Good morning, ladies and gentlemen, and welcome to the Killam Apartment REIT Third Quarter 2022 Financial Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we'll conduct a question-and-answer session. If at any time during the call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, November 9th, 2022. I would now like to turn the conference over to Philip Fraser. Please go ahead.
Thank you. Good morning, and thank you for joining Killam Apartment REIT's Third 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. The 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 laws.
Thank you, Erin. We are pleased with our strong financial and operating results for the third quarter. Our continued focus on our three growth strategies has resulted in an increase in same property NOI of 5.1% and an increase in Funds from Operation of 3.3% for the quarter. The fundamentals are strong in our core markets, which has translated into same property revenue growth of 5.1% and the highest occupancy in our history. Based on our year-to-date growth, we have increased the same property NOI guidance for 2022 to above 4% compared to our original target of 2% to 3%. Our investments in Ontario, Alberta, and BC over the last few years are increasing our NOI outside Atlantic Canada, which has been a strategic priority for Killam for the last decade.
Year-to-date NOI outside Atlantic Canada is 35.7%. The lease-up of the Latitude, The Kay, and Luma will further increase NOI generated outside Atlantic Canada during the remainder of the year. Looking further out, we are targeting over 40% of NOI coming from outside Atlantic Canada by 2025. Based on the rapidly rising interest rate environment and volatility in the capital markets, we have taken a pause on acquisitions during the second half of the year. Acquisitions will continue to be an important avenue for Killam's growth in the long term. However, we believe now is not the time to be aggressive on the acquisition front.
Although supply chain and labor constraints have pushed the completion of The Governor and Civic 66 out a couple of months from their original completion date, they are both exceptional assets that will enhance our existing portfolio and will be great additions to Canada's housing stock. Dale will now discuss our Q3 financial results, followed by Robert, who will discuss our MHC commercial portfolio results in our repositioning program. I will conclude with an update on our current and recent developments and an ESG update. I will now hand it over to Dale.
Thanks, Phil. Slide 5 highlights Killam's Q3 financial performance. Killam earned net income of CAD 3.6 million in the period and FFO per unit of CAD 0.31, up 3.3% from Q3 last year. AFFO per unit of CAD 0.28 was up 3.8% from Q3 2021. Killam's same property NOI, FFO, and AFFO growth in Q3 and year to date are summarized on Slide 6. We had a strong quarter with top-line growth of 5.1%, driven by higher apartment occupancy, rental rate growth, and gains in both seasonal MHPs and commercial revenues. Killam's apartment portfolio achieved 98.4% economic occupancy in Q3, a 100 basis points increase from Q3 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. Six of our core markets achieved 99%+ occupancy in the quarter, including Calgary, which had been carrying higher vacancy for the last few years. Ottawa is another market where we saw a strong improvement in occupancy. Momentum continues in all our markets as we wrap up 2022 and head into 2023. As shown on Slide 8, we also saw a 10 basis point reduction in incentive offerings this quarter. We expect this reduction to continue into Q4 and in 2023. The weighted average rental increase chart on the top of Slide 8 captures the increase in rents based on the leases that came into effect during each quarter.
This offers more current data than the year-over-year average rent increase results. In Q3, we achieved a weighted average increase of 4.2% for new and renewing leases that started in July to September. This was made up of 2.1% rental growth for existing tenants with leases renewing in the period, and 11% increase in unit rents on turns, representing new tenants moving in during the quarter. Same property operating expenses increased by 5.2% in Q3. Please refer to Slide 9. As in the first half of 2022, utility and fuel expenses were up the most by 9.8%, due primarily to higher natural gas prices. General operating expenses also increased by 5.5% in Q3 relating to inflationary pressures.
Killam's debt maturity profile, which can be seen on Slide 10, includes average apartment mortgage rates by year versus prevailing five-year CMHC-insured mortgage rates. Following recent interest rate increases, current borrowing rates are above Killam's weighted average interest rate. During the first three quarters of the year, Killam refinanced CAD 132 million of maturing mortgages with CAD 177 million of new debt, the majority of which was for 10-year terms at a weighted average interest rate of 3.43%, 76 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 for the last seven years and ended Q3 with debt as a percentage of total assets of 45%, in line with our strategic targets for the year. Killam ended Q3 with approximately CAD 79 million of capital available through its credit facilities. Killam's debt metrics are included 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. We continue to see positive results across all Killam's business segments. Our MHC and commercial portfolios had strong quarters and are expected to continue to add meaningful contributions to Killam's growth going forward. As seen on Slide 12, Killam's MHC portfolio realized same property revenue growth of 7.7% in Q3, and our nine seasonal resorts had very strong summer rentals, achieving revenue growth of 12.7% in Q3, and net operating income growth of 10.3%, as highlighted on Slide 13. Slide 14 shows our same property commercial portfolio, which also posted healthy gains in Q3, with revenues up 6.3% and net operating income up 6.6%.
These improvements reflect increased occupancy to 92.5% in Q3 versus 89.6% in Q3 last year. We are optimistic about the leasing momentum across our 1 million sq ft of commercial properties. The commercial portfolio is proving to be very complementary to Killam's apartment portfolio. We continue to invest strategically in our portfolio with capital upgrades, energy efficiencies, and unit repositionings. Year- to- date, we have repositioned 496 units, are on track to meet our target of 600 units for 2022. We are experiencing strong demand and healthy rental growth as these renovated units come online. With an average investment per unit of CAD 26,000, Killam generates an average return on investment of 13%. We are proud of the capital investments that modernize our portfolio, improving its efficiency and marketability.
Slide 16 is an example of a common area upgrade we completed in Q3 at Cunard Towers, a 233-unit building centrally located on the Halifax Peninsula. Due to its close proximity to downtown and both Dalhousie and Saint Mary's Universities, this property has been attractive to students and young professionals since we acquired it in 2004. We identified the opportunity to deliver expanded amenity space, including opening up and renovating formerly unused space on the second level to create a social room, including a boardroom and a fitness center on the ground floor. These renovations have been incredibly well-received by tenants and are expected to lead to record demand for this property. Continued population growth is also expected to drive demand for our properties across Halifax.
We hosted an analyst and investor tour in Halifax in early October, and participants were impressed with the growth and vibrancy of the city. As the chart on Slide 17 highlights, population growth in Halifax has continued to remain at near record levels. The city is attracting people from across Canada and around the world. It's exciting to see that young people are driving much of this growth. The largest cohort of residents in Halifax is now 25 to 34 years old, compared to 35 to 44 years old 20 years ago. These young people are important for the economic growth of Halifax and its increasing vitality. Further, other cities in Atlantic Canada, such as Moncton and Charlottetown, are also seeing similar population trends. I will now hand you back to Philip to provide an update on our developments and acquisitions.
Thank you, Robert. 2022 has been an important year for Killam's development program with the completion of three projects. We are very pleased with the lease-up of these properties, as shown on Slide 20. The Kay, as seen on Slide 21, was completed in April and was fully leased by August. The Latitude on Slide 22 opened in January and is now 93% leased. Both of these properties were built with geothermal heating and cooling systems and are expected to reduce heating and cooling energy consumption by approximately 25% when compared to a conventional system.
The Latitude was built adjacent to our existing building Frontier, and provides 17,000 sq ft of community space for our tenants with amenities such as fitness center, yoga studio, social rooms, pet wash, and a golf simulator. With an average monthly rent of CAD 3.05 per sq ft, this demonstrates strong demand from tenants who are turning to high quality apartments as affordable alternatives to home ownership. Luma, which opened to tenants in June, reached substantial completion in Q3 and is 62% leased. Slide 24 shows the three remaining developments underway. The Governor in Halifax, Civic 66 in Kitchener, which are both expected to be completed in early 2023. The Carrick, a 139-unit building in Waterloo, which broke ground last quarter and is expected to take 36 months to build.
This building will be Killam's first use of a SHARC wastewater heating and recovery system. This system includes a large storage tank in the basement, where the SHARC heat pumps remove heat energy from the building's wastewater and transfers it to the incoming water for domestic use in the units. This system is expected to reduce the building's hot water energy consumption by over 400,000 kWh annually compared to a conventional heating source. We are also registering the development as a condominium, which will give us the flexibility at a later date to sell a portion of all the units, a portion or all of the units, or keep it as a rental building. Renderings, progress photos, and key financial information on these active developments can be found on Slides 25 to 29.
In October, we obtained our 2022 GRESB rating results, earning an additional four-green star designation and a 15% score improvement from our 2021 rating. Killam now holds a green 3-star designation and a public disclosure rating of A, outperforming the global scoring average of B. Throughout the year, we have been investing in green solutions, as highlighted on Slide 30. With the opening of Civic 66, we will have six properties using geothermal heating and cooling, increasing our unit count to 1,021 apartment units. We continue to invest in solar with the completion of our first installation in Alberta this quarter at The Vibe, making it our 17th solar installation in our portfolio and increasing our installed solar capacity to an estimated annual production of 1.7 million kWh annually.
Finally, we continue to prioritize certifying our buildings through various certification programs in order to ensure we are providing our tenants with the best operating and living standards. We are on track to certify an additional 1,500 units this year, bringing us to 13% of our portfolio certified and on track to meet our target of certifying 20% of our portfolio by 2025. To conclude, we are focusing on producing high quality developments, providing high quality living standards for our tenants, and investing in innovative green energy to reduce our carbon footprint while mitigating our exposure to rising energy costs. As seen across all regions, the fundamentals supporting the rental housing sector in our portfolio are strong. We're optimistic in our ability to continue to grow NOI and net income.
I would like to thank our team at Killam for their hard work and their dedication. Thank you. I will now open up the call for questions.
Thank you. Ladies and gentlemen, we will now begin our question and answer session. Should you have a question, please press star followed by one on your touch tone phone. You'll hear a three-tone prompt acknowledging your request. If you'd like to withdraw your request, please press star followed by two. If you're using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Sairam Srinivas from Cormark Securities. Your line is open.
Thank you, operator. Good morning, everybody, and congrats on a good quarter. Just going back to your comment on the Killam reaching peak occupancy this quarter. Looking forward to the next couple of quarters, how should we think about the balance between rent growth and occupancy?
Well, it's always a balance that we're looking for. I mean, certainly the momentum is continuing on the occupancy side. On turns we'll be maximizing those rents. You know, we've got following guidelines in terms of renewals and in some markets where there's a little more flexibility looking to maximize that too. Looking forward, most of the top-line growth is gonna come from rent growth. There is still some occupancy when we look forward year- over- year. You know, Calgary, as I mentioned in the comments, Alberta had been carrying a little bit more vacancy than some other markets, and Ottawa as well.
There's gonna be some opportunity, but it's managing that balance in the current environment where lots of people are looking for a place to stay.
Thanks for that, Dale. Just following up on that in terms of, you know, how your markets are looking. Are there some markets that are fundamentally more attractive right now relative to others? Not fundamentally.
There's 12 major markets we report on, and six would be at 99% occupied. You know, they're all strong.
Thanks, guys. I'll turn it back.
Thank you.
Your next question comes from Jonathan Kelcher from TD. Your line is open.
Thanks. Good morning.
Good morning.
Just on the same property NOI guidance that you bumped up to 4%. You're kind of running 5% year- to- date, so that would suggest the bottom end is kind of 1% growth for Q4. I know you're pretty confident on the revenue side, so is that just utility costs, the unknown of utility costs? What's kind of the drag there?
Yeah, utility, would be one. I mean, as we head into late fall, early winter, and we've seen what's been happening in terms of utility costs. That would be probably the biggest piece.
I think I said above 4%.
It is above, yeah.
Yeah.
A bit of that's just occupancy as well, because year-over-year we were quite high in Q4 last year.
Yeah.
Okay. Fair enough. Then on the repositioning program, you're gonna hit your, hopefully hit your 600 number this year. Is that a number we can think about going forward or is that a program you can scale even a little bit more?
It's a number you can think about going forward.
Okay. I guess the last question, you talked about registering the Waterloo development, I think the Waterloo development as condos. Is that something you can think about going forward for more new developments just as a way to potentially fund them?
Absolutely. I mean.
Okay. Nice and quick.
I'm sorry.
Nice and quick. I'll turn it back.
Yeah. I mean.
That's good.
The answer is relatively short.
Lots of calls today. That's good.
Yeah. It gives you flexibility, Jonathan.
Well, thanks, guys.
Okay.
Thanks.
Your next question comes from Kyle Stanley from Desjardins. Your line is open.
Thanks. Morning, everyone.
Morning.
I just wanted to look at New Brunswick a little bit. I mean, it continues to be very impressive. I'm just wondering if you can just talk about some of the key drivers that you're seeing there that is contributing to the performance.
Well, I mean, it's almost the same rate across the country. There is population increase in all three centers that we operate in, and there's lots of jobs, for people in those markets. I mean, can't ask for much more.
Yeah. Resource is strong, and Saint John is seeing a lot of work with its container shipments. The traffic's up markedly. You know, across the board, things are firing on all cylinders.
Okay. Thanks for that. Maybe just turning to your developments. I'm just wondering, you know, what the NOI contribution from Luma would've been during the quarter and, you know, when you expect to achieve stabilization there.
Well, Luma would've been very minimal in terms of, I mean, just coming on in Q3, and we're still in lease-up mode there, so it would be minimal.
Okay. Fair enough.
I mean, it'll be probably, you know, between early mid 2023—
Yeah.
For stabilization there. We're at 62%. We're really pleased with how lease-up's going on there, but it's gonna take a few months to lease that up.
Okay. Fair enough. I mean, I guess just sticking with developments and looking at The Governor and Civic 66. I mean, we got to tour The Governor when we were in Halifax. I'm just wondering, you know, can you speak to any early developments on the leasing programs there as you approach, you know, completion early next year?
Well, we've got two to three spoken for, and the effort is to get those folks in as fast as we can. We're looking hopefully the first people moving in sometime either in February or March. I think the activity we've been holding back relative to showing what the product is gonna look like, and we're quite comfortable and confident that there will be quite a bit of demand once we finish it and people can walk through and see the units.
Fair enough.
Civic 66.
Go ahead.
Again, a little bit behind, but we believe we're gonna have the first six floors open, the first of February, maybe as late as the end of February. We've got some pretty strong pre-leasing already.
Okay. Great to hear. Thanks for that. I will turn it back.
Your next question comes from Mark Rothschild from Canaccord Genuity. Your line is open.
Thanks. Thanks. Good morning, everyone. The development clearly has worked well over the past number of years. Going forward, do you anticipate rising costs to cause you to rethink some of these projects, or does it impact the going in yields? Is the rent growth enough to offset all that and make it something you wanna continue in a big way?
The continuation in a big way is probably no. I mean, we're gonna be careful for the next property that we start. I think there's a few positive signs out there. One is the proposed changes in Ontario that the Ford government has basically done or will do. They're gonna basically reduce a lot of the cost, and I think it's gonna be cheaper from a development point of view, from a land dedication. There's quite a few positive things there. I think that will help start to sort of bring back the costing of these developments. I think, you know, there's opportunities from looking at developments with an affordability factor to it, and there's lots of talk about increased government programs to help offset the overall cost, for new product, which is pretty exciting.
There still is, from our point of view, opportunity to see rents rising in new developments. If you go in the ground thinking your pro- forma is CAD 3, there's a good chance in two and a half years' time, it's gonna be higher. You know, the issue today is availability of capital, you know, and where you put your capital.
Okay, great. Maybe just one more question. When we look at the cost of debt, would it be similar to the rates you received in the quarter on new debt, or has it moved further?
Sorry, what was? You're asking.
Cost of debt that we'll—
On interest rates on new mortgages as you refinance debt.
I mean, the rates are moving as the bond yields move, right, Mark? It's what we're doing at the beginning of the quarter is cheaper than what we're doing today, so.
We're looking at CMHC insured as, you know, probably between 4.5% and 4.8%. Not much difference in five and tens, but it's changing around by lender and by day.
Okay, great. That tells all. Thanks.
Thank you.
Your next question comes from the line of Matt Kornack from National Bank Financial. Your line is open.
Hey, guys. Just a quick follow-up with regards to you mentioned the cost and availability of financing with regards to development. Are you expecting, notwithstanding your pipeline, but others in the market to potentially put projects on hold and then we'll have an issue of less supply as we're seeing some of this population growth across the country?
I hope not, but the reality is I really don't know. I mean, you kind of start to hear. I think, you know, the lenders that we have in Canada are very good. They understand risk, they understand exposure. Basically, the other thing that's a given is that in a rising interest rate environment, the cost of debt is gonna be more, which means that there's gonna be probably more equity put into projects. It depends on these individuals and private companies or other sort of entities out there. The other thing is that there's a lot of money still out there in the system.
Fair enough. No, that makes sense. Then for you guys, I mean, Eventide and Aurora, that project, once it achieves final planning, I mean, I assume it's of a size that you'd be willing to go ahead with it, whenever you can start it in 2023. Is that a fair comment?
Well, you know what? I mean, if this was last year, I would've been saying, I think we're expecting to get the actual permit any day, and here it is another year that's gone by, and we don't have the permit. That will be a decision once we actually get it in our hand.
Okay. No, that makes sense. Just on Jonathan's earlier question with regards to the 600 suite renovations. I think the opportunity is 5,500, but that ultimately depends on, I guess, what suites turnover. I guess, do you see kinda 10% a year of that figure that would be suitable type suites to renovate and reposition?
10% of our turnover?
of the 5,500 opportunity.
Yeah, that's a fair number.
Yeah.
Okay.
It's in the range.
Fair enough. Thanks.
Thank you.
I just was wondering because I don't know what the nature is in terms of the suites that are. Do those tend to be longer existing leases that are the opportunity, or are you seeing it in shorter duration leases as well where somebody-
We still have some opportunity in shorter duration because when you look at, you know, we've been at this for about four years, five years, we've ramped it up, so there's still lots of opportunity across the portfolio.
Okay, fair enough. Thank you.
Ladies and gentlemen, as a reminder, should you have a question, please press star followed by one. Your next question comes from Johann Rodrigues from Industrial Alliance. Your line is open.
Hi, guys. Expense inflation obviously has hit almost every market, but, you know, New Brunswick has seen the expenses held really in check. I know Moncton had that property tax reversal, but even the other two cities and even Saint John in New Brunswick has seen pretty minimal expense growth, not just this quarter, but kind of a couple quarters running now. You know, what is it about those markets that are kinda keeping it in check? Is it just cheaper utilities or anything beyond that?
Yeah. In Newfoundland, it's certainly all electricity, so you don't have the exposure to natural gas. New Brunswick, it was mainly driven by the property tax, the reduced property tax across all of the regions there.
Oh, it's more than just Moncton. Okay.
It wasn't just Moncton. No. It was all of them.
Okay. Second question. You know, you put in there a target, 40% target for NOI generated outside Ontario by 2025. How would you say that's split between Ontario versus Western Canada?
I think we're looking at a big picture, so it's combined. I mean, you know, it's depending on how things go over the next couple of years. We're big believers of the West, especially Alberta in the last year or so with the resurgence of oil. That's a pretty vibrant market right now. BC has been very good to us so far. Plus we've got a great base in Ontario with a lot of upside. Hopefully.
Even the developments we've just completed and going to be completed in Ontario, those alone are gonna help us. In the shorter term, Ontario, looking forward for next year should grow just based on the lease up those developments alone.
Okay. Thanks.
Thank you.
There are no further questions at this time. I'll turn the call back to Mr. Fraser for closing remarks.
Thank you for participating today, and we look forward to reporting Q4 2022 next February. Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you disconnect your lines.