TD Notes RESIDENTIAL REITS Q2/24 REVIEW — FUNDAMENTALS TRANSLATING INTO EARNINGS GROWTH
THE TD COWEN INSIGHT
Q2/24 results for residential REITs met elevated expectations, with favourable supply/ demand fundamentals translating into strong earnings growth (AFFO +11%). Management commentary remains confident on near term operating fundamentals despite a slow down in market rent growth at the top end. Acquisition activity should also begin to pick up. Our top picks remain CAR.un and BEI.un.
Operating trends continue at robust levels. Same property NOI for the CAD focused
REITs was 9.5% in Q2/24 (ranged from 7.4% — 14.2%), down only slightly from Q1/24's very strong 9.9% (Figure 3). This was largely driven by favourable uplifts on new leasing, which averaged 15%. Renewals averaged 3% (aided by BEI's 8.8%). While management commentary suggested there was no material change in the mark-to-market gap, uplifts on new leases have slowed marginally from the peak reached in Q4/23. We view this largely as a function of more turnover being with shorter tenured tenants that have rents closer to market rents and market rent growth slowing in most markets (especially as the top
end absorbs some supply). With overall new supply (especially at the affordable end) not keeping up with recent population growth, fundamentals should remain robust through our forecast period. Our estimates reflect this, with forecast average annual SPNOI growth of 8.4% from 2024-2026 for CAD focused apt REITs and 7.9% for our overall residential coverage universe.
Results vs Expectations (Figure 1). Overall results were largely in line with expectations, with AFFO/unit growth of +11% (weighted average) coming in slightly ahead of our estimates (+1%). Most REITs beat or were in line, except for BSR (+12% vs our est), and Minto (+5%). MRG.un (-6%) and DRR (-4%) were slightly below expectations.
Estimate revisions. 2026 estimates Introduced. Overall, we made only minor (mostly positive) revisions to our 2024 estimates (+1%) while on average our 2025 estimates were unchanged. We also introduced 2026 estimates, which call for 9.2% overall growth for CAD focused apt REITs and 8.8% for our residential coverage universe overall.
Valuation (Figures 6-8). On forward P/Consensus AFFO, Canadian residential REITs (BEI.un, CAR.un, IIP.un, KMP.un, and MI.un) trade at only a 3% premium to US peers, despite having nearly 3x the y/y growth expected in 2025 (Figure 5). On P/NAV, Canadian residential REITs trade at an 14% discount vs US REITs at a 2% premium.
Killam Apartment REIT (BUY-rated, $22.00 Target Price) – link. KMP's 2024 earnings growth is expected to lag its peers, which we believe is being reflected in its current relative valuation. Looking to 2025, we believe strong op fundamentals, a more favourable refinancing environment (which benefits KMP most), and dev't lease up headwinds turning to tailwinds should allow KMP's growth to be back in line and should result in an improved valuation.