Boardwalk Real Estate Investment Trust (REIT) announced a robust second quarter for 2024, marked by a significant increase in same-property net operating income and funds from operation per unit. The company capitalized on favorable macroeconomic conditions, strategic acquisitions, and a focus on sustainability and affordable housing. With a strong financial foundation, Boardwalk REIT (TSX:BEI_u) is poised for continued growth and value creation into 2025.
Key Takeaways
- Boardwalk REIT's same-property net operating income rose by 14.2%, with funds from operation per unit up by 16.9%.
- Strategic acquisitions, including The Circle and Elbow 5 Eight in Calgary, have bolstered the company's portfolio quality.
- The fair value of Boardwalk's properties increased, influenced by market rent growth and recent acquisitions.
- Boardwalk is actively working on ESG initiatives and capital repositioning to enhance community living.
- The company anticipates insurance cost savings of around 10% and a property tax estimate of 3.5% for the year.
- Maintenance CapEx is on budget, with expected catch-up in Q3, the prime spending period for exterior projects in Canada.
- Boardwalk sees acquisition opportunities in Calgary and potential capital recycling from non-core assets.
- The company's property NOI guidance for 2024 has been raised due to higher-than-expected revenue and cost savings.
- CEO Sam Kolias emphasized the strength of the portfolio and the attractiveness of the affordable rental market in Canada.
Company Outlook
- Expectation of mid- to high-single digit revenue growth into 2025.
- Focused on sustainable rent adjustments and the provision of affordable housing.
- Financial guidance for 2024 has been updated, reflecting recent transactions and market conditions.
Bearish Highlights
- Divesting non-core assets in Edmonton, with no plans to exit the market entirely.
- Anticipated growth in total rental expenses by 1% to 3%.
Bullish Highlights
- Record high migration and affordable rental rates in Alberta.
- Strong rent growth in Calgary and Saskatchewan markets.
- Limited availability in university areas of Edmonton and Calgary, indicating strong demand.
Misses
- Growth in expenses for the quarter was at 1.6% and 3.5% year-over-year in Q1.
Q&A highlights
- The company is adjusting asking rents to align with market rates, eliminating discounts.
- Boardwalk's balance sheet flexibility allows for strategic pairing of asset dispositions with acquisitions.
- The disposition program is opportunistic and asset-specific, with a near-term focus on Edmonton assets.
In conclusion, Boardwalk REIT (ticker: BEI.UN) has demonstrated a strong performance in Q2 2024, with strategic actions that underscore its commitment to growth and value for stakeholders. The company's focus on its core markets, coupled with prudent financial management and strategic acquisitions, positions it well for continued success in the real estate investment sector.
Full transcript - None (BOWFF) Q2 2024:
Operator: Good afternoon, ladies and gentlemen. And welcome to the Boardwalk Real Estate Investment Trust Second Quarter 2024 Earnings Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. This call is being recorded on July 31, 2024. I would now like to turn the conference over to Mr. Eric Bowers, VP of Finance and Investor Relations. Please go ahead.
Eric Bowers: Thank you, Ina, [ph] and welcome to the Boardwalk REIT 2024 second quarter results conference call. With me here today are Sam Kolias, Chief Executive Officer; James Ha, President; Lisa Smandych, our current Chief Financial Officer; Gregg Tinling, our Incoming Chief Financial Officer; Samantha Kolias-Gunn, Senior VP of Corporate Development and Governance; and Samantha Adams, Senior VP of Investments. We would like to acknowledge on behalf of Boardwalk, the treaties in traditional territories across our operations and express gratitude and respect for the land we are gathered on today, and we now know as Canada. We respect indigenous peoples and communities as the original stewards of this land. We come with respect for this land that we are on today for all the people who have and continue to reside here and the rich diversity of First Nation, Inuit and [indiscernible] peoples. Before we get to our results, please note that this call is being broadly distributed by way of webcast. If you have not already done so, please visit bwalk.com/investors, where you will find a link to today's presentation as well as PDF files of the Trust's financial statements, MD&A and quarterly report. Starting on Slide 2, we would like to remind our listeners that certain statements in this call and presentation may be considered forward-looking statements. Although the expectations set forth in such statements are based on reasonable assumptions, Boardwalk's future operation and its actual performance may differ materially from those in any forward-looking statements. Additional information that could cause actual results to differ materially from these statements are detailed in Boardwalk's publicly filed documents. I would like to now turn the call over to Sam Kolias.
Sam Kolias: Thank you, Eric, and welcome, everyone to our Q2 2024 conference call and especially a very warm welcome to Gregg Tinling, our CFO as of August 1st. Starting on Slide 4, our culture. From our humble beginnings 40 years ago in 1984, our resident members are at the top of our organization. Our leaders put our team first, our team puts our resident members first. Guided by the golden rule, we have a peak performing customer service culture that creates exceptional results as we can see on Slide 5. Our continued strong performance with GAAP and non-GAAP measures increasing from the same quarter last year, our same property net operating income growth has increased 14.2%. This quarter as well as our funds from operation per unit of 16.9% with the exception of profit, which has decreased as a result of fair value adjustments. I would like to now pass it over to Samantha Kolias-Gunn.
Samantha Kolias-Gunn: Thank you so much, Sam, and congratulations to our team, our Boardwalk family, as we continue to deliver leading results. Macroeconomic conditions are robust in our core markets as illustrated on Slide 6. Demand remains strong. Alberta, our most significant market, continues to report record high interprovincial and international migration as a result of the Alberta Advantage to quote our Premier, Danielle Smith. What makes the Alberta Advantage? Our diversifying economy, job opportunities, world class educational programs that attract skill, talent and exceptional quality of life and affordability. Alberta has some of the most affordable rental rates in the country that will continue to attract more prospective Albertans and Boardwalk resident members home. Please refer to our appendix for more data on the Alberta Advantage. Supply remains low relative to anticipated household formation as challenging development economics and labor shortages continue. We are working collaboratively with all levels of government and other stakeholders to encourage implementing proven public policy to help rebalance demand and supply over the longer term. We would like to now pass the call on to Gregg Tinling and Lisa Smandych, who will provide us with an overview of our quarter results, strong balance sheet, fair value and ESG. Gregg?
Gregg Tinling: Thank you, Samantha. Slide 7 shows our key operational metrics with high occupancy, lower incentives and higher occupied rents, resulting in higher revenues for Q2 2024 compared to the same period a year ago. This is a reflection of our key strategic decisions made to maximize free cash flow and diversify our product offering, yielding significant financial performance. Slide 8 highlights our FFO per unit and distribution growth. Boardwalk's minimum distribution policy or maximum cash flow retention policy resulted in an FFO payout ratio of 34.6% for Q2 2024. Our disciplined FFO payout ratio continues to allow us to fund our organic growth opportunity and reinvest it with cash flow. Slide 9 illustrates our leverage reduction, highlighting our leverage metrics with respect to debt-to-total assets and debt-to-EBITDA. Boardwalk is naturally deleveraging, resulting in improved debt metrics with debt-to-total assets at 40.8% at June 30, 2024 compared to 43.2% at December 31, 2023, and debt-to- EBITDA of 10.75% at June 30, 2024, compared to 11.02% at December 31, 2023. Slide 10 shows strong, steady leasing spreads on new and renewed leases within our self-regulated resident friendly centric model, keeping retention and referrals high and our turnover and expenses low. Year-over-year, we have seen a significant improvement. Existing leasing spreads on renewals are strategically moderated to keep providing resident friendly affordable housing options in our core markets, while lowering our costs and steadying operational results, a win-win for all our stakeholders. Slide 11 shows continued strong and steady sequential rental revenue growth, including 2.3% growth in Q2 2024 compared to Q1 2024, a result of strong leasing spreads during a seasonally higher period from a leasing volume perspective. Slide 12 highlights Boardwalk's large presence in affordable and non-price controlled markets and with approximately 73% of our portfolio in Alberta and Saskatchewan, we are well positioned for sustainable organic growth. Boardwalk's current mark-to-market, which includes the reduction of incentives, averages $177 per suite and equates to an approximate $70.6 million revenue opportunity. With the current supply demand imbalance, we anticipate market rents will continue to increase resulting in a continued mark-to-market revenue opportunity. Moving to Slide 13, for Q2 2024, same property net operating income increased by 14.2% as compared to Q2 2023 with revenue growth of 9.5%. For the six months ended June 30, 2024, same property net operating income increased by 13.9% with revenue growth of 9.4%. Alberta, the Trust's largest region saw revenue growth of 10.8% in Q2 2024 and 11% for the six months ended June 30, 2024 as compared to Q2 2023 and the six months ended June 30, 2023 respectively. Operating expenses increased by 1.6% in Q2 2024 and 2.6% for the six months ended June 30, 2024, primarily due to higher wages and salaries as a result of inflationary adjustments at the beginning of the calendar year and higher utilities from an increase in utility rates. The team remains committed to ensuring focus and discipline when managing controllable operating expenses. On Slide 14, administration costs increased just over $1.7 million as compared to Q2 2023 and increased $1.4 million compared to Q1 2024. The increase was driven by inflationary wage adjustments at the beginning of the year, an increase in software costs, including cybersecurity and new software to improve operating efficiencies, as well as increases in professional services such as legal, tax and government relations. Specific to Q2 2024 is approximately $100,000 for our new customer service platform, while also incurring approximately $325,000 for the historic call center. Beginning September 2024, the Trust expects to only incur approximately $100,000 per quarter. Also, there were increased travel costs specific to Boardwalk participating in the Homes of Hope program, a cost of approximately $200,000 Deferred unit based compensation increased due to an increase in the number of participants as well as the cost of the program, noting that historically the highest deferred unit based compensation expense is in the second quarter. I would like to now pass the call on to Lisa Smandych to discuss the Trust Financial Foundation and ESG. Lisa?
Lisa Smandych: Thank you, Gregg. Slide 15 illustrates Boardwalk's mortgage maturity schedule. Our mortgages are well staggered with approximately 96% of our mortgage balance through NHA insurance, through the Canada Mortgage and Housing Corporation. This insurance remains effect for the full amortization of the mortgage and in addition to carrying the Government of Canada is backing provides access to financing rates -- financing of rates lower than conventional mortgages with the current estimated five year and 10 year CMHC rates of 3.85% and 4.15% respectively. Though current interest rates are above the trust maturing rates, the trust maturity curve remains staggered, reducing the renewal amount in any particular year. Lastly, the trust has an interest coverage of 2.86 in the current quarter. Slide 16 highlights our 2024 mortgage program. To date, we have renewed or forward locked $244.6 million at an average rate of 4.48% at an average term of six years. Earned underwriting criteria in our most recent submission to CMHC and our lenders has remained in line with our historically conservative estimates. Moving to the right of the slide, we provide a summary of Boardwalk's available liquidity. The Trust is well positioned with approximately $120 million in cash and subsequently funded financing as well as an undrawn $196 million operating line. This approximate $316 million in liquidity provides the Trust with a flexible financial position. Furthermore, subsequent to June 30, 2024, Boardwalk added an additional $50 million demand facility to upsize our total capacity. Our credit facility had remained unchanged since 2007 and given the cost of inflation in recent years Boardwalk felt it was prudent to keep in mind with current asset values and position ourselves favorably for opportunistic, strategic and accretive acquisitions that may present themselves in the future. Slide 17 illustrates the Trust estimated fair value of its investment properties. Excluding adjustments for IFRS 16, which totaled $8.2 billion as of June 30, 2024 as compared to $7.6 billion as of December 31, 2023. The increase in overall fair value is the result of increases in market rents of select sites and communities as market fundamentals improve as well as the acquisitions of The Circle and The Brenda Apartments in Calgary, Alberta and Dawson Landing in Chestermere, Alberta while being slightly offset by an increase to capitalization rates. For an estimated fair value of approximately $236,000 per apartment door remains below replacement cost. In consultation with our external appraisers, the capitalization rates or cap rates used in determining Q2, 2024 fair value were unchanged from Q1, 2024 and increased from Q4, 2023 from adjustments made to the Trust Ontario assets in London and Kitchener, Waterloo, Cambridge markets. As it does every quarter, the Trust will continue to review completed asset sales transaction and market reports to determine if adjustments to cap rates are necessary. Most recent published cap rate reports suggest the cap rates being utilized by the trucks for calculating fair value are within their estimated ranges. Slide 18 highlights our ESG initiatives. Using a disciplined capital allocation approach, we are focused on reducing emissions through reduced utilities consumption and therefore reducing utilities costs, while also promoting social and governance initiatives. We encourage our stakeholders to view our 2023 ESG report available on the Trust website. I would now like to turn the call over to Samantha Adams to highlight our capital allocation and discuss the development pipeline. Samantha?
Samantha Adams: Thank you, Lisa. On Slide 19, as previously mentioned by Gregg, we continue to prudently deploy some of our free cash flow to repositioning and value add capital improvements at our existing communities. We currently have 19 projects underway or planned in 2024, which include adding to or improving common area amenities, which will further enhance our revenue growth as well as resident satisfaction. In addition to our common area projects, we are also continuing with our suite optimization program, which is the conversion of underutilized storage or administration spaces that can be converted to rental suites. Each project we undertake is evaluated individually and we target at least an 8% return on cost providing an accretive return on our capital. On Slide 20, we are pleased to confirm that we have strategically allocated the net proceeds from the December 2023 equity raise to further support our growth and enhance the overall quality of our portfolio. As disclosed in Q1, we repaid our $57.2 million construction loan on 45 Railroad, which bore an interest rate of 6.6% and closed on The Circle, a $77.6 million, 295 Suite Community located in South Calgary. This acquisition, which was a forward purchase, represents a stabilized cap rate of 5.75% or about $263,000 per suite. The Circle is currently unencumbered, which provides us with some additional balance sheet flexibility going forward. Most recently, we announced and we have a purchase agreement in place to acquire Elbow 5 Eight, which like The Circle is a forward purchase. Elbow 5 Eight is in the final stages of construction, and we anticipate closing in Q1 of 2025, subject to closing conditions. The property is a 255 suite, six story wood frame project very well located, about 15 minutes south of Downtown Calgary and a two minute walk to Chinook Centre Mall. With a purchase price of $93 million, this represents a stabilized cap rate of 5.75%. While we anticipate stabilization to occur in Q4 of 2025, we are initiating a pre-leasing program later this quarter. Dawson Landing is a 63 unit, 12 building, newly constructed townhouse development located in Chestermere, a rapidly growing community located approximately 30 minutes east of Calgary. Comprised of two and three bedroom townhomes, Dawson Landing is well located within walking distance of many key amenities including schools and retail. Our acquisition price of $26.3 million represents a cap rate of 5% and increases our exposure to the townhome rental asset class. Slide 21 provides an update on our development pipeline. 45 Railroad is approaching the final stages of stabilization. The two rental towers are approximately 80% leased and we are currently marketing the commercial space. This project was delivered on time and on budget and we are projecting a stabilized yield within our forecasted range. Our 3 Victoria area development projects continue to move forward. Aspire has a target occupancy of December 31, 2024 for Building 1. The framing for Building 2 is scheduled to commence this August, and the estimated timeline for completion is June 2025. The Aspire is progressing on budget and is located adjacent to our existing Aurora community, which will allow for greater operational efficiencies once completed. The Marin and Island Highway projects are in the preconstruction phase. We have completed tender drawings for the Marin and the tender results expected in September will determine project timing. On Island Highway, we have just received official rezoning and we are working through next steps. Marta Loop is our 1 acre land assembly in Calgary, located in the heart of one of the city's most desirable and amenity rich neighborhoods. While currently in the pre-construction phase, our concept plan will feature the cost benefit of wood frame construction versus concrete, as well as larger suites that we believe will provide a differentiated product in the Marda Loop node that will attract strong rental rates. I would now like to turn the call over to James Ha.
James Ha: Thank you, Samantha. Starting on Slide 22, we have had a solid start to 2024 and are well positioned in our strategy and approach to create value for all our stakeholders. Our resident friendly approach to moderate and sustainable rent adjustments in our own, in our non-price controlled markets is resulting in strong leasing spreads and high occupancy, while also elongating our best-in-class organic growth trajectory. As our free cash flow continues to grow, our unique strategy of minimum distributions is maximizing our available capital for reinvestment back into housing and has improved our balance sheet providing increased flexibility for future opportunities, including investment in our own value add improvement program as well as the acquisition and development of new communities to expand our portfolio on an accretive basis. We believe executing on this growth approach will continue to create value for all our stakeholders, while our current valuation represents unique value in the public market and when compared to private market transactions. Slide 23 provides an update to our 2024 financial guidance. With our strong performance in the first half of the year, continued strong leasing trends into the Fall and measured cost control to date, we are updating our guidance to tighten the overall range for the balance of the year. 2024, we now anticipate same property NOI growth to range between 12.5% and 14.5% and FFO per unit to range from $4.11 to $4.23. As always, we will update our guidance on a quarterly basis and as market conditions may warrant. On Slide 24, we share an update on recent transactions that have occurred in our core markets. These transactions highlight the increasing investment activity and the value that Boardwalk Trust units represents relative to both transaction cap rates and on a per door basis. Lastly, we know many of our team are listening into this call, while preparing suites on a back-to-back basis with our month end today. We cannot thank our Boardwalk family and team enough for the over 200 units we will turn over today for our new resident members to move into tomorrow. Thank you to our team for providing communities that our resident members are proud to call home. We'd now like to open up the line for questions. Ina?
Operator: Thank you. Ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from the line of Frank Liu from BMO (TSX:BMO) Capital Markets. Please go ahead.
Frank Liu: Thanks, operator, and good morning, everyone.
Sam Kolias: Hi, Frank. Good morning.
Frank Liu: Good morning. So since on the launch of your strategic moderation on rents, you have been able to hit the 7% to 9% target spread. Just wondering how long you think the current momentum will sustain and at what point you will likely to revisit target? I mean, we see the MPM contract is likely this quarter. Like, would you reconsider your target and the strategy once, let's say it hits to the mid-single digit?
Sam Kolias: Mike, it's Sam. And looking at Slide 42 in our appendix, our overall average rents in place for typically a two bedroom, because that's our average size is $1,460 versus the Canadian average of about according to rentals.ca asking prices of $2,260. So we've got exceptional affordability and value in our product and service. Of particular note is our largest region, Edmonton, which has an even lower average rent for an average two bedroom of about $1,416 and rentals.ca on their June most recent report shows an average asking rent in Edmonton of $1,708. So we're really, really happy to be able to provide exceptional value and the difference between our in place rents and the rents on average in Canada are significant. And so the most important lesson we've learned is to continue to provide affordable housing. And there's always a demand for affordable housing. And with the gap that we're seeing, with inflation that we're seeing and the cost of new construction that we're seeing, we see a great future for a win, win, win for our resident members, our unit holders, and our associates and our communities. So we are seeing a very bright future continue to because of the relative value that we continue to provide, Frank.
Frank Liu: Got it. And so you think this will be sustained and this will be sustainable, like into 2025?
Sam Kolias: The number is 73. And given the relative rents that we have in place versus our competitors in the marketplace that shows we've got quite a gap still and we're going to continue to be flexible with our residents, continue to be self-regulated, because we agree regulation is good as long as it's self-regulation. That's the best form of regulation. So yes, we -- because of the gap see a number of years ahead of us that will continue to self-regulate, provide the best value and growth as well. That's that win, win, win that we are in a very great position to provide.
Frank Liu: Thank you. That's encouraging to hear. And just want to switching gears to the operating expense side. I knew that operating expense growth has contributed to a decent margin expansion this quarter. Do you have a sense on how property tax insurance are trending for the second half of this year and into 2025?
Sam Kolias: Yes. Hi, Frank. For insurance we just recently went through our renewal and it went very well. It's going to be lower than what we expected and lower than last year. And as for property taxes, we have received all of our final bills. So property taxes we're looking at around 3.5% for the year. And overall total rental expenses we're looking at 1%, 3% growth. Got it. And then insurance you think it's like 3% in the 3% range or? It's just going to be lower than last year. I think we're looking at perhaps a 10% savings there.
Frank Liu: Okay. Got it. And then insurance you think it’s like a 3%, industry preferred range or?
Sam Kolias: It just going to be a lower last year. I think we are looking at half so 10% savings.
Frank Liu: Okay. Got it. So lastly, I want to catch up on CapEx side. Your maintenance CapEx is tracking closely to your budget. For the year-to-date, I don't have CapEx seems relatively lower to your budget. Is this just a function of lower turnover? And do you expect this to catch up in the second half of this year?
Lisa Smandych: Yes. Hi, Frank. It's Lisa. You have it bang on. So it's a little bit driven by turnover, but more than anything it's driven a bit by seasonality. We do find that the first six months of the year from a CapEx spend tends to be a little bit lower than that second half. Q3 is that prime CapEx spend period especially for exterior projects in Canada. We have seen -- yes, we have seen a decline in suite turnover and our suite CapEx would be slightly down but not the same as what we saw last year. As you recall last year, we were quite below our suite CapEx budget. This year we're trending a little bit behind, again trying to make sure to pivot those dollar savings to other capital projects where possible.
Frank Liu: Thank you, Lisa. That's great color.
Lisa Smandych: Yes. And so the intention is we should come close to that capital budget for 2024.
Frank Liu: Got it. Thank you. I guess that's all for me. Congrats on another strong quarter. I'll turn it back. Thank you.
James Ha: Thanks, Frank. And it's James here. While you brought up the topic of insurance, we really cannot thank our insurance team and our entire team enough for the great work that we're doing in ensuring that our residents have insurance policies and reducing all of our claims that resulted in that strong insurance decline that Greg was speaking to. So thank you, thank you, thank you to our whole team.
Operator: Thank you. And your next question comes from the line of Jonathan Kelcher from TD (TSX:TD) Cowen. Please go ahead.
Jonathan Kelcher: Thanks. First question, just sticking with the insurance for one second. Sort of what percent of revenue is insurance cost usually?
Lisa Smandych: Jonathan, insurance is roughly, let's just call it roughly $10 million to $11 million of expense.
Jonathan Kelcher: Okay. That is helpful. And then just switching gears a little bit here, and maybe get Samantha answering some questions. On acquisitions, where are you guys seeing the most opportunities right now?
Samantha Kolias-Gunn: Hi, there. Yes, we still see an incredible number of opportunities in our core markets. So Calgary specifically, I would say, where we're still seeing really strong rent growth. We're not exclusively focused on Calgary, obviously. We're keen to buy the best property, the best community and the best location that will continue to drive our amazing rent growth. And we're also looking at recycling out of some of our non-core assets. So that's all part of the plan. But I would say today, some of the best value is still in Calgary.
Jonathan Kelcher: Okay. And then any other like if you're looking at Ontario, would that just be brand new stuff, staying away from rent controlled assets?
Samantha Kolias-Gunn: Yes. I think that's fair to say that it really needs to be 2018 and newer. I mean, I would never say never, but I think for us moving into sort of the non-rent controlled environment in Ontario is the goal.
Jonathan Kelcher: Okay. And then just on development, do you think your -- you guys will get in the ground on one of the three developments that you haven't started on in 2025?
Samantha Kolias-Gunn: It is, yes, it is very likely.
Jonathan Kelcher: Which one is most likely?
Samantha Kolias-Gunn: I think, I can get back to you with more specifics, but I think the Marin is the most likely. That's the furthest along of the three.
Jonathan Kelcher: Okay. That's helpful. I'll turn it back. Thanks.
Operator: Thank you. And your next question comes from the line of Kyle Stanley from Desjardins. Please go ahead.
Kyle Stanley: Thanks. Good morning, everyone. Probably a bit less impactful for Boardwalk relative to some of the peers. I'm just curious on your thoughts for -- your outlook for third quarter leasing and the beginning of the school year. Obviously, this will be the first year of the foreign student visa cap. So just curious on how that plays out?
James Ha: Hey, Kyle, it's James. So far as you know, we're leasing into August and even into September at this juncture and we're continuing to see strength across our portfolio. You can see in the leasing spreads, we're continuing to -- we're anticipating to continue to be in that range. But when we look at availability, there really is limited availability across our portfolio. When we look at our university areas in Edmonton and in Calgary, both are experiencing limited availability at this juncture. And so from a foreign student or the non-permanent resident cap, we're not seeing much impact today on the ground. But I'll remind everybody that for Alberta specifically, because there is a proportionate adjustment for those student visas, we actually anticipate Alberta to come out ahead with that adjustment. And so good news, as we look into fall, we're in good position to continue on this elongated and moderated path that we've been speaking to.
Kyle Stanley: Okay, great. That makes sense. Maybe just kind of building on Frank's earlier line of questioning, but as we start to really focus in more on 2025 and the growth story there and likely beginning to really see the merits of your strategic moderation, I think Sam gave some good color on expectations for leasing spread. But kind of when you dial it all back, do we still see this opportunity for kind of mid- to high-single digit revenue growth into 2025 given maybe the demand dynamics you're seeing in the market today?
James Ha: Kyle, it's James here again. Our whole strategy that started in 2023 on this strategic moderation was to develop and build very consistent and strong results. And so you've seen that so far this year where our results are very much mirroring how we performed in 2023. And we're aiming to build the exact same for 2025. And so as Sam talked about in terms of affordability, in terms of our own strategic moderation, we are set up well to continue to deliver those similar results. When we look at development and we look at demand relative to supply are under construction that continues to remain favorable and so from a macro standpoint we do think we are set up to deliver very similar results for 2025. But of course, we'll provide that formal guidance later in the year.
Sam Kolias: Kyle, it's Sam. Any provider of a product and service that provides exceptional value, exceptional experience and the best product quality and focuses on customers, which is resident members in our case. Any provider of anything that focuses in on that is going to be successful. And that's what we have to stress always when we get any inbound calls, especially from media that asks us what our focus is and that's why we're always going to focus in on and refer everyone to Slide 4. Our resident members, happy residents, make happy investors, happy associates, make happy residents. And so that's really the formula and that creates a virtuous cycle of low turnovers, high referrals and we've discussed this a lot before and great results. So we really start with our residents first always. Thank you.
Q –: Okay. Thank you for that, Sam. Just last one, looking at where the CMHC insured rate is today, especially on the five year, it looks like positive leverage on a going in basis is a lot more achievable, maybe than it's been for a little while. What kind of impact do you think this has on the transaction market, maybe in your core markets, but just broadly across the country? Any hangover from deals that got pulled forward because of the capital gains inclusion? Just a broad question I guess on the transaction environment.
Sam Kolias: Kyle, maybe I can start here. Certainly, this more stable interest rate environment as you've seen in our Slide 24, there has been incrementally more transaction activity even ourselves getting in front of the capital gains change with the closing of some of the acquisitions that we've previously announced. So we certainly are expecting more activity out there. Samantha mentioned earlier, I think it was in response to Jonathan, we certainly are looking at opportunities to become more transactional and look at even our non-core assets as an opportunity to recycle capital. And so it's early days. Summer is certainly going to be telling for this opportunity to see what occurs out there. But where else in Canada right now can we see the strong rental growth that we're currently seeing, we're talking double-digit NOI growth. And per our slide, you're seeing transactions generally with a four handle or to your point with positive leverage. But as we know, as NOI grows by 10% or 15%, these 4.5 caps quickly turn into 5, which can turn into 5.5, which could turn into 6. And really the place that we're seeing that is in Alberta and Saskatchewan.
Q –: Fair enough. Okay. Thank you very much for that. I'll turn it back.
Operator: Thank you. And your next question comes from the line of Sairam Srinivas from Cormark. Please go ahead.
Sairam Srinivas: Thank you, operator. Good afternoon, Boardwalk team. Just focusing on Saskatchewan. I mean, it's a market which we have spoken about it a lot, but it's a market that has seen a significant amount of rent growth in the last couple of quarters. Can you probably give a bit of color in terms of what you're seeing in that market? And if this is a market that could probably see some amount of capital allocation?
Sam Kolias: Looking at Rentals.ca and our discussions and all the credit goes to our Saskatchewan team because we really every month we review results in Saskatchewan we're like wow just month over month over month and years and when we look at relative rents, where is there even more affordable rents than Edmonton? That's Regina and Saskatoon. And so the relative affordability is a huge factor. Also the leadership, the public policies, the diverse economy, agriculture, resources, whereas real entrepreneur growth mindset, Premier. Again, it's really great, great province and Saskatchewan's got what everybody in the world needs like Alberta. And so we're really in a great spot being both these amazing provinces.
Sairam Srinivas: Sam, so is that market something you guys would be keen on growing in, looking ahead in the next 12 months?
Samantha Kolias-Gunn: Hi, it's Samantha. Yes, absolutely. And I would say specifically in Saskatoon, we have looked at a few opportunities, the investment team has. And we continue to be strong believers in both Regina and Saskatoon.
Sairam Srinivas: Thanks, Samantha. And just probably going back on your comment on non-core assets that you could probably see divested over the next 12 months, are there specific markets which you feel you kind of reach your potential and probably you want to kind of get out of?
Samantha Kolias-Gunn: Well, we're not looking to exit this market, but we are looking at trading out of some of our non-core assets in Edmonton. But we're certainly not exiting the Edmonton market.
Sairam Srinivas: Yes, no problem. All right. I'll turn it back. Thank you, guys.
Sam Kolias: Thank you.
Eric Bowers: Thanks, Sai.
Operator: Thank you. And your next question comes from the line of Mario Saric from Scotiabank (TSX:BNS). Please go ahead.
Mario Saric: Hi, good morning. Just first question, just on your 100 basis point highest in property NOI guidance boost this quarter for '24. Specifically, was it on higher than previously expected revenue or lower operating costs?
Lisa Smandych: Mario, it would be a combination of both I would say. So yes, revenue is certainly coming in at the higher end of our range and is that sort of what we're forecasting when we look for the year. And then extended yes, the team in that discipline focused on savings, savings in bad debt, advertising, insurance, repairs and maintenance. So it would be a combination of the both.
Mario Saric: And on the revenue side, is it more, the occupancy holding up quite well or new or renewal spreads where you're doing better than you don't?
James Ha: Hey Mario, it's James. The combination of both and in addition to Lisa's point on our team doing an exceptional job in controlling costs, we had a great first half of the year on utilities front as well. And so when you put all of that together that and in addition to the property tax, a finalization that Gregg was speaking to earlier, all of that has provided us that confidence and conviction to tighten that guidance going forward.
Mario Saric: Okay. Just on the expense side, the growth was 1.6% this quarter, 3.5% year-over-year in Q1. I think you talked about it being kind of 1% to 3% this year. I know 25% is a way out. But if you're able to maintain occupancy where it stands today, and I'm not talking about property taxes or utilities to some extent, those are less controllable when we think about your OpEx in '25. Is there a road map there where you can see similar type just like modest inflationary growth in '25 relative to '24?
Lisa Smandych: Yes. I think Mario, I mean, we've always articulated that Boardwalk's goal when it comes to managing expenses is to stay below inflation. So to your point, I think when we're looking at those controllable expenses in those tight markets, we would look for our expenses to be below inflation. So I guess, yes, looking 2025, if you take inflation and Boardwalk would likely be a little bit below that would be the goal.
Mario Saric: Got it. Okay. And then just last question on the 10% to 15% muni spreads 7% to 9% on renewal. When you missed reshop your competitors in your primary markets, would you say that competitors are trying to push a similar range in terms of rental growth or is it slightly different?
Sam Kolias: Mario, for the most part, we're seeing pretty well similar ranges from most of our competition. There are all obviously exceptions to that on both sides. And those exceptions we generally find coming from smaller owner operators who may have various mortgage or other cost impacts. But for the most part, we're seeing most of our competition and our peers take a very similar approach in our core markets.
Mario Saric: Okay, thank you.
Sam Kolias: Thank you, Mario.
Operator: Thank you. And your next question comes from the line of Jimmy Shan from RBC (TSX:RY) Capital Markets. Please go ahead.
Jimmy Shan: Thanks. So it's two quick ones for me. When I look at the Q2 expense growth by region, Calgary and Saskatchewan sort of stand out in terms of full-year decline. Can you remind me what the drivers were for those declines? And then secondly, on this new customer service platform you've implemented versus the call center, can you explain that a little bit further?
Lisa Smandych: Yes, I'll start with these. From an expense perspective, certainly Jimmy, when we're looking at Calgary and Edmonton, the savings come from similar areas. It's largely been driven by that insurance year-over-year. So reminding ourselves that first half of the year would have been the old insurance plan that came. So we now had two consecutive years I guess of insurance declines. In addition to that we're seeing savings from bad debts, advertising and a bit of repairs and maintenance. The areas where we're seeing cost pressure in actual results would be a little bit on the wages and salary side and utilities. But more or less it's being driven by advertising bad debt, insurance and repairs and maintenance being lower in both Alberta and Saskatchewan.
Jimmy Shan: Sorry, just to follow-up on that, is there anything specifically or unique about those two markets that would result in those savings being higher than the rest of the other regions?
Lisa Smandych: I would just say the premise right now is when there's limited availability for people to move, so advertising goes down when your turnover is going down and there's less availability. Bad debt, people are good at paying their rent. The affordability of our products enables people to be able to afford that rent. So that's part of the bad debt decline. Repairs and maintenance, again, that's going to fluctuate through all markets. Some markets will have a good repairs and maintenance quarter versus others. So that one's a little bit less market specific. But overall, I think it's being driven largely just by that low availability and people being on top of so that we can spend less on advertising and people pay their rent. Your second question, if you could I think it was the customer service one, but can you just ask it again so I make sure to answer it correctly?
Jimmy Shan: Yes, and as you noted, G&A, the customer service platform is going to result in some savings going forward. I just wanted to know what that's about.
Lisa Smandych: Yes. Maybe I'll start it off and then James can elaborate on this initiative a little bit. So currently Boardwalk operates, we're moving basically to an AI driven customer service center, so that those common questions as part of our 24/7 service program can be answered by a computer rather than an actual physical agent. And so that's largely where those savings are coming from. The quarter itself we have as we transition, we basically have both up and running right now to make sure that there's no transition hiccups. But maybe James, if you want to elaborate on that program.
James Ha: Yes, we're really excited about this, Jimmy. This is the first real use of a virtual assistant or an AI platform where when we speak to our team and our leadership team, who our customer service leadership team is really excited about it as well, because if you think of the type of calls that we might get, many of them as much as we would love and provide a platform for our resident members to input it virtually through our online platform, many of them still like to call in. So if we can serve that without that call being transferred to an agent and it's gated virtually and taken care of virtually, we believe we can reduce call volumes that are actually handled by a person while maintaining, if not even exceeding our current service levels. And so as you can see, there is a good savings that we are anticipating on a run rate basis with this new platform. We've seen this AI really grow as we've kind of fed it information over the last several months and it's only going to get better. And so we're really excited. I know you asked about the Op costs for other areas. We're really excited to see where this AI can go going forward. Can we extend it past our call center? Can we extend it into calls that go into our residents and into our communities. And so we're just at the leading edge of where this can go.
Jimmy Shan: Great. Thank you.
James Ha: Thanks, Jimmy.
Operator: Thank you. And your next question comes from the line of Gaurav Mathur from Green Street. Please go ahead.
Gaurav Mathur: Thank you and good afternoon everyone. Now given the pace of acquisitions so far in the first half of the year and where your cost of capital is currently, are you thinking about dispositions in any form in the second half of the year given that there is a strong appetite for multifamily assets, particularly in Alberta and across Canada?
Samantha Kolias-Gunn: Hi, it's Samantha speaking. Yes, we are currently contemplating some dispositions of some of our non-core assets in Edmonton. And that will be capital for us to redeploy into newer assets in some of our core markets.
Gaurav Mathur: That's great. And we can expect that in the second half of the year?
Samantha Kolias-Gunn: I believe so, yes.
Gaurav Mathur: Okay. And just last question. You've also highlighted the strength of the market on the call. Now as we look ahead, are there any pockets of weakness in the portfolio, either now or in the future, that you're keeping an eye on?
Sam Kolias: At this time, Gaurav, we're seeing pretty good strength across the portfolio. But again, I think a lot of that we have to give credit to our team and the moderation that we're taking. And as a result of that, it's resulting in very consistent growth and results. I think if we look at the affordability side, especially in our core markets, it's attracting Canadians and others who are moving to Canada as Samantha Kolias-Gunn talked about in her prepared remarks. That's a huge part of the Alberta advantage. And I think we should probably add the Saskatchewan advantage to that as well. So far, Gaurav, we're continuing to see really strong fundamentals in the multi-family sector in Canada, especially for affordable part.
Gaurav Mathur: Okay. Thank you for the color. I'll turn back to the operator.
Operator: Thank you. And your next question comes from the line of Matt Kornack from National Bank Financial. Please go ahead.
Matt Kornack: Hey, guys. Sam, you've mentioned rental.ca a few times and the rents relative to your portfolio, but you also provide market rent disclosure in your MD&A. But it sounds like those rentals.ca figures are probably closer to what the true market rent is. Is that a fair assessment that maybe there's 35% mark-to-market opportunity in your Alberta markets, the main ones at this point?
Sam Kolias: The difference between asking rents for renter and resident that's looking for a new home today is yes. That's the market, that's the average and that's the differential in percentage and it is significant. And that really drives our renewals, our satisfaction and lower costs as well because when we go through a renewal and we look at the market and show the huge relative value we continue to provide even with the adjustments that we are making. And again, the one chart we have to go back to and look at is Slide 39. Our discounts in the second quarter of 2018 were $11.575 million for the quarter. This quarter our discounts are $2.35 million. So we have to remind everybody that most of these adjustments that we're seeing are really the elimination of discounts. And when we go back to 2015 to now, we're simply not even catching up to consumer price index. So we're just catching up to consumer price index and we're still behind. And so, yes, we've got a long ways to go, but we're doing really well. We have -- as we discussed, happy residents make happy results, happy associates make happy residents. And it's a virtuous circle that we've seen many years going forward in being able to provide exceptional affordability and results. Both can go hand-in-hand.
Matt Kornack: That's fair. And I mean, we've seen nationally that rent has been well outstripping CPI. So presumably, in Alberta, where you're just playing catch up, you've also got a step change on top of that in terms of the supply demand imbalance that has established itself given the population growth dynamics in Calgary and Edmonton. So I mean, I guess, how should we think of your internal kind of regulation process over time with regards to where inflation is? I mean, in time, obviously, it has to come down to something closer to inflation. But what's the thought there?
Sam Kolias: Yes. That is what our average in place rents reflect is the correlation between consumer price index and our average in price rents are very correlated. And that absolutely is why we can't look at year-over-year in isolation and look at CPI last year versus rent growth last year. We've got to use that eight, nine year time period Matt, because what the current year-over-year does not take in place are the discounts and the reduction in rents that took place several years ago that many on our call will remember, and we certainly do that we have to keep on reminding everybody that new to the call or residents that are listening in is we have to keep in mind the reductions in the discounts that were used that we're making up over this period as well. So, the relativity is everything and especially the longer time horizon gives a more accurate picture of rent adjustments. And that's why we always refer to the longer X axis 2015 to where we are now and we're still behind.
Matt Kornack: And maybe a last question. I mean, we've talked about REITs being part of the solution on the new supply front. You've purchased some newer assets. It sounds like they're waiting lists already essentially for those properties. Do you see being part of more transactions like that within your core markets? And how do you think of just pricing those in the context of pro forma rents relative to the cost of construction?
Sam Kolias: Yes, Matt, we certainly are looking for more opportunities like that. As you've seen, most of our acquisitions over the last few years have been that type of acquisition where it is newer product where Boardwalk can come in and we can provide our value by leasing up or enhancing the NOI in those assets. And so those are definitely the type of assets that our team is looking for. Samantha, feel free to elaborate here. But on the development front, we'll remain consistent as well. And as Samantha talked about earlier, we have a project coming up in our pipeline that we will look to progress with and contribute to adding more housing into markets that needed the most in Canada.
Samantha Kolias-Gunn: And if I could just add in terms of the pro formas and the underwriting for development, we're very mindful of our approach to rents and where we want to be and that all gets factored into our initial pro forma underwriting. You don't want to come out at the top end of the market because that is really not the space we want to play in.
Matt Kornack: And are you finding NOI towards an asset that you purchased on lease up, you think there's material upside to the price that you've paid because you're taking a bit of the lease up risk? Is CMHC ultimately giving credit for that, because it's more on an income threshold in terms of the lending you can get, so you can actually extract more equity on financing that eventually? Or how should we think about that?
Sam Kolias: What we see, Matt, and what's presented this opportunity for us to acquire newer builds and newer assets is that for the most part, CMHC will finance based on current incomes is what we're finding. And so for groups such as ourselves where we can fund below 5.8 with cash or equity and take on that risk, we're being rewarded with what we're estimating is a stabilized cap rate of 5.75 at a time where as you see in that transaction summary, cap rates for that type of product certainly have a fore handle on it. And so even if you want to call it 4.75 or 4.5, I mean, that's 125 or 150 basis points that will pick up through lease up. And so those are the type of deals that we love. If we could find more and lots of those, we would do them all. And I know the teams are at work, patenting new pavement looking for those type of opportunities.
Matt Kornack: Fair enough. Appreciate the color guys. Thanks.
Operator: Thank you. And your next question comes from the line of Tim Wilkinson from CIBC (TSX:CM). Please go ahead.
Tim Wilkinson: Thanks. Good morning, everybody. Last till best. Just following on Matt's question there, how do you balance the acquisition metrics around looking at a newer asset that say, has less CapEx versus buying say an older asset that you could bring up to a Boardwalk standard and maybe have a little more of the near term growth trajectory given the mark-to-market difference? Just how do you think about that difference?
Sam Kolias: Tim, it's Sam, and good to hear from you. We're all in agreement that we focus in on the best acquisition value and we are only looking for one acquisition wherever it is. It's got to be the best acquisition. And there's always in the entire marketplace one best acquisition or one best development. And we focus one at a time and prioritize the maximum total return and value creation on whichever acquisition we make or development by the way that we make. So it's always about buying the best or building the best value community that we can see the most value creation that we can sell down the road for more and realize the maximum total return and free cash flow in our transactions like some of the assets that we purchased that were newly development, developed in Edmonton for example, that we're looking at pairing with some of our value add that we created exceptional value on value add. Pairing these communities has great appeal to buyers and it has great total return and free cash flow that we've released as a result of these non-core dispositions that we're looking at. And of course, Tim, we're going to be looking at value add in Edmonton or anywhere that we can create with our value add a vertical design and in house capital teams that have demonstrated exceptional capability in improving our communities from before and after pictures that in our appendix again shows extreme makeover. So we've got exceptional opportunities in looking at older assets in our core markets and any market where we can create exceptional value in repositioning, especially repositioning exceptional location. That's really what we've learned like our Canmore and Banff acquisitions, our university repositions and our university new development in Brio. Those are locations that decades approve. They're the least cyclical locations and there's always demand. We never really saw discounts in Banff, for example, and that's a perfect example of what we're looking for is exceptional locations when we are looking at developments or buying anything brand new, real special communities and value.
Tim Wilkinson: That's great, Sam. 40 years on and we're still learning. It's all about location, location, location. Thanks, everyone. Appreciate the color.
Sam Kolias: Price, price, price, Tim.
Tim Wilkinson: Price, price, price, yes. Thanks, everyone.
Sam Kolias: Thank you.
Operator: Thank you. And your last question comes from the line of Brad Sturges from Raymond James. Please go ahead.
Brad Sturges: Hi there. I'll keep it quick. Just one quick follow-up question. As you've identified, I guess, some potential asset sales in Edmonton. How do you think about the transaction activity going forward? Are you looking to tie acquisition opportunities with dispositions going forward? Or do you necessarily need line of sight on either buy side or sell side to transact at this point? Is it just more about the right opportunity and the right pricing going forward?
Lisa Smandych: Hi, Brad. I think the answer is yes, to be honest with you. When the right opportunity comes along to sell out of a non-core asset and the price is right, back to Sam's comment, we would take it. But ideally, we line that up with an accretive strategic acquisition as well, so the cash isn't sitting on the balance sheet for longer than absolutely necessary.
Sam Kolias: This is one of our differentiators as well, Brad, is having a super flexible balance sheet, right. We're retaining the most cash flow out there. We're growing that cash flow for reinvestments. We have rapidly improving balance sheet. And to Samantha's point, we also have access to equity in the form of dispositions of non-core assets. And so it's all of the above, Brad. It will be -- it'll depend on the opportunities that exist, but that should be no surprise either. We've been quite consistent in terms of pairing non-core assets and redeploying that into new acquisition each year or for last several years save for the last couple where we've had some interest rate volatility.
Brad Sturges: I assume that the disposition program will be more of an ongoing program going forward. Is there anything beyond the Edmonton assets at this point or is that sort of the near term sort of focus of that sort of recycling program?
Lisa Smandych: I would say that it's a near term focus for sure of the recycling program.
Brad Sturges: Okay. Good. I'll turn it back.
Sam Kolias: Yes. More asset specific than it is market specific.
Lisa Smandych: Yes. Not market specific, but asset specific. And they happen to be in Edmonton at this time. Yes.
Brad Sturges: It is more of an opportunistic program, I guess, is the way to think about it?
Lisa Smandych: Correct.
Brad Sturges: Yes. Okay. Thanks. I'll turn it back.
Sam Kolias: Thank you.
Operator: Thank you. That concludes our question-and-answer session. I will now hand the call back to Mr. Sam Kolias for any closing remarks.
Sam Kolias: Thank you, Ina. As always, if there are any further questions or comments, please do not hesitate to contact us. A big huge thank you to Lisa Smandych for her 16 years of service, inspiration and leadership. We are so blessed to have her in our Boardwalk family forever and wish her well in her future. With gratitude, we would like to thank our extraordinary team, loyal residents, CMHC, our lenders, and of course our unitholders. It really is all about our BFF, our Boardwalk family forever, whose huge shoulders we stand. And as leaders, we continue to do everything we can to support continued growth in extraordinary. We really can't thank our extraordinary team and great leaders enough. We are pleased with our improving results on a foundation of exceptional value, service and experience we continue to provide our resident members, investors and all stakeholders. Home is where our heart is, our heart is where our family is, and our family is where love always lives. Welcome home to love always. Our future is family. What can be more important when choosing where to call home. Thank you again everyone for joining us this morning. God bless us. And now more than ever grant us all peace. Peace is the prize.
Operator: Thank you. This concludes today's call. Thank you for participating. You may all disconnect.
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