Killam Apartment REIT Q2 Results Show Atlantic Canada Strength Offsets Office Vacancy
Killam Apartment REIT (TSE:KMP.UN) posted second-quarter operating results that underscored the resilience of its Atlantic Canada portfolio, even as the Halifax-based property owner absorbed a sizable office vacancy and watched student housing pressure build in one Ontario market.
Same-property net operating income (NOI) rose 3.0% across the portfolio in the quarter, while apartment same-property NOI climbed 4.6%. Same-property apartment occupancy ended June at 97.6%, up from 97.0% at the end of the first quarter.
“Our Atlantic Canada markets continue to be our strongest markets and the driver of our outperformance this year,” said President and CEO Philip Fraser. He added that increased federal defense-spending commitments are already showing up in the local economies where Killam operates.
Chief Financial Officer Dale Noseworthy said same-property apartment revenue rose 3.8% during the quarter. Weighted average rental increases on renewed and turned apartment units were 3.6%, in line with the prior quarter, with unit turns averaging 5.0% and renewals 3.0%. In-place rents remain roughly 10% below current market rents, Noseworthy added, giving the REIT room to keep pushing rents as leases turn over.
Killam held its full-year guidance, reaffirming targets of at least 3.5% same-property apartment revenue growth, at least 3.5% apartment NOI growth and at least 2.5% consolidated portfolio NOI growth.
On the expense side, apartment same-property costs rose 2.1% and consolidated portfolio operating expenses were up 1.9%. Management is factoring in higher utility costs, including an 18% water-rate increase in Nova Scotia in the third quarter and potential natural-gas cost pressure in the fourth quarter.
Funds from operations (FFO) came to C$39.6 million, up 0.5% from a year earlier, while FFO per unit was unchanged at C$0.32. Higher same-property NOI, contributions from The Carrick and lower administrative expenses helped offset higher interest expense and the April 1 departure of a large Sun Life office tenant at 50 Westmount Place. The vacancy trimmed second-quarter FFO by roughly C$900,000. Without it, FFO per unit would have increased 2.3% from the prior-year quarter.
Executive Vice President Robert Richardson said occupancy across Killam’s Atlantic portfolio remained above 98% during the quarter. Halifax, the company’s largest market, posted 6.3% same-property apartment revenue growth and 7.0% same-property apartment NOI growth.
Defense-related investment is becoming a visible, long-term demand driver for the region, Richardson said. Canadian Forces Base Halifax has about 10,000 military and civilian employees, and Nova Scotia is expected to receive roughly C$2 billion in defense-related investment. Another C$1 billion is expected across Atlantic Canada, primarily near CFB Gagetown outside Fredericton. The National Shipbuilding Strategy and the Halifax shipyard, which employs more than 3,000 people, add to that picture. Canada recently awarded ThyssenKrupp Marine Systems a contract to build and maintain up to 12 submarines, six of which are expected to be permanently stationed and serviced in Halifax beginning in 2034.
Management said it does not yet have a portfolio-wide estimate for employment growth from those initiatives, but Fraser noted Lockheed Martin, a contractor involved in shipbuilding work, expects to hire another 300 people to support its contracts.
Taken together, the second quarter highlights the uneven pattern of demand across Killam’s footprint. The Atlantic Canadian markets are operating with the kind of supply-demand balance that allows for steady rental growth, while the Sun Life vacancy and the softer London, Ontario student market create near-term friction. Management’s decision to keep its full-year targets intact suggests those headwinds are expected to remain manageable.
On the office side, Killam plans to reposition 50 Westmount Place into a mixed-use property with retail, office and dining uses. The redevelopment is expected to occur in three phases and be fully completed in late 2028. Fraser estimated redevelopment spending of between C$15 million and C$20 million. Before Sun Life’s departure, the building generated about C$5.2 million in NOI. After the repositioning and lease-up, management expects NOI to come in C$200,000 to C$300,000 below that prior level, while also creating room for potential future retail development.
Killam also continued to recycle capital through manufactured home community (MHC) sales. On Aug. 4, it closed the sale of an Ontario MHC portfolio with about 746 sites for gross proceeds of C$50.9 million. Net proceeds after debt were roughly C$40 million, and the money was used to reduce its credit facility. The company also has a Nova Scotia MHC portfolio of nine communities and about 1,300 sites under an agreement of purchase and sale, with a third-quarter closing expected. A separate 3,000-site portfolio of seasonal and year-round MHCs is under contract with an expected fourth-quarter close.
Following the Ontario disposition, debt as a percentage of total assets improved to 42.2% from 42.8% at June 30. The weighted average mortgage interest rate was 3.62% at the end of the quarter, and about 95% of apartment mortgages were insured by the Canada Mortgage and Housing Corp.
Killam remained active on the buyback front, spending C$31.3 million under its normal course issuer bid during the quarter to repurchase 1.7 million trust units for cancellation. Through the end of July, it had repurchased 2.7 million units, representing more than C$49.2 million in capital deployed. Management expects unit repurchases to remain a key part of capital allocation in the second half of 2026, depending on unit pricing.
On the development side, Killam’s Brightwood project in Waterloo, Ontario, reached substantial completion on June 1, ahead of schedule and below budget. The 128-unit property had a total development cost of C$55.1 million and was 45% leased, with stabilization expected in early 2027. Its 55-unit Eventide development in Halifax remains on track for fourth-quarter completion and was 22% pre-leased. Fraser said the project’s location near Spring Garden Road, major hospitals, Dalhousie University and medical facilities supports expectations for a relatively fast lease-up.
Killam Apartment REIT, based in Halifax, Nova Scotia, is one of Canada’s largest residential real estate investment trusts, with a C$5.4 billion portfolio of apartments and manufactured home communities. The company’s strategy focuses on increasing earnings from existing operations, expanding through accretive acquisitions and non-core dispositions, and developing high-quality properties in its core markets.