Killam Apartment REIT T.KMP.UN

RE: Why the drop?

[baudelaire]

"KMP is sinking but why? Second quarter results were mostly good with an improving occupancy level and FFO. The probable stop in the rise in interest rate is also a recent good news as it reduces Killam financial risk. May be we are just experiencing a summer effect or are there some bad news pending?" Vacancy in NFLD and PEI was 6.5% and 7.5% respectively. Hopefully they are not as committed to these markets. FFO this quarter includes proceeds from manufactured home sales and the sale of surplus lands. On the cc they mentioned acquisitions being in the 7% to 8% range. It wasn't long ago that they were talking of double digit cap rates on acquisitions. Unfortunately the share price hasn't followed property prices upward the last few years. The effects of this mismatch are made worse as the acquisitions' accretive benefits are distributed over a much larger asset and share base. (Why did they wait for the shares to fall from >$3 to $2.30 before doing the private placement?) Some shareholders may have been disappointed there was no conversion to a REIT. The longer the shares stay in the low two dollar range, the more pressure there is on management to do something, perhaps including a conversion. OTOH, it is obvious that the company needs the cashflow to reinvest in their turnaround projects, the conversion of units from oil to gas heating, etc. Capital improvements and energy upgrades used up more than $20 million in 2005. There has been some talk of the company getting involved in a few residential developments. No annoucements have confirmed anything but the market might view this as more risky than just collecting the rent. They are at or near their desired 10% of market share in most of their targeted Atlantic markets. IMHO, it is time to move on and announce a committment to Ontario, Quebec and the West beyond the present accumulation of trailer parks. Apartments in smaller Ontario and Quebec cities comparable to those in Atlantic provinces should be available in the 7% to 8% cap rate range. According to Statscan, all of the Atlantic provinces showed a decline in population for the first quarter of 2006 except PEI. 2005 verus 2006 is the same. I'm not sure how many years back the decline reaches or if it is accelerating. Is there a better reason for the company to move into other provincial markets? Long term buy and hold investors would certainly appreciate such a move. In terms of the apartment portfolio, about 7K units, it is still small enough to outgrow or diminish any drag the Atlantic properties may have over the next decade by acquiring elsewhere in the rest of Canada. For the sake of comparison, CAP has roughly 25K units and BEI has 33K or so. The "stop" to the rise in rates is good, especially for those companies that like 75% or more debt to GBV. IIRC, the NOI to interest coverage ratio was something like 1.6x for Killam - DBRS has Riocan at over 2.5x.