Good morning, everyone. My name is Philip Fraser, and I am pleased to chair this year's annual meeting of unitholders. Welcome to Killam's Apartment REIT 2023 Annual Meeting of Unitholders. This is our 23rd annual meeting of unitholders, and we are broadcasting live via webcast, with unitholders attending both virtually and in person. In order to ensure that the meeting covers the required business in an effective manner, we have pre-arranged with unitholders and proxyholders to move into second the motions of business. I welcome all guests attending by webcast, but note that only registered unitholders and duly appointed proxyholders physically present at the meeting are entitled to vote on matters before the meeting. The meeting of unitholders of Killam Apartment REIT will now come to order. With consent of the meeting, I will ask Ron Baron to act as Secretary of the meeting. Thank you.
First item of business will be the appointment of a scrutineer. I will ask Colleen Nielsen, Computershare Investor Services Inc. of Canada, to act as a scrutineer. Thank you. I have received the declaration prepared by the officer of Computershare, indicating that the notice calling this meeting, the accompanying Management Information Circular, form of proxy, annual report, and auditor's report were mailed out to all unitholders of record as at the closing of business on March 22nd, 2023. Accordingly, with the consent of the meeting, reading of the notice of the meeting will be dispensed with, and I require or request the secretary to keep a copy of the notice of the meeting and proof of service with the minutes of this meeting. I will now ask the scrutineer to summarize her report.
Mr. Chairman, I, the undersigned scrutineer from Computershare Investor Services Inc., hereby report that there are at least two unitholders and/or proxyholders present at this meeting, representing in person or by proxy 79,153,787 units, being 65.36% of the total outstanding units of Killam Apartment REIT.
Thank you. Based on the scrutineer's report, I declare that the quorum of unitholders is present and direct that the scrutineer report be kept with the minutes of this meeting. I now declare that the meeting has been regularly called and is properly constituted for the transaction of business. As the first matter of formal business, I table this meeting the financial statements of Killam Apartment REIT for the year ending December 31st, 2022, with the report of the auditors thereon. I do not propose to ask unitholders to approve the financial statements. We will now proceed with the election of trustees for the ensuing year. I now declare the meeting open for nominations. I nominate the following persons for election as trustees of the REIT to hold office until the next annual meeting of unitholders or until their successors are elected or appointed.
Philip Fraser, Robert Kay, Aldéa Landry, James Lawley, Karine MacIndoe, Laurie MacKeigan, Doug McGregor, Robert Richardson, Manfred Walt. I will ask Robert Richardson to move and Ruth Buckle to second the resolution to elect those nominated as trustees.
Mr. Chair, my name is Robert Richardson, and I move that those nominated to be elected as Trustees of the REIT to hold office until the next annual meeting of unitholders or until their successors are elected or appointed.
Mr. Chair, my name is Ruth Buckle, and I second the motion.
You have heard the motion. If there is no discussion, I ask those in favor to signify by raising their hands. Against? I declare the resolution carried and those nominated to be duly elected trustees of the REIT to hold office until the next annual meeting of the unitholders or until their successors are elected or appointed. The next item of business is the appointment of auditors. I will ask Robert Richardson to move and Ruth Buckle to second the resolution appointing the auditors for the ensuing year.
Mr. Chair, my name is Robert Richardson. I move that Ernst & Young LLP, Chartered Professional Accountants, be appointed auditors of the REIT to hold office until the close of the next annual meeting of unitholders, at such remuneration as may be fixed by the trustees and the trustees be authorized to fix such remuneration.
Mr. Chair, my name is Ruth Buckle, and I second the motion.
You have heard the motion, and if there is no discussion, I will ask those in favor to signify by raising their hands. Against? I declare the resolution carried and Ernst & Young LLP to be appointed auditors of the REIT to hold office until the close of the next annual meeting of unitholders, at such remuneration as may be fixed by the trustees and the trustees to be authorized to fix such remunerations. The next item of business is the advisory vote on Killam's approach to executive compensation, as set forth in the Management Information Circular in respect of this meeting. I will ask Robert Richardson to move and Dale Noseworthy to second the resolution on an advisory basis, the approval of Killam's approach to executive compensation.
Mr. Chair, my name is Robert Richardson, and I move that on an advisory basis and not to diminish the role and responsibilities of the Board of Trustees, that the unitholders accept the approach to executive compensation disclosed in the Management Information Circular in respect of this meeting.
Mr. Chair, my name is Dale Noseworthy, and I second the motion.
You have heard the motion, and if there is no discussion, I will ask those in favor to signify by raising their hands. Any against? I declare the resolution carried. If there is no further formal business, may I please have a motion terminating the meeting?
I move the meeting be terminated.
I second the motion.
All those in favor, please signify by raising your hands, Against? I declare the motion carried and the meeting terminated. Thank you. That ends the formal part of the meeting today, and, we have two presentations. The first one is Dale Noseworthy will come up, CFO of Killam Apartment REIT, and discuss our financial results from 2022 and first quarter 2023.
Thanks, Phil. I'm pleased to be here to talk about the results for 2022. Despite pressures in the capital markets, last year, multifamily residential fundamentals in Canada were the strongest we've seen in Killam's history. With that, we achieved record-high occupancy and acceleration in rent growth. This translated into strong financial results for the year, including 3.7% growth in funds from operation per unit, 3.3% growth in adjusted funds from operation unit per unit, and 4.7% same property net operating income growth. We continued to grow our portfolio with CAD 119 million of acquisitions, including properties in Halifax, Guelph, Vancouver Island, and Waterloo. We ended the year with CAD 4.8 billion in assets. This past year was the largest year for developments since we started the development program in 2010.
Killam's completed a total value of CAD 243 million in developments last year. CAD 152 million represents our ownership interest in those assets. The Ontario assets that we completed were in Ottawa and Mississauga, and they're exceptional additions to our portfolio. The development program is a really unique one that distinguishes Killam from its peers and allows us to add assets in our portfolios in the most desirable markets and create value to unitholders. The financial results from 2022 adds to Killam's long-term success of growing earnings on an annual basis. Funds from operations, or FFO per unit, is one of our primary financial measures. Over the last five years, we've achieved FFO per unit growth at a compound annual growth rate of 4.2%. We've also grown adjusted funds from operations, AFFO per unit.
AFFO takes out the capital requirements to maintain the portfolio as well as a bit of noise around commercial leasing. Overall, we've had strong AFFO per unit and an improving AFFO payout ratio, so when we look at the distribution. Our payout ratio in 2022 was 75% compared to 82% just two years earlier. This means more of Killam's earnings are being reinvested into our growth strategy while we continue to pay out our unit distribution to our unitholders, which currently sits at CAD 0.70 per unit on an annual basis. Growing earnings from our existing CAD 4.8 billion-dollar portfolio is an absolute priority in terms of growing funds from operation per unit. It's another one of our key financial metrics.
As you can see here, we had strong NOI growth from our same property portfolio. A reminder that our same property portfolio represents those assets that we would have owned prior to the beginning of 2021. It allows a very, it's a like-for-like comparison in terms of the performance of that asset base, taking away acquisitions, and development activity. Overall, we achieved 4.7% NOI growth, exceeding our target for the year, which was set originally at 2%-3%. This reflects strong top-line growth at 5%, which we attribute to record-high occupancy and increasing rental rates. Rental rates were up 3.5% during the year.
This includes 10% increase on rents when units turned and new tenants moved into the properties, which would've been the highest that we have seen historically. We also saw a reduction in rental incentives. This was having seen Alberta and Newfoundland markets come back to life last year, where we were previously issuing incentives, which was in line with the market. Same-property operating expenses, you can see at 5.4%, were high last year. This reflects the inflationary environment and, in particular, the high cost of natural gas, oil, and propane. Those commodity costs resulted in the 13.3% increase in fuel expense for the year. Relatively low increases from our general operating costs and property taxes helped to offset this.
We also ended the year with debt as a percentage of total assets at 45.3%. We've been focused on maintaining a healthy balance sheet, as you can see, with the consistency in terms of our debt levels over the last number of years, and we're benefiting from the conservative debt metrics in this higher interest rate environment. I'm pleased to report that Killam's mortgage financing program remained consistent throughout the volatility of last year, with strong support from our lenders and with the continued ability to up finance on mortgage renewals. We expect this friendly lending environment to continue for Killam, and we expect to further reduce our debt levels in 2023.
On Wednesday evening, we released our financial and operating results for the first quarter of 2023, which included funds from operation growth of 4.2%, achieving CAD 0.25 per unit in the first quarter. This growth was primarily attributable to earnings from our same property portfolio and as well as the lease up of the developments that we completed last year. Growth in revenue continues to be an important contributor to both our net operating income growth and our FFO per unit growth. You can see that NOI that we achieved in Q1 was 6.3%, with 5.4% top line growth. Occupancy for the quarter was a record high 98.6%, and we achieved 14.3% rent growth on those units that turned in the quarter.
With these strong results, we've restated our net operating income forecast for the year to exceed 5%. That's compared to where we started the year. In January, we were forecasting 3%-5%. That's a story of strong top line growth as well as natural gas costs having come down in 2023 compared to where they were expected to be. A very strong start to the year, and we look forward to updating you again with our second quarter results in August.
Thank you, Dale. Just to sort of relax the crowd a bit, I'm gonna speak for a couple of minutes, my job is to introduce the next group of speakers. Before I do that, I would like to again thank everybody for attending today. I would like to thank the trustees that are here at the meeting today, especially everyone at Killam that works there to come here to hear us talk. Also, after 23 years, another thank you for everybody that has ever worked at Killam. The dedication, it's been a privilege to be able to witness all the work that has gone on over the years. We find ourselves, I think, at a sort of an interesting crossroads.
Really, I just wanna sort of frame up a few of my thoughts relative to why we have this next presentation that we're gonna give. Throughout the years, the one thing that's been constant in our business has been change. I mean, years ago, basically, it was the beginning of the Internet. It was different in advertising. Fundamentally, what we did was we were a rental housing provider for people. We had assets, and we were renting that space to tenants. The idea that over the years, because we were public, it grew to the point where our business is very complex. Throughout this, we've been able to adapt over time.
One thing I, reflecting back is how hard it is to see when you're living through it, the structural changes that are occurring in a business model that you have or the larger government influences that you have on your business. What I'm talking about today is really where we are going from an environmental point of view in the net zero path that we're gonna follow. Really, when you see this, it's either it can destroy businesses or businesses can embrace it to their advantage. I know over the last five to eight years as we approached this, inside, we've always looked at it as an opportunity. Our business, again, in simple terms, is quite simple. We collect rent on a monthly basis, and we pay our expenses on a monthly basis.
We spend a lot of time talking about the side of the revenue, and we know the impact in the last few years coming through COVID and where we are relative to the supply-demand imbalance. That revenues are going up. There is an affordability issue for a number of Canadians right across the country. The other part of our business is the expense side, and how do we tackle that, and how do we go to work every day and think about it. The idea that we are moving from a basically a 100-year model of fossil fuels to heat to run our buildings to now looking at what is the alternative, where are the renewable energy sources, and are they gonna be able to meet everybody's demand in the years to come. That is part of our evolution over the next few years.
I look at it as saying there's more opportunity than downside, it's a very complex business that we are running today. From that, we have three members of the Killam team that are gonna come up and present. I will introduce them quickly. We have Andrew Kent, who has a master's in Civil and Urban Planning, he does a lot of our land use planning and design on the development side of our business. We have Aaron Caldwell, who is a mechanical engineer, he spends a lot of his time on our existing portfolio, looking at the buildings that we own and how to improve their heating systems, everything about the operation of our that side of the business.
James Tilley, who is a environmental engineer, and he is overseeing all of our sort of projects relative to solar power, solar panel installations and EV installations. Gentlemen, please come up and explain to the world what we're doing.
Thank you, Phil, and good morning, everyone. We know that more than half the energy a typical building uses, is to heat the building. For years, we've heated buildings with oil and gas. Many of those buildings have single-pane windows, they leak warm air, they're not well insulated. Those buildings require a lot of energy to heat. In the past, we've been able to do so without much consideration for the price of gas or even the greenhouse gas emissions. Historically, we definitely haven't accounted for the price of carbon. Of course, times have changed, and so, we now build our buildings more efficiently, and we try to conserve energy overall.
Our next step in that evolution is to electrify our buildings to significantly reduce or even eliminate the use of oil or natural gas. Electrification takes advantage of an increasingly clean electrical grid to heat buildings and domestic hot water, thereby reducing our carbon intensity, lowering operating costs, and hedging against future carbon pricing. While it would be easier to just, in the near term, to just continue to use fossil fuels, we know it's only a matter of time before more stringent building and energy code requirements will actually require electrification. More than that, it's about doing the right thing for our tenants, and for our investors and for the planet. Any steps we take towards electrification are steps towards carbon neutrality, which is our ultimate goal.
If we take The Kay, for example, which we opened last year, it uses an electrical geothermal system for heating and cooling. Here, we're targeting 32% reduction in energy use and 47% fewer emissions when compared to a typical building that uses natural gas. Civic 66, which we opened just this spring, which took electrification one step further. It uses geothermal for heating and cooling. We have additional heat pumps that produce domestic hot water, and we produce some of our own electricity on-site with PV solar panels on the roof. You can see the improvement or the evolution is that we're now aiming for a 52% reduction in energy use and 67% fewer emissions.
Despite the success of those two buildings, The Kay and Civic 66, both of those buildings still require small gas boilers to supplement the electric systems. Since electrification technology is evolving so quickly, it means that we can now target a completely electric building. In Waterloo, at The Carrick, which we've just, which is just now under construction about to come out of the ground, we first said, "Great, we will do another geothermal system." The geothermal system, of course, relies on deep wells that deposit heat in the winter and bring it back in the summer. The city of Waterloo can seize that to damage groundwater.
They said, "No, you're not allowed to drill your wells." We said, "Okay, well, on to option two." We decided that we would design a variable refrigerant flow system, which is an air-to-air heat pump system for heating and cooling. We were gonna combine that with a specific heat pump that can recover heat from the building's wastewater and use that to help heat the domestic hot water. Again, the city had an unfortunate interpretation of the plumbing code, which we've appealed. They said the wastewater heat pumps weren't gonna be permitted in the city. We're persistent, we kept going. We'll stick with the VRF system for heating and cooling.
Now we're specifying a specialized air-to-water heat pump to heat the building's domestic hot water instead of the wastewater heat pump. Nevertheless, after a lot of difficulty obtaining municipal approval, which it seems to be a trend, I'm proud to say that Carrick will be Killam's first completely electrified new development in Ontario. As you can see, it's not easy and despite the tremendous need for these electric solutions, municipal approvals are slow to catch up. Finally, just before I finish, I just wanna provide an example of electrification as well as future-proofing, and it's right next door. Hopefully, some of you will be able to visit after this meeting. It's The Governor here in Halifax.
The Governor is unique in that it's small, it's only 12 units. It allows us to test some new technologies to both electrify as well as future-proofing the building. We can imagine how this building's gonna operate 10, 20 years out. For example, each unit has its own condenser on the roof connected to the unit's electrical panel, and that ensures that tenants pay for all of their heating and cooling in their units. We have Wi-Fi connected thermostats that can be programmed to tenant schedules and adjusted remotely in order to save energy. We even have plugs in each unit connected to Killam's generator, and those plugs power tenants' refrigerators, so tenants won't lose perishables during climate change-induced power outages.
Their Wi-Fi will work, they'll be able to charge their smart devices. All of the building's parking spots will be ready for level two EV chargers. When people move in and they bring their electric vehicle, it'll be as simple as installing a charger, and they'll be ready to go. Those are just a few examples of the modernizations that we're trying there. We're trying to innovate, we're trying new things, we're figuring out electrification. That allows us to take some of those lessons learned in the development portfolio and then test them and then use them in the larger portfolio. To talk more about that side of the things is my colleague, mechanical engineer, Aaron Caldwell.
Thanks, Andrew. Good morning, everyone?
Good morning.
I'm going to discuss how we're taking some of the lessons that we're learning from our new constructions and applying them to our existing building portfolio. As you're probably aware, our portfolio, like everyone else, has a substantial reliance on fossil fuels. About 44% of our total energy comes from fossil fuels, so this is used to heat both our buildings but our domestic hot water. We have explored alternatives to these, namely hydrogen energy and renewable natural gas. We've just found that they're not market ready, and they won't be available in sufficient quantities to meet our needs in time to decarbonize our portfolio. This leads us to an electrified solution, and the federal government has mandated a net zero electrical grid across Canada by 2035.
We can look to this as a source of clean energy that we can apply to our buildings. We can apply new heat pump technologies at our buildings, similar to what we're doing at the new constructions. It should be noted, though, that applying these to older buildings is a little more difficult than a new building because the old buildings don't meet today's construction standards. We will continue to maintain our natural gas systems, and that'll carry the load during extreme periods of cold in the wintertime. Take a look at an example project. This is Lakefront Apartments in Dartmouth, Nova Scotia. It's one that we're conducting a feasibility study on now. It's a group of 32 buildings, former military accommodation, which now serves as affordable housing.
It was built in the mid-1950s, which, as you can imagine, differs greatly from the construction standards that we use today. Over the last 10 years, Killam has upgraded the heating plants and implemented high-efficiency natural gas systems. We're now looking at a wholesale retrofit of the buildings leading towards electrification. This would include upgrading both the roofs and the walls to today's performance standards for insulation, as well as new windows. Other things like LED lighting, we're actively doing at most of our properties already. We would implement that as well, as well as low-flow plumbing fixtures, which are not necessarily an energy measure, but they're a great water-saving conservation measure. Once we've got the building envelope upgraded, we can look at applying low-temperature heating systems, which enables the use of heat pumps in older buildings.
This would be an air-to-water heat pump and would provide probably about 90% of the energy required, so we'd see a 90% reduction in gas consumption at the buildings and an overall 50% reduction in energy use. Building on the heat pump methodology, we can look at two applications of heat pumps for two different types of buildings. In larger buildings, where we don't have balconies. They're heated by baseboard hydronic heating. We can look at applying a series of heat pumps in a cascade system, which can produce a temperature of water that's able to heat this existing building.
We're doing a feasibility study right now on Quinpool Tower in Halifax, and the results of that study indicate that we'll see a 40%-50% energy reduction for heating, and again, a 90% reduction in gas consumption. In buildings where we have balconies, which is a very common type of building in the portfolio, we can look to the residential market, and it's very common to have mini- split heat pumps installed in single-family homes in Atlantic Canada, and they're starting to broaden across the rest of Canada as well. These can be applied as a primary source of heating and cooling in these type of buildings, and we would integrate them with the existing heating system, so we still use that as a backup during extreme periods of cold.
We'll probably see greater than a 50% reduction in energy consumption to both heat and cool these apartments. You must understand, in the older buildings, it probably will require an electrical upgrade because they've been designed in the past to operate on a fossil-fired system for heat, and the electrical systems do require an upgrade to implement heat pumps across the building. Finally, we'll look at domestic hot water. Over the past 10-15 years, Killam has implemented a number of solar thermal collection systems to preheat hot water in our buildings, and we see an example here at 7 Parker Street in Dartmouth. We'll continue to maintain and operate these. They provide a good value, but technology has evolved since these have been applied at our buildings. Now we look to heat pumps.
Andrew mentioned a couple ways that we're using heat pumps at our new construction. We can also use air source heat pumps to preheat our domestic hot water in existing buildings where we have the space to do so. In any buildings where we apply geothermal energy, a water-to-water heat pump makes really good sense. Finally, we're still exploring the wastewater heat pumps as a type of system to reclaim the energy that's discharged from the building and serve our needs for new hot water. With any of these technologies, we expect to see, again, a 50% cost reduction to heat the hot water, as well as 250%-350% system efficiencies while doing that. I'll introduce James Tilley now, who will discuss some of our solar and electric vehicle deployments.
Hi, everyone. Good morning? As we just spoke about, we do have various initiatives in place to help decarbonize and electrify our new construction buildings as well as our existing. We also know that our residents, both present and future, are interested in doing their part as well, and that is part of why we are targeting the installation of an additional 400 or more level two electric vehicle chargers to about 50 properties within Killam's portfolio. Again, these are level two chargers, they can charge an electric vehicle in roughly eight to 10 hours. Presently, we have 183 level two electric vehicle chargers deployed across 27 properties. The additional installation of these 400 level two chargers is in the ballpark of about CAD 2 million worth of investment.
We're proud to say that we do have a project funding partner. It's Natural Resources Canada, and they are helping to fund 50% of this initiative. Because of this, we're able to target an ROI, return on investment, of roughly 8%-10%. They're actually now being required to be electric vehicle charger-ready at all of their parking stalls. This change is coming. We're preparing for this. We're adding a lot of electricity consumption to our portfolio, to our buildings, when we're going the electrification route, but we also want to produce our own electricity as well, and part of this can be done on site through solar PV installations.
To date, we have 18 properties with solar PV across our portfolio, the production is roughly 1,800 megawatt hours per year, this translates to a utility cost offset of almost a quarter of a million dollars. That leads to a simple ROI of around 7%. What I mean by simple ROI is that that's using our today's costs with the electric utility. As they inevitably increase, that ROI is going to improve. Distribution of these solar arrays is across four regions, four provinces, Nova Scotia, Ontario, Alberta, and most predominantly in Prince Edward Island. We targeted more heavily deployment in Prince Edward Island because of their higher electricity costs. This improves the ROI on that investment. These 18 properties are able to supply roughly 4% of our operationally controlled electricity costs.
Of those that have been installed for just over a year, it's 12 properties that have been installed for that long. We're seeing 94% of expected production, which we are very pleased to see. To show Killam's commitment to renewable energy, and we have set a target on utilizing 10% of renewable energy by 2025 to offset electricity use to our properties. This isn't as easy as installing solar PV to each and every rooftop that we have. There are many considerations. Highlighted are a couple of them that I think would apply to a lot of what Andrew talked about on the new development side, but also Aaron on our existing portfolio.
Some of those considerations are the cost of electricity, like I had touched on with our PEI solar deployment, the carbon intensity of that utility. If we deploy solar in a region with a more carbon-intensive grid, it's gonna offset more carbon emissions. Available rebates, those really help drive the return on investment for those projects. Then site capability. What I mean by site capability, specifically to the solar sense, would be the orientation of that property. Is there space on the roofs for solar? What's the electrical size coming into the building, and those sorts of things. There's lots to consider. We really wanna make sure that we're really making the right decisions when we are doing these investments, especially around these projects. Again, I just wanna drive that home.
At this point, I would like to pass it back to our CEO, Philip Fraser, for closing remarks.
Thank you, James. My closing remarks are basically the floor is open for any questions. We're all here, senior management, the team over here in terms of the renewable, and we've got one question from Steve.
You just mentioned that there's been 400 level two charging stations, about CAD 2 million. I've been a level two in my house, it cost me CAD 500 to attach, about CAD 1,000 from the saw. It costs about, like, CAD 5,000 a unit. Sorry. It costs, like, CAD 5,000 a unit.
He's on the wrong line.
I had one question about the cost of the level two charging station. He was pointed out that it's a cost of CAD 2 million for 400 units, which is about CAD 5,000 a unit. I was just wanting to point out that I put one into my house for CAD 500, plus about CAD 300 or CAD 200 installation, and it was in a remote garage. Had to run underground wire, this sort of stuff. I'm just wondering why the cost is CAD 5,000 and not CAD 500.
James?
Great question. I think you get an excellent deal there. We have in a lot of our parking garages, we have to do, whether it's three-phase or single-phase, we'll have to do various upgrades to the electrical system to allow us to actually receive those chargers. We also have to pay an added expense to do something called a capacity test, which is to make sure that there's actually space electrically to add the chargers. We have to do a bit more design than you would for a typical just residential install, as well as the runs for the cabling. It can be quite long when you're trying to get a good dispersion throughout the parking garages. There is a higher infrastructure cost as well.
I mean, as an example, a building over in Dartmouth, a 175 unit building, putting in 10 EV chargers will equate from the energy consumption, the equivalent of what we're using today on our meter. It's a lot of extra energy when you get past one, two, and especially most apartment buildings, they are basically on a billing system different than a residential house. We have demand charges, so there's a lot more in terms of the complexity of looking at these buildings. Then you go, We deal with 33 different electrical utilities across the country. Every one has a different billing system and a different standard relative to hooking up and adding more to the grid. Any other questions?
If not, again, thank you very much for attending today, and we will be around here for any other questions, but this ends the formal part of our meeting. Thank you.