Nov 11, 2016
Executives
James Ha - Director, Finance Sam Kolias - CEO Rob Geremia - President William Wong - CFO Lisa Russell - SVP, Corporate Development
Analysts
Heather Kirk - BMO Capital Markets Mario Saric - Scotiabank Jonathan Kelcher - TD Securities Mike Markidis - Desjardins Jimmy Shan - GMP Securities Dean Wilkinson - CIBC Matt Kornack - National Bank Financial
Operator
Good morning. My name is Christine and I will be your conference operator today.
At this time, I would like to welcome everyone to the Boardwalk Real Estate Investment Trust Third Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
James Ha, Director of Finance, you may begin your conference.
James Ha
Thank you, Christine. And welcome to the Boardwalk REIT 2016 third quarter results conference call.
With me here today is Sam Kolias, Chief Executive Officer; Rob Geremia, President; William Wong, Chief Financial Officer; and Lisa Russell, Senior Vice President of Corporate Development. Please note that this call is being broadly disseminated by way of webcast, if you haven’t done so already, please visit boardwalkreit.com where you will find a link to today’s presentation as well as PDF files of the Trust financial statements, MD&A 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 forward-looking statements.
Additional information that could cause actual results to differ materially from these statements are detailed in the earning press release and in other publicly filed documents including Boardwalk REIT’s Annual Report, Annual Information Forms and Quarterly Reports. Moving on to Slide 3, our topics of discussion for this morning will include a review of the current rental market fundamentals, our acquisition and development update, financial highlights, operational review, and lastly a finance and financial guidance review.
At the conclusion of today’s presentation, we will be opening up the phone lines for questions. I would like to now turn the call over to Sam Kolias.
Sam Kolias
Thank you, James, and thank you everyone for joining us this morning. On this Remembrance Day, please join us in a moment of silence to honor the memory of the sacrifices made so that we may all be here today.
Thank you. Beginning on Slide 4, some financial highlights for the third quarter 2016 include total rental revenue of $109 million and $332.7 million, a decrease of 9% and 7.7% from the same period last year.
When excluding the Windsor portfolio, which filled in September of 2015, total rental revenue decreased 6.4% and 4.6% from the same period last year. Total NOI of $63.2 million and $196.7 million down 15.7% and 12.1% from the same periods, last year, excluding Windsor NOI decreased 13.9% and 10% from the same periods a year ago.
Funds from operation of $37.2 million and $114.9 million, a decrease of 21.9% and 16.3% from the same periods last year; FFO per unit of $0.73 and $2.26 on a diluted basis, down 20.7% and 16.3% from the same period last year; and adjusted funds from operations per unit, which includes an estimated $525 per apartment unit of maintenance capital per year of $0.65 and $2, down 21.7% and 18.7% for the same period last year. Please note as per the previously slides, included in these numbers are one-time charges incurred in the first half of the year for a strategic review, Fort McMurray wild fire and the previously announced retirement of a senior executive.
Slide 5 and 6, shows CMHC housing market updates that forecast continued drop in new supply, our peak in vacancy in 2016 and 2017 with a downward trend in rental vacancy in our core Calgary and Edmonton market places in 2018. Slide 7, reflects Boardwalk’s vacancy has trended lower than market vacancy reflecting our self-regulated resident focused approach helps to enhance resident retention, even in a higher vacancy rental market.
Slide 8, reflects the cyclicality of rental incentive, incentives have grown wider than the previous cycle reflecting lower oil prices for a longer period of time coupled with an over-supply at newly build multi-family communities. Incentives in the past have assisted in the rebalancing of the rental market and represents significant revenue opportunity going forward as the rental market rebalances and vacancy and incentive normalize.
Slide 9, reflects how quickly and significantly rental markets can change with Fort McMurray showing a 17.5% sequential gain in revenue this quarter over previous quarters. One our site team was asked why our vacancy has dropped to 2.5%, our team confirms that the goodwill we built helping out Fort McMurray fire victims during the fire, which pre-rent flexible lease terms have contributed to the turnaround.
This is testimony that goodwill comes back as a residence call-out the rental company of choice. The rates of rental revenue declines is slowing in our core Edmonton and Calgary markets.
Our continued focus on increasing our level of service and product quality will accelerate a recovery back into positive growth. As reflected in previous cycles and in Fort McMurray, this can happen quickly and significantly.
Slide 10, depicts over the long-run, rents rise and essentially track ZPI. The supply of rental apartments built is a greater factor in rental rates than oil prices.
During the 90s, despite oil prices staying lower for longer period of time, rental rates began to rise as a result of a rebalancing of the housing market and emphasis was towards more affordable rental housing. Please note, in particular how relatively flat average rents remains and how oil prices dropped even further in 1997 and 1998 while rents began to rise again.
Slide 11, also reflects our vacancy decreases even during cycles of lower oil prices for a longer period of time as per the 90s data. Despite periods of volatile oil prices, stability and long-term growth in the rental market has prevailed.
Slide 12, shows the Alberta labor market with an overall total net loss in jobs in September relative to September of last year with some of the expected industries posting negative job creation in September of 2016. Please note the positive trends of jobs created in the service and public sectors, which generally is positive for rental apartment demand.
Slides 13 and 14; reflect net interprovincial migration into Alberta and Saskatchewan has decreased to negative, which is a reflection of the current economic climate. Although, interprovincial migration has gone negative, international migration is still positive and has resulted in net positive migration into these products.
Slide 15, depicts the affordability of rental housing relative to home ownership. With rental accommodation providing the most affordable form of housing in Canada, we anticipate long-term increased demand for Boardwalk communities.
Please note that there has been recent changes towards stricter mortgage underrating for new CMHC loans for condominium and home purchases. Historically this has also increased demand for rental home.
Moving on to slide 16, oil prices have remained lower for longer period of time. Despite the challenging economic environment, Boardwalk continues to mitigate further declines in NOI and FFO as a result of our continued focus on optimizing NOI through our self-regulation strategy during better times, continued offering of incentives, increased service levels and offering more renovations to minimize or eliminate incentives which has led to higher occupancy levels than the rental market overall.
In Calgary and Edmonton rental markets, has continued to soften with increased incentives or suite upgrades. Vacancy levels remain below market vacancy levels.
Higher renovation specifications have been received well in the marketplace when coupled with Boardwalk’s larger unit sizes located in our well-established amenity rich communities. We’re in the process of repositioning some of our inter-city communities with renovations to common areas to a higher level of standard finding new communities and adding enhanced rich social amenities.
Our repositioning plans are very exciting and will enable us to eliminate incentives sooner. The Saskatchewan and Grand Prairie markets also remain in the softer part of the rental cycles, resulting in both the decrease in occupancy and increase in incentives in these areas.
Regina’s seen an improvement of occupancy to approximately 97%. Saskatchewan has lower occupancy of approximately 92%.
Fort McMurray has seen an increase in occupancy at close to 98% versus just under, 80% in the first quarter before the fire as previously noted. The Ontario and Quebec markets remain in the balanced position.
Slide 17, illustrates the implied net asset value of the Boardwalk portfolio and includes the IFRS fair-value revenue expenses used to calculate implied cap rates on a per share basis and compares the trust valuation net of $2.16 of cash per unit and cap rates in relation to our unit price. The significant disconnect between the implied value of Boardwalk’s apartment assets and the evaluation of comparable apartments that have recently sold in the private Western Canada marketplace continues.
Slide 18, shows our public market valuation on a per dollar basis and continues to represent exceptional value opportunity when considered against net asset value recent transactions in the marketplace replacement cost, other consumer housing options like condominium ownership and current valuations on private market transactions. Slide 19, provides a summary of the trust strategic initiative to create and enhance value for our unit-holders.
Announced in February 2016, the trust has since increased its regular distribution, has acquired 747 new apartment units, continues to build our development pipeline, has purchased and canceled over 660,000 trust units and as always continues to focus on delivering exceptional service, quality and value. I’d like to now turn the call over to Lisa Russell to discuss our development and acquisition opportunities.
Lisa Russell
Thank you, Sam. We are pleased to announce the formation of a joint venture partnership between RioCan REIT and Boardwalk REIT to develop a mixed use towers.
The development will consist of approximately 10,000 square feet of podium retail and approximately 165 residential units in an 11-storey tower. This 1.3-acre site is located at RioCan’s Brentwood Village Shopping Centre in Calgary Alberta.
The development will include two levels of underground parking and will provide premium rental housing from the downtown Calgary along the Northwest LRT line. This site is in close proximity to the University of Calgary, McMahon Stadium, and Foothills Hospital.
The partnership involves a need for 50% interest in which the partnership will provide each other’s best-in-class retail and residential expertise to co-develop the asset. To maximize the value of the development, RioCan will manage the retail component and Boardwalk will manage the residential component, each on a cost basis.
Both partners are currently working together to finalize this commission of plans for a development permit. Subject to certain conditions including the receipt of both the development permit and the sub-division of the land closing is expected to occur in mid-2017, with construction beginning as early as Q3 2017.
Based on the determination of total buildable area, Boardwalk will pay RioCan approximately $2.9 million per 50% interest in the sub-divided land at closing. Subject to the finalization of the building plans and specifications, it is estimated that the total construction for the project will be between $60 million to $70 million or $30 million to $35 million per partner.
Slide 21, shows that demand for well located and stabilized rental apartments remain strong. Recent transactions confirm that cap rates remain at low levels.
The stability of multi-family assets and the demand for yield in the current low-interest rate environment continues to attract investors. Slide 22, summarizes our acquisition activities.
In 2016, we have closed on 747 newly constructed apartment units at estimated stabilized cap rates between 5.43 and 5.75, which reflect a lease-up risk of these newly built apartments. Slide 23, highlights our recently acquired Edmonton portfolio.
This portfolio consists of 509 brand new units in three properties located in newer communities with easy access to the ring-road. Each property consists of two four-storey food-frame elevatored apartment buildings with one level of underground parking.
The aggregate purchase price is $93 million which equates to $182,750 per door and averages $225 per square-foot rentable. Lease-up is underway and rental rates above the former levels.
Slide 24, provides details of our acquisition of Auburn Landing. This building is well located across from the South Health Campus in Southeast Calgary, which is major employer in this area.
This property consists of 238 brand new units in two four-storey wood-frame elevatored buildings which are connected by a common single level underground parkade. We closed this property on June 22, 2016 for $51,170,000, which equates to $215,000 per door and $244 per square foot.
Our estimated cap rate for year two is 5.43. Lease-up is ongoing with rental rates near to former levels.
Moving on to Slide 25, we completed the first phase on excess land of our Pines of Normanview development in Regina, and received occupancy at Pines Edge One on January 29, 2016. It is a four-storey wood-frame, elevatored building with one level of underground parking and consists of 79 units.
The total construction cost was $13.4 million or $170,000 per door which equates to a $170 per square foot buildable and $199 per square foot rentable, which was the lower budgeted cost. This building is currently over 97% occupied after nine months of leasing, which is well ahead of schedule.
There are no rental incentives offered, and we are estimating a stabilized cap rate of 6.9% excluding land. With the successful lease-up and elevated demand seen for phase 1, slide 26 provides a summary of the construction of the second phase of Pines Edge which commenced in May.
When completed, it will be an identical four-storey wood-frame building with two elevators and a single-level underground parkade however, will include updated 9-foot ceiling. Excavation, piling, foundation walls and the slabs have been completed, and work on the vertical framing has begun.
Estimated cost for this phase is $13.2 million or $167,000 per door. We estimate the stabilized cap rate to be between 6.25% to 6.75%.
Occupancy is anticipated to be in the summer of 2017. Slide 27 provides a summary of the third phase of Pines Edge.
Construction drawings are finalized for this phase, which will again be a four-storey wood-frame building with two elevators and a single-level underground parkade however with 71 units. Construction costs are expected to be similar to Phase 2 and depending on market and economic conditions, construction of this phase could begin Q2 of 2017; if this is the case and with the 14-month construction time frame occupancy could be in Q3 of 2018.
Slide 28, illustrates our Sarcee Trail Place in Calgary. We have completed DP drawings on 226 units, two-point tower project and are preparing to submit a development permit application this year.
We have received some preliminary construction costs and are reviewing potential phasing options to determine the economic viability of the development. If feasible, construction could begin as early as fall of 2017.
Slide 29, highlights some of our other development opportunities. In Edmonton we own an existing community of about 1,175 units on approximately 38 acres of land known as West Edmonton Village.
An initial concept plan has been developed to increase density of the site by replacing approximately 112 townhouse units on 12 acres of land with up to 950 units of four-storey wood-frame product. Zoning is in place to allow for this use.
We are exploring other concept plans as well and will determine which options would be most appropriate for this community. Also in Edmonton at our Viking Arms site, we have developed a concept plan for an additional 312 units in two concrete point towers.
Depending on the desired timing from moving the project forward, a DC zoning maybe required, or alternatively the city may have completed their proposed changes to the RA9 base zoning, which is currently in place to allow for this concept plans. We are currently analyzing the economic viability of this project.
At Wascana Park Estates in Regina, a draft concept Master Plan has been developed, which includes high-rise, mid-rise, low-rise and possible commercial lands. More detailed planning is underway to determine the optimal mix of residential and commercial uses.
Community engagement and rezoning will be required. Earliest construction start would be spring of 2018.
Entire site would allow up to 2,000 residential units. I would now like to turn the call over to William Wong.
William?
William Wong
Thank you, Lisa. Slide 30 shows a per unit reconciliation of funds from operations or FFO for the three and nine months ended September 30, 2016 from the FFO per unit amount reported for the same periods in 2015.
A reconciliation of FFO to Boardwalk’s condensed consolidated financial statements can be found in the appendix of today’s presentation. As the slide shows, for the current quarter, the Trust stabilized property net operating income or NOI declined $0.22.
This was partially tempered by $0.02 gain on un-stabilized property NOI and $0.01 gain on financing costs and $0.02 gain on administration. The Trust did not have any unit buyback in the quarter to offset the $0.02 FFO per unit loss attributable to the sale of our Windsor portfolio in the prior year.
Stabilized property NOI was lower as a result of lower rents and higher incentives, primarily in our Western Canada rental markets. Higher property taxes also negatively affected our NOI performance.
The Trust has successfully appealed certain property tax assessments and consistent with past practices will record the tax refunds when they are received, which most likely will be in Q4. For the first nine months of 2016, the Trust’s stabilized property NOI decreased by $0.36, this was partially mitigated by a $0.02 gain on un-stabilized property NOI and a $0.03 savings on its financing costs.
FFO per unit loss as a result of sold properties was $0.08, partially offset by the Trust’s unit buyback program, which contributed $0.02 for the year-to-date. As previously mentioned for the first nine months of 2016, non-recurring charges totaled $0.08.
And net result is FFO per diluted unit of $0.73 and $2.26 for the three and nine months ended September 30, 2016, respectively. Slide 31 shows Boardwalk’s rental statistics on a quarterly basis, leading up to the current quarter.
As noted, overall market rents have declined to $1,131 from the $1,133 in June of 2016 and $1,159 achieved in September of last year, as the Trust continues with its strategy of maintaining high occupancy levels. Occupied rent at $1,125 in September of 2016 however was slightly higher than the $1,123 in the previous quarter but lower than the $1,199 in the same period a year ago.
The net result is a decline in the Trust’s loss release on $10 per unit per month at the end of the second quarter, $6 per unit per month at the end of the third quarter. The next slide, slide 32, focuses on our stabilized portfolio performance.
At the end of the current quarter, a total of 32,947 units or 97.6% of our portfolio was classified as stabilized. For the current quarter, revenue on these properties declined by 7.6% compared to the same period last year with operating cost increasing by 5.1%.
This resulted in an NOI decrease of 14.6%. Lower revenue was primarily driven by our Alberta and Saskatchewan markets where lower rents and higher incentives were incurred to maintain occupancy levels.
Operating costs increased due primarily to higher promotional costs, maintenance wages and property taxes. The Fort McMurray portfolio, which represents a little more than 1% of our overall, NOI has seen occupancies rising to over 94% in October from the 81% reported for Q2 of 2016; revenue during this period correspondingly increased by over 17%.
Slide 33 provides a breakdown of our operational capital improvements and capital asset additions for the first nine months of 2016. Excluding acquisitions and development costs, the Trust reinvested back into the portfolio at total of approximately $67 million at the price of $62.7 million for its investment property improvements and $4.3 million in property plan and equipment, compared to a total of $60.2 million for the same period in 2015.
Including in the amount, to reflect Boardwalk’s internal capital program is approximately $14.4 million of allocated on-site wages and salaries and certain parts and supplies compared to $13.2 million for the prior year. Not included in the pie-chart for the first nine months of 2016, Boardwalk invested $3.7 million in development compared to $8.9 million for the same period in 2015.
The decrease in development cost was primarily the result of our 79-unit building in Regina, Saskatchewan called Pines Edge One which was substantially completed earlier this year. Also not included in the chart is $144.4 million of newly constructed apartment units acquired by the Trust in 2016.
As Slide 34 shows, total overall admin costs, which includes operating and corporate G&A for the first nine months of 2016 was $43 million, a decrease of $0.1 million or approximately 0.2% from the $43.1 million for the same period last year. The decrease was due primarily to the elimination of profit sharing and bonus accrued for 2016 partially offset by the retirement costs of the senior executive and higher professional fees incurred earlier in the year.
Slides 35 and 36; highlight Boardwalk’s investment property fair value calculations. As slide 35 shows, Boardwalk same property fair value at September 30, 2016 was $5.5 billion compared to $5.6 billion reported at the end of Q2.
Development cost and new acquisitions contributed $0.2 billion to investment property. Sequentially, the Trust same property fair value decreased relative to the second quarter of 2016, reflecting a softer Western Canada rental market and higher vacancy scenes in Alberta and Saskatchewan.
As slide 36 shows, same property forecasted NOI for fair value determination was $296 million as at September 30, 2016 compared to $300 million at the end of the second quarter of this year, primarily driven by lower market rents. Slide 37, highlights the range of capitalization rates used in determining the fair value of Boardwalk’s investment properties.
As you can see, overall, the weighted average cap rate used in the determination of fair value at September 30, 2016 was 5.37% unchanged from the previous quarter but slightly lower than the 5.41% at the end of the third quarter of last year. The decline is mainly attributable to the lower cap rates in London and Montreal.
Cap rates in Alberta and Saskatchewan have remained stable in spite of the current economic downturn and reflection of the low interest environment and the continued interest by private and public funds to acquire multi-family real-estate assets at and attractive long-term investments. Slide 38 and 39 reflects graphically the key assumptions used in calculating the fair value of our investment properties.
As previously shown on slides 5 and 6; CMHC has forecasted vacancies to rise for Calgary and Edmonton to 8% and 7% respectively until October 2016 but to trend downwards in 2017 for Calgary and 2018 for Edmonton. Part of this upward pressure on vacancy rates is due to the oversupply in Calgary and Edmonton.
These units will pick some time to absorb before the markets regain and more balanced demands rises equilibrium. While acknowledging the softer Western Canada rental margins, Boardwalk released a longer-term view should be taken on the vacancy level.
This was confirmed by third party appraiser who is engaged to provide Boardwalk with external appraisals on a quarterly basis and [indiscernible] properties. The appraiser also perhaps realized the chart the cap rates and major assumptions to be used in calculating the fair value of its investment properties.
The higher forecasted vacancy rates, means that at the end of the third quarter, while reflecting a softer market takes into consideration this longer-term view. As previously mentioned, there was a slight compression in overall cap rates compared to the end of the third quarter of the prior year mainly as a result of the Eastern Canada portfolio.
Alberta and Saskatchewan cap rates have remained flat due to continuing strong demand for apartment assets and interest rates remaining low. Slide 39, shows the quarter-by-quarter sequential change in effective gross income, which is used to calculate forecasted NOI for fair value typically.
Market rents are used to calculate effective growth income. Since lease terms in the sentence are at most 12 months long, incentives are not taken into account.
This is consistent with a longer term perspective taken when fair valuing our investment properties. The chart at the bottom shows the sequential change in same property fair-value as a result of the forecasted NOI and cap rates during the quarter.
Slide 40, shows a snapshot of the fair value of Boardwalk Alberta same property portfolio since 2014. From a peak, from the third quarter of 2014, the cumulative fair-value loss on Boardwalk’s Alberta same-property portfolio totaled approximately $298 million or 7.3% of Q3 2014’s fair value.
I would now like to turn the presentation over to Rob Geremia. Rob.
Rob Geremia
Thanks William. As is shown on slide 41, Boardwalk’s liquidity continues to be strong.
At September 30, 2016, the Trust has a base liquidity in excess of $340 million and we continue to be well-positioned to take advantage of the additional strategic investment opportunities. Slide 42, reports the Trust total debt maturity schedule.
At September 30, the Trust’s overall weighted average in place interest rate was 2.82%. This rate continues to be above the current estimated 10-year NHA insured rate of 2.3% and 112 basis points above the five-year rate of 1.7%.
Our mortgage maturity curve is well balanced as we focus on extending mortgage terms while staggering future maturities. Boardwalk’s remaining mortgage amortization under these insured loans are, in excess of 30 years.
Slide 43 shows the Trust interest coverage ratio on a four-quarter rolling basis. For the 12 months ended September 30, 2016, the Trust coverage ratio was over 3.35 times, slightly lower than the 3.59 times reported in the same period in 2015, however, still very strong.
Boardwalk’s secured mortgage portfolio is over 99% insured under the current government of Canada NHA insurance program. The use of this insurance has two unique and distinct benefits and assists addressing the two distinct financing risks, being interest rate and renewal risk.
With respect to the interest rate risk, the NHA insurance provides us the benefit of low cost of debt capital. Under this program, we are able to obtain very competitive interest rates, which are currently approximately 100 to 115 basis points over the corresponding Government of Canada benchmark bond.
Renewal risk is substantially reduced with this insurance and that once obtained, it is good for the entire amortization of the mortgage, which in most cases is 30 to 40 years. The insurance is transferrable to other approved lenders’ long-term maturity.
Slide 44, provides the reader with our estimate of current mortgage underwriting valuations. Boardwalk’s balance sheet continues to be conservatively levered at 50% after deducting our current cash position.
And Trust’s ability to access these funds is a distinct advantage. Boardwalk’s new property acquisitions reported at purchase price and when combined with other unlevered assets, represented at almost additional $183 million of potential cost effective debt capital.
Slide 45, updates our progress on our 2016 maturities. We have completed our 2016 renewal program.
In addition, we have increased leverage on these assets in excess of $197 million the majority of these new proceeds were used to assist in the closing of the 747 new apartment units which Lisa had referenced. On these mortgage maturities, we have reduced the interest rate from 3.92% to 2.14% for an average term of seven years.
Slide 46 reports the Trust normal course issuer bid for the nine months ended September 2016. The Trust has purchased and cancelled over 660,000 units at an average price of $49.02.
The Trust is constantly reviewing its allocation of its available capital, given investment opportunities. Our NCIB continues to be one of the investment opportunities as that is constantly monitored.
Slide 47 focuses on the Trust’s net operating income strategy. Our strategy focuses on the customer by providing the best value products and unprecedented level of service, managing operational efficiencies, adjusting to market trends, and where appropriate, offering strategic investment upgrades to our existing properties and suites.
As Slide 48, highlights the three key variables in our strategy, market rent; occupancy; and suite selective incentives, of the constant shift which allows us to focus on reporting the best possible net operating income. Slide 49, addresses the two basic operational approaches, which are dependent on market conditions.
In strong markets, our focus is on optimizing market rents, while maintaining a high occupancy level; while in weaker markets, our focus on adjusting rents to meet the existing demands while maintaining our higher level of service. In either market, where appropriate, the strategic investment in repositioning existing apartment units is undertaken to increase market rents or limited incentive offers.
In all situations, the focus is on the customer and offering them the individual choices based on the particular needs. Slide 50 documents the Trust’s customer turnover and related occupancy levels.
Even in these challenging economic times in Western Canada, our turnover levels continue to be low and our resident members continue to elect to stay with us longer. Our average member stay has increased over 3.8 years.
Moving on to Slide 51, Boardwalk’s 2016 financial forecast. As it is customary, on a quarterly basis, the Trust reviews the key assumptions used in deriving its public financial guidance.
Based on the continued challenging times we’re facing, mainly in our Western Canada market, we have revised assumptions for our 2016 guidance. For the most part, these challenges are focused on the increased amount of new rental specific products that has been introduced in the market over the past year.
While demand has been marginally lower, the effect of this has had a negative impact on NOI on our stabilized properties. We have reduced our expectation for NOI performance on these assets from minus 10% and minus 5% to minus 12% to minus 10%.
As a result of this change, we’re revising both our FFO guidance range to $2.90 to $3 and our AFFO range from $2.56 to $2.62. Our regional assumptions that we anticipated to begin witnessing a recovery in the Western Canada region in the latter half of 2016 is yet to materialize.
And we have not anticipated this recovery to be in the latter half of 2017. Giving the timing of the year, we have adjusted our new property acquisitions target with only those units that we have acquired to date.
In addition, we have increased our operational capital from $90 million to $102 million and the increased allocation is in the form of additional funds allocated to the new repositioning program, but I’ll discuss in more detail shortly. We have reduced our development capital to $9.4 million from $11.5 million.
This decrease is simply an adjustment to the expected timing of the expenditures which now have been pushed to 2017. Slide 52 has been included to provide you with more details on the area of change for our 2016 reported financial guidance.
It highlights the adjustments made through the year for your reference. In summary, these adjustments mainly show the results of the anticipated recovery in our Western Canada part in particular Alberta, which was slower than we anticipated to, be.
Slide 53, highlights Boardwalks Trust unit-holders’ distributions, as is customary, at each Board meeting, the trustees review the Trust unit-holders distribution. As a result of this review, the Board has decided to maintain its regular distribution at $0.1875 per Trust unit monthly or $2.25 on an annualized basis.
Moving on to slide 54, Boardwalk’s 2017 financial forecast. Consistent with prior year, the Boardwalk, the Trust releases its next year’s financial guidance as part of this Q3 disclosure.
And developing this guidance, we have tried to take into account the existing market conditions in our core market while also focusing on our overall NOI strategy and in particular the focus on the improved occupancy levels and adjusting rental incentives offered quarterly. Based on this, we are anticipating an FFO range of $2.70 and $2.90 and an expected AFFO forecast range of $2.36 to $2.56.
In determining these assumptions, we include the following. No new acquisition or disposition during the forecast period, the depletion of Pines Edge phase 2 and the commencement of Phase 3 stabilized building NOI range between minus 8% and minus 3% as compared to the prior year.
In general, we are anticipating a tougher first half of 2017 with a moderate recovery in the second half. Although we have not included any anticipated new acquisitions in our 2017 forecast at this time, our acquisition team continues to look at additional opportunities and compares them to our internal investments.
If we come across even more accretive opportunities, we are not adverse to allocating capital to this area. Slide 55, documents 2017’s estimated capital expenditures.
For 2017, the Trust anticipates a total of $117 million in operational capital and an additional $24.1 million development. Included in this amount are funds allocated to the just announced joint venture of RioCan.
We have maintained our maintenance capital estimate at $5.25 per unit the details of which can be located in the appendix of our conference call. Slide 56, provides more detail on 2017 investment and highlights the new $20 million renovation program.
Boardwalk has always provided prior to sell in providing the best late new products to the market over the years. Our renovation program provided product in the market that was well positioned and returns earned justified the investment.
Over the past few years, we have witnessed significant number of new rental projects coming to the market. This product offering is mostly to the high-end condominium ownership product, however targeted to the high-end ventures.
Although we have some seen some new supply like this is the past, in this cycle, we have seen the product being disguised than much more aggressive rates in the past. We’re on track with new competition and consistent with our overall clarity of upgrading our portfolio, we are selecting specific buildings to target with this new A-product.
Slide 57, highlights some of the offerings this program will begin to design the leverage on to benefit of our existing communities, such as significantly larger suites, better locations then the average rents that will offer. This program will also include upgrades to common areas, external amenities and enhanced community events.
Designed to draw additional attention to our communities, we have set this up as a reserve and we’ve drawn on as anticipated returns for the investment can be managed. This concludes our formal portion of our presentation.
We’d like to open it up now to questions. Operator?
Operator
[Operator Instructions] Your first question comes from the line of Heather Kirk from BMO Capital Markets. Your line is open.
Heather Kirk
Good morning.
Sam Kolias
Good morning Heather.
Heather Kirk
Given the - it’s a tough environment then even for you guys with a great deal of depth of experience. I’m just wondering whether and I’m sorry for the noise, I’m calling from a telephone.
I’m just wondering how you feel about the balance between rent reductions and where occupancy is going. And whether you consider being more aggressive, I mean, when you look at the year-over-year decline in your rental rates, it’s been relatively modest.
I just wanted to get your thoughts on that?
Sam Kolias
Heather, its Sam. And a lot of the strategy is about value and product quality and service.
And we have traditionally and still are focusing in on providing the best value and service not the lowest price. And so, we are seeing some small-scale success when we’ve increased our product quality and our service.
And that essentially eliminates incentives and draws a higher paying resident. We do realize the price is an issue.
So, we continue to provide choice and inclusion is a big part of our communities. And so, on-units that are older that are not renovated and residents that are looking for price, we definitely want to cater to a selection of residents that do seek price.
And that’s an important part of their housing choice. And so, we like to provide choice and selection and inclusion for all of the above and balance that with our renovation specifications.
So it’s all of the above. And in this market, especially we have to cater to all types of consumer demands.
And we try to and are able to, given the diverse portfolio we have.
Rob Geremia
And it’s Rob, to add to Sam’s comment, I 100% agree with what he’s saying. We’ve been very successful once the customer has been come to live with us, we keep them as long as possible.
You see our average customer stay has increased. So, once they get in with us, the realized the value that we do offer that they may not see coming in off the street with the experience after living with us.
We’ve been very successful where new-leased customers had lower discounts than in current market. So, once we get them in here, they tend to stay longer and we’re able to create more value for them.
And as a result of that we see the referrals going up.
Sam Kolias
We have communities that have no vacancy and 2% or 3% vacancy. We ask our team why, is, our vacancy so low, and the reply is, the referrals are the number one source of rentals.
And the schools, the community centers, the community activities and the amenity rich locations that we do have, and what we focus in our amenity rich locations like established schools, churches, community centers versus the new areas that are away from the courts and established locations. We get exceptional results, especially when we have a very friendly highly focused on service team in our low-vacancy communities.
And we’re working really hard to drive that service level on a consistent basis to every single of our communities and as we do vacancy drops.
Heather Kirk
So, would it be accurate to say that you’re more focused on maintaining rents than you are on yield-management?
Rob Geremia
I think we’re more focused on the customer more than ever. We believe in the long-term when the customer stays with us for longer, they will rocket rental correct quicker than the general market will.
So we are focused on the customer more than anything else right now.
Sam Kolias
Right.
Heather Kirk
Okay. And as you look forward to 2017 is there anything different that aside from the service levels, like I’m guessing it’s a tough market, it’s probably tougher than most of us expected.
Is there anything that you learned through 2016 that would make you approach 2017 with something new or in a different way to be competitive?
Sam Kolias
Yes, we’ve learnt a lot actually and that’s why revamped our specifications and improved our product quality, we’ve modernized it. And completely have changed the specifications.
So as we partially renovate our units they’re going to include what we have in our wholly renovated unit. So partial renovations are going to include new style door-handles, new light fixtures and new styled toilet, sinks, taps, and stainless steel appliances.
And so, our apartments that are going to be partially renovated and it already has been received extremely well by our existing residents that chew to get new light fixtures, new hardware in their apartment and new sinks and taps instead of lower rents. And so, we’re already realizing success on our renewals as a result of that less invest that we’ve learnt in this marketplace.
Heather Kirk
And just one final one on the CapEx. What’s your total rate on that and would you potentially look at the CapEx program as kind of a substitute for incentive and be willing to put the CapEx in just to get better lease-up, as it totals to a higher return?
Rob Geremia
Lease-up yes, but also we’ve looked it at a small scale so far. We’re seeing a dramatic improvement in leases as the level of only market rent increasing slightly but also the level that has to be offered in there.
So the capital program is a combination of consistent with our strategy we said when we announced this back in Q2 of this year that we want to upgrade our portfolio. So, this is part of that strategy as well too and what we’re seeing right now is that more than I’ve seen in the number of years, given market conditions, the customer is demanding value.
And the value now isn’t just price of entity but it’s also, quality. So that’s what this is coming from.
Now we’re good at doing this but we actually are becoming better at doing it.
Sam Kolias
The good news is we’ve got very large unit sizes and we’ve got very established amenity rich locations unlike our competitors that have built brand new. Our rental there on the fringe of establishing in a city-odd locations and are in suburban areas like the brand new apartments that we bought in the outer-skirts of the cities, with schools not quite established and amenities not quite as established as our inter-city amenity rich locations.
And so, when we provide the choice of higher product quality and allow our residents to experience a higher product quality and stay in the established areas where they’re kids are in school and they’re already part of the community centers, the churches and community activities, our residents choose to stay with us and take an amenity or improvement package instead of move to a further out-location or fringe-location in the brand - newly built community. The other thing we have is a lot of landscape too.
Lot of our communities, are very low density and we have a lot of green space. And we’re close to a lot of parks.
And when asking our residents why they stay and are with us for 5-10 years, especially a long-term resident, green space is something that’s really important to our residents too instead of concrete high-risers with no green space or fringe-locations that are more in queasy industrial like commercial locations.
Heather Kirk
Thanks for the color.
Rob Geremia
Thanks Heather.
Operator
Your next question comes from the line of Mario Saric from Scotiabank. Your line is open.
Mario Saric
Hi, good morning. Just maybe a couple of questions on the 2017 guidance, Rob, the negative 3% to negative 8%, how would you break that down between revenue and expenses?
Rob Geremia
We expect revenue to be slightly down year-over-year, expenses will be up. But I think on the expense side, we’re investing more on our people, we’re investing more on our quality of service.
So it will be increasing. Now couple of, variables are obviously utility prices and we also factored in member as a new apartment tax in Alberta as well too.
So, prices are anticipated to go up. And we’re anticipating property taxes to increase as well too but also our personnel.
So probably we’re targeting around slightly flat maybe slightly negative revenue on overall basis. But we are going to see some operating expense increase as well.
Mario Saric
Okay. And then just maybe on the property tax side, it was $12 million this quarter and it will, William mentioned some potential tax refunds in Q4 ‘16.
What’s a good run rate for us to use on a quarterly basis on the existing portfolio?
William Wong
$11 million.
Rob Geremia
Yes, I think, judging his comment, about $11 million would be the run rate but we’re expecting and we’ve already actually received in October a portion of the refund from the average in particular properties. On average right now we’re looking forward about $11 million per quarter on run rate.
Mario Saric
Perfect, okay. And then, on the repositioning and the $20 million of repositioning, would that be reflected in the same property NOI guidance for next year or are those suites anticipated to, be offline if you will?
Rob Geremia
No, they’re not going to be offline we’re going to renovate and sell at the same time. So they will be adjusting the same store numbers.
They will not be put on hold or separated, no.
Mario Saric
Okay. And then just maybe similar to Heather’s question, just on the return on that $20 million, is the expectation, is it fair to assume that the return in the near-term maybe fairly minimal i.e.
kind of keep in-place rents where they are but over the longer term that’s where you’ll see the return on that $20 million?
Rob Geremia
One of that is truthful. One is; we do things that will be short-term.
But we’re targeting on our fate to dip in our average base, we’ve been dipping around 10% per turn on this investment. But that will obviously be to meet how long this building has been renovated.
So, from that point of view we do are anticipating in short-term. Then in the longer term we’re even looking for more rent, what we’ve seen in Western Canada market, as the deepest discounts have been occurring in the higher market rents.
So we also anticipate when the market does recovery those rents will recover faster as well. It’s both for short and long-term investments.
Mario Saric
Okay. And my last question just more a broader question, the recovery that you’re looking for in the latter half of this year, it sounds like it’s been pushed out to the latter half of next year.
And could mean the excess supply in both Calgary and Edmonton is causing some other pressure. When we think about the supply curve in both Calgary and Edmonton, when you look out over the next two or three years, when do you see that supply, the completions peaking in terms of timing in both markets?
Sam Kolias
As CMHC data and even looking into the horizon, the cranes are disappearing and supply is dropping sharply. So that’s going to contribute to the recovery significantly.
So we’re not seeing any significant new supply or investment appetite for new construction compared to levels we saw two or three years ago.
Rob Geremia
And looking at the big picture, we’ve added 8% to 9% to our supply when we had the new product, that’s the vacancy in the market. The demand really hasn’t changed that much.
But the supply has increased. And with anticipation increase in that has now occurred.
But we will absorb this - the market will absorb this over time. And if we slow the building down, where we’re seeing right there will be a catch-up period in future and we’ll be well positioned for that as well.
Mario Saric
Okay. And I guess on the 8% to 9% new supply that you referenced Rob, in terms of what under construction could they come online within the next 12 to 18 months, how would that percentage go up compared to the 8% to 9%?
Rob Geremia
I haven’t seen them most roughly. We’re seeing probably about 1,000 units that are going to come to the market in the next 12 months.
We are seeing a multi-starter down dramatically year-over-year, so we’re seeing that slowdown and that will - but we probably do have some more coming to the market but that being said we’re absorbing everyday as well too. That has been taken into account.
With net new, we might actually see this to be flat because of that.
Mario Saric
And the 1,000 units would be Calgary, Edmonton combined or?
Rob Geremia
I’m going to say yes, Calgary and Edmonton combined.
Mario Saric
Great, okay. Thank you for the color.
Operator
Your next question comes from the line of Jonathan Kelcher from TD Securities. Your line is open.
Jonathan Kelcher
Good morning. Just in terms of your guidance, on the revenue side, where do you see incentives trending over the next I guess six to 12 months?
Rob Geremia
We’re anticipating most of our revenue growth, are maintaining well, will get back but we’re not going to be accelerating it’s actually slightly decreasing incentives over the next 12-mont period. So the most of our, let’s just call it revenue improvement will be through offering leases, lower levels of incentives that we had to in the current year.
Jonathan Kelcher
Okay. And can you just remind us how that incentive would work for a tenant.
So, if I’ve got $1,200 a month rent and I get one month free, do I just pay $1,100 for the 12 months or do I actually get that no-payment for the first month?
Rob Geremia
Well, it works, you’re the customer, if you’re getting one month free, you may see a free month on you and you not pay for December say for example, that amount is amortized and the accounting process over the 12 months. So all incentives offered are amortized over the lease term.
Jonathan Kelcher
Okay. So, as they come off, the customer doesn’t get sticker shock owning from $1,100 to $1,200?
Rob Geremia
That’s correct. And that’s the issue you have.
As you’re offering incentives at a higher level for short-term period, when they come off the incentive, usually in a 24-month period you get it back to the full market, assuming the market correctly. You go from $300 to $150 to zero, you won’t go - generally it will not go $300 a month rent off to zero.
Jonathan Kelcher
Okay. And then just on the JV with RioCan.
Can you maybe give us a rough allocation between the apartment and retail in terms of what you expect for development cost? I’m just trying to get a sense of really your cost per door on a constructing the building?
Rob Geremia
We’re still working with them on that so we don’t really have the details on an individual broken-by-broken basis for now. We will be obviously updating this plan as we move forward as well.
But right at this time we don’t really have a break-up between the two.
Jonathan Kelcher
Okay. Thanks I’ll turn it back.
Rob Geremia
I think to add, one of the variables we’re having is, once we go in to get approval, it will determine density as well obviously is going to impact, the size of the project is going to impact the cost as well too.
Jonathan Kelcher
Okay. Thanks.
Operator
Your next question comes from the line of Mike Markidis from Desjardins. Your line is open.
Mike Markidis
Hi everybody. Just sort of a higher level question here.
You’re talking about supply moderating and clearly you can see the numbers in terms of units under construction. But I guess, looking forward, if you anticipate sort of a prolonged low oil price environment and I would just call it lack luster economic growth.
You guys are starting to build more you’ve got your JV with RioCan and some other proposals on the go in Calgary and Edmonton. And then also there are others that are talking about doing intensification in residential development as well.
So, I guess, what gives you confidence that the supply issues and something that’s going to sort of an ongoing issue?
Sam Kolias
The developments we’re looking at have three-year window as far as completion. And the other very unique aspect of the development we’re looking at is it’s in a very established location.
It’s right next door to the University of Calgary and Foothills Hospital, two of the most significant employers of the Calgary economy, typically recession resistant employers because of the university and the hospital being pretty steady employers. It’s right on a transit node as well.
And the mixed use and very unique offering that we’ll be able to provide with larger apartment sizes given the new developments and condominiums that we’ve developed have very, very small apartment sizes. So we believe it’s a very unique opportunity and prime location and a very try-tested proven mixed use development that’s transit oriented that provides premium rents as a result of the location it’s in.
So, given the unique aspects of this opportunity, we’re very excited about it and given that it’s three years out, we believe we will be very well positioned to provide demand in this marketplace that has been historically a very stable market in up and down economies.
Mike Markidis
Okay. Thanks for that.
And then just switching over to the repositioning program and you’ve talked about doing partial and full rentals. I’m just trying to think about the capital that you’ve separated specifically in your 2017 budget.
How do we differentiate between normal long repositioning and these projects as it’s specific to a very select number of properties in terms of that figure?
Rob Geremia
We’re going to be both. I think we’re not going to be, that question was before, we’re not going to pull all these units off the market and renovate them.
What we’re going to do is on an ongoing basis, as we turn over and we see demand we’ll be increasing those. But at the same time, as Sam mentioned, we’re going to be upgrading our existing units as to higher levels back on a sort of an interim basis.
So, over time even those these tried individual units aren’t getting full renovation at one time and over a number of lease terms it will be actually up renovated, by themselves. So, it’s a combination of both.
We don’t want to just do zero to nothing but we’re not going to separate the two in going forward. We’re going to keep them all together.
And we’re anticipating in getting it.
Mike Markidis
So, is the extra $20 million of capital that’s been identified then just, to sort of bridge the gap between what you see the normal operational capital in a given year or is it selective, you mentioned I think university properties. I’m just trying to?
Rob Geremia
No, this is going to be first and foremost targeted specific buildings that we think are in great locations, established neighborhoods and have amenity arrangement there that we’d be able to leverage off up. So, that’s part of when we put the supply into stocks, we’re not making building specific.
And I don’t like many of our other capital improvements in more segregated into building and hallway. These are going to be targeted for all of the above as part of this fund.
So, we’re going to upgrade the upgrade the whole facility and commit to it. Again, the common areas we’re going to commit to, many we want to commit to.
The suites themselves which are largest portion obviously of the expenditure are going to be on a demand basis. So if we don’t see, we’re going expect a rate of return, we will push down obviously.
We know we’re not big in the market we understand that. But we do believe there is a market out there for this quality of product.
Mike Markidis
Okay. So you wouldn’t see this as an ongoing necessarily ‘18, ‘19 spend, it’s more just in response to market demand and then?
Rob Geremia
If it’s $20 million, it’s successful in the foreseeable period, we will back the board and ask for more.
Sam Kolias
What approach we’re taking is opposite to the field of dreams approach where we’re going to build and hope they come. We’re going to build a few short suites and take orders.
And if there is demand then we will renovate and sell that demand. If there is no demand we will not renovate and we will not spend that $20 million.
And so, it’s completely up to the market and the returns that we’re realizing. So, we’re going to continue to address the market demand and serve the market, and meet the market where it is.
Mike Markidis
All right, well, before I turn it back, let me just commend you guys on actually providing capital guidance, CapEx guidance specifically for ‘17 is something we’re most, of your peers are lacking.
Rob Geremia
Thank you.
Sam Kolias
Thank you.
Operator
Your next question comes from the line of Jimmy Shan from GMP Securities. Your line is open.
Jimmy Shan
Thanks. To follow-up Rob, and I think you mentioned that you’re seeing the deepest discounts at the higher end of the market.
So I wonder if you part your portfolio into kind of the lower end buildings versus the higher end buildings. Are you seeing any noticeable difference between the two in terms of vacancy rate or rent growth or rent declines?
Rob Geremia
That’s a good question. Because we’re seeing the deepest discount at the high end are some of our A-properties are experiencing more availability, whereas our more value creation buildings are slightly lower.
But I can’t even say that’s generic comment across the board. It’s a very challenging market out there everywhere.
And as a result of that we’re seeing pockets of weakness in all three categories. But pockets of strength in all categories and back to Sam’s point is, it seems to be very community focused and doing the right things at the right time and keeping your customers in there.
And we really are focusing more than ever about having our customers safe with us. We’re very, very proactive on removing, understanding what the customers’ needs and wants are.
We know it’s a tough economy. So, we’ll work with you to go from a three-bedroom to a two-bedroom if you need it.
So, we’re trying to really be proactive to meet these, end-market and customer needs and we believe that royalty will build up. And as we’ve kind of show in Fort McMurray will really pay off in the future.
Jimmy Shan
Okay. And then these new purpose-built rentals, can you quantify approximately the community units or unabsorbed units right now in Calgary and Edmonton that are on the ground competing with your properties for customers.
Do you have a sense of what the number might look like?
Sam Kolias
Yes, Jimmy, what really happened over the last two or three months was the change to discount brand new rental developments. And discount from significantly half of what their original rents were.
And so that really sets the tone of the entire market. And so the good news is Jimmy, when we market survey or mystery-shop these brand new communities they’re filling up very quickly.
And instead of 12-month leasing our lease-up period, they’ve essentially filled up in two or three months and it’s got to 90% occupancy very, very quickly. And so that’s very encouraging to us because as soon as these newly development purpose built rentals are full, they are essentially not really competing as they are empty and discounted.
And so, we are encouraged and seeing the new rental purpose-built discount and it’s working very well and it’s filling up these newly built rental communities very quickly. And the cranes are disappearing when we drive around and we look out into the skyline.
The cranes have rental purpose built apartments are disappearing. So that’s very encouraging as well.
So, we are seeing encouraging signs out there. And the market is rebalancing.
It’s just as CMHC’s forecast, it’s going to take another year to fully rebalance and start heading and the vacancies start to head back down.
Jimmy Shan
Right, okay. And lastly, just, when I look at that slide on the tenant move-outs, it does look like it was falling at very similar pattern as the last few years and then all of a sudden, June/July the move-outs really peaked, I think it went from 1,400 to 1,800, it looks like, I know the economy is weak.
But what would you attribute that to that certain spike. Is it just that people were delaying decisions all throughout the better part of last year and then decided also wants to move out?
Sam Kolias
Yes, I’ll you Jimmy this recession has hit everybody. And the biggest reasons for move-out, is personal reasons and situation.
One of the biggest reasons that really spiked and rent too high period, because people have lost their jobs, and as the recession continues and the jobs are harder to come by, people also lose their unemployment benefits as well. And so, it’s absolute reflection of how broad this economic contraction is.
And it’s essentially affecting all Albertans everywhere. And that’s really what the reflection is most.
Jimmy Shan
Okay. Thank you.
Rob Geremia
Thanks.
Operator
Your next question comes from the line of Dean Wilkinson from CIBC. Your line is open.
Dean Wilkinson
Good morning guys.
Rob Geremia
Good morning Dean.
Dean Wilkinson
I just had a question it comes up kind of every quarter, just on the implied net asset value under your IFRS valuation. I guess, in light of where you are in guidance both for the remainder of the year and the decline in the 2017.
So, what the discussions were at the audit committee level and sort of how you came to the mark that you did on the quarter and was perhaps a sort of larger amount discussed in light of the current environment?
Sam Kolias
Dean it’s Sam. Incentives and vacancy are cyclical and especially incentives.
Our lease terms are typically 12 months. And the capitalization rate is in perpetuity.
And because of our lease terms are 12 months and over the last 20, 30 years, there is a very clear secular long-term trend that vacancy goes up and down, incentives go up and down. But overall, our rents track in inflation and CPI.
So, given what other buyers in the market are doing, they’re taking a longer term approach. And given what we did, we purchased 747 units, most of them were empty with zero NOI, we didn’t get them for nothing because the NOI was zero.
And so, the vendors and the buyers are taking a longer term approach, realized cap rates aren’t to perpetuity. And then incentives are 12-month falling.
And so, why would you capitalize on incentive in perpetuity that’s 12-months long.
Dean Wilkinson
Fair enough. And then I guess sort of the question that comes out of that is, what do you think sort of in terms of the timing would be in closing that $40 million difference?
Sam Kolias
Yes, CMHC thinks after 2017 we’re going to start to see a closing of that. And that’s what CMHC is forecasting.
And we have no reason not to believe that and are seeing positive signs and very high, quick absorption of the brand newly built apartments which will clear that inventory quickly and allow the rest of the market to heal. And with a big sharp drop of newly built, perfect built, rentals dropping sharply that’s going to help with that.
Rob Geremia
And just to add Sam, the management spends a lot of time on fair-value calculations every quarter. I think it’s really important note that we get that write-down back in 2015.
So, we were on top of this quite a while ago. And so the current market adjustment wasn’t nearly as large maybe others have.
So we are constantly reviewing that, on top of it, working with our third party appraisers to get, to balance off the short-term impact with the long-term valuation methodology. And I’ve always spent a lot of time talking to them about what’s the best way to do this and concluded in the short term for now, the best way is just vacancy.
That will have an, in perpetuity of that will not sustain any long-term value in there as well too. So, it’s an ongoing process and we’re really getting next quarter.
But we’ve been very confident that our process is strong.
Dean Wilkinson
Okay. And as you look to the occupancy assumptions for 2017, are they sort of somewhat down from where we are currently then?
Rob Geremia
Yes, we actually adjusted vacancy up by1% in our major markets. But I think it goes both ways.
If it wasn’t that long ago when our occupancy level was 98%, 99%, and we weren’t using 1% vacancy either. So we do understand that this is a valuation methodology moving forward not a today valuation to see where it sits.
So it’s a fair value calculation. So, yes, it’s really good time for not assuming this is going to be good forever.
And in bad times it’s going to be bad for every one of you.
Dean Wilkinson
Fair enough, makes sense. And then the $386 million of up-financing that is done on, you look at that vis-à-vis CMHC as opposed to an IFRS perspective.
Rob Geremia
That’s correct, CMHC underwrites the assets individually, the IFRS value is not what they use to they have their own underwriting criteria.
Dean Wilkinson
Okay. So that $386 is reflective of their underwriting?
Rob Geremia
Yes, that gives a much higher value they give the higher cap rate than we’re seeing in the market as well.
Dean Wilkinson
Yes, I guess they’re about I think $900 million difference I think?
Rob Geremia
Yes, and then I think it’s the right thing to do because you’re underwriting an asset for a long-term valuation. But I think we’ve done a very good job over the years on a conservative base underwriting the entire industry.
Dean Wilkinson
Perfect. Okay.
That’s it from me guys. Thanks a lot.
Rob Geremia
All right. Thank you.
Sam Kolias
Thanks Dean.
Operator
[Operator Instructions]. Your next question comes from the line of Matt Kornack from National Bank Financial.
Your line is open.
Matt Kornack
Hi guys, I’m just wondering if you could provide a little bit more color with regards the specific markets you’re in particular, some of your comps now granted they don’t have as big of a portfolio as you do. But it looked like Edmonton was less impacted than Calgary.
But from your commentary earlier in the call it sounded like you see sort of a longer tail to the Edmonton issues than Calgary. Just wondering what there is there and then obviously the periphery markets are different.
But if you could touch on just Edmonton and Calgary, that would be good?
Rob Geremia
Well, our portfolio in Edmonton is much larger than it is in Calgary, so the impact of the overall downturn obviously is going to hit harder than the Calgary portfolio will. But we are seeing particularly in Calgary, a much higher supply of A-quality rental product coming to the market.
So we’re seeing different areas being hit quarterly, whereas in Edmonton we’re seeing more of the largest buildings coming to the market. So, I think both are from a market direct point of view, because we are bigger in Edmonton, we’re going to obviously be more focused on that.
But I think there has been more supply come to Edmonton than it has been in Calgary over that period of time.
Sam Kolias
Edmonton, sorry, Edmonton employment demographics are much different than Calgary, and Edmonton more a labor force and essential to continue on the production and sustainability of production in the oil industry. And so, it’s harder to lay-off workers that are working on pipe that they have to constantly re-weld and replace because it constantly wears out.
And the up-grader, that was built as a significant employer in Edmonton, the arena district that the city and the province funded that’s different than Calgary. That $1 billion construction investment provided lot of jobs.
And also the government parliament is in Edmonton and so most of the government workers. And the good news about our new government is they kept employment and took a different approach than our government did in the 90s where there was brutal and massive government, cuts in the 90s.
And this time around our government and our voters voted to keep government amenities and services consistent and avoid brutal and massive cuts that enabled Edmonton employment to be more stable and steady because of its significant government workforce that maintained its levels throughout the economy and the contraction that we’re going through. And so that’s, and also Edmonton rents started off about $100, $150 on average lower.
So our price is lower in Edmonton as well which makes a difference. And we were a lot more conservative in increasing our rents in Edmonton than we were in Calgary.
And so that is a good example as to why Edmonton is little bit different than Calgary.
Matt Kornack
Okay so if I'm hearing you correctly, it sounds like well, in talking to people in the industry as well .but the new employment at least in the early stages likely to be in the fields and the service is potentially for ramping up some of the product that has come off line, but corporate head-office in Calgary may take a little bit more time to come back?
Sam Kolias
Well, the good news about head-office space is it’s really, really cheap in Calgary. And we’ve got a couple of new diamond companies, the Bears moved here and another diamond company just announced moving to Calgary.
They’re going to save $10 million or $20 million. And our housing is very affordable here as well.
And so, in past recessions like the 80s, there were a lot of different industry companies that relocated here. We’ve got beautiful rocky-mountains, skiing, snowboarding and great camping in the summer time.
And it’s a beautiful province really. And it’s a very affordable province right now.
And so, in the past and in times when office rents were very, very low and housing had a lot of choices and it’s very affordable, we saw lot of different industries move into the city because of the significant amount of office space that’s available. And we can be very, very competitive versus Vancouver costs or living in Toronto and some parts of the U.S.
that are a lot more expensive to operate the business in. So that’s what we’re seeing in the small basis on a smaller scale and we expect that to continue going forward because of competitive pressures of G&A costs and just costs of doing business will attract more companies here.
The other thing we’re seeing is today in local newspaper, oil companies are trying to hire people back. And most of the folks have left.
And so, if they’re going to have to go back to the provinces where they have left to and track them back into Alberta which will help reverse the out-migration and turn it back into an in-migration. Because the folks that the oil companies need to hire seem to be in different provinces that will have to track back which will help increase demand by, in migration going positive again.
Matt Kornack
Interesting. Last question on my side, and you have a reputation historically you’re being conservative from a structural standpoint.
Some of what you’re doing now, given that the payout ratio has increased a little bit and you’re taking on more CapEx. Do you view as to where you’re comfortable taking leverage to over the sort of next 12 to 24 months in order to do what you need to do or?
Sam Kolias
We’re going to work really, really hard to increase our NOI and our profitability and focus in on our organic growth. And historically that’s been our biggest driver.
And the one different thing that we’ve got going for us now is, as we created a very unique counter-cyclical development strategy, during the financial crisis we introduced small 109 unit-development when builders were looking for jobs and opportunities just to keep their crews busy and bidding at cost. We built those 109 units for $180 a door.
And very successfully proved we can create significant value by developing in a very slow time. And so, what we’ve got that’s different this time around when we do see the recovery, we’ve got a very significant pipeline of about 4,000 units that we got in our existing communities and intensification where the land is already bought and paid for.
And we’re simply completing entitlements and getting those to shop already. So we’ll be really quick to turn those developments on when we see a recovery and improvement in the rental market.
So the other thing that we’re seeing and focusing in on is; land and partnership opportunities like the RioCan partnership. Relationships are everything.
This is the first partnership that we’ve announced. We’re very excited because we’re very like-minded, and see very successful companies in the United States like Federal Realty and Mace Ridge that has created significant value and prime transit oriented mixed used developments.
And our partnership to do this, are something very unique and different. So we have both an organic growth strategy and an external growth strategy going forward, something very different on a larger scale.
So we’re very excited about our future. And that we have tried-tested, proven on a very small scale are our external growth strategy.
We created significant value as shown in our Spruce Ridge and our Pines, very quick lease-up in our existing locations. And when we time these developments during a recovery of a rental cycle and we clearly see that, we are very successful and a very quick lease-up and use very conservative lease-price assumptions because our costs are very conservative because they are built during counter-cyclical time.
And so, we are better positioned than we’ve ever been to come out of this better than we’ve ever, ever been. So we honestly have never been so excited to be honest.
And we’ve got a new organic and external growth strategy that is unparalleled. And will position us very favorably going forward.
Rob Geremia
One thing that we can’t ignore it is we pay-off $50 million a year in amortization on mortgages as well. So even though the capital program is over $100 million, it’s really only half of that because half of it is going back in principle reduction.
Matt Kornack
Right that makes sense. Thanks for the color guys.
Rob Geremia
Thank you.
Operator
There are no further questions at this time. Mr.
James Ha, I turn the call back over to you.
James Ha
Thanks Christine. If you missed any portion of today’s call, 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.