Good morning, ladies and gentlemen. Welcome to the Killam Apartment Real Estate Investment Trust second quarter, 2024 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 this call you require immediate assistance, please press star zero for the operator. This call is being recorded on August 8, 2024. I would now like to turn the conference over to Mr. Philip Fraser, President and CEO. Please go ahead.
Thank you. Good morning, and thank you for joining Killam Apartment REIT's second quarter 2024 conference call. I'm here today with Robert Richardson, Executive Vice President, Dale Noseworthy, Chief Financial Officer, and Erin 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 Erin to read our cautionary statement.
Thank you, Philip. This presentation may contain forward-looking statements with respect to Killam Apartment REIT and its operations, strategy, financial performance, conditions, or otherwise. The actual results and performance of Killam discussed here today could differ materially from those expressed or implied by such statements. Such statements involve numerous inherent risks and uncertainties, and although Killam 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 to forward-looking statements, please refer to Killam's most recent 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 this presentation refers, and Killam does not intend to update or revise any such statements unless otherwise required by applicable securities law.
Thank you, Erin. We are very pleased with our strong financial and operating results for the second quarter of 2024. Killam delivered FFO per unit of CAD 0.30 in the quarter, consistent with CAD 0.30 per unit in Q2 2023. We achieved 8.5% same property NOI growth across the portfolio, including 8.8% same property NOI growth in our apartment portfolio, 7.4% same property NOI growth in our manufactured home community portfolio, and 4.9% same property NOI growth for commercial properties. We ended the quarter with 41.2% debt to total asset ratio, the lowest in our operating history. Continue to focus on strengthening our balance sheet and the lease up of our recently completed developments.
Continue to see strong rental demand for our properties, which shows in our same property apartment occupancy that ended the quarter at 98.2%. Dale will now take us through our financial results, followed by Robert, who will discuss progress made on our sustainability initiatives. I will conclude with an update on our current and recent developments and our capital allocation strategy. I will now hand it over to Dale.
Thanks, Phil. Key highlights of Killam's Q2 financial performance can be found on slide 5. Killam achieved solid earnings growth in Q2, including fair value gains on investment properties of CAD 85.5 million, reflecting strong NOI growth. As shown on slide 6, our focus on capturing market rents has resulted in our highest rental rate growth on turnover in our history, achieving an impressive 20.2% average lift on turns during the second quarter. Paired with a 4.5% increase on unit renewals, our Q2 weighted average increase on apartment rental rates was 8.2% across the same property portfolio. These strong rental increases highlight the strengths of demand for apartment units across the country. Slide 7 includes our mark-to-market spread for the portfolio and by region, showing a healthy spread of over 20% in over half of our core markets.
Overall, we estimate a mark-to-market spread of approximately 25% across the portfolio, representing significant growth opportunity as units turn. Turnover year to date is 10.5%, and we anticipate approximately 18% turnover for the year. Same property apartment operating margin improved 140 basis points, ending the quarter at a 66.5%. This margin improvement is attributable to our strong rental growth, paired with effective cost containment. In Q2, same property operating expenses increased modestly by 1.7%, as detailed on Slide 8. The most significant cost pressures in the quarter was property taxes, up 6.6%. This increase was offset by a 4% decrease in utility and fuel expenses. Overall, for the first six months of the year, operating expense growth remained muted, up only 0.4% across the total same property portfolio.
Year to date, Killam same property NOI is up 9.3%, and our 2024 NOI target remains over 8% growth for the year, up from our original target of over 6%. As Phil noted, we generated FFO per unit of CAD 0.30 in the quarter, consistent with CAD 0.30 per unit in Q2 2023. Our strong NOI growth was offset by higher interest expense and vacancy in our new developments. It's standard for new developments to be dilutive during the lease-up phase, as interest expense is no longer capitalized and properties carry high vacancy.... Quantify the impact. Had these three properties been fully occupied during Q2, FFO per unit would have been CAD 0.31, which would have reflected a 3.3% increase in FFO from Q2 last year.
I'm pleased to report that we've made significant leasing progress on all three properties during the second quarter, as highlighted on slide 10. The Civic 66 and The Governor fully leased, and Nolan Two at 74% leased. With this lease-up activities, these properties flipped to positive FFO contributors in July and will continue to increase their contributions to FFO as tenants move in and the remaining Nolan Two units lease up. Slide 10 outlines the expected FFO growth from these properties on a quarterly and annual basis for 2024 and 2025. Year-over-year in 2025, we expect approximately CAD 3.2 million of earnings growth or CAD 0.026 in FFO per unit growth from these three developments compared to 2024.
Higher interest expense also impacted FFO per unit growth in Q2, following higher mortgage rates on renewals during the year. With recent Bank of Canada rate cuts and the easing of bond yields, we have successfully refinanced recent mortgages at attractive rates and expect to continue to do so as we finish our 2024 mortgage maturities over the next few months. Slide 11 includes average apartment mortgage rates by year versus prevailing CMHC insured mortgage rates. As part of our debt management strategy, we are leveraging CMHC programs as mortgages come due, with a focus on increasing our CMHC insurance coverage, which is now at 79.4% for our apartment portfolio. Increasing our coverage of CMHC insured mortgages is intended to help mitigate our interest expense exposure for the remainder of 2024 and in 2025.
We are pleased to show continued strengthening of our balance sheet as shown on slide 12. At June thirtieth, debt as a percentage of total assets was 41.2%, down 170 basis points from year-end. We continue to diligently manage our debt metrics and have reduced debt to normalized EBITDA to below 10 times. I will now turn the call over to Robert, who will discuss our MHC performance and sustainability initiatives in more detail.
Thank you, Dale, and good morning, everyone. Killam Seasonal Resorts delivered strong results for Q2 2024, bolstering Killam's manufactured home communities performance. The seasonal resorts achieved 99% occupancy at the end of Q2 and recorded 7.6% NOI growth in the second quarter of 2024. Our permanent MHC portfolio also turned in impressive results, generating 7.3% net operating income growth in the second quarter of 2024. This past June, Killam released its 2023 ESG report, which outlines our commitment to incorporate sustainability practices that enhance operational performance and optimize long-term value for our stakeholders. We have made significant progress over the past year. Highlights from our report can be seen on slide 14, where we note Killam's progress in all three key ESG metrics, namely environmental, social, and governance. Killam's sustainability initiatives are integrated with our overall business strategy.
Having the ability to measure and monitor our impact on the environment using leading indicators such as greenhouse gas emissions and energy consumption, enables Killam to determine areas of focus and create opportunities for operational efficiencies. By investing in technologies such as tenant sub-metering or renewable energy production, Killam can help mitigate its exposure to rising energy costs and improved earnings. This is the case at our property in Waterloo, Westmount Place, shown on slide 15. In 2022, we installed photovoltaic solar panels covering the entire roof of the property. Through a sub-metering company, Killam collects a revenue on solar energy produced at this property by selling this clean energy to one of our commercial tenants at the building. In 2023, we produced 450,000 kWh worth of energy, resulting in the revenue of CAD 56,000.
This equates to a 7.5 return on investment. Since installation, this system has produced an average of 420,000 kWh per year, or approximately CAD 55,000 in annual revenue. Across our total portfolio, Killam has installed solar panels at 23 properties to date. In 2023, we estimate to have saved over CAD 200,000 in energy costs for the year, which is calculated based on our actual production and the average utility rate for the respective regions. As outlined in our 2023 ESG report, we have set an ambitious long-term target for self-generating 10% of operationally controlled electricity consumed by our portfolio through renewable energy sources by 2025. At the end of twenty-three, we had exceeded 5% and are working to meet our 10% goal.
These targets align with our mission to minimize our impact on the environment while creating value for our unitholders. We are pleased with these investments and their contributions to revenue growth and cost savings. I will now hand you back to Philip to provide an update on our development and disposition activity.
Thank you, Robert. During the quarter, we completed 1 small land acquisition with a development partner for a total combined price of CAD 4 million. On June seventeenth, we acquired 70% of a 2.5-acre site located at 105 Elmira Road North in Guelph, Ontario. We have started work on the rezoning process for a 6-story, 127-unit building, which we expect the approval process to take 1-2 years. On May ninth, we closed the sale of Woolwich Apartments, an 84-unit building located in Guelph, for CAD 19.2 million. Subsequent to the quarter end, we closed the sale of Bridlewood Apartments in PEI, containing 66 units for CAD 8.4 million.
We continue to see very good interest from a number of national and regional buyers for properties that are part of our disposition strategy and expect to exceed our CAD 50 million target this year. We will have more visibility by the end of Q3. The entitlement and design process continues to advance for our two future developments in Calgary. The 296-unit Nolan Hill, phase three, and a 235-unit building on our fourth and fifth site downtown. Design work continues on our 128-unit Whistler development in Waterloo and a 239-unit phase two at Westmount. The Westmount Square master plan design document for the entire site was resubmitted to the City of Waterloo earlier this year. We are now engaged with the city to determine the final scale and form of the redevelopment.
These six potential developments contain over 1,100 units, and all are in great neighborhoods with strong local economies and strong population growth. We are also designing the buildings to contain above average unit size and a total development cost in the CAD 400,000-CAD 450,000 per unit range. This will translate into more affordable rents for all future tenants. In Halifax, we are working on an as of right 92-unit development at Victoria Gardens, as well as of right 150-unit development on vacant land in our Harlington Crescent community. As seen on slide 18, The Carrick, a 139-unit development in Waterloo, which contains 89 one-bedroom units and 50 two-bedroom units, is progressing on time and on budget and is expected to be completed next June.
As shown on slide 19, we started the development of Eventide, an eight-story, 55-unit building in Halifax in February. This is expected to be finished in Q2 2026. Contains 33 one-bedroom units and 22 two-bedroom units with an average size of 764 sq ft. To conclude, the second quarter was strong, was a strong quarter, and we are very pleased with our financial performance. I would like to thank our employees for their hard work and dedication. We will continue to execute our strategy and work to create value for all of our unitholders. Thank you. I will now open up the call for questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press star one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. If you would like to withdraw from the question queue, please press star two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please, for your first question. Your first question comes from Jonathan Kelcher of TD Cowen. Your line is already open.
Thanks, good morning. So first question. I guess we're right into the heart of the student leasing season. Have you guys noted any change in demand from international students with the change in the rules?
Jonathan, we haven't noticed any notable change in any of our markets in terms of, international students.
Okay. That's quick and easy. And secondly, second question, just the mark-to-market, not down a lot, but it did start coming down this quarter. How much of that is a function of market rent growth slowing versus you guys just capturing the uplifts? And I guess related to that, can you maybe comment on your thoughts on market rents, market rent growth going forward?
I'd say, it's more about capturing some over the last quarter and over the last few quarters, we've been expanding our analytics on trying to really narrow in on that mark-to-market. So part of it's broadening our analytics work on that. So I'd say, we're not seeing market rents come down. I'd say looking out a few months ago, we were looking at it, you know, more stabilized. I'd say recent leasing activity, we're seeing it, come back up. This is a really strong period for us, and we're seeing those rents continue to grow. So I'd say if anything, it's just up us capturing, and we are still seeing some upward movement in market rents.
Okay. And is that consistent across the portfolio or some markets have better rent growth than others?
Certainly, just like the slide shows, our mark-to-market spread being strongest in that Kitchener-Waterloo, Toronto area, and Halifax. Those are the areas that we are seeing the strongest. But that's a very good picture of where we're seeing the most increase in terms of the market rents, but it would be pretty consistent over the last few quarters.
Okay, thanks. I'll, I'll turn it back.
Your next question comes from Gaurav Mathur of Green Street. Your line is already open.
Thank you, and good morning, everyone. Dale, as part of-
Good morning.
In your prepared comments, you mentioned that the turnover for the first half of the year is 10.5%, and for the year, you're looking to be at around the 18% mark. Drive turnover rates up over the second half of the year?
That's just looking at what we historically know, what turns. We're tracking just slightly below turnover from last year, so that's why we're expecting it to come down. We were at 19% last year. We're expecting to be around 18% this year.
Just switching gears here to the dispositions market. You know, you've been very active, and you are on track to meet your target as well for 2024. I'm just wondering if there's been any change, any material change in the buyer pool so far compared to the beginning of the year. Are you seeing new buyers step in, or is it still mostly private buyers that are seeking assets?
I think the, the other interesting point on that is that it's a lot of the repeat buyers. So for the folks that we sold properties to last year, they still have a strong interest to continue to look for properties that would, match well with their current portfolios. So it is the—when I said my comment, international or national and regional buyers, it's, essentially well over half of them would be buyers from last year.
Okay, great. Thank you for the color. I'll turn it back to the operator.
Your next question comes from Jimmy Shan of RBC Capital Markets. Your line is already open.
Thank you. So just to follow up on your comment, Dale, about seeing a bit of an upward movement in market rent, can you maybe give a range of kind of what sort of quantum you're seeing and sort of which markets would you be referring to?
Well, when I'm looking at recent activity, I'd say almost all markets over the last six weeks. But from a percentage perspective, I mean, it's, I'm going to say probably 2%-5%. It just, you know, it's based on recent activity, so.
and this is 2%-5% from the leases that are-
So probably from probably where we were three months ago.
Oh, I see. The market rent.
I'd say we would have seen it.
Gotcha.
Yeah.
Okay.
And then, and that's-
And then-
Just to clarify, Jimmy, that's what we're capturing on rents. So it depends a bit on what units are leasing, but I'd say generally across the board, we're seeing a little bit of an uptick after having seen a bit of stability over a few months prior to that.
Then the other question I had was just on the debt expiries next year. You do have a decent amount. How are you thinking of tackling the refinancing activity there, given the movement in rates and kind of where are they weighted to next year?
Yeah, they're a little more evenly distributed throughout the year, next year. So in terms of awaiting, we're actively kind of looking at that program now and reaching out to look at some opportunities to lock in early, potentially. So, we're and we'll be looking at term, depending on where the rates are, but certainly, I'm liking some longer term, and I'm really pleased to see some of the rates come down. We would have seen some pricing. Starting to see some sub-fours from CMHC insured on those, on those rates for fives anyway, which we haven't seen in a while.
But Jim, I mean, like everybody knows, if you look at it, in the last 12 months, the 5-year bond has come down almost about 100 points, and the 10-year bond has come down about 50 points. So the trend is downward. We've sort of seen the peak from our point of view. You've got 2 rate cuts with sort of, forecasting another 2-4, even by the end of this year. So everything points to our favor, for 2025. In terms of what's remaining in this year, we've got a lot done in the third quarter already. So we're looking, looking out, we're quite positive and pretty happy to see where interest rates are going.
Yeah. Okay, thank you.
Your next question comes from Matt Kornack of National Bank Financial. Your line is already open.
Morning, guys. Sorry for the minutiae, but it sounds like you had some short-term vacancy in London, one property in London, and then a property adjacent to a building in lease up in Calgary. Can you give us a sense as to, is that a one-quarter sort of variance in occupancy in those properties, or will it take through the balance of the year?
Well, the one in London is CAD 180 million, and that is primarily a student high-end building, and it's about every two to three years that there's a lot of turn, more than the previous years. And so it looks pretty good for almost being a full building first of September, and that's typically the way that that building has performed for the last 10 years that we've owned it. And then in terms of the one building in Calgary, again, it's part of the lease up of Nolan Hill, phase II, which is across the street from the Trio and also the Nolan One. And that's basically tenants kind of moving a little bit from one of our buildings to a newer building.
Okay. And then, I guess on, Civic 66 and Nolan Hill, can you give us a sense as to how those lease-ups are going, kind of in terms of the trajectory to get to stabilized occupancy, but also where rents are coming in relative to your pro formas?
Nolan Hill, I mean, we basically, we said 74%, and that was as of a couple of days ago. There's continuing leasing on a weekly basis. We're averaging CAD 1,500 for a one-bedroom, CAD 2,000 for two and CAD 2,400 for three. Still within our pro formas, absolutely. Civic 66, basically, we got one or two left, and a couple that are, are rolling, this time of the year. Our ones are CAD 1,900, our twos are about CAD 2,600, and, we got a couple of fours around CAD 3,600, and that's within our pro forma.
Okay, that's helpful. And then last one, just, Dale, a follow-up on, I think it was Jimmy's question with regards to the debt maturity profile. Have you been able, or would you be inclined to, given the move in the bond yields, to early kind of lock in a rate for anything that's maturing in the back half of this year? Because I know you had a fairly significant chunk of maturity in the back half.
Matt, I'm making the assumption as we look at the potential for additional rate cuts, that rates are going to only continue to go down.
That's a fair assumption. Okay, thanks.
Thank you.
Ladies and gentlemen, as a reminder, if you have a question, please press star one. There are no further questions at this time. I would hand over the call to Philip Fraser for closing comments. Please go ahead.
I would like to thank everyone today for listening and participating in our Q2 2024 earnings call, and we look forward to reporting our Q3 results on November 6, 2024. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.