Mr. Philip Fraser reports

KILLAM PROPERTIES INC. ANNOUNCES STRONG Q2-2015 RESULTS, INCLUDING 16.7% GROWTH IN FFO PER SHARE, AND $16.7 MILLION IN ACQUISITIONS

Killam Properties Inc. is releasing its financial and operating results for the second quarter ended June 30, 2015.

Second quarter highlights:

• Generated funds from operations (FFO) per share (diluted) of 21 cents, a 16.7-per-cent increase from 18 cents in the second quarter of 2014;
• Earned adjusted funds from operations (AFFO) of 18 cents, a 12.5-per-cent increase from 16 cents in the second quarter of 2014, and reduced the rolling 12-month AFFO payout ratio to 91 per cent;
• Increased same-store rental revenue by 2.3 per cent;
• Achieved same-store net operating income (NOI) growth of 4.0 per cent;
• Grew the investment properties portfolio with the completion of a $25.3-million development and an $8.3-million acquisition. Subsequent to the second quarter, Killam completed an $8.4-million acquisition;
• Achieved interest expense savings, reducing the weighted average interest rate on mortgages to 3.41 per cent at June 30, 2015, from 3.51 per cent at March 31, 2015.

Highlights from the six months ended June 30, 2015:

• Generated FFO per share of 35 cents, a 12.9-per-cent increase from 31 cents during the six months ended June 30, 2014;
• Earned AFFO of 30 cents, a 15.4-per-cent increase from 26 cents for the six months ended June 30, 2014;
• Increased same-store rental revenue by 2.4 per cent;
• Achieved same-store NOI growth of 4.4 per cent;
• Completed $35.8-million in acquisitions;
• Completed two developments, adding $36.1-million of value to the investment properties portfolio.

                     FINANCIAL HIGHLIGHTS 
 (in thousands of dollars, except per-share amounts and as shown)

                                       For the three months ended,
                                             June 30,     June 30,
                                                2015         2014

Property revenue                          $   41,452   $   36,518
Net operating income                          25,196       21,441
Income before fair value (loss) gain,                            
(loss) gain on disposition 
and income taxes                              12,953       10,301
Fair value (loss) gain                          (613)       8,200
Net income attributable to common                                
shareholders                                   8,753       13,671
Earnings per share (diluted)              $     0.14   $     0.23
FFO                                           12,912       10,173
FFO per share (diluted)                   $     0.21   $     0.18
AFFO per share (diluted)                  $     0.18   $     0.16

                                         For the six months ended,
                                             June 30,     June 30,
                                                2015         2014

Property revenue                          $   80,988   $   71,583
Net operating income                          45,851       39,061
Income before fair value (loss) gain,    
(loss) gain on disposition 
and income taxes                              22,075       17,347
Fair value gain                                  180        8,200
Net income attributable to common      
shareholders                                  15,675       18,540
Earnings per share (diluted)              $     0.25   $     0.32
FFO                                           21,835       17,009
FFO per share (diluted)                   $     0.35   $     0.31
AFFO per share (diluted)                  $     0.30   $     0.26

                                                            As at
                                             June 30,     Dec. 31,                        
                                                2015         2014

Total assets                              $1,845,786   $1,775,234
Total liabilities                          1,167,682    1,112,551
Total equity                                 678,104      662,683
Total debt to total assets                      55.3%        54.9%

16.7-per-cent growth in FFO per share

Killam generated FFO per share growth of 16.7 per cent in the 2015 second quarter and 12.9 per cent for the six months ended June 30, 2015. FFO growth in the second quarter was primarily attributable to a 4.0-per-cent increase in same-store property NOI, contributions from acquisitions and developments, and interest expense savings on refinancings.

AFFO per share increased by 12.5 per cent in the quarter and 15.4 per cent during the first six months of the year. This growth translated to a marked improvement in Killam's AFFO payout ratio for the last 12 months, to 91 per cent, from 99 per cent for the 12 months ended June 30, 2014.

Strong NOI growth in the second quarter

A 2.3-per-cent increase in same-store revenue was achieved in the second quarter through increased rental rates, a 60-basis-point improvement in apartment occupancy and a reduction in rental incentives. All regions contributed positively to revenue growth, with the highest gains realized in Killam's core markets of St. John's, Charlottetown and Ontario. Killam's Halifax portfolio, which accounted for 40 per cent of the company's apartment NOI in the second quarter of 2015, generated a 1.7-per-cent increase in revenue, attributable to a 100-basis-point improvement in occupancy and a 1.4-per-cent increase in average rents.

Same-store property operating expenses decreased 0.1 per cent in the second quarter of 2015, driven by a 4.3-per-cent reduction in utility and fuel expense. The improvement was attributable to lower oil and natural gas prices, and a reduction in energy and water consumption, as a result of capital programs focused on energy and water saving initiatives. Killam also managed controllable costs, limiting same-store operating expenses to a modest increase of 2.0 per cent through a continued focus on regional efficiencies.

Developments and acquisitions contributed positively to FFO

Acquisitions made during the last 12 months, the recently completed Chelsea Place and two previous developments that were stabilized partway through 2014, contributed $1.7-million to FFO growth quarter over quarter. Saginaw Gardens, a 122-unit building in Cambridge, Ont., was completed in June, 2015, and is expected to contribute to FFO growth during the second half of the year.

$8.3-million acquisition and a $1.0-million land disposition completed in the second quarter

On June 15, 2015, Killam completed the acquisition of 20 Technology Dr. in Saint John, N.B. Construction of the new 59-unit concrete building, located adjacent Killam's 40 Technology Dr., was completed in late 2014. The four-storey building includes large contemporary units, in-suite laundry and extensive amenity space, including a common room, fitness room and theatre. The building contains 19 one-bedroom units and 40 two-bedroom units. The average monthly rent per unit is $1,210. The purchase price of $8.3-million ($140,000 per unit) was satisfied with a new CMHC-insured mortgage for $6.0-million at 2.13 per cent and the balance in cash. The capitalization rate on the acquisition is 6.1 per cent. As part of the transaction, Killam sold to the vendor (of 40 Technology Dr.) a 34,000-square-foot lot at the corner of Cameron Street and St. George Boulevard in Moncton for $1.0-million, and provided a vendor takeback, interest-only, mortgage of $950,000 at 6.5 per cent for five years.

$8.4-million acquisition completed after the second quarter

On Aug. 5, 2015, Killam closed the acquisition of 5880 Spring Garden Rd., 1489/1491 Carlton St., 1483 Carlton St. and 1471 Carlton St. in Halifax, N.S. The existing properties are a combination of commercial and residential assets, and are located directly across from Killam's Spring Garden Terrace property. The largest of the properties is known as the Medical Arts Building, an 18,000-square-foot office building that Killam plans to redevelop in the future. The total purchase price of $8.4-million was satisfied with the issuance of $2.5-million in common shares of Killam and the balance in cash. Killam expects to place mortgages of $4.5-million on the properties during the third quarter of 2015.

Interest expense savings on mortgage refinancings

During the second quarter of 2015, Killam successfully refinanced $24.1-million of maturing apartment mortgages with $34.1-million of new debt at a weighted average interest rate of 1.90 per cent, 152 basis points lower than the weighted average interest rate prior to refinancing, all for five-year terms. The company also refinanced one MHC mortgage at 3.43 per cent, 194 basis points lower than the interest rate prior to refinancing. The company's weighted average interest rate decreased to 3.41 per cent at June 30, 2015, from 3.51 per cent at March 31, 2015, and 3.60 per cent at Dec. 31, 2014.

Management's comments

"We are pleased to present another quarter of strong FFO per share growth," noted Philip Fraser, Killam's president and chief executive officer. "Our properties realized strong earnings growth in the second quarter, generating a 4-per-cent increase in same-store NOI.

"Our team is focused on maximizing Killam's top-line growth, and we are realizing the benefit of recent leasing, marketing and customer retention initiatives. Occupancy remained stable in the second quarter, a quarter which often experiences a dip in occupancy in advance of the September peak. In addition to improved revenue growth in the quarter from higher occupancy, we are well positioned to maximize revenue as we enter our strongest leasing period.

"The lease-up of our two new developments has exceeded our expectations. Chelsea Place in St. John's (phase I and II completed in December, 2014, and March, 2015) is now fully leased. Saginaw Gardens in Cambridge, which was completed only a month ago, is already 72 per cent leased and we expect the property to be fully occupied by the end of the year. Demand for the new product we've introduced into both markets has been robust, catering to a demographic transitioning from home ownership into apartment-style living. We are anticipating a year 1 yield of approximately 6 per cent on both these new developments. With existing parcels of land for development adjacent each of these properties, we are optimistic about future development potential in both areas.

"Development will be an important growth component for Killam into the future. We are able to achieve yields that are superior to the current acquisition environment and we are increasing the quality of our portfolio with new, energy-efficient properties, with minimal maintenance requirements expected for many years."

Financial statements

Killam's second quarter 2015 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. 6, 2015, at 11 a.m. Eastern Time. The dial-in numbers for the conference call are 416-340-2220 (in Toronto) or 866-225-6564 (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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