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 4th Quarter and Year End 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.
Thank you. Mr. Waters, you may now begin your conference, sir.
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 Moran, our Chief Financial Officer. I'll begin the call with an overview of our 4th 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 4th quarter. Just as in Q3, in the 4th 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 continue 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 percent and realized $764,000 in annualized revenue growth.
Our average monthly rent per suite was $14.02 per month at year end compared to the forecast of $13.88 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 quarter's 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 $30,000,000 and retail 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 $750,000,000 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?
Thanks, Michael. To start off, I want to remind people that the REIT acquired the initial portfolio on July 2, 2018 and completed the IPO on the Toronto Stock Exchange the following day. So when I speak about the 6 months results ended December 31, I'm admitting July 1. That one 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 We reported revenue of $21,400,000 in the 4th quarter, which exceeded our IPO forecast by approximately $1,000,000 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 $13,000,000 compared to our forecast of $12,100,000 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%.
AFF sorry, FFO was $8,200,000 in Q4 2018, which was 18 point 3% favorable to our forecast of $6,900,000 This reflects the positive NOI variance I just discussed plus favorable financing costs due to a non cash gain on the retirement of debt of $600,000 AFFO was $6,500,000 or 0 point of $5,700,000 or $0.156 per unit. The positive variance was attributable to higher than forecast FFO, partially offset by the non cash gain on retirement of debt I just referred to. We declared cash distributions 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 $42,500,000 which was 4.2% favorable to the forecast of $40,800,000 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 point $1,000,000 or $1,700,000 above the forecast of $24,400,000 mainly attributable to higher revenue. FFO was $16,200,000 a positive variance of 14.9% compared to the forecast of $14,100,000 AFFO was $13,200,000 or $0.36 per unit compared to the forecast of 11 point $7,000,000 or $0.318 per unit. We beat the forecast by 13.4%. We declared cash distribution of $0.20.28 per unit, resulting in an AFFO payout ratio of 56.3 percent. 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 $14.02 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 Q4, 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 opportunity to generate monthly rental revenue growth of 8.2 percent through suite turnover. This would lead to annualized revenue growth of nearly $5,700,000 I would remind you that at the time of our IPO, we estimated total gain to lease off King was $5,100,000 in annualized revenue.
It has now increased to $5,700,000 even though we signed 6 13 new leases in the 3rd and 4th 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 $4,300,000 were higher than the forecast of $4,000,000 primarily due to higher than expected snow removal costs and nonrecurring maintenance items.
In the 6 month period, property operating costs exceeded the forecast by 1.9%. Overall, property operating costs for the 6 month period were 19 0.4% 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 $11.33 Occupancy was 97% at year end. We acquired the property for $20,400,000 or about $209,000 per suite, net of 9,200 square feet of commercial space. This represents a cap rate of 4.4 percent on forecasted year 1 NOI and had a 4.25 percent discount to appraised value.
We also assumed a $12,700,000 mortgage bearing interest at 3.59 percent maturing in June 2020. The transaction did not materially affect our operating results in the 4th quarter. On Slide 8 is an overhead image that shows you the property's outstanding location. It is 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 17 $6 and occupancy at the time of closing was 98%. We paid $63,800,000 or about $3.21 per suite, representing a 4.1 cap rate on 1st year forecasted NOI and a 6.25 percent discount to appraised value. We arranged a $44,300,000 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 quarter 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 1,700,000 square feet of office space, including the Imperial Oil headquarters, Santec, Lafarge and AECOM. It is serviced by 3 bus routes and is a short walk from the proposed Quarry Park LRT station. The quarter is also in close proximity to the Laurier and 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 $30,000,000 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 at 6 percent, 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 5th Avenue and Bank Street in the heart of the Glee, a premier residential and retail neighborhood in the nation's capital. It is just a few blocks north of TD Place in Lansdowne Park and is near the Rideau Canal and maybe many neighborhood attractions and retail amenities.
With a 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 Q4, including 6 Edmonton Yorkville and Toronto and 11 in our Edmonton portfolio. That brings the total number of suites repositioned in the second half of twenty eighteen to 111. We still have 212 remaining suites in these two 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 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 $115,000,000 I'll now turn it back to Michael for some closing comments. Michael?
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 $5,700,000 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 turnover.
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 Carlyle 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.
And your first question will be from Brad Sturges at Industrial Alliance Securities. Please go ahead.
Hi there.
Good morning.
With the Kaleidoscope acquisition, there is 49 units that are deemed to be affordable. I just want to understand, I guess, the mechanics of how that works in terms of being affordable units versus, I guess, units that would be at market rents?
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.
Okay. 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?
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 which are stabilized, but where there may be a gap between sitting rents and market rents, properties that are stabilized to 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 investments team has been very active looking in those 6 major markets. I'll say that our we have 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 Montreal. 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 sake, but bringing the right deals to drive NAV growth.
Okay. And last question just on Rich Grove, any update there on the development planning?
So the Rich Grove, I think you're speaking about the zoned pad that we have at Rich Grove to construct a 4th 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.
Potentially, is that still a 2020 target right now?
We're still target we haven't changed our targets on that. So yes, we're still looking at 2020.
Okay. Sounds good. Thank you.
Thank you. Next question will be from Mike Markidis at Desjardins. Please go ahead.
Hi there. Good morning. 2 topics I'd like to focus on would be, 1st, 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 rent bumps on your turn, if perhaps you feel that maybe you're not pushing hard enough on rents at this juncture?
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 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.
Okay. That's helpful. Thank you. And then just on the asset mix and your target markets and the opportunities you're seeing, dollars 80,000,000 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 of IPO to probably something in the range of maybe 12% to 13% on a go forward basis.
Is the 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 what's likely judged to be a market perhaps with less rent growth opportunities versus potentially what the opportunities are in the Ottawa and GTA?
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. It as a city has the fewest rental units per capita of any Canada's major cities. The REIT's 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, exist or they're located in nodes, I guess, within the city that have very strong demand characteristics just because 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 may be experiencing. 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.
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 the in place structure?
Yes. We didn't underwrite any additional efficiencies. It was on the sort of the standalone property NOI.
That's great. Thanks very much.
Yes. Thanks, Mike.
Thank you. Next question will be from Jonathan Kelcher at TD Securities. Please go ahead.
Thanks. Good morning.
Hi, John.
Just sticking with the, I guess, the rental growth for a second, that gained at least the 8.2% that you still have in your portfolio, that was as of December 31, correct?
Yes, that is correct. Yes.
How have market rents trended over the 1st couple of months of 2019? You've seen continued upward pressure?
We've seen I mean, certainly in the core markets, Toronto and Ottawa, we've seen sort of that trend continue, January, February, for sure.
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?
That's a good question. I mean, 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. What we've in Calgary, obviously, the assets that we have there, the Laurier and the quarters in particular, 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.
Okay. And then just lastly, on the mezz loan, that's for second half this year, I guess. How it's up to $30,000,000 How do you expect that to play out? Will it be like full $30,000,000 will be drawn in 2019? Or will it space out as the development goes along?
Yes. So it's a there are a number of conditions for the 1st 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 front end loaded, but the initial draw would be something in the order of about 16,000,000 dollars Jonathan, and then the remaining $14,000,000 would be spaced out over time over the first couple of quarters as construction first demolition and then construction progresses.
Okay. And look, do you think there'd be more like mezz type opportunities with Minto?
We think that obviously the Minto relationship and that strategic alliance does produce potential for deal flow. A 5th and Bank was not one of those opportunities that we highlighted at the time of the IPO. But I think that as Minto the Minto Properties, Minto Group continues to grow its homebuilding 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.
Okay. Thanks. I'll turn it back.
Thank you. Next question will be from Matt Logan at RBC Capital Markets. Please go ahead.
Thank you and good morning.
Hi, Matt.
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?
It's a really good question. It's one of those things Q3 and Q4, as you noted, reduced turnover and I think the winter was another factor. 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.
That's good color. And I guess in terms of the turnover, how has that trended? I mean, it looked like there was about 6 percent of the portfolio that turned over in Q4. Would that be typical for the quarter?
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.
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?
That's a good question, 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 1. 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 Edmonton. I mean the amount of money we're going to spend is going to be hugely different.
So we don't have a target. We try and reposition them as quickly as we can, but no specific numbers on that.
Makes sense to me. And maybe just taking it up a level, like what would you say your 3 top priorities for 2019 are?
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 on a number of suites in both buildings, and we're going to start seeing those results as those suites are 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 3rd party acquisitions. Those are our priorities.
As I'd indicated, we're really focused not on growth for growth 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.
Well, I appreciate the color. That's all for me. Thank you very much.
Thanks, Matt.
Thank you. Next question will be from Brandon Abrams at Canaccord Genuity. Please go ahead.
Hi, good morning, everyone.
Good morning.
Just following up a bit on Matt's question there and taking a look at the gain to lease table. I mean, 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?
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, 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 might 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.
Okay. That's helpful. And obviously, the increases on new leases, specifically in Toronto, I mean, above almost 14%. How sustainable do you think this pace of increases is? And I mean, everyone is so bullish on the multifamily market in the GTA specifically.
Are there any scenarios or things that you would be looking for that would point to any moderation in this growth or do you see this continuing?
We don't see anything in the near term. I mean, the underlying fundamentals of Canada's housing market and the rental market in particular supported by demographic trends. I mean 2018 saw the highest level of population growth in Canada, over 500,000 increase to the 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 the 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 6000, 7000 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 you even 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. You're talking about price points well below $500,000 which isn't really going to make a dent in some of Canada's urban markets, Toronto in particular.
Right. That's helpful. Okay. Thank you.
Thank you. Next question will be from Troy MacLean at BMO Capital Markets. Please go ahead.
Good morning. Just on the Rich Grove development, I know you're not going to start construction for a while, but just any comments on the trends in construction costs you've seen really over the last
like 6 to 12 months?
Yes. So Minto is obviously heavily involved on the condo market. So we're intimately familiar with 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 form a 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 200s, so very significant increases in hard costs. 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 costs 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 rates, and then there's risk mitigation efforts that you can put in place through tendering and other hard cost measures. This is, I don't 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?
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 form a together. And when you look at an urban core high rise mid market offering right now is going to be somewhere in the $1100 to $1200 a foot condo selling price. To really make that kind of apples to apples on a rental pro form a, you're stretching into the $5 plus per foot. And certainly, we're seeing pre leasing 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
than anything
else, Troy. 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.
And your next question is from Matt Kornack at National Bank Financial.
Good morning, guys. Just 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, I mean, 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?
So 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 sit through that. And I think that, 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 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 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 hues 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 the low and mid rise. 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. 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 maybe 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 II 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.
Fair enough. This may be an impossible hypothetical question, but assuming you mark to market the entire portfolio today and there no rent control, what do you think market rents are growing at on a year over year basis?
It's a good question. I don't think if we looked at somewhere like Ottawa, it has been in the maybe 7%, 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. It's been growing strong.
Now whether it would continue to grow at that rate is, I think, the big question.
Fair. 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 had said in the past that you were looking at Montreal, and I'm not sure if you've made any progress or whether determine that market is still interesting for the REIT to pursue?
Yes. It's 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.
Okay, great. Thanks,
guys. Thanks, Matt.
And at this time, Mr. Waters, we have no other questions. I would like to turn the call back over to you, sir.
Great. Thank you, Sylvie. So everyone, thank you for joining us. This concludes our call for this morning. Thank you for your interest in Mitchell Apartment REIT.
We look forward to speaking with you again after our Q1 reporting. Thank you so
much. 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.