Mr. Dale Noseworthy reports

KILLAM PROPERTIES INC. ANNOUNCES SECOND QUARTER 2014 RESULTS INCLUDING FFO PER SHARE GROWTH OF 5.6%

Killam Properties Inc. is releasing its financial results for the second quarter ended June 30, 2014.

Second quarter highlights:

• Generated funds from operations (FFO) per share of 19 cents, compared with FFO per share of 18 cents in the second quarter of 2013;
• Improved occupancy 130 basis points year over year;
• Increased same-store rental revenue by 2.2 per cent;
• Achieved same-store net operating income (NOI) growth of 1.3 per cent;
• Completed an $18.6-million apartment acquisition;
• Reduced the weighted average interest rate on mortgage debt to 3.85 per cent, from 3.93 per cent at March 31, 2014, and extended the weighted average term to maturity of mortgage debt to 4.4 years, from 4.0 years.

Highlights from the six months ended June 30, 2014:

• Generated FFO per share of 31 cents, compared with FFO per share of 32 cents during the six months ended June 30, 2013;
• Improved same-store rental revenue by 1.7 per cent;
• Same-store NOI decreased by 2.6 per cent due to high heating and utility costs;
• Completed $38.2-million in acquisitions.

                              FINANCIAL HIGHLIGHTS 
                   (in thousands, except per-share amounts)
                                                                For the three months ended
                                                               June 30, 2014 June 30, 2013

Property revenue                                                     $36,518       $34,506
Net operating income                                                 $21,441       $20,225
Income before fair value gains, gain on disposition and 
income taxes                                                         $10,301       $10,380
Fair value gains                                                      $8,200       $20,199
Net income attributable to common shareholders                       $13,671       $23,238
Earnings per share                                                     $0.25         $0.43
Funds from operations                                                $10,173        $9,478
Funds from operations per share (basic)                                $0.19         $0.18
Funds from operations per share (diluted)                              $0.18         $0.17

                                                                  For the six months ended
                                                               June 30, 2014 June 30, 2013

Property revenue                                                     $71,583       $67,758
Net operating income                                                 $39,061       $38,394
Income before fair value gains, gain on disposition and 
income taxes                                                         $17,347       $18,397
Fair value gains                                                      $8,200       $24,490
Net income attributable to common shareholders                       $18,540       $32,206
Earnings per share                                                     $0.34         $0.60
Funds from operations                                                $17,009       $17,290
Funds from operations per share (basic)                                $0.31         $0.32
Funds from operations per share (diluted)                              $0.31         $0.32

                                                                                     As at
                                                               June 30, 2014 Dec. 31, 2013

Total assets                                                      $1,592,708    $1,532,431
Total liabilities                                                   $982,519      $928,371
Total equity                                                        $610,189      $604,060
Total debt to total assets                                              53.8%         52.9%

FFO per share growth of 5.6 per cent

Killam generated FFO per share of 19 cents during the second quarter of 2014, up 5.6 per cent from 18 cents during the second quarter of 2013. The growth was attributable to positive same-store property NOI growth, contributions from acquisitions and developments, and interest expense savings. These positive contributions were partially offset by a reduction in manufactured home community (MHC) earnings associated with the November, 2013, sale.

Same-store NOI growth of 1.3 per cent

Killam's growth in revenue is attributable to higher rental rates and increased occupancy levels. Killam achieved positive same-store NOI growth of 1.3 per cent during the second quarter of 2014, despite a 14.7-per-cent increase in energy and utility costs in the quarter. More moderate natural gas prices in May and June, as well as flat property taxes and a 2.0-per-cent decrease in operating expenses, resulted in a 3.3-per-cent increase in total property expenses in the quarter. Same-store NOI growth for the first half of the year was impacted by high energy and operating costs during the first quarter of 2014.

Occupancy improvements

Killam's stabilized apartment portfolio achieved 95.3-per-cent occupancy at June 30, 2014, a 130-basis-point improvement from 94.0 per cent at June 30, 2013. This compares with 96.0-per-cent occupancy at March 31, 2014. Killam typically experiences its lowest occupancy during the summer, followed by its highest occupancy in September. In addition to higher occupancy at June 30 year over year, Killam achieved improved occupancy throughout the quarter, with its stabilized properties realizing 94.8-per-cent occupancy throughout the quarter, a 110-basis-point improvement from 93.7 per cent during the second quarter of 2013. The strongest occupancy gains were realized in St. John's, Moncton, Ontario and Charlottetown.

Redeployment of funds from 2013 MHC sale

During the second quarter of 2014, Killam completed the acquisition of 300 Royale, a new 83-unit property in the Halifax market, for $18.6-million. 300 Royale is the third of a three-building apartment community developed over the last four years. Killam acquired the first two buildings upon completion, in 2011 and 2013. During the first six months of the year, Killam completed $38.2-million in acquisitions and had redeployed approximately 70 per cent of the $42.6-million of cash generated from the sale of its New Brunswick MHC portfolio in November, 2013. The timing of earnings replacement from the MHC sale has resulted in short-term dilution in FFO per share in both the second quarter and the first half of 2014. The remaining funds from the MHC sale are expected to be redeployed during the third quarter.

Interest expense savings on mortgage refinancings

Killam continued to benefit from interest rate savings on mortgage refinancings. During the second quarter of 2014, Killam successfully refinanced $36.5-million of maturing apartment mortgages at a weighted average interest rate of 3.11 per cent, 110 basis points lower than the weighted average interest rate prior to refinancing. The company's weighted average mortgage interest rate improved to 3.85 per cent, from 3.93 per cent at March 31, 2014, and 4.25 per cent at June 30, 2013. The average number of years to mortgage maturity was extended to 4.4 years, from 4.0 years at March 31, 2014.

Total debt as a percentage of total assets was 53.8 per cent at June 30, 2014, compared with 52.9 per cent at March 31, 2014, and below Killam's target debt levels of 55 per cent to 65 per cent. Killam's interest coverage ratio for the last 12 months was 2.03 times, down modestly from 2.05 times at March 31, 2014.

Management's comments

"We are pleased to report same-store NOI and FFO growth in the quarter," noted Philip Fraser, Killam's president and chief executive officer. "Occupancy improvements, management of operating expenses, acquisitions and developments have all contributed to growth. In addition, our acquisition program is on schedule, having completed 50 per cent of our 2014 acquisition target of $75-million by the end of the second quarter. Based on our acquisition pipeline, we anticipate the funds from last year's MHC sale to be fully deployed by the end of the third quarter. We are pleased with the quality of the properties that have replaced the MHC assets, and their long-term potential for earnings growth and increased value.

"We've seen strong occupancy gains so far this year and the positive momentum has continued during the summer months. The lease-up at S2 and the Plaza, two developments completed last year, is also continuing, and we are currently projecting 92-per-cent and 90-per-cent occupancy at these properties for September. These occupancy gains will help contribute to earnings growth in the second half of the year.

"Development remains a growth opportunity for Killam. Our two developments under way in St. John's and Cambridge are progressing well, and are expected to be ready for occupancy in the fourth quarter of 2014 and the second quarter of 2015. Leasing demand is strong for our St. John's development, with 54 per cent of the 102 units already preleased and marketing is under way in Cambridge."

Financial statements

Killam's second quarter 2014 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.

Results conference call

Management will host a conference call to discuss these results on Thursday, Aug. 7, 2014, at 10 a.m. Eastern Time. The dial-in numbers for the conference call are 647-427-7450 (in Toronto) and 888-231-8191 (toll-free, within North America). A live audio webcast of the conference call will be accessible on the company's website.

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