Good morning. My name is Lara, and I'll be your conference coordinator today. At this time, I would like to welcome everyone to the Minto Apartment REIT 2023 fourth Quarter Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to advise your question, please press star then the number two. Before we begin, I want to remind listeners that certain statements about future events made on this conference call are forward-looking in nature. Any such information is subject to risks, uncertainties, and assumptions that could cause actual results to differ materially.
Please refer to the cautionary statements and forward-looking information in the REIT's news release in MD&A, dated March 6, 2024, for more information. During the call, management will also reference certain non-IFRS financial measures. Although the REIT believes these measures provide useful supplemental information about its financial performance, they're not recognized measures and do not have standardized meanings under IFRS. Please see the REIT's MD&A for additional information regarding non-IFRS financial measures, including reconciliations to the nearest IFRS measures. Thank you. Mr. Li, you may begin your conference.
Thank you, operator, and good morning, everyone. I'm Jonathan Li, President and Chief Executive Officer of Minto Apartment REIT. With me on the call is Eddie Fu, our Chief Financial Officer, and Paul Baron, our Senior Vice President of Operations. I'll begin the call by discussing some highlights from the 2023 fiscal year, followed by the fourth quarter specifically. Eddie will review our financial results and liquidity, and I will conclude with our property development pipeline and business outlook. After that, we will be pleased to answer your questions. Our improved financial performance in 2023 is due to strong operational execution supported by rental market fundamentals, as well as our disciplined capital allocation that resulted in a significant reduction in our variable rate debt.
We achieved strong double-digit NOI growth and converted it into growth in FFO and AFFO per unit, despite carrying a large amount of expensive variable rate debt earlier in the year. Importantly, our cash flow growth improved sequentially in every quarter this year, which positions our balance sheet to provide flexibility entering 2024. As the chart on this slide shows, we generated year-over-year growth in all of our key financial metrics. In addition, during 2023, we advanced attractive development projects in our pipeline, we increased cash distributions for the fifth consecutive year, and we scored highly in the 2023 GRESB Assessment. Turning to slide 4, strengthening our balance sheet was a key priority for us in 2023 and continues to be one in 2024.
We refinanced eight mortgages, generating incremental proceeds, and conserved capital by waiving on five ROFOs and one purchase option, and postponing construction of a major intensification project at High Park Village. In addition, we're very pleased with the execution of our capital recycling program. We have sold a total of five non-core properties for total proceeds of CAD 128 million, which represents 5% of our total asset value. All of the net proceeds from the asset sales were used to repay our expensive variable rate debt. On January 31, 2024, we received repayment of the CDL on Fifth + Bank, and we are also exploring upward refinancing opportunities for three additional properties. Upon completion, these efforts will reduce our variable rate debt exposure to low single-digit percentage of total debt, positioning us well for 2024. Moving to slide five, we had very strong fourth quarter results. Average monthly rent grew 8.4%.
Unfurnished suite revenue grew by 7.3% compared to Q4 last year. We achieved gain on lease of 16.1%, and our gain-to-lease potential was 17.1%. Annualized turnover was 20.3% in line with historical norms, allowing us to capture significant embedded rent in those suites. Normalized operating expenses increased by 2% due to a mild winter and a drop in natural gas rates. This led to a normalized NOI increase of 9% compared to Q4 2022 and a normalized NOI margin increase of 150 basis points. Normalized FFO and AFFO per unit increased by approximately 21% and 26% respectively, reflecting our successful efforts to moderate interest cost growth in addition to our strong operational execution. The normalized AFFO payout ratio was 60%, a reduction of over 1,300 basis points compared to Q4 2022.
You can see a summary of our key operating results on page six, and I'll now turn to Eddie Fu to discuss our results in greater detail starting on slide seven. Eddie?
Thank you, Jonathan. This chart highlights the REIT's continued growth in average monthly rent and strong quarterly gain-on-lease performance. Gain on lease has exceeded 16% in five consecutive quarters, and we have captured consistently strong gain on lease in the slower winter leasing season. Moving to slide eight, we signed 335 new leases in the fourth quarter. The average monthly rent on new leases increased 16.1% to CAD 2,182 per suite, with double-digit gains realized in all markets. The embedded gain-to-lease potential at year-end remains strong at 17.1%, representing CAD 23.8 million of annualized incremental revenue growth. The gain-to-lease potential was slightly lower compared to 17.7% at the end of the third quarter as growth in market rents slowed during the winter months, as is typical. Moving to slide nine, annualized suite turnover for the same property portfolio was 20.3%.
This was in line with traditional seasonal levels after lower-than-normal turnover in the first half of the year. Turnover was particularly high in Calgary due to the availability of affordable homes in Calgary and tenant departures arising from the loss of promotions granted in the past. Ottawa's turnover was relatively stable. Turnover in Montreal was slightly above seasonal norms as market rates are some of the most affordable of major Canadian urban centers. In Toronto, turnover was reduced in our rent-controlled buildings as tenants opted to stay in place due to high market rents. We maintained consistent closing occupancy in the quarter as move-ins kept pace with move-outs. We expect turnover to slow in 2024 as the gap between sitting rents and market rents continues to rise. On slide 10, we provide an update on our furnished suite portfolio.
The entertainment industry strikes were resolved in the fall of 2023, but demand is still stabilizing at Yorkville. In Ottawa, government activity remains below historic norms, and so we saw fewer contract extensions at 185. We continue to convert some of these suites into our unfurnished portfolio, completing 10 conversions in 2023. As we enter peak leasing season during the summer, we're hopeful there will be a return to historical occupancy levels in our furnished suites. Moving to slide 11, normalized operating expenses for the same property portfolio increased 2% compared to Q4 last year. This represented reduced expense growth compared to recent quarters. Normalized property operating costs increased 1.9% due to higher salary and wages, partially offset by lower repairs and maintenance costs due to mild winter weather. Property taxes increased 9.1% because of changes in assessed values in Montreal and increased rates in Ottawa and Toronto.
Utility costs declined 5.6% due to a large drop in natural gas rates combined with reduced usage. Moving to suite repositioning on slide 12, we repositioned 18 suites in the fourth quarter, which generated an ROI of 11.8%. For the full year, we repositioned 116 suites and generated an average ROI of 9.9%. We expect to reposition 50 to 90 suites this year, which is lower than previous years due to limited vacancy, slower turnover, and the opportunity cost to take suites offline and renovate them. Turning to slide 13, you will find our key debt statistics. As you can see in this chart, we have a balanced maturity schedule for our term debt. Maturities represent less than 9% of total debt in each of the next six years, and more than 40% does not start to come due until 2030.
As of the 2023 year-end, the weighted average term-to-maturity on our term debt was 5.8 years, with a weighted average interest rate of 3.4%. Thanks to the significant reduction in our exposure to variable rate debt, 88% of year-end debt was fixed rate and 75% was CMHC insured. Total liquidity was approximately CAD 98 million at year-end, and debt-to-gross book value was 42.8%. I'll now turn it back over to Jon to wrap up.
Thanks, Eddie. Moving to slide 14, we continue to have a robust pipeline of opportunities from a combination of on-balance sheet intensifications as well as acquisition opportunities through our strategic relationship with the Minto Group. These opportunities represent over 1,400 units, which will help contribute to increasing housing supply. You can find updated information and photos on slides 15 and 16. I'll conclude with our business outlook on slide 17. The fundamentals underpinning our sector continue to be strong. Canada has a housing shortage and an affordability issue for which there are no quick fixes. Very simply, our population is growing faster than the number of homes that we can build, especially in the REIT's core urban markets, and we believe this trend will continue throughout 2024 and beyond.
Our high-quality urban portfolio is well-positioned to capitalize on the positive industry fundamentals, and the disciplined capital allocation decisions we have made have positioned us well heading into 2024. Going forward, we will continue to manage our business prudently and focus on growing FFO and AFFO per unit, exploring attractive refinancing opportunities, making disciplined capital allocation decisions, reducing our credit facility balance where possible, and critically assessing growth opportunities in our pipeline. We are confident that by executing on this strategy, we will drive strong returns for unit holders. Operator, please open the line for questions.
Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request. Should you wish to decline from the polling process, please press star followed by the number 2two. If you're using a speakerphone, please lift your handset before pressing any keys. Our first question comes from the line of Jonathan Kelcher from TD Cowen. Please go ahead.
Thanks. Good morning. First question, just on the suite repositioning program, you guys are looking to slow that down this year. Is that a function of the turnover slowing, or just given how strong the market is, are the incremental returns on repositioning not justifying doing as many?
Hey, Jonathan. It's Jon here. Thanks for the question. Yeah, look, it's a continuation of everything we've seen. One, there's less white space in our portfolio, so that's number one. Number two, the opportunity cost of taking something down for three months is just very high now compared to what it was before. It's much better economically for us to do a turn in a few days or a week and get someone in there right away. And I think the 50-90 that we've kind of estimated for 2024 are definitely units that we think are going to need turns. And so those are the ones where a tenant's been in there for 10 or more years, and we need to invest some money into that unit to get it up to standard, to rent it out at a market rate.
Okay. And so then how should we think about per-unit cost for that or the CapEx that you're going to gear towards that?
I mean, it's similar to before, right? We're anywhere like CAD 50,000-CAD 85,000, depending on the market in the suite.
Okay. And then just on your furnished suite, you took 10 of them or you converted 10 of them this quarter. Are you at a level now where the 178 is a number we can think about, or are you going to continue to keep moving that number lower?
Look, I think we're trying to be nimble here. I think we are dipping our toe in the water in terms of what we think is better, and we're kind of experimenting a little bit. So I don't think you're going to see a sea change, but I think we're really trying to figure out the economics and really the long-term benefits of potentially converting some of these to be unfurnished. Predictability of cash flow, I think, is important to us. But we are balancing yield management. And as you can see, the rent performance in that portfolio has kind of exceeded even our own expectations despite even a takedown in occupancy. So you can see the power of that, but we are trying to optimize it, and I think you'll see us kind of tweak it around the edges going forward.
Okay. Fair enough. I'm guessing that in Ottawa, if 2024 ends up being an election year, that would be less government activity at Minto one80five, or is that fair to think of it that way?
Hey, Jonathan. It's Paul speaking. In prior year elections, we've actually seen a bit of an uptick in activity. We'll see what happens this time around, but could be optimistic in that situation.
We're kind of coming off a bit of a low base, right? So it's kind of any change will probably be a little bit upside, but we're not banking on it, but that's kind of how we're thinking about it.
Okay. Thanks. I'll turn it back.
Thank you.
Our next question comes from the line of Kyle Stanley from Desjardins. Please go ahead.
Thanks. Morning, guys. Just two quick ones for me. On the Alberta portfolio, I mean, you touched on the decline in occupancy and higher turnover, but just wondering if you could elaborate a bit more on kind of what happened there during the quarter. And then would it be specific to one building or kind of broadly across your asset base there? How do you see the lease-up evolving through the year? Do you look at it as a bit of a tailwind?
Yeah. Hey, Kyle. It's Paul Baron speaking. So really a timing issue there. So in Calgary, kind of mixed across all buildings in the market. Residents had affordable alternatives. Some promotion was running off. We also pushed through pretty strong renewal rates in the quarter. What I can say in the early part of 2024, we've really snapped back. So a bit of a checkmark in occupancy in that market to start the year off. So more of a timing issue than anything.
Okay. Perfect. So you would probably expect to see occupancy trend back towards maybe where it was? I think it was in the kind of mid-99% range, but maybe just a little closer to that through the year?
That's correct.
Perfect. And then just the last one, just on the Pusateri's vacancy, where would the rent have been versus market? Or I guess, put another way, do you expect to achieve an uplift on releasing once the space is kind of leased up?
Yeah. So they were very much at market. So they've been in the space for 20 years, Kyle, so it was somewhat designed for them. So we're optimistic that we will be able to achieve replacement rents at the same level as Pusateri's. We anticipate the release will likely take around 6 months, so optimistic that we'll have a resident in there for this fall, tenant in there for this fall.
Okay. Perfect. Well, thanks very much. I will turn it back.
Thank you.
Ladies and gentlemen, just a reminder, should you have a question, please press star followed by the number one on your touch-tone phone. We have our next question coming from the line of Jimmy Shan from RBC Capital Markets. Please go ahead.
Thanks. So we're three months into the year. Maybe if you could comment on what you're seeing in terms of market rent trends? You touched on Calgary and just an occupancy overall.
Sure thing. Hey, Jimmy. I think we saw the whole market saw a little bit of a pullback in rents kind of December and January. I think even internally as a management team and as we shared with many investors, it was like, "Look, we don't know if this is structural or if this is just January." We've been really keeping a close eye on our key lead metrics and just our lease-up in January and February. I guess what we can say is we're quite pleased with the performance through the end of January and also through February. February was quite strong from a leasing perspective, and so that's encouraging to us. I think we might also get some benefits from just I think it's been the warmest January and February, I think, as far as long as I can remember.
And so obviously, from a snow-clearing perspective and from a natural gas usage cost and all that, I think that's going to be pretty favorable, at least through January, February, and the first week of March.
Okay. And then on turnover rate, what would be your expectation for 2024?
I think we're thinking about it in the terms of, I don't know, 17%-19% type thing on average over the year, slightly lower than where we are for where we ended for 2024 or 2023, sorry.
Okay. And then maybe just last, you talked about passing up on a stabilized deal. Maybe could you provide a bit of color on kind of what that opportunity looked like and ultimately what's happened with that deal?
Sorry. Which deal are you referring to, Jim?
This was a deal from Minto Private, right off of this opportunity to buy a stabilized asset.
That was Fifth + Bank.
Oh, that's the one you're referring to?
Yeah.
I thought there was an additional one.
I mean, look, there was one called, I think, Sherwood that didn't really fit what the REIT wanted to buy. And so it didn't fit the quality and the location. But the one that I referenced in the opening remarks, it's Fifth + Bank.
I see. Gotcha. Okay. Thank you.
Thanks.
Our next question comes from the line of Matt Korn from National Bank Financial. Please go ahead.
Hey, guys. Just looking at your gain-to-lease versus the achieved spread on turnover, most of your peers, I think there's a bit of a positive variance between the mark-to-market and what they're achieving because of the lease duration of the tenants that are coming to maturity. In your sense, are you being conservative in the gain-to-lease, or are you getting turnover kind of in a broad spectrum of the tenants in the portfolio?
Hey, Matt. Look, I think our reporting of both embedded rents and our achievement on gain-to-lease have been very consistent since the IPO. I think it makes sense for those two numbers for us to converge because if we're accurate in estimating our embedded rent, well, guess what? Our gain-to-lease should be in and around that same percentage. So the fact that 116 and 117 makes some sense to us. I think in our portfolio in particular, with 14% unregulated, again, that's even more reason for it to converge a little bit. I don't think we're being conservative. I think we're being accurate. At the end of the day, you can think about this in percentage terms, but don't forget, our percentage is on a CAD 18.50 rent.
So from a dollar perspective, it's actually very close to 30% on a CAD 12.50 rent or something lower. So from a dollar perspective, you're getting the bang for the buck. And I think if you think about our kind of business and our platform, because we're so small, which from a capital markets perspective is a disadvantage, but because we're so small, we can generate a lot of alpha because everything that we do really moves the needle. From an operational perspective, from an asset sale perspective, from any perspective, for us, one of the advantages and one, again, the alpha that we can deliver is that anything we do does move the needle. And I mean, look, that can help us, and it can hurt us. But right now, it seems to be helping us.
That makes sense. And then I guess it's similar. The Toronto spread was a little lower this quarter, but the expiring rent was CAD 2,800. So I'd assume you can only push those higher rents a certain amount. But I guess you'd see a convergence to the 20%+ gain-to-lease in the Toronto portfolio as the composition.
Yeah. That is one market where it kind of does make sense for it to start growing, right, a little bit in terms of that gap because it's so expensive. So we are seeing a lot more people turnover in Toronto is a lot lower. We're somewhat fortunate in this market because our Toronto portfolio, as you know, which is kind of the lowest turnover market or one of the lowest turnover market in Canada, two of our projects in Toronto are active development sites in Leslie York Mills and Richgrove. So that in and of itself is kind of temporarily increasing the turnover, I would say, in those properties because no one likes to live on an active development site. So in a market like this where we can backfill, I think it's a bit of an advantage.
It's probably one of the reasons why our turnover is slightly higher than what we expected.
Yeah. Makes sense. Then just on capital allocation, you've completed the Ottawa sale. You got CAD 30 million back from the loan receivable from MPI. Is there anything incremental to that that we should expect for the balance of 2024? And again, about deployment of capital going forward as well.
Good morning, Matt. It's Eddie here. Yeah. And we've talked about some of our refinancing opportunities in 2024. And we're still pursuing on three of our Ottawa properties that have upward financing potential of CAD 55 million-CAD 65 million. Those refinancings are in progress, and we're hoping to fund those over the next couple of months. With the proceeds from Fifth + Bank, that CAD 30 million, plus the sale of Chesterton, Bowhill, and Tanglewood of CAD 68 million, we've significantly reduced our revolver balance subsequent to year-end. And if we can close on these upward refinancings, that could potentially take our revolver down to nil over the next two months. So we're extremely happy with that. That reduces our exposure and continues to give us some optionality going forward.
And that's what this is all about, right, Matt? To answer your second question around going forward, we've been doing everything we can to get our balance sheet in a position where at least we might have some flexibility going forward, right? We may or may not do anything. We like being pretty or having a very zero balance on our revolver. As you know, we are. We do have these CDL opportunities in Vancouver towards the end of the year. But if we just do nothing between now and then, I think that's a good thing for our business. And I think unless something drastic changes in the market, you're not going to see us go and be aggressive on third-party acquisitions.
I think you're going to see us focus on some of the CapEx and development that we have in front of us in 2024 and also think really hard and critically about potentially buying the stuff on the West Coast later in the year.
Yeah. Makes sense. And I mean, we've seen in your earnings growth turn the corner on that front and had pretty impressive numbers. So congrats on the quarter, guys. Thanks.
Thank you.
Thank you. There are no further questions at this time. I'd now like to turn the call back over to Mr. Li for final closing comments.
Thanks, Lara. Thanks, everyone, for your time. We really appreciate it. We'll talk to you guys in Q1. Take care.
Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.