Killam Apartment REIT Announces Q3-2020 Operating Performance and Financial Results

HALIFAX, NS, Nov. 4, 2020 /CNW/ - Killam Apartment REIT (TSX: KMP.UN) ("Killam") today reported its results for the three and nine months ended September 30, 2020.

"We are pleased to report our third quarter operating and financial results. Despite COVID-19 related impacts, we are executing on all three of our strategic priorities. We realized both same property revenue and net operating income growth in the quarter. This highlights the resiliency of our portfolio and our dedicated team," noted Philip Fraser, President and CEO. "Our suite repositioning program continues with over 400 completed repositioned suites year-to-date. As well, we are investing in energy efficiency initiatives, augmenting NOI growth from our existing portfolio and reducing our carbon footprint."

"We have been active in the acquisition market with $72.6 million in acquisitions in Moncton post quarter-end. These buildings, with a total of 269 units, are new, high-quality, energy efficient and compliment our existing Moncton portfolio. We are thrilled to grow our presence in the Moncton market."

"Progress also continues with our developments. Shorefront, our newest development, opened in PEI in October and we are eagerly starting the pre-leasing of two more developments coming online in Q1-2021."

Q3-2020 Financial & Operating Highlights

• Reported net income of $37.5 million, a decrease of $9.3 million compared to $46.8 million in Q3-2019, due to higher fair value gains on investment properties recognized in Q3-2019.
  
  
• Generated net operating income ("NOI") of $43.4 million, a 5.0% increase from $41.3 million in Q3-2019.
  
  
• Despite the impacts of COVID-19, generated same property NOI growth of 0.4% over Q3-2019.
  
  
• Achieved a 1.0% increase in same property revenue, including 1.8% from the apartment portfolio.
  
  
• Maintained a relatively high same property apartment occupancy of 96.6%, down 70 basis points ("bps") from 97.3% in Q3-2019.
  
  
• Earned funds from operations ("FFO") per unit (diluted) of $0.27, and adjusted funds from operations ("AFFO") per unit (diluted) of $0.23, both consistent with Q3-2019.
  
  
• Strengthened balance sheet with a $69.0 million equity raise, ending the quarter with debt as a percentage of assets of 43.8% and over $230 million of acquisition capacity.

Summary of Q3-2020 Results and Operations

Strengthened Balance Sheet
Killam strengthened its balance sheet during Q3 with the successful completion of a $69.0 million equity raise in July. Following the raise, Killam repaid the outstanding balance on its line of credit and expects to use the remaining capital to fund its acquisition and development programs. Killam ended the quarter with increased capital flexibility, including acquisition capacity of over $230 million and a strong balance sheet with debt to total assets of 43.8%, a 150 bps improvement from June 30, 2020.

Positive Same Property NOI Growth Despite Challenges with COVID-19
Killam achieved 0.4% same property NOI growth during the quarter, with apartments up 1.1% offsetting a 5.9% decline from the MHC portfolio. Overall, same property revenues were up 1.0% and expenses were up 2.3%. The impacts of COVID-19 were felt in the quarter with reduced activity at Killam's nine seasonal MHCs, reduced commercial rent following participation in the Canadian Emergency Commercial Rent Assistance (CECRA) program, delayed apartment rent increases following rent increase suspensions implemented during Q2, combined with salary increases for front-line workers. 

Rental Rate Growth Continues on Turns
Same property rental rates were up 3.1% as at September 30, 2020, versus September 30, 2019. Despite the current economic environment, demand remains strong for units on turnover with Killam achieving 5.2% rental rate growth on regular unit turns during Q3-2020. Rental rate growth was the primary contributor to apartment revenue growth of 1.8% for the quarter. These gains were partially offset by an uptick in vacancy, most notably in downtown Calgary, Kanata (Ottawa) and St. John's. Edmonton, Halifax and New Brunswick had the strongest apartment performance, achieving quarter-over-quarter same property apartment revenue increases of 5.8%, 2.7% and 2.6%, respectively.

Repositioning Program Continues to Generate Above-average Returns
During Q3-2020, Killam invested $3.6 million in repositionings, completing 151 unit renovations. Year-to-date, Killam has repositioned 426 units. The average return on investment on unit repositionings completed during the quarter was 12.0%, based on an average renovation cost of $25,500 per unit. Repositioned units completed year-to-date are expected to generate approximately $1.3 million in additional NOI on an annualized basis and approximately $26.4 million in Net Asset Value growth.

FFO and AFFO per Unit in Line with Q3-2019
Killam generated FFO per unit of $0.27, consistent with Q3-2019. FFO was $28.5 million in Q3-2020, an 8.6% increase over Q3-2019. FFO growth was attributable to lower financing costs, incremental contributions from recent acquisitions and completed developments, and increased NOI from its same property portfolio. This growth was offset by a 10.0% increase in the weighted average number of units outstanding from an aggregate of $183.4 million in equity issued in July 2020 and November 2019.

Refinancing at Low Rates Contributed to Earnings Growth
Killam benefited from lower interest rates on mortgages refinanced in Q3-2020. During the quarter, Killam refinanced $59.7 million of maturing mortgages with $86.5 million of new debt at a weighted average interest rate of 1.42%, 104 bps lower than the weighted average rate of the maturing debt.

Substantial Development Activity Underway
Killam continues to advance its development pipeline, investing $34.5 million during Q3-2020. Highlights in the quarter include: 1) reaching 97% completion on the Shorefront development (tenants started moving in during October); 2) starting construction and drilling for the geothermal system at the 169-unit, Civic 66 development in Kitchener, and 3) acquiring a 50% interest in a parcel of land for development from RioCan REIT to jointly develop a 168-unit apartment building adjacent to the grocery-anchored Elmvale Acres Shopping Centre in Ottawa.

Rent Collection
Killam's rent collection experience in Q3-2020 remained strong. During the three months ended September 30, 2020, and for the month of October, Killam has collected the following contractual rents:

Consistent with provincial directives, Killam worked with tenants who were financially impacted by COVID-19 during the quarter. Historically, Killam has had less than 0.4% of revenue uncollected, and management does not expect a material increase in rental defaults for the remainder of 2020. Killam offered a rent deferral program to assist residential tenants facing financial hardship due to COVID-19, working with residents on a case-by-case basis.

Killam also worked closely with commercial tenants under the CECRA program. Killam's commercial tenant base makes up a relatively small portion of Killam's overall business, with the commercial portfolio accounting for approximately 6.0% of total revenues and 4.6% of Killam's total NOI for the nine months ended September 30, 2020. Killam filed CECRA applications for approximately 40 commercial tenants and recorded a reduction in commercial revenue of $0.1 million during Q2-2020 and $0.1 million during Q3-2020 related to the program.

Q4-2020 Acquisitions Update 
On October 26, 2020, Killam purchased 171 and 181 Leopold F Belliveau Drive, a new 107-unit, four-storey wood frame property in Moncton, New Brunswick for $17.6 million with an all cash yield of 5.0%. This property consists of two buildings containing a mixture of 1 and 2 bedroom units with an average rent of $1,214 per month ($1.20 per square foot) and is currently 100% leased.

Killam has also committed to purchase the 162-unit Horizon Place, a new seven-storey concrete building in Moncton, New Brunswick for $55.0 million. This acquisition is scheduled to close by mid-November and with an all cash yield of 4.5%. This property has a geothermal heating and cooling system, underground parking and many condo-quality finishes and amenities. With a mixture of 1, 2 and 3 bedroom units, the average unit is 1,426 square feet with an average rent of $1.32 per square foot. The property is currently in its initial lease-up phase with 85% occupancy.

Financial Summary (in thousands, except per unit amounts)
FFO are recognized as an industry-wide standard measure of real estate entities' operating performance, and Management considers FFO per unit to be a key measure of operating performance. REALpac, Canada's senior national industry association for owners and managers of investment real estate, has recommended guidelines for a standard industry calculation of FFO based on IFRS. Killam calculates FFO in accordance with the REALpac definition except for the deduction of income recorded for accounting purposes related to insurance proceeds. Notwithstanding the foregoing, FFO does not have a standardized meaning under International Financial Reporting Standards ("IFRS") and therefore may not be comparable to similarly titled measures presented by other publicly traded companies.

Financial Statements
Killam's condensed consolidated interim Financial Statements and Management's Discussion and Analysis (the "Q3 MD&A") for the three and nine months ended September 30, 2020, are posted under Financial Reports in the Investor Relations section of Killam's website at www.killamreit.com and each of which are filed on SEDAR. Readers are directed to these documents for financial details and a discussion of Killam's results.

Results Conference Call
Management will host a webcast and conference call to discuss these results and current business initiatives on Thursday, November 5, 2020, at 9:00 AM eastern time. The webcast will be accessible on Killam's website at the following link http://www.killamreit.com/investor-relations/events-and-presentations. A replay will be available for 7 days after the webcast at the same link.

The dial-in numbers for the conference call are as follows:
North America (toll free): 1-888-664-6392
Overseas or local (Toronto): 1-416-764-8659

Profile
Killam Apartment REIT, based in Halifax, Nova Scotia, is one of Canada's largest residential landlords, owning, operating, managing and developing a $3.6 billion portfolio of apartments and manufactured home communities. Killam's strategy to enhance value and profitability focuses on three priorities: 1) increasing earnings from existing operations, 2) expanding the portfolio and diversifying geographically through accretive acquisitions, with an emphasis on newer properties, and 3) developing high-quality properties in its core markets.

Non-IFRS Measures
Management believes these non-IFRS financial measures are relevant measures of the ability of Killam to earn revenue and to evaluate Killam's financial performance. The non-IFRS measures should not be construed as alternatives to net income or cash flow from operating activities determined in accordance with IFRS, as indicators of Killam's performance, or sustainability of Killam's distributions. These measures do not have standardized meanings under IFRS and therefore may not be comparable to similarly titled measures presented by other publicly traded organizations.

• Funds from operations ("FFO"), and applicable per unit amounts, are calculated by Killam as net income adjusted for depreciation on an owner-occupied building, fair value gains (losses), interest expense related to exchangeable units, gains (losses) on disposition, deferred tax expense (recovery), unrealized gains (losses) on derivative liability, internal commercial leasing costs, interest expense related to lease liabilities, insurance proceeds, and non-controlling interest. FFO are calculated in accordance with the REALpac definition, except for the adjustment of insurance proceeds as REALpac does not address this adjustment
  
  
• Adjusted funds from operations ("AFFO"), and applicable per unit amounts and payout ratios, are calculated by Killam as FFO less an allowance for maintenance capital expenditures ("capex") (a three-year rolling historical average capital spend to maintain and sustain Killam's properties), commercial leasing costs and straight-line commercial rents. AFFO are calculated in accordance with the REALpac definition. Management considers AFFO an earnings metric.
  
  
• Adjusted cash flow from operations ("ACFO") is calculated by Killam as cash flow provided by operating activities with adjustments for changes in working capital that are not indicative of sustainable cash available for distribution, maintenance capital expenditures, commercial leasing costs, amortization of deferred financing costs and non-controlling interest. Management considers ACFO a measure of sustainable cash flow. ACFO is calculated in accordance with the REALpac definition.
  
  
• Earnings before interest, tax, depreciation and amortization ("EBITDA") is calculated by Killam as income before fair value adjustments, gains (losses) on disposition, income taxes, interest, depreciation and amortization.
  
  
• Interest coverage is calculated by dividing EBITDA by interest expense, less interest expense related to exchangeable units.
  
  
• Debt service coverage is calculated by dividing EBITDA by interest expense, less interest expense related to exchangeable units, and principal mortgage repayments.
  
  
• Debt to normalized EBITDA is calculated by dividing interest-bearing debt (net of cash) by EBITDA that has been adjusted for a full year of stabilized earnings from recently completed acquisitions and developments.
  
  
• Same property results in relation to Killam are revenues and property operating expenses for stabilized properties that Killam has owned for equivalent periods in 2020 and 2019. Same property results represent 87.8% of the fair value of Killam's investment property portfolio as at September 30, 2020. Excluded from same property results in 2020 are acquisitions, dispositions and developments completed in 2019 and 2020, non-stabilized commercial properties linked to development projects, and other adjustments to normalize for revenue or expense items that relate to prior periods or are not operational.

See the Q3-2020 Management's Discussion and Analysis for further details on these non-IFRS measures.

Note: The Toronto Stock Exchange has neither approved nor disapproved of the information contained herein. Certain statements in this press release may constitute forward-looking statements. Such forward-looking statements involve risks, uncertainties and other factors including risks and uncertainties relating to the COVID-19 pandemic, 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 Killam's most recently filed annual information form dated March 30, 2020 as well as Killam's Q3 MD&A for the three and nine months ended September 30, 2020, each of which are 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 statement. The forward-looking statements contained in this news release are expressly qualified by this cautionary statement.

SOURCE Killam Apartment Real Estate Investment Trust