Killam Apartment REIT

TSX:KMP.UN

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to the Killam Apartment Real Estate Investment Trust First Quarter 2024 Financial Results Conference Call . At this time, all lines are in listen-only mode. [Operator Instructions]. This call is being recorded on May 8, 2024. I would now like to turn the conference over to Mr. Philip Fraser, President and CEO. Please go ahead.

[Philip Fraser, executive]

Thank you. Good morning, and thank you for joining Killam 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.

[Erin Cleveland, executive]

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 Killam's most recent annual information form and other securities regulatory filings found online on SEDAR. All forward-looking statements made today speak only as of the date which this presentation refers and Killam does not intend to update or revise any such statements unless otherwise required by applicable securities laws.

[Philip Fraser, executive]

Thank you, Erin. We are very pleased with our strong financial and operating results for the first quarter of 2024. Killam delivered FFO per unit of $0.26 in the quarter, a 4% increase from $0.25 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 carbon portfolio, 9.8% same-property NOI growth in our manufactured home community portfolio and 9.7% same-property NOI growth for our commercial properties. 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.

[Dale Noseworthy, executive]

Thanks, Phil. Key highlights of Killam's Q1 financial performance can be found on Slide 5. Killam 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 6, 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 Phil noted, we generated FFO per unit of $0.26 in the quarter, a 4% increase from Q1 2023. It's important to highlight Killam's Q1 FFO per unit growth was impacted by the lease-up phase of our 3 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 3 developments are expected to increase Killam's FFO per unit growth starting in Q3. Slide 8 highlights the expected FFO impact from these developments for fiscal 2024 and '25. Year-over-year, in 2025, we expect approximately $3.4 million in growth or $0.27 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 reduce debt to normalized EBITDA from 10.29x at year-end to 10.6x at the end of the first quarter. Variable rate debt as a percentage of total debt remains low at 4% as at March 31. Slide 10 includes average apartment 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 program 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 of CMHC insured mortgages in 2024. I will now turn the call over to Robert, who will discuss our operating results in more detail.

[Robert Richardson, executive]

Thank you, Dale, and good morning, everyone. As highlighted in Killam's quarterly calls 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, Killam's long-term annual portfolio turnover rate pre-pandemic averaged 33%. However, by '23 turnover rate had declined to 19%, and we expect that percentage to trend lower in 2024.Slide 11 provides a breakdown of Killam's turnover by core markets for Q1 2024 compared to Q1 '23. Given decline in turnover rates, the mark-to-market spread between in-place rent and market rent has grown to approximately 25% in Q1 2024, as noted on Slide 12. With fewer units turning, it is increasingly important that Killam successfully leased its vacant units at rents that capture this mark-to-market premium. Killam's leasing team performed cost return analysis as units become vacant. The goal is to meet potential tenants expectations in terms of the unit 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. Killam 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 repositioning. Dale's repositioning program remains an important component of Killam'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. Killam's 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 Senegal & Company. Further, Royalty Crossing has renewed Winners, Dollarama, Loblaws and relocated the Bank of Montreal to a new pad site all in the last 3 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 life. Converting the 11,000 square foot stand-alone 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 leasable 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 7 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.

[Philip Fraser, executive]

Thank you, Robert. During the quarter, we completed 2 small acquisitions totaling $14 million. On January 31, we purchased 2 apartment buildings totaling 50 units in Halifax Nova Scotia for $11 million. The buildings are located on Harlington Crescent adjacent to existing Killam assets and contain future redevelopment opportunities. On February 20, 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 Woolwich 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 3 locations across Canada: Calgary, Kitchener, Waterloo and Halifax. The entitlement and design process continues to advance for our 2 future development opportunities in Calgary, Nolan Hill Phase 3 and our fourth and fifth site in downtown. Design work continues on the Wissler development in Waterloo in Phase 2 at Westmount. The Westmount Square intensification master plan design [indiscernible] for the entire site submitted to the City of Waterloo on February 26 with the request to build up to 2,000 units. Finally, in Halifax, we are working on as a right zoning 90-unit development at Victoria Gardens as well as 150 unit development on vacant land in our Harlington Crescent community. The Harlington Crescent development is a result of the Housing accelerator fund program that has encouraged the city to change the zoning increased density to 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, 139 unit development in Waterloo is progressing nicely and is expected to be completed in Q2 of 2025. As shown on Slide 19, we started the development of Eventide, an 8-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 and 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 charge. 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 increased 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 head work and dedication. We are optimistic for the future, and we will continue to execute on their priorities and create value for all of our unit holders. Thank you. I will now open up the call for questions.

[Operator]

[Operator Instructions]. Your first question comes from Mike Markidis at BMO Capital Markets.

[Michael Markidis, analyst]

Thank you, operator. Good morning, everybody. Phil, I just had 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 ACLP 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.

[Philip Fraser, executive]

The answer to the first part of that is The Carrick does have that financing. So that's locked in through the construction period and the same interest rate as it turns out the remaining amount of years out of the 10-year term. The other one that we started, we are looking to go in mega 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 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 a little bit more flexibility to go back in and maybe looking at construction financing, along with what the federal government is offering right now.

[Michael Markidis, analyst]

And what would be the -- 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?

[Philip Fraser, executive]

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 as someone else's term.

[Michael Markidis, analyst]

So it's based on the availability, not necessarily that there's any restrictions on that financing. 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 also [ signal ] like--

[Philip Fraser, executive]

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 3 months ago. in terms of the affordability, there was 30 units.

[Dale Noseworthy, executive]

Approximately. That would be below market.

[Operator]

The next question comes from Mark Rothschild at Canaccord.

[Mark Rothschild, analyst]

I realize for the carat you can get on 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, it's not the case, but I'm just curious how you guys are thinking about that.

[Philip Fraser, executive]

Well, I think I was trying to say that 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.

[Mark Rothschild, analyst]

I guess what I'm asking is if the rents aren't higher than where they are now, I guess, or where they were 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?

[Philip Fraser, executive]

Well, I think the bigger thing is one is that it depends on the market we're in. It depends on the construction 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 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.

[Mark Rothschild, analyst]

Okay. Fine. Maybe 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? Like should the pace be comparable?

[Dale Noseworthy, executive]

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.

[Operator]

The next question comes from Jonathan Kelcher at TD Cowen.

[Jonathan Kelcher, analyst]

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

[Dale Noseworthy, executive]

Sure. When we look year-over-year, Q1 to Q1, in total, 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 component. So that will get a lot smaller in Q2 and then will 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.

[Jonathan Kelcher, analyst]

Okay. And then just on the renewal rates that you got in Q1 at 3.7%. With Nova Scotia being around 5%, were there any issues in getting the full 5% bump there?

[Philip Fraser, executive]

None.

[Jonathan Kelcher, analyst]

Okay. That's short and sweet. And then next, just on dispositions and acquisitions. I guess, would it be fair to say that the dispositions you see coming for the balance of the year would mostly be Atlantic Canada?

[Philip Fraser, executive]

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

[Jonathan Kelcher, analyst]

Okay. So you've identified a number of properties on?

[Philip Fraser, executive]

Yes.

[Jonathan Kelcher, analyst]

Okay. And then are you seeing much or anything in the way of acquisition opportunities? And 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?

[Philip Fraser, executive]

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 the look, it helps to see what what's available. Where sort of pricing is going to be now. We're in the next 3 to 6 months. But I can say that we're not too active on looking hard to acquire assets in the next 3 to 6 months.

[Operator]

The next question comes from Kyle Stanley at Desjardins.

[Kyle Stanley, analyst]

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 lower all-in development costs. Just curious if you could elaborate on that a little bit.

[Philip Fraser, executive]

Again, The Carrick 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 $700,000 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 6 story, 5-story wood frame and Halifax for about $400,000, $425,000. We're getting a $450,000 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 6 of them. I mean it's 1 or 2 at a time. But I think the next way that's where some of this pricing is going to come in. And you got to remember, there's no HST on the future development, which helps a lot.

[Kyle Stanley, analyst]

Right. No, that makes sense and actually kind of leads me into the next question. You answered it there. It was just on the 3 markets you've identified as your target development markets, given the dynamics, obviously, you've just given the pricing in each of those markets to develop. Where would you like to focus your efforts more if you were starting something new today? Obviously, we saw even tied this quarter in Halifax, but just curious if a good option came up in one of those markets where you'd focus first.

[Philip Fraser, executive]

Well, I think logically, we just did Phase I to Phase II in the Nolan Hill in Calgary. So obviously, we're a small part of the ownership structure on that development in its 4 phases. So we're looking at Phase II with our partners, which makes a lot of sense. The shuffle of land that we announced in downtown Calgary, and basically, it was land beside Grid 5, and we sold one parcel and bought out our partners on the other one where we owned 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 Wissler. 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 zoning and increased density by getting the municipality to change their opinion for cash.

[Kyle Stanley, analyst]

Right. No, I think that all makes sense. Just one last one for me. Part of the rationale for the 6% same property NOI guidance last quarter. It was just uncertainty with regard to property tax. I think Dale and the disclosure you gave good color on 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 managing through that uncertainty? Or is it stronger revenue growth? Or maybe what was the driver there that gave you more comfort?

[Dale Noseworthy, executive]

Yes. I think 2 things. One is the revenue growth and the rent increases that we're seeing. We're 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. 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 [ net debt ] costs. So that was a positive for us this quarter.

[Operator]

The next question comes from Sairam Srinivas at Cormark Securities.

[Sairam Srinivas, analyst]

Just looking at the revenue growth, and I believe one bit of the driver was also a reduction in incentives year-over-year. Can you elaborate a bit on those the projects that relate to and the amount of unwinding that depth to the year?

[Dale Noseworthy, executive]

That's primarily Alberta. So 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.

[Sairam Srinivas, analyst]

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

[Dale Noseworthy, executive]

Well, I could say that in general, the past, it would have been 1 month free in Alberta, often really up until about a year ago on both new and renewals. And those ones now for majority of properties, we're not doing any incentives.

[Sairam Srinivas, analyst]

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 [indiscernible] development more attractive?

[Philip Fraser, executive]

Yes. For us, in particular, it's about land that we thought would take 3 to 4 years to get sort of zoned and ready for development. We can see some of it as right in the next 3 to 6 months. And if it's vague and land, then it's straightforward to be able to go design the building and maybe potentially start development.

[Sairam Srinivas, analyst]

Oh wow, that's amazing. And maybe you 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? Is it like a projects being leased faster nowadays? And is it more a function of just the market demand or also more incentives in play or any of those ports?

[Philip Fraser, executive]

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 our development program, really quick lease-ups between 3 to 6 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, the Civic 66 is a [ vote ] rate on schedule from that timing. The governor, it was only 12 units. Very high end in Halifax. And basically, we quickly leased up 6 of the 12 and then winter had and our target market are essentially folks that tend to go away for the winter. And since we are now in the spring, I mean, the activity has really picked up where we have 3 more leased and strong interest on the remaining 3. 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 6 to 9 months to really get a big dent on that one out there.

[Operator]

The next question comes from Jimmy Shan at RBC Capital Markets.

[Khing Shan, analyst]

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 trends are you seeing on that front?

[Robert Richardson, executive]

Jimmy, this is Robert. We're seeing the trend just being steady. If the demand is there, and we're continuing to lease happen. We're capturing a fair bit of the mark-to-market. We're pleased to say.

[Khing Shan, analyst]

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

[Robert Richardson, executive]

I would say the same steady pace.

[Khing Shan, analyst]

Okay. And then just a 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?

[Philip Fraser, executive]

You know what, I don't know that offhand, Jim. I mean honestly, I don't need there in the data [ room mill ]. So I don't know what they're asking. But my answer is that it's below 5%, and it's probably right around 4%.

[Khing Shan, analyst]

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 [ total capital ]?

[Philip Fraser, executive]

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

[Operator]

The next question comes from Matt Kornack at National Bank Financial.

[Matt Kornack, analyst]

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 stronger in terms of population growth relative to new supply of apartment rentals? Or is that just a point in time in comparison?

[Dale Noseworthy, executive]

Part of it is 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 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 more representative of the whole portfolio mark-to-market.

[Matt Kornack, analyst]

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 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?

[Dale Noseworthy, executive]

I mean I'd say there probably is. A few years ago, 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 as in as much detail. But I think that for those that have been there or recently don't have as much of a mark-to-market spread for sure.

[Philip Fraser, executive]

But it's a good question you asked 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.

[Matt Kornack, analyst]

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

[Dale Noseworthy, executive]

We have looked at that and the mark-to-market for tenants that have been in the units over 5 years is closer to 35%.

[Operator]

The next question comes from Dean Wilkinson from CIBC.

[Dean Wilkinson, analyst]

Phil, just a follow-up on the development side of things. That lower cost, would that come at 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?

[Philip Fraser, executive]

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

[Dean Wilkinson, analyst]

Yes. And I guess that was my second question then is development charges have arguably been one of the most inflated components of construction over the past 5, 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 punch-drunk on the money?

[Philip Fraser, executive]

Okay. I think you described it the way it is.

[Operator]

[Operator Instructions]. Question comes from Brad Sturges at Raymond James.

[Bradley Sturges, analyst]

Just to go back to the market rent growth discussion. In terms of the nonpermanent resident immigration policy change, how do you expect that to impact or alter market rent growth as population growth flows over the next couple of years?

[Dale Noseworthy, executive]

We're really not expecting it's going to have any change to the market rent growth. In 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.

[Bradley Sturges, analyst]

With the slowdown a little bit on the suite renovation side, obviously, you've noted turnover, but also strategically maybe not spending as much capital or market rent growth conditions are quite strong. Just 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?

[Philip Fraser, executive]

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

[Operator]

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

[Philip Fraser, executive]

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

[Operator]

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.