Minto Apartment Real Estate Investment Trust

TSX:MI.UN

Earnings Call Transcript

[Operator]

Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Minto Apartment REIT 2018 Fourth Quarter and Year-End Results Conference Call. [Operator Instructions] Mr. Waters, you may now begin your conference, sir.

[Michael R. Waters, CEO & Trustee]

Thank you, Sylvie, and good morning, everyone. My name is Michael Waters. I am Minto Apartment REIT's Chief Executive Officer. Joining me on the call this morning is Julie Morin, our Chief Financial Officer. I'll begin the call with an overview of our fourth quarter highlights. Julie will then review our financial and operating results in greater detail, and I'll conclude with some brief comments on our business outlook. Then we will be pleased to answer your questions.I'm proud to say that our strong performance continued in the fourth quarter. Just as in Q3, in the fourth quarter, the REIT outperformed the IPO forecast on all key metrics, including revenue, NOI, FFO and AFFO. Rental market conditions remained very strong through most of our portfolio during the quarter and supported our positive results.As well, we continued to generate strong organic growth during Q4. As suites turned during the quarter, we capitalized on gain-to-lease opportunities and increased rents to appropriate market levels. We signed 250 new leases during the quarter, increasing average monthly rents for those suites by 8%. This results in annualized revenue growth of approximately $321,000.During the full 6 months since our IPO, we signed 613 new leases, boosted revenue on those suites by 7.6% and realized $764,000 in annualized revenue growth. Our average monthly rent per suite was $1,402 per month at year-end compared to the forecast of $1,388. And we had no trouble filling unoccupied suites at attractive rents when our tenants did choose to leave. Our occupancy was nearly 99% at year-end, favorable to the 96% assumed in our IPO forecast.While we have achieved strong rental rate growth on new leases since going public, there are very significant gain-to-lease opportunities remaining in our portfolio going forward. Julie will address those later in the call. We also made progress with our asset repositioning program during Q4 as we renovated a total of 6 suites at our Minto Yorkville property in Toronto and 11 suites in our Edmonton portfolio.Overall, we have renovated 111 suites since going public. These investments generate very positive returns for the REIT. Further organic value creation potential remains as we have 75 suites remaining to renovate at Minto Yorkville and 137 suites across our Edmonton portfolio.We have also begun repositioning activities at our Castle Hill and Carlisle properties in Ottawa, and we expect that the first renovated suites from those properties will be available for lease by next month.Another core part of our strategy is external growth. We expected to be active, acquiring new properties following our IPO, and that was certainly the case during Q4. We bought Kaleidoscope, a 70-suite property in Calgary, which closed on December 18, and reached an agreement to purchase The Quarters, a 2-building property in Calgary with 199 suites. The Quarters transaction closed in Q1 of 2019. Both of these acquisition opportunities were sourced off-market.We also leveraged our strategic relationship with the Minto Group. We agreed to advance up to $30 million of financing for the redevelopment of a Minto commercial property in Ottawa. It is being redeveloped into a mixed-use multi-residential rental and retail property, and the REIT will have the exclusive opportunity to purchase the property upon stabilization at 95% fair market value.In late December, we filed a base shelf short form prospectus. It's valid for a 25-month period and qualifies us to issue up to $750 million in trust units, debt securities and subscription receipts. This provides us with the financial flexibility to capitalize on growth opportunities.Overall, we're very pleased with our performance since the IPO. We're generating the organic and external growth we envisioned when we created the REIT, and we expect to continue driving strong returns for unitholders in 2019.I'd now like to invite Julie to review our financial and operating results in more detail. Julie?

[Julie Morin, Chief Financial Officer]

Thanks, Michael. To start off, I want to remind people that the REIT acquired the initial property portfolio on July 2, 2018, and completed the IPO on the Toronto Stock Exchange the following day. So when I speak about the 6-month results ended December 31, I'm omitting July 1. That 1-day difference was not material to our results.I would also like to point out that we have not prepared any SPNOI metrics given the Kaleidoscope acquisition closed on December 18 and only had 14 days of operating results. The overall impact on our financial results, given the size of the property and the timing of the closing, was not material.Turning to Slide 4. We reported revenue of $21.4 million in the fourth quarter, which exceeded our IPO forecast by approximately $1 million or 5%. The outperformance was driven by higher-than-expected occupancy and average monthly rent, which was primarily achieved through suite turnover.NOI in Q4 2018 was $13 million compared to our forecast of $12.1 million, exceeding the forecast by 7.5%. This result was attributable to stronger-than-forecast rental revenue and lower property taxes and utility costs, partially offset by higher-than-forecast repairs and maintenance expenses. NOI margin was 60.9% compared to our forecast of 59.5%.FFO was $8.2 million in Q4 2018, which was 18.3% favorable to our forecast of $6.9 million. This reflects the positive NOI variance I just discussed plus favorable financing cost due to a noncash gain on the retirement of debt of $600,000. AFFO was $6.5 million or $0.176 per unit compared to the forecast of $5.7 million or $0.156 per unit. The positive variance was attributable to higher-than-forecast FFO, partially offset by the noncash gain on retirement of debt I just referred to.We declared cash distribution of $0.1025 per unit, meaning our AFFO payout ratio was 58.3% compared to the forecast of 65.6%.I'll also briefly review our 6-month results. Revenue was $42.5 million, which was 4.2% favorable to the forecast of $40.8 million. The positive variance was due to higher-than-expected occupancy and higher rents achieved on new leases, revenue earned from furnished lease and ancillary revenue.NOI was $26.1 million or $1.7 million above the forecast of $24.4 million, mainly attributable to higher revenue. FFO was $16.2 million, a positive variance of 14.9% compared to the forecast of $14.1 million. AFFO was $13.2 million or $0.36 per unit compared to the forecast of $11.7 million or $0.318 per unit. We beat the forecast by 13.4%.We declared cash distribution of $0.2028 per unit, resulting in an AFFO payout ratio of 56.3%. The forecast distribution payout ratio was 63.8%.At year-end, we had 4,350 total suites compared to the 4,279 suites in the initial portfolio assumed by our IPO forecast. Average monthly rent for occupied unfurnished suites was $1,402 per unit, $14 above our forecast. And occupancy of available unfurnished suites was 98.8%, about 250 basis points higher than our forecast of 96.3%.Slide 5 illustrates how we generated rental growth from gain-to-lease opportunities across our portfolio. As Michael noted, during the fourth quarter, we signed 250 new leases, which generated average monthly rental gain of 8% to the expiring lease rates. The gain in Toronto of 13.9% was notably strong, reflecting the strength of that market. These rental increases provide annualized incremental revenue of approximately $321,000 to the REIT, which goes right to the bottom line.We have only scratched the surface of the gain-to-lease opportunities that currently exist in our portfolio. We see an opportunity to generate monthly rental revenue growth of 8.2% through suite turnover. This would lead to annualized revenue growth of nearly $5.7 million.I would remind you that at the time of our IPO, we estimated total gain-to-lease opportunity was $5.1 million in annualized revenue. It has now increased to $5.7 million even though we signed 613 new leases in the third and fourth quarters combined. So there is a great deal of embedded value to be realized here.Now I'd like to review our operating expenses. Slide 6 shows you a breakdown of our expenses versus the forecast. Q4 property operating costs of $4.3 million were higher than the forecast of $4 million, primarily due to higher-than-expected snow removal cost and nonrecurring maintenance items. In the 6-month period, property operating cost exceeded the forecast by 1.9%.Overall, property operating costs for the 6-month period were 19.4% of revenue compared to the forecast of 19.9%. Property taxes and utilities were slightly below forecast in both periods. We are committed to managing operating expenses prudently.Michael briefly mentioned our acquisitions earlier. Now I'd like to provide you with a bit more detail. On December 18, we acquired the Kaleidoscope property in Calgary. The property was built in 2013, has 70 suites and an average monthly rent of $1,133. Occupancy was 97% at year-end. We acquired the property for $20.4 million or about $209,000 (sic) [ $290,000 ] per suite, net of 9,200 square foot -- square feet of commercial space.This represents a cap rate of 4.4% on forecasted year 1 NOI and had a 4.25% discount to appraised value. We also assumed a $12.7 million mortgage bearing interest at 3.59% maturing in June 2020. The transaction did not materially affect our operating results in the fourth quarter.On Slide 8 is an overhead image that shows you the property's outstanding location. It is near the University of Calgary and in close proximity to the Banff Trail LRT stop, the Alberta Children's Hospital and McMahon Stadium. There are also a number of retail amenities close by.As announced in November, the REIT also committed to the acquisition of The Quarters, a much larger property in Calgary. This property consists of 2 buildings constructed in 2017 and 2018, comprising 199 suites. The average rent is $1,506, and occupancy at the time of closing was 98%.We paid $63.8 million or about $321 (sic) [ $321,000 ] per suite, representing a 4.1% cap rate on first-year forecasted NOI and a 6.25% discount to appraised value. We arranged a $44.3 million mortgage insured by CMHC with a 10-year term at 3.04%. The acquisition closed on January 7 subsequent to year-end.As you can see on Slide 10, The Quarters is located in Quarry Park, a rapidly growing mixed-use neighborhood and corporate campus within a 20-minute drive of the downtown core. Quarry Park is home to several retail amenities and headquarters across 1.7 million square feet of office space, including the Imperial Oil headquarters, Stantec, Lafarge and AECOM. It is serviced by 3 bus routes and is a short walk from the proposed Quarry Park LRT station. The Quarters is also in close proximity to The Laurier, another Minto Apartment REIT property. We expect this acquisition to generate operating synergies and are pleased to gain further geographic diversification in our portfolio.Turning to Slide 11. We have talked before about the benefits of our strategic relationship with Minto Group. As previously announced, during the quarter, we agreed to advance up to $30 million for the redevelopment of a Minto Group commercial property in Ottawa. It will be redeveloped into a mixed-use multi-residential rental and retail property with approximately 160 suites.Construction is expected to start this year with occupancy beginning in 2021. The financing we're providing will bear interest of 6%, is guaranteed by Minto Properties Inc. and will mature in March 2022. As part of this transaction, the REIT will have an exclusive option to purchase the property upon stabilization at 95% of fair value.As shown on Slide 12, this property is located at Fifth Avenue and Bank Street in the heart of the Glebe, a premier residential and retail neighborhood in the nation's capital. It is just a few blocks north of TD Place and Lansdowne Park and is near the Rideau Canal and maybe -- many neighborhood attractions and retail amenities. With the Walk Score of 96, it is considered a walker's paradise.I'll now provide an update on our asset repositioning program. As Michael noted earlier, we renovated a total of 17 suites during the fourth quarter, including 6 at Minto Yorkville in Toronto and 11 in our Edmonton portfolio. That brings the total number of suites repositioned in the second half of 2018 to 111. We still have 212 remaining suites in these 2 properties left to renovate. These investments are accretive to both AFFO and net asset value, with a target average simple return on investment of 8% to 15%.As we continue the repositioning of Minto Yorkville and the Edmonton properties, we have also initiated similar programs subsequent to year-end at Carlisle and Castle Hill in Ottawa. We'll have more to say about these programs later this year.As a reminder, our strategy with repositioning is to beginning by renovating test suites to determine what improvements are most desired by tenants. Once we determine the optimal mix of upgrades, we renovate all the suites in the building as quickly as possible. The rate at which we can implement these upgrades obviously depends on suite turnover.Turning now to Slide 14. We are committed to maintaining a solid balance sheet and a conservative debt maturity schedule as we grow the REIT. Our fixed rate debt has a weighted average term to maturity of 5.86 years and a weighted average interest rate of 3.18%. 76% of our debt is insured by CMHC, which is lower cost, and approximately 93% is fixed rate. Our debt-to-gross book value was just 45% at year-end, and available liquidity was approximately $115 million.I'll now turn it back to Michael for some closing comments. Michael?

[Michael R. Waters, CEO & Trustee]

Thanks, Julie. Our message today is that we are performing well and are in an ideal position to pursue both internal and external growth in a strategic and disciplined manner. As suites turn, we will continue to capitalize on opportunities to increase rents to market levels. As Julie noted, we see a potential annualized revenue gain of nearly $5.7 million from gain-to-lease opportunities. Most of the REIT's portfolio is located in cities with tight rental markets and rising rents. And we'll continue to generate higher revenues as suites turn over.We'll also continue to drive organic growth from our repositioning program. We have more than 500 suites to renovate under our current plan, including all of the suites at the Carlisle and Castle Hill, providing ample opportunity to deploy capital at favorable returns.Externally, we're aggressively pursuing acquisition opportunities with a focus on properties in urban areas near transit and community amenities. We are pleased to have completed 3 strategic transactions thus far as a public company, and we see many more potential opportunities in a highly fragmented marketplace for multi-residential properties.Our relationship with the Minto Group has also proven to be highly valuable as we've already sourced a proprietary deal through it. We expect to see more of those. We have a very active investment team, and we're confident that acquisitions will continue to be a source of growth for the REIT. However, we are focused on our set strategy to find the right opportunities and are committed to maintaining strong financial flexibility and a conservative payout ratio.That concludes our remarks this morning. Julie and I would now be pleased to answer any questions you may have. Operator, please open the line for questions.

[Operator]

[Operator Instructions] And your first question will be from Brad Sturges at Industrial Alliance Securities.

[Bradley Sturges, Equity Research Analyst]

With the Kaleidoscope acquisition, there's 49 units that are deemed to be affordable. I just want to understand, I guess, the mechanics of how they're -- how that works in terms of being affordable units versus, I guess, units that would be at market rents.

[Michael R. Waters, CEO & Trustee]

So those assets, Brad, are -- the 49 suites of the 70 are subject to an agreement with the province. And the rents in there are capped at a discount of 10% to the CMHC market average. We are -- we -- as vacancies arise in those 49 affordable suites, we source tenants through a list approved by the city, and then we prequalify those tenants as we normally would.

[Bradley Sturges, Equity Research Analyst]

Okay. And in terms of the commentary there, obviously lots of opportunities you're seeing from an acquisition point of view. Just want to get a sense of where you're seeing or which segment you might be seeing in terms of best opportunities right now in the market, whether it's by city, or I guess, stabilized versus value creation opportunities.

[Michael R. Waters, CEO & Trustee]

So our strategy, which we articulated at the time of the IPO and has remained consistent through that -- since that time has been that we're sourcing opportunities where -- which are stabilized but where there may be a gap between sitting rents and market rents, properties that are stabilized but where there may be value-add or repositioning opportunities, properties where there may be intensification potential or even potentially development of new rental properties. So those are the criteria. We are focused, as we talked about, on Canada's 6 major urban markets, emphasizing central locations, proximate to transit with high Walk Scores. So we want to see access -- ready access to amenities and other features. And so we've been very, very choosy about the opportunities that we bring forward. Our investment team has been very active, looking in those 6 major markets. I'll say that our -- we've seen tremendous deal flow. But as I say, we've got a fairly stringent set of standards, and so we've been fairly choosy. I'd say that a lot of our time has been spent in the GTA, in Montréal. Those are markets of great interest to us. And we're optimistic that we will bring appropriate investments forward. But again, our focus is not growth for growth's sake but bringing the right ideals to drive NAV growth.

[Bradley Sturges, Equity Research Analyst]

Okay. And last question is on Richgrove. Any update there on the development planning?

[Michael R. Waters, CEO & Trustee]

So the Richgrove, I think you're speaking about the zoned CAD that we have at Richgrove to construct a fourth tower. And that project continues to move methodically through the predevelopment process. Site plan application and design development continues. Negotiations with the city continue. And we're pleased with the progress that we're making, but it is a slow and methodical process to develop and deliver quality building.

[Bradley Sturges, Equity Research Analyst]

So potentially, is that still a 2020 target right now?

[Michael R. Waters, CEO & Trustee]

We're still target -- we haven't changed our targets on that. So yes, we're still looking at 2020.

[Operator]

Next question will be from Mike Markidis at Desjardins.

[Michael Markidis, Real Estate Analyst]

Two topics I'd like to focus on would be, first, just looking at your occupancy of 99 versus where you were forecasting at the IPO. I think in past conversations, your teams indicated that you guys focus on a revenue maximization as opposed to an occupancy maximization strategy. I was just curious if you could comment on where your occupancy is today and if -- notwithstanding the fact that you are getting great turns on your -- or ramp-ups on your turn, if perhaps you feel that maybe you're not pushing hard enough on rent at this juncture?

[Michael R. Waters, CEO & Trustee]

So we have a fairly sophisticated yield management process and mechanics internally. We will scan the market comp set for every single one of our properties on a weekly basis. And I'm very confident that notwithstanding the high occupancy that we have been moving aggressively to optimize the rents. And I know this because when I look at our properties and the rents within those and I compare them to the direct comp set for each of the competing properties in their submarkets, we're about $190 a month higher on an average monthly rental basis. And we've been, Mike, I think pretty aggressive as well about the process by which we are able to pursue back-to-back leases. So we are moving people in within about 16 days of a vacancy. And that is, I think, a strong practice. So -- while, the occupancy rate is high, and I think that's more a function of market strength. And typically, we had planned on lower levels of occupancy. And that's certainly how the forecast in the IPO was developed. But I'm very confident that with our yield management process and the works that we're doing to evaluate the comp set and position ourselves from a pricing perspective that we are really maximizing the revenue there. I'd also like to add that in addition to what you're seeing from a rent perspective, the occupancy also allows us to drive other revenues and particularly parking. And so we're very mindful of that as well. And that was a significant component of our revenue variance.

[Michael Markidis, Real Estate Analyst]

Okay. That's helpful. And then just on the asset mix and your target markets and the opportunities you're seeing, $80 million-plus of acquisitions thus far in Calgary. And I think that would push your Alberta exposure from, I think it was, 7% of NOI -- or forecast NOI at the time IPO to probably something in the range of maybe 12% to 13% on a go-forward basis. Is -- I don't think -- perhaps the right question is, are you managing to a specific mix? But I think what I'm trying to get at is how you're seeing the value equation versus buying at the prices you're buying at in Calgary and much likely judged to be a market perhaps with less rent growth opportunities versus potentially what the opportunities are in the Ottawa and GTA?

[Michael R. Waters, CEO & Trustee]

Well, the strategy of the REIT is to focus on the core urban markets of Canada, and Calgary is certainly one of them. And while it's certainly challenging right now due to the volatile nature of the oil and gas industry, we feel that it has strong fundamentals as a rental market. The city has the fewest rental units per capita of any Canada's major cities. The REIT is a long-term investor in these assets, and therefore, the investments that we're making in Calgary are not focused on the short-term but more on the long-term growth potential. Both of the assets that we picked up in Q4, The Quarters and Kaleidoscope, which closed in early January, exists -- or they're located in nodes, I guess, within the city that have very strong demand characteristics just because of simply what's around them in terms of job creators and transit. And they're somewhat sheltered from the more overarching sort of economic cycle challenges that properties in the core of the city maybe experience. So these acquisitions grew our presence in Calgary from 144 suites to about 413 suites, which is a much more efficient scale at which to operate. At this point, we feel that we've achieved appropriate scale in Alberta, and we're focused on other urban centers. But we'll continue to be active in the Alberta market if the right opportunities present itself. And when you look at what we did in terms of leases in Q4, we did sign a bunch of new leases at some fairly significant increases over the sitting rents.

[Michael Markidis, Real Estate Analyst]

Okay. And just with respect to the yields of 4.1 and 4.4 that you guys have provided, does that contemplate additional operations -- or operational efficiencies? Or is that based on in-place structure?

[Michael R. Waters, CEO & Trustee]

Yes. There's -- we didn't underwrite any additional efficiencies. It was on sort of the standalone property NOI.

[Operator]

Next question will be from Jonathan Kelcher at TD Securities.

[Jonathan Kelcher, Analyst]

Just sticking with, I guess, the rental growth for a second. That gain-to-lease, the 8.2% that you still have in your portfolio, that was as of December 31, correct?

[Julie Morin, Chief Financial Officer]

Yes, that is correct, yes.

[Jonathan Kelcher, Analyst]

How have market rents trended over the first couple of months of 2019? Have you seen continued upward pressure?

[Michael R. Waters, CEO & Trustee]

We've seen -- certainly in our core markets, Toronto and Ottawa, we've seen sort of that trend continue, January, February, for sure.

[Jonathan Kelcher, Analyst]

Okay. And then just back to Alberta for a second. That 8.6% gains on new leases is pretty strong. Are you seeing much of a difference? And I know you don't have a lot of properties in either market, but is there much of a difference between Edmonton and Calgary? Or is it sort of consistent between both cities?

[Michael R. Waters, CEO & Trustee]

That's a good question. They are fundamentally different markets, Edmonton being more of a -- known as a government town. The assets that we have in the Edmonton portfolio, 3 of them are sort of right downtown just off of Jasper Avenue there. And what we've seen in Calgary, obviously, the assets that we have there, The Laurier and The Quarters in particular, are kind of more in that Southwest quadrant. But I think we've seen probably stronger performance in Edmonton from a leasing perspective than we have in Calgary.

[Jonathan Kelcher, Analyst]

Okay. And then just lastly on the mezz loan. That's for second half this year, I guess. How -- it's up to $30 million. How do you expect that to play out? Will it be like the full $30 million will be drawn in 2019? Or will it space out as the development goes along?

[Michael R. Waters, CEO & Trustee]

Yes. So it's a -- there are a number of conditions for the first draw that we've established. They include building permit, having a commitment from a senior lender in place and satisfactory construction tenders. I suspect that the way that the timing will work out, it will be -- look, it will be front-end loaded. But the initial draw would be something in the order of about $16 million, Jonathan. And then the remaining $14 million would be spaced out over time over the first couple of quarters as construction -- first demolition, then construction progresses.

[Jonathan Kelcher, Analyst]

Okay. And do you think there'll be more opportunities like mezz-type opportunities with Minto?

[Michael R. Waters, CEO & Trustee]

We're -- we think that obviously the Minto relationship and that strategic alliance does produce potential for deal flow. Fifth and Bank was not one of those opportunities that we highlighted at the time of the IPO. But I think that as the Minto Properties, Minto Group continues to grow its home building business and its pipeline of development land, other opportunities may arise that would be good rental assets. At this point, we don't have anything specific in our pipeline. But we're always evaluating, looking for opportunities.

[Operator]

Next question will be from Matt Logan at RBC Capital Markets.

[Matt Logan, Senior Associate]

Just looking at some of your leasing spreads, they've been quite healthy over the last couple of quarters. And your NOI has been well ahead of the IPO forecast. As we look to 2019, how should we think about the organic growth potential from the business? Would you say it's kind of above the 4% level that was contemplated at the IPO given the traction so far?

[Julie Morin, Chief Financial Officer]

It's a really good question. It's one of those things, Q3 and Q4, as you know, outperformed our IPO forecast. But we're seeing certain trends that worry us a little bit in terms of reduced turnover and...

[Michael R. Waters, CEO & Trustee]

I think the winter was another factor.

[Julie Morin, Chief Financial Officer]

The winter was very, very hard in Toronto, worse in Ottawa. And I think it was the coldest one in Alberta in 21 years. So we're going to see cost increases certainly in Q1 with respect to that. We also had record snowfalls in Ottawa. So that impacts our snow clearing and snow removal. So there are a couple of things out there that from an expense perspective, certainly, I think, could offset some of the revenue potential that we see out there.

[Matt Logan, Senior Associate]

That's good color. And I guess in terms of the turnover, how has that trended? It looked like there was about 6% of the portfolio that turned over in Q4. Would that be typical for the quarter?

[Julie Morin, Chief Financial Officer]

Q4 is typically a lower quarter, but it certainly was a little bit lower than what we had previously expected in our forecast. And I think we're seeing that trend continue in Q1 as well. So our actual turnover was 6.2 and our full fee had assumed 6.7. And I think we're seeing that trend continue to decrease a little bit in Q1 as well.

[Matt Logan, Senior Associate]

And just changing gears to your suite repositioning program. Can you remind us what you're planning to spend in terms of value-add CapEx in 2019?

[Julie Morin, Chief Financial Officer]

That's a good question and one for which we don't have an answer. And the reason for that is a lot of the suite repositionings are really dependent on suite turnover, for one. The other factor that impacts our total spend is really sort of where we're spending the money. So whether or not we're repositioning suites at Yorkville or whether we're repositioning suites at Edmonton, the amount of money we're going to spend is going to be hugely different. So we don't have a target. We don't have a budget per se. We're really opportunistic in terms of when the suites come back to us, we try and reposition them as quickly as we can. But no specific numbers on that.

[Matt Logan, Senior Associate]

Makes sense to me. And maybe just taking it up a level. What would you say your 3 top priorities for 2019 are?

[Michael R. Waters, CEO & Trustee]

I think that the 3 big ones obviously, continuing to exploit the organic growth opportunities that are in our portfolio, whether that's capitalizing on the gap between sitting rents and market rents. I think the repositioning opportunities particularly now with Castle Hill and Carlisle work is starting on both of those, a number of suites in both buildings. And we're going to start seeing those results as those -- as those suites begin to lease up in April, we'll start to see the impact of that and gather some momentum there. From an acquisition perspective, both opportunities that may arise from the Minto relationship and third-party acquisitions, those are priorities, as I -- as I've indicated, we're really focused not on growth for growth's sake. We want to make sure we're getting the right deals, and we've been fairly methodical about screening opportunities. But we have an investments team that has been very active scouring the market for opportunities, and they'll continue to do so. They're going to have a busy summer.

[Operator]

Next question will be from Brendon Abrams at Canaccord Genuity.

[Brendon Abrams, Analyst of Real Estate]

Just following up a bit on Matt's question there and taking a look at the gain-to-lease table. Understanding that the winter is a slower turnover month, if we look at over the past 6 months, there's been over 600 leases or about 15% of the portfolio turning over. So I guess you could say 30% annualized. Just trying to think about how quickly you can capture the potential opportunity. What would your expectations be for turnover for 2019 or perhaps on a normalized basis for the portfolio the way you see things now?

[Michael R. Waters, CEO & Trustee]

We -- what we've seen -- certainly our performance in Q3 and Q4 was very strong. We had -- in our initial forecast within the IPO prospectus, we had forecasted turnover that was in the mid- to high-20s. Recognizing that includes the Alberta market, which traditionally is a higher turnover market; Ottawa, which has traditionally been in the low- to mid-20s; and Toronto, which we've seen drop below 20. We're seeing the trend. And it's tough to take Q3 and Q4 such strong quarters and extrapolate that if we continue to see that kind of performance on a go-forward basis. Q1 traditionally is a low turnover quarter. I think that will be exacerbated by the cold winter weather conditions we had. And we've seen rents really move strongly. And that, of course, has a retrograde effect on turnover. So we'll see that might present a little bit of drag. So our sense is probably that we may see turnover continue to moderate over the next couple of quarters, and then beyond that, it's really difficult to say with any level of clarity. But that -- we're trying to inject a note of caution around the turnover opportunity.

[Brendon Abrams, Analyst of Real Estate]

Okay. That's helpful. And obviously, the increases on new leases, specifically in Toronto, above -- almost 14%. How sustainable do you think this pace of increase is? Everyone is so bullish on the multifamily market in the GTA specifically. Are there any scenarios or things that you would be looking forward that would point to any moderation in this growth? Or do you see this continuing?

[Michael R. Waters, CEO & Trustee]

We don't see anything in the near term. The underlying fundamentals of Canada's housing market and the rental market in particular supported by demographic trends. 2018 saw the highest level of population growth in Canada, over 500,000 increase to Canadian population, that we've seen in something like 4 decades. Half of that really was accrued to Ontario, where the bulk of our portfolio is. And a significant component of that, more than 40%, was in the GTA. And at the same time -- so you're seeing driving increases in household formation and population growth. Immigration is a big chunk of that, and immigrants still disproportionately choose to rent their first home in Canada before they get established and are able to buy a home. We've seen that affordability of purchasing a home has continued to face some challenges with the mortgage qualification rules. And the run-up of home prices still, while it's moderated, has not really subsided to a level where purchasing a home is really comparable to renting from an affordability perspective. And when you look at the supply of new rental housing coming online, it's in the 6,000, 7,000 new rental units being added. And it's nowhere close to the new demand. And that's being filled partly by rental condos, but there's still a significant gap there. So from our perspective, we don't see anything in the near term that would cause that. And when -- we need to look at the changes or measures that were introduced yesterday in the federal budget, a lot of that stuff was geared at price points that really just aren't realistic in the GTA. We're talking about price points well below $0.5 million, which isn't really going to make a dent in some of Canada's urban markets, Toronto in particular.

[Operator]

Next question will be from Troy MacLean at BMO Capital Markets.

[Troy Raymond MacLean, Analyst]

Just on the Richgrove development. I know you're not going to start construction for a while. But just any comment on the trends in construction cost you've seen over the last, let's say, 6 to 12 months.

[Michael R. Waters, CEO & Trustee]

Yes. So Minto's, obviously, heavily involved on the condo market. So we're intimately familiar with the trends that we've seen on hard costs in particular in the GTA. And we have seen some fairly significant increases over the last several years. And so we're very mindful of that as it relates to some of the new development projects. And so when you -- if you were to pro forma new high-rise concrete construction project in the downtown core, you might be approaching $300 a foot for hard costs. And looking at where that would have been, say, 3 or 4 years ago, it would have been in the low $200. So very significant increases in hard cost. On top of that, development charges have moved materially. Now the hedge, of course, that's there is that rental growth rates have moved at rates that are very significant. And we as a developer, constructor are very conservative in terms of how we would mitigate cost escalation risk. We act as our own construction manager, and typically, we would have tendered the vast majority, well in excess of 75% of the hard cost before proceeding with construction. And so that's our way of sort of managing that risk. So there is the hedge there in rental growth rate. And then there's risk mitigation that you can put in place through tendering and other hard cost measures.

[Troy Raymond MacLean, Analyst]

This is, I know, a hard question. But just any high-level thoughts on how far rents would have to rise in the GTA, for example, in order to incentivize enough new building to satisfy the rental demand?

[Michael R. Waters, CEO & Trustee]

So it's interesting because, again, as a condo developer, we look at all of our high-rise development projects side-by-side condo. And then next to it we'll put a rental pro forma together. And when you look at it, an urban core high-rise mid-market offering right now is going to be somewhere in the $1,100 to $1,200 a foot condo selling price. To really make that kind of apples-to-apples on a rental pro forma, you're stretching into the $5-plus per foot. And certainly, we're seeing preleasing activity now on brand-new rentals in Toronto's core at $4, $4.25 a foot. There's still a significant gap there. We need to see another $0.75 to $1 per foot to close that gap. And that's a significant gap. Even with the run-up of rents that we had, I would be surprised if we cover that gap that quickly. So that's just more anecdote than anything else, Troy, but that's certainly what we're seeing on the ground as -- on the development side.

[Operator]

[Operator Instructions] And your next question is from Matt Kornack at National Bank Financial.

[Matt Kornack, Analyst]

Just to -- we've touched on the GTA quite a bit. But I'm wondering what your thoughts are on the Ottawa market. There's been some good news there. But is it the same type of environment where you think supply will be constrained? And then also, the government budget, I agree with you, doesn't do much for housing in this market that most of us on this call are located in. But will it do something for the Ottawa market? And also, are the incentives that CMHC is providing doing anything to spur new supply outside of the GTA?

[Michael R. Waters, CEO & Trustee]

So maybe I'll tackle your last question first and sort of work my way into the Ottawa market question. The CMHC rules -- now there hasn't been a tremendous amount of detail provided, and we need to really sift through that. And I think that over the coming months, as that becomes available, we'll have a better sense. But our initial read was that new CMHC incentive that they're providing for buyers was really capped at purchase prices around $440,000. And you needed $120,000 of income to qualify for that. That, in a market like Ottawa, which is more modestly priced, could have an impact but more in the suburban settings. In the outlying suburbs of Ottawa, you can see that townhomes and small singles potentially could fit within that range. So it could have a little bit of impact. But remember, what you're doing is spurring more demand, and what they haven't done is address the supply equation. And that, frankly, is the bigger issue. I think it takes not months but years to bring new supply online. And that's more a function of municipal infrastructure, whether that's sanitary or roads, transit, other factors. But the approvals process in Ottawa, like in most major centers in Canada, are seeing timetables get extended further and further out. And planning policy is moving towards a more restrictive stance in terms of expansion of urban boundaries. So we're not seeing any near-term change in the supply picture that's going to open up a lot of new housing. What it's going to do if it spurs demand is, frankly, it's going to push up pricing. As a homebuilder, you celebrate that. If you're trying to ameliorate housing affordability, I don't think it's going to have an immediate impact. Now over time, it could help. But I think we've got to address the supply question first. I'll come back to your first question, which is really about Ottawa. And that market has always been as a housing market, as we would say internally, it's always been nice and steady. It hews pretty close to the trend line, as one of my colleagues would say. And so what we -- it's not prone to overexpansion or correction, particularly in low and midrise. What Ottawa has suffered from is an overbuilding on the condo side in past years, and we've seen condo sale volumes drop to 500, 600 new condos a year. But there has been a spurt of new rental development coming online. But a lot of that, anecdotally, we know, is predicated on achieving rents well over $2 a foot and even more. And we've seen some of those challenges with that. So -- and we sense that a lot of that is condo projects may be getting converted to rental. And certainly, there's an element of that in there. But we're bullish on Ottawa. Long term, we see good population growth, strong employment, continued investment in the city, whether it's large infrastructure projects, new LRT Phase 2 or other major investments, new hospital, other things like that, that are driving, I think, a pretty solid economy there. So we look at Ottawa and think that it's an underappreciated market, and we like it a great deal.

[Matt Kornack, Analyst]

Fair enough. This may be an impossible hypothetical question. But assuming you mark-to-market the entire portfolio today and there was no rent control, what do you think market rents are growing at on a year-over-year basis?

[Michael R. Waters, CEO & Trustee]

It's a good question. I don't think -- if we looked at somewhere like Ottawa, it has been in the maybe 7% to 8%, Toronto probably quite a bit higher than that like maybe low single digits -- or double-digits, sorry. And we're seeing that when you look on Slide 5, you see that, that gain that we're getting there from sitting rents. Now of course, that's a bit of a mixed picture because it's a mix of tenancies with different ages. But it's been growing strong. Now whether we continue to grow at that rate is, I think, the big question.

[Matt Kornack, Analyst]

And I guess rent control is the big ultimate question. But you can't do anything about that. And then last question with regards to other markets. I think you said in the past that you're looking at Montréal, and I'm not sure if you've made any progress or whether you determined that market is still interesting for the REIT to pursue.

[Michael R. Waters, CEO & Trustee]

Yes, very interesting to us. We're spending a lot of time investigating the market, its regulatory regime, the supply conditions, the demand conditions. We've been looking at it hard over many years, and we'll continue to do that work. And as I say, we're really focused on a pretty rigorous set of criteria before we're going to deploy any capital into a new property there, particularly in a market entry strategy where we want to make sure that our deals there are no-brainers. And I'm optimistic that we will bring something forward, but I don't want to rush it. I don't want to push it. I want to make sure that we proceed on our growth strategy in a disciplined manner.

[Operator]

And at this time, Mr. Waters, we have no other questions. I would like to turn the call back over to you, sir.

[Michael R. Waters, CEO & Trustee]

Great. Thank you, Sylvie. So I want to thank you for joining us. This concludes our call for this morning. Thank you for your interest in Minto Apartment REIT. We look forward to speaking with you again after our Q1 reporting. Thank you so much.

[Operator]

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.