Killam Apartment REIT

Philip Fraser - President and CEO Robert Richardson - EVP and CFO Dale Noseworthy - VP of IR and Corporate Planning Erin Cleveland - VP of Finance

Jonathan Kelcher - TD Securities Mark Rothschild - Canaccord Jason Kepecs - GMP Securities Mario Saric - Scotia Bank

Thank you for joining Killam's fourth quarter and year end 2014 conference call. I'm here today with Robert Richardson, the company's Executive Vice President and CFO; Dale Noseworthy, Vice President of Investor Relations and Corporate Planning; and Erin Cleveland, Vice President of Finance.

I will now ask Erin to read our cautionary statement.

This presentation may contain forward-looking statements with Killam Properties Inc. and its operations, strategy, financial performance, and conditions.

The actual results and performance of Killam Properties discussed here could differ materially from those expressed or implied in such statements. These statements are qualified in their entirety by the inherent risk and uncertainties surrounding future expectations.

Important factors that could cause actual results to differ materially from those expressed here, include among other things, general economic and market factors, competition, changes in government regulations, and factors described in the Risk Factors section of Killam's annual information form and other securities and regulatory filings. This cautionary statement qualified all forward-looking statements attributable to Killam Properties and the persons acting on its behalf.

Unless otherwise stated, all forward-looking statements are as of the date of this presentation, and the parties have no obligation to update such statements.

Thank you, Erin. We released our Q4 and 2014 results last night.

FFO per share diluted in the quarter was $0.18, consistent with $0.18 earned in Q4 2013. For the year, Killam earned FFO per share of $0.72, up 1.4% from $0.71 in 2013.

This past year has been a challenging one from an earnings standpoint. We've spoken at length in past calls and throughout our MD&A on the challenges of energy cost in the Maritimes over the last two years.

I believe that the increase expense associated with natural gas, which impacted FFO per share results by $0.02 this year have overshadowed many of the positive developments that Killam has achieved. Through increased operating efficiencies, improved leasing processes, continued geographical diversification, and acquisitions, development, investments in our properties, we are well positioned to generate stronger FFO per share growth in 2015.

Robert will provide highlights on our operational results, and then I will discuss our acquisitions and development activity, and outlook, before opening up the call to questions. Slides to accommodate today's call are available in the Investor Relations section on our Web site under Events and Presentations.

Robert?

Thank you, Philip. Highlights from Q4 are found on Slide 3 of the conference call presentation.

Slide 4 includes highlights for the year. There are two key areas I would like to highlight for Q4.

Firstly, we achieved same store NOI growth of 0.9% this quarter; albeit, relatively low, we accomplished positive growth despite another quarter with significant increases in utility and fuel expenses up 6.7%. This along with positive same store NOI growth in Q2 and Q3 enabled us to limit the decline in same store NOI for the year to 0.9%, a marked improvement from where we started the year when we recorded a same store NOI decrease of 6.9% during the first quarter.

Secondly, we completed $97.1 million in acquisitions in Q4, which included wrapping up our partnership with Kuwait Finance House and expanding our joint ownership interest with KingSett and AIMCo to include three additional properties. We're pleased to have completed these transactions prior to the end of 2014 as they contributed to Killam achieving $160 million in acquisitions.

Further, 84% of our acquisitions this year were outside Atlanta Canada. As Philip mentioned, this helped set us up for success in 2015.

Slide 5 highlights our annualized NOI by province as we start 2015. Geographic diversification is a key component of our corporate strategy.

Meeting [ph] our long-term growth targets and increase investment in Canada's more dynamic real estate markets we remain focused on expansion outside Atlantic Canada. Killam's target is to grow it's investment in Ontario and Alberta to ultimately represent 50% of our annual net operating income.

Slide 6, breaks down our same store NOI results for apartments. MHCs, and on a consolidated basis for Q4 2014.

Slide 7 highlights these changes in the same store NOI for 2014. Same store NOI growth is a key performance metric for Killam as growing earnings from our existing portfolio is critical to Killam's long-term success.

As the slides highlight, the MHC portfolio performed well again this year achieving same store NOI growth of 4.8% in Q4, and 4.3% growth for the year. This helped to offset a decrease in same store apartment NOI of 1.5%.

Despite the decline in same store NOI, we are pleased to report same store revenue growth of 1.6% for the apartment portfolio, given the more competitive rental market in Halifax over the last year. Slide 8 shows Killam's same store revenue growth by quarter over the last three years, during which time we have averaged a 1.8% increase in revenue with no quarter recording less than 1% growth.

The growth in 2014 was due to 1.3% increase in rental rates for the apartment portfolio, and an average 50 basis point improvement in occupancy throughout the year, contributing $500,000 in additional revenue. All of Killam's core markets reported revenue growth in 2014, the largest gains realized in St.

John, Charlottetown, and Ontario. In addition to growing rents and improving occupancy, we've also managed to decrease the level and incentives offered.

Slide 10 shows quarterly incentive offerings as a percentage of revenue since Q1 2012 for the same store apartment portfolio. Incentives have decreased again in Q4 2014 as they did in Q3.

We continue to use incentives, but selectively. As noted earlier, same store NOI was at 90 basis points this quarter, and decreased by 90 basis points for the year.

We expect NOI growth in 2015 to return to the 1% to 3% range levels we've generally delivered before the 2012 when natural gas pricing began to escalate. Utilities will play a factor; however, we do not anticipate increases of the same magnitude we've experienced in the last few years.

Killam same store natural gas costs increased by $1.2 million or 25% in 2014. The increase was attributable to higher gas costs in both Halifax and in New Brunswick as seen on Slide 11.

The lower cost in Nova Scotia last winter for gas was attributable to the province's gas distributor using annualized fixed rate contracts. These contracts resulted in below market pricing in Q1 2014, and less volatility throughout the year are contributed to a higher cost of natural gas in the spring and summer months of 2014 when compared to market rates.

You will note on this slide we have experienced a recent decrease in natural gas rates. Year-to-date in 2015, the daily market for Algonquin Citygate has not been as volatile as in 2014 due to more moderate winter temperatures this year and lower oil prices providing utilities with an affordable alternative fuel source.

Market prices however have continued to spike during very cold days, including during the first half of February. Approximately 40% of Killam's total natural gas volume is price fixed for the winter of 2015 through price contracts entered into by its Nova Scotia gas distributor.

We expect natural gas prices to remain volatile for the next two to three years until long-term solutions to improve the infrastructure and alleviate pipeline bottlenecks in New England are completed. These upgrades should then stabilize New England and Atlantic Canada's pricing for natural gas.

Higher water and electricity costs also contributed to utility expense increases in 2014. We absorbed a significant water rate increase introduced in Halifax in April of 2014, resulting in an increase of 11.4% in same store water costs.

These increases were partially offset by savings and all costs as a result of lower pricing in the fourth quarter of 2014. I would like to highlight that we continue to actively manage our controllable costs.

During 2014, our same store operating expenses increased by only 1.8% by achieving efficiencies across our portfolio, and this is attributable to our committed and diligent employees and managers throughout Killam. Before passing the call back to Philip, I would like to comment on our apartment mortgage maturity schedule as at December 31, 2014 as shown on Slide 12.

We have $87 million of apartment mortgages maturing in 2015 with a weighted average interest rate of 4.5%. Based on current bond yields for five-year and ten-year debts, and an expectation for yields to stay low in the short-term, we expect to refinance these maturing mortgages at lower interest rates, creating interest expense savings.

Considering our financing potential and assuming an average interest rate of 3% on refinancing, Killam could generate annualized interest savings of approximately $400,000 during 2015. These savings could increase to $1 million, should interest rates average 2.5% for 2015.

Year-to-date in 2015, we have financed three maturing mortgages representing $13 million of maturing debt at a weighted average interest rate of 2.81%, 303 basis points lower than the weighted average interest rates prior to refinancing. Our lowest 10-year mortgage financing completed year-to-date was at an interest rate of 2.26%.

We expect to use a mix of five and ten-year debt on refinancings during the year. Thank you.

And I will now hand it back to Philip.

Thank you, Robert. As we have already mentioned, we've completed $160 million in acquisitions in 2014; our biggest year of acquisitions since 2005.

[Technical difficulty] all the assets in Ontario. We also acquired our first property in Alberta located in downtown Calgary.

Today the performance has been strong with occupancy levels remaining high. We are especially enjoying the low natural gas costs in the Calgary market.

In addition to growing through acquisitions, we made great progress with our developments in 2014. During the year, we invested a total of $28 million in our Chelsea Place development, a two-phased complex in St.

Johns; and Saginaw Garden, a 122 unit building in Cambridge, Ontario. The total cost of these assets will be $48 million, when finished.

Chelsea Place is shown on Slides 14 and 15. Phase 1 contains 63 units, and was completed in December 14.

It is currently 83% occupied, and is expected to be fully leased by mid 2015. Phase 2 will be completed in March of this year with tenants expected to be moving in by the middle of that month; 24 of the 39 units are leased.

Demand for new rental units remains strong in St. Johns, with little competition for the new high quality rental in the city.

Our second development, second and third in Cambridge, Ontario is progressing on time and on budget. A rendering of the property is shown on Slide 16 and Slide 17.

Slide 17 shows pictures of where we are today with the construction of the building. We remain on track to meet our move-in targets of the middle of May.

We currently have 37 units on hold. The model suite is now ready to be viewed and we had our first showings last Monday.

The timing of lease up of Saginaw Gardens is expected to be between 9 and 12 months. We started construction of Southport in Halifax in December of last year.

A rendering and details, regarding the Southport development are pictured on Slide 18. This is a unique project with a 50-50 condo apartment mix.

We have partnered with Urban Capital on the project, with Killam retaining all of the apartment units, and Urban Capital developing and selling the condo units. This asset is located on Barrington Street in downtown Halifax and will offer a unique urban living environment for tenants.

Our 50% of that project will cost $14.7 million, and is expected to be completed in 2016. We are optimistic about the year ahead.

We are targeting same store NOI growth of approximately 2% in 2015, driven by revenue growth and modest expense increases. Improved economic growth in Atlantic Canada and fewer Atlantic Canadians moving west because of the lower oil prices should help to stabilize and potentially improve our occupancy levels.

We are well positioned to benefit from these improvements as the largest apartment landlord in the region for the 14% market share. We have realized strong occupancy in the first two months of the year, and expect to see the average rental rates increase between 1% and 2% in the year.

We expect that expense growth will be moderate in 2015, benefiting from the savings in oil costs, energy efficiencies, and less fluctuations in our natural gas cost. We hope to continue to grow through acquisitions in 2015, and will continue to increase the quality of our asset base.

We are assuming a great portfolio, which we believe will provide strong earnings and cash flow growth for many years to come. We expect over 50% of our acquisitions in 2015 will be in Ontario and Alberta.

We also expect to build on our existing asset base in Atlantic Canada, looking for assets that compliments and enhance our current portfolio. We would like to expand our co-ownership relationship with KingSett and continue to establish relationships with other high quality real estate organizations with a view to optimizing the potential of Killam's development expertise.

And finally, we will look to recycle capital at the right time and right price Atlantic Canada as we have done in the past. We look forward to updating you on our progress in the upcoming months.

I will now turn it over to the operator for the question-and-answer portion of the call.

Thanks. Good morning.

Good morning, Jonathan.

Just, first to get a little clarity on your target for same-property NOI growth? I guess, Rob, you said 1% to 3%.

Phil, you said 2%. And if I look at the MD&A, you guys have zero to 2% as a 2015 target, so I guess you are looking to hit the top end of that target?

Well, mine was a range of 1 to 3 which is what's reflecting back on the years before 2012. So by going forward that's what we would like to do.

We've discussed the fact we had a number of ranges that we had put out there. Suffice to say, 2% is a good number.

That's what we're shooting for. We can do better, we'd be happy, but that's our number.

Okay. Obviously, the wild card on that will be utilities expense, correct?

We're optimistic that they should be more stable this year.

Okay. Just sticking with that, and just on the revenue side for same-properly NOI growth, can you maybe walk through what you would -- and, Phil, I think you were saying 1% to 2% rental rate growth?

Where do you guys see occupancies trending in your largest markets?

So we can tell you at year-to-date we're trending a little stronger than we were this time last year. So -- and that's kind of across the board.

So we're thinking that the market is stabilizing a bit, and we don't really know for sure but it would seem to us that because there's not as much work in the west I think some people are maybe returning home and some are staying here.

I think a little more color to that, Jonathan, would be that in the first six weeks we're seeing really strong leasing in New Brunswick and PEI. Newfoundland has been quite stable.

When I say, "Strong," actually gains in all the markets there for us. And then, Halifax is holding its own.

It's better than it was last year, but again like all of our markets, there is a little bit of seasonality. I think that this year we are more aware of what we have to do from a leasing point of view.

And then Ontario is actually very strong for us.

Okay. Thanks, I'll turn it back.

Thanks.

Thank you.

Hey, guys. Just following up on the last comment you made to Jonathan, maybe you could just expand a little bit on what you're seeing on the ground in Halifax as far as new supply and absorption?

Then, maybe just in Halifax, what you see for rent growth that is achievable in the next year?

Halifax has actually had a good January. We're up 70 basis points over the last year from an occupancy perspective.

It's pretty strong. Overall, we may see quite regularly they do a survey as you are aware.

And they would tell us that for the most part they think an average -- to plan for an average about 1200 units to be delivered for the next couple of years. The market is absorbing them.

And so with the shipyard cutting field this year and adding something like a thousand new jobs that will be good for the market place. We're seeing it probably doing alight this year.

We don't expect it to decline and probably will grow by -- I don't know, it kind of go 100 basis for the year, but I bet on 50 basis points, perhaps, increased occupancy.

Okay. Just with the strategy for growing outside of Atlantic Canada, obviously, the price of oil impacts some markets in Canada.

Has your strategy towards Alberta shifted you -- how do you look at that as far as finding opportunities, or has anything changed in the way you are looking at that?

I don't think anything has changed. I think what has changed a bit is that we have a bit more patience to sort of way to see the product that we have run across or being introduced to in terms of what's currently available for sale.

So there is no real sense that we should buy it today because next week it's going to be more expensive. There's a bit of wait and see out there that from our sense and from the properties that we're looking at.

But at the same time as we go into the market like Alberta, our opportunities are not just existing products. We're also looking at different parcels of land in locations.

And then you're sort of looking at what will be ready to build on in the next six to twelve months versus something that you'd have to take through redevelopment. But I mean the overall theme is that there is still is very limited amount of supply or opportunities in Alberta right now.

So it's thin pickings for sure.

Thanks a lot.

Thank you.

Thanks. Hi guys.

In the quarter you showed a fair-value loss of about 16.8 million. I wondered what that reflected, what that referred to?

Is that a change in NOI assumptions on the portfolio, generally or was there any specific items?

There were some cap rate changes. And we know that there was a slight increase in vacancy.

I think 10 basis points overall by the appraisers which also impacted us, and there was an adjusting on operating cost due to the relatively high energy costs in the last number of years. So all those tweaks combined would have impacted the fair value game somewhat.

Okay. As far as how that goes as far as what you are forecasting in the change in operating costs, was that -- as far as the NOI margin, can you quantify that?

No, I can't actually. But we don't always agree with the appraiser.

Okay. Fair enough.

There were two properties in that -- I don't know if there has been an update, the 200 and 300 Royale, that were leased up and I'm not sure if they're -- are they stabilized now?

100 and 200 are basically almost a 100% full, and we're still working on the third one. And I think roughly there's about -- we're into about 60% to 70% leased, and expecting it to pick up now that we have the other two buildings essentially full.

Okay. Are you going to -- as far as there were two projects, Topsail Road and Carlton Street, is that going to proceed or is that a little bit further into the future?

Oh, that's all still in the development stages of future developments.

So as far as what you have remaining, in terms of the projects that are on your plate right now, it's about 30-35 million of costs to complete?

No, I mean I think we only have literally just a few more million dollars left on the two that we talk about all the time which is Cambridge and St. Johns Newfoundland.

And then the cost down in Southport, that project we just started, so obviously there's a -- it's about $14.7 million. We still haven't even taken a draw from the construction financing, but we're only two or three months away from finishing up our equity component to that project.

Okay, thanks a lot.

Thank you.

Thank you.

Hi, good afternoon. Maybe a couple of quick questions pertaining to Halifax, specifically; I think I saw commentary in the MD&A with respect to the supply and growth and perhaps that supply having targeted a shift of empty nesters shifting to rental from home ownership over the past couple of years.

When we look out, the supply growth that we've see in the last couple of years, do you think that it has been predominantly to satisfy that demand? Or, have developers gone ahead of the ship building contract in terms of adding new supply to the market?

That's a combination of both. I'd say too that a lot of the stuff in the suburbs, so let's call it Clayton Park, is designed to cater to an over clientele.

The units are very big often between 1400 and 1600 square feet, and it's designed to take big furniture. So that's the demand we're seeing there.

So the condo market here is not that developed. So that's how I think the market is addressing the requirement for downsizing by older and older clientele.

So that's happening. But there has been a number of developments on the Peninsula, and that's more I think in anticipation of demands from workers.

But some workers will have families, and they will be in Clayton Park. So it's a bit of both, Mario.

Okay, when we look out -- I think, Robert, you mentioned CMAT is looking for 1,200 starts?

1200 to be delivered actually, that's more what of what's becoming in. So historically we've been around 800.

That's been a pretty typical number in this market. So we're probably 50 % higher given the 1200.

So the general number is getting the starts and completion steps relatively confusing, but -- so the discussion is centered about hope for the next couple of years what you see in it. They said you can expect about 1200 units to be delivered.

So that's the absorption number we have to be concerned with, and the market can satisfy that.

But this number coming this year is less than what it's been in the [indiscernible]. So we're finally starting to see a little bit of a trend downwards.

Okay. I guess I'm just trying to get a better handle for what we may be able to expect in 2017 through 2020 as the job growth accelerates towards peak production?

How much of that job growth is already accounted for today versus developments ramping up from 2017 to 2020 to reflect the increased job growth during that time period?

You know what, that's a good question. I don't know if we have a real handle on that other the outlook for the next 12 to 18 months.

But out past that it's hard to say, I mean I would think just like us we might have one or two projects sort of that you're working on to get into the hopper to start development, but right now I don't think you could completely answer that question.

So the way we're looking at that, Mario, as a company is we're looking to diversify geographically more. So we a have a big presence.

And that's all we have. 45% of our annualized generated here and better than 5000 units and they're well placed units.

So they can compete well in the market. And new supply will affect us.

You can't deny that. But I don't think materially because we're going to be in a bit of a different price point and then for us we're looking to expand in Ontario and Alberta and looking to just address the use that geographic diversification to stabilize it, if it's a big impact.

All right, okay. I noticed in disclosure on -- it's very small, but you renovated two units in Mississauga and highlighted some pretty impressive returns on the capital invested.

I know it's only two units at this point, but can you give us any sense as to how much you can ramp up that program over time and whether there is any specific markets where you're seeing a big opportunity to do so at similar returns?

That's at Silver Spear, which is a 200 unit building. We have surplus land there.

We can do another 100 units, a little more than that actually like 110. So that's a great location and we think that based on our initial foray and renovating those two units that we think there is good market demand for an approved unit we can get a couple of hundred bucks additional rent pretty significant.

So we'll pursue that. But the balance of our portfolio on Ontario, not in Ontario, but certainly in the GCA area is relatively new construction.

So there won't be big movements there, expectations, but for sure there's an opportunity at Silver Spear to see some good gains.

Okay, so that was more of a test project to see whether you can get the rents that you need to go ahead with the second opening?

Right.

How about it Halifax or Eastern Canada, do you see a lot of opportunity in putting in that type of CapEx into existing buildings and seeing returns, or because of new supply…

Well, we've gone through that with our project that we call Brentwood that we are still doing that, and we saw for -- previously in 2014 and even starting in 2013 we cared quite a bit of vacancy as we rolled good portion of those units. And we saw some great lifts in that.

So I think Halifax has probably a couple of other buildings that we've looked at where we can continue to prove and upgrade. And then it's really some of the stuff that we own in Ottawa venue [ph] where it was such a -- at the low end of the price point that any renovation there you can see big lifts come in.

Okay. Last question, just any update on the potential re-conversion process?

It's ongoing, and we're making headway on it just working through the documentation. So we'd say we'll come back here later this year with something more definitive.

Great, thank you.

All right, thanks.

Thank you very much for participating today. And we will look forward to the next conference call, which will be Q1 2015 in the 1st of May.

Thank you very much.