In Q3/22, the Killam Apartment REIT (KMP.UN:TSX) delivered "record same-property occupancy and record lifts on unit turnover, showcasing widespread fundamental strength across its markets," reported Echelon Capital Markets analyst David Chrystal in a November 9, 2022 research note.
"We continue to like Killam for the fundamental strength in its core markets, its value-add development program, and its high-end suite repositioning initiatives," Chrystal commented. "We believe these will contribute to solid organic net operating income (NOI) growth and consistent net asset value (NAV) growth over the near and longer term."
Record Highs on Two Metrics
As far as the strengthening fundamentals of "the largest residential landlord in Atlantic Canada," Chrystal relayed that during Q3/22, its same-property occupancy reached a historical high of 98.4%, an increase from 97.4% a year earlier. Another record for Killam was a peak in lifts on unit turnover of 11%.
"Combined with a 2.1% average increase on renewals, the weighted average increase for the quarter was a healthy 4.2%," Chrystal noted.
NOI Increasing Organically
The analyst also highlighted that organic net operating income growth continues in a positive direction. Specifically, the apartment portfolio experienced a same-property revenue boost of 4.8% due to strong leasing, driving up NOI.
Echelon expects Killam to have "modest positive growth in the near term as underlying fundamentals continue to strengthen.
As for the manufactured home communities portfolio, it saw a 6.7% organic NOI growth due to a 12.7% revenue growth from the seasonal resort portfolio.
Commercial same-property NOI increased 6.6%, thanks to occupancy improvements and increased net rents.
Pipeline To Boost NOI
Regarding Killam's development pipeline, leasing continues to go well at three projects delivered so far this year. The Kay in Ontario is fully leased, Latitude is 93% leased, and Luma is 63%.
Looking ahead, Chrystal wrote, "the REIT's active development pipeline should contribute to cash flow and NAV growth over the next few quarters."
Killam is expected to curtail acquisitions in the short term due to difficulty in equity markets and few transactions. Yet Echelon expects Killam to have "modest positive growth in the near term as underlying fundamentals continue to strengthen.
However, it has three developments, already in the hopper, that is slated to come online in 2023 and 2024, which "should contribute meaningfully to NOI (CA$180 million budget, 4–5% projected development yields) once stabilized."
Target Price Lowered
Echelon revised its estimates on Killam, increasing interest expense on 2023 refinancing activity as well as the cap rate used to value the REIT's portfolio. These changes led to a reduction in its per-unit NAV estimate, to CA$21.40 from CA$22.50.
To reflect the new NAV per unit, Echelon lowered its target price on Killam to CA$21.50 from CA$22.50. In comparison, the REIT is trading at about CA$16.43 per share. Killam remains Buy rated.
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Disclosures For Echelon Wealth Partners Inc., Killam Apartment REIT, November 9, 2022
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Company: Killam Apartment Real Estate Investment Trust | (KMP.UN-TSX)
I, David Chrystal, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.
During the last 12 months, Echelon Wealth Partners Inc. provided financial advice to and/or, either on its own or as a syndicate member, participated in a public offering, or private placement of securities of this issuer.
During the last 12 months, Echelon Wealth Partners Inc. received compensation for having provided investment banking or related services to this Issuer.
The Analyst has had an onsite visit with the Issuer within the last 12 months on October 2022, Halifax property tour.