Time is Money; Killam Properties Progress Magazine

photo by SANDOR FIZLI

When you’re paying up to four teams of lawyers, you want your deals to close on time LEGAL SERVICES Let’s make a deal: Killam Properties’ Robert Richardson (left) and Philip
Fraser count on legal expertise to help grow their business.

BY PETER MOREIRA

Philip Fraser is recognized around the Atlantic region as an expert in multi-residential properties, but he also knows a thing or two about lawyers. The president and CEO of Halifax-based Killam Properties Inc. has been on a rampage buying properties around the region and has needed a team of crackerjack lawyers to help close the deals.

After forming the company in May of 2000, Fraser and executive vice-president and CFO Robert Richardson began assembling their property portfolio three years ago. Since that time, the company has closed about 70 deals and has built a portfolio that was worth $280 million as of April. With each deal, Fraser has counted on a team of lawyers to execute things efficiently, so if the deal didn’t close on time, it wouldn’t be the fault of the Killam team. Fraser says legal advice costs Killam hundreds of thousands of dollars each year, but it’s money well spent. “The firm has done a lot of acquisitions, and it needs someone who is able to get the job done,” says James Murphy, a Saint John-based partner with regional law firm Stewart McKelvey Stirling Scales. “It needs to operate smoothly and cleanly because it has so many of these deals on the go at any one time.” Murphy was interviewed for this article just one week after he had handled the legal work on one of Killam’s biggest deals yet. On March 31, the company agreed to pay $15.8 million for Pine Tree Manufactured Home Community, 840 lots with manufactured homes just outside Moncton. The acquisition increased Killam’s portfolio by 12.4% to 7,610 units. From the outset, Killam planned to grow through aggressive acquisitions, though few could have predicted just how aggressive. Fraser and Richardson both had spent their careers in real estate in the Halifax area; they opened their multiresidential publicly traded real estate company for Atlantic Canada. At the time, the company owned 143 apartment units.

The team spent two years establishing the company, which aimed to own apartment buildings with a middle- to upper-middle income tenancy. The goal: to own 10% of Atlantic Canadian multi-unit residential properties (the company is halfway there). The team was interested in rental apartments, but as it investigated the market, another asset class piqued its interest: manufactured home communities, or MHCs. Commonly dismissed as trailer parks, Killam believed that MHCs were superb investment vehicles.

They have a cap rate—rental income expressed as a percentage of a property’s purchase price—similar to that of apartment buildings, but the maintenance costs tend to be lower because the landlord isn’t responsible for heat or electricity. That can be a major consideration, given the soaring fuel costs over the past year. On top of that, MHCs have a much lower turnover than apartment buildings, so the risks of vacancy are lower. And MHC residents actually own their home, if not the land, so there is pride of ownership, meaning residents contribute to the upkeep of the property more so than in an apartment building. With this strategy as the blueprint, Killam began buying in earnest in early
2003 and assembling its team of lawyers.

One part of the network was already in place: When Fraser and Robertson floated their company in December of 2000, they listed it on the Canadian Venture Exchange (now the TSX Venture Exchange) in Calgary. The offering at 20 cents a share, which gave the company a market capitalization of $950,000, was organized by Yorkton Securities Inc., and the pair chose Calgary law firm Bennett Jones LLP to do the securities work. The company’s relationship with Ronald Barron, a partner with Bennett Jones LLP, grew strong enough that, by the time of the listing, Killam had named Barron its corporate secretary. He still handles the legal work on its securities issues, which is sizable given Killam’s frequent stock offerings to fund its acquisitions. To achieve its ambition of gaining critical mass in the Atlantic Canadian property market, Killam needed a network of lawyers with local knowledge, local contacts, and the right attitude about closing a deal on time. “We don’t need lawyers who are going to stall the transaction for any reason,” says Fraser.

It began a relationship with one of Atlantic Canada’s largest law firms, Stewart McKelvey Stirling Scales, which was created in 1990 through the merger of major law firms from each of the Atlantic provinces. Killam uses different lawyers in each province, tapping Murphy in Saint John for New Brunswick, James Travers in Charlottetown for Prince Edward Island, and Halifax-based Douglas Mathews for some Nova Scotian deals. “Most of our involvement is in due diligence,” says Murphy, “and making sure there are no surprises when it comes to the closing.” In Newfoundland Killam relies on Wayne Spracklin from White, Ottenheimer & Baker. If Killam is negotiating with a party that already is using Stewart McKelvey in Nova Scotia, Fraser will turn to Eric Thomson of Quackenbush, Thomson & Robbins. “We have to have a balance between the workload and the size of the transaction,” says Fraser.

If there’s a large deal, he has to make sure he has hired a big enough firm to get the work done so there is no last-minute panic or delay leading up to the closing date. “With the big firms,” he says, “whatever you give them, it gets turned around that night. It’s amazing how often the other side has been using a smaller firm they’ve been using for years, and they just don’t have the resources.” Picking up the pace From its modest base in February of 2002, Killam began buying properties in several Atlantic Canadian cities and towns with a trio of deals. Then in 2003, it accelerated that pace, paying $2.3 million for the White Frost Estate MHC in Moncton; $8.7 million for a Halifax apartment building; and $7.6 million and $5.5 million for apartment buildings in Saint John and St. John’s, respectively. By the end of the year, Killam’s total assets had almost quadrupled to $76.2 million from $20.1 million. It was just getting started.

One bonus was the benevolent interest rate environment, in which it was able to borrow money at 6% and invest it in properties with cap rates of 9% to 10%. “To some extent, when interest rates are at 40-year lows, time is of the essence,” says Jonathan Norwood, a partner with the investment firm Rudderham Norwood Ellison Investment Counsel in Halifax. In 2004 Killam ramped up its acquisition machine again. As well as making incremental purchases in Halifax, Saint John, and Moncton, Killam made the biggest deal in its history with the purchase last May of a 594-unit residential apartment portfolio in Dartmouth for $24.9 million. Shortly after that deal was announced, the company raised $44 million with a new issue of shares. Fraser says some of those deals were financed by issuing stock and cash to the seller, as well as by taking out a mortgage for the property. As the buyer, Killam could be required to pay for three or four teams of lawyers in such transactions—one each handling Killam’s property, mortgages, and securities work.

Last year Killam began to extend its grasp beyond Atlantic Canada when it bought 70 MHC units in Niagara Falls, Ont. For that deal, it brought in another Bennett Jones attorney, Toronto-based Scott Martyn. In all, the company logged 43 acquisitions with a total value of $167 million in 2004, up from a total value of $44 million in 2003. Its shares have increased to more than 13 times their value when the company listed five years ago. The questions now facing Killam are whether it can maintain its torrid pace of growth and whether its shares now reflect fair value. The second is difficult to answer because the company’s cash flow rose 635% last year, making it hard to value the shares because an investor can’t judge whether there will be similar growth this year. To an extent, an investor’s view of the company may hinge on his or her judgment on whether interest rates will stay down and vacancy rates in Killam’s markets remain low.

One thing is certain: Killam is going to keep buying. Fraser says expansion plans depend largely on the company’s access to capital, and that access is very good right now. To prove his point, Killam recently announced plans to raise $57.5 million through a private placement of convertible, unsecured, subordinated debentures and common shares. There’s no question—the Killam acquisition machine is gearing up for another year of spending.