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Killam Properties Inc. announces second quarter results and $14 million in acquistions

^{Published on 2011-08-03 14:36:42 - Market Wire}
 

HALIFAX, Aug. 3, 2011 /CNW/ - Killam Properties Inc. (TSX:KMP) today announced its financial results for the second quarter ended June 30, 2011. Killam reported, in accordance with International Financial Reporting Standards ("IFRS"), net income of $18.2 million for the three months ended June 30, 2011, compared to $7.8 million for the three months ended June 30, 2010.

Highlights of Killam's Second Quarter

• Earned net income attributable to common shareholders of $18.0 million, or $0.40 per share, compared to $7.6 million, or $0.17 per share during the second quarter of 2010.
• Earned net income before fair value gains and income taxes of $8.1 million, or $0.180 per share, compared to $8.1 million, or $0.181 per share during the second quarter of 2010.
• Generated funds from operations ("FFO") of $7.9 million, or $0.175 per share, compared to $7.9 million, or $0.176 per share during the second quarter of 2010, using Killam's definition of FFO implemented with the adoption of IFRS in 2011.
• Achieved same store rental revenue growth of 2.5% during the second quarter.
• Maintained high occupancy rates, ending the second quarter with consolidated occupancy of 98.3%, compared to 98.0% at June 30, 2010.
• Operating expenses increased by 11.6%, due in part to a 16.7% increase in fuel and utility costs, resulted in a 2.9% decrease in same store net operating income ("NOI").
• Completed a $46.0 million convertible debenture offering on June 2, 2011 to fund development, acquisitions, debt repayment and other corporate purposes.
• Completed $40.4 million in acquisitions during the second quarter and actively increased the acquisition pipeline for the remainder of 2011.
• Substantially completed Phase 1 of Charlotte Court and began site development work at Shaunslieve Apartments in Halifax and Forest Hills Apartments in Fredericton.
• Ended the second quarter with $39.6 million of cash on hand and total debt as a percentage of total assets of 57.9% at June 30, 2011.

Financial Highlights (in thousands, except per share information)

FFO of $0.175 per Share in the Second Quarter

FFO is recognized as the industry-wide standard measure for real estate entities' operating performance, and management considers FFO per share to be a key measure of Killam's operating performance. The calculation of FFO includes adjustments specific to the real estate industry applied against net income to calculate a supplementary measure of performance that can be compared with other real estate companies and real estate investment trusts (REITs). FFO does not have a standardized meaning under IFRS or GAAP and therefore may not be comparable to similar titled measures presented by other public companies.

Killam earned FFO of $7.9 million, or $0.175 per share, during the second quarter compared to $7.9 million, or $0.176 per share during the second quarter of 2010, using Killam's definition of FFO implemented with the adoption of IFRS in 2011. The calculation of FFO is as follows:

Killam's $115 million of apartment acquisitions completed in 2010 contributed $0.5 million to FFO growth in the quarter. This was offset by a $0.5 million, or 2.9%, decrease in NOI attributable to the Company's same store properties, as described below. Also impacting FFO in the quarter was an increase in interest on convertible debentures associated with a net $61.3 million increase in convertible debenture debt outstanding compared to the second quarter of 2010. The additional convertible debentures were raised primarily to fund acquisitions and development. At the end of the second quarter Killam had a cash balance of $39.6 million.

Killam's same store properties, which account for 94% of the Company's portfolio on a unit count basis, generated NOI of $16.4 million during the second quarter of 2011. Consolidated revenue growth of 2.5% was offset by an 11.6% increase in expenses, due primarily to higher energy, utility and repair and maintenance costs.

Occupancy Rates Remain Strong

Killam's consolidated occupancy at June 30, 2011 was 98.3%, compared to 98.0% at June 30, 2010.  The change year-over-year is shown in the chart below:

The apartment occupancy increased by 70 basis points from June 2010 to June 2011. Halifax, Killam's largest apartment portfolio, experienced a 90 basis point increase in occupancy in June 2011, compared to June 2010. Occupancy also improved in Fredericton, which experienced an up-tick in vacancy during the second quarter of 2010, as Killam's Forest Hills property came back on-line. Also, occupancy in Killam's Ontario apartment portfolio was up 330 basis points, with the Company's Richmond Hill property in London, purchased in April 2010, responsible for the improvement, as occupancy increased to 96.4% in June 2011, compared to 88.3% in June 2010.

The MHC portfolio had an occupancy rate of 98.8%, with an average monthly rent of $232. Not included in the MHC vacancy numbers are 134 MHC sites that had not been previously rented and 376 transient sites in Killam's seasonal resort portfolio. These units are excluded from vacancy statistics in the table above.

Fair Value of Investment Properties Increased

Management uses the fair value approach to account for Killam's investment properties under IFRS. Killam's investment properties and investment properties under construction were valued at $1.164 billion at June 30, 2011, up $61 million, or 5.5% over the fair value of $1.103 billion at March 31, 2011. This increased value is primarily attributable to $40.4 million in acquisitions made during the second quarter, $6.3 million in capital expenditures and $14.9 million in fair value gains relating to market capitalization rate compression. The capitalization rates on Killam's apartment portfolio decreased an average of 12 basis points during the quarter, compared to an average rate compression of 3 basis points for the MHC portfolio. There was little change in the normalized NOI attributable to each property during the quarter. The properties' normalized NOI and capitalization rates are the two key components used to determine the fair value of the investment properties.

The fair value adjustment of $2.2 million during the second quarter of 2010 related primarily to an 11 basis point decrease in the average capitalization rate attributable to the MHC portfolio. Capitalization rates attributable to the apartment portfolio were stable during the second quarter of 2010.

Killam invests capital to maintain and improve the operating performance of its properties and to develop new properties. During the second quarter of 2011 Killam invested a total of $3.7 million in capital investments, including $2.1 million on apartment properties and $1.6 million on MHCs. This compares with $3.7 million in capital expenditures during the second quarter of 2010.

The following table summarizes the changes in the value of Killam's investment properties for the second quarter ended June 30, 2011.  The fair value adjustment noted below, in millions of dollars, flows through the income statement.

 Debt Equal to 57.9% of Assets

The ratio of Killam's total gross debt of $707.1 million at June 30, 2011 to the Company's total assets, including the fair market value of the Killam's investment properties, is 57.9%. The Company continues to have access to debt and was successful in refinancing maturing debt during the quarter at attractive interest rates.  The average term to maturity of Killam's mortgage debt is 3.7 years. Killam's annualized interest coverage ratio was 2.0 times for the second quarter, consistent with 2.0 at December 31, 2010.

Strong Acquisition Activity

$40 Million in Acquisitions Completed During Q2

During the second quarter Killam completed two previously announced apartment acquisitions, a six-building, 310-unit portfolio in Fredericton for $36.1 million ($116,500 per unit) and a two-building, 64-unit complex in Moncton for $4.3 million ($67,000 per unit). The properties are located in close proximity to numerous other Killam properties and were purchased at a capitalization rate of 6.2%.

$24 Million in Acquisitions Completed Subsequent to Q2

Subsequent to the end of the second quarter, on July 13, 2011, Killam completed the purchase of the previously announced acquisition of 115 Canaan and 115-133 Kedgwick Street, a three-building, 96-unit portfolio in Moncton for $10.0 million.

On July 28, 2011, Killam acquired Domaine Centre-ville, a newly constructed 68-unit building located at 135 Gould Street in Moncton. Tenants started to move into the building in June and the building is currently 60% occupied. The building includes 28 one-bedroom and 40 two-bedroom units and is expected to have an average monthly rent of $950 per unit. The purchase price of $7.8 million was satisfied with the assumption of a $5.1 million mortgage at 4.4% and the remainder in cash. The capitalization rate upon stabilization is projected to be 6.0%.

Killam also acquired Eagle Ridge Estates, a 59-unit building located at 22 Westmount Street, close to downtown Moncton. Eagle Ridge, built in 1994, has 22 one-bedroom units and 37 two-bedroom units and is currently 98% occupied. The average rent is $825, with tenants responsible for their own heating costs. The purchase price of $5.8 million ($99,100 per unit), representing a capitalization rate of 6.0%, was satisfied with a new $3.7 million mortgage at 3.2%, and the balance in cash.

On July 28, 2011, Killam increased its position in Garden Park Apartments by 1.7%. The purchase price of $0.4 million brings Killam's ownership in the 246-unit apartment building in downtown Halifax to 47.3%. In early March, Killam took over property management responsibilities of Garden Park Apartments, which was previously managed by a third party company.

Development Update

Phase I of Charlotte Court in Charlottetown, is complete and the Province of PEI has leased the entire building for a 10-year term. Construction has begun on Phase II of Charlotte Court, a second 49-unit building.

Killam has begun construction at two other development projects, S2 and The Plaza. S2 will be a luxury 63-unit concrete building in Halifax, located adjacent the Company's 154-unit Shaunslieve Apartments. The development is expected to take approximately 18 months to complete with occupancy anticipated during the first quarter of 2013. The cost of the project is expected to be approximately $14.0 million.

The Plaza will be a luxury 101-unit concrete building, located adjacent to Company's 151-unit Forest Hills Apartments in Fredericton. The development is expected to take approximately 18 months to complete, with occupancy anticipated during the first quarter of 2013. The cost of the project is expected to be approximately $21.4 million.

The development projects are expected to yield all-cash returns of between 5.8% and 6.5%.

Management's Comments

"Despite the impact of rising costs, our revenue remains strong", noted Philip Fraser, Killam's President and CEO. "We have maintained our high occupancy rates and continue to experience strong demand across the portfolio. We have achieved an average increase in rental rates of 2.5% over the last year and are working to increase that average to 3.0% for the second half of the year."

"Increased operating costs, many of which were reflected in our budgets, impacted our ability to report same store property NOI growth during the second quarter. The high cost of oil, along with increases for other utilities, including electricity and water, was a major contributor to the decline in quarter-over-quarter same store NOI. Our operations team continues to look for efficiencies in the portfolio to mitigate against the impact of rising costs across all expense categories."

"We are pleased to announce our recently closed acquisitions. We have expanded our presence in Moncton and Fredericton during the first half of the year and look forward to adding more properties to our Ontario portfolio during the second half of the year."

"The acquisitions announced today, including Domaine Centre-ville and Eaglewood Estates in Moncton, brings the Company's 2011 apartment acquisitions to $64 million with a weighted average cap rate of approximately 6.1%. We continue to have an active acquisition pipeline and we expect to meet our goal of completing $100 to $150 million of acquisitions in 2011."

"In addition to growth through acquisitions, we have made progress on all of our developments, including S2 and The Plaza. Both these projects will allow Killam to realize the full potential of excess land at two well located properties."

Financial Statements

Killam's June 30, 2011 Financial Statements and Notes and Management's Discussion and Analysis can be found at [ www.killamproperties.com ].

Second Quarter Conference Call

Management will host a conference call to discuss Killam's second quarter results on Thursday, August 4, 2011 at 10:00 AM Atlantic time (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 ] and at [ www.newswire.ca ].

A replay will be available by dialing 416-849-0833 (Toronto) or 800-642-1687 (toll-free) and using the passcode 81638956 until August 11, 2011, or on the Company's website for 90 days after the conference call.

Corporate Profile

Killam Properties Inc, based in Halifax, Nova Scotia, is one of Canada's largest residential landlords, owning and operating 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 statement.