Ladies and gentlemen, welcome to the Killam Apartment Real Estate Investment Trust second quarter 2022 financial results conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded today, Thursday, August 11, 2022. I would now like to turn the conference over to Philip Fraser, President and CEO. Please go ahead.
Thank you. Good morning, and thank you for joining Killam Apartment REIT's second quarter 2022 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. 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 laws.
Thank you, Erin. We are pleased with our strong financial and operating results for the second quarter. Our continued focus on our three growth strategies have resulted in an increase in same-property NOI of 6.6% and an increase in funds from operations of 3.7% for Q2. Our 13 core markets are all performing very well, from St. John's, Newfoundland to Victoria, B.C., as highlighted on slide 3, and we see the benefit of a diversified portfolio. We have made progress on our 2022 strategies as outlined on slide 4. I would especially like to highlight the same property NOI growth has outperformed our original expectations for the year.
We have produced 4.8% same-property NOI growth for the first six months of 2022, and we now expect to exceed our original NOI target of 2%-3% in 2022. Year-to-date, we have completed CAD 119 million in acquisitions, with 92% of these acquisitions outside Atlantic Canada, supporting our target to have greater than 35% of NOI generated from Ontario and Western Canada. Our development program is also contributing to our geographical diversification with the completion of three properties year-to-date. I will ask Dale to take us through Killam's Q2 financial results, followed by Robert, who will discuss our MHC and commercial portfolio results. I will conclude with a recap on our acquisition and developments and an ESG update. 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 earned net income of CAD 68.7 million and FFO per unit of CAD 0.28, up 3.7% from Q2 last year. AFFO of CAD 0.24 was up 4.3% from Q2 2021. Slide 6 summarizes Killam's same-property NOI, FFO, and AFFO growth in Q2 and year-to-date. A strong quarter of top-line growth of 5.2% attributable to increased occupancy and rent growth on unit turns was an important driver of 6.6% NOI growth. A more moderate increase in expenses of 2.8% in Q2 compared to 8.2% in Q1 also contributed to the strong NOI growth.
Expense growth in Q2 was moderated by the partial reversal of New Brunswick property tax expense related to Q1 following the province's June 2022 announcement to limit assessment increases to 10% for the 2022 and 2023 taxation years. This realty assessment cap translates into lower property taxes in New Brunswick for fiscal 2022 than the 15% originally expected and discussed in our Q1 results. Strong top-line growth was a key highlight for the quarter. Killam's apartment portfolio achieved 98.0% economic occupancy in Q2, a 140 basis increase from 96.6% in the same period last year. The line chart on slide 7 highlights the improved occupancy we've seen over the last year and a half.
The chart at the bottom of the slide shows the strength across our portfolio. Our Halifax, Moncton, Charlottetown, Kitchener, Waterloo, Cambridge, and Victoria markets all achieved 99%+ occupancy in the quarter. We also saw marked improvement in Calgary and Edmonton, with occupancy up 340 and 360 basis points from Q2 last year. As well as St. John's, Newfoundland achieved 94.5% occupancy in Q2 compared to 90.5% occupancy last year. With supply constraints, properties are reaching full occupancy and market rents are increasing. Slide 8 shows Killam's Q2 apartment rental rate growth for the last five years. At June 30, 2022, rents were up 3.3% from June last year.
The weighted average rental increase chart on the top right of slide 8 captures the increase in rents based on the leases that came into effect during each period. This offers more current data than the year-over-year results. This chart shows that in Q2, we achieved a weighted average increase of 3.7% for new and renewing tenant leases that started in April through June, well above the 3.3% year-over-year growth. This is made up of 1.6% rent growth for existing tenants with leases renewing in the period, and an 8.2% increase in unit rent on turns, representing new tenants moving in during Q2. Should this increased rent spread on turns continue, we expect to achieve higher than historic average rental rate growth for the second half of the year and into 2023.
Incentive offerings also impact revenue growth. Although the amortization of incentive offerings were relatively flat in Q2, 2022 versus Q2 last year, we've had a consistent reduction in monthly rent incentive amortization in each of the last six months. We expect incentive offering amortization expense to continue to decrease as less incentives are offered in today's tight rental market. As noted, same property operating expenses increased by 2.8% in Q2. Please refer to slide 9. As in Q1, utility and fuel expenses were up the most by 9.1%, due primarily to higher natural gas prices. Killam offset this increase in expenses with a 0.8% decrease in property taxes, driven by the change in New Brunswick to cap property tax assessments. General operating expenses increased by 2.1% in Q2.
Killam's debt maturity profile, which can be seen on slide 10, includes average apartment mortgage rates by year versus prevailing five- and 10-year CMHC insured mortgage rates. With recent changes in bond yields, current borrowing rates are above Killam's weighted average interest rates. During the first half of the year, Killam refinanced CAD 109 million of maturing mortgages with CAD 150 million of new debt, the majority of which was for 10-year term at a weighted average interest rate of 3.32%, 55 basis points higher than the rate on the maturing debt. Refinancing at higher rates is expected to lead to increased interest expense. However, this increase is expected to be gradual due to the staggered nature of our debt ladder.
We've been focused on reducing our debt levels over the last seven years and ended Q2 with debt as a percentage of total assets of 44.3% compared to 45% at year-end. Killam ended Q2 with approximately CAD 88 million of capital available through its credit facilities. Killam's key debt metrics are available on slide 11. I will now turn the call over to Robert, who will discuss our operating results in more detail.
Thank you, Dale, and good morning, everyone. Killam's focused on revenue optimization and expense management as we see the impact of our work across all three business segments, apartments, MHC, and commercial properties. Our MHC and commercial portfolio delivered especially strong results in Q2 2022 and are expected to add meaningful contributions to Killam's growth going forward. Killam's MHC portfolio realized same property net operating income growth of 6.5% in Q2 2022, as shown on slide 13. Killam's nine seasonal resorts reported excellent results in Q2 2022, with revenue increasing by 15.5% and net operating income up 11.1% compared to last year's Q2. Revenue increased at all seasonal communities this year, but Killam's two New Brunswick assets are standouts, generating a combined top line increase of 56% versus Q2 2021.
The lifting of COVID restrictions this spring permitted inter-provincial travel in Atlantic Canada. That, combined with many recent capital upgrades and additional amenity offerings, drove demand for Killam's Camping Oceanic and Camper's City seasonal resorts. With high occupancy in July 2022 and pre-bookings well above last year's level for the remainder of the season, we anticipate the seasonal MHC properties will continue to outperform in Q3 2022. Our same property commercial portfolio also posted impressive results in Q2 2022, with revenues increasing 9.8% and net operating income up 11.6%, as outlined on slide 14. Commercial occupancy increased 320 basis points from 89.9% in Q2 2021 to this year's 93.1% occupancy. Killam receives a steady level of inquiries to lease at its three main retail assets.
Westmount Place in Waterloo and Royalty Crossing in Charlottetown attract international and national retail brands that seek to build on the accelerating occupancy momentum Killam has generated over the past 18 months. Royalty Crossing, with 383,000 sq ft, is now 92% occupied, up 400 basis points since last summer. We have seen a significant improvement in the performance of this asset since we purchased our initial 50% interest in 2019. Today, Killam owns 75% of Royalty Crossing, with a very experienced local partner owning the remainder. Recent activity at this property includes its renaming and rebranding, installing new signage and exterior upgrades. A new to Prince Edward Island 4,500 sq ft Sephora has taken occupancy.
A new BMO branch is under construction along University Avenue, and year to date, we have leased or renewed over 64,000 sq ft at Royalty Crossing. We are in discussions with additional quality tenants, and Killam is confident Royalty Crossing will remain a high-performing asset for the long term. Inflation and housing affordability have been important topics of discussion in Canada this past year. Killam takes its responsibility to be part of the affordable housing solution seriously, and we are proud of our contributions as highlighted on slide 15. 42% of Killam's apartment units rent for less than CAD 1,100 per month. This represents 8,000 affordable housing units in our portfolio, and these units are distributed throughout the core markets, as highlighted on slide 15.
In 2021, Killam increased its supported affordable housing portfolio by an additional 108 new units to now total 850, representing 5% of our portfolio. Killam is an active partner with many nonprofit housing and government agencies as well as other charitable organizations such as the YWCA, Nova Scotia Mental Health, and Turning Point Housing, to name but a few. Annually, we employ an independent third-party survey company to poll our residents to assess their satisfaction with Killam's housing and service deliveries. We want to ensure our residents remain satisfied with the Killam property as their home. Results from our 2021 tenant survey are also included on slide 15. The overall tenant satisfaction rating was 87%, which we are advised by our survey provider is markedly better than the industry benchmark for multi-residential owners.
As well, I would highlight that Killam's overall satisfaction score has ranged from 87%- 90% for the last nine years. In terms of satisfaction with their apartment unit, Killam received a 90% satisfaction rating, another very positive outcome. Our residents tell us they enjoy living at a Killam property, and 83% consider their apartment to represent good value. The significant increase in inflation, realty taxes, and the upkeep cost for single-family homes these last two years further reinforces the value proposition Killam offers its residents. I will now hand you back to Philip to provide an update on our developments and acquisitions.
Thank you, Robert. As mentioned earlier, we have completed CAD 119 million in acquisitions year to date. Following a busy first half of the year, we expect acquisition activity to slow in the second half of 2022. Photos and information on our largest acquisitions completed in Q2 are included on slides 17-19. Overall, we are pleased with our earnings contribution from acquisitions completed in the last 18 months. Our most exciting acquisition in 2021 was the 785-Unit Kitchener-Waterloo Portfolio. During Q2, we completed the first upgrades to units in these buildings and are thrilled with the results. Before and after photos are included on slide 20. We are seeing strong demand for renovated units across the country, and we are on track to meet our target of 600 units for the year.
We are very pleased with the lease up on our recently completed developments as shown on slides 21. The Latitude, which opened in January, is now 88% leased, and The Kay, which opened on April 1, is now fully leased. The Kay marks one of the fastest development lease up in Killam's history and underscores the incredible demand for new housing in the GTA. The Luma, which recently opened, is already 38% leased. Photos of The Luma are included on slide 23. We have three remaining developments underway. The Governor in Halifax, which is expected to be completed by the end of this year. Civic 66 in Kitchener, which is expected to be completed in early Q1 2023. The Carrick, a 139-unit building in Waterloo, which recently broke ground and is expected to take 32 months to build.
In addition, we have a 10% interest in the second phase of Nolan Hill, a 334-unit complex located in Calgary. We will purchase the remaining 90% of this development upon completion in late 2023. Slides 25- 29 show renderings, progress photos, and key financial information on our active developments. During the quarter, we continued to move forward on a number of our 2022 ESG initiatives. We continued to work on increasing the number of properties with building certifications, investing in energy efficiency projects, including solar projects, to decrease our energy consumption and greenhouse gas emissions.
At the end of Q2, we had 12 completed projects producing an estimated 1.28 MWh of annual production, and subsequent to the quarter, four more installs were completed, increasing our total production to 1.6 MWh per year. Finally, increasing the number of electric vehicle charging stations across our portfolio. We have 74 chargers installed today of the 438 EV chargers planned for 2022-2023. To conclude, the fundamentals supporting the rental housing sector in our portfolio are strong, and we are optimistic on our ability to continue to grow NOI and net income. I would like to thank our employees for their hard work and their dedication. Thank you. I will now open up the call for questions.
Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by the number two. One moment for your first question. Your first question comes from Mark Rothschild of Canaccord. Please go ahead.
Thanks and good morning, everyone. In your disclosure-
Good morning, Mark.
Hey. You wrote about the or there was a comment that acquisition pace will slow in the second half of the year. Is that based more on just being careful with capital in this environment? Or is it more that it's just difficult to set values and prices for assets with volatile interest rates?
I think it's the first comment that you mentioned. It's really about being with our capital and waiting to see really where the markets go. I think it's gonna take all of the third quarter into the fourth quarter to get a real clear picture.
Okay, great. Thanks. Then on the development side, you guys have been, you know, building for a number of years now, and it's worked out pretty well, but development costs are continuing to go up and in some places quite materially. Does this impact your view, maybe in the near term at least, on starting new projects, and the yields you can achieve? Or is the rent growth enough to justify and maybe make it valuable to keep on going?
I think it depends on where you're building in the country. It depends on the type of construction is part of that answer. For instance, you can still build very good product in Western Canada, especially in Alberta, stick built with underground, concrete parking for CAD 250,000 -CAD 300,000 all in per door. If you get into the larger urban centers, Ontario, basically the prices has gone up. We've seen that. I think our strategy and the reason why we have announced the first development on our Westmount Property is because, we are looking at that project, the same way we looked at one in Halifax a number of years ago, which was basically half was condo and half was rental.
We are giving ourselves maximum flexibility in about two and a half to three years to determine, will it be 100% rental or will it be one part of it that we will sell as condo and take that profit to offset the overall cost and yield.
Okay, great. Thanks so much. I'll turn it back.
Your next question comes from Matt Kornack of National Bank Financial. Please go ahead.
Hey, guys. I don't know if it's possible, but can you give a sense as to how much NOI would have been contributed by The Kay? I don't think The Luma would have done much of anything in the quarter. Just how we should expect that NOI to come on through the balance of the year. It sounds like you're expecting CAD 2.7 of the CAD 5.5 total, but just a sense as to what was in this quarter.
It would've been pretty light in this quarter when we think of NOI.
Hold on just one second.
Erin's just pulling it up here.
Okay.
I think that you can expect, you know, when we look at, you know, for September, we're essentially fully occupied. From an NOI perspective, it's gonna be a strong contributor for the last four months, last quarter for sure and
It was very limited in Q2.
Yeah, it would've been because people just started moving in, so it does take a while. From September onward, essentially full NOI.
Okay, perfect. That's helpful. On Westmount, I guess with the first phase starting and you'll get a sense it's not gonna be imminent, but in the next little while as to the demand for that product, how should we think about the subsequent phases? I know this one is on kind of land that was not encumbered by prior structures, but I think the next few phases are a little bit more intensive. I'm just wondering, is this a pilot project or are you still committed to a timeline on the other aspects of that development, regardless of how this goes?
Good question. I think really the first part of it is that we do not see any slowdown on the demand side for the product. It really does depend on the cost side. Answering your question, we believe that even in the Kitchener-Waterloo area, demand is very strong for new housing, you know, higher end, to justify developing these assets. I think that basically where we are, we have the first one, as-of-right, approved. Over the next year to year and a half, we will look at more of a master plan and be able to sort of give the sort of answer you're looking for in terms of second phase, third phase, in the next, at that time period.
Your commentary on condo is interesting. To what extent does that actually improve the yields for the residual rental that you keep? Is it entertained that there would be a condo component in those other phases in that project as well, or is this unique to the first phase?
No, I mean, it could be that you look at it. There's developers that we see right across the country that are committed to long-term rental development. Depending on where we are in the cycle from a cost point of view, some of these developers will basically say, "We will build two buildings at the same time, one rental, one condo," and take the profit from the condo and just sort of offset and subsidize the rental in terms of the capital that you're gonna have to use over that, you know, 24-36-month period to construct. In a case like this, as costs continue, one of the largest components of this is actually the HST. If it goes condo, that is basically borne by the owner of the unit.
From a cost point of view, the cost is a lot less, and there is really good profit margins to be involved in the condo side of the business.
Okay. No, that's very interesting. Appreciate the color.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one at this time. Your next question will come from Jimmy Shan of RBC Capital Markets. Please go ahead.
Thanks. Just a quick follow-up on the Kay. Given the fast lease-up and at CAD 3 a foot, like, I guess it would be fair to assume that there's probably a good runway in getting further price increases in that property, or will it be kinda like above market within the competitive set in that market?
I think, I mean, we are seeing market rates steadily increase. I think over time, the expectation as long as that trend continues, that on turns, we would expect to be able, you know, to see those markets. As market rents continue to rise, we'll be able to see rent growth in that property.
Based on the demand and the speed of lease-up, I think it's comfortable to assume that there's opportunity to see rents move up.
Okay. I know the seasonal resort is a small part of the business, but it's done so well in the last couple of years. Kinda how are you thinking about that business? Is there an opportunity to further scale that up, and is there any willingness to do that? Kind of curious as to how you're thinking about that piece of the business.
Well, I think that there is a renewed interest, and I might have even said this, last quarter on the call, to grow, not only the apartment business, but there's renewed interest in terms of the MHC and seasonal side of our business, and really concentrate on, from a commercial point of view, the assets that we have. We're not out there looking for more commercial assets today. The ones we have, we just see real upside and in terms of expanding, re-leasing some of the space and improving the operating side of it. We see good opportunities for growth commercial. Then the MHC side, it's interesting because, one, in today's environment, it is really a good alternative for affordable housing for all Canadians across the country. We are out there looking.
The interesting thing about the seasonal side of the business is that that is leisure dollars for Canadians, and there is a huge demand for that as well. From our point of view, it's just, as you know, we are out there actively looking to grow that side of the business.
Okay, thank you.
Your next question comes from Lorne Kalmar of TD Securities. Please go ahead.
Thanks. Maybe just flipping back quickly to acquisitions. I know you mentioned a slowdown. Do you guys think you can still get to your CAD 150 target for the year?
Well, I mean, we're gonna have to wait and see. I mean, we'll have to wait and see what really the third quarter going into the fourth quarter looks. From our point of view, 120, 150, it's kind of almost just a rounding error. It's just really one building. It's a wait and see.
Fair enough. You know, obviously demand continuing to get stronger. What do you guys estimate the mark to market on the portfolio is, on the apartment portfolio is at the moment?
Well, looking at how those market rents are moving, we would say probably around 25%. We've got variability by different markets, but we are seeing those numbers and what we're able to achieve increase every month. We're watching it carefully, but there is a lot of room.
Just quickly, actually, sticking with that, on the repositioning, what were the lifts you got this quarter? I may have missed it, but was just wondering.
Oh, the lifts.
The repositions, it was about 30%.
Yeah, 30%.
Still getting a pretty strong uptake there. Then
Very strong.
Just lastly. Yeah. Just lastly, on The Carrick, how much of the cost would be tendered as of right now?
75% of the hard costs.
Okay, great. Thank you so much.
Lorne, I just wanna add one thing. In terms of the 30%, the investment there is typically CAD 30,000. In some of the units we're doing, it's over CAD 50,000. You know, there's we're investing a fair bit of money to see that lift.
Your next question comes from Sairam Srinivas of Cormark Securities. Please go ahead.
Thank you, operator. Congrats, guys, on a good quarter. My first question. I mean, most of my questions have already been answered, but I thought it might be a good idea to kind of zoom in on the New Brunswick market from an operations point of view. I see you guys have had a good quarter in terms of leasing. Maybe if you could give us a little color on what's happening there in terms of are you still seeing the demand continue and, heading for the rest of 2022?
For leasing? Sorry, just to clarify, is that what you're asking, demand to continue for leasing?
Yeah.
Can you repeat? Across the portfolio?
No, specifically just looking at New Brunswick.
Oh, New Brunswick.
Because I know there are some occupancy gains as well as some rental upside there. Like, is there something specific that's happened there or do you just feel that it's gonna continue for the rest of the year?
We're seeing continued strength in our New Brunswick markets. There are still mark-to-market opportunities in that market. Leasing continues to be strong. Really across all of our markets, we're just about at full occupancy here, and New Brunswick would be included in there.
Part of the gain in New Brunswick too is that there was a portion of the portfolio that we were paying for the electricity. As the market's become stronger, we've stopped doing that. We were seeing some gains there. Overall, the New Brunswick economy is strong.
Perfect. Thanks for that, guys. I'll join back.
There are no further questions from the phone lines. At this time, I will turn the call back to Mr. Fraser for closing remarks.
I would like to thank everybody for participating and listening to our conference call today, and we look forward to our third quarter conference call in the beginning of November. Thank you.
Ladies and gentlemen, this concludes your conference call for this morning. We would like to thank everyone for participating and ask you to please disconnect your lines.