Good morning, ladies and gentlemen, and welcome to the Killam Apartment Real Estate Investment Trust First Quarter 2025 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require assistance, please press *0 for the operator. This call is being recorded on May 8th, 2025. 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 First Quarter 2025 Conference Call. I am 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 first quarter of 2025. Killam delivered FFO of CAD 0.28 per unit in the quarter, a 7.7% increase from CAD 0.26 per unit in Q1 2024. We achieved 7.8% same property NOI growth across the portfolio, which included 8% same property NOI growth in our apartment portfolio, 7.5% same property NOI growth in our manufactured home community portfolio, and 4.2% same property NOI growth for our commercial properties. The multifamily fundamentals in Canada are still very strong, and our same property apartment occupancy at the end of the quarter was 97.5%, the same as Q1 2024. We have completed the first quarter with meaningful progress towards our strategic targets listed on slide three, and we are on track to meet these targets by the end of the year.
We remain very optimistic about the future of the Canadian rental market and will continue to focus on growing our earnings, cash flow, and the underlying value of our assets. Dale will take us through our financial results, followed by Robert, who will discuss spring lease-up trends and our ability to produce top-line growth. I will conclude with an update on our current developments and our capital allocation strategy. I will now hand it over to Dale.
Thanks, Phil. Key highlights of Killam's Q1 financial performance can be found on slide four. Killam earned net income of CAD 102 million, which includes CAD 70 million in fair value gains, driven by robust same property NOI growth across our portfolio. We are pleased with our 7.7% increase in FFO per unit growth in Q1, generating CAD 0.28 per unit compared to CAD 0.26 in Q1 last year. Our three most recently completed developments contributed meaningfully, adding CAD 1.5 million in FFO growth compared to Q1 2024. Adjusted funds from operations also increased, up 9.5%. The growth in AFFO is a function of our strong same property performance and is further enhanced by our capital recycling program, which focuses on selling older capital-intensive assets. Our 7.8% same property performance in Q1 was driven by 6.6% revenue growth and 4.6% expense growth. Killam's same property operating margin was also up by 70 basis points.
With this strong start to the year, our same property NOI target for the year remains intact. We expect to end the year in the middle to upper end of our same property NOI target of 4%-7%. As shown on slide five, Q1 delivered 15% rental increases on unit turns. Combined with units that renewed in Q1, we achieved a 5.1% weighted average combined increase in apartment rental rates in the quarter. This step down in the weighted average rental rate change from 7.9% in Q4 2024 was anticipated based on Q1 and January, in particular, having the highest number of unit renewals during the year and a recognition that market rents are off their highs from mid-year last year. Our achieved average rental increase on unit turns of 15% was in line with the current mark-to-market of our portfolio.
Slide six highlights the variability of mark-to-market spreads between regions, with Halifax and Kitchener, Waterloo, Cambridge maintaining the greatest opportunity on turnover of approximately 25%. While we are confident in this figure, it's important to note that this spread will be captured over time based on the length of tenure from the units turning and the markets in which the units turn. Slide seven highlights Q1 expense growth by category. Total expense growth across the same property portfolio was 4.6%, with general operating expenses up only 2.1%. Property taxes increased 4.8% due to higher assessments across the portfolio. Utility and fuel expenses were up 7.9% due to higher natural gas pricing and higher consumption through the colder winter heating season compared to the mild winter experienced in 2024. We do not expect the same level of energy expense pressure during the remainder of 2025.
The recent removal of carbon tax is estimated to provide annualized savings of approximately CAD 2.5 million. We expect to see approximately half of this carbon tax removal savings realized over the remainder of 2025, with the other half realized in early 2026. We're pleased with our strong balance sheet positioning, with our debt-to-total assets ratio down to 39.9%. This marks the first quarter in Killam's operating history that this ratio reached below 40%. We also reduced our debt-to-normalized EBITDA to 9.66 times at the end of the first quarter and improved our interest coverage and debt service coverage ratios compared to Q4 2024. Slide nine includes average apartment mortgage rates by year versus prevailing CMHC insured mortgage rates. In Q1, Killam refinanced CAD 51 million of maturing mortgages, with approximately CAD 97.1 million of new debt at a weighted average interest rate of 3.67%.
We have CAD 253 million in apartment mortgage refinancings during the remainder of the year at a weighted average interest rate of 2.03%. The longer-term outlook for mortgage maturities is favorable. Based on current market rates, Killam anticipates refinancing at close to its current weighted average rate in 2026 and below the average interest rate for maturities in 2027-2029. As part of our debt management strategy, we are also leveraging CMHC programs as mortgages come due, with a focus on increasing our CMHC insured coverage, which is now at 83.4% for our apartment portfolio, up from 79% this time last year. 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. Although new apartment supply is evident in Killam's markets, its impact has been nominal. We are very pleased with Killam's Q1 2025 leasing and rental growth results that generated a 15% weighted average rental increase on unit turns. As well, Killam is continuing to achieve strong leasing results with its Spring 2025 leasing program. Our ability to achieve these spreads on new leases speaks to Killam's well-positioned rental-rate diversified portfolio. Further, Killam's dynamic operating platform drives pricing decisions based on up-to-date market information, keeping us informed so we may quickly move rental rates to address market changes. The graph shown on slide 10 illustrates Killam's apartment portfolio's rental buckets and highlights the rental options for tenants for a range of price points.
17% of Killam's portfolio has asking rents over CAD 2,000 per month, which may experience limited competition from newly constructed buildings that demand rents between CAD 2,000-CAD 2,500 per month to make their economics work. Killam is confident it can retain its market share because our suites have an established tenant base, excellent locations, and modern amenity offerings. Like Killam's decision to operate in seven provinces, our portfolio's further diversification based on rental rates is defensive and creates inherent opportunities for growth with lower risk. Killam calculates its average mark-to-market opportunity for its apartment portfolio to be approximately 15%, providing ample opportunity for additional rental growth across the portfolio. For Q1 2025, the markets driving Killam's strong rental growth include Halifax, Moncton, Fredericton, and Newfoundland. Reaffirming the resiliency of the Atlantic Canadian rental market, we are confident these cities will outperform in 2025.
In addition to strong rental growth and mark-to-market opportunities, as shown on slide 11, occupancy levels and NOI growth in the region are above portfolio averages. Slide 12 details the variability in the tenure length of tenants who moved out in Killam's markets for the first four months in 2025. To date, in 2025, Alberta, BC, and Ontario are experiencing the highest proportion of turns from units having a tenancy of only one year and are delivering lower NOI growth. Interestingly, the average increase in net operating income for New Brunswick is 12.44%, despite the fact that 50% of New Brunswick's turnover is from tenancies of only one year, demonstrating the strength of the market rents in this province. More broadly, Killam's portfolio turnover is increasing modestly, with turnover trending higher year-to-date in 2025 by 100 basis points to 19% turnover from 18% last year.
Using data analytics, we can see the average increase achieved on new leases based on the tenure length of the vacating tenants. No surprise here. The longer a tenant's tenure, the higher the increase in rent for the incoming tenant. As shown on slide 14, we are slightly behind last year's record-breaking numbers. Our rental increases year-to-date are in line with or slightly above the five-year average across all tenure terms. We are seeing leasing activity return to pre-pandemic norms, with asking rents beginning to stabilize, as illustrated by the blue bar for 2025 year-to-date highlighted with the circle. In summary, this data reinforces our ability to achieve our target of 5%-6% revenue growth in 2025. I will now hand you back to Philip to provide an update on our development and disposition activity.
Thank you, Robert.
Subsequent to the end of the first quarter, Killam sold four properties in Newfoundland. On May 2, we completed the disposition of a manufactured home community in Gander and one in Corner Brook for a total sale price of CAD 4.8 million and net proceeds of CAD 2.9 million. On May 5, we completed the disposition of two apartment buildings in Grand Falls, Newfoundland, totaling 148 units for CAD 13.7 million, with net proceeds of CAD 11.5 million. We have three properties under a firm agreement to sell in PEI containing 127 units for CAD 15.7 million, with expected net proceeds of approximately CAD 9 million. This transaction is expected to close by the end of May. In addition, we have four separate conditional agreements to sell an additional 725 units in PEI, New Brunswick, for approximately CAD 129 million, which are expected to close on or before the end of August 2025.
We invested CAD 530,000 in our PV solar initiative in Q1 2025 and plan to spend approximately CAD 3 million more by the end of the year on 11 additional PV solar installs throughout our portfolio. Our PV solar program is a key cornerstone of our ESG commitment. By continuing to invest in our electrical power production, we are reducing our carbon footprint and operating cost. Building new apartment buildings in our core markets is an important component of Killam's capital allocation strategy. The Carrick, as shown on slide 17, is expected to open on June 1, with the first 11 tenants moving in. We have strong pre-leasing, with 26% of the building pre-leased. The Carrick will be Killam's first all-electric heating and cooling system building. The domestic hot water will be preheated using an air-to-water heat pump.
The remainder of the hot water heating will utilize electricity, so the building will not require natural gas for day-to-day operations, thus mitigating the impact of carbon pricing and potential fuel taxes. Other green features include the energy-efficient envelope, electric vehicle charging, low VOC finishes, LED lighting, and low-flow fixtures and full submetering to encourage conservation. As shown on slide 18, construction continues at Eventide, our 55-unit building off Spring Garden Road in Halifax. Completion is expected by Q3 2026, and pre-leasing will start in October. Slide 19 shows progress to date of the Brightwood, our 128-unit wood frame building at 150 Whisper located in Waterloo. Completion is scheduled for June 2026, and pre-leasing will also start in October. In Halifax, we are working on a 95-unit development at Victoria Gardens and a 150-unit development at our Harlington Crescent community.
We hope to start at least one of the above-mentioned developments by the end of the year and access the existing ACLP financing program from CMHC, which reduces overall development risk by providing below-market interest rate construction debt. On the acquisition front, we are actively looking and touring properties in Western Canada and Ontario, plus looking at a couple of our Atlantic Canada markets for new acquisitions. As RealCan reported on Tuesday, we have entered into a conditional agreement to purchase a 50% interest in our JV properties located in Ottawa. To conclude, we are very pleased with our Q1 2025 performance and remain committed to investing in high-quality assets and developments, executing our overall strategy and creating value for all of our unitholders. I would like to thank our employees for their hard work and dedication. 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 * followed by 1 on your touch-tone phone, and you will hear a prompt that your hand has been raised. If you wish to decline from the polling process, please press * followed by 2. If you're using a speakerphone, please lift your handset before pressing any keys. One moment for your first question. Your first question comes from Mike Marquitas with BMO Capital Markets. Please go ahead. Hello, Mr. Marquitas. Are you there? You may be on mute.
I was on mute. Sorry about that. Good morning. Thank you. Just first on the same property guidance, I know it's early in the year and you're probably being a little bit conservative just given that we still got three quarters to go. I think, if I remember correctly, Q1 was sort of the worry in terms of where utility expenses would go. Now we have certainty on where that came out and we've got the carbon tax. I'm just wondering, looking at where you guys came in on OpEx this year and looking at what you're still expecting, what are the other OpEx pressures that might still be there in the portfolio? I think on a blended basis, you were below your OpEx expectation for the year, and we know what's going on with carbon taxes. Sorry, long-winded question, but hopefully that's clear.
Yeah, I think property tax is still the one that we won't have final numbers on what those will actually be until the end of Q2, likely for the whole portfolio. We are expecting it to come in around six. Unfortunately, a lot of what we've seen is supporting those numbers. I'd say that that is one that continues to be out there as an uncertainty, but we will have more color. You're right, we knew we were going to have some higher utility costs in Q1, but they actually came in a little bit less than we had expected. There are some positives on that front, absolutely.
Okay. Is the property tax, is it specific to a specific region or regions, or is it broad-based, the 6%?
It's quite broad-based. Yeah. I'd say Halifax is one that, of course, for us is an important one in terms of what our average is, and that one has come in around that range.
Okay. Sounds like you guys are pretty—I mean, you pretty much got the agreements conditionally in place to hit your disposition target, so congrats on that. I haven't had a chance to make an estimation, but how should we be thinking about the purchase price of the remaining 50% interest relative to the volume of dispositions that you expect to close this year?
Hi, Marquitas. Are you asking what the purchase price is?
I guess in a backwards way, I am, yes.
136 million. And a cap between 4.5-4.6.
4.5-4.6. Okay. And can you remind us the blended cap on the dispositions?
The first wave that we closed, bear in mind that they were in Newfoundland and they were sort of assets we had picked up many, many years ago in smaller portfolios. They were sort of—we never ever went back into those markets to purchase. The liquidity was a little bit higher than the norm. They were about between 6.5% and 7% for those four assets. Obviously, the remaining deals will be lower than that.
Okay. Can you give us an indication of lower?
Lower? Between 5.25 and 5.5.
Okay. All right. So just as we—I mean, you had a strong year-over-year earnings growth rate, but just as we look going forward, just given the capital recycling, and I guess you'll still have a bit of a drag now offsetting when The Carrick comes online. Is it fair to say that your year-over-year earnings growth in the next three quarters will be lower than where you came in in Q1?
I think so partially because the benefit from the developments that were completed in late 2023, the biggest every quarter, the year-over-year change is less. When you think of that, it had meaningful impact in terms of FFO per unit growth this quarter. That will, by the time we hit Q4, be positive, but not near to the same extent. I think when you look at FFO per unit growth and you factor that in, that alone is going to—I think Q1 could be the high in terms of FFO per unit growth.
Yeah, that's fair. Last one before I turn it back, can you just remind us? I think there's a pretty favorable ACLP on the Carrick. Just trying to think about how to model in the interest. I imagine you start decapitalizing in Q2. Is that how it'll work, or?
Yes. Yeah, exactly. Once we're substantially complete and leasing commences and people move in, we would stop capitalizing the interest.
We would expect right now, likely based on the timing, it'll probably be July.
July. Okay. What is the rate on that loan specifically again? Can you remind us?
3.08%.
Wonderful. Thanks so much. Congrats on the strong quarter. I'll take it.
Thank you.
Your next question comes from Jonathan Kelcher with TD Cowen. Please go ahead.
Thanks. Good morning. First, just on the elevated amount of renewals in January, is that just a hangover from COVID? I guess we should expect to see your blended rental rates sort of inch up over the course of the year?
Yeah. Yes, it is. Part of it is like PEI is one region that has the majority of the renewals in January.
Ontario as well. It has a lot in Guelph.
Okay. The increase in incentives, is that market-specific, asset-specific? Maybe let us know how you're thinking about that going forward.
Yeah, it's very much asset-specific and very specific to the Nolan phase II lease up in Civic 66 as well.
Okay. So outside of that, not a lot of incentives?
Yeah. I think 70% of the incentive balance in the month of March was specific to 10 assets in the portfolio. It is pretty limited. Across there, it would be a very tiny sprinkling here or there.
Okay. Lastly, on the development side, I guess outside of government programs, what are you guys seeing in terms of where hard costs are trending with tariffs and everything going on?
They've trended down. I guess really the one that we just priced in Waterloo, hard costs came in at about CAD 360,000 for wood frame. All the other costs are the soft plus the land. We're pretty encouraged about that.
Okay. So that's estimate.
Overall, it's stable to slightly declining on hard.
Okay. Would that be similar for concrete as well, or just?
Absolutely. Yeah.
Okay. Thanks. I'll turn it back.
Thank you.
Your next question comes from Kyle Stanley with Desjardins. Please go ahead.
Thanks. Morning, everyone. As you sit here today, you're approaching completion on The Carrick, and you know obviously a deep pipeline of opportunities still to come. Can you just talk through the yield dynamics on taking on the development yourself versus maybe looking to acquire new build assets, whether stabilized or not stabilized? Just how do you think you rank those in your capital allocation pecking order?
I think we've tried to communicate in the past. The development side, you have to look at it from a point of view that it's 2%-3% on the balance sheet size. At any given time, there's only between CAD 100 million-CAD 200 million. The goal is to consistently be having or having that amount of development in the pipeline or finishing up. Therefore, in terms of growth, obviously the real growth will come from looking at acquisition opportunities now and in the future.
Right. Okay. No, that makes sense to me. A question just on Halifax and supply. Obviously, you kind of touched on it in your disclosures. I'm just wondering, what is the market like for condo delivery, specifically in Halifax? And are you seeing similar dynamics at play in Halifax as maybe what we're hearing about in Toronto or Vancouver, more individual investors, some distress in the market, and the impact that that's maybe had on discounting of rents? Is that something that you see a risk of in Halifax at all?
I think I can address the condo side of it. Really, there's one operator from Toronto. He's finishing up one that's about 70-100 units, and he's in the ground for a second one about the same size. I can't think of any other ones out there. Now, maybe there might be a couple of them, but it's way less than a handful. That's similar to a lot of the other markets right now, for sure.
We've never had a big condo market here. We've never had a big condo market. It just isn't part of our market for rental for the most part because there's a very evolved new build on the multi-side in Halifax.
Okay. Okay. That's as expected, but doesn't have the same risk profile as maybe we're seeing in other markets, which is good to hear. Okay. I will turn it back. Thanks very much.
Thank you.
Your next question comes from Dean Wilkinson with CIBC. Please go ahead.
Thanks. Morning, everyone. Phil, maybe just want to come back on the Brightwood. I think we talked about this a little bit before. The $200,000 close to differential between what you could build that and say the Carrick, is that land basis, or is that just straight up because it's a timber frame construction?
No. I mean, the Carrick is a COVID or COVID building, which means there's HST to it. And that's a big chunk of the difference.
Yep. Got it. Going forward, it still seems like there is quite a large spread between, say, steel frame, concrete construction, and wood frame. Are you seeing more builds going towards the wood, or do you think that could happen? How is that playing out? It would appear that wood might not be as hit by potential cross-border tariff issues and things like that.
I think the way that we're looking at it inside Killam is that if you look at two buildings and the land is yours, you can do either wood or mid-rise concrete. We're taking the approach that the wood building provides an opportunity that we can start and finish it in relatively 18 months versus three years. That's part of the decision as well. We're not saying we're going to go all wood. There will be, obviously, in the next few buildings if we get them ready to come out of the ground. It will be a mixture of the wood frame and the concrete. It's about really looking at the timing it takes to develop these assets as well as the differential in the cost.
The rents you're getting, I would assume, are fairly similar.
Fairly similar. Yes.
Yeah. Okay. That's great. Thanks. I'll hand it back.
Thank you.
Your next question comes from Jimmy Shan with RBC Capital Markets. Please go ahead.
Thank you. Maybe just on New Brunswick operation, Fredericton, Moncton, still very strong markets, it looks like. How are you feeling about New Brunswick over the course of this year? Just given that you do have a bit of exposure to U.S. trade exports and just kind of wonder what your thoughts are on that market.
Right now, we have not seen any signs, not saying that there is not in terms of the tariff sort of potential threat. I look at them, I mean, they are thriving sort of basically all three cities right now. From our point of view, and when you also look at it from an affordable average cost of rent in that province, it is very affordable, which helps cushion any type of economic sort of decline or impact on the tariffs. It seems they are holding stronger on population growth. The main cities are still seeing people, and therefore, demand is there. In terms of the tariff, yeah, softwood, that type of tariff could be an impact. If nothing else, Atlantic Canada has proved to be resilient, and they find a way.
Yep. As we look into early May now, how is leasing so far and occupancy trending relative to how it ended at the quarter?
Yeah. It's been robust. Say quite similar to what we would have shown in Q1. I think what we have seen, as the whole market is seeing, is that if rents are too high and people are still looking for pricing from six months ago for new stuff, it might not move as quickly. Once rents are adjusted to what true market rents are, we see a lot of activity. We have been very pleased with the momentum from our spring leasing.
Yeah. Sorry, just one more. Slide 14 is interesting, the table here where you show the tenant turnover by tenure. I was curious, if I look at the four- six-year and over six-year bucket where you're capturing obviously the biggest rental increase, is there any common reason for move-outs that you can gather from those two buckets?
From the older buckets, sorry? Just.
Yeah. Yeah. From the older buckets.
We've been surveying people for years. It's homeownership. It's people growing families. It's people moving to a senior center. Every year from tracking this, there is movement that happens. We're not seeing anything different, I wouldn't say.
Every now and again, you get the 20-25 year tenant. A multitude of things. We would not know definitively what it is.
Okay. Thank you.
Ladies and gentlemen, as a reminder, if you do have any questions, please press * followed by 1. Your next question comes from Matt Kornack with National Bank Financial. Please go ahead.
Morning, guys. Just wanted to quickly touch. I think you made the commentary that you're seeing market rents stabilize and in some cases accelerate again. That would be evidenced by your kind of holding 15% mark-to-market, notwithstanding getting a pretty good rent increase this quarter. What markets are the markets that you're starting to see kind of move higher again in market rents at this point? Presumably, there's not a supply issue in those, but interested.
The acceleration is not significant, but we're seeing it in Halifax right now. It's doing well. We have good activity. The three New Brunswick cities have done very well. They continue. As we went through April, it did very well.
Plus Newfoundland.
Even assets in Ontario where we did bring those, we were seeing a little bit of vacancy. We brought the rents down, got those units leased up, and now we're able to start moving up slowly in select assets there too. It is really a variety of locations and assets.
Affordable product or relatively affordable product versus, call it, higher-end product in terms of that rent trajectory?
Again, our slides showed, I mean, we're just barely cresting over CAD 1,500 as a whole portfolio.
Yeah. No, fair enough.
Which goes to your point about affordability and value proposition. I mean, in terms of our assets, we spend a lot of money on maintaining them. I think it shows within markets when they start to get a little more challenging. We seem to be doing very well in terms of maintaining our existing and able to attract other renters at prices that are a gain for us and work for them.
Makes sense. I did notice as well on the CapEx front, I understand that it's one quarter and there's seasonality in terms of CapEx spend, but it did seem like even for this time of year, it was on the lower side. Is that a function of a decision in terms of what to invest in, or is it just a quarter?
Good observation, actually. We had a discussion about it tonight with our capital team. It really is, you'll see it pick up in Q2. We know that we need to be getting contracts in place early so we can have the work done and maybe gain on the operating costs for the year. That was a bit of a slow start this year, but we'll make it up.
Okay. Fair enough. Lastly, I mean, I think you guys took advantage of the opportunity to get up to the 50% that you did not own in Ottawa. At the same time, I think at the beginning of the year or maybe late last year, you were talking about the disposition program and maybe some of that going to unit buyback. Should we think that instead of buying back stock, you have done that transaction, or is there still an opportunity to buy back the stock at this point with disposition proceeds?
I think there's still an opportunity to do buybacks once we finish up all our dispositions for 2025.
Okay. Thanks, guys.
Thank you.
Thanks.
There are no further questions at this time. I'd now like to turn it back to your speakers for any closing remarks.
Thank you for listening and your questions today. We look forward to our Q2 conference call on August 7. Thank you.
Ladies and gentlemen, this does conclude your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.