Minto Apartment Real Estate Investment Trust

TSX:MI.UN

Earnings Call Transcript 2021-Q3

[Operator]

Good morning. My name is Britney, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Minto REIT's Third Quarter 2021 Results Conference Call. [Operator Instructions] Before we begin, I want to remind listeners that certain statements about future events made on this conference call are forward-looking in nature. Any such information is subject to risks, uncertainties and assumptions that could cause actual results to differ materially. Please refer to the cautionary statements on forward-looking information in the REIT's news release and MD&A dated November 9, 2021, for more information. During the call, management will also reference certain non-IFRS financial measures. Although the REIT believes these measures provide useful supplemental information about its financial performance, they are not recognized measures and do not have standardized meaning under IFRS. Please see the REIT's MD&A for additional information regarding non-IFRS financial measures, including reconciliations to the nearest IFRS measures. Thank you. Mr. Waters, you may begin your conference.

[Michael R. Waters, President, CEO & Non]

Thank you, Britney, and good morning, everyone. I'm Michael Waters, Chief Executive Officer of Minto Apartment REIT; Julie Morin, our Chief Financial Officer, is also with me on the call. I'll begin the call by discussing highlights from the third quarter as well as recent developments, Julie will review our financial and operating results in detail, and then I'll wrap up with our business outlook. After that, we pleased we'll be pleased to take any of your questions. The urban rental market conditions continue to gradually improve in the third quarter. This was reflected in our increased occupancy and continued strong leasing activity. There's still ways to go before the market returns to pre-pandemic normalcy. However, we continue to successfully execute on our strategy during the quarter, while positioning the REIT for success in the long term. We entered into an all-time record 555 new leases during Q3, exceeding the previous high of 534 leases that we set in the second quarter of the year. The 555 leases represent a 38% increase compared to the 403 new leases we signed in the same quarter a year ago. So we're seeing demand for urban rent has improved. We realized a gain to lease of 4.4% on new leases signed. This is slightly lower than the second quarter but still driving significant sustained revenue growth. Average monthly rent in the quarter reached $1,651 per unfurnished suites. Average occupancy increased to 92.9% in Q3, up from 91.5% in the second quarter. Our point-in-time occupancy, however, at the end of the quarter was 94.8%. And so while average occupancy was lower compared to 94% in Q3 last year, this is the second consecutive quarter in which occupancy is increased. Move-ins are now outpacing move-outs by a substantial amount, which is highly encouraging. Julie cover this in more detail shortly. We've also made progress on other organic initiatives in the quarter. We completed the repositioning of 120 suites, a quarterly record for the REIT. Repositioning improves asset quality, reduces future repair costs and also drive strong growth in rental revenue. We made progress in our intensification development projects where we're achieving important financing and permitting milestones. Construction at our Richgrove project begun and we have secured a construction financing commitment from CMHC while Leslie York Mills is poised to get underway during the fourth quarter as well. Finally, we recorded a fair value gain of $34.7 million on our investment properties during the third quarter, based primarily on strong valuations for multi rental properties. Recall that we also recorded a fair value gain on investment properties of $50.5 million in the second quarter of 2021. That's a substantial increase in a 6-month period. Subsequent to the end of the third quarter, we agreed to acquire La Hill Park, a high-quality 261 suite property in Montreal. That's an ideal fit to our portfolio. After the closing of the transaction next month, we'll have 4 properties and almost 1,800 suites in Montreal, which is a highly attractive rental market. We had no properties in that geography at the time of our IPO in 2018. On October 29, we completed an $87 million bought deal equity offering, including the exercise -- the full exercise of the overallotment. The deal was fully subscribed, reflecting strong demand from the investment community. The proceeds will be used to fund acquisition development opportunities, including Le Hill-Park while increasing our financial flexibility. Finally, I'll conclude with the best news of all for our unitholders. As you probably saw yesterday, our Board has approved a 4.4% increase to the REIT's monthly cash distributions beginning with the November distribution, which is payable in December. The increase reflects the Board's high level of confidence in our business outlook, including our ability to execute on our strategy. The REIT's now increased distribution in each of the 3 years since it went public and 2 of those were during the pandemic. I'd also note that while we're committed to raising distributions over the long term, we also plan to maintain a strong balance sheet and conservative payout ratio that allows us to continue to reinvest capital to fund future growth. To sum up, we're pleased with the positive momentum we're seeing in our business and the fact that we continue to capitalize on attractive growth opportunities, we expect the REIT financial performance to continue to improve as the pandemic dissipates and our urban market conditions gradually return to normal. So I'll now ask Julie to discuss our third quarter financial and operating performance in a little bit more detail. Julie?

[Julie Morin, Chief Financial Officer]

Thank you, Michael. Let's start on Slide 4, where I'll begin by reviewing our Q3 operating results. We reported revenue, excluding furnished suites of $29 million in Q3 2021 compared to $29.3 million last year, a slight decline of 1.2%. The decrease was mainly due to lower occupancy and promotions, partially offset by higher rents. The majority of the decline continues to be focused on several core properties in urban centers where the negative impact of COVID-19 has been most common. Total revenue, including furnished suites was $31.2 million, an increase of 0.3% compared to Q3 last year, reflecting higher occupancy and rental rates for furnished suites. NOI, excluding furnished suites in the third quarter was $18.1 million or 62.4% of revenue, a decline of 6% compared to $19.2 million or 65.6% of revenue last year. Total NOI, including furnished suites, was $19.4 million or 62.1% of revenue, a decline of 3.7% compared to $20.2 million or 64.7% of revenue in Q3 last year. Lower NOI in Q3 2021 reflected the lower revenue from unfurnished suites as well as increased property operating costs, property taxes and utilities expenses. FFO was $12.5 million in Q3 2021 compared to $13.2 million last year, a decline of 5.5%. This mainly reflected the negative NOI variance. AFFO declined 6.3% year-over-year to $10.9 million from $11.6 million in Q3 2020, mainly due to lower FFO. AFFO per unit was proximately $0.184 compared to $0.197 last year. The REIT declared cash distribution in the third quarter of $0.1138 per unit, resulting in an AFFO payout ratio of 61.7%. Cash distributions were $0.1125 per unit in Q3 last year, resulting in an AFFO payout ratio of 57.2%. As of September 30, 2021, our portfolio consisted of 7,277 suites with an average monthly rent of $1,651 per occupied unfurnished suite. Average monthly rent increased by $38 or 2.4% compared to $1,613 at the end of Q3 last year. The average occupancy rate in Q3 was 92.9% compared to 94% last year. Turning to Slide 5. As Michael noted in his introduction, our quarterly move-ins have now outpaced move-outs for 2 consecutive quarters. This is a very positive trend that is driving growth in occupancy and highlights the steady recovery of urban rental markets in Canada. We had 615 move-ins during Q3 2021 versus 517 move-outs, a positive difference of 98. That compares to 36 net move-ins during the second quarter of 2021 and 65 net move-outs during the first quarter of the year. Occupancy has steadily increased from 91.1% in the first quarter to 91.5% in the second and 92.9% in the third quarter. On Slide 6, we've provided our revenue analysis as of the end of September. We break down gain to lease activity for Q3 2021 in the upper chart and our estimate of the gain-to-lease potential of the portfolio in the lower one. Beginning with the upper chart, as Michael noted, we find 555 new leases in the quarter, [indiscernible] turnover. Leasing activity was strong, and we were pleased to generate positive gain-to-lease in all of our markets. The average rent on new leases increased by 4.4% from $1,630 to $1,701. This resulted in an annualized incremental revenue gain of approximately $392,000. The strongest performance came in Montreal, where we generated a gain on new leases of 8.2%. Turning to the gain-to-lease potential on the lower chart. We believe we can generate approximately $7.3 million of annualized incremental revenue growth by bringing rents in 6,664 suites to market levels. We expect to realize a significant portion of this potential over the next 3 to 5 years. You should also note that this chart does not include the Le Hill-Park property in Montreal in which average sitting rents are well below market rents. We expect to complete the acquisition of Le Hill-Park next month. Turning to Slide 7. The upper chart tracks our gain-to-lease and average monthly rent growth on a quarterly basis, gain-to-lease has been negatively impacted by the pandemic, but as you can see, this remained highly positive through challenging period. Average monthly rent continues to hit new highs every quarter despite the impact of COVID-19 on urban rental markets. Moving to Slide 8. I want to provide you with an update on permitting. The lower chart shows that we are generating significantly stronger performance from our furnished suites than we have at any point in more than a year. Average monthly rent for furnished suites was nearly $4,000 at the end of the third quarter and average occupancy for the quarter was 86.3%. These figures represent a dramatic improvement from the levels we saw in early 2021. We expect the recovery in demand for the furnished suites coming quarters as restrictions are lifted and economic growth continues to improve. On Slide 9, you'll find a summary of our repositioning activities. We renovated a record total of 126 -- 120 suites in the third quarter or 91 of the REIT's proportionate ownership share. The average cost per renovation was approximately $48,400 per suite. The average annual rental increase following repositioning was $4,298 per suite, which generated a healthy return on investment of 8.9%. In total, we have approximately 3,000 remaining suites to reposition in our portfolio, again, not including the potential repositioning of [indiscernible] Le Hill-Park. We expect to reposition another 100 to 110 suites in the fourth quarter for a total of approximately 350 suites for the year. This is above our prior guidance of approximately 250 to 300 repositioned suites in 2021. On Slide 10, we highlight the strong predictable returns on the invested capital that we generate from repositioning. Over the last 4 quarters, our average annual unlevered return has remained in a narrow window of between 8.4% and 9% per quarter with an overall average return of 8.7% on 310 renovated suites. The average renovation cost per suite was approximately $48,100 and the average annual rental increase per suite was $4,185. We've mentioned Le Hill-Park a few times already on this call, so let's take a closer look at it on Slide 11. We're paying $80.1 million for the property which comprises 20 stories and 261 suites. Part of the reason it is so appealing is that it provides significant organic growth potential, both from gain-to-lease and repositioning. We estimate that sitting rents are approximately 20% below current market rents and only 72 of the 261 suites have undergone a repositioning program, which provides additional potential upside in rents that are approximately 20% to 25% upon completion of renovation. We expect the acquisition to close on around December 7. The purchase price will be satisfied in part by proceeds from the bought deal we completed last month and a new mortgage loan of approximately $41 million. This is our fourth acquisition in Montreal and brings our suite count in the city to 1,793 or roughly 1/4 of our total.The map on Slide 12 shows the location of Le Hill-Park. It's located in close proximity to our 3 other properties in Montreal, Rockhill, Le 4300 and Haddon Hall. This creates the potential for operating synergies. The property is also located close to the Côte-des-Neiges metro station and the planned new station at Edouard-Montpetit, which is a part of the Réseau express métropolitain or REM a massive expansion of the city's existing metro network.In addition, Le Hill-Park is near the University of Montreal, McGill University, 3 major hospitals, Summit Woods and Mt. Royal park.Now I'd like to review our intensification and development initiatives on Slide 13. We currently have investments in 6 projects in various stages of development. Each of these is advancing at a steady rate. I'll provide highlights on a few properties over the next few slides, and you can find more details about the current status of each project in our Q3 MD&A. One important recent development is that we have obtained a construction financing commitment from CMHC for the Richgrove project under their rental construction financing initiative that will provide construction financing on attractive terms and construction has commenced. Construction at Leslie York Mills is also expected to begin later this quarter.Combined these 6 projects could expand the REIT's portfolio by 1,570 suites by 2029. That represents an increase of approximately 21% from the current level, inclusive of Le Hill-Park. I'll now provide updates on a few of the individual development projects, beginning with the Fifth + Bank redevelopment in Ottawa on Slide 14. You can see from the photo on the upper right that construction is very near completion. 78 out of the 160 suites have been conditionally pre-leased already with first occupancy beginning this month. The project is on schedule to be stabilized in mid-2022, at which point that we will have an exclusive option to purchase it at a 5% discount to then-appraised fair market value.Turning to Lonsdale Square, North Vancouver on Slide 15. Our first development project in Greater Vancouver is making good progress. Site excavation is complete, as you can see on the upper right photo and formwork has commenced. The project is comprised of 113 suites and approximately 7,800 square feet of retail space. Construction completion is expected in the first quarter of 2023 with stabilization in the fourth quarter of that year. We'll have a purchase option at that point with the same terms as Fifth + Bank. These offerings really highlight the benefits of the REIT's unique relationship with the Minto Group.Moving on to the Richgrove project on Slide 16. We are taking advantage of excess land on this site to add a new rental tower with 225 suites, including 100 affordable housing suites and 213 parking stalls. Construction is underway and stabilization is expected in early 2026. One additional benefit to this property is that it is adjacent to the future site of the Martin Grove LRT station, which should be completed around 2030 or 2031.Finally, I'd like to review our debt financing and liquidity on Slide 17. Essential part of our strategy is maintaining a conservative leverage ratio and balance in our debt maturity schedule. The chart demonstrates that maturities between 2022 and 2026 are highly manageable. As of September 30, 2021, the weighted average term to maturity on our fixed rate debt was 5.17 years with a weighted average interest rate of 2.9%. Approximately 91% of our debt is fixed rate and 73% is CMHC insured debt. Our total liquidity was approximately $126 million at quarter end and debt-to-gross book value was 37.9%. I'll now turn it back over to Michael.

[Michael R. Waters, President, CEO & Non]

Thanks, Julie. I'll wrap up with our business outlook on Slide 18 before we take your questions. When the pandemic struck in March of 2020, of course, the impact on urban multi-residential real estate in Canada was significant with the border shut, shops and restaurants closed immigration delayed and post-secondary institutions operating largely remotely, the benefits of urban living were temporarily disrupted. But that's changing rapidly. Pandemic restrictions are being eased on a regular basis as COVID-19 vaccinations increase and we continue to improve. Borders are reopening, including the land border with the U.S. Restaurants and sports venues are welcoming customers without capacity limits post secondary education has returned largely in-person learning. Immigration is rapidly picking up again with the federal government increasing its targets for new permanent residents over the next 3 years to catch up on the immigration that was delayed by border closures.Although we must remain vigilant, COVID case counts have not been nearly as high this fall as some had feared. These are all really highly positive developments for the REIT. We're seeing market demand and occupancy increases the benefits of urban living, gradually reassert themselves. It will take some time to get back to normal, but we're confident that our focus on high-quality multi-res housing and desirable areas will outperform over the long term as it has done historically. The increase to our distribution that we just announced sort of underscores this confidence. Our positive outlook is supported by strong fundamentals in Canada, including expansive immigration policy, an elastic supply and the growing affordability gap between owning and renting a home. The population growth continues to increase in 2021 and beyond. Rental housing demand is expected to strengthen. We expect to see further increases in occupancy and stronger growth in rent rates driving improved financial performance. However, we still do anticipate lower-than-normal occupancy for the remainder of this year.To sum up, we continue to believe that Minto Apartment REIT has the right assets and strategy for long-term success. We'll continue to focus on 4 key areas to grow the REIT, namely capitalizing on organic growth through gain-to-lease creating value from suite repositioning, exploring attractive acquisitions and capitalizing on our relationship with the Minto Group. These have been the key elements of our strategy since the day the REIT was created and we're confident by sticking to these principles will generate strong returns for unitholders as the impact of the pandemic subside. That concludes the formal portion of our presentation this morning. Julie and I would now be pleased to answer any questions you may have. Britney, please open the line for questions.

[Operator]

[Operator Instructions] Your first question is coming from Jonathan Kelcher from TD.

[Jonathan Kelcher, Analyst]

First question, just on the leasing. If you just look at where September ended versus the average, obviously, September was a very strong quarter on the leasing front for you guys. Has that continued into October?

[Michael R. Waters, President, CEO & Non]

Yes. We're -- October saw to more than 200 leases. So it was continued strength, basically continued where we were in September. And that was true in almost all of our markets. Toronto has been perhaps the slowest to really recover. But we signed more than 90 leases in October in Toronto, which has been fantastic. It continues to still be the largest consumer of incentives, I'll say, if we look at our different markets, Jonathan. But when I look at Ottawa as well, that market has been steady and strong for a while. We're seeing that housing price growth, both new home and resale has really pushed main buyers into rental. And so we've done more than 60 leases in Ottawa in October, and we're seeing promotion there being really peeled off quite rapidly. Montreal has been resilient. It's been supported by pretty strong job market there. We've signed 22 leases in October, would have done more. But we had many sweep offline for the repositioning programs, particularly at Haddon Hall and Le 4300. Alberta, I would say, Edmonton remains a soft market, but Calgary has been surprisingly strong, actually. We have very little availability in our Calgary portfolio. And we can see continued strength there just economically with job growth in Alberta. So I think what we saw was really strong momentum through the quarter, and that continued through October. Just injecting all [Indiscernible] you'll see leasing demand tend to taper towards the end of Q4 and the first part of Q1.

[Jonathan Kelcher, Analyst]

Okay. Fair enough. That's helpful. And then just, I guess, switching gears a little bit as you're in the ground at Richgrove, expect to be at Leslie York Mills this quarter. What are the yields you're targeting on development there? And how much of your costs would be fixed?

[Michael R. Waters, President, CEO & Non]

So we're -- typically we're targeting return on investment of somewhere between 4% and 4.5%. And if you compare that to kind of market cap rates for new multi res in the city, they would be sort of 3% to 3.5%. So fairly significant margin of kind of 100 plus or minus basis points which translates to -- and we tend to think of it in terms of levered IRRs, but levered IRRs that would be in the high teens. So pretty decent, and in some cases higher.

[Jonathan Kelcher, Analyst]

Okay. And do you have a lot of the cost fixed on that or?

[Michael R. Waters, President, CEO & Non]

Yes. So we, of course, before we put a shovel in the ground, we would tender the vast, vast majority of the bill of materials. So our internal rule is we want to tender more than 70%, 75%. I think at Richgrove, we're approaching almost 90% of cost tendered. And on those -- the tenders that we've done and started to award contracts we are at or favorable to our pro forma. So tracking quite well on that one. Leslie York Mills is not quite as far advanced, but the tendering process is moving along nicely there as well.

[Jonathan Kelcher, Analyst]

Okay. And then I guess just last question. When you're in the past when you've done sort of infill things like you're doing with Richgrove, has the construction I guess, processed, does that impact the performance of the existing assets at all?

[Michael R. Waters, President, CEO & Non]

Well, in the short term, of course, there's some noise and dust and disruption for existing tenants, particularly on access in and out of the site. And so it does have a very short-term impact. We have a fairly detailed construction management plan that we put forward for each of those communities. It's multipronged. It would include communication with our residents and our resident engagement strategy and really try and give tenants a lot of visibility on what we're doing, including communicating the benefit what's in it for those existing tenants in terms of improvements to amenities, improvements to landscaping. If you think of Leslie York Mills, for example, we're completely redoing the entire suite of amenities, generating very significant improvement to that. So from a selling proposition, often we're able to lessen the sting, if you will, of the construction inconvenience. Obviously, long term, the impact of having these new suites refreshed or brand new amenities, expanded amenities and the landscape, it rises the potential of the entire property. So, yes, there is a near-term impact. I think we worked as hard as we can to manage and mitigate that, but it's something that you're right to note that we work very hard on that.

[Operator]

Your next question comes from Mike Markidis from Desjardins.

[Michael Markidis, Real Estate Analyst]

I just the chart on -- I know small but the furnished suite segment, and you've kind of got it going back, I guess, 4 quarters. But what would be helpful maybe is just thinking about how and what pre-pandemic? And how much runway you think we have to go both from an occupancy average perspective and maybe potentially AMR, not suggesting it gets here in the next 2 quarters, but just in terms of thinking about the normalization going forward.

[Michael R. Waters, President, CEO & Non]

Yes. So you think about furnished suites going back pre-COVID. So if we went back to sort of late 2019, let's say, if you look at the fall of that year, October, November, December, then, of course, our suite count was higher. We were sort of in the almost 250 range or a little bit over. And we were seeing average daily rates that were in the $140 range and occupancy that quarter started the quarter very strong.October, we were in the low 90s, which was absurdly high. We don't typically see that kind of level of occupancy. So producing RevPARs that were like $136, which is really, really high. The balance of that quarter, we saw occupancy drop, which is more typical. We were dropping into the low 80s in November and sort of getting into the high 60s by December. And so I think that illustrates a couple of things. I mean, one, the furnish suite segment is highly seasonal, depending on the property you'll see seasonal trends, for example, in Toronto, often tied to the movie business and other things.And secondly, it is obviously a little bit more volatile than the unfurnished. You typically are generating much, much higher rate but at the expense of a little bit more vacancy and some more volatility there. Again, not ever intended to be a huge part of our business. Right now, we're kind of low 200 suite count probably getting into the high 180s at least at this stage as we complete the renovation repositioning program at Roehampton, where we had 48 furnished suites at the beginning of the renovation program. But it is a fantastic yield management tool, particularly in steady or rising markets because they are very short tenancies, which allows us to reset to market rent. And so from that perspective, it's a fantastic yield management tool. Again, right now, we really have furnished suites at only a handful of probably 185 lying in Ottawa. Our Yorkville property in Toronto, Roehampton still has surprisingly strong 20 suites there. They're 79%, 80% occupied at this stage. And so we're waiting for those contracts have burn off, obviously, and then we've got just a handful at [indiscernible] property in Calgary. I think what you'd expect to see is that we maintained a meaningful inventory at 185 in Yorkville, but that Roehampton inventory will disappear in the [indiscernible] as well. It's possible that we could bring more suite count back online at some point in the future if market conditions merited. But at this stage, right now, we're sort of focused on the plan we communicated way back in for the Q4 reporting back in March.

[Michael Markidis, Real Estate Analyst]

Okay. And then just last question. In terms of the -- obviously, more leasing done, but in terms of the amount and intensity of incentives may be offered on a [indiscernible] basis. Would it be fair to say that, that decline through 3Q and is declining in the 4Q would be the first part. And secondly, I think you mentioned Toronto coming back slower than expected on that front. So maybe just a little bit more color on how that's unfolding on the incentive side in the Toronto market, in particular.

[Michael R. Waters, President, CEO & Non]

Yes. So as we talked about in our Q2 reporting back in August, we really saw the market bottom in April, and it just has strengthened sort of month-over-month sequentially since then. And our use of promotions certainly peaked in Q2, early part of Q2 or very late part of Q1 and have really dropped very, very significantly subsequent to that. And as I mentioned in my response to Jonathan's question earlier, if you think about lease -- or sorry, promotion defined as a number of months rent per lease signed, we have brought that number way down. The area where we're seeing it still the highest has been Toronto, which has been the slowest to recover, though it is recovering strongly. So it's been the area the last one where we've been peeling them off, we pulled them off in Ottawa, Montreal much sooner.Now I think with the strength that we're seeing, I mean, 94 leases signed in October in Toronto, I think, is a pretty strong sign. So we think that the amortization impact of promotions will have peaked in Q3. So the P&L impact will, of course, lags, right? Your -- the granting of the promotions probably peaked back in March. The amortization impact in the P&L will have peaked in Q3, and we'll start to see it tail off. It will still be meaningful as we get into Q1 and Q2. But by Q3 next year, we anticipate that, that promotion expense, which is really the amortization of promotions in the prior year will largely tail off.

[Michael Markidis, Real Estate Analyst]

Okay. So just Q4, the amortization effect will not decrease still this year, just to be clear, right?

[Michael R. Waters, President, CEO & Non]

It will come down.

[Michael Markidis, Real Estate Analyst]

It will come down in Q4 this year?

[Michael R. Waters, President, CEO & Non]

Yes, yes.

[Michael Markidis, Real Estate Analyst]

Okay, that's great. And then obviously, next year, yes. Late 2022, while we're not discussing incentives anymore, so I appreciate that. I'll turn it back.

[Operator]

Your next question comes from Matt Logan from RBC.

[Matt Logan, Analyst]

Michael, if we roll up some of your commentary on the positive post-quarter leasing demands, where do you think occupancy can trend over the next 2 or 3 quarters?

[Michael R. Waters, President, CEO & Non]

Well, if we finished the quarter September 30, that number was 94.8%. You look at the continued -- well, we had very strong leasing, as we talked about in Q3. Leasing is a leading indicator of move-ins. Not all of those leases would have moved in the quarter. We were plus 98 net move-ins Q3. We expect that, that momentum of move-ins to continue into Q4. So we're looking to see occupancy by the -- in Q4 would be likely in the 95-ish range. And you might anticipate that the ending occupancy, so that's the average 95-ish, by the end of the year, it would be probably a little bit higher. Now of course, we get into that slower Q4, particularly the latter part of Q4, Q1 is typically a slower leasing demand quarter. But we anticipate that going into Q2 and Q3 next year that we'd be in the 96, 97 plus kind of range, which is sort of what we would consider to be more full occupancy pursuant to our kind of yield management philosophy.

[Matt Logan, Analyst]

And in terms of the realized gains on the leases that you're signing, at least the new leases, would it be fair to think about that 4% print in Q3 as a function of perhaps low single-digit spreads in the early part of the quarter, 3 or 4 months ago, strengthening perhaps somewhere into the mid-single-digit range today?

[Michael R. Waters, President, CEO & Non]

Definitely, yes. Because we marked this on a lease-by-lease basis. And just when you look at the volume of leasing, which was fairly balanced through the quarter, but certainly, the trend in terms of what we were achieving continued month-over-month sequentially during the quarter, July through September. So I would expect that the gain to lease would be, I think, more representative of the future. I think we'll see -- our estimate at the end of the quarter was 6.6 potential. I think that, that number will continue to climb if we look out into 2022, hopefully getting back to the range we were pre-COVID seeing double digits on some of those.

[Matt Logan, Analyst]

That's good color. And maybe just following up on some of Michael Markidis' questions on the furnished suite business. What would be a fair kind of annual target for occupancy and in the monthly rent for that business?

[Michael R. Waters, President, CEO & Non]

That is a good question. Give me a second, I'll come back to that a little later in the call, if that's okay. I need to -- real quick.

[Matt Logan, Analyst]

No rush, if you don't have that handy, just wanted to think, could we see some of that pricing moderate seasonally, similarly with occupancy but not a big part of the business overall. Maybe just one other housekeeping question for me. I didn't see it in the press release, but are you able to provide a cap rate for Le Hill-Park?

[Michael R. Waters, President, CEO & Non]

It would be roughly 3%. We sort of -- we underwrite not on a cap rate basis. We look at a couple of metrics, levered IRR which would be right around 7% over a 10-year basis. What we see there is -- I mean, if you were to look out 2 and 3 years, the cap rate would be rising in the mid-3s, like 3.4, 3.6. And a lot of that is our going in is always a little bit lower with a renovation program, and this one has a very substantial renovation program like it really had about 70 suites renovated leaving something like 190 suites. And it's a fantastic program. I think we build off what the vendor did there. our sense of what they've done, their execution was quite strong. And so we look at that and think that we could do quite well. Now the only gating factor for us there is the pace of turnover because, of course, you can only renovate an unrenovated suite of a turn. So we're hoping over the next 5 years to get well into the more than 120 of those suites renovated. But that will drive, to some extent, the return from the investment. But as I say, even on an unrenovated market basis, we're seeing very significant cap to market, like more than 20%. So just back to your furnished suite question, if we were to think about the year ahead 2022, Typically, we would look for something like an occupancy that would be kind of 80%-ish, 81 like low 80s. And then that average daily rate for the 2 big properties, 185 Line, it would be something like 120 and Yorkville would be substantially higher, something like 170, so an average of about 140 between the 2 of them. I'm doing this rough math here, but that's kind of what that would look like.

[Matt Logan, Analyst]

That's great. And maybe just 1 last question for me before I turn it back. If we kind of take a bit of a 30,000-foot view over the next 12 months, what do you see as the REIT's biggest opportunity to capitalize on?

[Michael R. Waters, President, CEO & Non]

So we see opportunity on development for sure. I think that obviously, starting LYM and Richgrove are big steps. We've been talking about those projects since the time of the IPO. I think as well, some of the opportunities through the convertible development loan program that we've been doing. If you think about Lonsdale or Fifth + Bank or Beechwood, I think Fifth + Bank when it stabilizes some time around in Q2 will be the first of those projects to roll off the assembly line. And I think that they really demonstrate the value of the Minto pipeline and not only the pipeline of deals, but also the strategic relationship with Minto Group in terms of development and construction expertise. And that, I think, will be a fantastic project.163 suites. And as we said earlier, it's almost 50% pre-leased. We haven't even start to occupy the building yet. So I think that one will be fantastic. It's obviously not subject to Ontario's rent control provisions, and I think there are more opportunities like that. I think as well, broadly speaking, the Minto pipeline is something that we think also has substantial potential for the REIT as we saw in the past with Leslie York Mills and High Park, where acquisitions of Minto Properties, Inc. investments in stabilized assets. And and the Minto portfolio outside the REIT has some attractive candidates, I think that would fit very nicely into the REIT portfolio. So we're going to continue to work those deals and see if there's an opportunity to bring those forward. And then, of course, as we talked about earlier, the repositioning program that we've done has been so strong. I mean this has been our strongest quarter in terms of the sheer number of repositioning 120 suites in the quarter, bringing us to 254 year-to-date. And if we do add another 90 to 110 in Q4, geez, we'd be almost 350. And the guidance we gave everybody was 250 to 300, generating very strong ROI, north of 8%. And very simple ROI like that, it's a pretty nice program. So with the addition of Le Hill-Park and some of the other deals that we're looking at in the portfolio, completing the feasibility, I think if we can add to the potential on the repositioning side, that's certainly an area of focus. It's our best use of capital on a risk-adjusted basis. The only limiting factor is we can only do so much of it, and it's really gated by the turnover of unrenovated fleet.

[Operator]

Your next question comes from Joanne Chen from BMO.

[J. Chen, Director of Equity Research]

Sorry if I missed this earlier, but just on the furnished suites, it's nice to see the turnaround this quarter, for sure. But what are you guys thinking with respect to the overall percentage of furnished suites in your portfolio kind of going forward? Or is it continues to be quite flexible on your?

[Michael R. Waters, President, CEO & Non]

Well, at the time of the IPO, that number would have been about 6% of the portfolio. Today, the furnished suite count is something like less than 3%. So we brought it down as a proportion of the total portfolio, but also in absolute terms, quite substantially. And as I said in the past, Joanne, the beauty of furnished suites is their short tenancies. If you can reset to market. It's very easy for us to brings unfurnished suites online that's furnished. And to go the other way, we can take them off-line very, very quickly. It's really purely about demand and what are the demand lead indicators that we're seeing advanced bookings and things of that nature. So we don't want to make furnished suites a big part of our business that we see it as a yield management tool when the unfurnished rental market is stable or growing. It is a fantastic tool for us, and so we'll continue to use it opportunistically, but not meant to be a big part of the portfolio. And so if you think about where we're at now, just a little bit less than 3%, it could grow a little bit in terms of suite count, but probably not materially as a percentage of the portfolio. And it's really only effective at a handful of properties. It's you can't do furnished suites in every property. And so that's the other limiting factor.

[J. Chen, Director of Equity Research]

Great. That makes sense. That's helpful. And I guess just on your repositioning efforts, has the current inflation environment impacted your thinking kind of on the pace and the magnitude? Or is it -- has that not made a substantial difference thus far?

[Michael R. Waters, President, CEO & Non]

Are you talking about inflation on construction costs?

[J. Chen, Director of Equity Research]

Yes. And labor, and I guess everything these days.

[Michael R. Waters, President, CEO & Non]

Yes. Well, I mean, speaking about the repositioning program, we -- there is a -- it's typically a different trade base, not entirely, but it is a bit of a different trade base from new construction. But some of it is certainly caught up in some of the same supply chain disruption. Like if you think of cabinets, for example, those are issues. But we are able to leverage the relationship with Minto Group and the strong buying power that we get through that because of the substantial number of new home and development stuff that we're doing outside the REIT. So we're not shy about leveraging those relationships to sort of get some volume pricing incentives and things.I would say generically about inflation more broadly, obviously, we saw in the quarter insurance, property taxes, certainly salaries is an area where we're seeing some price pressure, for sure. We've struggled to fill some of the vacancies we saw higher turnover and some of that was coming out in higher salary expense. So inflation is certainly something that we're seeing in the business and something we're conservatively sort of working that into our planning. Hopefully, the net result will be better than what we're sort of providing for, but it's something that we're definitely mindful of.On the new construction side, as I said earlier in the call, our safeguard there is that we would tend to tender the vast, vast majority of our cost categories before we put a shovel in the ground, and so we're locking in pricing for that. So -- and so that's I think, from that perspective. But we've seen typically that inflation does pass through rent. If you were to look at Ontario's rent control regime and you go back to 1975, and you look at the guideline increases that were promulgated each year, they tend to track inflation pretty closely. So certainly, that would be our expectation going forward.

[J. Chen, Director of Equity Research]

That's good to hear. And I guess just one more. How should we be thinking kind of the acquisition pipeline kind of for the remainder of the year and into early 2022? Obviously, the environment is very competitive right now. Are you still seeing kind of a healthy pipeline on your end?

[Michael R. Waters, President, CEO & Non]

Yes. Look, we are very active, Joanne, always looking at deals. We're pretty choosy about what we pursue. We are looking for investments. If we're buying stabilized assets, we're looking for properties that, one, hit the location tests that we set. But number two, we're looking for assets where there's significant embedded rent and where there's repositioning potential and/or intensification potential. And those are, as you said, are pretty hotly contested right now. And it's not just the usual suspects, our peers in the publicly traded REIT space, but also pension fund and institutional investors and then private investors are bidding aggressively. So I think we're spending as much or more time on development I think that's 1 of our differentiators because of our strategic relationship with Minto Group, we're able to underwrite and pursue development deals. And some of them many of them we've been using -- doing through the convertible development loan structure, such as Fifth + Bank, which I think from our perspective, yields huge advantages to the unitholders because the unitholders see an accretive return to AFFO through the development period from the coupon on the instrument. And then with the discount on the stabilized future value often, we're seeing those levered returns -- or sorry, unlevered returns on those investments sort of in the mid-teens. So they're fantastic. And buying a stabilized new asset at a 5% discount to fair value is a huge advantage there. They're obviously NAV accretive almost right away. So we like that, and we'll just continue to remain our discipline, remain maintain our discipline on the acquisition front. And we're not growing for growth sake. So it's not chasing every deal. And they come in bunches. We went 9 months or 12 months really without anything. And we did the Beechwood deal and that was much it. And then suddenly, we've seen a flurry of opportunities. So that's just kind of the way it works sometimes.

[Operator]

[Operator Instructions] Your next question comes from Brad Sturges from Raymond James.

[Bradley Sturges, MD & Equity Research Analyst]

So good color on the trends you're seeing from leasing activity and move-ins. Just curious if last year turnover move-outs was elevated if you're seeing maybe a little bit more normalization of move outs heading into the end of this year.

[Michael R. Waters, President, CEO & Non]

So move out, thinking about -- like 2020 was kind of bonkers in terms of totally turned upside down kind of the normal seasonal patterns. If you recall, we saw a massive move-outs in Q4, which was unseasonable and Q1 had very high numbers move-outs, which is sort of unusual. I think what we're looking for is to see move-outs return to kind of normal patterns looking ahead to Q4. We have fantastic visibility because of the way the notices work that we're seeing Q4 look sort of more like normal kind of fourth quarter in terms of the number of move-outs.If you think of turnover, which we define as new leases divided by total suites, I mean actually, Q3 had -- because we had such strong leasing, we had a huge turnover number approaching kind of 30% overall. You can see that by -- through the table that we put in the on a teleconference deck, on a trailing 12 months or 4 quarters, that would be, like I say, 30%, which is pretty high. I mean which is fantastic if you're seeing a growth in market rates because you're able to realize on some of that embedded rent there. So what we've seen in the lead up to COVID was turnover was dropping down pretty substantially. And so what we saw now, at least the most recent couple, 3 quarters is strong leasing activity generating higher turnover.

[Bradley Sturges, MD & Equity Research Analyst]

Right. And I guess it depends on what type of unit turns. But it seems like the renovation program has been seen, I guess, higher levels of suites repositioned than, I think, what you were forecasting. I guess how do you see -- do you see that as repeatable in 2022? Or what would be the expectation, I guess, for the amount of suites you might be able to get to next year?

[Michael R. Waters, President, CEO & Non]

Yes. So I mean we used the crisis, I would say, starting in Q4, but really picking up steam in Q1 of this year to weaker softer demand for unfurnished suites meant that rather than furiously discounting those suites just to fill them, we took them offline and renovated them. And then we built up a substantial inventory of renovated suites. And as we got into Q2 and Q3 with the strong leasing season, that really reflects the numbers that you saw of 120 in the quarter, 254 year-to-date, which is substantially higher than the guidance we've given 250 to 300 earlier in the year were maybe a little bit conservative on that.I think looking ahead into 2022, the gating factor, as we always talk about, is the turn of unrenovated suites. And so of course, unless you're adding new buildings to the program, there would be a natural tailing off of the program. But adding Le Hill-Park to the program, completing the feasibility on a couple other buildings as well means that we can hopefully keep the program going on. I don't know if we're getting at the 350 again next year. That's probably wishful thinking. Probably looking at something more like 250, which is kind of where we started in 2021. So -- but we're always exploring opportunities, always looking for the potential to deploy some value-add capital. And sometimes, as we've seen it in the past with Parkwood Hills, the enhanced churn program was very small amounts of capital, but we were generating very nice ROIs kind of in that well in excess of our target. So -- and some of those were kind of $10,000 a suite or less even and generating 8% ROI. So we're always pretty opportunistic if we see those opportunities, and we'll keep doing that. Our asset management team is always on the hunt for ideas like that.

[Operator]

Your next question comes from Matt Kornack from National Bank Financial.

[Matt Kornack, Analyst]

Just a quick one on operating costs this quarter. Was there anything specific to this quarter or maybe to the prior year quarter in terms of the growth there?

[Michael R. Waters, President, CEO & Non]

Yes. So I would say when you drive a huge volume of leases, it does tend to be associated with higher marketing costs and higher repairs and maintenance. So lots and lots of turns in the quarter. As I mentioned, if you look at the new leases on a quarterly basis, it was 8%. So with a pretty strong number. If you annualize that over the last 4 quarters, that's kind of 30. So that's certainly that amount of new leases, new move-ins certainly had an impact on that. The other ones we talked about in the prior quarter is insurance. Certainly, we're seeing insurance really moving. We don't have a lot of control over insurance. The other, I'll say, uncontrollable categories are property taxes. We've highlighted in the past, Calgary, certainly. But Montreal as well, where we're seeing property taxes moving. Utilities in certain cases, for sure, impacting us, not all utilities because a lot of our suites are sub-metered, but that's an area that we're keeping an eye on, watching gas prices and other things pretty closely. And I would say the last one, which we touched on earlier, Matt, was staffing, particularly our frontline staff, more modestly paid strong job market in many cases. And we did have a lot of vacancies going into the quarter. We were, I think, quite successful in getting a lot of fantastic new members on the team. And so that partly is playing out as well in the OpEx numbers that we did have a little bit more salary expense there, too. So I don't know if that color helps.

[Matt Kornack, Analyst]

That's very helpful. So I guess in terms of trajectory going forward, it sounds like Q4, you're still going to see some elevated leasing activity. Q1 maybe slows down a bit, although who knows these days. And then into the balance of the year, I guess, some of the additional sort of marketing and other costs may fall away. Is that fair?

[Michael R. Waters, President, CEO & Non]

They will, though, again, continue to highlight those -- some of those noncontrollable categories that we can't manage. And what I think we're looking at for 2022 is that revenues will outstrip the cost growth on the OpEx side, but it's certainly something we're very conscious of.

[Matt Kornack, Analyst]

Okay. That makes sense. And then last one for me. Can you just give a little bit of color around -- obviously, we've seen a pretty substantial uptick in occupancy, but sort of what's happening with High Park Village, Roehampton and maybe Yorkville in the context of what's going on around those assets as well. Are you sort of in line with?

[Michael R. Waters, President, CEO & Non]

Certainly, in the quarter, what we had seen was that we had good performance, High Park, we signed something like 64 leases, Roehampton 31 leases. So Roehampton had significant vacancy owing for the renovation program there. That really got momentum in the quarter and we did quite well on that. Minto Yorkville 19 leases, it was one of our problem children earlier in the crisis. But now I think if you look at Yorkville and I am looking at the stats from the beginning of November, we had no availability in that building. So those are very, very encouraging signs for us.Now as I said in the past, Matt, like leases signed as a leading indicator of move-ins, which is a leading indicator of revenue. So there is that lag effect. And I just want to caution people from over-exuberance about Q4 because we'll see that impact, but it will continue to follow, I guess, the move-ins, which follow the leases. But yes, so I think we look at those ones. I feel real positive about it. As I said earlier, I think Toronto was probably the slowest market to really come back. And so -- but it is coming back, and it's looking good. I think Roehampton, particularly as those renovation program continues to steam along, we're going to see even more leasing in Q4 than we saw in Q3, for example. So I'm very, very optimistic on that front.

[Operator]

Mr. Waters, there are no further questions at this time. Please proceed.

[Michael R. Waters, President, CEO & Non]

That's great. Thank you, everyone. That concludes our call this morning. Thanks for joining us and for your interest in the REIT and its results. We look forward to speaking with you again after we report our Q4 2021 results early next year. So thank you so much, and we'll talk to you all again real soon.

[Operator]

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