Q3 2024 Killam Apartment REIT Earnings Call
Good morning, ladies and gentlemen, welcome to the kill them apartment real estate investment Trust third quarter 'twenty 'twenty four financial results conference call at.
At this time all lines are in a listen only mode. Following.
Following the presentation, we will conduct a question and answer session.
If at any time during this call you need assistance, especially start Joe for the operator.
Call is being recorded on November seven 2024.
Speaker Change: I would now like to turn the conference over to Mr. Philip Fischer President and CEO. Please go ahead.
Speaker Change: Thank you good morning, and thank you for joining killed apartment REIT third quarter 2024 conference call.
Speaker Change: Thank you good luck.
Speaker Change: Thank you good morning, and thank you for joining killed a perfect.
Thank you good luck.
Speaker Change: Thank you.
Speaker Change: Good morning, and thank you for joining killing apartment REIT third quarter 2024 conference call I'm.
Speaker Change: I'm here today with Robert Richardson Executive Vice President.
Speaker Change: Noseworthy, Chief Financial Officer, and Erie, 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 Aaron to read our cautionary statement.
Aaron: Thank you Philip this presentation may contain forward looking statements with respect to kill them apartment REIT and its operation strategy financial performance conditions are otherwise.
Aaron: Actual results and performance of kill them discussed here today could differ materially from those expressed or implied by such statements such.
Aaron: 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.
Speaker Change: Further information about the inherent risks and uncertainties in respect of forward looking statements. Please refer to kill them. Its most recent annual information form and other securities regulatory filings found online at SEDAR plus all forward looking statements made today speak only as of the date, which this presentation refer and kill and does not intend to update or revise any.
Speaker Change: Such statements unless otherwise required by applicable securities laws.
Speaker Change: Thank you Erin we are very pleased with our strong financial and operating results for the third quarter of 2024 kill them deliver F. F O per unit of 33 cents per unit in the quarter.
Speaker Change: A three 1% increase from 32 cents in.
Speaker Change: In Q3 2023.
Speaker Change: We achieved seven 4% same property NOI growth across the portfolio in the third quarter.
Speaker Change: Positioning us to meet our target of 8% same property NOI growth for the year.
Speaker Change: We have also made very good progress towards achieving all of our strategic goals as shown on slide four.
Speaker Change: We ended the quarter with 47% debt to total asset ratio the lowest in our operating history and continue to focus on strengthening our balance sheet and the lease up of our recently completed developments.
Speaker Change: We continue to see strong rental demand for our properties, which shows in our same property apartment occupancy that ended the quarter at 97, 9%.
Speaker Change: Dale will now take us through the financial results, followed by Robert who will discuss market trends within our core markets.
Speaker Change: I will conclude with an update on our current and recent developments in our capital allocation strategy.
Speaker Change: I will now hand, it over to Dale.
Dale: Thank you Phil key highlights to kill them Q3 financial performance are presented on slide five Killen reported robust earnings growth, including fair value gains on investment properties at $51.3 million.
Dale: We are pleased to report another strong quarter of same property NOI growth up seven 4% in Q3.
Speaker Change: These gains were a primary driver of our three 1% and increase in <unk> per unit.
Speaker Change: Topline growth was key to our strong result, overall same property revenue was up five 9% in Q3.
Speaker Change: This included a seven 2% increase in rents in September 2024, compared to September 23.
Speaker Change: Partially offset by an uptick in vacancy.
Speaker Change: Slide six summarizes the rent gains achieved by quarter for those units that turned or renewed in the period.
Speaker Change: For the second consecutive quarter kill them achieved an average rent increase of over 20% for those units that turned over to new tenants during the quarter.
Speaker Change: Renewal increases also remained healthy at 4.7% combined.
Speaker Change: Combined kill them achieved a weighted average rental increase of seven 7% during Q3.
Speaker Change: Same property operating expenses increased by 2.6% compared to the third quarter of 2023 as detailed on slide eight.
Speaker Change: As we've seen in previous quarters. This year. The most significant cost pressure was property taxes up five.
Speaker Change: 0.2% Gen.
Speaker Change: General operating costs were up three 6%.
Primarily to inflationary pressures.
Speaker Change: These increases were partially offset by a 4% decrease in utility and fuel expenses due primarily to lower electricity costs in Alberta.
Speaker Change: Overall kill them same property apartment operating margin improved 100 basis points in Q3 and is that a 160 basis points year to date versus the same period last year.
Speaker Change: Total operating margin improved 180 basis points, which reflects the disposition of properties with lower margins and the introduction of new development with higher margin.
Speaker Change: I'm pleased to report positive <unk> contributions from our three recently completed developments in Q3 with further contributions expected as the properties reached full occupancy developing.
Speaker Change: Developments contributions to <unk> per unit growth will continue throughout the next year as full occupancy is achieved.
Speaker Change: To quantify the impact slide nine highlights the approximate impact of $3 5 million in additional earnings in 2025 to accelerate our F O growth.
Speaker Change: Higher interest expense impacted <unk> <unk> per unit growth in Q3, following higher mortgage rates on renewals over the last year.
Speaker Change: Recent decreases in interest rates are encouraging and provide a path for more attractive refinancing opportunities looking forward.
Speaker Change: Longer term outlook for refinancing is favorable looking out beyond 2025 current CMA sea insured refinancing rates are not far off our 2026 maturity rates and are starting to come in lower than our average rates in 2027 and beyond.
Speaker Change: Slide 10 includes average apartment mortgage rate by year versus prevailing see MHC insured mortgage rate and.
Speaker Change: In the coming year, we have the opportunity to increase our CMA sea insured mortgages from our current level of 76, 2% to 85% by the end of 2025, reducing our overall borrowing costs.
Speaker Change: Our total debt levels have also improved with that as a percentage of total assets down to 47% the lowest in our history slide.
Speaker Change: Slide 11 shows our debt management strategy has changed our balance sheet composition over the last decade, we plan to continue this positive trajectory in the coming years.
Speaker Change: Finally debt to normalized EBITDA, a key metric for measuring balance sheet health was further reduced to $9 eight six times in Q3.
Speaker Change: Positioning us competitively among our Canadian peers.
Speaker Change: We're in a strong financial position as we get ready for 2025, both from a balance sheet perspective, and from an earnings growth perspective.
Speaker Change: Bert will now discuss the strength of our portfolio in the current market. Thank.
Bert: Thank you Daryl and good morning, everyone.
Speaker Change: The prevailing trend in market rents across the country has been receiving increased attention recently.
Speaker Change: Tom closely monitors market rents and each of its operating regions and we continue to see rental growth across the portfolio slide.
Speaker Change: Slide 12 illustrates the change in rent per square foot achieved on new leases signed in Q3 2024 compared to Q3 last year.
Speaker Change: Yeah, Larry region remained strong with Halifax, delivering an increase of 48 cents per square foot on new leases signed in Q3 2024 compared to new leases in Q3 23.
Speaker Change: Either Atlantic Canadian cities, and New Brunswick, and Newfoundland also performed when compared to larger markets such as the GTA Kitchener, Waterloo, Cambridge and London.
Speaker Change: Geographic diversification is yielding positive results as demonstrated on slide 13.
Speaker Change: Comes experienced staff and established operating platform enables kill them to quickly respond to market factors impacting its portfolio and offer competitive rates and it's fluid market.
Speaker Change: As Dale indicated earlier, John same property revenue growth was just over 20% on new leasing across the portfolio in Q3 2024.
Speaker Change: Slide 13 reinforces our relative.
Speaker Change: The Atlantic Canadian market compare to Ontario, and the west.
Speaker Change: So that increases achieved with new leases are strongest in Halifax, St. John of Moncton, yet we are pleased to note that comes current average rent to income ratio on new leases across our portfolio aligns with CMA shoes definition of affordable rent.
Speaker Change: What percentage of growth.
Speaker Change: <unk> manages his portfolio to capture market rents as units term. However, we remain cognizant of our responsibility to our communities by maintaining an affordable housing component in kilns mix of rental suites. For example, we work with teammates his finance programs to deliver an increased supply of rental units long term affordability.
Speaker Change: <unk> commitments.
Speaker Change: Looking forward, our overall mark to market spread on rental rates has tightened slightly from 25% to 22% unit turnover is stabilizing in the 18% range for 2024.
Stanley Jordan: Your next question comes from Stanley Jordan. Please go ahead.
Stanley Jordan: Thanks, Good morning, everyone, just sticking with Moncton, just given that you've highlighted.
Speaker Change: IRA you'd like to buy and you mentioned some new development.
Speaker Change: I know obviously very early days is there any.
Speaker Change: Discussion or have you heard anything from the new government that would.
Speaker Change: Indicate there might be like a rent controlled breaker holiday not unlike what you see in Ontario for Newbuild as they think about rolling out the process and Rob you said, they're open to discussion just curious yes.
Speaker Change: We have no insight.
Speaker Change: At all I mean, we're just reading what what it is.
Speaker Change: In the sort of depressed in the news.
Speaker Change: Okay fair enough that makes sense just curious.
Speaker Change: For next year as you think about.
Speaker Change: The guideline increase in Nova Scotia being at 5% do you see do you have any concerns with being able to achieve that just given the.
Speaker Change: The market that has maybe shifted a little bit and kind of lower inflation on a macro basis.
Speaker Change: Turnover is down to 20% I would say that.
Speaker Change: We feel quite confident that we can achieve.
Okay.
Margaret.
Speaker Change: Yeah, No that's fair and just the last one for me I guess, if we look at the most recent rentals dossier reported had Halifax running at year over year rent growth.
Speaker Change: In the 11% range, let's call it.
Speaker Change: Asking rents.
Speaker Change: Curious do you believe that's accurate is that what youre seeing on the ground would just love to hear your thoughts on.
Speaker Change: What we're seeing come out of some of these monthly.
Speaker Change: Monthly reports.
Speaker Change: Yeah, we tried to we added a new slide which in my opinion slides that you may have noticed that slide 12 to.
Speaker Change: Two actually in reaction to that is to show what we're seeing on a per square foot basis on what we've been able to achieve in at Halifax number.
Speaker Change: It's probably in that if not even a bit higher so it really does stand out that that Q3 this year versus Q3 last year.
Speaker Change: It has moved up.
Speaker Change: Okay Fair enough I had done the quick math earlier, when I saw the slide and thought it but still wanted to gather so thank you for that I will turn it back.
Okay.
Speaker Change: Your next question comes from Mario <unk> with Scotiabank. Please go ahead.
Speaker Change: Hi, good morning.
Speaker Change: Just I wanted to continue on the new lease spreads renewal rates through 'twenty five as I mentioned I feel pretty confident about getting 5%.
Speaker Change: How confident are you in terms of your ability to continue hitting 20% new lease spreads.
Speaker Change: Over the next two to three quarters.
Speaker Change: I'm not so sure Mary I was going to be 20%.
Speaker Change: But I do know is we do have room to mark to market, we've not absorbed all of that and so I'm quite confident as we go forward, we should be able to.
Speaker Change: And it will depend on what units turn so some that have only been there in the short term.
Speaker Change: Obviously that that looks different than some of them may be more inclined to move because they don't have that mark to market spread depending on America. So I think which units turn can make a big difference.
Speaker Change: Got it and just on that point do you have any.
Speaker Change: Incremental color on kind of a weighted average lease term can you get that did turn this quarter in relation to what the Walmart would be for the portfolio.
Speaker Change: I don't think we have that data so in terms of youre asking this.
Speaker Change: The unit the turn how long they had been tenants essentially.
Speaker Change: Yes, I'm just trying to understand whether.
Speaker Change: This quarter of the past quarter or whether the related actually to turn them back normally.
Speaker Change: Below are abnormally high.
Speaker Change: In relation to the fourth quarter.
Speaker Change: So you don't have that data on hand.
Speaker Change: To be able to comment I expect it's pretty similar to what we've seen.
Speaker Change: I don't think anything standout as abnormal this quarter, but.
Speaker Change: We don't have those details right at our fingertips, but just.
Speaker Change: And when I think when I listen to your question Mario I mean, we're seeing.
Speaker Change: Positive spreads right across the country with a little bit less.
Speaker Change: And sort of the worst right now, but I mean, it really is a function of where we've been in terms of an average rent as a portfolio and we would be the lowest of the other.
Speaker Change: Three or four rights that our peer group in Canada. So.
Speaker Change: Really what youre looking at is tenants that might have been with us for many years and the rents have moved a lot in the last three to four years and that's what we're capturing not just in Halifax, but right across the country.
Okay.
Speaker Change: And then my second question just pertains to a comment that you made on page nine of the MD&A.
Speaker Change: <unk> to reduce pressure from interest rates.
Speaker Change: Moderating I E.
Speaker Change: Do you feel like it's getting better.
Speaker Change: I'm curious on the comment that you expect the refi rate in 'twenty six closer to your current average rate and I just wanted to clarify whether you are saying that you expect a 26 debt refi rate that is consistent with your expiring rate and 26, 4% or closer to your current weighted average rate of three nine.
Speaker Change: We're looking at what's coming due in that year.
Speaker Change: Understood, Okay and based on current current information so.
Speaker Change: Looking out if we were to assume today's bond yields.
Speaker Change: Getting pretty close.
Speaker Change: What could be rolling period.
Okay, Alright, thank you very much.
Yeah.
Hello.
Operator is there another call question.
Yeah.
Okay.
One moment, while we.
Determine what's going on.
Good call.
Yes.
Yes.
Speaker Change: Next question comes from Matt Hornack National Bank. Please go ahead.
Speaker Change: Good morning, guys.
Speaker Change: Just quickly is it fair to say that.
Speaker Change: Your your goal through capital recycling is still to kind of lessen or make newer the age of the portfolio and if so can you kind of give us the sense as to how to balance the idea that some of these older assets are probably more defensive rent profiles.
But there's clear benefits to owning new assets as well.
Okay.
It's.
I think the majority of looking out for 2025 is fundamentally theirs.
We still have a lot of assets with pgi, So I mean.
In itself.
We've talked about this in the past, but we're going to concentrate on.
Speaker Change: Selling down in that marketplace. So that you know whether there.
Speaker Change: Low rents brand, new eventually will be out of that market in the next couple of years.
Speaker Change: The other assets at.
Speaker Change: It really is about when we look long term and not that there was a deferred capital maintenance.
Speaker Change: Right now in those assets, but in the next three to five years, they are going to take quite a bit of money to maintain them and basically at that size and where costs have gone over the last four years of inflation.
That's another added element and it makes it part of the decision too.
To sell them a lot easier. So it's not just you know they are affordable.
It is about the combination of what is going to take to maintain them for the next five to 10 years.
Speaker Change: Okay. No. That's fair and then just in terms of in the quarter. It sounds like you had some transitory vacancy in Victoria London.
Obviously, calgary, but that sounds like it's related to kind of lease up of one property adjacent to an existing one can you give a sense of how quickly you think those will resolve and maybe the nature of vacancy with London student related or otherwise.
Speaker Change: Yes, London was COVID-19 related and that property is.
As for now, though we see that every three years frankly with that property, that's a group of students.
Lee: Lee then please come back how many people come in September so that is resolved.
Lee: And then the other market there that's where that's what we're working on.
Lee: They can see around the Olin Nolan wanted.
Yes, it would be like that particular node would be almost 25% to 30% of our overall vacancy and in Victoria that will take a little bit, but we're focused on that particular region right now, yes, I think the other thing.
The other thing to highlight is that northern too is leasing up for the first time and so it's just.
Lee: Now, making its way through its a big complex over 200 units and it takes a little longer now and so but now it's included in our numbers.
Speaker Change: And do you actually see people moving from your existing property to that one during the lease up and then you're back filling those then that gets filling both properties at the same time Sir.
Lee: Thanks.
Speaker Change: We have one questions to tie a tie up everything you've said regarding the 25 outlook.
Speaker Change: Would you agree that a 5% to 6% same property NOI growth is quite achievable and I ask this just because.
Lee: The market seems to be pricing in the far worse scenarios of immigration you. So I just wanted to get your thoughts there.
Speaker Change: At this point I think that I think that does seem reasonable we will provide our guidance range as we always do it with Q4.
To give a little bit more but based on what we're seeing today that that does seem reasonable.
Speaker Change: Okay. Thank you.
Speaker Change: Okay.
Speaker Change: Ladies and gentlemen, as a reminder, if you do have any questions. Please press star. One. Your next question comes from Fred <unk> with Green Street. Please go ahead.
Speaker Change: Thank you and good morning, just one for me Dale you discussed the interest rate environment, just looking at your maturities I used to have 100 million remaining this year I was wondering at today.
Speaker Change: What are you seeing if you have any color for us and maybe a quick overview of the $230 million maturing in next year.
Speaker Change: Well, we're seeing sorry in terms of rate.
Speaker Change: Yes.
Speaker Change: Well, yeah, those bond yields are bouncing around a lot so call it yeah.
Speaker Change: 3536, depending on the day for 2007, maybe even a bit lower than that three and a half. It just is it's varying by day.
Speaker Change: I think a good chunk of the 100 million has already been completed so far this quarter.
Speaker Change: Okay.
Speaker Change: Can you be a bit more specific on this or.
Speaker Change: Okay.
Speaker Change: I mean, yeah. The chunk of it had been completed I don't have the exact dollar volumes out of me, but kind of in that range of 3.3 to three 5%.
Speaker Change: Okay, Okay, and the 330 maturing next year is it more like in the first half or second half of the year.
Speaker Change: It's more in the second half of the year and predominantly in the fourth quarter, yes.
Speaker Change: Perfect. Thank you.
Speaker Change: Thank you. Thank you.
Speaker Change: There are no further questions at this time I would now like to turn it back over to the speakers for any closing remarks.
Speaker Change: Thank you for the questions today, and thank you to everyone everyone else for listening well.
Speaker Change: We look forward to presenting our year end Q4 results on February 12 2025.
Speaker Change: Thank you ladies and gentlemen, this now concludes your conference call for today, we do thank you for participating and ask that you. Please disconnect your lines have a great day everyone.
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