Killam Properties Inc. announces first quarter 2013 results

HALIFAX, May 7, 2013 /CNW/ - Killam Properties Inc. ("Killam" or the "Company") (TSX: KMP) today announced its financial results for the first quarter ended March 31, 2013.

First Quarter Highlights

• Generated funds from operations ("FFO") per share of $0.15, consistent with FFO per share of $0.15 during the first quarter of 2012.
• Same store rental revenue increased by 2.7%.
• Same store net operating income ("NOI") decreased by 1.1% following a 7.6% increase in operating expenses driven by a 45% increase in Killam's per gigajoule cost of natural gas in Atlantic Canada related to production declines and delays from Nova Scotia's offshore Sable and Deep Panuke energy projects, respectively.
• Recorded net unrealized fair value gains of $4.3 million on the Company's investment properties, contributing to net income attributable to common shareholders of $9.0 million.
• Debt levels remain conservative at 51.9% of total assets.
• Completed $37.7 million in acquisitions, including $32.6 million in apartment acquisitions at an average cap rate of 5.7%.
• Completed second apartment development, Brighton House, which is 96% leased.

Financial Highlights (in thousands, except per share amounts)

Stable FFO per Share

Killam generated FFO per share of $0.15 during the first quarter, consistent with $0.15 earned during the first quarter of 2012. Increased earnings associated with new acquisitions and interest savings were offset by higher natural gas prices, a reduction in NOI in the MHC portfolio following the May 2012 disposition of twelve properties, and a 9.1% increase in common shares outstanding. The equity raised in late 2012 included funds to support acquisitions and developments, which have not yet been fully deployed. In addition, Killam's investment in development projects and land for future development had a short-term dilutive effect, impacting Killam's FFO per share growth in the first quarter.

1.1% Decrease in Same Store NOI Due to High Natural Gas Costs

Killam experienced a 1.1% decrease in NOI from its same store portfolio during Q1 as high natural gas costs offset increased revenues. Consolidated same store results for the first quarter are summarized below:

Killam's 2.7% growth in revenue is attributable to an average 3.0% increase in rental rates over the last year. This growth was offset by a 7.6% increase in operating costs, including utility and fuel costs up 18.0%. The majority of the increase in utility and fuel expenses related to higher natural gas pricing as a temporary shortage of gas production off the coast of Nova Scotia exposed gas suppliers in Atlantic Canada to volatile market prices during a period of high gas demand. The result was a 45% increase in Killam's weighted average cost of natural gas per gigajoule in the quarter. This included an 82% increase in the Company's per gigajoule cost of natural gas in Nova Scotia, which was partially offset by a 3% decrease in the cost per gigajoule in New Brunswick. Total gas prices decreased in New Brunswick as savings from a new rate structure and lower delivery charges offset an 86% increase in the commodity charge.

Despite the reduction in NOI during the first quarter, Killam continues to target positive same store NOI for the year.

Consolidated Occupancy of 96.3%

Killam's consolidated occupancy was 96.3% in March 2013, compared to 96.6% in December 2012 and 97.1% in March 2012. The occupancy and average rents for apartments and MHCs are shown in the following table:

Killam's apartment portfolio ended the quarter at 95.4% occupancy, down 60 basis points from March 2012 and down 50 basis points from December 2012. It is typical for Killam to experience a decrease in occupancy during the first quarter; there is seasonality to the portfolio's occupancy rates, with the highest occupancy typically during the third quarter, and the lowest during the second quarter. Current occupancy levels reflect increased rental supply in certain markets in Atlantic Canada, specifically in Halifax, Moncton and Charlottetown, and softness in the Saint John economy. Offsetting increased competition in the above noted markets is continued strong demand for apartments in St. John's and a stable market in Fredericton.

Killam's occupancy in Ontario reflects the short-term effect of high turnover at a portfolio of properties in Ottawa acquired in September 2012 and a short-term increase in vacancy in Cambridge. Following Killam's growth in Ontario in 2012, Management has expanded its Ontario operating platform and expects to see improved occupancy levels throughout 2013.

Acquisitions in Ontario and Atlantic Canada

Killam completed $37.7 million in acquisitions during the first quarter of 2013, including $32.6 million for three apartment properties and $5.1 million for two parcels of land for future development. The acquisitions are comprised of previously disclosed apartments, including a 102-unit building in Ottawa and a newly constructed 83-unit building in Halifax. In addition, on March 28, 2013, Killam acquired Strathmore Apartments, a 40-unit property located adjacent existing Killam apartments in Moncton. The property consists entirely of two-bedroom units and has an average rent of $738 per month. The purchase price of $3.15 million ($79,000 per suite) was satisfied with cash and represents a capitalization rate of 6.0%. The Company is currently finalizing a $2.1 million, 10-year term mortgage on the property.

Additional Acquisitions Scheduled to Close in Q2

Killam has agreed to acquire Gauvin Estates, a new 48-unit apartment building located in Moncton. Construction of the six storey concrete apartment building with one level of underground parking was completed in February 2013, and contains 48 two-bedroom units with an average size of 1,050 square feet. The purchase price of $8.1 million ($168,000 per suite) will be satisfied with cash, and mortgage debt is expected to be placed on the property during 2013. The capitalization rate (based on 98% occupancy) is approximately 6.0% and the acquisition is scheduled to close by the end of May 2013.

Killam has also agreed to acquire a 172-unit apartment building portfolio adjacent to other Killam buildings in Charlottetown. The portfolio of high-end buildings is less than ten years old and includes spacious units averaging 1,200 square feet and an average rent of $855 per unit. The purchase price of $18.7 million ($108,700 per suite) will be satisfied with the assumption of existing mortgages totaling $10.9 million, $2.4 million in common shares and the remainder in cash. The capitalization rate is approximately 6.2% and the acquisition is scheduled to close by the middle of June 2013.

Apartment Developments Now Leasing and Accepting Tenants

Killam's three outstanding development projects were 87% complete at March 31, 2013, and are scheduled to be completed during the second quarter. Occupancy permits were received for all three properties last week and tenants have started to move in. The properties are expected to contribute positively to FFO during the second half of the year. Brighton House, the Company's 47-unit development in Charlottetown, was completed in March 2013 and is 96% leased. The other three projects will start generating rental income in May.

The Company has eight development sites with the potential for over 900 units and expects to begin construction on two new developments during the second half of 2013.

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 March 31, 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 is 2.13 times.

Management's Comments  

"We're pleased to report Killam's same store revenue growth during the first quarter of 2013", noted Philip Fraser, Killam's President and CEO. "We've been focused on maximizing revenue though balancing occupancy with the opportunity to increase rental rates. The successful growth in our top line helped offset the impact of higher operating costs in the quarter caused by volatile natural gas prices in Atlantic Canada."

"The unexpected increase in commodity costs caused by production disruptions off the coast of Nova Scotia impacted our ability to generate same store NOI growth and FFO per share growth. Excluding these uncontrollable costs, operating costs were relatively stable during the quarter."

"I'm pleased to report that our developments have now all received occupancy permits and will start generating revenue this month. The lease-up is going well with 51% of the 282 new units already leased.  We are actively marketing the buildings and anticipate the remaining units to lease-up over the next six to nine months."

Financial Statements

Killam's Q1 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 Wednesday, May 8, 2013, at 9:00 AM 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.