Killam Apartment REIT (KMPUN) Earnings Call Transcript & Summary

I move the meeting be terminated.

I second the motion.

All those in favor, please signify by raising your hand. [Voting] Against? [Voting] I declare the motion carried and the meeting terminated. Thank you. So that ends the formal part of the meeting today. And we have 2 presentations. The first one is Dale Noseworthy, who'll come up, CFO of Killam Apartment REIT and discuss our financial results from 2022 in the first quarter 2023.

Thanks Phil. I'm pleased to be here to talk about the results for 2022. Despite pressures in the capital markets, last year, multifamily residential fundamentals in Canada were the strongest we've seen in Killam's history. And with that, we achieved record high occupancy and acceleration in rent growth. This translated into strong financial results for the year, including 3.7% growth in funds from operation per unit, 3.3% growth in adjusted funds from operation units -- per unit and 4.7% same-property net operating income growth. We continue to grow our portfolio with $119 million of acquisitions, including properties in Halifax, Wells, Vancouver Island and Waterloo. We ended the year with $4.8 billion in assets. This past year was the largest year for developments since we started the development program in 2010. Killam's completed a total of -- value of $243 million in developments last year, $152 million represents our ownership interest in those assets. The [ two imperial assets ] that we completed were in Ottawa and Mississauga and they're exceptional additions to our portfolio. These -- the development program is a really unique one that distinguishes Killam from its peers and allows us to add assets in our portfolio in the most desirable markets and create value to unitholders. The financial results from 2022 adds to Killam's long-term success of growing earnings on an annual basis. Funds from operations, or FFO per unit, is one of our primary financial measures. And over the last 5 years, we've achieved FFO per unit growth -- compound annual growth rate of 4.2%. We've also grown adjusted funds from operations. AFFO per unit. So AFFO takes out the capital requirements to maintain the portfolio as well as a bit of noise around commercial leasing. But overall, we've had strong AFFO per unit and an improving AFFO payout ratio. So we look at the distribution. So our payout ratio in 2022 was 75% compared to 82% just 2 years earlier. So this means more of Killam's earnings are being reinvested into our growth strategy while we continue to pay out -- a unit -- distribution to our unitholders, which currently sits at $0.70 per unit on an annual basis. Growing earnings from our existing $4.8 billion portfolio is an absolute priority in terms of growing funds from operation per unit and -- one of -- another one of our key financial metrics. So as you can see here, we had strong NOI growth from our same property portfolio. A reminder that our same property portfolio represents those assets that we would have owned prior to the beginning of 2021. So it allows a very -- it's a like-for-like comparison in terms of the performance of that asset base, taking away acquisitions and development activity. So overall, we achieved 4.7% NOI growth, exceeding our target for the year, which was set originally at 2% to 3%. So this reflects strong top line growth at 5%, which we attribute to record high occupancy and increasing rental rates. So rental rates were up 3.5% during the year. This includes 10% increase on rents when units turned and new tenants moved into the properties, which would have been the highest that we have seen historically. We also saw a reduction in rental incentives, and this was having seen Alberta and New Zealand markets come back to life last year, which we were -- where we were previously issuing incentives, which was in line with the market. Same property operating expense, as you can see, at 5.4% were high last year. This reflects the inflationary environment, and in particular, the high cost of natural gas, oil and propane. So those commodity costs resulted in a 13.3% increase in fuel expense for the year. Relatively low increases from our general operating costs and property taxes helped to offset this. We also ended the year with debt as a percentage of total assets at 45.3%. We've been most focused on maintaining a healthy balance sheet, as you can see, with the consistency in terms of our debt levels over the last number of years, and we're benefiting from the conservative debt metrics in this higher interest rate environment. I'm pleased to report that Killam's mortgage financing program remained consistent throughout the volatility of last year with strong support from our lenders and with the continued ability to up finance on mortgage renewals. And we expect this friendly lending environment to continue for Killam, and we expect to further reduce our debt levels in 2023. On Wednesday evening, we released our financial and operating results for the first quarter of 2023, which included funds from operation growth of 4.2%, achieving $0.25 per unit in the first quarter. This growth was primarily attributable to earnings from our same-property portfolio and as well as the lease-up of the developments that we completed last year. Growth in revenue continues to be an important contributor to both our net operating income growth and our FFO per unit growth. You can see that NOI that we achieved in Q1 was 6.3% with 5.4% top line growth. Occupancy for the quarter was a record high, 98.6%, and we achieved 14.3% rent growth on those units that turned in the quarter. With these strong results, we've restated our net operating income forecast for the year to exceed 5%. And that compared to where we started the year in January, where we were forecasting 3% to 5%. So that's a story of strong top line growth as well as natural gas costs having come down in '23 compared to where they were expected to be. So a very strong start to the year, and we look forward to updating you again with our second quarter results in August.

Thank you, Dale. Just to sort of relax the crowd a bit. I'm going to speak for a couple of minutes and my job is to introduce the next group of speakers. But before I do that, I would like to again thank everybody for attending today. I would like to thank the trustees that are here here at the meeting today, and especially everyone at Killam that works there to come here to hear us talk, but also after 23 years, another thank you for everybody that has ever worked at Killam, the dedication. It's been a privilege to be able to witness all the work that has gone on over the years. And so we find ourselves, I think, as a sort of an interesting contra. and really, I just want to sort of frame up a few of my thoughts relative to why we have the NIC presentation that we're going to give. So throughout the year, the one thing that's been constant in our business has been changed. I mean, years ago, basically, it was the beginning of the Internet. It was a difference in the advertising. But fundamentally, what we did was we were a rental housing provider for people. We had assets, and we were renting that space to tenants. And so the idea that over the years because we were public, it grew to the point where our business is very complex. And throughout this, we've been able to adapt over time. But one thing I'm reflecting back is how hard it is to see when you're living through it, the structural changes that are occurring in a business model that you have -- or the larger government influences that you have on your business. And what I'm talking about today is really where we are going from an environmental point of view and it's sort of -- not sort of -- the net 0 path that we're going to follow. And really, when you see this, it's either it could destroy businesses or businesses can embrace it to their advantage. And I know over the last 5 to 8 years as we approach this, inside, we've always looked at it as an opportunity because our business, again, in simple terms, is quite simple. We collect rent on a monthly basis, and we pay our expenses on a monthly basis. We spent a lot of time talking about the size of the revenue, and we know the impact in the last few years coming through COVID and where we are relative to the supply demand imbalance that revenues are going up, there is an affordability issue for a number of Canadians right across the country. But the other part of our business is the expense side and how do we tackle that and how do we go to work every day and think about it. So the idea that we are moving from a -- a basically a 100-year model of fossil fuels to heat to run our buildings to now looking at what is the alternative? Where are the renewable energy sources? And are they going to be able to meet everybody's demand in the years to come. And that is part of our evolution over the next few years. So I look at it and say, there's more opportunity than downside, but it's a very complex business that we are running today. So from that, we have 3 members of the Killam team that are going to hear are going to come up and present. I really need to introduce them quickly. We have Andrew Kent, who is a -- he has a masters in civil and urban planning, and he does a lot of our land use planning and design on the development side of our business. We have [ Aaron Colwell, ] who's a mechanical engineer, and he spends a lot of his time on our existing portfolio, looking at the buildings that we own and -- how to improve their heating systems and everything about the operation of our -- that side of the business and [ James Tilley, ] who is a environmental engineer, and he is overseeing all of our sort of projects relative to solar panel installations and ED installations. So gentlemen, please come up and explain to the world what we're doing.

Thank you, Phil, and good morning, everyone. So we know that more than half the energy atypical building uses is the heat the building. And for years, we heated it with -- heated buildings with oil and gas. And many of those buildings have single pane windows, they leak warm air, they're not well insulated. And so those buildings require a lot of energy to heat. And in the past, we've been able to do so without much consideration for the price of gas or even greenhouse gas emissions. And historically, we definitely have an account for the price of carbon. And of course, times have changed. And so we now build our buildings more efficiently, and we try to conserve energy overall. But our next step in that evolution to -- is to electrify our buildings to significantly reduce or even eliminate the use of oil or natural gas. And so electrification takes advantage of an increasingly clean electrical grid to heat buildings and domestic hot water, thereby reducing our carbon intensity, lowering operating costs and hedging against future carbon pricing. And while it will be easier to just -- in the near term to discontinue to use fossil fuels. We know it's only a matter of time before more stringent building and energy code requirements will actually require electrification. But more than that, it's about doing the right thing for our tenants and for our investors and for the planet. And any steps we take towards electrification are steps towards carbon neutrality, which is our ultimate goal. So if we take the Kay for example, which we opened last year, it uses an electrical geothermal system for heating and cooling. And here, we're targeting 32% reduction in energy use and a 47% -- 47% fewer emissions when compared to atypical building that uses natural gas or Civic 66, which we opened just this spring, which took electrification one step further. So it uses geothermal for heating and cooling. We have additional heat pumps that produce domestic hot water, and we produce some of our own electricity on-site with PV solar panels on the roof. And so you can see the improvement or the evolution -- in fact we're now aiming for a 52% reduction in energy use and 67% fewer emissions. Despite the success of those 2 buildings, the Kay and Civic 66, both of those buildings still require small gas boilers to supplement the electric system -- but since electrification technology is evolving so quickly. It means that we can now target a completely electric building. So in Waterloo, at the cart, which we've just -- which is just now under construction, about to come out of the ground, we first said great. We will do another geothermal system. But the geothermal system, of course, relies on deep wells that deposit heat in the winter and bring it back in the summer. And the city of Waterloo can seize that damage groundwater. So they said, "No, you're not allowed to drill your wells -- so we said, okay, well, on the option 2 -- we decided that we would design a variable refrigerant flow system, which is an air-to-air heat pump system for heating and cooling. And then we were going to combine that with a specific heat pump that can recover heat from the buildings wastewater and use that to help heat the domestic hot water. But again, the city had an unfortunate interpretation of the Plumbing Code, which we've appealed, but they said the wastewater heat pumps weren't going to be permitted in the city. So we're persistent. We kept going. So we'll stick with the VRF system for heating and cooling. And now we're specifying a specialized air to water heat pump to heat the building's domestic hot water instead of the wastewater heat pump. So nevertheless, after a lot of difficulty, obtaining municipal approval, which seems to be a trend. I'm proud to say that Carrick will be Killam's first completely electrified new development in Ontario. But as you can see, it's not easy. And despite the tremendous need for these electric solutions, municipal approvals are slow to catch up. And finally, just before I finish, I just want to provide an example of electrification as well as future proofing and it's right next door. And hopefully, some of you will be able to visit after this meeting. But it's the governor here in Halifax. And so the governor is unique in that it's small, it's only 12 units. And it allows us to test some new technologies to both electrify as well as future-proofing the building. So we can imagine how this building is going to operate 10, 20 years old. And so for example, each unit has its own condenser on the roof connected to the unit's electrical panel, and that ensures that tenants pay for all of their heating and cooling in their units. We have WiFi connected thermostats that can be programmed to tenant schedules and adjust it remotely in order to save energy. We even have plugs in each unit connected to Killam's generator and those plug to power tenants refrigerators. So tenants won't lose perishables during climate change induced power outages, their WiFi will work, and they'll be able to charge their smart devices. And all of the buildings, parking spots will be ready for Level 2 EV chargers. So when people move in and they bring their electric vehicles, it will be as simple as installing a charger and they'll be ready to go. And those are just a few examples of the modernization that we're trying there. We're trying to innovate. We're trying new things. We're figuring out electrification. And that allows us to take some of those lessons learned in the development portfolio and then test them and then use them in the larger portfolio. And to talk more about that side of the thing is my colleague, mechanical engineer here in Killam.

Thank you, Andrew. Good morning, everyone. So I'm going to discuss how we're taking some of the lessons that we're learning from our new constructions and applying them to our existing building portfolio. And as you're probably aware, our portfolio, like everyone else has a substantial reliance on fossil fuels. So about 44% of our total energy comes from fossil fuels. So this is used to heat both our buildings but our domestic hot water. We have explored alternatives to these, namely hydrogen energy and renewable natural gas. But we just found that they're not market ready, and they won't be available in fishing quantities to meet our needs in time to decarbonize our portfolio. So this leads us to an electrified solution. And the federal government has mandated a net 0 electrical grid across Canada by 2035. So we can look to this as a source of a clean energy that we can apply to our buildings. And we can apply new heat pump technologies at our buildings similar to what we're doing at the new construction. So it should be noted though that applying these to older buildings is a little more difficult than a new building because the old buildings don't meet today's construction standards. So we will continue to maintain our natural gas systems, and that will carry the load during extreme periods of cold in the winter time. So take a look at it as an example project. This is Lakefront Apartments St Dire with Nova Scotia. And it's one that we're conducting a feasibility study on now. And it's a group of 32 buildings, former military accommodation, which now serves as affordable housing, and it was built in the mid-1950s, which as you can imagine, differs greatly from the construction standards that we use today. So over the last 10 years, Killam has upgraded the heating plants and implemented high-efficiency natural gas systems. We're now looking at a wholesale retrofit of the building leading towards electrification. So this would include upgrading both the roofs and the walls to today's performance standards for insulation as well as new windows. Other things like LED lighting, we're actively doing at most of our properties already. We would implement that as well as well as low flow plumbing fixtures, which are not necessarily an energy measure, but they're a great water saving conservation measure. Once we've got the building envelope upgraded, we can look at applying a low-temperature heating systems, which enables the use of heat pumps in older buildings. And this would be an air-to-water heat pump and would provide probably about 90% of the energy required. So we see a 90% reduction in gas consumption at the buildings and an overall 50% reduction in energy use. So building on the heat pump methodology, we can look at 2 applications of heat pumps for 2 different types of buildings. So in larger buildings where we don't have balconies and they're heated by baseboard hydronic heating, we can look at applying a series of heat pumps in a cascade system which can produce a temperature of water that's able to heat this existing building. So we're doing a feasibility study right now on Queen Pool Tower and Halifax. And the results of that study indicate that we'll see a 40% to 50% energy reduction for heating, and again a 90% reduction in gas consumption. In billings where we have balconies, which is a very common type of building in the portfolio, we can look to the residential market. And it's very common to have many split heat pumps installed in single-family homes in Atlantic Canada, and they're starting to broaden across the rest of Canada as well. These can be applied as a primary source of heating and cooling in these type of buildings. And we would integrate them with the existing heating systems. So we still use that as a backup during extreme periods of cold. We probably see greater than a 50% reduction in energy consumption to both heat and cool lease apartments. But you must understand in the older buildings, it probably will require an electrical upgrade because they've been designed in the past to operate on a fossil-fired system for heat and the electrical systems do require an upgrade to implement heat pumps across the building. Finally, we look at domestic hot water. Over the past 10 to 15 years, Killam has implemented a number of solar thermal collection systems to preheat hot water in our buildings, and we see an example here at 7 Parker Street in Dartmouth. We'll continue to maintain and operate these. They provide a good value, but technology has evolved since these have been applied at our building. And now we look to the heat pumps. So Andrew mentioned a couple of ways that we're using heat pumps at our new construction. We can also use air source heat pumps to preheat our domestic hot water in existing buildings where we have the space to do so. In any buildings where we apply geothermal energy, a water to water heat pump makes really good sense. And finally, we're still exploring the wastewater heat pumps as a type of system to reclaim the energy that's discharged from the building and serve our needs for new hot water. And with any of these technologies, we expect to see again a 50% cost reduction to heat the hot water as well as 250 to 350% system efficiencies while doing that. So I'll introduce [ James Tilley ] now, who will discuss some of our solar and electric vehicle deployment.

Hi, everyone. Good morning. As we just spoke about, we do have various initiatives in place to help decarbonize and electrify our new construction buildings as well as our existing. But we also know that our residents, both present and future are interested in doing their part as well. And that is part of why we are targeting the installation of an additional 400 or more Level 2 electric vehicle charges to about 50 properties within Killam's portfolio. Again, these are level 2 charges, so they can charge an electric vehicle in roughly 8 to 10 hours. And presently, we have 183 Level 2 electric vehicle chargers deployed across 27 properties. The additional installation of these 400 Level 2 chargers is in the ballpark of about $2 million worth of investment, but we're proud to say that we do have a project funding partner. It's Natural Resources Canada, and they are helping to fund 50% of this initiative. Because of this, we're able to target an ROI, return on investment of roughly 8% to 10%. They're actually now being required to be electric vehicle charger ready at all of their parking stalls. So this change is coming. This is -- we're preparing for this. So we're adding a lot of electricity consumption to our portfolio, to our buildings when we're going the electrification route, but we also want to produce our own electricity as well, and part of this can be done on site through solar PV installations. To date, we have 18 properties with solar PV across our portfolio. And the production is roughly 1,800 megawatt hours per year, and this translates to a utility cost offset of almost $0.25 million. So that leads to a simple ROI of around 7%. And what I mean by simple ROI is that, that's using our today's costs with the electric utilities. So as they inevitably increase, that ROI is going to improve. Distribution of these solar arrays is across 4 regions, 4 provinces, Nova Scotia, Ontario, Alberta and most predominantly in Prince Edward Island. And we targeted a more heavily deployment in Prince Edward Island because of their higher electricity costs. So this improves the ROI on that investment. These 18 properties are able to supply roughly 4% of our operationally controlled electricity cost. And of those that have been installed for just over a year, it's around -- it's 12 properties that have been installed for that long. We're seeing 94% of expected production, which we are very pleased to see. So to show Killam's commitment to renewable energy. And we have set a target on utilizing 10% of renewable energies -- renewable energy by 2025 to offset electricity to our properties. But this isn't as easy as installing solar PV to each and every rooftop that we have. There are many considerations highlighted -- are a couple of them that I think would apply to a lot of what Andrew talked about on the new development side, but also [ Aaron, ] on our existing portfolio. And some of those considerations are the cost of electricity, like I had touched on with our PPI solar deployment, the carbon intensity of that utility. So if we deploy solar in a region with a more carbon-intensive grid, it's going to offset more carbon emissions. Available rebates, those really help draw -- drive the return on investment for those projects and then site capability. And what I mean by site capability, specifically to the solar sense would be the orientation of that property is their space on the roof for solar? What's the electrical size coming into the building and those sorts of things. So there's lots to consider. We really want to make sure that we're really making the right decisions when we are doing these investments, especially around these projects. So again, I just want to drop that home. And at this point, I'd like to pass it back to our CEO, Philip Fraser for closing remarks.

Thank you, James. My closing remarks are basically -- the floor is open for any questions. We're all here, senior management, the team over here in terms of the renewal, and we've got one question from Steve.

So I had one question about the cost of the Level 2 charging station. So he -- it was pointed out that it's a cost of $2 million for 400 units, which is about $5,000 a unit. And I was -- just wanted to point note that I put one into my house for $500, but about $300 or $200 installation, and it was in a remote [ grad ], had run underground wire this sort of stuff. So I'm just wondering why the cost is $5,000 or not $500?

Okay. Great question. I think you got an excellent deal there. So we have -- in a lot of our parking garages, we have to do, whether it's 3 phase or single phase. We'll have to do various upgrades to the electrical system to allow us to actually receive those charges. And we also have to pay and add an expense to do something called the capacity test, which is to make sure that there's actually space electrically to add the chargers. So we have to do a bit more design than you would for a typical just residential install as well as the runs for the cabling. It can be quite long when you're trying to get a good dispersion throughout the parking garages. So there is a higher infrastructure costs as well.

I mean as an example, building over in [ Dartmouth ] 175-unit building, putting in 10 EV chargers, we equate from the energy consumption, the equivalent of what we're using today on our meter. It's a lot of extra energy when you get past 1, 2 and especially most department buildings, they are basically on a billing system different than a residential house. We have demand charges. So there's a little -- a lot more in terms of the complexity of looking at these buildings. And then you go -- in every -- we deal with 33 different electrical utilities across the country. Everyone has a different billing system and a different standard relative to hooking up and adding more to the grid. Any other questions? If not, again, thank you very much for attending today. And we will be around here for any other questions, but just in the formal part of our meeting. Thank you.