Killam Apartment REIT (KMPUN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Killam Apartment Real Estate Investment Trust Q4 2020 Year-end Financial Results Conference call. [Operator Instructions] Also note that this call is being recorded on Thursday, February 11, 2021. And I would like to turn the conference over to Philip Fraser. Please go ahead.

Thank you. Good morning, and thank you for joining Killam Apartment REIT's Q4 and Year-end 2020 Conference Call. I'm here today with Robert Richardson, Executive Vice President; Dale Noseworthy, Chief Financial Officer; Erin Cleveland, Senior Vice President of Finance; and Nancy Alexander, Vice President of Investor Relations and Sustainability. Slides to accompany today's call are available on the Investor Relations section of our website under Events and Presentations. I will now ask Nancy to read our cautionary statement.

Thanks, Phil. This presentation may contain forward-looking statements with respect to Killam Apartment REIT and its operations, strategy, financial performance, conditions and otherwise. The actual results and performance of Killam discussed here could differ materially from those expressed or implied by such statements. Such statements are qualified in their entirety by the inherent risks and uncertainties surrounding forward-looking statements. For further information about the inherent risks and uncertainties in respect of -- 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. Unless otherwise stated, all forward-looking statements made today speak only as of today's date. Killam has no obligation to update such statements unless required under applicable securities laws. Unless otherwise stated, all forward-looking statements speak only as of the date of which this presentation refers, and the parties have no obligation to update such statements.

Thank you, Nancy. Despite the headwinds and uncertainties that 2020 brought us, our employees rose to the challenge, and we achieved 2.3% same-property NOI growth and 2% FFO per unit growth. Our strategy and commitment to the long-term viability of our core markets has remained unchanged. Increasing earnings from our existing portfolio is a key component of our strategy. We do this in a very responsible way, considering the current financial demands of our tenants, communities and global environment. Our portfolio is benefiting from the innovative ways we are growing our revenue and managing our expenses. We are diversifying our portfolio geographically through accretive acquisitions with over $200 million in acquisitions in 2020 and $70 million year-to-date in 2021. We met our targets to achieve 32% NOI outside Atlantic Canada in 2020, and we will continue to look for additional assets in our Ontario markets as well as Calgary, Edmonton and Victoria. In addition, Killam's development pipeline continues to be a key driver of net asset value creation, adding high-quality properties to Killam's portfolio each year. In 2020, Killam opens the shorefront in Charlottetown. Nolan Hill and Calgary opened in January and Harley is coming online next month. We have included our original 2020 strategic targets in our year-end documents and measured our performance against them, as shown on Slide 4. We were able to achieve all targets with the exception of same-property NOI growth, which was slightly lower than our 3% to 5% target prior to COVID-19. Our targets for 2021 are also disclosed, including a sustainability target of ensuring we invest a minimal of $5 million in energy initiatives to assist in attaining our long-term goals of reducing greenhouse gas emissions and increasing our renewable energy sources. Dale will take us through the Killam's financial results, followed by Robert, who will discuss our initiatives for growing our existing asset base. I will conclude with a recap of both acquisitions and development pipeline. I will now hand it over to Dale.

Thanks, Phil. Highlights of Killam's 2020 financial performance can be found on Slide 5. Notwithstanding challenges this year, we achieved solid earnings growth, attribute to the resiliency of our portfolio, our key markets and our teams. In 2020, Killam generated FFO per unit of $1, up 2% from 2019, and AFFO per unit of $0.83, up 3.7%. These gains were driven by solid earnings from our same-property portfolio and incremental contributions from acquisitions and stabilized developments. 2020 continues a strong record of performance. Slide 6 recaps key financial metrics over the past 5 years. We're proud of our consistent FFO per unit growth, while also greatly increasing the size and quality of the portfolio and maintaining a conservative balance sheet. NOI has increased steadily, and FFO per unit has grown by a compound annual growth rate of 3.8%. Killam's current AFFO payout ratio of 82% has improved from 91% five years ago, while distributions have increased 4x during the same period. As we continue to execute on our growth strategy, our total assets have grown by an impressive compound annual growth rate of 17.4% to $3.8 billion today. Slide 7 shows our Q4 results. FFO and AFFO per unit were both flat in the quarter as 0.9% growth in same-property NOI and earnings from acquisitions and developments were offset by an increase in the weighted average number of units outstanding following July's equity raise. The portfolio showed strength with same-property revenues up 2.2%, including a 3.4% increase in apartment rents and 3.8% top line growth from the MHC portfolio. These gains were partially offset by an uptick in apartment vacancy. Same-property apartment occupancy was a healthy 96.6% in Q4, but down 100 basis points from historically high occupancy rates in Q4 2019. Same-property operating expenses were up 4.4% in the quarter, mainly due to higher compensation for our on-site staff, increased insurance premiums and a 4.4% rise in property taxes. Annual same-property portfolio results are shown on Slide 8. Overall, same-property revenues were up 2%, but these gains were not consistent throughout the portfolio. The apartment sector led with 2.4% growth. This was partially offset by reduced revenues for the MHC and commercial portfolios, both of which reflect the impact of COVID-19. Delayed openings and reduced activity at our 9 seasonal MHCs resulted in an overall annual revenue reduction for the MHC portfolio of 0.8%. This overshadowed the strength of Killam's 30 permanent MHCs, which generated 2.7% revenue growth in the year. The decline in the seasonal portfolio's revenue and NOI is short term. We expect earnings to be back to pre-COVID levels once social distancing and emergency measures are lifted. Revenue for our commercial portfolio was down in 2020 following participation in the CECRA program. Same-property expenses were up 1.4% in 2020. Slide 9 breaks down operating expenses by category. Higher general operating expenses, including increased salaries for on-site staff and a 4.6% rise in property taxes, were partially offset by a 5.9% reduction in utility and heating fuel costs. Overall, NOI was up 2.3% for the year. Additional details on Killam's 2020 apartment revenue results are highlighted on Slide 10. Occupancy declined 40 basis points overall from an all-time high in 2019. The biggest declines were seen in St. John's and Ottawa. St. John's is feeling economic pressure from softness in the oil sector, while Ottawa was impacted by reduced demand linked to COVID-19 and increased supply in the immediate neighborhood of our largest property in the region. Other markets remain resilient with our 3 New Brunswick markets and PEI achieving relatively consistent occupancy levels year-over-year. In Halifax, we recorded only a modest 50 basis point decline in annual occupancy, much of which relates to student-focused properties near the universities, which have historically had little to no vacancy. Overall, incentive offerings remained limited and focused primarily in Alberta, St. John's and very specific properties with occupancy challenges. Overall, Killam recorded incentives of 40 basis points of total residential rent for the year, very much in line with the last 2 years. As previously noted, same-property rental rates were up 3.4%. Although a slight decline from 2019, rents were trending higher by the fourth quarter of 2020, showing signs of momentum leading into 2021. Slide 11 shows rent growth by quarter. The top growth breaks down the rent achieved on renewals, the green line, and turns, the gray line, as well as the total average rental rate shown on the blue bars. As shown here, with strong gains on turns, Killam's mark-to-market opportunities remain strong. The bottom graph on Slide 11 provides additional details on rental rate growth and renewals by month for the past 24 months. Killam's decision to delay issuing notice of future rent increases in the months of April through July impacted rent growth for renewals in Q2 and Q3. The growth was again realized in the fourth quarter. Note that Nova Scotia renewals are currently capped at 2% during the state of emergency in the province, and Ontario and BC currently have freezes in effect, muting rental growth on renewals for most of 2021. With these restrictions, most of Killam's rental growth in the year ahead will come from unit turned. Killam's unit turnover remains healthy at 28.8% in 2020, well above Canada's national average. Slide 12 highlights our debt maturity profile, including average apartment mortgage rates by year versus prevailing CMHC-insured mortgage rates. Based on current market conditions, we expect to refinance at lower interest rates in 2021, continuing to reduce our weighted average interest rate. In addition, we expect to generate net proceeds of approximately $50 million from our 2021 refinancing program. Slide 13 includes key balance sheet metrics. We are maintaining a conservative balance sheet and ended the year with debt as a percentage of total assets of 44.6%, well below our target of less than 47%. We also ended the year with expanded capital flexibility following a $40 million increase to our operating line in late 2020. Following the funding of recently announced acquisitions, capital flexibility remains high with acquisition capacity of $250 million. We are well positioned to execute on our growth plans for the year. I will now turn the call over to Robert, who will provide color on key operating initiatives and value delivery to our residents.

Thank you, Dale, and good morning, everyone. Before discussing our current operating initiatives and strategy, I would like to begin by acknowledging that 2020 was a challenging year for many businesses, and likewise, for most people. The stress created by forced isolation, the fear of the unknown and the heartbreak of being separated from loved ones can be crippling. And yet, faced with all of this on a personal level as well as their daily work caring for over 40,000 residents, Killam's 700 employees continued to work diligently and adapt to this evolving pandemic. In recognition, Killam continues to compensate its frontline staff with extra pay. We respect and greatly appreciate the excellent care they extended to our apartment residents as well as our MHC and commercial tenants. Despite COVID-19, rent collection has remained exceptionally strong for Killam throughout 2020. Killam collected 99.7% of all rents for the year, including gross build commercial rents. This aligns with Killam's historical bad debt loss, which tracks at less than 30 basis points of total revenues. We do not expect any material change in rental defaults in 2021. Killam's existing portfolio totals over 17,000 apartment units, 5,900 MHC sites and 750,000 square feet of commercial space, not including 150,000 square feet of ancillary retail related to the apartments. Killam's commercial segment accounts for approximately 5% of its total net operating income. We worked closely with our commercial tenants under the Canadian government's CECRA program and recorded a $300,000 reduction in commercial revenue related to this initiative. In addition, Killam separately negotiated pandemic-related rental abatements with a number of commercial tenants, and these also totaled $300,000. To deliver value to our unitholders, we have a continuous focus on growing same-property net operating income. Slide 14 details a number of the levers Killam can use to grow income. I will speak to these in the next few slides. In late December, we received the results of Killam's annual tenant survey conducted by our third-party provider, Narrative Research. Narrative tells as Killam's 2020 survey had an impressive response rate of 30%. And the overall tenant satisfaction rating of 87% is markedly better than the industry benchmark for multi-residential owners. It is worth noting Killam's overall tenant satisfaction rating has ranged between 87% and 90% for the last 8 years. In terms of satisfaction with their apartment units, Killam received an 89% satisfaction rating, a very positive outcome. Our residents tell us they enjoy living at a Killam property and consider their clean, affordable housing to be good value. Renting remains a very attractive alternative when compared to homeownership given the high cost of upkeep, maintenance, taxes and insurance for single family housing. Please refer to Slide 15. Killam offers a range of housing products in each of its markets from long-standing properties providing a clean, safe housing option to newly constructed luxury buildings with modern finishes and a multitude of amenities. Killam's portfolio has a wide selection of locations, unit sizes and layouts in each of its urban and suburban communities. With an average rent of $1.42 per square foot across the portfolio, this represents remarkable value and accommodates a diverse group of residents and potential tenants. Canada Mortgage and Housing Corporation's measure of housing affordability is the shelter cost-to-income ratio, which sets the affordability threshold at 30% of before tax median household income. When we compare Killam's rents to the 30% shelter cost-to-income metric in each of Killam's core markets, it underscores the fact Killam's average rents are well within CMHC's threshold, ranging from 15% to 25% of median household income in our markets. This housing affordability discussion is very germane. Even more so, when many Canadians are experiencing the greatest financial and mental health pressures in recent memory, Killam recognizes it has a civic duty to be a contributor to the affordable housing solution. Not only does Killam provide very affordable living options generally, but Killam is an active partner with many nonprofit housing and government agencies, such as the YWCA, urban housing initiative and centers for addiction and mental health to deliver more than 750 subsidized units in our communities. Looking forward, we continue to pursue opportunities that provide additional affordable housing. For example, last month, we closed on a 233 unit Nolan Hill development in Calgary. By participating in CMHC's Rental Construction Financing Initiative, Killam was able to provide 78 units or 1/3 of the units at Nolan Hill at rental rates that are 70% of market rates. This was possible by utilizing CMHC's financing for a $41 million mortgage [indiscernible] 10-year money at the low interest rate of 1.95%. Killam released our annual rental market housing report last week, reporting on rental statistics across Canada as of October 2020. Due primarily to restrictions on immigration during the year, vacancy rates have increased nationally and rental rate growth has slowed. But not all markets have been impacted to the same degree. And I would like to speak briefly to the strength of Killam's largest market, Halifax. CMHC reported vacancy in Halifax increased 90 basis points from October 2019 to October 2020 and stood at 1.9%. This was the lowest vacancy rate for cities in Canada at that time. CMHC also noted that despite a lack of immigration and post secondary schools moving to more online teaching, the Halifax market still needs new supply. The graph on Slide 16 compares Killam's Halifax portfolio's average in-place rent to the market rent for the last 14 months, all on a dollar per square foot basis. In-place rent is the average monthly rent Killam's Halifax tenants pay that month. Market rent is the average rent being achieved by Killam on leases to new tenants during that same month. As can be seen with this chart, new leasing is providing a healthy average $0.18 per square foot more than in-place rents. Although this delta fluctuates from month to month due to the number of new leases and unit types leased, overall, mark-to-market opportunity has remained consistent during the pandemic and a 10% to 15% mark-to-market opportunity exists. Killam has also benefited from Halifax's market's resiliency at its 160,000 square foot Brewery market, adjacent its Alexander residential property, overlooking the Halifax harbor. Brewery market is an iconic asset, a 200-year old jewel in our city and added over 30,000 square feet of new retail and office leases this past year. The demand for Killam's new and newly renovated apartment units also remained strong across the portfolio in 2020, and work on Killam's suite repositioning program continued unabated. We finished the year with 495 suites repositioned, just 5 less than originally budgeted, as highlighted on Slide 17. It costs an average $25,000 to reposition a unit, but when you earn a 30% unlevered return on investment, it makes perfect sense. Based on the market demand for repositioned suites for 2021, Killam is targeting a minimum of 550 units to be completed. Overall, Killam currently has 5,000 additional units that can be repositioned, and this opportunity continues to cycle forward as the properties age. An example of a very successful repositioning program for Killam is shown on Slide 18. This is Bronson. A 43 unit property in downtown Ottawa that was built in 1968 and has dated finishes. By replacing the flooring and updating the kitchens and bathrooms, the product offering for this building changed. And Killam realized, on average, rental increases of 35%, representing a 20% return on its $31,000 per suite investment. I will emphasize that Killam only undertakes repositionings as units become vacant, as we are not proponents of evicting tenants to facilitate unit repositioning. Killam has fine-tuned the process of repositioning its units over the past 3 years to rightsize the upgrade, minimize the downtime for renovation work and provide our residents with the best finishes based on appeal, functionality and durability. Slide 19 shows a repositioned unit at Cambridge Place, a 63 unit building in Moncton, New Brunswick. The unit highlighted won the best unit renovation of the year award from the Canadian Federation of Apartment Associations in 2020. Suite renovations are a component of Killam's overall $70 million annual capital budget plan with important investments being made to address building envelopes, can be windows, roofing, cladding, heating plants, plumbing upgrades, curb appeal and landscaping as well as energy projects. Please see slides 20 and 21. Killam has a 3-year rolling capital plan that is executed by our capital projects and operations team. This capital investment maintains and improves the efficiency, marketability and management of Killam's portfolio. The increasing capital investment each year, as shown on Slide 21, speaks to Killam's willingness to invest in revenue-enhancing and expense-saving initiatives that deliver excellent returns on investment, keep our tenants pleased to call Killam's portfolio their home. Killam's $5.9 million energy plan for 2021 is important as we continue to focus on lowering Killam's utility and heating costs, decreased consumption and pursue Killam's smaller carbon footprint. In 2021, energy plan -- sorry, the 2021 energy plan consists of 94 projects from our solar panel installs to boiler upgrades that should provide Killam with an estimated $900,000 in annual operating savings and a 6.5 year average payback. With traditional energy efficiency projects, such as LED lighting retrofits and installation of low-flow water devices nearing completion across Killam's portfolio, we are now investing in building data analytics. As noted on Slide 22, Killam is analyzing its energy data and using technology to inform how we operate our portfolio. From smart metering to understanding and shaving peak electrical demand consumption, we are collecting and analyzing data with our business intelligence platform to make better decisions. We made mention on our Q3 call in November of our ESG rating participation. We now have our results, and we are very pleased to say that we have improved our initial 2019 submission by 32% or 15 points. This provides Killam with a 2 Star designation for its 2020 submission, along with a green star rating for achieving more than 50% on both performance and our approach to managing our goals. As well, Killam earned a B rating for the public disclosure GRESB survey, outperforming its GRESB peers that earned a global scoring average of C. We are committed to enhancing and accelerating our comprehensive ESG program and recently set quantitative targets to lower our greenhouse gas emissions as well as increase our use of renewable energy. Adjustments to these targets will occur with more information and time as we wish to align ourselves with the Paris Climate accord in the coming years to ideally and ultimately achieve carbon neutrality. I will now hand you back to Philip to provide an update on our development and acquisitions pipeline.

Thank you, Robert. Slide 23 summarizes Killam's acquisition activity for the year. 56% of the capital deployed in 2020 was in British Columbia and Ontario. During Q4, Killam closed 2 acquisitions located in Moncton that were announced with our Q3 2020 results in November. We purchased 171 and 181 Leopold, a new 107 unit wood frame property, as shown on Slide 24, for $17.6 million. This property is 97% occupied with an average rent of $1.20 per square foot. Slide 25 shows Horizon Place, a new 7 story, 162 unit property that we closed on November 13, 2020. Killam has started 2021 with $71 million in acquisitions. Slide 26 shows the 233 unit Nolan Hill development in Northwest Calgary. Killam purchased the remaining 90% interest on January 21 for $49.5 million. Along with Killam's original 10% interest, the total cost was $54.3 million and we recorded a $0.7 million fair value gain upon purchase. Killam secured financing through CMHC's Rental Construction Financing Initiative. This national housing strategy program that is delivered through CMHC supports rental housing projects to encourage affordable new supply for middle class families across Canada. We are offering 78 units at 70% of market rents. As Rob already mentioned, this aligns with our approach to help alleviate the need for affordable housing in the country. The 3-building property opened in January and lease-up is progressing nicely as noted on Slide 28. On February 1, we purchased a 23 unit building located in Moncton for $5.6 million. This 4-story concrete building shown on Slide 29 has a mix of 1 and 2 bedroom units that are 100% occupied in Moncton's strong rental market at an average of $1.43 per square foot. It is well -- it is well-located in the downtown core and easily absorbed into our operating platform. With regards to development, construction activity progressed nicely in 2020. Slide 30 shows a rendering of the 6 projects that are currently underway, which will add 535 units and $240 million of high-quality new product to our portfolio over the next 18 months. Our 78 unit shorefront development on Slide 32 received its occupancy permit on October 1, and tenants started to move in during Q4 2020. Leasing activity has increased since the beginning of the year and we are currently 55% leased, which we are pleased with given the backdrop of COVID-19 and the restrictions we are living with. The Harley, which is 24% pre-leased, is expected to receive its occupancy permit by February 20, 2021, and we will be welcoming residents on March 1. Progress photos are shown on Slides 33 and 34. For progress on the Latitude, please turn to Slides 35 and 36. The concrete structure is complete with both the masonry and internal wall framing done up to the 20th floor. Because of the number of COVID-19-related slowdowns during the year, we now expect the project to be 2 to 3 months delayed with a completion date in Q1 2022. The Kay in Mississauga is progressing along as planned and should be completed by year-end. The details of this development are on Slide 37 and progress shots on Slide 38. Our 169 unit development known as Civic 66 in Kitchener started in late 2020. We have almost completed the geothermal bore drilling, and footings are starting this week. Target completion date is late 2022. As well, we have broken ground on The Governor, a 12 unit luxury project in Downtown Halifax that is adjacent to the Alexander and the Brewery market. Slide 42 breaks down Killam's future development opportunities, totaling approximately 3,100 units that are in various stages of development or predevelopment. This pipeline gives us great value creation for the -- for Killam in the coming years. To conclude, we are proud of the performance in 2020, and confident that we will continue to execute on our priorities and create value for all our unitholders during 2021. Thank you. I will now open up the call for questions.

[Operator Instructions] And your first question will be from Jonathan Kelcher at TD. Could you unmute your line, Jonathan?

Sorry about that. First question on -- just on your acquisition target for 2021 at $100 million, does that include Nolan Hill given that we've known about that one for a while?

No, it doesn't include Nolan Hill. And hopefully, we'll be able to exceed it. But for now, it's $100 million.

Okay. And you've already done $70 million of it, right?

Yes.

Okay. And then -- and on Nolan Hill, 31% leased. How many of those leased units are the affordable ones? And can you maybe give a little color on how that program works? Like is it -- I'm assuming it's not just anybody can get the affordable units.

You're correct on that. So to date, the majority of the leases have been at market, and we are still finalizing the details with a couple of charities that we will -- that they will be helping us provide tenants that are -- that would be qualifying underneath the program in terms of their income.

Okay. Is that program something that you'd look at using for some of your other development projects?

There is actually 1 that we're thinking of in New Brunswick right now in Moncton, but the other ones in Ontario, we haven't -- currently, the answer would be no to that.

Okay. And then just lastly, and I'll turn it back, but just on the guidance, Dale, like the property tax was a pretty good jump in 2020. What's your outlook for increases in 2021?

Yes, that's a big question. So we would expect -- it may look similar to what we've seen in this past year. We'll be working hard to appeal those when they're not reasonable, but based on what we -- the information we have today, we're kind of looking at a similar type increase for this year, but hopefully comes in lower.

Okay. So your 2% plus same-property NOI is sort of assuming 4% to 4.5% increase in property tax?

Yes.

Next question will be from Matt Logan at RBC Capital Markets.

It's great to see the sustainability metrics as part of Killam's strategic targets. Can you talk a little bit about what the expected ROI is on your renewable power initiatives? And what type of investment it would take to achieve your 10% renewable power target?

The first -- answer to your first question is we are looking at a target of 10% return on the existing solar panel installs that we currently have underway. And roughly that totals about $2.85 million. It's the 800 to 900 kilowatts of power that we'll be able to produce. And so we're looking at roughly about $200,000 of energy produced or electricity produced. So that is very attractive. And a lot of that is in PEI where we have the highest rate, it's about $0.20 a kilowatt. So it makes it pretty easy to approve those. And then what's left is actually just getting it done and getting it sold and then hooked up to the grid. The second part of your question was...

About getting -- yes. So Matt on ESG, our longer term target right now is 10% to 15% reduction in our greenhouse gas. And we know that along -- we're not the only ones motivated to reduce our greenhouse gas along with all of our utility providers. So we feel very conservative about being able to target that with our current approach to our energy projects. And we're scoping out all of our buildings across our provinces to figure out where the best payback is and how we can go about becoming more renewable. But -- so both those goals, more renewable as well as reducing greenhouse gas, seem fairly attainable, the way we currently invest our capital initiatives. And of course, continuing then to dig deeper and see if we can become a little bit more aggressive with our approach in the coming years as everybody looks towards becoming -- reducing that carbon footprint.

I think we've also stated that these -- this current round of solar panel installs in Halifax and in Charlottetown would represent about 14% of our electricity consumption and bill for Halifax and PEI.

It's great color. In terms of your GRESB rating, can you talk a little bit about what drove the improvement in your 2020 results? And what it would take to maybe move that up a notch next year?

For sure. So for us, 2019 was our first initial submission. So there was a lot of disclosure things that had to happen between the initial year, a lot of the stuff we had already been doing but just not having the -- some of the formal structures in place. On the management side of that, having the right procedures in place. We've come a long way in making sure that it's formalized. And as well as really measuring and managing our energy and water -- waste and water and tracking that. That's a big part. And then to keep moving on. It's about -- for us, it's about building certifications. The residential space that was -- has not been as big as it has been in the commercial space. So for us, it will be to continue to monitor, reduce our like-for-like greenhouse gas and increase our building certifications.

Excellent. And maybe just changing gears to your renewal spreads. Can you tell us what the metrics were in Q4, excluding the suite renovations?

Sorry, Matt, can you say that again? Please?

The renewal spreads on suite turnover in Q4, excluding the renewal -- excluding the suite renovations? Just like the normal suite turn.

Oh, 5.7% on the turns without repositions. Yes.

And I guess when we think about market rents in Atlantic Canada, would it be fair to say they have been generally stable over the past few months and perhaps even moving a little bit higher?

Yes. We've been -- we've seen that spread stay pretty consistent, and we've been able to put those increases through. So I'd say stable to increasing.

Your next question will be from Brad Sturges at Raymond James.

Maybe just starting with the guidance discussion. Just to talk a little bit more about your expectations for occupancy for -- over the course of the year. When you're baking in the sort of over 2% same-property NOI growth, what are you assuming in terms of the occupancy trend, I guess, first half of the year and into the back half of 2021?

So I think overall, we think that we have some improvement to make in occupancy overall for the year. You would have seen that we've got some markets that have carried more vacancy than historically this past year with St. John's a prime example, and we're seeing that turn around nicely with increased focus and some initiatives there, same with the Alberta assets. We're looking at the marketing program to make sure we're making some headway there. And we've got lots of markets that are remaining very stable. When you look at the Maritimes and Ontario as well across most of our portfolio and Victoria, the markets are looking strong. So we think we have an opportunity to make a little bit of an improvement in terms of our occupancy year-over-year.

The first 6 weeks would indicate that?

Yes, right. The trends are moving in the right direction.

That's helpful. And with Nolan Hill, just to go back to that, what would be your time line right now to reach occupancy, stabilization? And does that differ between the 2 types of units?

We were planning that it would take roughly a year to lease-up based on the sort of the overall conditions of Alberta. And we are pleasantly surprised the strength of the leasing activity coming, knowing that it's only been roughly about 6 weeks. So we're hoping that by roughly the beginning of the fall, that will be close to almost -- up to a 90%, 95% occupancy in that property.

Great. And maybe just lastly, just to go back to the questions on acquisitions. Is it fair to say you're within that minimum [indiscernible] just assuming predominantly more tuck-in acquisitions within Atlantic Canada, and you're not assuming, at this stage, more material acquisition activity outside of Atlantic Canada? Or how should we think about that target rate?

Well, I think it's -- we have to sort of, again, take just a sort of an overview that we're still in a lockdown and COVID-19 is still with us. And so the activity that we had last year was a result of really the work that we put in the year before. So we actually had visited those properties. The time it takes the leg, to put them under contract, to do the due diligence, then close, they tended to fall into first quarter of last year, especially the assets out West. And so with this restriction, it's almost coming up to a year that in Atlantic Canada, most of us at this table right here have not traveled once in the year coming up to it. So our expectation is that maybe by third quarter, we'll be able to travel freely throughout Canada. And when we do that, it's going to open up more opportunities, the stuff that we're looking at just by the packages that come to our desk or talking to brokers. So really, what that is trying to say is that for the next 4 months, 5 months until everybody gets their vaccine shot, we're going to be a little bit sort of handicapped getting out there and looking at properties.

Next question will be from Mike Markidis at Desjardins.

Looking back at your Slide 16 and your in-place versus market rent spreads for Halifax figures, if we had to move forward with a cap on -- a temporary cap, I should say, on the renewal side in Nova scotia this year, is this -- should I take this slide to say that you guys would be able to push your rents, generally speaking, up to that mark-to-market opportunity on renewal as well? Or how should I be thinking of that?

Well, I think when we look at that as a balance, that looks at repositioning as well. I think that when you look at 2019, on regular turns in Halifax, we were up 7% last year on regular turns in the Halifax market. So -- and then repositionings, we added -- we were up over 20%. So you look at that balance. I mean I think that looking at that together, not unreasonable, I think 10% is not bad.

Okay. So that does factor in the capital on the unit [indiscernible]?

It does. And the way that that's measuring it is capturing the actual lease per square foot of everything we leased in that month. So some of those have repositioned units, some of them don't. So it's not all repositioned. It's a balanced metric. So it's an indicator. I don't think we would say it's for sure exactly that exact number, but it's kind of looking at that trend over time. So I think that there's lots of upside, and we've been able to achieve that in 2020, and we expect to be able to continue to do so in 2021 on turn.

Okay. Okay. And I guess stated alternately, if you didn't see any change in the market rents, I don't know it depends on what's rolling in versus 10-year lease and all that kind of stuff. But if you were doing sort of that 7% on new leases, would you be prepared to push on renewals that hard? Or is it something where if it's a renewing tenant, you just try and maybe not take everything all at once?

On renewals? I mean we've got -- are you saying once the cap comes off?

Yes, just like, theoretically, if the cap wasn't there, I'm just trying to get a sense of where you've been in overall portfolio-wide sort of -- I mean 10% to 15% is the mark-to-market opportunity you disclosed, which I totally accept and no question. I'm just...

Well, I think that no, most of our growth is going to be coming from the turns. That 2% is -- really when we look at our whole portfolio overall, 2% is pretty close to what we've been doing overall. So I'd say it's going to be a balance, but that number is...

Yes. I mean, Mike, it's going to take this year and a bit of next year in terms of the economy recovering 100%. So it's not lost on us that the people that are living in our buildings mean that there's not going to be a lot of big rents pushed through at this time and not that there ever has been with the 20 years of the history of Killam.

Right. Okay. No, that's a fair comment. Just with respect to Nolan Hill, got your comments on the lease-up. Can you just confirm -- I think the answer is no, but is there an NOI bridge on that property or no you accept the slight drag, I guess, on acquisition?

Sorry, what's that? The NOI bridge?

Like is there an income guarantee inflows?

No, no.

No. No.

Next question will be from Matt Kornack at National Bank.

Just a quick follow-up on that line of questioning with regards to rent spreads. You've kind of held your renewal spreads at around 2%. It sounds like it's essentially self-imposed rent control to some extent there. But what would your sense be in terms of market rent growth in your markets at this point, presumably given wider turnover spreads, market rents are increasing at greater than 2%, your thought on that spread?

Are you sort of asked when you say markets, I mean are you talking like Ontario? I mean there's a...

No, no. I mean the bulk of your portfolio, I guess, Nova Scotia and New Brunswick. I mean are market rents there are growing at obviously more than inflation, but 3%, 4%. Ontario, we've seen significant rent growth for a period of time in the market relative to rent control levels. But I'm wondering, have you seen an acceleration in market rent growth in Atlantic Canada?

It's not an exception, but I'd say continue to what we've been seeing in the last modest growth. And it really -- now that we're measuring this with all the leasing, it depends on seasonality a bit, too. But I'd say more of what we've seen over the last few years. I don't think a huge acceleration, but I think continued modest growth.

Okay. And with regards to your renovation program, it sounds like you're planning on expanding that. So clearly, you're seeing demand for the renovated product. Interested in your thoughts there. Is that 550 suites -- do you think you could do more than that? Or is that kind of the annual cap at which you'd like to operate?

It's our projection for '21. We like to do more than that. We probably would, but there are some limitations. And I think coming out of 2020, there were issues with delivery of suite fixtures and appliances. So that's -- we think there's a chance that, that will also be an issue for us going through 2021. So 550 is a working number, but if we find ourselves with the opportunity, we certainly would do more.

And I guess in terms of the market opportunity, if you could do the full amount, I understand that, that's not possible given turnover, et cetera. But is there demand essentially for the full? I think it's couple of thousand plus units today? Or is the market not there yet and this is a reasonable figure in that context?

Market is not the limit. The demand is there. And if we can deliver more, we could do more.

Okay. Fair enough. Dale, with regards to the OpEx and the COVID-related costs on employment, can you give a sense as to what the dollar figure is there? And should we expect that 2021, there'll be similar type benefits to your employees given that COVID is still here, at least for the first half of the year, but who knows about the second half?

So I think when we look at dollar with what we increase, it's probably around $700,000 to $800,000 for the year in increased costs when we look at that total component. Some of that will carry forward because we've -- we're keeping part of that increase throughout the year. So certainly at the height, in April, May, June, July, the number was higher, but we've kept some of that increase throughout, and we'll continue to do so. So I think that part of that continues, but not to the full extent. And then look at our results for COVID, there'd be other costs that are impacting our results for 2020 with the CECRA for commercial tenants and for the drop in seasonal because of demand. So when we kind of look at all those, those are some other components that once we get through this pandemic, that should -- those should come back.

And I think the discussion here on the MHC side is we're optimistic because the protocols were in place in 2020 that we could open eventually. But I think they're in place now we can open, hopefully. Ontario will be the biggest place where we can start in May and have people attend to their MHC site. So we're optimistic that we can -- we'll have a good year there. It will come on earlier. And then I think the state of emergency in the various provinces is going to be one of the triggers. And once that's lifted with the inoculations going forward, that would also -- we would take a look at the compensation for our staff and adjust accordingly.

Okay. And looking at your residential portfolio, I mean if you look at Q4 '20 versus Q4 '19, I mean renewal and turnover spreads were essentially the same. So is the issue, the gap on the residential portfolio, would it be students in select markets in terms of occupancy at this point? Because it seems like functionally, there's been almost no impact on operations outside of a little bit of occupancy dip.