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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and welcome to the Killam Apartment REIT Fourth Quarter 2017 Financial Results Conference Call. [Operator Instructions] Please note that this call is being recorded today, February 14, 2018 at 11 Eastern Time.I would now like to turn the meeting over to your host for today's call, Philip Fraser, President and Chief Executive Officer. Please go ahead, Mr. Fraser.
Thank you. Thank you for joining Killam Apartment REIT's 2017 Year-end Conference Call. I'm here today with Robert Richardson, Killam's Executive Vice President; Dale Noseworthy, Killam's Chief Financial Officer; Erin Cleveland, Killam's Vice President of Finance; and Bob Jenkins, Killam's Director of Investor Relations.Slides to accompany today's call are available on the Investor Relations section of our website under Events and Presentations. I will now ask Bob to read our cautionary statement.
This presentation contains forward-looking statements with respect to Killam Apartment REIT operations, strategies, financial performance and condition. 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, competition, 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 its 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, Bob. I will start today's call with a quick overview of Killam's 2017 results. I will then ask Dale to take us through the financial highlights for the past year. Robert will provide a recap of Killam's operating performance for 2017. I will conclude the call with a review of our recent acquisitions and current developments as well as a look forward to Killam's 2018 strategic targets.On Slide 3, we show that same property NOI increased by 3.6% compared to 2016, exceeding our target of 1% to 3%. We purchased $200 million of assets in 2017, well in excess of our minimal target of $75 million. 3/4 of the acquisitions were outside Atlantic Canada, and Killam generated 23% of its 2017 NOI in Ontario and Alberta. On a full year run rate basis, approximately 25% of the current portfolio's NOI will come from outside Atlantic Canada. Our 3 development projects are progressing and tracking largely to schedule and budget with some delays at The Alexander, partly offset by performance at Saginaw Park, where we are ahead of schedule.As Dale will discuss, our leverage ratio improved in 2018. Killam also achieved a significant milestone in December when it was added to the S&P/TSX Composite Index. Inclusion in the index reflects the successful execution of Killam's growth strategies and expands Killam's investor base and increase of liquidity for all unitholders.I will now ask Dale to recap our financial position.
Thanks, Phil. I'll start with a recap of Killam's growth over the last 5 years. A summary of key financial performance and balance sheet metrics for this period is included on Slide 4. Over the past 5 years, Killam has achieved steady improvements across all of its financial metrics. NOI has increased at a compound annual growth rate of 8.5% and FFO per unit has grown by a compound annual average rate of 6.1%. We've grown our portfolio by $780 million since 2013 and improved our payout ratio to 86%.Leverage and liquidity have also improved with debt-to-assets trending down and liquidity trending up. Killam ended 2017 with an acquisition capacity of $300 million, following a $77 million equity raise, which closed in late November and a $60 million increase to its borrowing capacity under an expanded line of credit finalized in December.In 2017, Killam generated FFO per unit of $0.90, 4.7% ahead of 2016. AFFO per unit was up 9.1%. Increased earnings from same property operations, lower interest rates on refinancings, repayment of the convertible debentures and acquisitions and developments contributed to the growth, partially offset by a 14% increase in the average number of units outstanding. Highlights of Q4 results are included on Slide 5. Same property revenue was 3.9% ahead of Q4 2016, following strong performance in the Maritime. Operating expenses were up 2.5% due to inflationary cost increases and rising taxes, partially offset by lower utility costs.In total, NOI increased 4.9% from Q4 2016. Killam generated FFO per unit of $0.22 in the quarter, 4.8% ahead of Q4 2016 and AFFO per unit was up 12.5% in the quarter.Turning to Slide 6 and our financial highlights for 2017. Same property revenue was up 2.6% in the year. The increase is attributable to a 1.8% rise in rental rates and a 60-basis-point increase in apartment occupancy as well as a 3.1% top line growth from our MHCs. Occupancy in 2007 (sic) [ 2017 ] was at its highest level in a little past 5 years. And over this period, the average monthly rent has grown by a compound annual average of 2.7%, reflecting organic rental rate growth, a growing portfolio of new assets and our increased presence in higher-end markets in Ontario and Alberta.As shown on Slide 7, Killam's same property total operating expenses increased a modest 1% during the year, contributing to the 3.6% increase in same property NOI. Utility and fuel expenses were down 5.7% due to lower consumption as a result of recent energy initiatives as well as the reduction in the pricing for natural gas in Nova Scotia and electricity in Ontario. These savings largely offset inflationary general operating expense pressure and a 5.5% increase in property taxes.Turning to our debt metrics. As highlighted on Slide 8, Killam has made significant progress in reducing indebtedness. Total debt as a percentage of total assets decreased 480 basis points over the last year to 48.7%, following the redemption of convertible debentures in April, fair value gains and the acquisition of 3 properties in December without debt. Killam expects this percentage to rise above 50% in Q1 2018 once mortgages are placed on the properties acquired at the end of 2017; however, has focused on managing debt below 52% for the year. Killam also improved its interest coverage and debt-to-EBITDA ratio during the year.Slide 9 highlights our debt maturity profile, including average apartment mortgage rates by year versus prevailing CMHC-insured mortgage rate. Killam benefited from lower interest rates on refinancings in 2017, contributing to a 4% reduction in same property mortgage interest expense year-over-year.In total, Killam refinanced $70 million of maturing mortgages with a $102 million of new debt at a weighted average interest rate 106 basis points lower than the weighted average rate on the maturing debt.Looking forward, Killam has staggered its maturities and reduced overall leverage to manage exposure to rising interest rates in the future.I'll now turn the call over to Robert, who will provide further details on our operations.
Thank you, Dale, and good morning, everyone, or afternoon, depending where you are. As shown on Slide 10, Killam continues to focus on 3 key strategies to increase the value of our business, namely, increase earnings from the existing portfolio, expand the portfolio and diversify geographically through accretive acquisitions with an emphasis on newer properties and develop high-quality properties in Killam's core markets. I will provide details on our 2017 leasing and expense management initiatives before turning the call back to Philip for his comments on recent acquisitions and new developments.Slide 11 details Killam's same property revenue and NOI growth by market for the past 5 years. As shown on this graph, the strongest rental rate and occupancy growth has been from our maritime markets. In particular, Killam generated strong leasing activity at our New Brunswick properties, and over the past 12 months, they contributed 21% of Killam's net operating income. With more than 4,300 units in New Brunswick, this portfolio increased revenue by 4% year-over-year, fueled by a 1.2% increase in rental rate and a 150-basis-point increase in occupancy.Strong occupancy in New Brunswick over the past year is due primarily to interprovincial and international migration migrating and demand from downsizing boomers. Additionally, migration has flowed with improved provincial economies. These factors, combined with limited new apartment construction, have resulted in improved occupancy. CMHC 2017 market outlook forecast the population of Moncton, Fredericton and Saint John to collectively grow by almost 7,300 people or 5% between 2017 and 2019. Actual vacancy as reported by CMHC for these cities averaged less than 4% in 2017, an improvement of 250 basis points from a year ago.Slide 30 in the appendix of today's slide deck provides further details on the New Brunswick markets, including information from both CMHC and Killam's same property portfolios.The Halifax market continues to perform well with revenue increased -- increasing by 2.6% and NOI also up 5% compared to 2016. As mentioned on our last call, the city's population increased from mid-2016 to mid-2017 by almost 7,000 people, the largest 12-month increase in recent memory. Although there had been an increase in housing starts, particularly in the multifamily sector, a combination of population and economic growth are helping to resolve this new supply. We expect Halifax to continue to perform well and a summary of Halifax's rental market condition is provided on Slide 28 and 29 in the appendix.Revenue in Ontario increased by 1.1% compared to year-end fiscal 2016, as 2.7% increase in average rental rates more than offset a 120-basis-point reduction in occupancy. During 2017, Killam took over leasing responsibility for the 739-unit Kanata Lakes portfolio following the expiry of rental guarantees at 2 properties in this 5-property complex. Killam generated strong leasing activity since taking full management and as at year-end 2017, our Kanata properties completely stabilized, reporting vacancy of less than 2%.NOI in Ontario for 2017 were slightly below 2016 as property tax increases and inflationary operating cost pressures more than offset higher revenues.Looking forward, we expect Killam's Ontario portfolio to outperform in 2018. The resort-focused market of St. John's, Calgary and Edmonton experienced softer rental demand in 2017 as a balance of Killam's portfolio. Fundamentals are improving on the ground in these markets, however, and CMHC forecasts lower vacancy and stronger rents for 2018 and 2019.Last but not least, Killam's MHC portfolio had another strong year, with revenue 3.1% higher and NOI 4.3% higher than in 2016 due to a 2.5% increase in logged rental rates and stronger results from our seasonal [ perks. ] So accounting for only 8% of Killam's consolidated net operating income, same property NOI growth from Killam's MHCs continues to be impressive, and we are on the look for new seasonal resorts to acquire in 2018. One of the keys to Killam's occupancy gains is tenant satisfaction, which is directly related to tenant retention. As summarized on Slide 12, Killam has surveyed residents during each of the past 5 years to measure our success in meeting tenant expectations. These surveys have been administered by corporate research associates, a leading market research firm and focus on tenant satisfaction with unit quality and customer service. Almost 3,000 residents responded to the 2017 survey, a statistically relevant sample size. In total, 90% of respondents reported being satisfied, the third straight year we received this score. Everyone at Killam takes great pride in these results, and we remain committed to maintaining and enhancing our resident leasing experience.Killam continues to execute on projects in its 5-year energy plan, as summarized on Slide 13. As of year-end 2017, Killam has invested over $5 million of its $25 million budget for this energy intensity reduction strategy. Projects are focused on the installation of ultra low-flow toilets, LED lighting retrofits and heating efficiency projects such as conducting gas boilers and system recommissioning. Total energy intensity for the year ended December 31, 2017 was $1.25 per square foot as Killam benefited from volume savings from the energy reduction initiatives combined with price reductions for natural gas in Nova Scotia. These energy projects are expected to reduce energy intensity from $1.40 per square foot at the programs launch in 2016 to $1.10 per square foot by 2021, an impressive 23% reduction.This $0.30 reduction should equate to $4.3 million in annual energy cost savings after 2021. This will not only save direct energy costs, but will also reduce and offset anticipated future carbon tax charges. A key focus of this program is reducing energy consumption from heating. Utilities and heating fuel costs account for almost 30% of Killam's total operating expenses. As shown on Slide 14, the largest portion of our units are heated with natural gas. Electricity is also a significant heating source; however, the majority of this electricity costs are borne by tenants directly.Given its exposure to natural gas pricing, Killam has focused on managing these costs through 2 main approaches: hedging to manage commodity cost and efficiency projects to minimize consumption. On the hedging front, Killam either directly or with energy marketers, or indirectly through its relationship with its energy distributor in Nova Scotia, has fixed the cost for approximately 80% of its expected gas consumption for 2018 at a rate largely in line with 2017 rates.On the consumption front, Killam continues to upgrade boilers to improve the efficiency of heating system and as a rolling program to complete building envelope upgrades to reduce heat loss. So far, the winter of 2018 has been slightly cooler than 2017 as measured by heating degree days. Halifax, Killam's largest market, was 1% cooler in January 2018 versus 2017. New Brunswick has been approximately 5% cooler. Killam's Ontario markets are approximately 20% cooler this year.Based on the weather to date, the financial impact of a modestly colder weather in 2018 is not expected to be significant.I'll now hand you back to Philip to provide details on our acquisition and new development activity in the quarter.
Thank you, Robert. Slide 15 details our acquisition activity for 2017. Killam acquired over $200 million of assets in 2017. We purchased 8 buildings totaling $184 million, which added 850 units in Calgary, Edmonton, Halifax, London and Ottawa. Killam also spent $12 million for development sites in Edmonton and Ottawa, which have the development potential for up to 600 units. Over 75% of the capital deployed in 2017 was in Ontario and Alberta as Killam executed on its strategy of increasing a portion of NOI generated outside Atlantic Canada.During the fourth quarter, we closed 3 transactions. In early December, we closed the second phase of Sherwood Park acquisition, completing the purchase of 296 units near Edmonton for $68 million. In mid-December, Killam invested $21.5 million in 2 acquisitions for 212 units, building on our portfolios in Halifax and London.Details of these transactions are summarized on Slide 16. Killam just recently agreed to acquire 2 properties to start 2018. The first acquisition, shown on Slide 17, is a recently completed 12-story 110-unit apartment building located on the waterfront in downturn Dartmouth. This $33 million purchase is expected to close by the end of February. The building is one of -- is the only rental building in a 4 building complex. The other 3 are condo buildings.Second property is a 1.8-acre development site in downtown Kitchener, which includes a small office building in a heritage house. That will be purchased for $6 million. This property is zoned for a 140-unit development and the transaction is scheduled to close in mid-March. As we are nearing the completion of our Saginaw Park development in Cambridge, we have been actively searching for our next development site in the Kitchener-Waterloo- Cambridge area. We continue to focus in this market given its high growth and proximity to Toronto. We also have a strong relationship with our general contractor that has constructed our 2 Saginaw developments and expect to engage them for this development.We are continuing to advance The Alexander, Saginaw Park and The Frontier developments. Details on The Alexander and progress photos are included on slides 18 and 19. Killam has a 50% interest in The Alexander development and expect to increase its ownership to 100%.On October 1, 2017, the first residents moved into The Alexander's [ 4-level ] podium and all the 55 available units in this portion of the project are occupied. In total, 50% of the project's units are leased. We've experienced delays and cost pressures related to the exterior cladding of the building. Glass costs nationally have increased and the lead time to receive panels from suppliers is longer than expected. However, total budgeted project cost of $77 million is within 9% of the initial budget, and the overall project schedule is within a similar margin of our original plan. We've been able to offset a portion of the increased cost with higher rents than originally expected. Details and photos of Saginaw Park are included on slides 20 to 22. We are on track to open the 1st of April and the project is slightly below budget. The building is approximately 50% leased, and we expect to have the building fully occupied within 6 to 9 months from completion. This high-end building includes several design features that improve the tenants' experience and promote efficiency; examples include the condo quality kitchen and bath fixtures, smart locks and separately metered water shown on Slide 22.As detailed on slides 23 and 24, The Frontier project that we are codeveloping with RioCan in Ottawa is progressing on schedule. The first phase is a 23-story 227 unit tower is now on its 21st floor of construction. We have funded the equity component of the tower and the balance of the capital for the first phase is expected to be drawn from construction financing.With Killam's equity portion already invested in all 3 projects, the additional cash to complete the developments will come from construction financing. Once completed and stabilized, we expect the 3 projects to grow FFO by approximately $2.8 million or $0.033 per unit. Comparing the expected market value to the assets to our total cost to develop, we estimate that will add $18 million of value to NAV through these developments.The Frontier development is worth highlighting for a couple of reasons. It is the first building we are developing that has geothermal heating and separately metered water, where the tenant will pay for the water consumption, combination of both. This is the way of the future, increasing our operating margin per building and reducing our environmental footprint. Geothermal means no carbon tax because we are not using natural gas. Currently, the carbon tax in Alberta is $30 per ton of CO2 or $1.50 per gigajoule. In Ontario, it is $17 per ton of CO2 or $.033 per meters cube of consumption.We are continuing to progress the projects in our pipeline. Our full list of development sites is included on Slide 25. The Silver Spear 2 development in Mississauga is our top priority, and we hope to break ground on this project in 2018, pending the final timing approvals.With the equity component of this project already invested in the land, we expect the rest of the development funding to come primarily from construction financing. Construction is expected to take 18 to 24 months from the day we break ground. Following the success in 2017, we have set Killam's strategic targets for 2018. A summary of these goals is included on Slide 26. Following a very strong year, we expect to increase property NOI by 1% to 2% in 2018. Our acquisition target for 2018 is minimum of $125 million, and we are well on our way with $39 million in transactions announced. The focus will continue to be on expanding our presence outside Atlantic Canada, and we expect NOI from these regions to exceed 26% in 2018. We expect to bring the Saginaw Park and The Alexander projects online this year and to break ground on at least one more development. We continue to manage our balance sheet, and we'll look to manage leverage to below 52% of net assets by the end of 2018.As I mentioned at the start of the call, 2017 was a very successful year for Killam. Our focused strategy is leading to increased earnings, stronger balance sheet, capital flexibility and one of the highest quality apartment portfolios in Canada. We entered 2018 with $300 million of acquisition capacity and expect to continue to accretively grow the portfolio, increasing the portion of NOI generated outside Atlantic Canada. We look forward to providing updates on our progress in the upcoming month -- quarters.I will now turn the call over for questions.
[Operator Instructions] Your first question comes from the line of Fred Blondeau of Echelon Partners.
In regards to my first question, I think, Rob answered it. I mean, you were just mentioning the weather, and I guess you are not overly concerned about the same property operating expenses so far in 2018. That is correct, right?
That is correct.
Okay.
I think when we look at January, the info has started to come in for January. So January, we are going to -- we are expecting expenses to be up modestly in January year-over-year. February's actually been quite nice. So we'll see where that comes in, but it's -- we are not expecting a significant increase year-over-year.
I think some receivables are classified to say we're down so far. [indiscernible][indiscernible] I mean, we can have a pretty hard kind of late February, into March perhaps, but I would think that we've maybe [ will benefit. ] Everybody is knocking on wood here.
And -- that's great. And in terms of your acquisition capacity of $300 million at the end of the year, is it fair to say that once again this year your objective of choosing a minimum of $125 million in acquisitions is a bit conservative?
I don't know. I mean, it's one of those things where you can see your sort of deal flow, but we are comfortable we'll get to there. But it depends on opportunities as they present themselves throughout the sort of the second half of the year.
And you would still be focused on Ontario and Alberta, I guess?
Yes.
Okay. And lastly, in regards to your acquisition in Dartmouth, I was wondering if you could confirm a cap rate on this one?
I think we posted it in our conference call material, but it's a 5%.
Your next question comes from the line of Jonathan Kelcher of TD Securities.
Your occupancy is pretty close to an all-time high for you guys. At what point do you start pushing a little bit more on rental renewal rates? I think they were only up 1% in 2017.
Excellent question, Jonathan. And so that is primary focus here at Killam in 2018. Now is the time.
So now. The answer is now?
Last month.
Okay. And then just sort of related to that, the same property NOI guidance is a little bit lower, a little bit tighter than you've done in the past few years. Is there something you're seeing on either the cost or revenue side that's making a bit more conservative on that metric?
I think a bit of both. I mean, on the revenue side, as you mentioned, occupancy is the highest it's been. So when we look at opportunities to improve occupancy, the greatest opportunity to grow that top line is about increased rent. So that is where most of the top line growth is going to come from. So without the occupancy combined with that, I think that's going to limit it compared to what we've seen in the last few years on top line growth. On expenses, as I just mentioned, we have seen expenses in January on heating costs up a little bit already. We do know that last Q1 was mild and the pricing, especially in New Brunswick, was quite low. So when we would be looking at 2018, Q1 is always the huge deciding factor for what happens for our total expenses. Oil cost is not a huge component of our heating, but oil is another example of costs that are higher now than they were in the winter of last year. So with expectations of higher gas pricing in New Brunswick, which we've seen an increased consumption should it get colder year-over-year, that would be part of what would keep us a little bit conservative on that. Property taxes is the other one that you would have seen last year, we were at 5.5%. We do a lot to tax -- appeal tax increases, but those are consistent pressures. So I'd say, after Q1, we will refine our NOI guidance a bit, but a lot of that conservatism relates to -- we've seen some wild weather impact our Q1 results. So, let's say, that's a factor. But knowing that Q1 last year was -- we saw big gains on the utilities and it makes for a harder comps.
Your next question comes from the line of Dean Wilkinson of CIBC.
Phil, just on the acquisitions, I guess, we are sort of at an interesting point here. Bond rates are backing up. You had about a 50-basis-point move over the past year, yet cap rate continue to sort of -- continue to come down. So when you look out, do you think you can do better than the 5.4%? Or are people's expectations still, particularly on Ontario, pushing down into the low 4s? And do you think that dynamic perhaps changes towards the back half of the year if sort of rates even hold here or perhaps continue the trajectory a little more on the upside?
Sorry, Dean, you said 5.4%?
5.4% was the average cap rate on acquisitions that you guided in 2017.
Okay. I think, again, those would be off-market deals. So I think we are very fortunate to be able to find properties like that with upside. I think that in Ontario, for sure, the current world is less than that. It's probably around a 4% for even basically anything that's for sale these days. And the question is, even that, if you're going to find something, it's going to be relatively small relative to your asset base, and can you see upside in 2 or 3 years? I mean, that's the decision that you make versus developing a product that is better fundamentals and better growth profile, but it takes 1.5 to 2 years to build. So, again, relative to where everybody is today and with their base, you are just looking for deals that you can look at, analyze and see that they're going to be accretive day 1 or within a very short period of time. So really, that's the environment out there. I don't think, from an interest rate, from a spread point of view, it's still positive. And the one thing I can tell you is that every deal today, there is way more analysis goes into it than there would have been in previous years.
Are the pool of potential buyers for the assets you're looking at sort of continuing to grow?
Well, I mean, the other way to answer that, it's definitely not shrinking.
That would be better. Okay. So I guess, the environment would still favor if the market is not disseminating between a 40-year old asset at a 4 cap and a brand-new asset at a 4 cap to go a little heavier on the development than the acquisitions, but it's just the timing of tying up that money and not having it come online for 2 years that might hold you back?
I might have said that a year ago, but again, looking at the opportunities we have in front of us, the development side will get most of our attention. And again, it's because of this -- what I just mentioned, it's because of geothermal, because we are separately metering the water, the margin increase is huge. What we end up with at the end of the day, if the market is saying it's a 4, then our buildings have to be better than that.
Your next question comes from the line of Mike Markidis of Desjardins.
I think it was Rob. Rob you mentioned in your comments on the energy savings initiatives about the potential to offset future increases in carbon taxes. And I know that it's now in place in Alberta, it's in place in Ontario. So is that to mean you are expecting the carbon taxes in Alberta and Ontario to keep going higher relative where the rates are today? Or is that because you're expecting carbon taxes more generally across other areas of your portfolio?
I think the federal government has said they are going to take it to $50 a ton by 2021.
Okay. You're much more educated on that than I am. So that's good. Just changing over to The Alex, the slight delays that are impacting the timing of the lease-up on that property, is that going to impact the mechanism in terms of -- I believe, you have the ability to buy the other 50%. Will that affect the timing material at all?
No, I mean, it's basically -- it's whenever we finish it and then it's the process in terms of valuing it at the time completed.
Okay. Got you. And I may have missed it, sorry if it's in the deck. But where would you guys be leased on that project today on the part that's not already...
Part that's already [ been sold ] and the overall, the 240 units, it's approximately 50%.
50%? Okay. Would you expect a similar 6- to 9-month time frame for Saginaw once that's...
Yes.
Yes. Okay. Just thinking about the distribution increase, fairly modest. I know you guys want to get down the path of having a modest increase every year. I was just curious with respect to the lower same property NOI, more conservative outlook on the same property NOI, and, I guess, just caution regarding where your 2019 to 2021 debt costs are relative to where we would be today on market. I know we had a pretty big spike. Could you just walk us through the puts and takes of the decision to go ahead with a 3% now?
Well, again, I think, it's very -- it is modest relative to what we expect. I mean, again, you talk about same store, which doesn't include the developments and all the new properties in terms of like we already mentioned, what we have basically paid for, but is coming online. So that is a fairly big gap that covers easily what we just gave in terms of an increase in the distribution. I mean, your -- the other part of that question was, where are interest rates in 2 to 3 years? Now, I mean, you can have the general thought, yes, interest rates are going to go up because they've been down so low for so many years. But there is another aspect of that is, the economy has to sort of basically improve with very sound fundamentals. And right now, I mean, there's 2 schools of thoughts. Maybe there's not going to be anymore increases in Bank of Canada this year. I mean, is our GDP going to be 3% or is it going to be 1.5%? Sort of some of the banks have come out and said that's really what we're going to hit. So from our point of view, I mean, we know what we are prepared to do from a distribution of our units. And right now, we are comfortable with that.
Okay, that's fair. Last one for me before I turn it back. Dale, I think in Q4 on the same property side, the property taxes, I know you have experienced pressure across the board, but in Ontario specifically was up 15% year-over-year. Was there one reassessment or anomaly driving that? Or is that more broad-based pressure just in Ontario that you're seeing versus other areas?
I think it's -- is there one? I don't think it's one in particular. I'm just looking here, same property -- where are you looking at the -- oh that was the -- was that MHCs, we're up 15%.
Oh was it MHCs? Okay.
I think it's MHCs. So when you look -- so it is a high percentage, but when you look at the actual dollar increase, it's probably $15,000. So I would say, there's not one that's driving that so -- and on the apartments, we wouldn't have seen that type of increase.
Mike, you heard, she said $15,000 increase.
Okay. I thought I saw 15% in the...
Here on the MHCs, yes, $25,000. So [$125,000] on the MHC. So that's the number that...
Okay. It's possible I was getting a little cross-eyed last night when looking at that. So I apologize. If it's not clear, I will email you and follow up.
Yes, overall, property taxes for apartments were up 6.2% in the quarter for same property, which was an up.
Your next question comes from the line of Matt Kornack of National Bank Financial.
Just had a quick question. In the context of pretty strong results in Atlantic Canada, does that change your outlook at all on geographic diversification? Or is it a question of gaining scale and there not being enough product available in Atlantic Canada to gain that scale?
I think you're right on both assumptions. One is, it doesn't change our outlook. We still are big believers in Ontario and Alberta. And, yes, there is an element of scale relative to what we want to achieve over the next few years in terms of overall growth. So I think -- I've been saying this for a number of years, and we're very sort of content on carrying out our strategy.
And just drilling down a little bit more into the Maritimes results, it seems like there is economic improvement in a number of those geographies. Halifax is obviously doing quite strong and is benefiting from in-migration and a little bit of emigration as well. Is your view at this point that these gains are sustainable, obviously some of it has been occupancy driven, but is the outlook in your view more or less positive over the next couple of years for Atlantic Canada?
I think it is positive in -- especially in Halifax and Charlottetown in terms of the real growth in population and economic activity for sure.
And, I guess, to some extent from a pricing standpoint, has that found its way through into some of the valuations you're seeing in those particular markets? Or are people still bidding heavily in the GTA, in Vancouver and not looking to the Maritimes at this point?
I think we've got a lot of competition here in Halifax. It's less but we have -- we've got a bunch of our peer group in the other markets, especially in New Brunswick these days and even in PEI. So there is stiff competition everywhere.
[Operator Instructions] Your next question comes from the line of Brad Sturges of Industrial Alliance.
In your opening presentation there, I think -- maybe I misheard, so correct me if I'm wrong, but as part of the acquisition opportunity, MHC's might have been highlighted as something that could be an opportunity this year. Is that correct? And if so, what's the opportunity, I guess, you are seeing there at the moment?
So yes, you did hear correctly. And so we'd look at -- in particular, resort style would be in Ontario. We have a strong management team there, and they have capacity, and we would like to find a way to augment. Currently we have 6 communities there that we operate, and we would like to find a way to broaden that. But it's really subject to finding the right assets, but we would take a good look at them, and we have the management team to take care of them.
Okay. And last question would be, obviously a lot of discussion on pricing and in the acquisition context. I guess, historically you have talked about not being as active on the capital recycling side given, I guess, tax inefficiencies. Is that still your view that you won't be that active in pursuing or has the environment changed your view on potential dispositions?
It's not inactive, but I don't think it's going to be ramped up where we have tens and tens of millions of dollars of assets that we're going to dispose of. But we get inquiries, we take them seriously, and it's just part of what we do.
Okay. So continue to be more opportunistic on that front?
Yes.
Your next question comes from the line of Mario Saric of Scotiabank.
I just wanted to touch on the IFRS evaluation really quickly. You showed a nice little bump in the fair value of $32 million in the quarter despite cap rates being relatively unchanged. And so it was driven by your kind of NOI forecast going forward. Can you just maybe refresh in terms of how you think about that NOI forecast? And how you built it into Q4? Are you using numbers based off of record-high occupancy, if you will, and just maybe kind of some of the elements behind that gain?
So Q4 is when we reload our NOI based on our budget. So budgets get completed in October, November. Looking forward to the year ahead, and we would upload our NOI changes. So throughout the quarters, we are not making any real big changes to our NOIs unless something significant happens that is sustainable that we think we should capture. Really throughout the quarters, it's more cap rate changes. And I guess, it's rental. No, it's Q4 when we really our rent -- so what are our rents going in, and what's our expectation for growth on rents just 1 year out, and what is our budget at expense? So that's why you tend to see more activity in the quarter. I would say that we are relatively conservative when we look at some of the key drivers. So occupancy is one that, since we implemented IFRS, we have used the 10-year CMHC average look back per market to say what would a buyer estimate for a vacancy perspective. So it's interesting you asked the question because as we sit around the table and look at however many years we've been at IFRS now and thinking, is this a good -- the right way to be looking at it as we are in the strongest -- the fundamentals are so strong in Canada for apartments, is that look back on vacancy the right way to look at. So I think we need to look at that going forward to make sure it's accurately reflecting the current market, but that is the way we have done it since we implemented IFRS. And so the cap rates we do look every quarter, we get third-party guidance on the cap rates that we use and 20% approximately [ of our ] portfolio gets fully valued from a third-party appraisal per year. So Q4 is where you see a lot of activity, but I think as we -- we're quite mature now looking at this IFRS value, we are continuing to look for at the program and make sure that the assumptions we are making reflects the true market conditions.
Got it, okay. And so, like if your occupancy entered the year at 96.3% for the apartment portfolio, the $32 million increase, what occupancy would reflect on average?
So, again, it's by market that we look at. So I would say, it's probably a little bit less than that because we are on that historic look-back and the vacancy has been higher. That's why I am saying we need to make sure that we're going to revisit those assumptions going forward and making sure that it reflects current market conditions.
Understood, okay. And then just to confirm the $32 million increase, that's based off of expected NOI changes within 12 months or is it a 10-year DCF and so on kind of bringing that?
No. It's really our 2018 expectation with the cap rates and with maintenance capital built in for kind of the 1-year structural maintenance requirements.
Okay, that makes sense, good. And then just maybe one question for Rob. I think in your prepared remarks, you mentioned you expect Ontario to outperform in 2018. I was just wondering whether that meant outperforming the 2017 results or if it meant outperforming kind of the broader portfolio in 2018?
Certainly the 2017 results. And perhaps the overall -- I don't know if it will lead the market, but we have very good assets that should do well in 2018. So, yes, year-over-year, we expect it to be better and I'd like to report back next year that it's best in the country, best for our portfolio.
There are no further questions at this time. I will turn the call back over to the presenters.
Thank you. As we end this call, I would like to acknowledge 2 analysts that have covered Killam over the many years that have recently announced their retirement. Jimmy Shan, formerly of GMP, and Heather Kirk from BMO. We wish them the best of luck in the future and thank both of them for their interest and coverage of Killam over the years. Thank you.
This concludes today's conference call. You may now disconnect.