Killam Apartment Real Estate Investment Trust

Good morning, ladies and gentlemen. Welcome to the Killam Apartment Real Estate Investment Trust First Quarter 2024 Financial Results Conference Call. At this time, our lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you need assistance, please press star zero for the operator. This call is being recorded on May 8, 2024. I would now like to turn the conference over to Mr. Philip Frazier, President and CEO. Please go ahead.

Thank you. Good morning and thank you for joining Kellam Apartment REIT's first quarter 2024 conference call. I am here today with Robert Richardson, Executive Vice President, Dale Noseworthy, Chief Financial Officer, and Erin Cleveland, Senior Vice President of Finance. Slides to accompany today's call are available on the investor relations section of our website under events and presentations. I will now ask Erin to read our cautionary statement.

Thank you, Philip. This presentation may contain forward-looking statements with respect to Killam Apartment REIT and its operations, strategy, financial performance conditions or otherwise. The actual results and performance of Killam discussed here today could differ materially from those expressed or implied by such statements. Such statements involve numerous inherent risks and uncertainties, and although Killam management believes that the expectations reflected in the forward-looking statements are reasonable, There can be no assurance that future results, levels of activity, performance or achievements will occur as anticipated. For further information about the inherent risks and uncertainties in respect to forward-looking statements, please refer to Kilham's most recent annual information form and other securities regulatory filings found online on CEDAR. All forward-looking statements made today speak only as of the date which this presentation refers and Kilham does not intend to update or revise any such statements unless otherwise required by applicable securities laws.

Thank you, Erin. We are very pleased with our strong financial and operating results for the first quarter of 2024. Kellum delivered FFO per unit of 26 cents in the quarter, a 4% increase from 25 cents per unit in Q1 2023. We achieved 10.3% same property NOI growth across the portfolio, which included 10.4% same property NOI growth in our apartment portfolio, 9.8% same property NOI growth in our manufactured home community portfolio, and 9.7% same property NOI growth for our commercial properties. The multifamily fundamentals in Canada are very strong, and our same property apartment occupancy at the end of the quarter was 98.2%. We remain very optimistic about the future of the Canadian rental market, and we will continue to focus on our earnings, cash flow, and the underlying value of our assets. Dale will take us through our financial results, followed by Robert, who will discuss our apartment and commercial operational results. I will conclude with an update on our current developments and our capital allocation strategy. I will now hand it over to Dale.

Thanks, Bill. Key highlights of Kiln's Q1 financial performance can be found on slide five. Kiln achieved solid earnings growth in Q1, resulting in net income of $127.2 million, compared to 83 million in Q1, 2023. This increase is primarily attributable to 116 million in fair value gains, driven by robust same property NOI growth across our portfolio. As shown on slide six, Growth in revenue was an important driver of Killam's 250 basis point margin expansion in the quarter. We're seeing strong rental increases on unit turns. A 5.4% weighted average combined increase in apartment rental rates for those units that turned or renewed in the quarter highlights the strong demand for apartment units across the country. This step down in the weighted average rental rate change from 7.5% in Q4 2023 was anticipated based on Q1, and January in particular, having the highest number of units renewing during the year. This resulted in only 10% of the units that turned or renewed in the quarter being turned, compared to an expectation of approximately 17% for the year. Slide 7 highlights our expense growth by expense type, with a reduction of 0.7% in total same property expenses in Q1. We realized a 10% reduction in utility and fuel expenses, with a mild winter leading to lower energy consumption and low natural gas prices, as well as savings from our energy investments. These savings more than offset a 6% increase in property taxes. General operating expenses were up 1.6% in Q1. Looking forward, we expect operating expenses to be generally in line with inflation for the year. Following 10.3% NOI growth in Q1, we have revised our 2024 NOI target to over 8% growth for the year, up from our original target of 6%. As still noted, we generated FFO per unit of 26 cents in the quarter a 4% increase from Q1 2023. It's important to highlight Kiln's Q1 FFO per unit growth was impacted by the lease-up phase of our three developments completed last year. The short-term dilution during the property's initial occupancy is standard for new developments as interest expense is no longer capitalized. Looking forward, upon stabilization, Earnings from these three developments are expected to increase Kilns FFO per unit growth starting in Q3. Slide 8 highlights the expected FFO impact from these developments for fiscal 2024 and 2025. Year-over-year, in 2025, we expect approximately $3.4 million in growth, or 2.7 cents in FFO per unit, from these developments compared to 2024. We're pleased to show continued growth in our balance sheet in Q1, as debt as a percentage of total assets was 42.1%, down 80 basis points from year-end, as shown on slide 9. We continue to diligently manage our debt metrics and have reduced debt to normalized EBITDA from 10.29 times at year-end to 10.16 times at the end of the first quarter. Variable rate debt as a percentage of total debt remains low at 4% as at March 31st. Slide 10 includes average department mortgage rates by year versus prevailing CMHC-insured mortgage rates. Our mortgage maturities are strategically staggered to avoid overexposure in any one year. In Q1, Killam refinanced $12 million of maturing mortgages with approximately $17.4 million of new debt at a weighted average interest rate of 4.32%, 130 basis points higher than the average rate on the maturing debt. Refinancing at higher rates is expected to lead to increased interest expense. However, this increase is expected to be gradual due to the staggered nature of Killam's debt ladder. We have $276 million of apartment mortgage refinancing ahead for the remainder of the year at a weighted average interest rate of 2.91%. As part of our debt management strategy, we're leveraging CMHC programs as mortgages come due with a focus on increasing our CMHC insured coverage. which is now at 79% for our apartment portfolio and 74% of our total portfolio. We are targeting increasing our percentage CMHC insured mortgages in 2024. I will now turn the call over to Robert, who will discuss our operating results in more detail.

Thank you, Dale, and good morning, everyone. As highlighted in Kiln's quarterly call, Since 2020, the combination of population growth, increased government regulations in the form of both temporary and permanent rent control, and increased urbanization have all contributed to the decline in units available for releasing, also known as vacant units. For example, Kiln's long-term annual portfolio turnover rate pre-pandemic averaged 33%. However, by 23, the turnover rate had declined to 19%, and we expect that percentage to trend lower in 2024. Slide 11 provides a breakdown of Kilns turnover by core market for Q1 2024 compared to Q1 23. Given declining turnover rates, the market-to-market spread between in-place rents and market rents has grown to approximately 25% Q1 2024, as noted on slide 12. With fewer units turning, it is increasingly important that Kilns successfully lease its vacant units at rents that capture this mark-to-market premium. Kilns' leasing team perform cost return analysis as units become vacant. The goal is to meet potential tenants' expectations in terms of the unit's level of upgrade when compared to mark-to-market rents. With this approach in mind, our 2024 suite repositioning target has been reduced to 300 units. With 70 units repositioned this quarter, we are on target. Kilham invested a total of $4.5 million for renewal and repositioning renovations during Q1 2024. This represents a 44% decrease compared to the $8 million invested in total renovations in Q1 2023. The reduction in investment quarter over quarter is attributed to the decrease in unit turnovers coupled with the opportunity for market rent growth without the need for an investment in full suite repositionings. Kiln's repositioning program remains an important component of Kiln's operating strategy. We are committed to enhancing the value offering to our residents and maintain the quality of our existing portfolio of properties. In addition to our strong apartment portfolio performance, our MHC and commercial segments continue to contribute positively to our overall performance as shown on slide 14. Our same-property MHC portfolio recorded 9.8% net operating income growth for the quarter, and our commercial portfolio generated 9.7% NOI growth. Kilham and its 25% partner have made impressive progress transforming the Charlottetown Mall into the new Royalty Crossing. We have attracted strong national retailers including Sephora, Pandora, The Shoe Company, RW & Company, Pure & Simple, and Samuel & Company. Further, Royalty Crossing has renewed Winners, Dollarama, Loblaws, and relocated the Bank of Montreal to a new pad site all in the last three years. Royalty Crossing will continue to execute its reinvestment strategy in 2024, completing common area upgrades and unlocking strategic expansion and redevelopment opportunities. These include the 8,500 square foot Winners expansion to 35,000 square feet, a complete food court renovation to maximize height and access to natural light. converting the 11,000 square foot standalone former office building to a multi-tenant retail strip that faces University Avenue and is already 65% leased, and the development of a 12,700 square foot former indoor tennis facility to 25,400 square feet of leaseable space that should attract a big box user. Our commercial team also continues to find opportunities for organic growth as we analyze existing lease terms at renewal with the objective of recovering more operating costs given current inflationary pressures. This has resulted in over $200,000 in annualized savings. In Q1 2024, our weighted average rental increase on renewed leases saw an 18% increase per square foot across seven leases. As seen on slide 15, since 2021, we have increased our net operating income at this property from $3.3 million in 2021 to $4.7 million in 2023, a 42% increase with a 12% annualized unlevered return on cost of leasing and upgrades. We have created a positive leasing momentum and have increased occupancy from 89% in 21 to 94% in Q1, 2024. We are pleased to see the investments in the property translate into strong revenue and earnings growth. I will now hand you back to Philip to provide an update on our development and disposition activity.

Thank you, Robert. During the quarter, we completed two small acquisitions totaling $14 million. On January 31st, we purchased two apartment buildings totaling 50 units in Halifax, Nova Scotia for $11 million. The buildings are located on Harlington Crescent adjacent to existing Kilimanthor and contain future redevelopment opportunities. On February 20th, Killam acquired the remaining 60% interest in land for future development adjacent to an existing Killam asset in downtown Calgary for $3 million. We also completed the disposition of the land in downtown Calgary for a sale price of $2.4 million. Subsequent to the quarter end, we expect to close this week the sale of Woolrich Apartments located in Guelph for $19.2 million. As shown on slide 17, we are focusing on the majority of our future development opportunities in the three locations across Canada, Calgary, Kitchener-Waterloo, Cambridge, and Halifax. The entitlement and design process continues to advance for our two future development opportunities in Calgary, Nolan Hill Phase 3, and our fourth and fifth site in downtown. Design work continues on the Whistler development in Waterloo in Phase 2 at Westmount, The Westmount Square Intensification Master Plan design document for the entire site submitted to the City of Waterloo on February 26th with the request to build up to 2,000 units. Finally, in Halifax, we are working on, as of right, zoning 90-unit development at Victoria Gardens, as well as 150-unit development on vacant land in our Harlington Crescent community. The Harlequin Crescent development is a result of the Housing Accelerator Fund program that has encouraged the city to change the zoning and increase density in this neighborhood. Developing high quality properties in these markets is an important component of Killam's capital allocation strategy. And it also allows us to make a contribution to the housing supply for all Canadians. As seen on slide 18, the Carrick, our 139 unit development in Waterloo, is progressing nicely and is expected to be completed in Q2 of 2025. As shown in slide 19, we started the development of Eventide, an eight-story, 55-unit building in Halifax, Nova Scotia, in February of 2024. The population of Canada has grown from 39.5 million in Q1 2023, 40.8 million in Q1 2024, an increase of 1.3 million people, compounding the housing shortage in the affordability crisis. During the last 12 months, the federal government has shifted their attention to this issue, and the recent federal budget has a number of positive features to help address the housing shortage. This would include more money to the Housing Accelerator Fund, providing funding directly to municipalities, which have resulted in a number of municipalities increasing density and zoning changes. Accelerate capital cost allowance on new rental properties to 10% from 4%. and increase the amount of debt for the apartment loan construction program. We are well positioned to take advantage of these changes. To conclude, the first quarter was a strong start to the year, and we are very pleased with our financial performance. I would like to thank our employees for their hard work and dedication. We are optimistic for the future, and we will continue to execute on our priorities and create value for all of our unit holders. Thank you. I will now open up the call for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Mike Marquitas at BMO Capital Markets. Please go ahead.

Hi, thank you, operator. Good morning, everybody. Bill, I just have a quick question on how you guys are looking at development returns. If I remember correctly, last quarter you mentioned you had favorable financing. I think it's a ALCP or apartment construction loan program, ACLP. on at least one of your new developments. Is that something you're relying on as you go forward? And I'm just wondering how you're thinking about the appropriate spread on that financing in this environment and just given the higher for longer interest rate environment that we're experiencing.

Good morning, Mike. The answer to the first part of that is that Carrick does have that financing, so that's locked in through the construction period in the same interest rate as it turns out remaining. amount of years out of the 10-year term. The other one that we started, we are looking to go and make application very shortly on that one as well. So really, if you're looking at it, the interesting thing is that where the interest rates are today, it makes a lot of sense to be able to lock in using CMHC in this program. I think on a go-forward basis, depending how much we can sort of get to the point where we're willing to start, the next wave of developments are actually at a lower cost point in terms of the overall development cost. And so that gives us a little bit more flexibility to go back in and maybe looking at conventional financing, construction financing, along with what the federal government's offering right now.

Okay.

And what would be the advantage? I mean, there's a lower rate on the ACLP. So what would be the advantage of switching back to conventional if your yields are going higher?

Well, I think it's all about availability from them. So we will do that. But again, we might get to the point where they're saying that we're out of money or basically you've had your share of projects and maybe it's someone else's term.

Okay. Gotcha. So it's based on the availability, not necessarily that there's any restrictions on that financing. Okay. Got it. And then for the care, can you remind us where that rate you locked into was and how long and were there any specific affordability requirements you had to meet or was it all sustainability?

The interest rate was 3.08 and that's locked in today and that's good for 10 years. And we just started that about three months ago. And in terms of the affordability, there was 30 units?

Approximately.

Yeah, 30 units.

That would be below market.

Okay. Below market. Below market. Got it. Yeah. Okay. No, that makes sense. Thank you for that. I think, you know what, I'm going to leave it there and turn it back. That's great. Congrats on a strong quarter. Thank you. Thank you, Mike.

Thank you. The next question comes from Mark Rothschild at Canaccord. Please go ahead.

Thanks, and good morning, everyone. I realize for the CARIC you can get, in some of these projects, you can get some more attractive debt, but in general, I'm just curious about how you think about starting new development projects when it appears that the yields have just, they're at a level that's comparable to cost of debt in many cases. Maybe because of the availability that you guys have for some special loan programs, that's not the case, but I'm just curious how you guys are thinking about that.

Well, I think I was trying to say, if I didn't say it with Mike, we are looking, number one, to go and apply through the program that's being offered from the feds. First, on every development. Now, I'm saying that if we don't get it for whatever reasons in terms of availability, then we'll look at what's available relative to conventional construction financing at the time.

I guess what I'm kind of asking is if the rents aren't higher than where they are now, I guess, or where they were at budgeting for the projects that you're undergoing now, will you still be comfortable going ahead with projects if you can't get any special low rates like you were able to for the Carrick?

Well, I think the bigger thing is, one is that it depends on the market we're in. It depends on the construction industry. in terms of the material, whether it's wood frame or concrete, and it depends on the overall development cost and what the yield would be, all cash, and that, you look at that and then you compare it to what's going to be your cost of financing at that time. And the cost of financing on a variable rate is higher than what you could get with conventional CMHC financing, which we will be going and applying for all projects.

Okay, fine. Let me just move on to a different question. The spread between market rents and what you have in place is pretty significant, both in Halifax and in Ontario. Do you see any potential changes in, whether it's immigration laws or what's going on, which will impact your ability to capture that in one market versus the other? Should the pace be comparable?

I think it should be comparable. I mean, it's all about turn. And as we know and talked about, for a number of quarters, turn is coming down. So that is the challenge in capturing those. But outside of that, I think that's the big limiting factor.

Okay, great. Thanks.

Thank you. The next question comes from Jonathan Kelcher at TD Cowan. Please go ahead.

Thanks. Good morning. You talked about the drag from your development properties and lease up. Could you estimate or let us know how much that was in Q1?

Sure. When we look year over year, Q1 to Q1, in total, it's about $1.2 million, and that would include the difference in interest that would have been capitalized in Q1 last year. That is the equity, like the full interest capitalized interest. So that will get a lot smaller in Q2, and then we'll flip positive in Q3 and should provide us some good runway Q3 to Q2 next year, especially Q1 next year. So we're almost through that.

Okay. And then just on the renewal rates that you got in Q1 at 3.7%, with Nova Scotia being high allowed five percent were there any issues in getting the full five percent bumps there none okay that's short and sweet and then and then um next just on dispositions and acquisitions i guess would it be fair to say that uh the the dispositions you see coming for the balance of the year would mostly be atlantic canada um

There's the odd thing that might be outside, but again, the majority will be in Atlantic Canada, and over time, the majority will be even more so in Atlantic Canada.

Okay, so you've identified a number of properties then? Yeah. Okay, and then are you seeing much or anything in the way of acquisition opportunities? There's obviously that one large portfolio out there. Would you be interested in any parts of it if it ends up getting broken up?

I think that's way too early to tell on that portfolio you're talking about. And right now, there's quite a bit of product that potentially could be for sale. I mean, we're looking. I mean, it helps to look. It helps to see what's available, where sort of pricing is going to be now or in the next three to six months. but I can say that we're not too active on looking hard to acquire assets in the next three to six months.

Okay. That's it for me. I'll turn it back. Thanks.

Thanks. Thank you. The next question comes from Kyle Stanley at Desjardins. Please go ahead.

Thanks. Good morning, everyone. I just wanted to clarify something in your answer to Mike's question earlier, Phil. You just mentioned the next wave of developments running at kind of lower all-in development costs? Just curious if you could elaborate on that a little bit.

Well, again, I think we sort of, the CARIC would have been, as we stated, about $600,000, and that included HST. So when you look out that we're looking, we can still see that mid-rise concrete in the urban centers with a lot of development charges like around GTA, maybe some locations in Halifax, if they're really urban, that's the pricing today. I mean, even in Toronto, the pricing is still between 700 and $800,000. So if you take a look at it and you say, okay, what's the landscape really look like? You can look at Alberta and we're getting pricing to do mid-rise concrete for about $400,000. We're getting pricing to do six-story, five-story wood frame in Halifax for about 400, 400 and a quarter. We're getting about 450 wood frame in Waterloo. So we're just basically looking at all our options. And right now, if I could do the next number of developments in that price range, then I think that's a pretty prudent thing to do. And again, it's not like we're going to be doing six of them. I mean, it's one or two at a time. But I think the next wave, That's where some of this pricing is going to come in. And you got to remember, there's no HST on the future developments, which helps a lot.

Right. Now, that makes sense and actually kind of leads me into the next question. You kind of answered it there. It was just on the three markets you've identified as your kind of target development markets, given the dynamics, obviously you've just kind of given the pricing in each of those markets to develop. You know, where would you like to focus your efforts more if you were starting something new today? Obviously, we saw you've been tied this quarter in Halifax, but just curious if a good option came up in one of those markets where you'd focus first.

Well, I think logically, we just did phase one to phase two in Nolan Hill in Calgary. So obviously, we're a small part of the ownership structure on that development in its four phases. So we're looking at phase three. with our partners, which makes a lot of sense. The shuffle of land that we announced in downtown Calgary, excuse me. And basically it was land beside grid five and we sold one parcel and bought out our partners on the other one we wanted 100%. So there's another logical location in the next 12 months to 24 months to do something. And then we're actively talking about our property in Waterloo, which is Whistler. And then after that are the opportunities that are coming to us a lot faster than we would have thought a year ago. And that's because of the program that the feds have introduced, which is to accelerate sort of zoning and increase density by getting the municipality to change their opinion for cash.

Right. Nope. I think that's, that all makes sense. Just one last one for me. Part of the rationale for the kind of 6% same property NOI guided last quarter was just uncertainty with regard to property tax and Dale and the disclosure you gave good color on kind of how that's trending. Would you say the increase in your guidance to 8% or greater than 8% for the year was more related to, you know, managing through that uncertainty or is it stronger revenue growth or maybe what was the driver there that gave you more comfort?

Yeah, I think two things. One is the revenue growth and the rent increases that we're seeing. We are really pleased with the trend that we're seeing and what we forecast for the rest of the year. And certainly the property taxes, I would say not too much has changed on that front. We will get, by the end of Q2, we'll have a much more certainty A bigger piece was the energy cost in Q1. Winter season is always an important one when we look at those nat gas costs, so that was positive for us this quarter.

Okay, perfect. I will turn it back. Thanks very much.

Thank you. The next question comes from Saram Srinivas at Cormac Securities. Please go ahead.

Thanks, Alfreda. Good morning, everybody. Guys, just looking at the revenue growth, and I believe one bit of the driver was also reduction in incentives year-over-year. Can you elaborate a bit on those, you know, the projects that relate to an amount of unwinding that's left to the year? Thanks.

That's primarily Alberta. So, you know, outside of Alberta, we're very limited in terms of our use of incentives. So, for the last number of years before things really heated up in that market, would have been used quite regularly, us and I think most of the landlords out there. And as Alberta has strengthened, we've definitely seen a reduction in those incentives. So I think it's reasonable to expect that to continue to come down this year. But outside of Alberta, it's pretty limited.

All right. And Dale, can you just probably quantify the amount of those incentives?

Well, I could say that in general, the past it would have been one month free in Alberta, often really up to about a year ago on both new and renewals. And those ones now, for majority properties, we're not doing any incentives.

That makes sense. And just maybe looking at the National Housing Plan and the implications, are you seeing all these announcements also maybe make development or the math on development more attractive?

Yes. I mean, in terms of for us in particular, it's about land that we thought would take three to four years to get sort of zoned and ready for development. We can see some of it as of right in the next three to six months. And if it's vacant land, then it's straightforward to be able to go design a building and maybe potentially start development.

Oh, wow, that's amazing. And maybe just probably shifting the gears towards leasing, if you look at historical time of maybe leasing up a new development, Has that timing essentially changed over the years? Are projects being released faster nowadays and is it more a function of just the market demand or also more incentives in play or any of those thoughts?

That's a good question, an interesting one because we've had a number of discussions around that. So I think that if you look back, a lot of our developments have been in Atlantic Canada and we have experienced over the history of of our development program, really quick lease-ups between three to six months. If you take a look at Ontario, the larger projects that we've been involved with our partners, they have typically taken about a year. So from that point of view, this Civic 66 is a boat right on schedule from that timing. The governor, it was only 12 units, very high end in Halifax. And basically, we quickly leased up six of the 12 and then winter hit. And our target market are essentially folks that tend to go away for the winter. And since we are now into spring, I mean, the activity has really picked up where we have three more leased and strong interest on the remaining three. So again, that's a bit of a one-off type of look in terms of lease-up ability. And then again, back to where we are out west, you know what, we'll be on target between six to nine months to really get a big dent on that one out there.

That's great, Kala. Philip, thank you so much, and I'll turn it back. Thank you. Thank you.

Thank you. The next question comes from Jimmy Shen at RBC Capital Markets. Please go ahead.

Thanks. Last quarter, you talked a little bit about seeing some moderation in market rent growth in certain markets. I was wondering so far in the spring leasing season, what sort of trends are you seeing on that front?

Hi, Jimmy. This is Robert. We're seeing the trend just being steady. The demand's there and we're continuing to lease up and we're capturing a fair bit of the market to market, I'm pleased to say.

Right. And by steady, you mean like is market rent still growing or it's growing at a slower pace or at the same steady pace?

I would say the same steady pace.

Okay. All right. Okay. And then just to follow up on the acquisition comment, the various products that are on the market, what sort of pricing are being indicated for those portfolios or assets?

You know what? I don't know that offhand, Jim. I mean, honestly, you know, I don't need to be in the data room at all. So I don't know what they're asking. But my guess is that it's below five and it's probably right around four.

Right. Okay. And so your comment about not being too active is a function of the pricing still being relatively tight versus... the development opportunities that you prefer to allocate capital to?

Well, I mean, even that's not fair to say. We don't really know what the portfolio looks like. So, you know, we had no sense of that to make comment on it.

Okay. All right. That's it for me.

Thanks. Thanks. Thank you. The next question comes from Matt Kornick at National Bank Financial. Please go ahead.

Hey guys, just a quick follow-up to Jimmy's question with regards to the estimated mark-to-market opportunity. It looks like you had pretty substantial gains in that figure on slide 12, I think it is, for Kitchener, Halifax, Calgary, and Victoria. Is that just the nature of those markets being kind of stronger in terms of population growth relative to new supply of apartment rentals, or is that just a point-in-time comparison?

Part of it's the way we've been measuring that. So just expanding our unit count. So historically, we've been reporting what we've been capturing in terms of what units have turned. So we've done more of a deep dive to look at the true mark-to-market compared to all the units in our portfolio looking at actual rents compared to estimated market rents based on what we've been seeing. So I think that that's the difference and, you know, what we capture is all dependent on what units turn. And we all know there's a number of units that don't turn every year that have long-term tenants that aren't leaving. So it's a more representative of the whole portfolio mark to market.

Okay, no, that's a very helpful distinction. And then just on that, I mean, given where rents have gone and the lack of opportunities, are you seeing a higher propensity for kind of recently rented units to turn than some of these ones where you've got people in place for a longer period of time? And is there a certain number of years after which tenants become stickier, I would say, in this market?

I mean, I'd say there probably is. A few years ago, we weren't We were looking at total turnover. We're certainly digging into the details more as we've seen it come down. Even in the slide deck, we report that we've seen a slight downtick in turnover Q1 this year versus last year. So I'd say that it is coming down and there are maybe 15 to 20% of units that we looked at last year turned we're only there for a year. Now, I don't know that that's any different from past years because we weren't measuring it in as much detail. But I think that those that have been there more recently don't have as much of a mark-to-market spread for sure.

But it's a good question to ask in terms of taking a look at our portfolio and see what the correlation is between the number of years in the unit and the frequency of turning. We'll take a deeper dive. Maybe next quarter we can talk about it.

Yeah, I mean, I'd anticipate that you could actually see a widening mark-to-market spread because the same units may turn for a period of time.

We have looked at that, and the mark-to-market for tenants that have been in the units over five years is closer to 35%. Okay. For sure.

That makes sense. Thanks for that.

Thank you. The next question comes from Dean Wilkinson from CIBC. Please go ahead.

Thanks. Morning, everybody. Phil, just to follow up on the development side of things, that lower cost, would that come at sort of a lower density or are you just finding that some of the, say, non-Ontario jurisdictions have more favorable land acquisition and actual hard construction costs?

I would say that a lot of it is lower density, for sure. Yeah. And you like... Lower development costs, a big part of it.

Yeah, and I guess that was my second question then is, you know, development charges have arguably been one of the most inflated components of construction over the past five, 10 years, whatever you want to call it. Have you had any conversations with any jurisdictions that are perhaps acknowledging that and saying, maybe there's something we can do to help you build more affordable housing vis-a-vis? You look in the 416, it's probably 30%, 35% of your construction budget is DCs. Or are they just stuck on that and they're kind of punch drunk on the money?

I think you've described it the way it is.

Okay. Fair enough. That's all I've got. Thanks.

Yeah, thank you.

Ladies and gentlemen, as a reminder, should you have any questions, please press star 1. The question comes from Brad Sturgess at Raymond James. Please go ahead.

Hey, good morning. Just to go back to the market rent growth discussion, in terms of the non-permanent resident immigration policy change, how do you expect that to impact or alter market rent growth as population growth slows over the next couple of years?

We're really not expecting it's going to have any change to the market rent growth. When we look at our portfolio, it's relatively small exposure, but there's a lot of other drivers of demand for apartments, so we don't see that as a big risk for market rent.

With, I guess, the slowdown a little bit on the suite renovation side, obviously you've noted turnover, but also strategically maybe not spending as much capital where market rent growth conditions are quite strong. Is there certain markets where you're allocating less capital to suite renovations right now, or is it just more of a broad statement across the portfolio?

There's no standout on that, no standout market. We're seeing it across the portfolio.

Okay, sounds good. I'll turn it back.

Thank you. We have no further questions. I will turn the call back over for closing comments.

I would like to thank everybody for listening and participating today, and we look forward to reporting Q2 results the first week in August. Thank you.

Ladies and gentlemen, this concludes your conference for today. We thank you for participating, and we ask that you please disconnect your lines.