Good morning, ladies and gentlemen. Welcome to the Killam Apartment Real Estate Investment Trust Q4 2022 year-end 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 star zero for the operator. This call is being recorded on Friday, February 17th, 2023. 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 Q4 2022 year-end financial results 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, strategies, 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 have delivered strong financial and operating results for Q4 and for the year ending December 31, 2022. The past year came with new uncertainties and headwinds. We remain focused on our three core growth strategies. We achieved 4.7% same property NOI growth across the portfolio, which included 4.5% same property NOI growth in our apartment portfolio, 6% same property NOI growth in our manufactured home community portfolio, and 7.9% same property NOI growth for our commercial properties. Despite pressure in the capital markets in 2022, multifamily fundamentals in Canada were the strongest we have seen in our 20-year history. Killam ended the year at 98.3% same property apartment occupancy, also the highest in our 20-year history.
We are optimistic of the opportunities ahead and will remain focused on growing our portfolio, our cash flow, and the underlying value of our assets. Dale will take us through our financial results, followed by Robert, who will discuss our MHC and commercial portfolio results in an operational update. 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. Slide five highlights Killam's financial performance. Killam earned net income of CAD 122.7 million in 2022, and FFO per unit of CAD 1.11, up 3.7% from last year. AFFO per unit of CAD 0.93 was up 3.3% from 2021. Killam's same property NOI, FFO, and AFFO growth in Q4 and for the year are summarized on slide six. The growth in FFO and AFFO was attributable to increased NOI from our same property portfolio and incremental contributions from acquisitions, which totaled over CAD 500 million since the beginning of 2021. This growth was partially offset by an increase in the weighted average number of trust units outstanding and the impact of rising interest rates. Strong top-line growth continued to drive positive results in Q4.
Same property revenue growth of 5% was driven by higher rental rates across all three business segments, coupled with a 130 basis points increase in apartment occupancy, ending the year with Killam's highest occupancy level in its history. The weighted average rental increase chart on the top of slide seven captures the increase in rents based on the leases that came into effect during each period. This chart shows that in Q4 we achieved a weighted average increase of 4.3% for new and renewing leases that started in October to December, well above our 3.7% year-over-year growth. This 4.3% increase is made up of 2.1% rent growth on lease renewals and an average increase of 12% on unit turns from new tenants moving in during the quarter.
Slide eight illustrates our total same-property operating expenses, up 5.4% in 2022. The most significant increase was in property utility and fuel expenses, driven primarily by higher natural gas prices. Same property general operating expenses were managed below inflation, increasing by 3.6%, while property tax expenses increased by 2.2%. Killam's debt maturity profile, which can be seen on Slide nine, includes average apartment mortgage rates by year versus prevailing five-year CMHC insured mortgage rates. Based on today's bond yields, current borrowing rates are above Killam's annual weighted average interest rates. In 2022, Killam refinanced CAD 152 million of maturing mortgages with approximately CAD 213 million. Of new debt at a weighted average interest rate of 3.7%, 90 basis points higher than the average rate on the maturing debt.
Refinancing at higher rates is expected to lead to increased interest expenses. This increase is expected to be gradual due to the staggered nature of Killam's debt ladder. We remain focused on reducing our debt levels and ended the year with debt to normalized EBITDA of 11.2 times and debt as a percentage of total assets of 45.3%, just above our target of 45%. The increase in this ratio is attributable to higher balance on Killam's credit facilities from acquisitions during the year and the recognition of fair value losses related to investment properties due to a moderate expansion of cap rates in the H2 of the year. Killam's debt metrics are included on slide 10. 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 Q4 2022 results and are expected to continue to add meaningful contributions to Killam's future growth. The MHC sector also delivered an impressive performance for the year as a compelling, affordable housing solution. Killam's seasonal resorts outperformed previous years as Canadians enjoyed these well-located, affordable vacation destinations during the summer and fall of 2022. As noted on slide 11, Killam's MHC portfolio realized same-property revenue growth of 5.8% and NOI growth of 6%. This growth is mainly attributable to increased seasonal revenues achieved through annual rent increases, plus more short-term rentals, all compared to 2021. Killam's MHC business segment generated 6.1% of Killam's overall net operating income for 2022.
Slide 12 highlights Killam's same property commercial portfolio, which also performed very well in 2022, with revenues up 5.9% and a 7.9% increase in net operating income. These improvements are primarily due to a 240 basis point increase in occupancy to 93% for the year. Killam leased 50,000 sq ft of net new commercial space and renewed a further 108,000 sq ft throughout the portfolio during the year. Combined, new and renewal leasing generated a weighted average net rental rate increase of 11.4%. Killam's commercial portfolio is proving to be very complementary to our apartment portfolio. On the apartment side, we continue to strategically invest capital in our portfolio with capital upgrades, energy efficiencies, and unit repositionings. Killam is well-positioned to deliver quality housing solutions to our residents and communities.
Our suite renovation program is an important initiative that meets the market's demand for modernized suites. Potential first-time homebuyers are turning to the rental market as an increasingly affordable option given today's surging single-family home prices. At Killam, we are cognizant of our responsibility in Canada's competitive apartment market. For example, Killam upgrades only those suites that come vacant when tenants do not renew, as we do not engage in programs to influence suite turns through aggressive rent hikes or incentive offerings. As shown on slide 13, Killam repositioned 617 suites, exceeding our 2022 target of 600 suites. This represents approximately 15% of the suites turned and 3% of our total portfolio.
Over the years, Killam has fine-tuned its upgrade processes and has the ability to reposition most suites within 28 days and provide our residents with the best finishes based on appeal, functionality, and durability. Slides 14 and 15 profile a number of Killam's upgrade projects in 2022, where we invested capital to improve the attractiveness and curb appeal of multiple properties. We added 2 new amenity rooms at Quinpool Towers in Halifax, a fully equipped 2,000 sq ft gym along with a 2,000 sq ft residence lounge. Further, we installed a dedicated elevator to ensure our mobility-challenged residents can also access and enjoy these facilities. At Brentwood Apartments, also in Halifax, and at Belvedere in Charlottetown, Killam installed new exterior cladding and windows.
These capital investments improve the durability of the properties given climate changes related to weather and increased insulation for improved energy efficiency and resident comfort. Our energy efficiency investments totaled CAD 8.5 million in 2022, exceeding our annual target. This included projects such as solar photovoltaic installations, electric vehicle charging stations, geothermal heating and cooling systems, boiler and heat pump replacements, and electricity and water conservation projects. These advanced green initiatives will reduce Killam's impact on the environment and help mitigate our exposure to volatile energy costs. As the chart on slide 16 highlights, continued population growth in Canada, and specifically in the Halifax region, our largest market, is also expected to drive demand for our properties. Population growth in Halifax has continued to remain at record levels. The city is attracting people from across Canada and around the world.
According to Statistics Canada, Halifax was the second fastest growing region in the country, behind Moncton's Canada-leading impressive 5.4% population growth. Not only are Atlantic Canadian cities growing at a record rate, the average age of the population in the region is also trending younger. Demand for housing is unprecedented. We recognize that housing supply and affordability is a challenge in Canada, and as noted earlier, Killam is committed to contributing to a solution. In 2022, we increased our long-term commitment to affordable housing through CMHC's innovative MLI Select mortgage loan insurance product. We ended the year with over 1,000 apartment suites having a long-term affordable commitment, an 18% increase from 2021. At year-end, fully 42% of our portfolio remains affordable, as defined by CMHC's 30% of median household income metric.
Our environmental, social, and governance priorities are core to our business. In 2022, we continued to focus on inclusive and sustainable growth. Our annual third-party managed residential survey is an essential way we measure our progress. In 2022, we continued to score well on these metrics compared to industry benchmarks with 86% of our residents stating that they are happy to rent from Killam. We certified an additional 10 properties this year under the Certified Rental Building program. We are well on our way to reaching our portfolio goal of 20% certified by 2025. These certifications ensure that we have the best operating and healthy living standards for our residents. I will now hand you back to Philip to provide an update on our developments, acquisitions, and capital allocation strategy.
Thank you, Robert. We completed CAD 119 million in acquisitions in the H1 of 2022, expanding our portfolio in Halifax, Waterloo, Guelph, and on Vancouver Island. We reduced our acquisition activity during the H2 of the year because of rising interest rates and focused on maintaining capital flexibility. Future acquisitions will continue to be an important component of Killam's growth. However, we believe now is not the time to be aggressive. During the last 2-3 months, Killam has been focused on identifying assets to sell and reallocating this capital to pay down our variable rate debt. After repayment of debt, we will use the capital for new developments or our NCIB program. Killam has received many inbound inquiries for off-market sales from private capital. We expect to close on several small transactions in the coming months.
PEI is one of the markets where we've had many inquiries. We will look to reduce our ownership exposure throughout 2023, 2024. Killam's focus on dispositions is driven by a desire to recycle capital, increase geographical diversification, and reduce leverage. Developing high quality properties in our core markets is an important component of Killam's capital allocation strategy as we grow our portfolio and contribute to new housing supply that is so badly needed in Canada today. This past year has been Killam's largest year for development since our program started in 2010 with CAD 243 million in completed developments. This component of Killam's growth strategy is one that distinguishes us from our peers and allows us to add assets to our portfolio in strong markets.
As seen on slide 19, in 2022, we completed three developments in the Ontario region. The Kay property in Mississauga, Latitude, Luma in Ottawa. These developments are exceptional additions to Killam's portfolio and are expected to contribute positively to our NOI and FFO growth in the coming year. We finished the year with three developments underway, which will add an additional 320 high-quality suites to Killam's portfolio over the next 24 months. They are profiled on slides 20 to 25 and include The Governor in Halifax and Civic 66 in Kitchener. The Carrick in Waterloo, which broke ground last fall, is expected to be completed by the end of 2024. To conclude, Killam has a strong balance sheet, has a proven business model, and an experienced management team.
We recognize that Canadians rely on us more than ever, Killam will be there for our residents and our communities as a responsible corporate citizen. We are committed to being an ESG leader, developing a culture of diversity inclusion, building meaningful purpose-built rentals, and in investing in initiatives to improve operating efficiencies. I would like to thank our Killam team across the country for their hard work and dedication, our residents for choosing Killam as their home, and our unitholders for their continued support. We are optimistic of the year ahead, We will continue to execute on our priorities and create value for our unitholders during 2023. 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. Should you have a question, please press the star followed by the one on your touch tone phone. You will hear a 3-tone prompt acknowledging your request. Should you wish to decline from the polling process, please press the star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. The first question comes from Michael Markidis of BMO Capital Markets. Please go ahead.
Thank you, operator. Good morning, everyone.
Good morning.
Phil, just wanna get a little bit of additional clarity on the dispositions. Is that a gross figure or is it net? And I guess what I'm getting at is, are you contemplating doing any acquisitions at all this year?
That is right now a gross as a minimal. It could go higher than that. It depends on Basically, the deal, and that's gonna be deal by deal. These are all smaller properties that we're looking at. It doesn't really exclude acquisitions. Again, from our point of view on the growth side, right now we don't see a lot of value in opportunities on the older stock. Looking at it, if there's opportunities out west on maybe newer product in the H2 of the year, we'll look at that. The focus on growth for us this year will be on our development side of the business.
Okay. Not ruling out acquisitions, but not explicitly putting a target out.
Right.
for the year. Got it. Okay. On the guidance for same-property NOI of 3%-5% for this year, perhaps you guys could give us a little bit more color in terms of what you're expecting from the top line and versus the OpEx inflation side. That would be great.
I'll take that one. On the top line, I mean, we're, we are seeing acceleration in terms of rent growth, as you would have seen in the results. First to starting off 2023, that's continuing. You know, we're pretty bullish in terms of being able to get 4%-5% on top line. Again, reminder, occupancy is pretty high in most of our markets, so it's all gonna be about rent growth. Although we do have some occupancy gains to be made in 2023. And then on the expense side, you know, we've talked a lot about nat gas exposure, and we're gonna have a lot more information after Q1.
Heading into 23, I think that was our biggest cost pressure that we were seeing, especially some of the pricing, where we're high in Atlantic Canada. What we have seen is that pricing is coming in a bit lower than we'd originally expected. On the expense side, I think, you know, similar to probably what where we will have ended this year when we look across the board. The mild weather is certainly helping us on that on that side. You know, when we look at other expenses, property taxes will probably, you know, 3%-4%. We've got some provinces are gonna be a lot less, some it's gonna be more. We are having inflationary pressures on a lot of our repairs and maintenance and contract-related costs.
Those are being offset by some other efficiencies we've got internally. Overall, you know, that should get us to the range that we talked about.
Okay. Just, I mean, you didn't say it explicitly, Dale, and I think you guys are likely being conservative for a variety of reasons, probably lower turnover on the OpEx side, like you noted. Would it be fair to say that, you know, you're expecting lower turnover from a top-line perspective, you're expecting lower turnover, but that 12% and, you know, really your new leasing spreads have started to inch up over the last couple of quarters will be the offset, and that will continue to go higher. Then on the OpEx side, likely some conservatism there. We just got to get through the Q1 bogey and then we'll reassess. Is that fair?
I think that's fair. You know, the turnover is one you would have seen, like it really came down a fair bit in this past year. That trend, we are expecting that to continue. That's the big question when we look out, how much lower turnover are we gonna have.
That's great. Thanks. I'll turn it back.
Thank you.
Thank you. The next question comes from Mark Rothschild of Canaccord. Please go ahead.
Thanks, and good morning, everyone. Philip, in your comment about not being aggressive in acquisitions this year, I assume that was referring to just the returns you can get, and you also mentioned that you're getting inbound calls to sell properties. What do you think changes over the next little while? Do you think that prices need to come down or does the market just need to stabilize as far as interest rates go? Obviously, over the long term, you do wanna be, you know, active in buying properties. I understand your point that the numbers don't seem to work right now.
Well, I think the, of the two comments or the two reasons, the one that's more concerning to us is just to understand where the interest rates are gonna be. Again, it's been a constant sort of increase throughout last year. The beginning of this year, they started to come down, and now they've moved back up in the last three or four weeks again. All we want is a little bit of certainty. We wanna know that the Bank of Canada has signaled this is the end of their rate increases. I think that once that happens, for sure, we will start to see the bond yields and even the cost of our debt on a five or 10-year to come down a little bit. Even if it doesn't, that's not the end of the world.
What is really hard to sort of work with, if you look at a property and it's gonna be a 60 to a 90-day sort of tie-up, you don't even know what it's gonna be when you close. We just want a little bit of certainty. Up until for the last 10 years, it was always quite simple. It was gonna be relatively stable or less. That's the part. Again, we're looking at, typically the acquisitions are all gonna be CAD 50 million plus. So you don't really wanna make a mistake if you can sort of postpone that sort of uncertainty for a few months.
Understood. Okay, great. Maybe on the development side, where you've been successful and remain active, the cost to develop, whether it's development charges or just general costs, have gone up quite a bit. Are you seeing further pressure on returns or is the rent growth, the rise in rental rates enough to offset that and get to comparable returns?
I think it's, to answer your question again, we see that there is the ability to move those rents. Therefore, even if it, if you look at it and say it's a 4.5 development yield today, and even if there's cost pressure over the next 30 months as you build it, we truly believe we can move the rents. Again, if you look at it, what this country needs is new supply. From a pure real estate company, the growth side should be on the new supply. You can do your own developments, you can sort of maybe partner up with other developers and have joint ventures on the new construction. I think that that's really what we're gonna concentrate on because that's the biggest opportunity in need for the country.
Okay, great. Thank you so much.
Thank you. The next question comes from Jonathan Kelcher of TD Securities. Please go ahead.
Thanks. Good morning. Just going back to the same property NOI guidance, Dale. You said 3%-4% expected increases on the property tax, and utilities are obviously always going to be a wild card, at least through Q1. What are your expectations for your R&M or your general operating expenses?
They're more, yeah, four to five.
4%-5%? Okay. Then on the, Dale Noseworthy, you talked about in your remarks about selling assets to reduce leverage. Your sort of outlook or targets for the year, you have leverage basically flat. Where do you think you want to take leverage over, I guess a 2-3-year period?
Well, again, the trend has always been to try to move it down. Right now we're at 45.3%. When I say we're reducing the debt, it is our sort of our line of credit that we would have typically for the last number of years, been partially into the line, which is variable. Basically, we've been, over the last three or four years, fortunate enough to be able to raise money on the market through the markets, pay down that line, and then go out and look for acquisitions and use that line in terms of quickly being able to close. We know where everybody's stock price went last year. We're not prepared to raise equity at this time. Therefore, one of the ways to pay down that line is to sell assets.
I mean, there's such huge demand. The pricing looks incredible. use that to pay down the line, and it will reduce our leverage to a certain extent, and then we have the flexibility in the capital flexibility to look at opportunities or to put it back into their development program or, as I said, our NCIB program.
Okay. That makes a lot of sense. You mentioned specifically PEI. Is that basically due to the regulatory environment there? You just can't get enough or as much growth?
Well.
As you can in the rest of your markets?
I think, you know, as we sort of thought about if we were going to get asked that question today, I mean, we are looking at opportunities to sell assets in Ontario, New Brunswick, Nova Scotia, and PEI. PEI is basically, we've been there almost for 20 years. It's been very good to us. The last couple of years have been, the rent control side of it has been less than what we hoped for and expected. It comes to the point where we know that our capital can find a better home. If we can sell down some of those assets, then we're prepared to do that.
Okay. Then just last for me on rent control, is there anything to suggest that it doesn't go away at the end of 2023 in Nova Scotia?
Well, there's talk one way or the other. We don't know anything for sure. My comment on rent control this morning, I guess is if you look at it, with basically BC at two, Ontario with 2.5, Nova Scotia with two. These are the provinces that affect us the most. My comment is that as we've experienced the inflationary pressures for the last 2-3 years, it's been a lot higher than that 2.5 range. I think that, you know, as a landlord and even sort of talking to these provincial governments or just even being involved, in the industry, we need a little bit more of a, of an increase on these rent control markets.
Okay. That's, that's helpful. I'll turn it back. Thanks.
Thank you. The next question comes from Brad Sturges of Raymond James. Please go ahead.
Hi there. Just to continue on the line of questions on the asset sales. It sounds like, you know, there's potential for several small transactions. Is it fair to say then you're targeting or contemplating, I guess, some smaller assets, maybe a little bit, perhaps older assets? Are there other attributes that make an asset sale attractive at this point?
I would say that that's a big chunk of the opportunities in front of us are older and smaller assets, for sure.
Yeah.
Again, sorry, just one more comment. It's almost because that's the biggest pool of potential buyers are in the smaller range of these assets.
Because it's mainly private buyers,
Absolutely
that are approaching you. Yeah.
Yeah.
You know, can you comment on where those conversations are going in terms of pricing relative to your IPO value? Are you expecting to basically achieve your current book value if you are to sell assets?
That would be fair to say, for sure.
Okay. I'll turn it back. Thanks a lot.
Thank you. The next question comes from Kyle Stanley of Desjardins. Please go ahead.
Thanks. Morning, everyone. Just going back to the earlier comments on PEI. I'm just wondering, as you do look to sell some of the assets in the province, are you seeing reduced investor interest or, you know, any impact on potential pricing just given the recent regulatory shift?
No, not at all.
Good to know. You did disclose that kind of 10%-20% mark-to-market upside across your portfolio. I'm just wondering, could you talk about how that may differ across your geographies?
Sure, yeah. I mean, I think that, you know, with the moving target, every month looking at it is a hard one to peg down. I'd say, you know, we've seen acceleration in the West where we wouldn't have had, I'd say in the last two quarters, much on that mark-to-market, but that's really starting to broaden. Especially when we look at net effective rents after incentives in that market, I think that's like 10% plus in Alberta that we haven't seen. You know, Nova Scotia is one that Halifax got a lot of headlines when the CMHC stats came out. That's another one that it's moving up quickly. Mark-to-market in this market is probably 15%-20%, but it gets higher when we do some repositionings. Ontario, it's very healthy.
I'd say New Brunswick still, you know, strong, but maybe just a little bit under 10%. Newfoundland is probably, you know, 3%-8%. Yeah.
The vacancy has gone down materially in St. John's.
Yeah.
We're seeing good gains there. Southwestern Ontario across the board has been very strong.
Very strong, yeah.
Would probably lead us.
really like that 10-20 is probably closer to the 20. We're just keeping an eye on what we're capturing.
A lot of it's a function of the decrease in turnovers. With the jurisdictions having re-rent control, people are choosing not to move. Therefore, fewer units come up and those when they do come up, there's a requirement to maximize rent.
That's an average number too, just a reminder too. We're seeing some far above that and some lower.
Okay, perfect.
Depending on the rent.
That's exactly where, I guess why I asked the question, just thinking that maybe the number is maybe a little closer to the 20%. Great to hear. Just one more for me. Just on your capital budget for 2023, I mean, capital spending was up a decent amount, I think about 30% in 2022. I do believe some of that was catch up. I mean, you've highlighted the fact that maybe you do fewer repositionings this year, but I'm just wondering, you know, where your capital spending maybe trends in 2023 versus versus last year?
It'll be relatively comparable. It'll be, let's call it CAD 85 million-CAD 90 million. It'll be very similar to this year.
Okay. Thank you very much. I'll turn it back.
Thank you. The next question comes from Mario Saric of Scotiabank. Please go ahead.
Hi, good morning. I want to come back to the turnover as well. In 2022, it was 23%. It sounds like you've mentioned or you did mention that you expect it to come down this year. Can you give a sense of what is baked into the guidance in terms of how much more it can come down? The reason I ask is there's essentially a structural turnover that takes place that irrespective of the market, people move. What do you think that structural turnover rate is for your portfolio?
We're expecting for this year, kind of probably in the range of 18%-20%. That structural number, I think... Oh, are we there?
I can hear you, Dale. I just.
Oh, hi. Sorry.
Cut off for a second.
We just had some technical problems. Can you hear me?
Yep.
I think probably 10% is probably that, you know, when we look at, is probably that technical number.
Got it. Okay. In terms of, so coming back to the turnover, have you had a chance to track that turnover by lease duration? It was 23% for the overall portfolio, but how would that vary, you know, for leases that have been in existence for 10 years plus 5 to, is there a wide variation in that?
We don't have, by tenure. We haven't dug into that detail.
I would say, yeah, there were turnovers for the ones that have been there for a longer period of time, generally.
Yeah. Yeah.
Obviously the main driving factor of the reduction in turnover is simply the increased population right across the country and our ability not to keep up with the supply side.
Right. Okay. Just my second question. In terms of cap rates. In your Q3 disclosure, I think you talked about the expectation of cap rates moving higher, which we saw evident in your IFRS valuation this quarter. That disclosure was missing this quarter. I'm not sure if that was intentional or not, but based on, I guess, Philip's commentary regarding strong market pricing, is it fair to say that at the current rate environment, you think that the upward pressure in cap rates is pretty much done?
We think so. You know, it's that balance between the rent growth. I mean, we feel good where cap rate settled for the quarter and we're especially with the transactions that we're looking at, as Phil already talked about, in terms of sales, there's lots of support for the values that we have. At this point, you know, we're not expecting those to continue to move in any material way, based on current information.
I mean, the other comment I'll make is it's interesting that, as a sector, Killam and all the other publicly traded apartment REITs, we own 3% of the market. Just by default, we don't dictate where values are going. Even if we stop buying, you know, there's a larger market out there behind us that basically sees a lot of value. That's just being reinforced to us almost every day with the number of inquiries we're getting to sell assets.
Okay. Then, I guess, I don't know if you can answer this question. With these buyers, like what are they seeing insofar as cap rates still seem to be a bit below where financing costs are today?
What they're seeing.
major markets. What are they seeing?
What they're really seeing is that they look at it, they probably, and in almost every case they already are landlords at a smaller scale. They're seeing the incredible pressure on rents. They're seeing that they basically know that rents are going to go up. What they're buying, depending on the market, it's a lot of it would be under rent control. They look at it and say, "I don't have to report it every 90 days, so therefore I take the long view. These assets are going to appreciate it in value. I'm at a size where I can see real wealth creation, by being a smaller mid-size landlord because I like the business.
It's a hard asset and inflationary pressure. It's going to, as we see the cost to replace, it's significantly higher and it's accelerating. You know, taking those assets and in time they will pay back.
Okay, makes sense. Maybe just the last one. Where would kind of 5 and 10-year CMHC financing cost today?
Would be in the range kind of a 4.10%-4.30% depending on the day.
Again, two o r 3 three weeks ago it was about 30 to 40 basis points less. Depending on sort of, the way that the Bank of Canada reacts in the rest of the year, I mean, we kind of expect that it will go back up and down a bit of a rollercoaster.
Okay, great. Thanks for the, for the color.
Thank you.
Thank you. The next question comes from Matt Kornack of National Bank Financial. Please go ahead.
Morning, guys. Just wanted to quickly go back to the CapEx guide, being similar to 2022. Is the composition changing there in terms of where you're spending the capital in suite versus on buildings? In terms of the building improvements, what's kind of the target in terms of how you go about that CapEx spend?
It's a very detailed budget and it gets allocated accordingly. You know, certainly for us, one of the main thrust of that program is our repositioning program. We're looking at 450 turns this year on the repositioning side. You know, we'll invest there, the returns being 13% all cash. But across the board it's, you know, building envelopes. When we're doing that, we're improving our value of the building, so we're saving money operationally. There's a payback on that. But in terms of the breakdown, it will be very similar. The other key initiative we have is just our green program, where we're using more photovoltaic installations are working for us on new construction. Geothermals are the way to go unless a compelling reason you can't do it. That's exceptional payback.
You know, across the board, we're modernizing our properties and working to make them more, you know, weather resistant, given there's a fair bit of variability these days and frequency of storms.
Okay. No, that's perfect. Appreciate that color. Just the last one for me. With regards to your development pipeline, can you give us a sense as to what the impediment would be to build at this point or preventing you from building further? Is it access to capital returns or kind of process-driven zoning items? Is the development pipeline or expanding it at all dependent on the disposition program?
Right now I think it's independently. One of the biggest focuses we'll be doing for the rest of this year is looking at all our developments, all the opportunities in front of us, and moving ahead from the entitlement process on a number of files straight up. If there is a theme, on this call or what we see in terms of the big opportunity in front of us is to be involved in the supply side. It takes a lot of time for every single project to from a concept to an entitlement to the beginning of construction. We've got three developments. Currently, two finishing up, one, just starting. There'll be another 24 months.
We're involved in another one in a smaller percentage ownership in Calgary, we truly want to get the next one or two, at least one started this year. You know, we've got high probability of that happening. We are looking at that one to kind of do a little bit of value engineering to see if we can bring down the cost one more time because, we still hadn't received the permitting up until the last few weeks, that's not gonna be the issue. Really the next one, we've got a number of files that we just really have to push. To be able to look at these opportunities and bring them up to the next level is a big chunk of work that we're prepared to do at this time.
One of the more exciting ones will be Westmount. That's the one where we have the Carrick underway. The second phase would be as of right, potentially up to 244 units. Then it's the master planning behind that which is, we will be quite aggressive on trying to get the number up, in terms of building a real community there over time.
Okay. No, that makes sense. Given your expertise on the building front, your contribution to new supply would be through development more so than buying of new assets. Is that a fair characterization?
Again, I think the big, as I was hopefully trying to reinforce, if we see stabilization of interest rates in the H2 of the year, then we know what kind of return we're gonna get looking at opportunities on the new side of the, of acquisition. I think right now, the idea of buying something relatively old and doing the added value with a low turnover, it's just gonna take that much more time to basically turn these buildings around and see huge improvements in cash flow. I mean, that's better served for the private investor because they don't have the time horizon that we do.
That makes sense. Thanks, guys.
Thank you. The next question comes from Jimmy Shan of RBC. Please go ahead.
Thanks. Just a quick follow-up on the turnover rent spread. When I look at the CMHC rental report, you know, they're reporting spreads in markets like Halifax, Kitchener-Waterloo in the 25%-30%, and even in New Brunswick in the kind of low teens. And that was October data. I'm just trying to square that with your reported 12 for the quarter. Is that I don't know if that's just law of averages, but just any thoughts as to why there's seemingly a big difference?
Yeah, we've been having the same question. You know, when we look at it, I will just highlight that CMHC, how they gather the data. They do note that Halifax actually has a level D, which is poor data supporting that. I'm not sure how they pull it. Certainly, when we look at the repositions and, you know, those numbers make sense, but regular turns, they seem high. For example, we're the largest landlord here, and we were not included in those conversations. I think it's, it is probably what peer, what group they pulled to get that data. Yeah, it is different than what we're seeing. I think that the trend with those market rents increasing is absolutely true.
I'm expecting that their sample pool was quite small. If you look at our more, you know, depending on some of our older assets, those numbers do make sense. That's, they don't fully align with what we're seeing.
Okay.
Jimmy, did you pick that up in terms of the data? They're saying that it's the quality of it was a D. New Brunswick was a C.
Oh, yeah.
Really you're talking, a very small sample.
Yeah.
For us, I mean, 6,000 units, I mean, statistically, we'd be 10%, and they never, they never called us.
Okay. All right. Well, that makes sense then. Okay. Just turning to the debt maturity for 2023. I think half of the maturities on the apartment side are non-CMHC insured. If you could remind me, like what was the rationale to not have CMHC insured to begin with, and then as a suspected plan is to refinance those debt with CMHC financing?
Yeah, I mean, most of those would have been either assumptions that we would have assumed when we acquired those assets or debt that we put in place just immediately upon an acquisition. All of those would likely go CMHC this year.
Yeah. I mean, there.
Okay.
There's been recent acquisitions out west that did not have CMHC money on it, and we assumed the debt when we bought it in the last couple of years. They were relatively short-term, like 3-year terms on them.
Two to three?
2-3 years.
While on new developments, we weren't necessarily putting CMHC insured just because of timing and whereas the new developments today we are doing it, and we're able to use the MLI Select and use the energy efficiencies, and that's really positive for us on the new developments. Some of the changes that CMHC has made has we're fans of and we're using on the new development financing.
Okay. Great. Thanks, guys.
Thanks.
Thank you. The next question comes from Gaurav Mathur of iA Capital Markets. Please go ahead.
Thank you so much, and good morning, everyone. Firstly, thank you for the guidance. It's really helpful. When you're thinking of capital recycling in 2023, given the recent upward movement in cap rates, are there any markets which look more favorable from an acquisition viewpoint than the others, especially once financing rates stabilize?
sorry if I If your question is what where do we see the most attractive markets in the for acquisition, not disposition of assets?
Yes.
Is that correct?
Yes. 1.
I would say from a cap rate, it will be the West Alberta.
Mm-hmm. Okay. Okay, thank you. Just on the disposition front, could you provide some more color on how deep the buyer pool is and if that's changed materially, from the last 12 months?
Well, I think Well, the list is different. It's quite deep. When we're looking at the opportunities in front of us, like I mentioned earlier, these are off-market inbound inquiries. Basically it is the one person coming up and saying, "I wanna buy it, and this is what I'm willing to pay." Because of the pricing, we're more than happy to entertain that, negotiate with them. That's the starting point.
Okay. Thank you for the color. I'll turn it back to the operator.
Thank you. The next question comes from David Crystal of Echelon. Please go ahead.
Thanks. Good morning, guys. Just really quickly on the disposition proceeds, do you have a target for debt reduction? You know, below that level, would you kind of focus on the NCIB, or how would you balance the kind of proceeds of dispositions?
I mean, Our acquisition line is now currently 6+%. Therefore, I mean, the goal is to sort of pay that down, and then we'll look at it, the capital to look at the development side or the NCIB program.
Okay.
Clarify, refinancings will help pay down that line as well.
Okay. The goal really is get that line down as close to zero through dispositions and refinancing.
Yes.
Okay. Just maybe a quick housekeeping one. For the developments you delivered in 2022, can you provide the total NOI contribution from these assets in Q4, just relative to the CAD 6 million annualized run rate?
Q4.
Probably at, like, two-
Don't you have the numbers in here?
CAD 200-300. Yeah. The year was about CAD 1.2 million. It's probably about CAD 300,000 in contribution in the Q4.
Okay.
Certainly the fit, you know, today is fully, you know, leased up and contributing very positively for FFO as well.
I'm sorry, that was FFO, not NOI.
No, I think the question was. Oh, your answer.
My answer was FFO.
Yeah. From an NOI perspective, it'd be a fair bit higher. You know, looking out to 2023, Erin, do you wanna comment on those just to give a bit of guidance?
Well, 2023 we had in the MD&A that it was about CAD 6 million in NOI.
Yeah.
That's on a stabilized basis. That would be between 23 and 24.
Yeah. I'm just trying to get a sense of the incremental. Like, how much was the NOI in Q4 and how much incremental upside is there from stabilization?
There's still lease-up happening on both Luma and Latitude. The Kay in Q4 would've been relatively stabilized. You probably have CAD 200,000 from occupancy gains year-over-year, you'll see a bit of a reduction in interest expense from an FFO perspective, as well as that debt is fixed.
Okay. Okay, that's helpful. Thanks. I'll turn it back.
Just to add a little color, I mean, overall, when we look at our developments that we finished last year, we would expect from an FFO perspective year-over-year contribution of, you know, around CAD 1.2 million, if that helps.
Yeah. That's great. Thank you.
Thank you. Once again, ladies and gentlemen, if you do have a question, please press star 1 at this time. Our next question comes from Dean Wilkinson of CIBC. Please go ahead.
Thanks. Morning. Dale, on the debt, I think, you know, we talk about rates stabilizing, and I think that's, you know, we can all agree that's a euphemism for being lower than they are today. If that stabilization doesn't come till, say, into 2024, would you be willing to look at trading off term for rate with a view that you might be able to do something better, or would you rather just ladder out the debt maturity right now and then sort of take the rates as they are?
I think, you know, generally overall, we're looking long term in terms of laddering. Now one-off opportunities, that's a different discussion, but overall, we wanna make sure that we are allocating that risk, you know, not overloading any one year. I'd say that we will continue to manage our debt ladder.
Responsible way.
I mean, look at it. I think I don't have it in front of me, Dean, this year is about what? Around CAD 200-CAD 250, and even next year is maybe around CAD 300.
Yeah.
These are even smaller years relative to the CAD 2 billion. I mean, what we're talking about in terms of thinking, on the lines that you just asked that question is, what are we doing on the new developments? Is it a 5, is it a 10 because where rates are today? I think, you know, you've never been able to beat the market relative to what it's gonna do. The easiest thing and the most conservative thing is to look out and see if it actually makes sense. Always in the last 20 or 30 years, the cheaper form of it, part of the curve has been five versus 10. That wasn't, you know... We've just come off a 20-year decline in interest rate environment.
Now it's a little bit more complicated, but at the same time, our existing debt will just naturally roll, and we'll be looking for that same five and 10-year sort of ladder. On the new developments, it will take a little bit more decision-making from our part to decide whether it's five or 10.
That's great. I guess, you know, we all lose sight of the fact, Philip, that over our lifetimes, 4.2% is still actually pretty cheap debt.
Pretty cheap.
Yeah. Well, my back tells me that I'm probably too old to be playing rate games. Thanks, guys. I'll hand it back.
Thank you.
Thanks.
Thank you. There are no further questions at this time. Please continue with closing remarks.
I would just like to say thank you very much for everybody participating today, and we look forward to Q1 2023, the first of May. Thank you.
Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please