Q3 2022 Killam Apartment REIT Earnings Call

November 9, 2022

Good morning, ladies and gentlemen, and welcome to the killer apartment real estate investment Trust third quarter 2022 financial results Conference call.

At this time all lines are in listen only mode. Following the presentation, we will conduct a question and answer session.

If at any time during the call you require immediate assistance. Please press star zero for the operator. This call is being recorded on Wednesday November nine 2022.

I'd now like to turn the conference over to Philip Fraser. Please go ahead.

Thank you good morning, and thank you for joining Kellogg apartment Reits third quarter 2022 conference call.

I am here today with Robert Richardson Executive Vice President Dale Noseworthy, Chief Financial Officer, and Aaron Cleveland Senior Vice President of Finance.

Slides to accompany today's call are available on the Investor Relations section of our website under events and presentations.

I will now ask Karen to read our cautionary statement.

Thank you Philip this presentation may contain forward looking statements with respect to kill them apartment REIT and its operations strategy financial performance condition or otherwise the actual results and performance of Killen discussed here today could differ materially from those expressed or implied by such statements.

Such statements involve numerous inherent risks and uncertainties and although killer management believes that the expectations reflected in the forward looking statements are reasonable there can be no assurance that future results levels of activity performance or achievements will occur as anticipated for further information about the inherent risks and uncertainties in respect of forward looking statements. Please refer to <unk> most recent.

<unk> annual information form and other securities regulatory filings found online on SEDAR.

All forward looking statements made today speak only as of the date, which the presentation refers and kill and does not intend to update or revise any such statements unless otherwise required by applicable securities laws.

Thank you Eric.

We are pleased with our strong financial and operating results for the third quarter.

Our continued focus on our three growth strategies has resulted in an increase in same property NOI of five 1%.

And an increase in funds from operation of three 3% for the quarter.

The fundamentals are strong in our core markets, which has translated into same property revenue growth of five 1% and the highest occupancy in our history.

Based on our year to date growth, we have increased the same property NOI guidance for 2022 to above 4% compared to our original target of 2% to 3%.

Our investments in Ontario, Alberta, and BC over the last few years.

Our increasing our NOI outside Atlantic, Canada, which has been a strategic priority for <unk> for the last decade.

Year to date NOI outside of Atlantic, Canada is 35, 7%.

The lease up of the latitude the K and Luna will further increase NOI generated outside of Atlantic Canada during the remainder of the year.

Looking further out we are targeting over 40% of NOI coming from outside of Atlantic Canada by 2025.

Based on the rapidly rising interest rate environment and volatility in the capital markets. We have taken a pause on acquisitions during the second half of the year.

Acquisitions will continue to be an important avenue for <unk> growth in the long term.

However.

We believe now is not the time to be aggressive on.

On the acquisition front.

Although supply chain and labor constraints have pushed the completion of the governor and civic 66 out a couple of months.

From the original completion date, they are both exceptional assets that will enhance our existing portfolio.

It will be great additions to Canada's housing stock.

Dale will now discuss our Q3 financial results followed by Robert who will discuss our MHC commercial portfolio results in a repositioning program.

I will conclude with an update on our current and recent developments and in ESG update.

I'll now hand, it over to Dale.

Thanks, Bill slide five.

Financial.

Film earned net income of $3 $6 million in the period and <unk> per unit of 31.

Up three 3% from Q3 last year.

<unk> per unit of <unk> 28 was up three 8% from Q3 21.

Kill them same property NOI, <unk>, <unk> and <unk> growth in Q3 and year to date are summarized on slide six we had a strong quarter with top line growth of five 1% driven by higher apartment occupancy rental rate growth and gains in both seasonal MHC and commercial revenues.

Kill them Department portfolio achieved 98, 4% economic occupancy in Q3, a 100 basis point increase from Q3 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 fixed of our core markets achieved 99% plus occupancy in the quarter, including Calgary, which had been carrying higher vacancy for the last few years.

Ottawa is another market, where we saw strong improvement in occupancy momentum continues in all our markets as we wrap up 2022 and head into 2023.

As shown on slide eight we also saw a 10 basis point reduction in incentive offerings. This quarter. We expect this reduction to continue into Q4 and into 2023.

The weighted average rental increase chart on the top of slide eight captures the increase in rents based on the leases that came into effect during each quarter. This offers more current data than the year over year average rent increase results in.

In Q3, we achieved a weighted average increase of four 2% for new and renewing leases that started in July to September .

This was made up of two 1% rental growth for existing tenants with leases renewing in the period and 11% increase in unit rents on turn representing new tenants moving in during the quarter.

Same property operating expenses increased by five 2% in Q3, please refer to slide nine as in the first half of 2022 utility in fuel expenses were up the most by nine 8% due primarily to higher natural gas prices.

<unk> operating expenses also increased by five 5% in Q3 relating to inflationary pressures.

<unk> debt maturity profile, which can be seen on slide 10 includes average apartment mortgage rates by year versus prevailing five years teammates the insured mortgage rates.

Following recent interest rate increases current borrowing rates are above <unk> weighted average interest rate during the first three quarters of the year, killing refinanced the $132 million of maturing mortgages with $177 million of new debt. The majority of which was for 10 year terms at a weighted average interest rate of three.

43% 76 basis points higher than the rate on the maturing debt.

Financing at higher rates is expected to lead to interest 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 for the last seven years and ended Q3 with that as a percentage of total assets of 45% in line with our strategic target for the year.

Kill them ended Q3 with approximately $79 million of capital available through its credit facilities.

<unk> debt metrics are included 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. We continue to see positive results across all business segments, our MHC and commercial portfolios had strong quarters and are expected to continue to add meaningful contributions to <unk> growth going forward.

On slide 12, <unk> MIP portfolio realized same property revenue growth of seven 7% in Q3, and our nine nine seasonal resorts had very strong summer rentals, achieving revenue growth of 12, 7% in Q3 and net operating income growth of 10, 3% as highlighted on slide 13.

Slide 14 shows our same property commercial portfolio, which also posted healthy gains in Q3 with revenues up six 3% and net operating income up six 6%. These improvements reflect increased occupancy to 92, 5% in Q3 versus 89, 6% in Q2 Q3 last year.

We are optimistic about the leasing momentum across our 1 million square feet of commercial properties. The commercial portfolio was proving to be very complementary to <unk> apartment portfolio.

We continue to invest strategically in our portfolio with capital upgrades energy efficiencies and unit repositioning year to date, we have repositioned 496 units are on track to meet our target of 600 units for 2022, we are experiencing strong demand and healthy rental growth as these renovated units come.

Online with an average investment per unit of $26000 come generates an average return on investment of 13%.

We are proud of the capital investment that modernize our portfolio improving the sufficiency and marketability.

Slide 16 is an example of a common area upgrade we completed in Q3, our clinical towers, a 233 unit building centrally located on the Halifax Peninsula.

Due to its close proximity to downtown and both Dow housing in St Marys universities.

This property has been attractive to students of young professionals since we acquired it in 202004.

We identified the opportunity to deliver expanded amenity space.

Including opening up in renovating formerly unused space on the second level to create a social room, including a boardroom and a fitness center on the ground floor.

These renovations have been incredibly well received by tenants and are expected to lead to record demand for this property.

Continued population growth is also expected to drive demand for our properties across Halifax.

We hosted an analyst and Investor tour in Halifax in early October and participants were impressed with the growth and vibrancy of the city.

As the chart on Slide 17 highlights population growth in Halifax has continued to remain at near record levels, the city's attracting people from across Canada and around the world.

It's exciting to see that young people are driving much of this growth the largest cohort of residence and Halifax is now 25% to 34 years old compared to 35% 44 years old 20 years ago.

These young people are important for the economic growth <unk>.

And its increasing vitality further other cities in Atlantic, Canada, such as mountain in Charlottetown are also seeing similar profit similar population trends I will now hand, you back to Philip to provide an update on our development and acquisition.

Thank you Robert 2022 has been an important year for pillows development program with the completion of three projects.

We are very pleased with the lease up of these properties as shown on slide 20.

The K as seen on slide 21 was completed in April and was fully leased by August the latitude on slide 22 opened in January and is now 93% leased.

Both of these properties were built with geothermal heating and cooling systems and are expected to reduce heating and cooling energy consumption.

By approximately 25% when compared to conventional system.

The latitude was built adjacent to our existing building frontier and provide 17000 square feet of community space for our tenants.

With amenities, such as fitness center yoga studio social rooms, pet loss and the golf simulator with an average monthly rent of $3 <unk> per square foot. This demonstrates the strong demand from tenants.

Turning to high quality appropriate as affordable alternatives to home ownership.

Luma, which opened to tenants in June reached substantial completion in Q3, and a 62% leased.

Slide 24 shows the three remaining developments underway the governor in Halifax, <unk> 66 in Kitchener, which were both expected to be completed are both expected to be completed in early 2023 and the carrot.

139 unit building in Waterloo.

Which broke ground last quarter and is expected to take 36 months to build this.

This building will be killers first use of a piranha wastewater heating a recovery system. This system includes a large storage tanks in the basement, where the piranha heat pumps remove heat energy from the buildings wastewater and transfers.

To the incoming water for domestic use and the units. This system is expected to reduce the building's hot water energy consumption by over 400000 kilowatt hours annually compared to a conventional heating source.

We are also registering the development is a condominium, which will give us the flexibility at a later date to sell a portion of all the units a portion or all of the units or keep it as a rental building render.

Renderings progress photos and key financial information on these active developments can be found on slides 25 to 29.

In October we obtained our 2022 gross results, earning an additional star Green Star designation and a 15% score improvement from our 2021 rating kill them now holds a green three-star designation.

Public disclosure reading of outperforming the global scoring average of B.

Throughout the year, we have been investing in green solutions as highlighted on slide 30.

With the opening of the <unk> 66, we will have six properties using geothermal heating and cooling increasing our unit count to 1021 apartment units.

We continue to invest in solar with the completion of our first installation in Alberta this quarter at <unk>.

Making it our 17th solar installation in our portfolio and increasing our installed solar capacity.

To an estimated annual production of $1 7 million kilowatt hours annually.

Finally, we.

We continue to prioritize certifying <unk> through various certification programs.

In order to ensure we are providing our tenants with the best operating and living standards. We are on track to certify an additional 500 units this year, bringing us to 13% of our portfolio certified and on track to meet our target of certifying 20% of our portfolio by 2025.

To conclude.

We are focusing on producing high quality developments, providing high quality living standards for our tenants and investing in innovation green energy to reduce our carbon footprint, while mitigating our exposure to a rising energy costs.

As seen across all regions the fundamentals supporting the rental housing sector in our portfolio are strong we are optimistic in our ability to continue to grow NOI and net income.

I would like to thank our team at kill them for their hard work and their dedication.

And I'll now open up the call for questions.

Thank you ladies and gentlemen, we will now begin our question and answer session should you have a question. Please press star followed by one on your Touchtone phone, you'll hear a three part acknowledging your request if you'd like to withdraw your request. Please press star followed by <unk>.

If youre using a speaker phone please lift the handset before pressing any key.

Your first question comes from Sergey <unk>.

Comps Cormack Securities Your line is open.

Thank you operator, good morning, everybody and congrats on a good quarter.

So just going back to your comment on the colon breaching peak occupancy this quarter.

Going forward to the next couple of quarters, how should we think about the balance between growth and occupancy.

Well, it's always a balance that we're looking for certainly the momentum is continuing on the occupancy side. So on turns will be maximizing.

Those brands and we've got <unk>.

Following guidelines in terms of renewal and in some markets, where there's a little more flexibility looking to maximize that too. So looking forward. Most of the topline growth is going to come from from rent growth. There is still some occupancy when we look forward year over year Calgary as I mentioned in the comments had been Albert had been carrying a little bit more vacancy.

And then some other markets in Ottawa as well, so theres going to be some opportunity back.

It's managing that balance in the current environment, where youre at.

People are looking for a place to stay.

Thanks, Bob and then just following up on that in terms of markets are looking are there some markets that are fundamentally more attractive right now relative to all those.

Not fundamentally.

<unk> <unk>.

12 major markets, we report on and fix would be at 99% occupied.

And so.

They are all strong.

Thanks, guys I'll turn it back thank you.

Yes.

Your next.

<unk> comes from Jonathan Culture from Keybanc. Your line is open.

Thanks, Good morning.

Just on the.

Same property NOI guidance.

Bumped up to 4% you are kind of running at 5% year to date, so that would suggest.

The bottom end is kind of a 1% growth for Q4.

And I know you are.

Pretty confident on the revenue side so.

That just utility costs, the unknown of utility costs, what's what's kind of the drag there.

Yes utility would be one.

As we head into late fall early winter and we've seen what's been happening in terms of the utility costs. So that would be probably the biggest piece, but I think I said above 4%.

Occupancy as well because year over year, we were quite high in Q4 last year.

Okay.

Fair enough and then on the repositioning program Youre going to hit your <unk>.

Hopefully hit your 600 number this year is that something we can is that a number we can think about going forward or is that a program you can scale, even a little bit more.

That's a number you can think about going forward.

Okay.

And I guess the last question you talked about registering.

The Waterloo development.

I think the Waterloo development as condos is that something you can think about going forward for more new developments, just as a way to potentially fund.

Absolutely.

Yes.

Hey, Nathan.

Quick.

I'll turn it back.

That's a good relatively short lots of calls today.

It gives you flexibility Jonathan.

Okay terrific. Thanks, guys.

Okay. Thanks.

Your next question comes from Kyle Stanley from David Barden.

Your line is open.

Thanks, Good morning, everyone.

Just wanted to look at new Brunswick, a little bit I mean, it continues to be very impressive I'm. Just wondering if you can just talk about some of the key drivers that youre seeing there.

Contributing to the performance.

Well I mean.

Almost the same rate across the country. There is population increase in all three centers that we operate in and there is lots of jobs for people in those markets.

Ken ask for much more.

Resources strong in St. Johns is seeing a lot of work with it.

Its container shipments as the traffic's up markedly so across the board things are firing on all cylinders.

Okay. Thanks for that maybe.

Maybe just turning to your developments I'm just wondering.

What the NOI contribution from <unk> would have been during the quarter and when you expect to achieve stabilization there.

Alumina would've been very minimal in terms of I mean, just coming on.

In Q3, and we are still in lease up mode. There so it would be minimal.

Okay, Okay fair enough and then <unk> looking I mean, it'll be probably.

Yes.

Between early mid 'twenty three.

Per stabilization there so we're at 62% and we're really pleased with how lease up going on there, but it's that.

It's going to be take a few months to lease that up.

Okay fair enough, but I mean, I guess, just sticking with development and looking at Governor and Civic I mean, we got the tour governor when we're in Alpha and I'm just wondering.

Can you speak to any early developments on the leasing program there as you approach.

<unk> early next year.

What we've got.

We got two to three spoken for and.

The effort is to get those folks and as fast as we can so we're looking hopefully.

The first people moving in.

Sometime either in February or March and I think the activity, we've been holding back relative to showing what the product is going to look like and we're quite comfortable and confident that there will be quite a bit of demand. Once we finish it and people can walk through and see the new units.

Fair enough.

So I think sorry go ahead.

Again, a little bit behind but we believe we're going to have the first six floors open.

The first one.

February maybe as late as the end of February .

And we've got some pretty strong pre leasing already.

Okay, great to hear thanks for that I will turn it back.

Your next question comes from Mark Rothschild from Canaccord. Your line is open.

Thanks, and good morning, everyone.

The development clearly has worked well over the past number of years going forward.

Do you anticipate rising costs to cause you to rethink some of these projects or does it starting new projects or does it impact the going in yields or if the rent growth enough to offset all of that and make it something you want to continue in a big way.

The continual continuation of Big way is probably no I mean, we're going to be careful for the mix.

Property that we start but I think theres a few positive signs out there.

One is the proposed changes in Ontario for government.

Basically done or will do.

We're going to basically clean reduce a lot of the costs and I think it is going to be cheaper from a development point of view from a land dedication so theres quite a few positive things there.

And I think that will help start to sort of bring back the costing of these developments and I think.

There's opportunities from.

We're looking at developments within the affordability factor to it and there was lots of talk about increased government programs to help offset the overall cost.

For new product, which is pretty exciting.

And then at the same time there is still is.

From our point of view opportunity to see rich rising and new developments.

So if you go on the ground thinking your pro forma $3 Theres, a good chance in two and a half years' time, it's going to be higher.

The issue today is availability of capital.

And what youre going to and where you put your capital.

Okay, Great and maybe just one more question when we look at the cost of debt will be similar to the rates you receipts in the quarter on new debt or has it moved further.

Sorry, what was your asking cost of debt.

Rates on new mortgages as you refinance that.

The rates are moving as the bond yields move right Mark So it's what we're doing at the beginning of the quarter is cheaper than what we're doing today. So we're looking at him HCN shared probably between four five and four 8%.

A much different in five and 10, but.

It's changing around by lender it by day.

Okay, Great. That's helpful. Thanks, Thank you.

Yes.

Your next question comes from the line of Mike Mccormack.

From National Bank Financial your line is open.

Hey, guys.

Just a quick follow up with regards to I mean, you.

And the cost and availability of financing with regards to development are you expecting I mean, notwithstanding your pipeline, but others in the market to potentially put projects on hold and then we will have an issue of less supply as we're seeing some of this population growth across the country.

I hope not.

And then the reality is I really don't know I mean.

It kind of start to here.

But I think.

The lenders that we have in Canada are very good they understand risk we understand the exposure.

Basically the other thing Thats given us is that in a rising interest rate environment.

The cost of debt is going to be more which means that there's going to be probably more equity put into projects. So it depends on the.

These individuals and private companies or other sort of.

Entities out there.

But the other thing is that there is a lot of money still out there in the system.

Fair enough no that makes sense and then for you guys I mean, <unk> Aurora that project once it.

It achieves final planning I mean, I assume it's of a size that you'd be willing to go ahead with it.

Whenever you can started in 2023 is that a fair comment.

I mean, if this.

This was last year I would've been saying I think we are.

Back to me to get.

Will permit any day and here. It is another year, that's gone by and we don't have the permit.

So that will be a decision.

Once we actually get it in their hands.

Okay, Yeah that makes sense.

And then just on Jonathan's earlier question with regards to the 600.

Sweet renovations I think the opportunities 5500, but that ultimately depends on I guess, what suites turnover.

I guess do you see kind of 10% a year of that figured that would be suitable type.

Sweden to renovate and reposition.

10% of our turnover.

5500 opportunity.

Oh, yes, that's a fair number yes, okay.

Okay.

Fair enough. Thanks.

Thank you.

Was wondering because I don't know what the nature is in terms of the suites that are.

Do those tend to be longer.

<unk> leases that are the opportunity or are you seeing it in shorter duration leases as well we are having the opportunity and shorter duration because when you look at we've been at this for about four years five years, we've ramped it up so there is still lots of opportunity across the portfolio.

Okay fair enough. Thank you.

Thanks.

Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by one.

Your next question comes from Joanne Rodriguez from Industrial Alliance. Your line is open.

Okay.

Hi, guys.

Expense inflation, obviously, you said almost every market, but you know in new Brunswick is seeing the expenses held fairly in check I know Martin had the property tax reversal.

Do you mean, the other two cities and even even in St. John's Newfoundland is seeing pretty minimal expense growth not just this quarter, but kind of a couple of quarters running now.

What is it about those markets that are trying to keep it in check as it just cheaper utilities or anything beyond that.

Yes in Newfoundland, it's certainly it's all electrical sneaking I'll have the exposure to natural gas and New Brunswick. It was mainly driven by the property tax at a reduced property tax across all of the regions there.

So it was more than just function okay.

And just with all of them.

Okay.

And then second question you may have.

Put in there.

<unk>, 40% target for NOI generated outside Ontario by 2025.

How would you say that split between Ontario versus Western Canada.

So I think we're looking at a big picture so as combined.

Depending on how things go over the next couple of years.

We're big believers of the west, especially Alberta in the last year or so.

<unk> of oil.

Pretty vibrant market right now.

BC has been very good to us so far and plus we've got a great base in Ontario, with a lot of upside so even the developments, we've just completed and going to be completed in Ontario.

Alone are going to help us in the shorter term, Ontario looking forward for next year should grow just based on the lease up of those developments alone.

Okay. Thanks.

Thank you.

Yes.

There are no further questions at this time I will turn the call back to Mr. Fraser for closing remarks.

Thank you for participating today, and we look forward to reporting Q4 2022 next February .

Thank you.

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

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Q3 2022 Killam Apartment REIT Earnings Call

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