Management’s Discussion and Analysis Dollar amounts are in thousands of Canadian dollars (except as noted) Business Strategy Maximize NOI from Existing Portfolio Growth through Acquisitions Growth through Development Investment in New Properties Geographic Diversification Killam ProPerties inc | 2013  29 Management is focused on increasing the value of its real estate portfolio by maximizing revenue and operating efficiencies. To achieve NOI  growth, Killam must address three critical factors; occupancy, rental rates, and operating costs. The Company focuses on customer service,  investing in its properties, leasing and marketing initiatives, and training its employees to maximize these outcomes. Management is able to directly control approximately 40% of operating expenses, including labour costs, repairs and maintenance and property  general and administrative expenses. The remaining operating costs, including utilities and property taxes, are less controllable. Killam’s  apartments are currently heated with a combination of natural gas, electricity and oil. Volatile oil and natural gas prices have an impact on  Killam’s operating costs. To mitigate this volatility, the Company is active in energy conservation initiatives and regularly monitors its energy  usage. Killam is expanding its portfolio by acquiring newer, centrally located buildings and is focused on Ontario. During 2013 Killam completed $121.1  million in acquisitions, including properties in Toronto, Ottawa, Moncton and Prince Edward Island. Killam enhances its portfolio growth opportunities by developing properties. Killam started apartment developments in 2010 and has completed  five properties to‑date, including four in 2013. Building new properties directly allows Killam to control the quality and features of the buildings,  maximizes the use of excess land and eliminates the seller’s profit, generating higher returns than through acquisitions. Management expects to  limit development projects to approximately 5% of the balance sheet on an annual basis.  In addition to developing new properties, Killam also acquires newly constructed assets. Management believes that increasing Killam’s ownership  in new, high‑quality buildings will result in above‑market and long‑term demand for the Company’s assets from an aging population, reduce  annual capital requirements for deferred maintenance, and transform Killam’s portfolio, over time, into one of the highest quality portfolios in  canada.  Demand by renters for newly constructed rental apartments is strong, with high occupancy rates and above‑average rents. CMHC’s Fall 2013  Halifax Rental Market Report reported 97.3% occupancy for properties built in 2000 or later, compared to 96.8% for all rental markets in the city.  The average rent for a two‑bedroom unit in these newer buildings was $1,320 per month, compared to a market average two‑bedroom rent of  $976.  The new properties added to Killam’s portfolio are condo quality, providing tenants with features and amenities traditionally associated with  ownership. The Company believes that demand for this type of rental accommodation will grow given an increasing number of homeowners  reaching retirement age and looking for alternatives to home ownership. Killam is also attracted to the low capital spend requirements from new  assets compared to older buildings, which often include significant capital investment to address deferred maintenance. Generally, the amount  of annual capital to maintain a property increases as the building ages. In addition, with energy efficient features, the NOI margins are generally  higher in newer buildings. With strong demand for the acquisition of apartments over the last three years, cap‑rates have declined and the pricing differential between  older and newer buildings has reduced. This enables Killam to increase the amount of newer apartments in its portfolio without paying a  significant premium for quality assets.  Geographic diversification in the apartment segment is a priority for Killam. With a 14.2% market share in its core markets in Atlantic Canada,  Killam is the region’s largest residential landlord. The maximum market share Management foresees Killam reaching in Atlantic Canada is  between 15%‑18%. With Atlantic Canada representing only 4.9% of the Canadian rental market, Killam’s growth opportunities increase  significantly when considering assets outside Atlantic Canada. With its strong operating platform, Killam can support a larger and more geographically diverse portfolio. The Company is actively building  a portfolio in targeted Ontario markets, including Ottawa, the Greater Toronto Area, and Southwestern Ontario. An increased investment in  Ontario, and potentially Western Canada, will increase the Company’s diversification and exposure in high growth centres in Canada. Based on  the Company’s portfolio at year‑end, 15% of Killam’s 2014 NOI will be generated in Ontario. Management has set a long‑term target of growing  the amount of NOI generated outside of Atlantic Canada to 50%.  In 2013, Killam sold a portfolio of ten MHCs in New Brunswick that allowed Killam to crystallize the increased value of this portfolio at attractive  cap‑rates. This creates moderate short‑term dilution but it provides the Company with funds to continue its geographic diversification by  accretively growing its apartment portfolio in Ontario.