Killam Apartment REIT (KMPUN) Earnings Call Transcript & Summary

No. I declare the resolution carried and Ernst & Young LLP the appointed auditors of the REIT, to hold office until the close of the next Annual Meeting of Unitholders at such remuneration as may be fixed by the trustees and the trustees to be authorized to fix such remuneration. That's a full one. The next item of business is an advisory note on Killam's approach to executive compensation as set forth in the management information circular in respect to this meeting. I will ask Robert Richardson to move and Dale Noseworthy to second the resolution on an advisory basis, the approval of Killam's approach to executive compensation.

Mr. Chair, my name is Robert Richardson, and I move that on an advisory basis and not to diminish the role and responsibilities of the Board of Trustees, that the unitholders accept the approach to executive compensation disclosed in the management information circular in respect of this meeting.

Mr. Chair, my name is Dale Noseworthy, and I second the motion.

Thank you both. You've heard the motion. And if there is no discussion, I ask for those in favor to signify by raising their hand. [Voting]

Any abstentions? [Voting]

I declare the resolution carried. As there is no further formal business, may I please have a motion terminating the meeting.

I move the meeting be terminated.

I second the motion.

Thank you, Dale. All those in favor, please signify by raising your hand. Any contrary minded? I declare the motion carried and the meeting terminated. Thank you for your patience on this part of the meeting.

Turning you back over to us. Thank you, Jim. First off, to talk about our financial results from last year and the first quarter that we released last night, is Dale Noseworthy, CFO.

Thanks, Phil, and Jim. I'm pleased to be here today to provide a summary of Killam's financial results for 2023 and for the first quarter of 2024. Starting with 2023. We had a strong year of financial and operating results as reflected in 3.6% growth in FFO per unit and 4.3% growth in AFFO per unit. There were a number of highlights from last year. The first was generating NOI growth for our same-store portfolio of 7.8%. This was well above our original target for the year of between 3% and 5%. This is an important measure of our performance as it represents the year-over-year change from the majority of our $5.2 billion portfolio. The second highlight was strengthening our balance sheet. Debt as a percentage of total assets decreased from 45.3% at year-end 2022 to 42.9% at year-end. In addition, Killam's variable rate debt reduced by $150 million. In the current environment, we are longer -- for higher for longer on the rent interest rate front is very much the case. Our conservative balance sheet is improving its value. 2023 marked the beginning of Killam's annual disposition program. Killam completed $169 million of dispositions last year, focused on noncore assets and properties where long-term growth potential was not as strong as other assets. Traditionally, we have not been an active seller, but Killam has evolved its strategy to active recycle a portion of its portfolio on an annual basis. This increases our capital flexibility and allows for the redeployment of net proceeds toward other value-enhancing opportunities. Development is one of those opportunities. And last year was a busy one, with $94 million of developments completed, including Civic 66 in Kitchener and The Governor right next door to us here in Halifax. In addition, Killam purchased the remaining 90% interest in Nolan Hill Phase 2, adding 234 new units to our Calgary portfolio at an attractive yield of over 6.5%. We're an experienced developer, and we've built over 2,000 units since we started developing 14 years ago. Killam development program enables unitholders to benefit from value creation, from the development and elevates the quality of our portfolio. The next slide highlights the components of our 7.8% NOI growth last year. Top line gains of 5.5% was a key contributor to our performance. With market rates accelerating across the country last year, we captured a 16% increase in rents when units turned and new tenants moved in. Rent increases for the 81% of tenants that stayed in the units increased by 2.8%. Overall, Killam's apartments were up 5.4% -- rents were up 5.4% in 2023. Operating expenses were up 1.6% last year as property tax savings partially offset energy cost increases and inflationary pressures across our operating expenses. As mentioned, we're very pleased with 7.8% NOI growth as well as a 140 basis point expansion in our operating margin. All of these factors from 2023 set us up well for a strong year ahead. Yesterday evening, we released our financial and operating results for our first quarter of 2024. We generated funds from operations of $0.26 per unit, up 4% from $0.25 during Q1 2023. Killam recorded net income of $127 million including $160 million in fair value gains associated with its investment property portfolio. It was a very strong quarter on the operating standpoint, with same property NOI up 10.3%. This marks our 40th consecutive quarter with positive NOI growth and the highest quarterly NOI growth since Q1 2010. With continued growth in market rents, revenues were up 5.9%. During the quarter, operating expenses were down 0.7% as we benefited from year-over-year savings in natural gas, following a mild winter and low commodity prices. Expense management programs across the portfolio were also reflected in low expenses in the quarter. Following a strong Q1, I'm pleased to report that we increased our NOI target for our same property portfolio to over 8% for the year, up from over 6%. From a balance sheet perspective, we ended the quarter with debt levels further reduced from year-end. Debt as a percentage of total assets was 42.1% at March 31, an 80 basis point improvement from December 31, and the lowest debt levels in Killam's history, a very strong start to the year. I'll now pass the presentation on to Philip.

Thank you, Dale. I get one slide, and this is the last one. But I find it's -- I'm reinforcing a lot of the ideas and information that Dale just presented. But I'm doing it in a way that we look back actually over the last 3 years. So what I have in front of you is our 2024 corporate strategy and the goals for the year. And these are the key sort of pieces of the strategy that we work towards on every year. But what's interesting is that up there as well is what our goals were in 2022 and 2023. And I would have been here 2 years ago presenting these and last year. And when you start to look at them, you say, well, a lot of things aren't really changing, which is good because we have had a very consistent growth strategy for many years, and we continue to execute on it on a yearly basis. So the first one that Dale mentioned was the earnings growth. If you look at it from 2022, I mean, we thought -- and we started the year between 2% to 3%, ended up with 4.7% same-property NOI growth. Last year, we started with a 3% to 5% and ended up with 7.8%. And this year, the first -- coming out of the first quarter at the end of February, we said above 6%. And after the first quarter now, we've advised it to move it up to 8%. And I guess the question is, why? And you look at it, it just is another example or indicator of how strong the fundamentals are in our business. Also, the fact that adding to it, there is a shortage of housing, and that will continue for a number of years. So all the things we do, the most important one is to look at our portfolio that we own and see how we can improve it, how we can reduce operating expenses. And then basically, the market takes care of itself relative to where rents are going. Because we're just one little tiny component in terms of the number of units we own versus the market in Canada or in any market that we're in. The next one up is capital recycling. So for the first 20 years, all we were -- our sort of strategy for growth was to grow, to acquire, to build. Back in 2022, the objective was to buy $150 million of acquisitions. We ended up just slightly less than that, that year. But that was sort of the year coming off of COVID. Everything was opening up. 2023, the beginning of it, we basically said we should be looking at our portfolio, looking to see what we could sell. Take that capital, recycle it, move it maybe to some other part of the country, and that's what we started doing. We went through, and again, we ended up realizing that we had owned assets for many years in locations that there was no other growth coming. And so for instance, we had assets in Cape Breton, we sold the 2 assets that we own. So we're out of that small market, and also even in Miramichi up in New Brunswick. So that was something that we said, it's timely. We have to do it. That year, last year, we actually sold $170 million like Dale said, but we ended up buying $65 million, and that was through an acquisition part ownership. This year, we're basically saying we'll continue that recycling of capital. And where -- I guess you'd asked where are the acquisitions in terms of growth? And just like last year, we basically said, you know what, now is not the time, where interest rates are, we can just wait, they'll come back, we'll be part of that sort of program and like the other sort of apartment REITs, we'll grow through acquisitions, but not in the foreseeable time. Next up is geographical diversification. And that's been an important one. And of all of them, you can look at it, and we're just slowly moving it up because it takes actually quite a bit to sort of change that. So many years ago, we recognized that, and I know I've said this before in front of this audience in past years. We knew that we started life as a consolidator of apartments in Atlantic Canada, where our competitors were consolidating apartments in other parts of Canada. And around 2010, we realized that we should be moving some of our assets out of Atlantic Canada from a growth point of view and going into the other markets. So we've been doing that ever since and we find ourselves -- we're getting close to about 40% of our assets outside Atlantic Canada. And the biggest reason to do this is to be diversified. I mean, I'm sure you've heard that term used many times, especially if you're talking about owning stocks, you diversify, you don't have all your eggs in one basket. And essentially, in this country, over the years, there's always been one region outperforming another region. And the sooner we get more balance, the better we will be from a sort of a solid growth with no sort of slant one way or the other in terms of being outperformed by another part of the market. So we continue to do that. And we're doing that from a secondary point of view on some of these other strategies, which would be basically recycling the capital. Our developments are more focused outside Atlantic Canada today, everything moving towards that more balanced. And the first big step will be 50-50, 50% of income coming from Atlantic Canada, 50% from outside and eventually going 1/3, 1/3, 1/3, Atlantic Canada, basically Central Canada and then 1/3 from out West. The development portfolio that sets us apart. Many years ago, we recognized that from a growth point of view, from a quality of growth, we should be involved in the development side of the business. We've been doing it for a number of years. Really, it only ever contains about 4% to 5% of our balance sheet at any one given time is still small, but it has an extra important side to it today relative to where we are with a shortage of housing. The development also allows us to sort of see where trends are going. Because again, like everything, technology, innovation is happening, and we want to be a part of that in terms of building operating systems, the materials, from windows, everything like that. And especially when it comes to how we heat and cool our buildings, which, again, we talked a lot about it last year, the electrification of our portfolio, meaning getting off of fossil fuels and going to cleaner energy. The other part about development is you look at it, everything -- everybody can relate to this, if you own a home, time is not your friend in terms of -- there's deferred maintenance and everything starts to age. And eventually, a lot of the buildings that are in Canada today, they will become obsolete. And really, this last 5 to 6 years, it may be a little bit longer, has really highlighted that in terms of where we're going from a green economy and what the future is going to look like. Back to our balance sheet. Dale mentioned a couple of times. And essentially, it's as simple as this, less debt, it's easier to run and manage the company. What can really kill you is overleveraged or being in a situation where you can't meet your obligations from a debt point of view. And real estate is one of those asset classes that relies heavily on debt because you don't sort of run -- because of the large dollar -- volumes that it entails. So over time, I mean, years ago, we used to be about 60% leverage. We're working it down. And really, we are following the trend from our peers, and we're into the low 40s and the lower we can get over time, the better. And then the last part about it is sustainability investment. So there's lots of talk about where we're going from big picture on the economy. But in our business, and again, I've said this before, it fundamentally makes a lot of sense because every dollar we can save on expenses is another dollar earned. So all the stuff that we do, whether it's geothermal, solar, basically -- and solar panel install, it all adds to the bottom line for us. So we're committed to spending money in that side of the business to reduce our operating costs, to reduce our greenhouse emissions and we're doing that. So really, to sum it up, if you look at it, you can see a strategy that changes a little bit, but not a lot. And I think that's one of the strengths that we had, that we are consistently executing on what we say we're going to do. But what's changed in the landscape, even in the last 24 months and even looking out at this year coming. So the first thing would be population. Last year, 1.3 million new Canadians. We've gone from 39.5 million to 40.8 million people and probably adding the year before, we're close to 2 million new people living in Canada. Interest rates in the last 24 months. Starting in March '22, the Bank of Canada rate was 1 quarter of 1%, they raised it 10x in the next 18 months to now where it is, it's 5%. The cost to everybody, whether you're an individual, a company, has been gigantic relative to the cost of debt that's floating variable. New supply. Where has that gone? Really, it takes a lot to ramp up to the traditional amount of supply that Canada produces. We've averaged probably in the last -- on a rolling average over the last 10 to 15 years between 200 to 240 units a year. And all indications are is we need a lot more than that. And then inflation, it's still around. Anytime you go anywhere, you know that stuff is costing more. And we feel that in terms of all the expenses that we have. But finally, in the last 24 months, what really has changed is the focus of the federal government, and that's been positive. They are now really focused on housing policy and increasing the supply. It started before the budget. One of the big things they did was take off the HST, the tax, plus a lot of the provinces followed to get the combined HST, which reduces the overall cost to build new supply. That's positive. The Housing Accelerator Fund, money that they said they will give to the cities, the municipalities, if they will change the way that they look at density and zoning and they make positive changes to allow for more density and more zoning, they're going to give them money, in which Halifax is one of the cities that they've done. Increase the capital cost allowance on a go-forward basis. It's up to 10% versus 4%. And then another one that really is pretty interesting, is the Apartment Loan Construction Program. So just to back up, typically, if we borrow money, if you buy something, you basically borrow money from an institution and it's a term, financing arrangement where you lock in the interest rate, you already have cash flow and life goes on. You get a little bit more complicated when you start to build because the typical way that you do it is you range a construction loan on the period of development. And when the asset gets stabilized, you turn around and take a mortgage from a lender. It could be the same lender or it could be another lender. But that first part of it, the construction, the rate floats, meaning that it changes or can change any month. This program basically says, we will lend you money, and we will -- it's our money, not another financial institution. It's Bank of Canada's money, and we'll basically fix it throughout the construction period, and so you know exactly the cost of your debt going into it. We will reduce our fees and basically -- and in return, you will put some component of this in the affordable bucket. So summing it up, what do we know? Operating costs are going to continue to go up. The interest rate will come down, but I believe it's not going to come down as low as it was, but any amount will be a benefit to all of us. The fundamentals in this industry have never been stronger, which is very positive for us. And you have a company that is focused on doing the right thing in this sector. We have an incredible group of people that work here. We'll do our part to help solve the housing shortage. And basically, onboard drink. We've never seen opportunities like this. So really, it's a really exciting time to be part of this. So thank you.

Thank you, Phil, for the presentation. And thank you, Dale, for the presentation. Like you say, lots of opportunity there, Phil. Now I get to go off script for a minute, which might scare Phil but we'll be okay. First of all, I I'd like to thank the members of the Board that have bestowed upon me the Chairmanship of the company. 25 years ago, 8 of us threw in an amount of money and formed an Alberta capital pool, that very small pool of money now has a company with a balance sheet with $5.2 billion in assets. It's an impressive job, Phil and Rob, you've done. And it speaks to the stability that you've given this company because I see all the managers that have been here for years and years that worked for you guys. And I think that's a really impressive thing you've done. So thank you for that. The company has only had 3 Chairman in its 25 years. So like I say, I feel very privileged to be the third. But I'd like to thank Bob, who is the longest-serving one and took a big chance on a couple of guys a long time ago and sold us his first couple of buildings. And took some shares in lieu of cash, brave move, but it was a good one for him. And I hope you're watching, Bob, and I just want to thank you for your years on the Board and your many years as our Chairman, and I wish you best in the future. So thank you, Bob. Last, I always think about who does the job every day. And I know none of our buildings' supers are here today, but we have over 200 of them who look after our thousands of employees -- or tenants every day. And once in a while, I go secret shopping, and my main test is, is the lobby clean? So whenever I'm driving by a Killam building, whether it's in Calgary or Halifax, Dartmouth, Moncton, I always stop and then just have a peek of the lobby. I've never had to call Phil yet, so. So to our 200-plus supers, I just want to thank you guys every day, that carry out the interaction with our tenants. I know you're not here, maybe some of you are watching, but hopefully some of you will pass on my thanks to them. And last, I'd just like to thank you all for coming. I think, as Phil reiterated, we have an incredible future ahead of us. The last 3 or 4 years have been difficult for a number of reasons, but that speaks to the kind of management the company has had. We just produced one of the best quarters we've ever had in a tough interest rate environment for this kind of a company. But I would say the winds change after a while and usually they blow longer more in your favor than they blow against you. So I see a great future for the next 10 years for this company, and pleased to be your Chairman for the next few years. Thank you.