Todd Cook — President & CEO

Rob Palmer — CFO

Lizaine Wheeler — VP, Residential Operations

Louise Elsey — Corporate Secretary

Jason Kepecs — GMP Securities

Jonathan Kelcher — TD Securities

Alex Avery — CIBC

Jenny Ma — Canaccord Genuity

Fleming Neilson — Private Investor

Heather Kurtz — BMO Capital Markets

Northern Property Real Estate Investment Trust (OTC:NPRUF ) Q4 2014 Earnings Conference Call March 12, 2015 11:00 AM ET

Good morning. My name is Jamie, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Northern Property REIT 2014 Fourth 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. Mr. Todd Cook, CEO of Northern REIT Property REIT, you may begin your conference.

Thank you. Good morning, ladies and gentlemen, and thank you for joining us this morning for our fourth quarter conference call. Joining me today is our Chief Financial Officer, Rob Palmer; Lizaine Wheeler, our Vice President of Residential Operations; and Louise Elsey, our newly minted Corporate Secretary. We’ll begin the conference call after Louise reads a brief cautionary statements. Louise?

Thank you. Today’s conference call may contain forward-looking statements with respect to Northern Property REIT and its operations, strategy, financial performance, and condition. The actual results and performance of NPR discussed herein could differ materially from those expressed or implied by such statement.

Important factors that could cause actual results to differ materially from expectation include, among other things, general economic and market factors, competition, changes in government regulation, and the factors described in the securities regulatory filings. All forward-looking statements speak only as of today March 12, 2015 and the parties have no obligation to update such statements.

Thank you, Louise. Yesterday, we reported our financial results for the fourth quarter and the year ended December 31, 2014. We are pleased with our FFO growth in 2014 over last year. FFO for the quarter was $0.60 per unit, an increase of $0.08 over $0.52 in 2013.

For the year, FFO per unit was $2.37, a 5.3% increase over a 2013’s FFO of $2.23 which excludes the noise in 2013 related to the taxes of the stapled unit structure. I’m pleased with our FFO growth particularly when we look at the economic headwinds we are facing in Alberta, and the higher vacancy levels in Yellowknife. I’ll take us through a bit of a nostalgic look at 2014 before getting into the specifics of today’s conditions.

2014 was somewhat of a roll coaster in terms of positive and negative events and conditions that came into play in our results.

We started out the year in the deep freeze which negatively impacted our results by approximately $1.5 million or $0.05 per unit. In the middle of freeze we dismantled the stapled unit structure returning to a simplified peer trust unit structure. As mentioned in previous earnings calls, the executive suite performance declined from the prior year, an impact of almost $1.6 million in NOI just over $0.05 per unit.

Our commercial portfolio continued to perform well. We completed the acquisition and lease up of the Bristol Court business park in St. John’s. The fifth and final building was acquired in January and 150,000 square foot business park is fully leased effective May 1.

We completed the acquisition of 279 residential units in Slave Lake, Alberta, and Lloydminster. These acquisitions are performing as expected.

Our development program continued to deliver high quality, desirable apartments that are delivering returns at or above our pro forma levels. During 2014, we started 528 units with total expected development cost of $92 million. 363 units were completed during the year for a total cost of just over $61 million. I’ll get into a bit more detail on the developments in a couple of minutes.

A couple of key residential regions Fort McMurray and Yellowknife battled and are still battling higher vacancy levels. That said, we’ve also had a number of good new stories in our residential operation. Our 627 unit portfolio in the Nanaimo has improved from vacancy in the 12% to 13% range in 2013 to under 6% for the fourth quarter and today sits around 4%. We have a similar story in Abbotsford which was over 7% at the beginning of the year and as high as 13% with year back to early 2013, today has improved to the 3% to the 4% range.

And last, but certainly not least, we announced our eight distribution increase in our 12-year history. This 3.1% increase in November brings our annual distribution to a $1.63 per unit.

Now I’ll get a bit more details on our development activity. Acquisitions at a reasonable pricing level continue to be somewhat scarce. We are still seeing a number of opportunities come across our desks but not at pricing we’re interested. We’ll continue to look at these opportunities but as in prior years we expect activity to remain low.

As I mentioned earlier, we started construction of 528 units in 2014, of which 229 units were turned over in the year and another 71 so far this year. Going quickly through the projects, early in the year, we completed 24 units in the Yellowknife and 39 units in Iqaluit, both these projects were well received by the community and are 100% occupied today.

158 units in Lloydminster were completed late in 2014. The eight town homes are 100% occupied and the 150 units in two buildings currently sits at 80% occupied today. Lease up was very strong for the first building but has slowed in the second building which was brought online in mid December. We continue to see traffic and interest but at a slower pace as the local economy has slowed down with the decreased activity in the oil sector consistent with what we are seeing in our existing portfolio.

Grande Prairie, the first building was delivered in mid December and the second building in late February. We sit today at 70% lease with 44 units left to be leased. Traffic remains steady as this market appears to be holding its own as it is more geared towards natural gas, forestry and agriculture with some of our other markets in Alberta. Rents are still in the $300 range above pro forma.

142 unit development in Fort St. John’s is progressing according to plan with the first building turned over in April. Pre-leasing is strong and close to 30% and the overall outlook in this community remains positive. Our current assets remain strong and full throughout the year.

The other development currently under construction is 110 units in Bonnyville, Alberta. This project is continuing on time and on budget and is expected to turn over in the summer. This community is similar to Lloydminster in that the economy is oil based. We don’t expect to have the same rapid lease up as we have seen in Lloydminster over the last couple of quarters.

We also continue to work on development permits for applications of many of our land investments, including the Calgary developments and in St. John’s hinterland. We focused on a 5.6 acre site in St. John’s in February after obtaining revised zoning that will allow for the development of up to 229 units.

During 2014, we also acquired 4.5 acres in Airdrie, Alberta, a veteran community of Calgary. We’re in the final stages of permitting and costing and expect construction of our 142 unit project as early in the second quarter. Airdrie has a fast growing population of around 55,000 people with a fairly limited apartment strength[ph]. This is a good compliment to our Calgary Skyview Ranch development in the northeast quadrant of Calgary which we expect to commence later in the third quarter.

On the Residential side, we saw an overall increase in the physical vacancy going from 8% at the end of Q3 to 10% in the end of fourth quarter. Lloydminster increased from around 1% to 10% and Fort McMurray is over 20% today. These two regions were the main reasons for the overall increase in physical vacancy. We have a number of regions that were strong performers in the quarter and having these for strong performers allowed for our financial vacancy to remain flat for the quarter at 7.6%.

I’ll go into greater detail on the regions starting with the first two. Fort McMurray remains our toughest region. There is no doubt we have felt the impact of lower oil prices and job losses. We have taken the increased vacancy as an opportunity to improve our buildings with our street to suite program. When the price of does bounce back we believe we’ll be in a position to provide improved housing and be the first choice for renters coming back into the market.

We’ve also seen rent reductions of close $200 per month and other incentives being used in the market. One small consolation is that we have seen from a large amount of layoffs is that there are people to fill our vacant jobs allowing us to snap up for our maintenance and our accelerated CapEx plans.

We’ve also seen an increase in vacancy in Lloydminster since December 1 when we returned 26 units to inventory which were being used by our construction team on the construction projects. Vacancy today sits around 14%. The starting line in Lloydminster was our new building Tesla Estates which came around in Q4 and currently sits at 86% leased.

In our overall portfolio we’re offering incentives about $100 per month off on our existing portfolio as well as receiving reduced security deposits in the market. Yellowknife vacancy remains higher than we would like. As in Fort McMurray we have accelerated the CapEx plan with our street to suite program.

2015 has been a bit better as we’ve seen our vacancy drop by close to 2%. Our fourth quarter saw a number of positives in many regions. Prince George, Japer, Inuvik, Fort St. John, Taylor and St. Paul all continue to perform well with vacancy around the 3% mark. And as mentioned earlier, despite the following oil prices Grande Prairie remain very strong with vacancy just under 3%.

Cow Head also had a solid quarter finishing with vacancy just over 3%. This was an increase from the end of Q3, however, an expected one as received notices us on a few of the suites rented to the Government of Canada.

In Eastern Canada, with the exception of Labrador City, things remained strong. St. John’s and Gander’s vacancy was just under 4% while Sept-Iles remained at zero. The local economy in Labrador City is based on iron ore will remain slow with few signs of new economic activity. We’re doing everything we can to make sure we are the first choice for any renters coming into the town.

Our operations team continues to focus on a number of strategies in 2015. Our number one focus is on the street to suite program to make sure our properties look good when you drive up all the way to you arriving at the suite.

We continue to review our major expenses and are looking at ways to decrease. We will also be putting a larger focused on the residential retention throughout the year. This combined with our improved customer service will lead to better retention and longer tenancies.

Our Commercial operations continue to perform as expected. Vacancy is around 34,000 square feet or 3% at December 31. Same-door NOI growth was strong around a 11% in this business line as leases came on line in Bristol Office Park compared to last year when they are in lease up and tenants didn’t move.

I’ll turn the mike over to Rob now to dive into bit more detail on the financial results.

Thank you, Todd. As part of the Q4 financial review I would like to cover the following items: the FFO per unit results, same-door NOI, an update on our financing program, and CapEx.

As Todd mentioned, we are pleased to see an increase in FFO when compared to the fourth quarter of 2013 FFO per unit for the fourth quarter was $0.60, up 7.1% from the $0.56 per unit in the fourth quarter of 2013 excluding the stapled unit income tax in 2013. If you recall this additional tax related to payment made between stapled securities being non-deductable for tax purposes.

A key driver of our FFO growth was increased NOI from the recent acquisitions and developments specifically the 189 units completed in Regina in late 2013 and early 2014, 39 unit in Iqaluit in Q2, the 24 units in the Yellowknife in the summer along with the acquisition of Slave Lake portfolio, Quesnel town in Lloydminster and the Bristol Court business park lease up in St. John’s.

In 2014, 363 new units contributed an additional $1.1 million of NOI in the quarter. Same-door NOI for the fourth quarter of 2014 decreased by 1.7%, multifamily same-door declined 3.2%, commercial was up 8% and hotels were down 10.2%. As mentioned Fort Mc and the Yellowknife saw vacancy increases during the quarter and were the main driver for the lower multifamily same-door NOI. On a positive side, same-door improvements realized in BC, Nunavut and Saskatchewan.

Commercial same-door NOI was positively impacted as a result of Bristol Court buildings acquired in 2012 being fully refit included in the same-door calculation. The strong St John’s commercial results are expected to continue as a remainder of the Office Park is completed and the new buildings become stabilized.

As it had been the trend in 2014, the exec suite and hotel same-door NOI experienced another tough quarter. Same-door NOI declined by 10.2% when compared to the fourth quarter of 2013. Majority of this decline can be traced to the Yellowknife’s Capital Suites property and the Hotel Arctic in Iqaluit. Both properties have been impacted by lower travel to the north specifically the government and less long-term stays. 2015 will focus on longer term stays as well as an accelerated CapEx program.

Now turning to our financial position. Our balance sheet remains healthy, debt to gross book value was 48.6%, debt service coverage ratio was 2.1, interest coverage ratio was 3.7 weighted average interest rate was 3.67, and the weighted average term to maturity is five years. These ratios have increased during 2014 but still remains strong and within our comfort zone.

On the mortgage front, we completed approximately $34 million of financing in the quarter; the fourth quarter mortgages were financed with a weighted average interest rate of 2.91% with an average term to maturity of 9.7 years. Debt funds from the mortgage financing in the quarter were $14.1 million; construction financing added another $20 million of funds during the quarter.

Liquidity remains healthy as we enter into 2015. Combined capacity on the operating facilities has increased by $25 million to $90 million. The borrowing base currently is $66 million and additional assets will be added to increase the borrowing base to $90 million. 2015 has just over $100 million of mortgages up for renewal at a weighted average interest rate of 3.71% allowing drop financing opportunities and mortgage interest savings with interest rates on new mortgages 100 basis points to 150 basis points lower. The expected interest expense for 2015 is the $29 million to $30 million range.

As mentioned previously, we are increasing our CapEx for 2015. Historically, we’ve been around $15 million to $18 million in total CapEx, but for 2015 that number is expected to double with significant projects in Fort McMurray Yellowknife and two exec suite properties.

As Todd mentioned, NPR’s primary exposure to the decreased oil, crude oil prices in Alberta specifically for McMurray and Lloydminster. Alberta represents 25% of total NOI and Fort McMurray and Lloydminster approximately 16% of total NOI.

Over last several years NPR has improved is geographic diversity; nearly half of the NPR’s NOI still comes from Nunavut and the Northwest territories. NPR’s diversification in southern areas of BC has also reduced its exposure to natural resources.

Our 1.1 million square foot commercial portfolio with long-term leases represents 17% of NOI and provides NPR with additional stability from both operating cost increases and the impacts of lower natural resource prices as 68% located in Nunavut and the north west territories.

With that, I will now turn it back to Todd to expand on this and his closing remarks before we open up the call for questions.

Thanks, Rob. The largest focus of NPR’s executive leadership team is managing the impact of low oil prices on our portfolio specifically Alberta, Saskatchewan and [indiscernible]. The impact of $50 per barrel oil set two impacts on us: the first operationally and the second being in the unit price. As we discussed earlier, Lloydminster and Fort McMurray are the two areas where we have felt and expect to feel the impact. We don’t expect either community to turn in the near term. We continue to get notices related to layoffs and residents leaving the community.

That said, we’re also seeing traffic come through the office in Fort McMurray and seeing some positive impact coming from oil companies starting to shut down work camps. I’m not sure where this ends up, but while we’re working through this we’ve stepped up our capital program and we’ll continue to work through our portfolio to improve their feel, customer service, both with the focus of ensuring that we are the first choice for potential residents, and that once they are residence we will provide a high level of customer service to keep them.

As Rob mentioned, while Alberta accounts for a quarter of our NOI they are a piece of the whole pie which remains very strong.

To sum up, the impact of the lower oil prices will impact our financial performance but not to material extent. Our conservative operating style, low payout ratios, low leverage and strong debt coverage ratios puts us in a strong position to weather the storm and to be in a very good place when the storm subsides.

We’ve been frustrated with the NPR unit performance since October. In my humble the market has priced NPR more like an oil stock than a REIT and has not given us credit for the geographic diversity and the strength in our balance sheet. We will continue to work on that through our communications with the investors.

Thank you for your time. And I’ll now turn the call back to the operator for questions.

Question-and-Answer Session

[Operator Instructions]. Your first question comes from Jason Kepecs with GMP Securities. Your line is open.

Jason Kepecs

I noticed so you haven’t changed any of the expected cap rates on the properties that are still on your development and you mentioned that you’re delivering an 8% cap on the Lloydminster project. Is that based on pro forma or is that currently at the current lease up?

Based on current lease up, the cap rates are in excess of the pro forma. So pro forma is around 8%; we’re probably closer to 9%, but as things — as the world settles out we still expect it to settle out at a statewide cap.

Jason Kepecs

And as far as the Calgary developments that you’re looking to commence in Q3, have you changed your expectations as far as where the development yields will come in?

No, we haven’t. There is still positive in-migration. So if I look back the last couple years I mean, in-migration in the Calgary has been in excess of 40,000 people a year. The latest stats I’ve seen say it’s going to decrease but there’s still somewhere 15,000 to 20,000 new people coming to Calgary. The overall vacancy in Calgary is still very low and the new apartment supply in these areas is non-existent. So I still believe the rents are achievable and the returns are there. So you know what it hasn’t played to the change in our expectations.

Jason Kepecs

Okay. In Fort McMurray, you’ve spent I think about $7 million this year on the Riverside Apartment. Are you finding that that’s bringing you a competitive advantage versus other apartment having potential in your portfolio that hasn’t had this CapEx spend? And if so specifically are the occupancy better in that building than the rest of the portfolio?

It’s probably performing in-line with the rest of the portfolio, I mean what’s happened to Fort Mc is there has been an overall decrease in the people going. So we had to invest the money in that building. If you remember back a year ago we start to load this is the building that froze up. So there wasn’t much of a choice into getting this done. So did I get the return that I expected on that investment? No. In the long term will I get it? Absolutely.

Jason Kepecs

Okay, thanks, I’ll turn it back.

Your next question comes from Jonathan Kelcher with TD Securities. Your line is open.

Jonathan Kelcher

If we look at Fort McMurray, you said it’s a little north of 20% where we sit right now in terms of vacancy, how high do you think that can go or where it might top out? And I guess a similar question would be for Lloydminster which is, it looks like it’s really shot up since the end of December?

Where it ends up, it’s a hard question. The relative comparison I have is if I go back to 2008, 2009 where it topped off probably around 25%. So it’s a bit of a different world. There is some new supply, not specific rental, but there has been a fair bit of condos built in Fort McMurray since 2009. So I would hope it tops off at 25%. If I look at our notices for March 31 we got about 15 that relate to people that have lost their jobs and leaving town. So I don’t think the fall out is done, but I my crystal ball isn’t all that clear these days, Jon.

Jonathan Kelcher

Right. Well just looking for a rough guess. What would you think would be similar for Lloydminster?

Yes, I mean Lloyd in 2009, and I’ll look at Rob to correct me when I’m not telling the truth, but it was around 20%. So if I look at both the existing and the new stuff sitting at 14% today. There are still notices coming in; there’s still some activity. The one thing that’s happening in Lloyd is a competitor just put on a 160 brand new units in the past 30 days. So there’s new supply there that will affect that. So 20% is our benchmark from 2009.

Jonathan Kelcher

Okay. And then just switching over your development program you said you are going to pull it back a little bit this year to 300 units to 400 units. That doesn’t include what you are doing right now right, is that 300 to 400 new units?

Yes, that’s 300 to 400 new starts. We are finishing up; the last building on Grande Prairie was down. So we have the right now there and I wrong earlier there’s 118 units in Fort St. John, I think the first buildings in the turnover April 1, second building probably mid May, then there’s a 110 units in Bonnyville that’s probably a June-July turnover give or take. So those projects will be finished and then the 300 to 400 is new starts

Jonathan Kelcher

And with that also be that your Calgary project?

That will be Airdrie in Calgary.

Jonathan Kelcher

Okay so it will just be those two markets where you expect to start the developments this year?

Yes.

Jonathan Kelcher

Okay. And just Rob, for the up-finance you said you have up financing available on your 2015 maturities. Can you give us a rough idea of how much up-financing you expect to do this year?

Yes, probably $50 million to $60 million of our regular up-financing. We have a pretty large portfolio on top of that which we could add as well, but a regular financing is what $50 million to $60 million of our financing.

Jonathan Kelcher

Okay. Thanks. I’ll turn it back.

Okay. Thanks John.

Your next question comes from Mario Saric with Scotiabank. Your line is open.

Todd, just with respect to your comment on the market not appreciating Northern’s diversity today, if I go back to 2008, 2009 being kind of the benchmark that you refer to, I can’t quite recall whether — some of the disclosure wasn’t the same as it is today, the disclosures gotten better, but can you give us a sense of what Lloydminster and Fort Mc would have been as the percentage of NOI back in ’08, ’09 and during the crisis?

Yes, Mario, we have — back then in ’08, ’09 it was north of 20%; that was probably 19% to 20% is what those two were back in ’08, ’09.

It would have been — we have just got into Lloydminster in ’08. So it wouldn’t have been that significant.

Lloyd yes.

But Fort Mc it was a big number and the rents were quite a bit higher at that point.

Okay. And they are probably like what’s $400 to $500 higher?

Yes.

We are today. And now those numbers would include your senior housing contribution back then as well?

Exactly.

Okay. With respect to — and then one more question on Fort Mc and Calgary, so generally Fort Mc moves before Calgary both on the good and on the bad. I guess what gives you, you talked about the migration a little bit and the lack of supply, but what gives you the confidence that shoe isn’t about to drop in Calgary? And do you think that if Calgary would get worse it would have been worse by now given when Fort Mc started to move up?

I guess what I’m seeing today has we moving down the path as I don’t think, I mean Calgary was I making numbers up now 1%, 1.5% vacancy. I’m six months away from having a development permit, Mario, and once I get the development permit then I need a building permit. So I look at it to say I’m six to nine months away from starting. I mean, it could move quicker because our development team is in-house and we don’t have contracts to walk away from Bo and I can hold a pen on developing in Calgary any time between now and when we get approval. So we’re going to continue down. Looks like today I think it’s going to remain strong that’s my belief but if things change we have the ability to say we’re not going to go ahead.

All right, okay, that makes sense. And then, Todd, you also mentioned slight positive with respect to work camp shutting down. Is it still too early to kind of assess what the total impact may be to Northern over the next six to nine months? Can you just quantify what the impact could be?

It’s hard to quantify because all we’re getting is anecdotal evidence. So you talk to people and say well, you know syncrude is staring to fly in and fly out, and that’s good news, that’s anecdotal. We talk to our leasing agents in Fort McMurray and they’re saying yes, they’re getting some responses. I can’t say that there is 400 people moving out of caps to come into Fort McMurray. What I do know is that 12 months there was close to 40,000 beds in work camps in and around Fort McMurray. So it has to be positive but I’m not sure I can’t tell you what that is, because we’re still seeing people that live in Fort McMurray having job losses. So I think it’s a positive but I’ve not, I’m not running to the bank account on it. I hope to continue to close camps because I think that’s better for the rental market but its beyond my control.

Understood, okay. And then Yellowknife, you mentioned the vacancy is still high up 15.5% probably at the end of the year, but it was down 110 basis points quarter-over-quarter, but I missed the comments you made with respect to year-to-date vacancy. Did you say that vacancy was down another 200 basis point thus far this year or if you didn’t kind of how should we think about the vacancy trends in Yellowknife for the next 12 months?

Every time I talk a little vacancy trends in Yellowknife I get proven wrong, but what we have seen in the first couple of months is that there is a positive trend, so we’re another 150 basis points lower than we were on January 1. I take that as a positive given the winter months are typically not strong months in the north. So we’re seeing positive, we’re still seeing positive traffic to-date. So I remain hopeful that we continue to progress. I think if it goes the way I expect it to, I think we should drop down below the 10% by midyear, that’s just we’re feeling.

Okay. And then of the 150 basis points, can you give us a sense of how much of that is NPR stealing market share versus the actual market [indiscernible]?

No, other than I feel we are stealing our market share, we are higher than the market. So I believe it’s probably more of us stealing our market share but it’s hard to, it’s a hard number to quantify.

Okay. My last question may be for Rob, just on the IFRS cap rate, it was down 2 basis points quarter-over-quarter for the full year as a whole. When I looked at the individual markets we saw some bigger decline on a quarter-over-quarter basis in areas like probably Yellowknife or the northern territory and so on 20 to 30 basis point decline. Is there anything that’s specifically driving that, just wondering why the overall portfolio cap rate went down 2 basis points?

Some of the changes in the Yellowknife, we’ve had some recent portfolios, [indiscernible] but relatively minor changes. So we’ve had some commercial stuff appraised and we’ve had some residential stuff appraised from a financing perspective. So nothing significant, it’s some of its just fine tuning that we’ve done throughout the quarters that we had some external some big data sets and fine tune our internal estimates.

Okay, great, thank you.

Your next question comes from Alex Avery with CIBC. Your line is open.

Todd, on your discussion and I guess commentary around the developments in Calgary and Airdrie, you noted that you’ve got the internal development team and that allows you to pull the pin on development right up until the last minute. And what would you be looking at or what would you expect could change your mind if you were to change your mind on those developments?

If we start to see, and again remember Calgary is not a market where we have properties in, so I’m not an active participant, but I watch what’s going on. So if I, you watch me see we watch our the big boys in Calgary. So you start hearing the rents moving in Boardwalk, The Main Street, The Capri that sort of thing. We continue to do our market research on availability in rents. So if you start to see movement on any of those things we go so. What I would say is our market research today in this market is fairly significant because it is a big decision.

Yes, okay. I guess on the one had you’d have sort of ideal contrarian timing if you do start developing into the bottom of a energy cycle provided that the energy cycle comes back, but on the other hand you’ve got an implied cap rate north of 8% on your stock, and I’m just wondering between those two uses of capital, are they interchangeable or are those two different buckets how do you compare that?

Something Rob and I are doing almost every day. There is three uses of capital that we look at; there is acquisitions, developments and buying our stock back. If I had $100 million in the bank I’d be buying our stock back all day long. The fact is we’re managing our capital. I believe developments is the best long term value creation for NPR, so we’re looking at that but it’s going to be a balance.

Okay. And then in Fort Mc you gave a little bit of color about what’s happening in terms of the markets and what’s happening with labor work force labor camps. Can you talk about your, I guess, strategy relative to the market in terms of rent versus occupancy?

Right now everybody in Fort Mc is fighting for occupancy. So I’ve never been a leader in chasing rents to the bottom. That said, Shelter is a big landlord, couple of others. So you watch what’s going on; we’re seeing rent increases, we’re seeing increased use of incentives. So in order to, is the term [indiscernible] to make sure we’re getting our fair share of occupancy we’re using all the tools.

So there is sort of a hold the line on occupancy and move the rent to make that happen or is it rent oriented from longer term perspective?

At this point we’re probably trying to hold the occupancy versus get the rents.

Okay. That’s helpful. Thanks guys.

Your next question comes from Jenny Ma with Canaccord Genuity. Your line is open.

Further on Fort Mc, I know in the past you guys have been a little bit more reticent to lower your rents or offer incentives. And I’m wondering you mentioned that you’re offering about $100 off in Fort Mc, how does that compare to the market and do you think that is sufficient to hold occupancy concerning that the average rent in Fort Mc is much higher?

I think that in Fort Mc that we’re probably a $200 off. We’re bang on with our competitors, Jenny. So what I know if I make the decision to go to $400 then we’re all going for $400 off. So it’s right now our decisions are holding our vacancy. It’s something we evaluate weekly.

Okay. And with regards to the tenants that are giving you notice, are they leaving after having been there for two years or some of them leaving halfway through their leases because they’ve lost their jobs and simply can’t afford it? How does that impact potentially bad debts in the Fort Mc and potentially Lloydminster portfolios?

We haven’t seen much in the bad debt piece in Lloyd. In Fort Mc they are leaving; it’s they are little they are similar but they’re little different. Fort Mc varies a place people go to work and if there’s no work then you go to somewhere else. So it doesn’t seem to be a town that people will stick it out. And so when their job’s done and there is not a prospect they pack up and leave. So it is impacting our bad debt; you mitigate that through some of the security deposits but they are leaving when their job is done.

And that not still the case in Lloydminster?

It’s fairly similar but Lloyd probably a little less so but Lloydminster is six months behind Fort McMurray and as we’ve talked about before the increase — the decrease in activity and the increase in vacancy for everyone and Fort Mc started midyear, probably June last year. So in Lloydminster we are really just started to see the increased vacancy and people leaving in the last sixty days. So it’s a bit earlier in the cycle but it is there is similar. Lloydminster has a bit of agriculture and it’s a bit of a regional center, so it has a bit more color other stuffs than oil so it doesn’t the term doesn’t NTL link for Mc tends to do.

Okay. And moving on to acquisition I mean the theme that vendors have been asking too much of and prevalent for a long time now, I’m not sure about the depth of the potential buyers in your markets, but if pricing is going to be that sticky have you considered selling of certain assets that you consider to be non-core?

Yes.

Are you able to elaborate on that.

No, I mean it’s something we were looking at. And in many of our markets there is not a lot of activity. So if you talk what the acquisition piece people selling apartments in most of our markets which are smaller are families individuals that may or may not want to sell but if they get the right price they are out. But it’s not the same for the buying thing. There’s not a lot of institutional interest in our markets so there is not a bit out spread. We’re seeing lots of opportunities come probably more that aren’t in our markets. There are markets that we track and we look at but if I we got 28 regions I would say there’s probably step that we’re seeing in a handful of them. So it’s not an active market in a lot of our good business.

Okay. So when you look at your entire rental apartment portfolio what is the proportion that you would consider to sort of been non-core, if you will?

Nice question, anywhere 0% to 5% I think. And that said, non-core not just is a lot of non-core, I think there stuff that you would offer to quickly look to get rid of. So but I’m not going to identify them but there is couple of markets if someone came to me and said I would like to buy your portfolio we talk about it, but it is not something I’m actively looking to. There are some specific assets that we’ve looked at and continue to look at but again there got to be an active market.

Okay. That’s helpful, thank you very much.

Your next question comes from Maria Benavente with BMO. Your line is open.

Hi, Maria.

Your next question comes from Fleming Neilson, a private investor. Your line is open.

Fleming Neilson

Yes, my question to you is how does actual property value compared to your total assets now. You must have whether it’s you through the assessment rule, they would — each property be assessed. Can you —

On a property tax basis?

Fleming Neilson

All right well not the taxes but the assessment. Or actual property value compared to your total assets?

Sorry, Fleming, is it from like looking at our evaluation that we have in our balance sheet? So we have our investment property which we get which gets fair-valued every reporting period so every quarter just above $1.6 billion. Total assets $1.65 billion.

Fleming Neilson

Is that current that your total asset because you depreciate your buildings?

Yes. So there is not we don’t have that the concept to historical cost anymore from an accounting perspective and the presentation perspective. So it’s really what you see on the balance sheet as of that reporting date is our fair value for our investment properties.

Fleming Neilson

Okay. It’s not —

It’s not being depreciated. So it’s not the balances are —

Fleming Neilson

The property values appreciate over time.

If the underlying metrics support that. So if your rents are going up, your vacancy is going down, and that would be then your values would be going up as well; our cap rates are changing and something like that.

Fleming Neilson

Okay, And as far as the property value itself because a building is worth $10 million when you bought it and now it’s worth $15 million; is that reflected in that?

Yes, it is. And I’m happy to talk if you maybe call me back later and call us we can have more detailed conversation around this if you like.

Fleming Neilson

No, I think that answers my question.

Okay.

Fleming Neilson

Yes. Thank you very much.

[Operator Instructions].

Your next question comes from Salim Ben Mansour with BMO Capital Markets. Your line is open.

Heather Kurtz

Hi, it’s actually Heather Kurtz; just been having trouble getting myself through here. I just wanted to delve into the CapEx a little bit more; you talked about this I guess street to suite program. Can you talk about sort of what sort of things you will be allocating capital to and whether you actually think that there’s going to be a return on that in the next 12 months or that’s something that should be sort of 2016, 2017 expectation?

I guess there is two parts; there is a hotel; there’s a chunk of the cash that’s going to go into the executive suites and its really retrofitting the suites and the appearance of them to really get more into — what’s happened in specifically in St. John’s they had gone from our core business in that line which was medium to long-term stays into what’s called an overflow hotel. So we sort of get when the suite rates fall that. So we moved into — we’re moving at back; so there’s a renovation program with that which is going to be suites, hallways and so on.

Specifically Yellowknife, Fort McMurray and called street to suite program is what we’ve been focusing on over the last while was really renovating suites. What we are doing is taking it from there is a number of nice suites in our buildings what we are doing is doing the call the common areas so we’re taking through the hallways the stairwells, the entrance ways, the exteriors and so on so that it’s got an overall appeal so you are not walking through dark hallways to get to a nice suite. So that sort of how we’re allocating the capital.

In Fort Mc, is the payback immediate? I’m not sure because its bit of an economic mess. So it’s probably more of 2016, 2017 payback. I think in the Yelllowknife, it’s probably a more accelerated payback, I think we’ll see the return on that as we regain our market share and we’re already seeing a bit of that from some of the work we’ve done.

Heather Kurtz

Right. And given the commentary that you’ve made with respect to occupancy pressures and rate pressures, is there anything that you think you could achieve on the either CapEx investment or just straight out op cost side that might be on offset to dwindling NOI?

There’s still projects ignore those two — ignore for McMurray. There’s still projects where if you invest in the suites in the buildings that there is a return. So the Nanaimo has been — Nanaimo would be an example. Abbotsford where we put — where we’re investing the capital similar sort of concepts getting the suite rentals and people will stay more for nicer newer looking suite. So by getting rid of carpets, dated like fixtures and so on we are seeing a return. So there are still opportunities for the return in the non-challenged markets.

Heather Kurtz

Okay. And just back on the asset sales discussion, would selling assets and buying back stock like would you be more aggressive on maybe ramping up the asset sales to direct some of that capital to repurchasing stock?

If I had asset sales in hand, yes. Again, we’re looking at what the best use of our capital is. Knowing that we do want to continue our development program so there is a piece of that’s get allocated to that. You got to remember for asset sales you need a buyer and in lot of our markets we’ve been the only buyer. So it’s not like I can walk into a town that’s struggling in vacancy like Fort Nelson and say I want to sell the assets; they aren’t buyers. So it’s not — our markets are in Calgary and Toronto or Edmonton where there is an active transaction market.

So yes, we look at it, but we do understand that we’re in markets with limited activity.

Heather Kurtz

And what about even some of the — it has some good development returns, does it make sense to crystallize some of those gains and then redeploy that capital to the discounted share price?

Potentially. Although our new developments, our Regina development is still giving us little over a eye cap. So at that price it’s still a better return than our unit. So we I want to make — part of our development program is still that we can grow the number of newer quality assets into the regions where we would want to be. Is it an opportunity? Yes. Is it high on my list? No.

Heather Kurtz

Okay. There was a comment with respect to not reaching an occupancy target on a covenant. Can you just elaborate on what that was related to?

Yes, in Fort McMurray, we have a couple of buildings in Fort McMurray that our on our credit facility and there is a cap on the vacancy, and those two buildings have exceeded that vacancy cap.

Heather Kurtz

Okay. And is your expectation that will just I guess give you a wavier on that?

They have already, yes. I know two buildings actually have come back below it, yes, subsequently they’ve come back below. As of February or March anyways they come back below that cap, and we do have a labor on it existing right now.

Heather Kurtz

Okay. Great, thank you very much.

There are no further questions at this time. I’ll turn the call back over to the presenters.

Thank you everyone for your attention in questions and look forward to talking to you in a couple of months with our first quarter results. Have a good day.

This concludes today’s conference call. You may now disconnect.

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