increase towards the end of the next year?

William Wong

I think it's the fact that our occupancy levels are going to be so high and we're making a strategy now of going in aggressively, getting occupancy levels very, very high. So really we'll have not a lot of supply of our rental product going to the market. We believe in these tougher times, other landlords will be cutting back on quality and service and we will not be. So we'll be providing even a more superior product than our competitors do. In our view and on an operations team's view, that will drive us into higher occupancy and possibly even more value rents.

Michael Markidis

And then just maybe following-up on Mario's question, realizing there haven't been any transactions at all in Calgary, maybe to ask it another way, assuming obviously – how would your underwriting change today from a risk perspective on what you'd be willing to pay for an asset in Alberta, say Calgary and Edmonton, where it might have been 12 months ago?

Sam Kolias

That's a tough question to answer right now. But one thing that we're definitely seeing is lower rents. And in the past, our experience has been much higher volatility in new construction and new rental supply. So there's been a lot of new construction built in Calgary and Edmonton and those particular communities we would be using a lower rent and as a result would be a lower NOI. But the cap rate would be the same. And the only difference would be the rent that is being used.

And the past has shown, history clearly reflect it, the biggest volatility in the past has been in new apartment units, that's why in our new apartment, we estimated very sustainable long-term lower rents that were much lower than other new rentals that were being built or new condominiums that were being rented out. And so that's why we continue to maintain a higher occupancy. So the rents that we use would be lower and typically to be honest we usually use a lower rent on newly built rental stock as a result of the historic statistic that show they're more volatile.

Operator

[Operator Instructions] Your next question comes from the line of Jimmy Shan from GMP Securities.

Jimmy Khing Shan

So just to push that valuation comment further, I mean, if cap rates you think haven't changed much, but market rents certainly did and they're lower today than they were a quarter ago. I mean, that would suggest that the values have come down, right, and – which will be consistent with what you did on the IFRS reported value. Would that be fair to say or do you think of it differently?

William Wong

I think that's fair today, hence the reason why we took a look at our rent – when we do look at our market rents in Calgary for September 30 [indiscernible] to be exactly how much it is, no, because we're more aggressive on driving rents because of our optimization of occupancy levels too. So I just want to caution you, the IFRS valuation is our best guesstimate at this point in time given current market rents, which could change quite dramatically over a period of time.

If you look back in 2008, they changed dramatically extremely fast. Where are we in this current cycle? None of us can answer that question. But we are taking a different approach to this than we have in the past approached and this time is much, much more of an NOI-focused, higher occupancy, lower costs as well too. So at the end of the day, you should be better off on the bottom line.

Jimmy Khing Shan

And then turning to the NOI guidance again in 2016, what confidence levels do you have that the NOI actually won't go down by more than 2%, just wondering where that number comes from and especially given that the mark to market adjustment is around $11 million or $12 million, which in and of itself is more than 2%?

William Wong

It is, but that is a snapshot of period of time and if you go back historically, if we went back to 2007 when we saw the mark to market being $275 million positive, it evaporated overnight too. We always caution be careful in the mark to market because the mark to market is a snapshot. If you look at September, that wasn't a great month for us and we adjusted rents accordingly.

We're not anticipating that kind of environment to continue for the entire year either through increased occupancy levels and/or adjusting the market rents. So where does that number come from that we stress tested within our guidance range. As we go through the year, every quarter we will view our assumptions. If we're incorrect, if there is actually more pressure than we thought there was, you'll hear back from us adjusting it quarterly.

Jimmy Khing Shan

Just lastly on the NCIB front, is there any thought of – given where the stock price is, to do something a little bit more aggressive than just the regular buyback?

William Wong

At this point in time, no. We're continuing moving forward with our existing strategy. We have excess capital right now to be able to deploy that. Again, our board will review that every quarter again as well to make the determination they feel we should be more aggressive or not.

Operator

Your next question comes from the line of Heather Kirk from BMO Capital Markets.

Heather Kirk

I was just wondering if you can walk us through what you see as a typical phases that you've seen in previous downturns and how we should expect it to come out and I guess this is just tying in with some of the other questions in the call with respect to rents going down, clearly now you're fighting on price, what are the timelines that you expect if you were to forecast throughout the next 24 months?

Sam Kolias

We've been through here in these tough economic times before many, many times and have really changed our strategy as the result of our experience in the past. In the past, in the long time ago past, we would be aggressive with both in place and new resident members coming in with much more and higher price adjustments in better times. And so in the last downturn, the most recent one before this one, in 2006/2007, during that period, we were very conservative with our existing resident members.

And we're quite conservative in Edmonton with our new resident members, but much more aggressive with new applicants in Calgary. So we saw lot more volatility in Calgary because we are more aggressive with new customers versus Edmonton. And so this slowdown, we have been very conservative with both existing and new resident applicants and we're seeing much less volatility, much less vacancy as the result.

We're also doing something different this time around in Edmonton, we were very suite and community specific in incentives and we saw much less volatility in our revenues as a result of that as well. In Calgary, the last downturn in 2009/2010, we were blanketing incentives and giving the same incentives to everybody, which really isn't fair way to adjust, because some suites are overlooking undesirable views, could be darker, again less desirable, and this time around we're using aggressive incentives on empty units that we're having a hard time renting.

And it's very similar to the airline industry that realizes whether or not the plane is full, they're going to have to pay for all the fuel and expenses and the team that flies that plane. And so our industry is very similar. Our expenses for the most part are fixed. And every month that goes by, we're going to pay to serve that unit, whether it's full or empty.

And so we're essentially having what the airline industry does is [seats down] in selective units, selective time, and it's a selected amount of time that they are available during the month. And so we're taking a best practice approach and we're looking at all the good things we have done and our team has succeeded over the past decade and applying it and as a result we're seeing much more steady results and much less volatility as we expected.

Heather Kirk

Just turning to other geographies, at the end of the day, the Alberta portfolio seem to hold better than Quebec. Can you talk about whether that's something you see – that we've seen some volatility up and down in the organic growth in that portfolio, can you just give us a sense of your outlook there and how condos might be affecting you?

William Wong

In Quebec?

Heather Kirk

Yes.

William Wong

Our forecast there is very similar to the previous year, not much pricing power, particularly more condominiums developed in Quebec City that's impacted our portfolio there as much. So we're not seeing aggressive rent increases there as well too. Costs are going up. So I wouldn't see that our Eastern Canada portfolio is doing stellar as well. It's holding in there, it's doing okay, but developed and new supply, no matter where you are across the country, it'll impact you.

Heather Kirk

And you scripted on the NCIB and given where the stock price is, given the demand for the apartment sector, would a sale of the portfolio as a whole be something that could be on the horizon?

Bill Chidley

We would never comment on global assumptions like that. The comment that's best to say. A question came before was would you sell more of your portfolio like you did with Windsor and BC to buy back stock and I think it's a fair question to say we're not out there marketing it right now. And as Windsor was, it wasn't marketed, they approached us. We would sell some more if that's the right price.

Operator

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

Matt Kornack

With regards to asset purchases, it sounds like there really hasn't been a move in cap rates and vendors aren't really willing to sell at this point. But have you seen any move towards that by any of your competition in the Alberta market or do you think everyone is going to sit and wait this out?

Sam Kolias

I think what's happening now is what happened in 2009 in Canada and that was there just weren't sales because apartment owners have access to capital, very inexpensive capital and they're not under really any pressure to sell. I think that would apply to all of our competitors, they're not under any pressure to sell. And as a matter of fact, in 2009, we thought there would be an opportunity to buy and we had capital available and we were ready to scoop down and those opportunities just never presented themselves.

Matt Kornack

On that front, you have a fairly sizable cash balance, I mean, $1, a fair amount of it will go to the special distribution, but you'll still have a fair bit leftover, I don't anticipate or you're not going to use all of that for NCIB purchases. What are you comfortable with the cash position going forward?

William Wong

If you go back historically, we've been comfortable around the $75 million to $100 million range. That being said, we raised excess capital last year to look for opportunities and opportunities can also investing back into our portfolio and getting better returns and buying some of the assets too.

Matt Kornack

And in terms of those opportunities, you mentioned a few [outlets that are there] in Eastern Canada that you're looking at as well right now?

William Wong

With respect to investments in our properties or respect to asset purchases?

Matt Kornack

No, no, with respect to intensification on existing properties.

William Wong

We're always [indiscernible] Nun's Island portfolio to see if there's an opportunity to upgrade some of the suites and we're doing on a one-off selective basis if we can feel we can get the return that we are indiscernible] no, we're not.

Matt Kornack

And last question with regards to CMHC and how they look at the market, are they taking, at least from a new financing standpoint, a similar approach in underwriting as you guys are or is there – are you more or less conservative than they are at this point?

William Wong

They've been more conservative than us for the last number of years. And I think they've built enough cushion into theirs that they haven't really come back with any adjustments whatsoever given the situation that we are today. So I'd give them credit, they've always been an underwriting conservative business.

Operator

We have no further questions in the queue. I'll turn the call back over to Mr. James Ha.

James Ha

Thanks, Aaron. 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'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 call. You may now disconnect.

Chinese Investors New York Real Estate | Kuafu Properties

Posted: 13 Nov 2015 11:26 AM PST

The latest frontier for Chinese investors in NYC: Multifamily

Industry leaders see growing interest in low-risk assets

November 13, 2015 02:26PM
By Konrad Putzier

From left: Jeff Dvorett, a rendering of the Pacific Park rental building 535 Carlton Avenue, Darcy Stacom and Xinyuan Real Estate's CEO John Liang

Chinese firms make headlines in New York by investing in trophy office buildings and condo projects. But as quick profits become more difficult to achieve amid a cooling market, a growing number of Chinese investors are now looking for stable low-risk assets, including multifamily buildings, industry leaders said on a panel hosted by the New York Law School Thursday.

"We've really seen more of an uptick in that multifamily, stabilized-type asset as a kind of desire for investment in recent weeks," said Jeff Dvorett, head of development at Kuafu Properties, a New York-based development firm that specializes in partnering with Chinese investors. Dvorett said his firm regularly "polls" foreign financiers to see what kind of projects they are interested in.

"We are starting to encounter investors that are more willing to be in it for a longer period of time," Dvorett added.

The new Chinese interest in New York multifamily echoes a broader trend among domestic investors, with firms like the Blackstone Group or Starwood recently making big bets on rental housing amid declining homeownership and rising rents.

Darcy Stacom, a star investment sales broker at CBRE, also noted a shift in Chinese investment behavior. "What we've seen mostly from Chinese investors is the desire to see the exit, they want to be in and out in three years," she said. "And that's starting to change as we're seeing the sovereign wealth funds and the insurance companies (come in)."

Industry insiders have argued that the recent market entrance of institutional investors marks a third wave of Chinese investment, following individual apartment buyers and development firms. The most famous example is insurer Anbang Group, which bought the Waldorf Astoria Hotel for $1.95 billion earlier this year. And several Chinese firms are reportedly vying to buy Starwood Hotels.

Institutional investors often have a longer investment horizon and lower return expectations, making multifamily assets an attractive proposition.

"You could invest in bonds, but you don't get anywhere near the kind of returns on bonds these days that you still get out of real estate," said Jim Costello, a senior vice president at research firm Real Capital Analytics.

Another factor that could explain a growing interest in low-risk assets is that many observers now believe the market is nearing a peak, making high returns on risky bets less likely. "They're not going to be able to argue that they're early in the cycle," Stacom said on the panel.

The new interest in multifamily buildings has yet to manifest itself in actual transactions — most of the recent reported deals involving Chinese firms are condos. Two weeks ago, The Real Deal reported that developer China Vanke is partnering with Slate Property Group and Adam America on a 33-story condo project in Downtown Brooklyn. And Xinyuan Real Estate, which is currently building the Williamsburg condo Oosten, is working on a second condo project in Hells Kitchen. Dvorett's Kuafu recently bought a development site on East 60^th Street, but sources told TRD at the time said that the developer is looking to build a condo tower.

The city's only major current Chinese multifamily developer is Greenland Holdings Group, which is developing the condo and rental megaproject Pacific Park (formerly Atlantic Yards) in Brooklyn in partnership with Forest City Ratner.

Tags: Chinese Developers, darcy stacom, Kuafu Properties

Real Estate Investing

Saturday, 14 November 2015