Killam Properties Inc. announces second quarter 2013 results and $40 million acquisition in downtown Toronto

HALIFAX, Aug. 7, 2013 /CNW/ - Killam Properties Inc. ("Killam" or the "Company") (TSX: KMP) announced its financial results for the second quarter ended June 30, 2013.

Second Quarter Highlights

• Generated funds from operations ("FFO") per share of $0.18, compared to FFO per share of $0.19 during Q2 2012.
• Same store rental revenue increased by 1.7%.
• Same store net operating income ("NOI") decreased by 0.6% following increased vacancy costs and a 5.1% increase in operating expenses driven by the high cost of natural gas in Nova Scotia.
• Recorded net unrealized fair value gains of $20.2 million on the Company's investment properties, contributing to net income attributable to common shareholders of $23.2 million.
• Completed $26.8 million in apartment acquisitions at a weighted average capitalization rate of 6.1%.
• Completed three apartment developments, adding 235 units fair valued at $61.7 million to the Company's portfolio.
• Reduced the weighted average interest rate on mortgage debt to 4.25% from 4.34% at March 31, 2013.
• Debt levels remain conservative at 51.9% of total assets.

Highlights from the Six Months Ended June 30, 2013

• Generated FFO per share of $0.32, compared to FFO per share of $0.34 during the first two quarters of 2012.
• Same store rental revenue increased by 2.2%.
• Same store NOI decreased by 0.9% due to high natural gas costs in Atlantic Canada.
• Completed $64.3 million in new acquisitions, including $59.2 million in apartment acquisitions at a weighted average capitalization rate of 5.9%, and $5.1 million in land for future developments.
• Completed four apartment developments, adding 282 units fair valued at $69.6 million to the Company's portfolio.

Financial Highlights (in thousands, except per share amounts)

For the three months ended,	June 30, 2013		June 30, 2012		Change
Property Revenue	$34,506		$33,679		2.5%
Net Rental Income	$20,225		$20,331		(0.5%)
Fair Value Gains	$20,199		$14,930		35.3%
Net Income Attributable to Common Shareholders	$23,238		$18,558		25.2%
Funds from Operations	$9,478		$9,178		3.3%
Funds from Operations per Share	$0.18		$0.19		(5.3%)
Shares Outstanding (weighted average)	54,029		49,623		8.9%
For the six months ended,	June 30, 2013		June 30, 2012		Change
Property Revenue	$67,758		$66,388		2.1%
Net Rental Income	$38,394		$39,259		(2.2%)
Fair Value Gains	$24,490		$21,390		14.5%
Net Income Attributable to Common Shareholders	$32,206		$28,640		12.5%
Funds from Operations	$17,290		$16,640		3.9%
Funds from Operations per Share	$0.32		$0.34		(5.9%)
Shares Outstanding (weighted average)	53,952		49,494		9.0%
As at	June 30, 2013		Dec 31, 2012		Change
Total Assets	$1,526,859		$1,443,128		5.8%
Total Liabilities	$916,797		$854,692		7.3%
Total Equity	$610,062		$588,436		3.7%
Total Debt to Total Assets	51.9%		51.6%		30 bps

 

New Toronto Acquisition Completed in July 2013

On July 31, 2013, Killam acquired 1033 Queen Street West, a newly constructed 8-storey mixed use building in downtown Toronto containing 21,242 square feet of street-level retail space and 179 apartment units. The average apartment rent is $952 per month, including 91 units which are designated as affordable units. The remaining units are rented at market rates. The apartment units are fully occupied and the commercial space is 90% leased with high-quality, national tenants on long-term leases with step-ups. The average rent for the commercial space is $33 per square foot net. The building includes 121 underground parking stalls and it is on leased land with a 50-year term. The purchase price of $40.0 million ($145,000 per rental suite and $659 per square foot of commercial space) represents a capitalization rate of 5.5% and was satisfied with a combination of a new fixed mortgage, a vendor take-back mortgage and cash on hand. This purchase brings Killam's total acquisitions for the year to $104.3 million, including $99.2 million in apartment acquisitions and $5.1 million in land for future development.

FFO per Share of $0.18 in Q2

Killam generated FFO per share of $0.18 during Q2 2013, compared to $0.19 during Q2 2012. Lower interest costs and earnings associated with new acquisitions were offset by high natural gas costs, a reduction in NOI in the MHC portfolio following the May 31, 2012, disposition of twelve properties and an 8.9% increase in shares outstanding. The equity raised in late 2012 included funds to support developments and acquisitions, the full benefit of which was not realized during the second quarter. Three developments were completed in Q2 and are expected to contribute positively to FFO per share during the second half of the year. The timing of acquisitions completed during the first half of the year also contributed to a short-term decline in FFO per share. The $0.02 decrease in FFO per share realized in the first half of the year is attributable to the same explanations as noted for the quarter.

Same Store NOI Growth Impacted by High Utility Costs

Killam experienced a 0.6% decrease in NOI from its same store portfolio during Q2 2013 as high natural gas costs in Nova Scotia continued to offset revenue growth, as they did in Q1. Consolidated same store results for Q2 and for the first two quarters of the year are summarized below:

Consolidated Same Store NOI (in thousands)
For the three months ended,		June 30, 2013	June 30, 2012	Change	% Change
Property Revenue		$31,490	$30,974	$516	1.7%
Property Expenses
	Operating Expenses	5,621	5,492	129	2.3%
	Utility and Fuel Expenses	3,699	3,297	402	12.2%
	Property Taxes	3,636	3,533	103	2.9%
Total Property Expenses		12,956	12,322	634	5.1%
Net Operating Income		$18,534	$18,652	($118)	(0.6%)
For the six months ended,		June 30, 2013	June 30, 2012	Change	% Change
Property Revenue		$62,395	$61,081	$1,314	2.2%
Property Expenses
	Operating Expenses	10,633	10,428	205	2.0%
	Utility and Fuel Expenses	9,239	7,989	1,250	15.6%
	Property Taxes	7,122	6,954	168	2.4%
Total Property Expenses		26,994	25,371	1,623	6.4%
Net Operating Income		$35,401	$35,710	($309)	(0.9%)

 

Killam's growth in revenue is attributable to increased rental rates over the last year, up 2.4% from June 2012 to June 2013, partially offset by increased vacancy. This top-line growth was primarily offset by a 5.1% increase in operating costs in the quarter, driven primarily by higher natural gas costs. As seen in Q1 2013, the cost of natural gas in Atlantic Canada has been higher than normal due a temporary shortage of gas production off the coast of Nova Scotia. The cost of gas moderated in New Brunswick in Q2, but has remained higher than expected in Nova Scotia during the second quarter. Subsequent to Q2 the cost of natural gas in Nova Scotia declined to $6.95 per GJ in July and $5.93 in August, compared to $8.85 in June.

Consolidated Occupancy of 95.3%

Killam's consolidated occupancy was 95.3% in June 2013, compared to 96.3% in March 2013 and 96.4% in June 2012. The occupancy and average rents for apartments and MHCs are shown in the following table:

		June 30, 2013				June 30, 2012
		Units	Occupancy	Average Rent		Units	Occupancy	Average Rent
Apartments
Halifax, NS		4,970	95.0%	$914		4,821	95.6%	$871
Moncton, NB		1,512	93.0%	$818		1,426	94.4%	$789
Fredericton, NB		1,394	93.3%	$894		1,293	94.8%	$834
Saint John, NB		1,143	90.3%	$750		1,143	93.4%	$738
St. John's , NL		813	96.5%	$837		742	98.2%	$755
Charlottetown, PE		906	94.3%	$892		687	95.3%	$860
Ontario		1,180	93.5%	$1,292		834	97.5%	$1,459
Other Atlantic Locations		431	96.5%	$785		448	95.3%	$765
Total Apartment Portfolio		12,349	94.0%	$910		11,394	95.4%	$874
MHC Portfolio		7,407	98.0%	$227		7,397	98.3%	$221
Total Portfolio		19,756	95.3%			18,791	96.4%

 

Killam's apartment portfolio was 94.0% occupied at the end of the second quarter, compared to 95.4% at June 30, 2012. Killam typically experiences its lowest occupancy at the end of the second quarter followed by its strongest occupancy in September. Decreased occupancy levels year-over-year reflect increased rental supply in certain markets in Atlantic Canada, specifically in Halifax, Moncton and Charlottetown, and softness in the Saint John economy. Partially offsetting increased supply is stable demand levels for rental units fuelled by population growth in Atlantic Canada's urban centres and an aging population base with a propensity to rent. Killam's occupancy level in Ontario reflects the short-term effect of repositioning the buildings and tenant base of a portfolio of properties acquired in Ottawa in September 2012.

Acquisitions in Q2

Killam completed $26.8 million in acquisitions during Q2 2013, including $18.7 million for a 172-unit apartment portfolio in Charlottetown and $8.1 million for a 48-unit newly constructed property in Moncton. Including these previously disclosed acquisitions Killam completed $64.3 million in new acquisitions in the first half of the year, comprising $59.2 million in apartment acquisitions at a weighted average capitalization rate of 5.9%, and $5.1 million in land for two future apartment developments. Killam's acquisition target for the year is $75 to $125 million.

Apartment Developments Completed

During Q2 2013 Killam completed three new developments, adding 235 new apartment units to its portfolio. These three properties, in Halifax, St. John's and Fredericton, are currently 62% leased (on average) and are expected to contribute positively to earnings and cash flow during the second half of the year. The St. John's building is fully leased and Management expects the Halifax and Fredericton buildings to be over 80% leased by the end of the year. Killam expects to begin two new development projects during the second half of 2013, including one in St. John's, nearby the recently completed Bennett House, and one in Cambridge, Ontario.

Debt Equal to 51.9% of Total Assets

Killam's balance sheet remains conservative with debt as a percentage of total assets at 51.9% at June 30, 2013, compared to 51.6% at December 31, 2012. The Company's target level of debt as a percentage of total assets is between 55% and 65%. Killam's interest coverage ratio for the last twelve months improved to 2.17 times, up from 1.98 times at June 30, 2012 and 2.09 times at December 31, 2012. The Company's weighted average mortgage interest rate also improved to 4.25%, down 23 basis points from 4.48% at December 31, 2012.

Management's Comments  

"We're pleased to have added a total of approximately $169 million of new apartment properties to Killam's portfolio so far this year, including $70 million in new developments completed in the first half of the year, and $99 million in apartment acquisitions," noted Philip Fraser, Killam's President & CEO. "The expected weighted average all-cash yield on these properties in the year 2014 is 5.5%. The full impact of these additions on FFO should be realized in 2014, once all the new developments are leased."

"We believe that adding new properties to our portfolio will benefit Killam, and our shareholders. We recognize that there is a short-term dilutive impact on FFO per share during the period of construction, before the properties start generating positive cash flows, however we believe that building and buying new apartments will generate more stable cash flows and improved return on investment due to the limited capital requirements at the properties in the foreseeable future."

"We plan to continue to develop as a complement to our acquisition program, and we anticipate being able to complete construction at higher yields than the projects we've finished in 2013. We're targeting all-cash yields of approximately 6% for the two projects we're planning to start in the latter half of 2013."

"Generating same store NOI growth is essential to Killam's long-term success and profitability. 2013 has proven to be a challenging year on this front with increased supply in certain markets resulting in a more competitive environment and unpredictable gas costs impacting our operating expenses and profit margins. In addition to diversifying geographically, we have addressed the more competitive environment by expanding our leasing team and are seeing positive results. We have a well-maintained and diversified portfolio of assets and a strong reputation in our markets and I expect that we will continue to generate NOI growth as we have in the past."

"Finally, I'm pleased to report that we continue to lower our cost of debt by taking advantage of low interest rates. During the quarter we refinanced $15.7 million of mortgage debt at a weighted average interest rate of 2.76%, a 139 basis point reduction to the weighted average interest rate prior to refinancing. With $194 million of mortgages maturing over the next 18 months we expect to continue to lock in interest rate savings."

Financial Statements

Killam's Q2 2013 Financial Statements and Notes, and Management's Discussion and Analysis can be found under Financial Reports in the Investor Relations section of Killam's website at www.killamproperties.com/investor-relations.

Results Conference Call

Management will host a conference call to discuss these results on Thursday, August 8, 2013, at 12:00 PM Eastern. The dial-in numbers for the conference call are 647-427-7450 (in Toronto) or 888-231-8191 (toll free, within North America).

A live audio webcast of the conference call will be accessible on the Company's website at www.killamproperties.com/investor-relations/events-and-presentations and at www.newswire.ca.

Corporate Profile

Killam Properties Inc., based in Halifax, Nova Scotia, is one of Canada's largest residential landlords, owning, operating and developing multi-family apartments and manufactured home communities.

Note: The Toronto Stock Exchange has neither approved nor disapproved of the information contained herein.  Certain statements in this report may constitute forward-looking statements relating to our operations and the environment in which we operate, which are based on our expectations, estimates, forecast and projections, which we believe are reasonable as of the current date.  Such forward-looking statements involve risks, uncertainties and other factors which may cause actual results, performance or achievements of Killam to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. For more exhaustive information on these risks and uncertainties, you should refer to our most recently filed annual information form which is available at www.sedar.com. Readers, therefore, should not place undue reliance on any such forward-looking statements. Further, a forward-looking statement speaks only as of the date on which such statement is made and should not be relied upon as of any other date.  Other than as required by law, Killam does not undertake to update any of such forward-looking statements.

SOURCE: Killam Properties Inc.

Killam Properties Inc.
Dale Noseworthy, CA, CFA
Vice President, Investor Relations and Corporate Planning
[email protected]
Phone: [phone]