It’s Not Just An East Coast Thing
Our Conclusion
KMP reported an in-line Q2/24, continuing to exhibit strong operations
resulting in another quarter of robust organic growth. Although unit turn
remains muted due to the lack of affordable housing and renters reluctant to
part with much more affordable legacy rents, it nonetheless remains crucial
for continued growth, as we continue to expect rental lifts in the ~20% range.
With an attractive mark-to-market opportunity within the portfolio of ~25%,
unit turnover will remain a topic of focus given that a good portion of the
portfolio is exposed to differing degrees of rent control policies. Selective
development and increased usage of the REIT’s NCIB program both remain
a viable, and attractive, alternative use of capital given the success of the
capital recycling program. We are increasing our forward NAV estimate to
$23.00 (previously $22.00) and accordingly increasing our price target to
$23.00 , reflecting higher-than-expected organic growth through 2024 as
KMP continues to capture the current (and substantial) market-to-market
spread on in-place rents. Killam remains Outperformer rated.
Key Points
Operating Fundamentals: Q2/24 FFOPU was $0.30, in line with
consensus, and flat Y/Y. Same-property metrics were positive, with same-
property revenue increasing 6.1% and a 140 bps increase in the same-
property NOI margin (to 66.2%), resulting in an 8.5% increase in SP-NOI.
Debt And The Rate Environment: As the interest rate environment
continues to stabilize, we are being presented with a normalized view of what
to expect in terms of debt rolls. Killam’s current weighted average interest
rate on mortgage debt of 3.32% compares to the most recent refinancing at
4.59%. KMP has ~$195MM of mortgage debt maturing in 2024 at a 2.77%
weighted average interest rate that will ostensibly increase its financing costs
through 2025.
Balance Sheet And Capital Recycling: Debt/Total Assets was 41.2%, a
decrease of 170 bps since year-end 2023 and marks the lowest ratio in the
REIT’s history. The REIT continues to focus on reducing leverage,
specifically variable rate debt, through its value-enhancing capital-recycling
program and general operations. During the quarter, Killam completed the
disposition of an 84-unit apartment building located in Guelph, Ontario for
gross proceeds of ~$19.2MM. This brings the total dispositions completed in
H1/24 to $21.6MM. Subsequent to quarter end, the REIT completed the
disposition of a 66-unit apartment building located in PEI, for a sale price of
~$8MM and net cash proceeds of $2.7MM. Killam expects to complete a
minimum of $50MM in dispositions by year end, with proceeds used to
reduce the balance on its credit facility, fund future development, support
strategic acquisitions and potentially buy back trust units. The REIT had
~$161MM of liquidity at year-end (as measured by undrawn facilities +
current cash)