Killam Apartment Real Estate Investment Trust

Good morning, ladies and gentlemen, and welcome to the Killam Apartment Real Estate Investment Trust First Quarter 2025 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require assistance, please press star zero for the operator. This call is being recorded on May 8, 2025. I would now like to turn the conference over to Mr. Philip Fraser, President and CEO. Please go ahead.

Thank you. Good morning and thank you for joining Killam Apartment REIT's first quarter 2025 conference call. I am here today with Robert Richardson, Executive Vice President, Dale Noseworthy, Chief Financial Officer, and Aaron 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 CDAR. All forward-looking statements made today speak only as of the date which this presentation refers, and Killam does not intend to update or revise any such statements unless otherwise required by applicable securities law.

Thank you, Erin. We are very pleased with our strong financial and operating results for the first quarter of 2025. Killam delivered FFO of 28 cents per unit in the quarter, a 7.7% increase from 26 cents per unit in Q1 2024. We achieved 7.8% same property NOI growth across the portfolio, which included 8% same property NOI growth in our apartment portfolio, 7.5% same property NOI growth in our manufactured home community portfolio, and 4.2% same property NOI growth for our commercial properties. The multifamily fundamentals in Canada are still very strong, and our same property apartment occupancy at the end of the quarter was 97.5%, the same as Q1 2024. We have completed the first quarter with meaningful progress towards our strategic targets listed on slide three, and we are on track to meet these targets by the end of the year. We remain very optimistic about the future of the Canadian rental market and will continue to focus on growing our earnings cash flow, and the underlying value of our assets. Dale will take us through our financial results, followed by Robert, who will discuss spring lease-up trends and our ability to produce top-line growth. I will conclude with an update on our current developments in our capital allocation strategy. I will now hand it over to Dale.

Thanks, Bill. Key highlights of QILM's Q1 financial performance can be found on slide four. Killam earned net income of $102 million, which includes $70 million in fair value gains, driven by robust same property NOI growth across our portfolio. We are pleased with our 7.7% increase in FFO per unit growth in Q1, generating $0.28 per unit compared to $0.26 in Q1 last year. Our three most recently completed developments contributed meaningfully, adding $1.5 million in FFO growth compared to Q1 2024. Adjusted funds from operations also increased, up 9.5%. The growth in AFFO is a function of our strong same-property performance and is further enhanced by our capital recycling program, which focuses on selling older, capital-intensive assets. Our 7.8% same property performance in Q1 was driven by 6.6% revenue growth and 4.6% expense growth. Killam's same property operating margin was also up by 70 basis points. With this strong start to the year, our same property NOI target for the year remains intact. We expect to end the year in the middle to upper end of our same property NOI target of 4% to 7%. As shown on slide 5, Q1 delivered 15% rental increases on unit turns. Combined with units that renewed in Q1, we achieved a 5.1% weighted average combined increase in apartment rental rates in the quarter. This step down in the weighted average rental rate change from 7.9% in Q4 2024 was anticipated based on Q1 and January in particular having the highest number of unit renewals during the year and a recognition that market rents are off their highs from mid-year last year. Our achieved average rental increase on unit turns of 15% was in line with the current mark-to-market of our portfolio. Slide 6 highlights the variability of mark-to-market spreads between regions, with Halifax and Kitchener-Waterloo-Cambridge maintaining the greatest opportunity on turnover of approximately 25%. While we are confident in this figure, It's important to note that this spread will be captured over time based on the length of tenure from the units turning and the markets in which the units turn. Slide 7 highlights Q1 expense growth by category. Total expense growth across the same property portfolio was 4.6%, with general operating expenses up only 2.1%. Property taxes increased 4.8% due to higher assessments across the portfolio. Utility and fuel expenses were up 7.9% due to higher natural gas pricing and higher consumption through the colder winter heating season compared to the mild winter experienced in 2024. We do not expect the same level of energy expense pressure during the remainder of 2025. The recent removal of carbon tax is estimated to provide annualized savings of approximately $2.5 million. We expect to see approximately half of this carbon tax removal savings realized over the remainder of 2025, with the other half realized in early 26. We're pleased with our strong balance sheet positioning, with our debt-to-total assets ratio down to 39.9%. This marks the first quarter in Kilham's operating history that this ratio reached below 40%. We also reduced our debt-to-normalized EBITDA to 9.66 times, at the end of the first quarter and improved our interest coverage and debt service coverage ratios compared to Q4 2024. Slide 9 includes average department mortgage rates by year versus prevailing CMHC insured mortgage rates. In Q1, Killam refinanced $51 million of maturing mortgages with approximately $97.1 million of new debt at a weighted average interest rate of 3.67%. We have $253 million in apartment mortgage refinancing during the remainder of the year at a weighted average interest rate of 2.03%. The longer-term outlook for mortgage maturities are favorable. Based on current market rates, Killam anticipates refinancing at close to its current weighted average rate in 2026 and below the average interest rate for maturities in 2027 to 2029. As part of our debt management strategy, we are also leveraging CMHC programs as mortgages come due with a focus on increasing our CMHC insured coverage, which is now at 83.4% for our apartment portfolio, up from 79% this time last year. I will now turn the call over to Robert, who will discuss our operating results in more detail.

Thank you, Dale, and good morning, everyone. Although new apartment supply is evident in kilns markets, its impact has been nominal. We are very pleased with Kilham's Q1 2025 leasing and rental growth results that generated a 15% weighted average rental increase on unit terms. As well, Kilham is continuing to achieve strong leasing results with its spring 2025 leasing program. Our ability to achieve these spreads on new leases speaks to Kilham's well-positioned rental rate diversified portfolio. Further, Kilham's dynamic Operating platform drives pricing decisions based on up-to-date market information, keeping us informed so we may quickly move rental rates to address market changes. The graph shown on slide 10 illustrates Kiln's apartment portfolio's rental buckets and highlights the rental options for tenants for a range of price points. 17% of Kiln's portfolio has asking rents over $2,000 per month, which may experience limited competition from newly constructed buildings that demand rents between $2,000 and $2,500 per month to make their economics work. Kiln is confident it can retain its market share because our suites have an established tenant base, excellent locations, and modern amenity offerings. Like Kiln's decision to operate in seven provinces, our portfolio's further diversification based on rental rates is defensive and creates inherent opportunities for growth with lower risk. Kiln calculates its average mark-to-market opportunity for its apartment portfolio to be approximately 15%, providing ample opportunity for additional rental growth across the portfolio. For Q1 2025, the market's driving Kiln's strong rental growth include Halifax, Moncton, Fredericton, and Newfoundland. Reaffirming the resiliency of the Atlantic Canadian rental market, we are confident these cities will perform in 2025. In addition to strong rental growth and mark-to-market opportunities, as shown on slide 11, occupancy levels and NOI growth in the region are above portfolio averages. Slide 12 details the variability in the tenure length of tenants who moved out in Kiln's markets for the first four months in 2025. To date in 2025, Alberta, BC and Ontario are experiencing the highest proportion of turns from units having tenancy of only one year and are delivering lower NOI growth. Interestingly, the average increase in net operating income for New Brunswick is 12.44%, despite the fact 50% of New Brunswick's turnover is from tenancies of only one year. demonstrating the strength of the market rents in this province. More broadly, PILMA's portfolio turnover is increasing modestly, with turnover trending higher year to date in 2025 by 100 basis points to 19% turnover from 18% last year. Using data analytics, we can see the average increase achieved on new leases based on the tenure length of the vacating tenants. No surprise here, the longer a tenant's tenure, the higher the increase in rent for the incoming tenant. As shown on slide 14, we are slightly behind last year's record-breaking numbers. Our rental increases year-to-date are in line with or slightly above the five-year average across all tenure terms. We are seeing leasing activity return to pre-pandemic norms with asking rents beginning to stabilize. As illustrated by the blue bar for 2020-25, year-to-date highlighted with the circle. In summary, this data reinforces our ability to achieve our target of 5% to 6% revenue growth in 2025. I will now hand you back to Philip to provide an update on our development and disposition activity.

Thank you, Robert. Subsequent to the end of the first quarter, Killam sold four properties in Newfoundland. On May 2nd, we completed the disposition of a manufactured home community in Gander, and one in Corner Brook for a total sale price of 4.8 million and net proceeds of 2.9 million. On May the 5th, we completed the disposition of two apartment buildings in Grand Falls, Newfoundland, totaling 148 units for 13.7 million with net proceeds of 11.5 million. We have three properties under a firm agreement to sell in PEI containing 127 units for 15.7 million, with expected net proceeds of approximately $9 million. This transaction is expected to close by the end of May. In addition, we have four separate conditional agreements to sell an additional 725 units in PEI New Brunswick for approximately $129 million, which are expected to close on or before the end of August 2025. We invested $530,000 in our PV solar initiative in Q1 2025 and plan to spend approximately $3 million more by the end of the year on 11 additional PV solar installs throughout our portfolio. Our PV solar program is a key cornerstone of our ESG commitment. By continuing to invest in our electrical power production, we are reducing our carbon footprint and operating costs. Building new apartment buildings in our core markets is an important component of Killam's capital allocation strategy. The Carrot, as shown on slide 17, is expected to open on June the 1st, with the first 11 tenants moving in. We have strong pre-leasing with 26% of the building pre-leased. The Carrot will be Killam's first all-electric heating and cooling system building. The domestic hot water will be preheated using an air-to-water heat pump. The remainder of the hot water heating will utilize electricity, so the building will not require natural gas for day-to-day operations, thus mitigating the impact of carbon pricing and potential fuel taxes. Other green features include the energy-efficient envelopes, electric vehicle charging, low VOC finishes, LED lighting, and low flow fixtures and full submetering to encourage conservation. As shown on slide 18, construction continues at Eventide, our 55-unit building off Spring Garden Road in Halifax. Completion is expected by Q3 2026, and pre-leasing will start in October. Slide 19 shows progress to date of the Brightwood. our 128-unit wood frame building at 150 Whistler located in Waterloo. Completion is scheduled for June 2026, and pre-leasing will also start in October. In Halifax, we are working on a 95-unit development at Victoria Gardens and a 150-unit development at our Harlington Crescent community. We hope to start at least one of the above-mentioned developments by the end of the year and access the existing ACLP financing program from CMHC. which reduces overall development risk by providing below market interest rate construction debt. On the acquisition front, we are actively looking in touring properties in Western Canada and Ontario, plus looking at a couple of our land in Canada markets for new acquisitions. As RealCan reported on Tuesday, we have entered into a conditional agreement to purchase their 50% interest in our JV properties located in Ottawa. To conclude, we are very pleased with our Q1 2025 performance and remain committed to investing in high-quality assets and developments, executing our overall strategy and creating value for all of our unit holders. I would like to thank our employees for their hard work and dedication. Thank you. I will now open up the call for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press star followed by one on your touchtone phone, and you will hear a prompt that your hand has been raised. If you wish to decline from the polling process, please press star followed by two. And if you're using a speakerphone, please lift your handset before pressing any keys. One moment for your first question. Your first question comes from Mike Markides with BMO Capital Markets. Please go ahead. Hello, Mr. Marquitos. Are you there? You may be on mute.

I was on mute. Sorry about that. Good morning. Thank you. Just first on the same property guidance, I know it's early in the year and you're probably being a little bit conservative just given that we still got three quarters to go. But I think if I remember correctly, Q1 was sort of the worry in terms of where utility expenses would go. And now we have you know, certainty on where that came out and we've got the carbon tax. I'm just wondering, you know, looking at where you guys came in on OpEx this year and looking at what you're still expecting, what are the other OpEx pressures that might still be there in the portfolio? Because I think on a blended basis, you're below your OpEx expectation for the year and we know what's going on with carbon taxes. Sorry, long-winded question, but hopefully that's clear.

Yeah, I think property tax is still the one that, you know, we won't have final numbers on what those will actually be until the end of Q2, likely for the whole portfolio. So we are expecting it to come in around six. And unfortunately, a lot of what we've seen is supporting those numbers. So I'd say that that is one that continues to be out there as an uncertainty. But we will have more color. But you're right, Q, we were... We knew we were going to have some higher utility costs in Q1, but they actually came in a little bit less than we had expected. So there are some positives on that front, absolutely.

Okay. Is the property tax, is it specific to a specific region or regions, or is it broad-based, the 6%?

It's quite broad-based, yes. I'd say Halifax is one that, of course, for us is an important one in terms of what our average is, and that one has come in around that range.

Okay. Sounds like you guys pretty much got the agreements conditionally in place to hit your disposition target, so congrats on that. I haven't had a chance to make an estimation, but how should we be thinking about the purchase price of the remaining 50% interest relative to the volume of dispositions that you expect to close this year.

Hi, Michael. So are you asking what the purchase price is?

I guess in a backwards way I am, yes.

$136 million and a cap between 4.5 to 4.6.

4.5 to 4.6. Okay. And can you remind us the blended cap on the dispositions?

The first way that we closed, bear in mind that they were in Newfoundland and they were sort of assets we had picked up many, many years ago in smaller portfolios. So they were sort of, we never ever went back into those markets to purchase. So the liquidity was a little bit higher than the norm. So they were about between six and a half and seven for those four assets. And obviously the remaining deals will be lower than that.

Okay. Can you give us an indication of lower?

Lower? Between five and a quarter and five and a half.

Okay. All right. So just as we – I mean, you had a strong year-over-year earnings growth rate, but just as we look going forward, just given the capital recycling, and I guess you'll still have a bit of a drag now offsetting when the care comes online. Is it fair to say that your year-over-year earnings growth in the next three quarters will be lower than where you came in?

I think, well, I think so because partially because the benefit from the developments that were completed in late 23, the biggest, you know, every quarter, the year-over-year change is less. So, when you think of that had meaningful impact in terms of FFO per unit growth this quarter, that will, by the time we hit Q4, will be, you know, positive but not near to the same extent. So I think when you look at FFO pre-unit growth and you factor that in, that alone is going to, you know, I think Q1 could be the high in terms of FFO pre-unit growth.

Yeah, that's fair. And then last one before I turn it back, can you just remind us, I think there's a pretty favorable ACLP on the CAREC, so just trying to think about how to model it in the interest, and I imagine you start decapitalizing in Q2. Is that how it'll work, or?

Yes, exactly. So once we're substantially complete and leasing commences and people move in, we would stop capitalizing the interest.

So we would expect right now, likely, based on the timing, it'll probably be July.

July. Okay. And what's the rate on that loan specifically again? Can you remind us? 3.08%. Wonderful. Thanks so much. Congrats on a strong quarter. Thank you.

Your next question comes from Jonathan Cletcher with TD Cowan. Please go ahead.

Thanks. Good morning. First, just on the elevated amount of renewals in January, is that just a hangover from COVID? And then I guess we should expect to see your blended rental rates sort of inch up over the course of the year?

Yes, it is. And part of it's like PEI is one region that has the majority of the renewals in January.

Ontario as well has a lot in Jan 1.

Okay. And then the increase in incentives, is that market specific, asset specific? Maybe let us know how you're thinking about that going forward.

Yeah, it's very much asset specific and very specific to the Nolan Phase 2 lease up in Civic 66 as well.

Okay, so outside of that, you're not a lot of incentives?

Yeah, I think 70% of the incentive balance in the month of March was specific to 10 assets in the portfolio. So it's pretty limited. And then across there, it would be very time sprinkling here and there.

Okay, and then just lastly on the development side, I guess outside of government programs, what are you guys seeing in terms of where hard costs are trending with tariffs and everything going on?

They've trended down, and I guess really the one that we just priced in Waterloo Hard costs came in at about $360,000 for wood frame. And then all the other costs are the solid plus the land. So we're pretty encouraged about that. Okay. So overall, it's stable to slightly declining on hard.

Okay. And would that be similar for concrete as well, or just... Absolutely, yeah. Okay, thanks. I'll turn it back. Thank you.

Your next question comes from Kyle Stanley with Desjardins. Please go ahead.

Thanks. Morning, everyone. As you sit here today, you're approaching completion on the CARIC, and you know, obviously, a deep pipeline of opportunities still to come. But can you just talk through the yield dynamics on taking on the development yourself versus maybe looking to acquire new build assets, whether stabilized or not stabilized? Just how do you think you rank those in your capital allocation pecking order?

I think we've tried to communicate in the past. The development side, you have to look at it from a point of view that is 2% to 3% on the balanced sheet size so at any given time there's only between 100 to 200 million dollars and the goal is consistently be having or having that amount of development in the pipeline or finishing up therefore in terms of growth um obviously the the real growth will come from looking at acquisition opportunities now or in the future right okay no that uh that makes sense to me um

A question just on Halifax and supply. Obviously, you kind of touched on it in your disclosures. I'm just wondering, you know, what is the market like for condo delivery, specifically in Halifax? And are you seeing, you know, similar dynamics at play in Halifax as maybe what we're hearing about in, you know, Toronto or Vancouver, more individual investors, some distress in the market and, you know, the impact that that's maybe had on discounting of rents? Is that something that you see a risk of in Halifax at all?

Well, I think I can address the condo side of it. And really, there's one operator from Toronto. He's finishing up one that's about 70 units to 100 units, and he's in the ground for a second one about the same size. And I can't think of any other ones out there. Now, maybe there might be a couple of them, but it's way less than a handful. So that's similar to a lot of the other markets right now, for sure.

Okay. We've never had a big condo market here. Well, we've never had a big condo market. It just isn't part of our market for rental for the most part because there's a very evolved new bill on the multi-side in elements.

Okay, okay. That's as expected, but doesn't have the same risk profile as maybe we're seeing in other markets, which is good to hear. Okay, I will turn it back. Thanks very much. Thank you.

Your next question comes from Dean Wilkinson with CIBC. Please go ahead.

Thanks. Morning, everyone. Phil, maybe you just want to come back on the Brightwood. I think we've talked about this a little bit before. The $200,000 close to differential between what you could build that and, say, the Carrick, is that land basis or is that just straight up because it's a timber frame construction?

No, I mean, the Carrick is a COVID building, which means there's HST to it, and that's a big chunk of the difference.

And then going forward, it still seems like there's quite a large spread between, say, steel frame concrete construction and wood frame construction. Are you seeing more builds going towards the wood or do you think that could happen or how is that playing out? Because it would appear that wood might not be as hit by a potential cross border tariff issues and things like that.

Well, I think the way that we're looking at it inside Kilham is that if you look at two buildings and the land is yours, you can do either wood or mid-rise concrete. We're taking the approach that the wood building provides an opportunity that we can start and finish it in relatively 18 months versus three years. So that's part of the decision as well. We're not saying we're going to go all wood. There will be obviously in the next few buildings if we get them ready to come out of the ground. It will be a mixture of the wood frame and the concrete. And it's about really looking at the timing it takes to develop these assets. as well as the differential in the cost.

And the rents you're getting, I would assume, are fairly similar. Fairly similar, yes. Okay. That's great. Thanks. I'll hand it back. Thank you.

Your next question comes from Jimmy Shan with RBC Capital Markets. Please go ahead.

Thank you. So maybe just on New Brunswick operation, you know, Fredericton, Moncton, still very strong markets, it looks like. How are you feeling about New Brunswick, you know, over the course of this year? Just given, did you have a bit of exposure to U.S. trade exports? I'm just kind of wondering what your thoughts are on that market.

Right now, we haven't seen any signs, not saying there isn't in terms of the the tariff sort of potential threat. And I look at them, I mean, they're thriving sort of basically all three cities right now. So from our point of view, and when you also look at it from a affordable average cost of rent in that province, it's very affordable. So which helps, you know, cushion any type of economic sort of decline or you know, impact on the tariffs.

And it seems they're holding stronger on population growth. So the main cities are still seeing people and therefore demands there. In terms of the tariffs, yeah, so softwood, that type of tariff could be an impact. But if nothing else, Atlantic Canada has proved to be resilient and they find a way.

As we look into early May now, how is leasing so far in occupancy trending relative to how it ended at the quarter?

Yeah, it's been robust. Quite similar to what we would have shown in Q1. So I think what we have seen as the whole market seeing is that if rents are too high and people are still looking for pricing from six months ago for new stuff, it might not move as quickly. But once rents are adjusted to what true market rents are, we see a lot of activity. So we've been very pleased with the momentum from our spring leasing.

Sorry, just one more. Slide 14 is interesting. table here where you show the tenant turnover by tenure. I was curious, if I look at the four to six year and over six year bucket where you're capturing obviously the biggest rental increase, is there any common reason for move outs that you can gather from those two buckets?

From the older buckets, sorry? Just, yeah.

Yeah, from the older buckets.

You know, we've been surveying people for years. It's homeownership. It's people, you know, growing families. Divorces. Divorces, people moving to a senior center. So every year from tracking this, there is movement that happens. And we're not seeing anything different, I wouldn't say. Every now and again, you get the 20 and 25-year tenants.

So, no. It's a multitude of things. We wouldn't know definitively what it is.

Okay. Thank you.

Ladies and gentlemen, as a reminder, if you do have any questions, please press star followed by one. Your next question comes from Matt Kornack with National Bank Financial. Please go ahead.

Good morning, guys. I just wanted to quickly touch, I think you made the commentary that you're seeing market rents stabilize and in some cases accelerate again. And that would be evidenced by your kind of holding 15% mark to market, notwithstanding getting a pretty good rent increase this quarter. What markets are the markets that you're starting to see kind of move higher again in market rents at this point. Presumably there's not a supply issue in those, but I'm interested.

The acceleration is not significant, but we're seeing it in Halifax right now. It's doing well. We have good activity. The three New Brunswick cities have done very well, and they continue. As we went through April, it's It did very well. And plus Newfoundland.

And even assets in Ontario that where we did bring those, you know, we were seeing a little bit of vacancy, we brought the rents down, done those units leased up, and now we're able to start moving up slowly and select assets there too. So it's really a variety of locations and assets.

affordable product or relatively affordable product versus call it higher end product in terms of that rent trajectory?

Well, like again, our slides showed, I mean, we're just clearly cresting over $1,500 as a whole portfolio. That goes to your point about affordability.

And value proposition. I mean, in terms of our assets, we've spent a lot of money on maintaining them and I think it shows within markets when they start to get a little more challenging, we seem to be doing very well in terms of maintaining our existing and able to attract other renters at prices that are a game for us and it works for them.

It makes sense. I did notice as well on the CapEx front, I understand that it's one quarter and there's seasonality in terms of CapEx spend, but it did seem like even for this time of year, it was on the lower side. Is that a function of a decision in terms of what to invest in, or is it just a quarter?

Good observation, actually. We had a discussion about it tonight with our capital team. And it really is, you'll see it pick up in Q2. And we know that we need to be getting contracts in place early so we can have the work done and maybe gain on the operating costs for the year. But that was a bit of a slow start this year, but we'll make it up.

Okay, fair enough. And then lastly, I mean, I think you guys took advantage of the opportunity to get to the 50% that you didn't own in Ottawa. But at the same time, I think at the beginning of the year or maybe late last year, you were talking about the disposition program and maybe some of that going to unit buybacks. Should we think that instead of buying back stock, you've done that transaction, or is there still an opportunity to buy back the stock at this point with disposition proceeds?

I think there's still an opportunity to do buybacks once we've finished up all our dispositions for 2025. Okay. Thanks, guys. Thank you. Thank you.

There are no further questions at this time. I'd now like to turn it back to your speakers for any closing remarks.

Thank you for listening in your questions today, and we look forward to our Q2 conference call on August the 7th. Thank you.

Ladies and gentlemen, this does conclude your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.