Killam Apartment REIT

Thank you. Good morning, and thank you for joining Killam Apartment REIT's Q4 and year-end 2018 Conference Call.

I am here today with Robert Richardson, Executive Vice President; Dale Noseworthy, Chief Financial Officer; Erin Cleveland, Vice President of Finance; and Nancy Alexander, Senior Director of Investor Relations & Performance Analytics. Slides to accompany today's call are available on the Investor Relations section of our website under Events & Presentations.

I will now ask Nancy to read our cautionary statement.

Thanks, Phil. This presentation contains forward-looking statements with respect to Killam Apartment REIT's and its operations, strategies, financial performance and conditions.

The actual results and performance of Killam Apartment REIT could differ materially from those expressed or implied in such statements. These statements are qualified in their entirety by the inherent risks and uncertainties surrounding future expectations.

Important factors that could cause actual results to differ materially from those expressed include, among other things, general economic and market factors, competitions, changes in government regulations and factors described in the Risk Factors section of Killam's annual information form and other securities and regulatory filings. This cautionary statement qualifies all forward-looking statements attributable to Killam and the persons acting on their behalf.

Unless otherwise stated, all forward-looking statements are as of the date of this presentation and the parties have no obligation to update such statements.

Thank you, Nancy. I am pleased to report another very strong year for Killam.

We achieved net income of $136 million compared to $115 million in 2017 and earned funds from operations of $0.94 per unit at 4.4% increase from $0.90 per unit in 2017. We realized historical high occupancy across our portfolio and achieved our largest year of acquisitions with $315 million in assets acquired across the country.

We were successful in achieving majority of our strategic targets for the year as summarized on Slide 4. Based on strong top line revenue growth, same property NOI has increased by 5% compared to Q4 2017 and 4.8% for the year, reaching the upper range of our same property NOI guidance for the year.

We purchased $113 million of properties in 2018, well in excess of our revised 2018 target of $225 million. Of the assets acquired, approximately 70% are located outside of Atlantic Canada, and Killam generated 27% of its NOI from Alberta and Ontario in 2018.

The Alexander, our most recent completed development in Halifax, opened in September and reached substantial completion in October, is now 100% leased. In December, we acquired the remaining 50% ownership in The Alexander.

I will now ask Dale to recap our financial results.

Thanks, Phil. Before covering the details of 2018, I'd like to recap Killam's growth over the past 5 years.

A summary of Killam's financial performance for this period is included on Slide 5. Killam has achieved steady improvements in all its key financial metrics over this period.

NOI has increased at a compound annual growth rate of 12.5%, FFO per unit has grown by a compound annual average of 6.8% and Killam has reduced its AFFO payout ratio to 84%. Leverage and liquidity have also improved with debt-to-total assets trending downward and increased capital resources available to fund acquisitions and development growth.

Year-end 2017 debt and liquidity results reflected a temporary increase in liquidity following the closing of the November 2017 equity raised and a subsequent acquisition of 3 properties in December 2017 without debt. Mortgages replaced on these assets in early 2018.

Debt-to-total assets of 49.8% presented at year-end 2018 are on a more sustainable basis. 2018 full year results are also included on this slide.

Killam generated FFO per unit of $0.94, 4.4% growth from 2017. AFFO per unit was up 5.6% in the year.

This was driven by increased earnings from strong same property results and contributions from recent acquisitions, partially offset by an increase in the average number of units outstanding and increased interest expense spent, including increased amortization of deferred financing costs. Amortization of deferred financing costs was up in 2018 and in Q4, specifically, due to the timing of recognition of CMHC premiums linked to refinanced mortgages.

We have updated our accounting note on prepaid CMHC insurance premiums. CMHC premiums are amortized over the amortization period of each loan.

On refinancing, older and unamortized premiums that don't relate to the new refinanced mortgage are written off in the period of the refinancing. Killam uses a mix of refinancing options with CMHCs, often with the previous CMHC insurance continuing to benefit all or a portion of the new mortgage on refinancing.

There are times when we may maximize the mortgage on our financings and also begin a new amortization period. Under this scenario, although a portion of the rental CMHC insurance premium may be applied as a credit to the new premium, a portion of the older premium that has not been fully amortized will be written off with the start of the new mortgage.

During Q4, Killam expensed approximately $1.8 million of CMHC insured premiums related to previous refinancings. As disclosed in the MD&A, we expect amortization of deferred financing costs to decrease to approximately $2.5 million in 2019 compared to $4.4 million in 2018.

Partially offsetting the timing of recognition of deferred financing costs, Killam recorded $1.1 million of revenue in Q4 related to the recognition of forgivable government loans used to fund affordable housing units, as noted on Page 16 of the MD&A. Netting these two nonrecurring entries, net income and FFO were reduced by approximately $700,000 in Q4 and for the year.

Highlights of Q4 operating results are included on Slide 6. Same property revenue was 3.1% ahead of Q4 2017, due to strong leasing activity in Killam's core markets.

Operating expenses were a modest 0.1% higher than Q4 of 2017. In total, Killam's same property NOI increased 5% in Q4 and Killam generated FFO per unit of $0.23, 4.5% ahead of Q4 2017.

Turning to Slide 7 and Killam's full year results, overall occupancy and rental rate growth continues to trend higher. The 2.7% increase in rents achieved this year is 90 basis points ahead of last year and the highest average rent rate increase since 2012.

We've also reduced rental incentives, which are down 43% year-over-year. Same property expense growth is up 1.6% for the year, as shown on Slide 8.

Savings were realized in utility and heating costs due to lower natural gas prices in Ontario as well as reduced consumption as Killam benefits from efficiency projects installed in the last 2 years. These savings were offset by inflationary increases and timings of general operating expenses.

Property tax expense remained relatively flat as rising property assessments were offset by successful tax assessment appeals. Killam's debt metrics are highlighted on Slide 9.

Slide 10 highlights our debt maturity profile, including average apartment mortgage rates by year versus prevailing CMHC insured mortgage rates. Killam benefited from lower interest rates on refinancings in 2018, but we expect to refinance apartment maturities in the next 12 months at slightly higher rates than the weighted average interest rate on maturing debt of 2.82%.

We are using a combination of 5- and 10-year terms on debt refinancing and to date have been more heavily weighted to 10-year debt. Year-to-date, we have refinanced $30 million of debt, representing 18% of our refinancings for the year at weighted average term of 8.1 years and our weighted average rate of 3.08%.

As shown on Slide 11, through acquisitions, developments, capital invest improvements and appreciation of existing properties, Killam's real estate portfolio has grown to $2.8 billion in value. This, along with strong fundamentals and cap rate compressions, translated into $135 million in fair value gains in 2018.

I'll now turn the call over to Robert, who will provide details on our operating performance this quarter.

Thank you, Dale, and good morning, everyone. As shown on Slide 12, Killam remains focused on increasing funds from operations and net asset value by executing on its 3 key strategies: increasing earnings from the existing portfolio; expand the portfolio and diversifying geographically through accretive acquisitions with an emphasis on newer properties; and thirdly, developing high-quality properties in Killam's core markets.

I will focus on Killam's operating performance for 2018 along with our strategic revenue and expense management initiatives before turning the call back to Philip to discuss our development pipeline and recent acquisitions. Killam's existing $2.8 billion portfolio includes 15,900 apartment units, 5,400 rental sites and 37 manufacturer-owned communities and 500,000 square feet of commercial space.

We are committed to maximizing unitholder value and Slide 13 highlights the creative and innovative programs Killam employs to achieve its FFO and net asset value growth goals. Top line growth combined with expense management remains the key priority, but additional metrics that are more subjective, such as superior customer service, technology gains and enhanced analytics are also critically important.

Killam seeks continuous improvement and provides the tools to enable its path to reform efficiently. Slide 14 details Killam's strong same property rental rate growth and property occupancy results by market for 2018.

Following an impressive 2017 that posted higher-than-average rental rate growth and occupancy gains, Killam successfully maintained this momentum throughout 2018 to again deliver better year-over-year rental rate growth in all its core markets. Rental rate growth for new tenant leasing was up 5.3% year-over-year, a 190 basis point improvement over 2017.

Rental rate growth for renewing tenants, which represents approximately 2/3 of our apartment portfolio, delivered an average rental rate gain of 1.7%, a 70 basis point gain versus 2017. Halifax, Killam's largest market is one of 4 Killam markets that reported same property rental rate increases of 7.4% or greater on new leasing, slightly better than 2% improvement for renewing tenants.

Overall, Killam's management and leasing team generated record high occupancies for both the fourth quarter and full year 2018. Killam reported a 20 to 150 basis point improvement in all markets except for 2.

Both St. John's and Calgary continue to be impacted by low oil prices.

However, despite the fact that both St. John's and Calgary recorded occupancy dips of 120 basis points and 40 basis points, respectively, both markets reported improvements in same property net operating income, up 70 basis points for St.

John's and up a strong 5.1% for Calgary. The chart at the bottom Slide 14 highlights that Charlottetown remains better than 99% occupied, and we expect this trend to continue given the higher rates of international immigration and very little new multi-residential supply in the PEI market.

Overall, Killam reported consolidated same property occupancy of 97.1% in 2018, 50 basis points better than 2017. Market demand for quality rental units continues undiminished and Killam's portfolio is well positioned to capture additional rental rate growth.

In response to this opportunity, and as highlighted on Slide 15, we accelerated our suite repositioning program in 2018 to $3 million, extensively renovating 170 units. This represents an increase of $2 million from the $1 million invested to upgrade 47 units in 2017.

The repositioned units completed in 2018 earned an average return on investment of 14%. This from average monthly rental rate increases of $253.

We recognized the significant return opportunities from repositioning units, and we are accelerating this program. In 2019, we have budgeted 300-plus repositionings and should generate in aggregate $900,000 in additional net operating income from these upgrades.

An in-depth review of our almost 16,000 multi-family units identified 3,000 additional units for repositioning. We estimate we can complete work on the 3,000 units within 6 to 7 years and earn an estimated $9 million in additional NOI.

This $9 million in additional earnings should translate into approximately $170 million of organic net asset growth. The portfolio average cost to repositioning unit is approximately $20,000 or a total of $60 million to reposition these 3,000 units.

Hand in hand with suite upgrades, we also completed upgrades to the related buildings' common areas complementing the suite renovations and resulting in a more thoroughly repositioned property. Slide 16 through 20 highlight examples of the type of unit in common area renovations completed in 2018 for 32 properties within our portfolio.

As presented during the last two quarterly conference calls, today we will highlight three new properties where we have performed upgrades. Slide 17 profiles our Garden Park property in Halifax.

Built in 1980, this mid-rise building has 246 units and is located at the corner of Spring Garden Road and Cathedral Lane, in the heart of downtown Halifax. Garden Park's excellent location supports the investment in updated higher-end units and we've been doing this for the past 3 years.

In 2018, a $22,000 investment focused on kitchen, bathroom and flooring upgrades generated an average rental rate increase of $235 per month, equating to a 14% return on investment. As well, we updated Garden Park's main lobby, entrance and gym as shown on Slide 18.

Garden Park is well positioned to remain competitive for the next 10 to 15 years. Slide 19 shows our 50-year-old Parker Street property in Dartmouth.

This 239-unit mid-rise -- mid-market asset is a case study in the value of investing $21,000 in new kitchens, bathrooms and flooring to earn average rental increases of 24% or $220 per month to generate a return on investment of 13%. Our third property profile is on Slide 20 and highlights Spring Garden Terrace in Halifax.

This 201-unit property has a prominent location on Spring Garden Road adjacent to Halifax Public Gardens and is within walking distance to all urban amenities. Constructed 55 years ago, Spring Garden Terrace offers large rental suite and has excellent views of the city's south end skyline.

Over the past 5 years, Killam has invested $6.3 million to return this asset to its former prominence. Upgrades include new balcony railings and glass panels, new windows and brickworks as required and upgraded exterior entrance, including a new canopy grand steps and hand railings.

With faceted hands, more recently, we've been updating the corridor and common areas along with the suites. An investment of $18,000 per unit on kitchens, bathrooms, yes, flooring, we had an increase in rental rates of $230 per month or 18% for an overall 20% return on investment.

Since each of these three properties has little-to-no vacancy, we reposition those units as they turn. And with experience, repositioned units are now offline an average of only 28 days.

In conjunction with driving revenue growth, Killam manages expenses to further optimize net operating income. As shown on Slide 21, Killam is currently entering year 3 of its 5-year $25 million energy efficiency plan focused on energy savings, such as the installation of ultra-low-flow toilets, LED lighting retrofits and heating system upgrades.

These projects help mitigate the impact of expense increases. To date, we have invested approximately $10 million in energy projects and have achieved a 20% return or a 5-year payback.

In 2019, we have 123 projects planned for a total investment of $4.9 million, which should earn an estimated $1.1 million of annualized savings or a 4.6-year payback. Slide 22 highlights Killam's focus on technology as we continue to leverage and develop our operating and financial platforms to help maximize growth and earnings.

We employ leading-edge processes to better service and engage our residents, prospective tenants, employees and suppliers. Killam's investment in its property management platform, including the education of our skilled staff, enables Killam to integrate new and innovative technologies as our business continuously evolves.

All Killam employees have smartphones or tablets that deliver faster response times to our tenants' inquiries, enhance task efficiencies and reduce paperwork, all saving time and money. We implemented mobile maintenance work orders, property inspection apps and are currently fully integrating our front-end online leasing, marketing and customer relationship software.

On our Q3 conference call, we mentioned that we were in the pilot stage with our front-end CRM software and expect to be fully operational by the end of Q1 2019. We are well on our way with this target and currently we are at 47% of our portfolio online today.

As Slide 23 shows, this investment is benefiting all stakeholders. The CRM tool will give Killam the ability to deliver the high-quality service to our tenants and prospective tenants have come to expect and deserve as Killam maximizes rental opportunities and further reduces vacancy.

We ensure our clients have the ability to book appointments and complete applications from the comfort of their home. With more of the data entry being driven by our tenant prospects, our leasing teams can focus on delivering exceptional customer service as well, having real-time access to this data is key to ensuring Killam can rapidly analyze its markets and make informed and more accurate operating decisions.

Already as illustrated on Slide 24, we're using analytics to make timely decisions regarding employee engagement, marketing sources, leasing conversion ratios and traffic trend. Before turning the call back to Philip, I want to quickly touch on the strong multi-residential fundamentals in our key markets.

The Halifax, New Brunswick and Ontario markets performed very well in 2018, delivering both excellent occupancy and NOI growth. Occupancy in the Maritime Ontario markets remained strong given increased immigration, economic growth and home affordability constraints, especially in the GTA.

We have included Slides 36 to 38 in this presentation for additional information on our key markets. I'll now hand you back to Philip to provide an update on our recent acquisitions and new developments.

Thank you.

Thank you, Robert. Slide 25 details our acquisition activities for the year.

Nearly 70% of the capital deployed in 2018 was in Alberta and Ontario, as Killam continues to execute on its strategy of increasing the portion of NOI generated outside of Atlantic Canada. Slide 26 charts the 2018 acquisitions by both segment and region.

We acquired $210 million or approximately 750 units in apartments across the country, with an average age of 18 months. Our $80 million Westmount acquisition in Waterloo will be focused around the future multi-residential development opportunity of that property.

$4.7 million was spent on 2 MHC properties that were -- that we absorbed with our existing operating platform in Ontario and Nova Scotia. And lastly, Killam doubled its development pipeline in 2018 with $27.7 million in land for future development in the Kitchener, Waterloo, Calgary and Charlottetown markets.

As previously mentioned on the Q3 call, we purchased a new Edmonton asset, The Treo, in the last quarter of 2018 as shown on Slide 27. This property consists of two 4-story apartment buildings located in Northwest, Calgary.

The 158-unit property was acquired for a purchase price of $39 million, representing an all-cash yield of 4.9%. The property is also located adjacent to the Killam's recently announced 10% interest in the 13.6-acre Nolan Hill development.

On the development front, we completed 2 developments in 2018, Saginaw Park, a 94-unit, 7-story building located in Cambridge and The Alexander, a 240-unit building in Downtown, Halifax. Slide 28 illustrates the leasing activity for these 2 developments, and we're pleased to report both are 100% leased as of January 2019.

Details of The Alexander and photos are included on Slide 29. Killam had a 50% interest in this project and increased its ownership to 100% in late December, with the purchase of the remaining 50% interest for $44.5 million.

Progress is on track with our Frontier development in Ottawa, a project we are codeveloping with RioCan, as detailed on Slides 30 and 31. The first phase of the 23-story tower, 228-unit building will have geothermal heating and separately metered water, increasing our operating margins and reducing our environmental footprint.

The building is on schedule to be completed in Q2 of 2019. Pre-leasing started on December 28, 2018, with the tenant prospects that had filled out a prequalifying survey online.

Formal marketing started last week, and the full campaign begins in early March with digital, social targeted ads, local billboards, transit and Cineplex theatre ads. We have 60 units pre-leased as of today.

We are in the design and approval stages for the second phase of this project, a 208-unit building and expect a completion date for Q3 2021. We are excited to have broken ground on our new development in Charlottetown PEI in Q4, as shown on Slide 32.

The 5-story building will contain 78 units with underground parking, overlooking downtown Charlottetown on the waterfront. The average size of the units will be 1,020 square feet with amenities that include a gym, social room and a library.

The project's budget is $20.8 million with an anticipated all-cash yield of 5.6%. As shown on Slide 33, Silver Spear II, our 128-unit development in Mississauga, is expected to break ground in Q2 of this year.

Construction will take 24 months with a $49 million budget with an anticipated all-cash yield of 5.25%, approximately a 175 basis point premium over the current market cap rates. Finally, we continue to advance our development pipeline.

A full list of our development pipeline is included on Slide 34. It is worth noting that 70% of Killam's future development pipeline is outside Atlantic Canada as we continue to grow our presence in Ontario and Alberta.

To finish, 2018 has been a banner year for Killam on many fronts with strong operating and financial performance. Our focused strategy is leading to increased earnings, a stronger balance sheet, more geographic diversification and one of the highest quality apartment portfolios in Canada.

In 2019, we will continue to grow the portfolio accretively, accelerate our suite renovation program and execute on our energy efficiency plans in technology, innovations. This concludes the formal part of the presentation.

And we will now open up the call for questions.

Just quickly on the suite upgrades. Is Slide 16, the targeted properties for 2019?

Or are they into different markets?

They are all different markets. Really when we look at our target, it's across the portfolio, different provinces, markets, yes, that's just an example.

That's just an example, [indiscernible] example.

So what are you guys targeting for this upcoming year?

There?

Yes, whether it'd largely be Halifax and Ontario or...

Jon, it's really all over. So it's kind of if you look across our portfolio, we've got some happening across New Brunswick, St.

John's as well, Fredericton, London, Ontario, PEI, yes, all over.

We would have worked on 37 properties last year, and so it will be similar. It'll be a broad swipe of the portfolio.

Fairly, we're reaching out to our property managers to look to them for feedback within their properties where they think the opportunity lies and that's nearly successful so far.

What we've tended to do and what we'll continue to do is besides units term, we do the big renovations. So nothing is offline and it's across the portfolio.

Okay. Now turning to developments, I saw you guys push back the -- a couple of the Alberta developments from last quarter.

What was the rationale behind that? And will that impact sort of where you guys are looking for acquisitions going forward?

I think you are correct in assuming that we are actually still going through all the sort of the design and planning approval for Calgary, but there is a sort of committed sort of pause on it relative to seeing where that market is going. And then the same with Edmonton.

It doesn't preclude us really looking for good opportunities and the existing sort of acquisition sort of market, but the development ones we are sort of like just slowing it down a bit and seeing where that part of the market is going. So to answer the second part of that question is, we are still looking at existing properties and depending on the opportunity, the pricing and also gauging where we are with the current market conditions in Alberta.

Okay. And then just quickly on the Frontier for Phase 2, who is the development manager on that project or that phase of the project?

Well, I think it's both of us, but obviously, RioCan was the lead on the first one and we are both heavily involved in it and it'll be the same construction company overseeing the same architect.

Okay. And then just finally on the Halifax market, you guys had, I think, better metrics than you did in Ontario.

Do you see yourselves being able to push rents even further than the 3-plus-percent you guys got this year?

It'll be similar, I think. I don't know if we can surpass this year's performance.

But it's a strong -- it's a tight market here. There's lots going on and we'd like the chances.

Yes. We say that every year.

Phil, just a question on the debt and as you look forward on that, every time we turn around and we see interest rates are going up, they come back down again. Looking at the 2019 maturities, you're probably flat to 5 year.

Is there a thought in and I know that it elevates the risk and maybe going shorter term on that and seeing what happens? And then secondarily, when you look out to 2020, where there's probably a bigger gap, is there an ability to rate lock that right now or you just hit the wind with the market as it comes up?

Dale got her hand up...

I'll just say that, so I mean we're working closely to see -- to watch that trending and monitoring opportunities to potentially be able to lock that in, be it through hedging or rate locking with lenders. So I mean, we have our eye on it, we haven't -- there are some we can lock in even a few weeks to couple months before.

So we're talking about that. We haven't executed on anything beyond kind of a shorter-term lock-in, but we are exploring options.

I guess, it's just a reality we are all facing, right?

Right, but again, from any historical point of view, the spread between the 5 and 10 is so small currently and where rates were November, December and where they are today, it still makes a lot of sense to look at the 10-year money versus even the 5, but it depends on the assets right now. But it's something that we spend a lot of time on every asset you look at.

So -- and still from a historical point of view, these are still very cheap rates.

Oh, for sure. I guess, maybe a secondary question of that is, when you look at these assets, the new ones you're building in Mississauga that would be valued probably at a 3.5 cap, which is a number that 5 years ago, we all would have probably thought as lunacy, but now that's the world.

Would that be something that you would look at being a lot shorter term on the debt maturity just because, one, it's the spread and, two, the ability to roll into higher rates, particularly, given that, I guess, that new build is not going to be rent controlled?

Yes. But again, you're going to try to build to a 5-plus with still upside on the rents on a yearly basis for the next few years.

So if you can lock in, if you can somehow, depending on where it is, but you got to float it through the construction phase, but depending how fast you can get it over. That 10 year is still a -- one of the sort of the strongest in terms of locking in debt.

Yes. Okay, fair enough.

And just looking at the 2019 capital improvement budget, so let's call it 57.5 as the midpoint of where you bracketed that. Would sort of '14 of that similar to 2018 be sort of just the straight up maintenance CapEx at 900 and change per unit or do you think that number changes?

No, I think, that's a very good estimate of how it'll come out.

Okay. And then when we look at the remaining, call it, 43.5, I'm assuming that the return on that is probably going to be a little more back-end loaded and, I guess, the question I had is, how much of that 43.5 goes into the curb appeal and the building envelope upgrades?

And do you get the same return on that or should we be thinking of that 43.5 maybe not coming in at mid-teens kind of return, but maybe closer to sort of a 10 to 12?

Right, go lower. Yes, when you spread it out, I think, some are going to be high, some are -- I think, go lower...

It's a good estimate. That's -- we tend to run always to a minimum of 10 and we've been successful on that, but that's a good range.

And some are harder to measure when we're talking about replotting buildings, for example, where we're modernizing the look, but to measure how much of our rental growth is linked to that versus suite rental and other things, so it's hard to measure the return on some of those, especially, when you like about the curb appeals and actual returns.

Just in terms of the same property guidance of 3% to 5%, the turnover rates did decline a little bit year-over-year. I guess, within that guidance range, what are your expectations for turnover rates in 2019?

Essentially, pretty similar. I mean, even in terms of a change, I think any change is pretty small when we see about 33% to 32%, it if it gets down to 30%.

Maybe I can tell, consistent it's been over the years and so it's down a little bit. I don't see it changing materially.

So I think, it's 30% to 33%.

Okay. Specifically with St.

John's, obviously, the occupancy was a little bit, I guess, weaker year-over-year there, but the market, at least according to CMHC, is starting to see some declines in the vacancy rate. Just can you walk through maybe the dynamics you're seeing there in the market right now and maybe our expectations for this year?

So the news out of St. John's these days is a lot more offshore work on the goal and there's, I think, it's the orphan space and that's been a big push Hebron's coming on, and they may have a record number of wells being drilled this summer.

So things are looking better in the market for sure.

But I'll tell the other two factors, there are like, again, as we talked about our change from a leasing perspective and how we're doing it, we're quite excited about the new leasing personnels or the new folks we have over in St. John's that will help drive up the occupancy plus we have basically quite a capital focused on those assets this year as well.

Okay. So an area of opportunity for sure.

And then lastly, just a target of $100 million acquisitions this year, taking a little bit more of a pause, I guess, on development opportunities in Alberta. Just walk through what you're seeing in terms of opportunities at the moment?

Good question. I mean, going from west to east, there is still quite a bit of the new product that's available both in Calgary and Edmonton.

It's about trying to figure out where it really is relative to the purchase price. And then again what is the actual asset in terms of its local sort of neighborhood and what are the dynamics.

So there's just products there as you're willing to buy it at this time. Ontario is -- hasn't changed.

It's very, very competitive. We've got some opportunities that we are looking at, maybe some long shots, but most of our focus is on our own sort of development pipeline because, again, if you can get it and get it approved and get it ready to build, it's pretty exciting from that point of view from a growth point of view.

And then it never really surprises me anymore the opportunities that sort of are in all our local markets here with some pretty good sort of visibility on a couple of assets that make a lot of sense for us because of our location, our size and proximity to where we have own assets today. So it's quite robust.

I just wanted to maybe -- excuse me, delve back into the same store NOI targets both for 2019 and then, I guess, the longer term that you disclosed. In terms of 2019, can you give us a sense in terms of how the revenue growth compares to the expected expense growth within that 3% to 5% or maybe ask differently at the midpoint of, let's say, 4% of your expected margin or further margin expansion in '19?

I think that we do expect some improvement in margin in 2019, and I think that top line, I think that could look pretty similar to -- I think 2018 is a good kind of proxy for what we hope to be able to do. On the expense side, we have some opportunities for efficiencies, but we also have some cost pressures and some of the initiatives we're taking on from a technology perspective.

And from a leasing perspective, those do add some costs. So factoring that in as well comes into play.

So I think, somewhat similar to this year is for what we're seeing today like at the starting point.

Okay. And then maybe on the longer-term side, what are some of the parameters that kind of go into that kind of 3% target?

Is it kind of historical average? How did you get to the 3%?

Well, just, I think for a long time we talk to and now we recognized based on the fundamentals now, should fundamentals shift widely in the long term? That might change.

But based on certainly we will continue to drive revenue, but when we look at expenses, there are inflationary pressures and we would expect that to continue. We are going to look for how to do things better, but property taxes, there's something there that it's hard to know what's going to happen, right?

We can do all the tax assessments, reductions, go for them, though we don’t know we see them. So insurance costs, those things that are -- things happen in the market that cause those to rise.

So we're going to be doing various initiatives to manage expenses, but recognizing that over time if there are also pressures that are going to cause expenses to go up. So I guess, what we're trying to say is that we expect with all the initiatives we have underway to our growth expectations are higher than they were a few years ago.

Got it. Okay.

And then I think, Robert, I think you mentioned that the rent growth on turn and how Halifax was 7.4% for 2018. With that type of rent growth, what we're seeing in other parts in the market is some increasing concern about tenant affordability.

Are you seeing any signs of kind of tenant affordability coming up within the portfolio today?

We're not feeling our average rent. I can't remember exactly from [indiscernible] but for Halifax, but it's about around $1,000 or $1,050.

So that's affordable. So cost of portfolio we would be very affordable.

And what's interesting, I think, using Dartmouth as an example, we were able to move rents there $220 a month on repositioning units and good uptake. So there is an appetite in market for units that are renovated and the way we have in our buildings that we're doing it on turns, so there's ones that are at lower rates of similar units and there's ones that are higher rates.

And if you want a higher -- you want a unit that's renovated, you can spend paying more for rent. So I think we're addressing it across the board.

Got it. Okay.

And then just in terms of the CRM implementation, you highlighted that 47% of the portfolio is under the new system and recognize that it's really early days, but has anything really kind of stuck out to you in terms of direct revenue drive coming from the 47% of the portfolio? Are you seeing that you're not seeing on the other 53%?

Mario, it's Nancy. We are rolling live in the 5 to 6 weeks.

So this is a very early stages. We're just going region-by-region.

Ottawa is going live today. But things that we have seen as this data has really allowed us to see some opportunities that really see trends are really target sources and stuff like that and try to make sure that we're maximizing our leasing hours and our opportunities like we hadn't seen before.

So honestly, I would say, it's very early to actually pinpoint and quantify trends that we've seen, but it's very exciting to see even early data of what we can do with it.

One thing I'll add to like Newfoundland, we were talking about Newfoundland and that's one that's been live for a few weeks. So to be able to see the detailed traffic in terms of number in calls, number of e-mail showings and start to track that stuff where before it was delayed and more of a manual process to reporting that.

Now it's all being captured.

Very quickly being able to see what campaigns, what marketing sources work, what don’t, what's really driving that traffic and what is really good traffic to that allows that conversion leasing ratio and close ratio to increase.

Mario, that's the question that's frayed up Nancy's alley. She is a quince girl, and she gets very excited about all those numbers coming in.

I don’t know how she can sleep at night...

But, Mario, just as what Nancy said, one of the key points was the marketing source of where all the leads come from and that is so important in terms of where you spend your marketing dollars. Though this is a sort of stuff that it's a lot of data to absorb, but it gives you such sort of clarity in terms of what you're doing and it's pretty interesting and it's important.

The other interesting part of it is the hours. So for our leasing staff, their hours are quite flexible and they're younger and they -- I think -- I know they're enjoying because I asked question of them, but it enables us to address between 10 and 7, which is when the calls are coming in, whereas before we kind of had a more centralized leasing activity that was kind of over at 5:00.

It didn't complete...

Done at night.

Yes, yes, 10 and 7 -- yes, 10 and 1 to 7 at night.

Yes.

So that's interesting. I think it makes us better able to address those leasing inquiries.

Okay. I'll make sure I'll ask the same question three months from now.

The last question maybe for Phil. Just on the comment on the ease back on the construction in Alberta, are you seeing any change in terms of attitude towards construction financing in the province?

We aren't. But again, for the projects that we're doing or planning to do out there, we wouldn't be at the stage actually go and sort of say are typical sort of construction financing, but I would like to believe that we would be a good -- best relative to schedule any banks to sort of give us construction for our developments.

Just following up on the comments you made on Alberta, Phil, and just putting a pause button on the developments that you have planned there, would that have also changed at all either your appetite or your pricing expectations? How much you'd be willing to pay for a new build or a new acquisition of a build relative to say where you would have been 3, 6, 9 months ago?

It's a good question. I mean, I don't know if they've really thought of this like that because again when you're -- the purchases from last year were sort of at the time in the market looking competing against other buyers and being very happy to sort of buy the assets we did, especially, the Vibe in Edmonton where we own the last number -- last 2 or 3 months, we've seen some pretty good leasing activity in the right direction in terms of leasing -- finally leasing that up 100%.

So the slowdown really comes with what we thought and where the market was going in 2018 from a positive sort of trend that everything was getting better, getting better and then all of a sudden again kind of hitting a pause and a stop where oil went down through November and December. And sort of the word still is that there could be a little bit more pain from a job creation/job sort of destruction in the next few months.

And that really has given us the pause to sit there and say, "You know what let's just -- we can wait, we can afford to wait as opposed to really going 100%."

Okay. And then, so I guess, taking -- extrapolating from that commentary on the development side, would that be meaning that your pricing on what you would be willing to buy today would be a little bit higher in terms of the cap rate will be or lower price per door in terms of which you'll be looking to acquire?

Again, I don't think from a pure acquisition point of view, I mean, it's still -- we're still trying to get the best price out of some of the sort of potential sellers, and it's just negotiation and it depends on -- you go in there and look at these assets and kind of see what they really are, though I find it kind of hard to even answer that question exactly what you're asking other than nothing's really changed on the acquisition front. It's a different sort of beast in itself in terms of the activity and the interest in Alberta.

It's still -- it's quite strong.

Okay. I just noticed you also had a couple small Ottawa property sales during the close, looks like in April.

Did you guys have off hand the 2 properties or the number of units and the disposition metrics attached to that, those 2 sales?

Sorry, what was the last part of that question?

Disposition metrics, just in terms of price per door and disposition yield.

Price per door, I think, it's 14.8 and there's 135 units combined between the two of them. And your -- the sort of sale cap is about 4.6.

Okay. And then just last question from me before I turn it back, I know The Alexander was 100% leased by the end of the year, just from all-in perspective.

Do you guys have a sense of what the average in-place occupancy would have been for the quarter?

For Q4?

4Q, yes.

End of the quarter?

No, well, during the quarter, just trying to model in the incremental contribution as we go forward.

It's probably...

You know what, people were moving in every single week.

The Alexander, 60% maybe for the quarter or a little bit high.

Well, we ended at 100% occupied.

Okay. So it's an occupied...

We will take that information on the call. We can check that out.

Just to follow-up on The Alexander while you're checking that information. Also in terms of the capitalized interest, can you give us a sense as to when that would have come off?

And also were there any incentives offered in terms of the lease-up that would have been expensed during the beginning? Then just again margins-wise, I know these projects can be negative NOI contributors in the beginning.

And then obviously, as they lease-up, they contribute, but that will be helpful information as well. And then question-wise, with regards to -- just going back to the 7% turnover spread for Halifax and maybe you can broaden this out to the rest of the portfolio as well.

But driving that, I assume a portion of it is the suite renovation program, but can you give a sense as to what you're getting in terms of rent increases on turnover if you're just painting an apartment and dispersing it up versus we know what the numbers are on the renovation program?

Okay, well, let's start at your Alexander question first. So you first did ask when do we stop capitalizing, so would have been end of September.

So for Q4, there is no capitalized interest associated with that. That would have been fully expensed in terms of the average occupancy...

This was Mike's question.

For Q4...

Was 78%.

78% economic. And in terms of incentives, we did not offer incentives on the lease-up of The Alexander.

So it's -- we're just fully booking revenue-less agency essentially is what hits the top line. Is there anything else on The Alexander?

I think that was it, yes.

Yes. And then...

The question about...

The rents, what are we getting. If we're just...

Yes, without having the 170 units that we would have done renovations on.

It's really asset by asset, but...

That's such a small -- you know what, it's a good proxy, I'll bet, it all affects. Because those ones, while they were high, there just weren't that many of them when you think about it because 30% of 16, so I -- the new leasing aspect of it.

But that's 4,500 units for round number. So 100, yes.

6% or anywhere.

I would say, 6.5%.

And I guess, the question is renewal spreads and I guess, we're just talking about Halifax and I only have the aggregate number, but those have moved significantly as well. I mean, you're approaching 2% on renewals.

And that is their view that you can push that renewal spread higher as well if you're getting that target increased?

Yes. We think there is an opportunity to be able to move those renewal rates in the market where we're operating in with occupancy as high as it is.

Yes, we should be able to do something like that.

And there is no CapEx or limited CapEx associated with that, so that's a pretty good.

Where is it that there is no CapEx, but there's limited CapEx, sometimes it's paint, just a tad, yes.

And then with regards to the funding of The Alexander, I guess, one more question there. Is there a permanent mortgage in place on that property yet or not?

And I think if not, will it take out some of the construction financing that's still outstanding?

Sorry, Matt, the construction will get slipped to take out and it's with CMHC, as we speak.

Have you disclosed your development budget for 2019 anywhere?

No, we haven't, because we're still working on that in terms of what we're actually going to end up doing.

Would you be able to give us a rough range, like?

Well, I guess, when you look at cash flow, Phil, are you looking to try to track cash flow specifically?

No, just I'm trying to understand how much you're going to spend during the year on?

Yes. I guess, I asked for cash flow because for Frontier, for example, where we got construction financing in place, we will have spent, but we've got construction financing to fund that.

So that's the existing one.

Existing, no, that's the one, yes.

So I mean, the potential list of them really is the existing one that we're doing finishing up the Frontier over and PEI where we put in our equity, and that's going in the ground now. So there's probably -- again, I don't have in front of me, $2 million or $3 million more of cash before it starts drawing on the construction facility.

And then potentially, Phase 2, which will be, well -- the equity is probably funded by the land that we own there in Ottawa with RioCan. There will be a bit of cash coming out of that for a few months and then if we get Mississauga running.

Again, we own the land, so that's a good chunk of the equity.

Would it be roughly $50 million?

How much, $15 million?

$50 million, 5-0?

No.

That will be too much?

Yes.

Okay.

I mean that still would be roughly no more than $15 million to $20 million of cash.

Of cash, in terms of cash now.

All right. Your commercial NOI, was there anything seasonal in Q4 or do you think that is a good run rate?

I think it is a good run rate because with Westmount, for example, now we have our new tenant at Westmount. But just to highlight on that, we -- I don't know if you saw on the MD&A we disclosed that we are doing some work on the brewery market.

So we will see a temporary decrease in commercial revenue and NOI next year as we sit up part of that asset for new tenants. So we disclosed that we expect NOI -- actually FFO relating like -- after interest relating to that asset to go down by about $500,000 in 2019 and that's in anticipation of some -- Bob, maybe you can provide some comments on that, but some good growth in terms of new tenant leasing and activity in that product.

So that's the one thing when you model out commercial. Just be aware of that brewery market, but there is some disclosure in the MD&A around that.

Yes. So we have a tenant there that's vacating.

It's 50,000 feet for a round number and they're paying $932 a foot net and we're looking at new deals that are round number $14. And we have currently spoken for of the 50,000 feet, we have 15,000 feet with another 12,000 feet looking very probable.

So we're making good headwind on the leasing and we have lots of inquiries. So we should be in good shape.

We won't have it fully let by the end of 2019, but we'll have -- before the end of the year, I think we'll have 60% or 70% of it leased, so good activity.

And just one last question. In your IFRS valuation, you disclosed your apartments and MHC cap rates.

What cap rate do you use for your commercial? I know it's a small percentage, but just want to...

The commercial we tend to look more of a discounting cash flow metrics, though from a cap rate perspective.

6.5%.

But again, one of them would have been just that year with an appraisal. So that's well over three quarters of it.

You're right, what counts by far is biggest piece.

Yes.

Thanks very much for listening and participating today, and we look forward to giving you an update in May for the first quarter results. Thank you.