Q2 2022 Killam Apartment REIT Earnings Call
results, followed by Robert, who will discuss our MHC in commercial portfolio results.
I will conclude with a recap on our acquisition and developments and an ESG update. I will now hand it over to Dale.
Thanks, Bill. Key highlights of Killam's Q2 financial performance can be found on slide 5. Killam earned net income of $68.7 million and FFO per unit of 28 cents, up 3.7% from Q2 last year.
AFFO of 24 cents was up 4.3% from Q2 2021.
Slide six summarizes Kilm's same property NOI, FFO, and AFFO growth in Q2 and year to date. A strong quarter of top line growth of 5.2%, attributable to increased occupancy and rent growth on unit turns, was an important driver of 6.6% NOI growth. A more moderate increase in expenses of 2.8% in Q2 compared to 8.2% in Q1 also contributed to the strong NOI growth.
Expense growth in Q2 was moderated by the partial reversal of New Brunswick property tax expense related to Q1 following the province's June 2022 announcement to limit assessment increases to 10% for the 2022 and 2023 taxation years.
This Realty Assessment Cap translates into lower property taxes in New Brunswick for fiscal 2022 than the 15% originally expected and discussed in our Q1 results.
Strong top-line growth was a key highlight for the quarter. Killam's apartment portfolio achieved 98.0% economic occupancy in Q2, a 140 basis increase from 96.6% in the same period last year.
The line chart on slide seven highlights the improved occupancy we've seen over the last year and a half.
The chart at the bottom of the slide shows the strength across our portfolio. Our Halifax, Moncton, Charlottetown, Kitchener, Waterloo, Cambridge and Victoria markets all achieved 99% plus occupancy in the quarter.
We also saw marked improvement in Calgary and Edmonton with occupancy up 340 and 360 basis points from Q2 last year.
As well, St. John's Newfoundland achieved 94.5% occupancy in Q2 compared to 90.5% occupancy last year.
With supply constraints, properties are reaching full occupancy and market rents are increasing.
Slide 8 shows Kilm's Q2 apartment rental rate growth for the last five years. At June 30, 2022, rents were up 3.3% from June last year. The weighted average rental increase chart on the top right of slide 8 captures the increase in rents based on the leases that came into effect during each period. This offers more current data than the year-over-year results.
This chart shows that in Q2, we achieved a weighted average increase of 3.7% for new and renewing tenant leases that started in April through June , well above the 3.3% year-over-year
This is made up of 1.6% rent growth for existing tenants with leases renewing in the period and an 8.2% increase in unit rent on turns representing new tenants moving in during Q2.
Should this increased rent spread on turns continue, we expect to achieve higher than historic average rental rate growth for the second half of the year and into 2023.
Incentive offerings also impact revenue growth. Although the amortization of incentive offerings were relatively flat in Q2 2022 versus Q2 last year, we've had a consistent reduction in monthly rent incentive amortization in each of the last six months. We expect incentive offering amortization expense to continue to decrease as less incentives are offered in today's tight rental market.
As noted, the same property operating expenses increased by 2.8% in Q2. Please refer to slide 9. As in Q1, utility and fuel expenses were up the most by 9.1%, due primarily to higher natural gas prices.
Killamaw set this increase in expenses with a 0.8% decrease in property taxes driven by the change in New Brunswick to cap property tax assessments.
General operating expenses increased by 2.1 percent in Q2.
Kilm's debt maturity profile, which can be seen on slide 10, includes average apartment mortgage rates by year versus prevailing five and ten year CMHC insured mortgage rates.
With recent changes in bond yields, current borrowing rates are above Kilom's weighted average interest rates.
During the first half of the year, Killam refinanced $109 million of maturing mortgages with $150 million of new debt, the majority of which was for 10-year term at a weighted average interest rate of 3.32%, 55 basis points higher than the 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 our debt ladder.
We've been focused on reducing our debt levels over the last seven years and ended Q2 with debt as a percentage of total assets of 44.3% compared to 45% at year end.
Kill amended Q2 with approximately $88 million of capital available through its credit facilities.
film's key metrics are available on slide 11. I will now turn the call over to Robert, who will discuss our operating results in more detail.
Thank you, Dale, and good morning, everyone.
Kiln is focused on revenue optimization and expense management as we see the impact of our work across all three business segments, apartments, MHCs, and commercial properties.
Our MHC and commercial portfolios delivered especially strong results in Q2-22 and are expected to add meaningful contributions to kiln's growth going forward.
Kim's MHC portfolio realized same property net operating income growth of 6.5% in Q2-22 as shown on slide 13.
CIMS 9 seasonal resorts report an excellent results in Q222 with revenue increasing by 15.5%. And that operating income of 11.1% compared to last year's Q2.
Revenue increase at all seasonal communities this year, but kill them two new Brunswick assets or standards, generating a combined top-line increase of 56% versus Q2-21.
The lifting of COVID restrictions this spring permitted interprovincial travel in Atlantic Canada. That combined with many recent capital upgrades and additional amenity offerings drove demand for Kelton's Oceanic and Camper City seasonal resorts.
With high occupancy in July 2022 and pre-bookings well above last year's level for the remainder of the season, we anticipate the seasonal MHC properties will continue to outperform in Q3-22.
Her same property commercial portfolio also posted impressive results in Q2 2022 with revenues increasing 9.8% and net operating income up 11.6% as outlined on slide 14.
Commercial occupancy increased 320 basis points from 89.9% in Q221 to this year's 93.1% occupancy.
Kilmer sees a steady level of inquiries to lease at its three main retail assets.
Westmount Place in Waterloo and Royalty Crossing in Charlottetown attract international and national retail brands that seek to build on the accelerating occupancy momentum kiln has generated over the past 18 months.
Royalty crossing with 383,000 square feet is now 92% occupied, up 400 basis points since last summer.
We have seen a significant improvement in the performance of this asset since we purchased our initial 50% address in 2019.
To date, Killam owns 75% of Royalty Crossing with a very experienced local partner owning the remainder.
Recent activity at this property includes its renaming and rebranding.
installing new signage and exterior upgrades.
A new to Prince Edward Island, 4500 square foot Sephora has taken occupancy. A new BMO branch is under construction along University Avenue and near to date we have leased or renewed over 64,000 square feet at Royalty Crossing.
We are in discussions with additional quality tenants and Kiliman is confident Royalty Crossing will remain a high performing asset for the long term.
Inflation and housing affordability have been important topics of discussion in Canada this past year.
kiln takes its responsibility to be part of the affordable housing solution seriously and we're proud of our contributions as highlighted on slide 15.
42% of Kiln's apartment units rent for less than $1,100 per month.
This represents 8,000 affordable housing units in our portfolio. And these units are distributed throughout the core markets as highlighted on slide 15.
In 2021, Kiln increased its affordable housing portfolio by an additional 108 new units.
So now total 850.
representing 5% of our portfolio.
KILM is an active partner with many non-profit housing and government agencies as well as other charitable organizations such as the YWCA, Nova Scotia Mental Health and Turning Point Housing to name but a few.
Annually, we employ an independent, third-party survey company to poll our residents.
to assess their satisfaction with Kiln's housing and service deliveries.
We want to ensure our residents remain satisfied with the killing property as their home.
Results from our 2021 Tenant Survey are also included on slide 15.
The overall satisfaction rating was 87%.
which we are advised by a survey provider is markedly better than the industry benchmark for multi-residential owners.
As well, I would highlight that Kilm's overall satisfaction score has ranged from 87% to 90% for the last nine years.
In terms of satisfaction with your apartment unit, Kiln received a 90% satisfaction rating, another very positive outcome.
Our residents tell us they enjoy living at a Killam property and 83% consider their apartment to represent good value.
The significant increase in inflation, real-day taxes, and the upkeep costs for single-family homes these last two years.
further reinforces the value proposition Kilm offers its residents.
I will now hand you back to Philip to provide an update on our developments and acquisitions.
Thank you, Robert. As mentioned earlier, we have completed $119 million in acquisitions year-to-date.
Following a busy first half of the year, we expect acquisition activities to slow in the second half of 2022.
Photos and information.
on our largest acquisitions completed in Q2 are included on slide 17 to 19.
Overall, we are pleased with the earning contribution from acquisitions completed in the last 18 months.
Our most exciting acquisition in 2021 was the 785 unit Kitchener water portfolio.
During Q2, we completed the first upgrades to units in these buildings.
and are thrilled with the results.
Before and after photos are included on slide 20.
We are seeing strong demand for our renovated units across the country, and we are on track to meet our target of 600 units for the year.
We are very pleased with the lease up on our recently completed developments as shown on slides 21. We are very pleased with the lease up on our recently completed developments as shown on
The latitude, which opened in January , is now 88% leased. And the K, which opened on April 1st, is now fully leased.
The K marks one of the fastest development lease-ups in Killams history and underscores the incredible demand for new housing in the GTA.
The Luma, which recently opened, is already 38% leased.
Photos of the luma are included on slide 23.
We have three remaining developments underway. The governor in Halifax, which is expected to be completed by the end of this year. Civic 66 in Kitchener, which is expected to be completed in early Q1 2023.
in the Carrick and 139 unit building in Waterloo, which recently broke ground and is expected to take 32 months to build.
In addition, we have a 10% interest in the second phase of Nolan Hills, a 334 unit complex located in Calgary. This is standing by for the second phase of the project, a 24 unit complex located in
We will purchase the remaining 90% of this development upon completion in late 2023.
Slides 25 to 29 show renderings, progress photos, and key financial information on our active developments.
During the quarter, we continue to move forward on a number of our 2022 ESG initiatives.
We continue to work on increasing the number of properties with building certifications.
investing in energy efficiency projects including solar projects to decrease our energy consumption in greenhouse gas emissions.
At the end of 2-2, we had 12 completed projects, producing an estimated 1.28 megawatt hours of annual production. And subsequent to the quarter, four more installs were completed, increasing our total production to 1.6 megawatt hours per year.
And finally, increasing the number of electric vehicle charging stations across our portfolio. We have 74 chargers installed to date of the 438 EV chargers planned for 2022-2023.
To conclude.
The fundamentals supporting the rental housing sector in our portfolio are strong.
And we are optimistic on our ability to continue to grow NOI in net income.
I would like to thank our employees for their hard work and their dedication.
Thank you. And I will now open up the call for questions.
Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session.
If you would like to ask a question, please press star followed by the number 1 on your telephone keypad.
If you would like to withdraw your question, please press star followed by the number 2.
One moment for your first question.
Your first question comes from Mark Rothschild of Canaccord. Please go ahead.
Thanks, and good morning, everyone. In your disclosure, you wrote about the comment that acquisition…
pace will slow in the second half of the year. Is that based more on just being careful with capital in this environment or is it more that it's just difficult to set values and prices for assets with volatile interest rates?
I think it's the first
Comment that you mentioned it's really about being with our capital and waiting to see really where the markets go. And I think it's going to take all of the 3rd quarter into the 4th quarter to get a real. Clear picture.
Okay, great, thanks. And then on the development side, you guys have been building for a number of years now and it's worked out pretty well, but development costs are...
continue to go up and in some places quite materially. Does this impact your view maybe in the near term at least and starting a new project and the yields you can achieve or is the rank growth enough to justify and maybe make it valuable to keep on going?
I think it depends on where you're building in the country. It depends on the type of construction is part of that answer. For instance, you can still build.
a very good product in Western Canada, especially in Alberta. Thick built with underground concrete.
Parking for 250 to 300 thousand dollars all in per door.
if you get into the larger urban centers.
Ontario, basically the prices have gone up. We've seen that and I think our strategy and the reason why we have announced the first development on our Westmount property is because we are looking at that project the same way we looked at one in Halifax a number of years ago which was basically half was condo and half was rental.
So we are giving ourselves maximum flexibility in about two and a half to three years to determine will it be a hundred percent rental or will it be one part of it that we will sell as condo and take that profit to offset the overall cost and yield.
Okay, great. Thanks so much. I'll turn it back.
Your next question comes from Matt Kornack of National Bank Financial. Please go ahead.
Hey, guys, I don't know if it's possible, but can you give a sense as to how much N.O.I. would have been contributed by the K? I don't think Luma would have done much of anything in the quarter. And just how we should expect that N.O.I. to come on through the balance of the year. It sounds like you're expecting 2.7 of the 5.5 total, but just a sense as to what was in this quarter.
It would have been pretty light in this quarter when we think of NOI. Erin's just pulling it up here. But I think that you can expect, you know, when we look at, you know, we're fully for September , we're essentially fully occupied. So from an NOI perspective, it's going to be a strong contributor for the last four months, last quarter for sure. And it was very limited in two weeks. Yeah, it would have been because people just started moving in. So it does take a while, but.
not encumbered by prior structures, but I think the next few phases are a little bit more intensive. So I'm just wondering is this a pilot project or are you still committed on to a timeline on the the other aspects of that development regardless of how this goes.
Good question, and I think really the first part of it is that we do not see any slowdown on the demand side for the product. It really does depend on the cost side.
So answering your question, we believe that even in the Kitchener-Waterloo area, demand is very strong for
new housing, you know, higher end to justify developing these assets. And I think that basically where we are, we have the first one as of right.
Approved and over the next year, a year and a half, we will look at more of a master plan and be able to sort of give. The sort of the answer you're looking for in terms of 2nd phase 3rd phase. In the next at that time period.
And your commentary on condo is interesting. To what extent does that actually improve the yields for the residual rental that you keep? And is it entertained that there would be a condo component in those other phases in that project as well, or is this unique to the first phase?
No, I mean it could be that you look at it, there's developers that we see right across the country that are committed to long-term rental development.
but depending on where we are in the cycle from a cost point of view.
some of these developers will basically say we will build two buildings at the same time, one rental, one condo. And take the profit from the condo and just sort of offset and subsidize the rental in terms of the capital that you're going to have to use over the 24 to 36 month period to construct.
So in a case like this, as costs continue, one of the largest components of this is actually the HST. And if it goes condo, that is basically borne by the owner of the unit. So therefore, from a cost point of view, the cost is a lot less and there is really good for customers.
and profit merchants to be involved in the condo side of the business.
Okay, so that's very interesting. Appreciate the color.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one at this time.
Your next question will come from Jimmy Shan of RBC Capital Markets. Please go ahead.
Thanks, just a quick follow-up on the case. So given the fast lease up and at three bucks a foot, I guess it was fair to assume that it was probably a good runaway in getting further price increases in that property or will be kind of like above market.
within the competitive set in that market.
I think as, I mean we are seeing market rates steadily increase so I think over time the expectation as long as that trend continues that on turns we would expect to be able to see those markets continue to rise, we'll be able to see rent growth in that property. Based on the demand and the speed of Lisa, I think it's comfortable to assume that there's opportunity to see rent move.
Yeah, okay
Okay, and then the, I know the seasonal resorts a small part of the business, but they've done so well in the last couple of years. How are you thinking about that business? Is there an opportunity to further scale that up? Is there a willingness to do that? And kind of curious as to how you think about that piece of the business. Well, I think that there is a renewed interest, and I might have even said this last quarter on the call, to grow the business.
not only the apartment business, but there's renewed interest in terms of the MHC and seasonal side of our business.
and really concentrate on from a commercial point of view the assets that we have. We're not out there looking for more commercial assets today, but the ones we have we just see real upside and in terms of expanding, releasing some of the space and improving the operating side of them. So we see good opportunities for growth commercial and then the MHC side it's interesting because
One, in today's environment, it is really a good alternative for affordable housing for all Canadians.
across the country. So we are out there looking and the interesting thing about the seasonal side of the business is that that is leisure dollars for Canadians and there is a huge demand for that as well. So from our point of view it's just as you know, we are out there actively looking to grow that side of the business.
Okay, thank you.
Your next question comes from Lorne Kalmar of TD Securities. Please go ahead.
Thanks. Maybe just flipping back quickly to acquisitions. I know you mentioned a slowdown. Do you guys think you can still get to your 150 target for the year?
Well, I mean, we're going to have to wait and see. I mean, we'll have to wait and see what really the 3rd quarter going into the 4th quarter looks. But from our point of view, 120, 150. It's kind of almost just a rounding error. It's just really 1 building. So. It's a wait and see.
Fair enough. And then.
What do you know, obviously demand continue to get stronger. What do you guys estimate the mark-to-market on the portfolio is on the apartment portfolio is at the moment?
Well, looking at how those market rents are moving, we would say probably around 25%. We've got variability by different markets, but we are seeing those numbers and what we're able to achieve increase every month. So we're watching it carefully, but there is a lot of room.
Cool.
Just quickly, actually sticking with that, on the repositioning, what were the lifts you got this quarter? I may have missed it, but I was just wondering.
Oh, the list of positions of about 30%. Yeah. 30%.
Okay, we're still getting a pretty strong uptake there. And then just lastly, on the CARIC, how much of the cost would be tendered as of right now? Thank you very much and good luck on your long journey ahead.
75% of the hard costs.
Okay, great. Thank you so much. So Lauren, I just want to add one thing in terms of the 30% the investment there is typically $30,000 and then some of the units we're doing it's over $50,000. So now there's we're investing a fair bit of money. See that lift
question comes from Sairam Srinivas of
Thank you, Aparita. Thank you, Aparita.
My first question, I mean most of my questions have already been answered, but I thought it might be a good idea to kind of zoom down on the transit market from an operations point of view. I see we have had a good quarter in terms of leaving. Maybe if you could give us a little color on what's happening there in terms of are you still seeing the demand continue and ending for the rest of 2022?
For leasing, sorry, just to clarify is that we are asking demand to continue for leasing.
Yeah, can you repeat?
across the portfolio?
I know especially just looking at New Brunswick because there are some occupancy gains as well as some rental upside there. Like is there something specific that's happened there or do you just feel that it's going to continue for the rest of the year?
We're seeing continued strength in our New Brunswick markets.
There are still marked market opportunities in the market, leasing continues to be strong. Really across all of our markets, we're just about at full occupancy here and New Brunswick would be included in there. Part of the gain in New Brunswick too is that there was a portion of the portfolio that we were paying for the electricity and as the markets become stronger we stopped doing that so we were seeing some gains there but New Brunswick economy is strong.
Perfect. Thanks for having us, guys. I'll join back.
There are no further questions from the phone lines. At this time, I will turn the call back to Mr. Fraser for closing remarks.
I would like to thank everybody for participating and listening to our conference call.
Today, and we look forward to our 3rd quarter conference call in the beginning of November . Thank you.
Ladies and gentlemen, this concludes your conference call for this morning. We would like to thank everyone for participating and ask you to please disconnect your lines.