Q3 2021 Killam Apartment REIT Earnings Call
Good morning, ladies and gentlemen, and welcome to the Killam apartment real estate investment Trust third quarter 2021 financial results Conference call. At this time all 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 require assistance. Please press star zero for the opera.
Later this call is being recorded on Thursday November 4th 2021, I would now like to turn the conference over to Philip Fraser President and CEO. Please go ahead.
Thank you and good morning.
I want to welcome you to kill apartment rates Q3, 2021 earnings presentation.
Here today with Robert Richardson Executive Vice President.
Noteworthy Chief Financial Officer.
Here in Cleveland Senior Vice President of Finance, and Nancy Alexander Vice President of Investor Relations and sustainability.
Slides to accompany today's call are available on the Investor Relations section of our website under events and presentations.
I will now ask Nancy to read our cautionary statement.
Phil This presentation may contain forward looking statements with respect to kill them apartment REIT and its operation 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 are qualified in their entirety by the <unk>.
Risks and uncertainties surrounding forward looking statements for further information.
[noise] formation about the inherent risks and uncertainties in respect of forward looking statements. Please refer to <unk>. Most recent annual information form and other securities regulatory filings found online on SEDAR unless otherwise stated all forward looking statements made today speak only as of the date, which this presentation refers and.
Parties have no obligation to update such statements.
Thank you Nancy I am pleased to report another very strong financial and operating quarter for killing.
The third quarter.
<unk> seen strong leasing activity in our apartment and commercial divisions and a strong rebound in our seasonal MHC business.
Our 2021 targets are outlined on slide three along with our year to date performance. We produced positive same property net operating income for the 30 <unk> consecutive quarter and increased our same property NOI target to exceed 4% up from the initial target of plus 2%.
Dale will take us through <unk> third quarter financial results, followed by Robert who will discuss our operating performance I will conclude the call with an update on our recent acquisitions and our development pipeline.
I will now hand, it over to Dale.
Thanks Bill.
Financial highlights of kill them strong Q3 results can be found on slide four.
We achieved net income of $46 6 million compared to $37 5 million in Q3 2020.
The resilient demand for apartment the rebound of our seasonal MHC business and strong leasing in our commercial segment are reflected in both same property growth and $25 $8 million of fair value gains on investment properties in the quarter.
<unk> realized <unk> per unit growth of 11, 1% and <unk> per unit growth of 13.0% in the quarter <unk> payout ratio improved 900 basis points in Q3 to 66%.
Please refer to slide five kill.
<unk> same property portfolio achieved strong seven 4% NOI growth in the quarter year to date same property NOI is up 5%.
Johns key revenue leavers are chartered on page six apartment leasing and occupancy have been steadily gaining momentum since the beginning of 2021.
Leading to 97, 4% same property occupancy in Q3 90 basis points ahead of a year ago. This included occupancy of $98 zero percent in September and the trend of strong occupancy is continuing in Q4.
Apartment rental rates as at September 32021 were up three 4% versus September last year.
Year to date, we've achieved one 5% and rental increases on renewals and four 9% on regular unit turns are repositioning program also contributed to our topline growth.
We've seen a slight uptick in rental incentives in the last year with incentives in the quarter equal to 7% of revenues. These incentive offerings remain primarily limited to our Alberta portfolio, excluding Alberta incentive offerings for our same property portfolio remained very low at <unk>, 3% of revenue.
Q3.
In addition to strong performance from our apartment portfolio.
<unk> and commercial properties also performed well in Q3, which Robert will expand on.
We remain focused on expense management, turning to slide seven we realized a modest <unk>, 2% increase in same property expenses for the quarter year to date same property expenses increased one 5% as higher general operating and property tax expenses were offset by lower utility and fuel.
Fences.
Same property NOI margin increased by a healthy 160 basis points in the quarter and 80 basis points.
Year to date.
Slide eight highlights our debt maturity profile, including average apartment mortgage rates by year versus prevailing <unk> insured mortgage rates, we realized a 43 basis point reduction in interest rates on $27 3 million of maturing debt in the quarter based on current market conditions, we expect to refinance mature.
Bring that throughout the remainder of this year and in 2022 at relatively flat rates.
Slide nine highlights our debt metrics debt as a percentage of total assets was 44, 1% at September 30 below our target for the year of less than 47%.
In addition, kill and finished the quarter with acquisition capacity of over $250 million.
I will now turn the call over to Robert Thank you Dale and good morning, everyone.
Today, I will provide an update on the strength of our apartment manufactured home community and commercial property segments before turning the call back to Philip to discuss our acquisition and development pipelines.
Please refer to slide 10.
<unk> continues to execute its long term growth objectives to increase unit holder value based on three key strategies.
<unk> increased films earnings from its existing portfolio to expand the portfolio diversifying geographically through accretive acquisitions with an emphasis on newer properties and three develop high quality properties in <unk> core markets.
We have made notable progress on all three strategic priorities. This year <unk> growth is intentional and focused keeping both community building and long term sustainability top of mind.
Slide 11 shows <unk> revenue growth for the third quarter and year to date by property segment.
Market fundamentals for apartments Rural Canada remains solid with consistently high occupancy rates coast to coast.
In Q3, 2021 comes occupancy increased 90 basis points contributing significantly to same property apartment revenue growth of four 1%. This trend continues today with 50% of kilometer 216 apartment complexes at 100% occupancy and 80% of the apartment complex as have only one unit.
Or less vacant.
After a challenging 2020, that's all kilns resort properties in the manufactured home community sector experienced record high vacancy in our commercial segment that required rental deferment and in some cases rental abatement 2021, Thats produced markedly improved results for films MHC and commercial properties.
Our MH business accounts for approximately 7% of total year to date net operating income and.
And these 39 communities kill them, one to land and the supporting infrastructure and leases sites to tenants that own their own homes and pay kill them.
And monthly site rent.
<unk> 39, Mhc's offer permanent year round affordable housing to 3800 residents. The remaining nine communities are seasonal operate from May to October each year and are often referred to as resort communities as they typically have water features as well as many recreational amenities.
Johns resort portfolio achieved record growth this quarter and year to date with the easing of COVID-19 restrictions and a return of Interprovincial travel all the resort communities opened on time and operated at near capacity throughout 2021.
Revenue growth as well as NOI growth were bolstered by MHC site expansions at many of kilns communities. This year.
It comes commercial segment consists of approximately 1 million square feet of Standalone commercial space that accounted for five 1% of comp NOI for the nine months ended September 32021, the majority of the commercial space is concentrated in three assets totaling 847000 square feet, namely westbound.
And Waterloo for brewery marks in Halifax, and the Charlottetown mall soon to be renamed royalty crossing in Prince Edward Island.
It comes commercial portfolio reported same property revenue growth of 8% in Q3, and six 2% revenue growth year to date, a combination of increased commercial occupancy rental step ups nominal rental abatements and a lower bad debt expense all contributed to better performance when compared to 2020.
Year to date, the commercial team has completed deals totaling 160000 square feet.
110000 square feet of renewals at a weighted average increase of 10% and 50000 square feet of new commercial leasing at an average net rent of $15 90 per square foot.
I will now discuss Johns apartment suite repositioning program.
The market demand for films, new and newly renovated suites remains robust slide 12 highlights comes planets, who deliver 550 reposition suites for 2021 to date in 2021, the average capital investment for a reposition suite is $26000, resulting in an average return on investment of 13%.
I want to emphasize that kill them reposition suites once they have become vacant and has not and would not pressure a resident to surrender their suite for repositioning.
The demand profit suites is not restricted to specific geographies or properties, but holds true across <unk> portfolio.
These upgrades provide attractive rental growth and return opportunities as well as improving the energy efficiency and curb appeal of the portfolio.
So finish the discussion on <unk> revenue growth I want to highlight some of the value proposition that has been successful for 20 years in attracting and retaining our valued residents and tenants.
We undertake to build and be part of our communities supporting housing initiatives that house 800, plus families needing additional support please refer to slide 13.
Quilmes close to 19000 apartment units and as noted earlier 5900, macys sites across seven provinces from Newfoundland to British Columbia.
We offer a range of housing options in each of our markets and I've always maintained a very responsible approach to increasing rents for existing tenants. The decision to move rent takes into consideration the financial demands on our tenants and the evolving economic climate and our communities through Canada and increasingly globally.
<unk> portfolio has a wide selection of locations unit sizes and layouts throat its urban markets in suburban communities with an average apartment rent of $1200 per month.
This represents considerable value and accommodates a diverse group of tenants and potential residents fully 35% of killing suites rent for less than $1000 per month.
And kills average MSC sites lease for $260 per month.
Slide 13 also compares kilns average rent to the median household income in the markets, where we operate.
Using CMA sees recommended 30% of medium household income as the upper limit for rent. This slide clearly shows kills rents are well below this upper limit.
I will now hand, you back to Philip Thank you.
Thank you Robert Please turn to page 14 to see our acquisitions summary slide.
This is a record year of growth for <unk> with $390 million in acquisitions year to date.
After a quiet third quarter, we have acquired four new properties totaling 482 units in Charlottetown Moncton and.
And two in Edmonton.
On October six we closed on a new 61 unit property.
In Charlottetown as shown on slides.
<unk> and <unk> the purchase price of this four story wood frame apartment building.
Was $15 3 million.
Our $251000 per unit.
And contains 30 affordable rental units approved under the CMA Sea National housing strategy program.
These projects are to encourage a stable supply of new rental housing for middle class families across Canada.
In addition, this purchase aligns with our ESG initiatives to increase our affordable housing base by 20% by 2025.
Average monthly rents for the affordable units or $1 14 per square foot, which is 65% of market rents.
At $1 76 per square foot. The property opened early this year and is 98% leased.
On October 18th kill them acquire into place for $31 8 million.
$269500 per unit, representing a stabilized all cash yield was three 9%.
Please refer to slide 17 and 18.
This new luxury 118 unit concrete building in London.
A mix of unit types with an average size of 1035 square feet.
This low quality assets has many of entities and is very well located and looked at.
The next two acquisitions on slides 19, and 20 are located Edmonton.
As a part of our geographical diversification and growth strategy.
We are increasing our presence in western Canada by using our established operating platform to absorb the management of these new assets.
On October 28, we acquired Heritage Valley Central a newly constructed 123 unit wood frame building for $28 9 million or 241000 per unit.
Representing an all cash yield of four 6%.
This property is near other killen assets and as close to the new admitted hospital that is under construction.
As well kill them has agreed to acquire nautical suites a one.
<unk> hundred and <unk> unit property that contains three wood frame buildings built in 2019 for $42 $3 million or $235000 per unit, representing a four nine all cash yield.
The average monthly rent is $1525 or $1 74 per square foot and is currently 98% leased.
Kill them is assuming a $32 $7 million mortgage with a two 3% interest rate that matures in March 2023.
We expect this purchase to close early next week.
Through acquisitions and completed developments, we have added 1601 appropriate units this year to our portfolio.
Our recently completed developments on slide 21 show the operating margins and annual NOI contribution of 10, Harley Nolan Hill and short run.
They were fully leased within six months of completion and contributed $2 7 million and SSO in the third quarter.
Our development pipeline provides us with an excellent opportunity to add high quality real estate assets to our portfolio.
Slide 22 shows the five developments underway in the following cities Halifax, Mississauga, Kitchener and two in Ottawa.
Adding an additional 497 units to our portfolio over the next 18 months slides 23 to 29 show updated progress shots of each development project along with construction information.
Cost increases have been minimal and we have experienced slight delays due to supply chain issues similar to all developers across the country today.
The governor remains on schedule and on budget.
He will be a great complement to our surrounding neighborhoods of the brewery and the Alexander apartment building in Halifax.
<unk> of two future development projects are shown on slides 30 and 31.
We expect to break ground on both of these projects in early 2022.
Finally, we continue to refine and advance our development pipeline a full list of our development pipeline is included on slide 32.
We are committed to being amongst the leaders in ESG for multifamily Reits.
And we are working to reduce our environmental footprint.
Our 2021, Chris results earned us a green to start designation.
Its also worthy to note that we also earned an a rating on the grass public disclosures survey.
An improvement from 2020.
And outperforming our greuze comparison group.
To finish Q3 has been a very good quarter with strong operating and financial performance.
Our focused strategy is leading to increased earnings a stronger balance sheet more geographical diversification and one of the highest quality of permanent portfolios in Canada.
This concludes the formal part of the presentation and we will now open up the call for questions.
<unk>.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone Youll hear three ton prompt acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from cooling process. Please press star followed by two years ago.
Speaker phone please lift your handset before pressing any one moment for your first question.
Your first question comes from Jonathan <unk> with TD Securities. Please go ahead.
Thanks, Good morning.
Good morning, Mark.
First Rob just to just to clarify I think I might've missed this but did you say 50% of your apartment properties are 100% Paul.
Yes. It is.
Okay, and 80% one year or less vacancy.
Correct.
Okay would that be.
I guess you'd have some markets in there that would be base.
Basically as strong as you've ever seen them would that be would that be fair to say.
What markets would those yes.
Well.
For the most part its coast to coast I think theres demand everywhere now the west a little bit in Alberta, a little.
But Atlantic Canada across the board, they're performing very well in Ontario, just a little bit of vacancy in Ottawa.
And it looks to be coming around now in the fourth quarter. So.
They are all strong.
Okay.
And then just switching gears on energy costs, but a lot of volatility in those.
Well what are your expectations.
For this winter versus last winter do you think with higher revenue you can sort of keep.
Margins similar to last winter.
We are expecting to see some pressure on natural gas and.
Oil costs.
As we've seen I think most people are expecting that I do think when we look at our total energy utility cost we are.
We're expecting more moderation, though like less increase on electricity and water, which should balance it out. So we will see we do expect to see especially in Q1, an increase in utility costs overall.
But there are electricity and water should be nominal.
But we'll.
We'll see.
With all that we've been investing a lot of those energy initiatives, we continue to.
Solar panel all of the other.
Other energy upgrades, so that should help.
And we know that our utilities here in Atlantic, Canada and securing.
Delivery lines and less volatile market. So that also should help we have done a lot of.
Teething plant conversions and that will help us as well that would be more efficient and these ones will be doing burning propane. So there's some efficiencies there.
Okay.
Hedging have you hedged much of your of your costs.
We haven't.
No when we look the pricing unlocking those end are pretty high.
Right now not a lot hedged, but we do have our biggest exposure in new Brunswick, and Nova Scotia again that have.
They've been very proactive after the volatility we saw years ago and securing lines to two less volatile market. So.
I think it'll be a different story than it was back in $2014 15.
Okay. Thanks, Al I will turn it back.
Thank you.
Your next question comes from Joanne Chen with BMO capital markets. Please go ahead.
Hi, good morning.
Good morning.
Just wanted to get to.
So how has obviously been a very strong quarter.
And front, it's great to see but.
I noticed how leasing has trended so far I guess in October and November.
And how does that cadence kind of continued.
The leasing trends.
Yes, yes.
In fact it has.
It stayed as strong if not stronger than what we would have where we would have.
Hello.
Did you hear us Oh, sorry.
When we got cut off their policies.
Okay.
Just to say that.
The leasing trending that we've seen when we ended the quarter. It has stayed as strong if not stronger in October and November, whereas historically, we will see we tend to see occupancy come off a little bit in Q4.
Seeing stronger than normal demand and leasing activity than in past years.
Q4.
That's great to hear and I guess just switching.
Acquisition side of things.
Right now where are you seeing I guess, the best markets in terms of the most attractive for a balanced winter in terms of growth potential.
The acquisition price I know the goal is to continue to diversify out of Atlanta, but youre still kind of.
Are you seeing more attractive opportunities in those markets right now given how strong it is.
So I think to answer your question, you're asking is are we seeing attractive opportunities in Atlantic, Canada as well right.
Yes, no we've got our eye on a number of interesting opportunities.
And Atlantic Canada.
Which we typically always have.
But there's a lot of opportunities in Ontario.
Which we're pretty excited about a lot of them would be added value sort of in terms of being able to go in and repositioning some of the.
These assets long term or with a development.
Surplus and density opportunity as well and then the west.
<unk>, there's lots of product available as well as Alberta.
Okay got it.
Obviously, I'm getting a lot of strength. These days so that's good to hear.
And I guess.
Let's see.
<unk>.
Really keeping your expenses.
Very minimal so I guess just on that what are you guys doing differently with respect to kind of how you're managing the portfolio to keep costs.
Costs down like the way you guys are.
Well I'd say that the energy initiatives, we are seeing the impact of that which we've already talked about.
We are looking at contract negotiations as we look for economies of scale across the country for everything from looking for opportunities slip with garbage collection and any of those large contract services.
And which is helping also working with our staff tremendous group at <unk>.
<unk> that keeping the buildings running well in it.
It can take on some of the smaller maintenance.
<unk> on their own and that teaching them that and expanding the capabilities of that team is also helping so across the board.
Looking for opportunities for efficiency tax appeals.
Our existing us so there's benefit there.
Conversions on the heating plant.
Okay.
Hello.
Pardon me it sounds like the phone may have went on mute.
On the company is that right, yes, sorry.
Alright, Joanna Okay, yes.
We just take them.
Quick.
Check here.
Please standby we are just experiencing a technical issue.
Thank you Sarah.
We can hear you now yes.
Okay great.
Maybe there's something impressing on something.
Okay.
Okay.
Okay.
Go ahead with your question yes.
Yes, sorry, just maybe one more Harley.
On the regulatory front I guess.
In 2022, I mean or is it do you think it's.
Well it would be likely.
So status quo and most of your markets.
I think it is.
Well I mean, there was.
Oh, sorry about that.
I think it's status quo, we don't have any insight to any changes in Ontario.
And the announcement was was out a couple of weeks ago regarding Nova Scotia, where there is not rent control to rent cap.
24 months.
Okay Alright.
Turn it back thanks very much airtime.
Thank you. Your next question comes from Matt Logan with RBC capital markets. Please go ahead.
Thank you and good morning.
Good morning.
With significant cap rate compression across the country. This year can you talk a little bit about what.
Your acquisition pipeline, and how you're balancing that with development and your thoughts going forward.
Well I think what comes first is that the the development side the planning as multiple years.
And the works it takes to get ready to.
Startup projects. So once it starts it's another two years so we've been working on.
The projects that we hope to finish in the next 12 months to 18 months for probably the last.
Five to six years, we're working on the next two or three to keep that pipeline going so that's a constant relative to.
What we see in terms of growth.
Compared to the acquisition side the acquisition side.
Again, it's always interesting and sort of changing but the deals that we're looking at you look at them in terms of where they are relative to the cap rate.
If they're accretive if we see good upside with the actual asset to them.
More than willing to sort of get to the point to to try to purchase it.
And with rent growth in your market.
Offsetting some of the cost increases would you say development yields are largely steady or has there been any compression on the development front.
Yes.
Well I mean again, there is pressure on the cost side right across the board in every market in Canada.
But by the time, you pro forma and hopefully by the time you finished that the market has again moved on the upside which takes care of all of the sort of the cost pressure thrilled that piece, but.
The interesting.
Part of your question is there is such a demand for housing in new supply across this country.
No matter, what we're going to have to figure out a way to build it.
To house, all the people and all the new folks that are coming into the country, So which gives us really the huge opportunity for the years to come.
Agreed.
Maybe just changing gears to the commercial property segment were there any nonrecurring items in the quarter or said differently, how should we be thinking about the cash NOI run rate that would be something around $10 million.
In terms of the investment side.
In terms of the NOI run rate.
Run rate.
Sure.
I'd like to think it's going to have a bit more growth in 2022, we've done some deals here that haven't made it to the income statement yet so it should improve I don't have a number for you. There is no reoccurring income in that.
No not unless you're not in the tender I.
I heard that question.
Okay. Good.
<unk>.
So 10, plus a little bit of growth here next year is going to better we should be thinking about the outlook for commercial.
Yes.
Yes.
And maybe one last question from me before we turn it back you talked about some of your energy initiatives and cost savings what are you seeing on the labor front.
Yes, there are pressures on the labor front.
And we're seeing and I think part of it is a federal policy on the service side, where some workers who are happy to not find themselves in the workforce.
But that were hoping in 2022 will change and I'll come back to work, but right now there's a bit of pressure and you're seeing it I know I notice in the paper today.
The minimum wage in Ontario will go to $15. So that's.
That's the way things are tracking.
Okay, well I appreciate the color that's all from me I'll turn it back thank you.
Thank you.
Ladies and gentlemen, as a reminder, should you have any questions. Please press star one.
Your next question comes from Matt Mccormack with National Bank. Please go ahead.
IL <unk>.
Just with regards to the Nova Scotia election.
The new Premier came out.
We put a rent cap in place, but noted that supply is the true answer to affordability have there been any been any new programs that would have been rolled out by the province at this point to encourage supply and obviously I would think that you guys as.
As a potential supplier of it would've been involved or may be involved in the future in providing affordable housing in Nova Scotia.
The only thing they've come out so far with as a $35 million investment.
Looking to support 1100, new units that would be the equity portion of.
How does the investment, but nothing other than that at this time.
Having met the Premier a number of times.
He is serious about looking to find a solution he knows who's going to take additional investment by I think the various levels of government have to come together.
And.
Contribute.
To make it I guess some of the new housing more affordable.
Also think he is engaging the city of Halifax in terms of.
Understanding the process for.
Behold permitting and development of new applications and not owning four multifamily developments.
Development, but for.
Large tracts of single family.
And if there is sort of.
Sort of a log jam that gets broken and then I think theres going to be more supply of all types of housing for metro in the next six to 12 months.
But it's still going to take time to build.
Sure.
Makes sense on all fronts, and then last one for me.
Edmonton.
You bought they're granted newer assets with pretty good yields.
Does that signal sort of.
Increased optimism around the Alberta market and could we foresee additional expansion there it does.
Yes, it does I mean.
That province is still heavily dependent on the price of oil.
This rebound in the price of oil I think its got on.
Positive effects for all of the province, and we see it in terms of leasing.
Just talking to whether.
Whether it's brokers or other developers out there that they see increased traffic.
Right across the board.
Okay makes sense.
Congrats I don't often get beat by a few cents on my estimate.
Yeah.
Our pleasure.
There are no further questions at this time. Please proceed.
Thank you very much for participating today in today's.
Conference call and we look forward to reporting fourth quarter results.
In February of 2022 thank.
Thank you.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a great day.