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May 8, 2024
Killam Apartment REIT Double digit club
Outperform
TSX: KMP.UN; CAD 16.95
Price Target CAD 24.00 ↑ 23.50
Our view: KMP registered its first double-digit SP NOI growth since 2010. We think its upwardly revised NOI target/guidance of 8%+ is realistic and achievable, implying renewal spreads at +3.7%, turnover rent growth of 20% (at 17% turnover rate) and expense growth of 4%. There is no sign of deceleration yet with KMP indicating that market rent trends continue to be ‘steady.’ KMP is preparing for its next wave of development activity. At 5.8% implied cap, 16x 2025E AFFO and $210K/suite, KMP’s valuation looks attractive both on an absolute and relative basis. Maintain OP.
Key points:
Operating metrics remain strong with KMP registering double digit NOI growth: SP NOI growth was +10.3 % (SP-Rev +5.9%; SP-Exp -0.7%). Apartment SP-Occupancy was 98.2% (-30 q/q, -10 bps y/y); SP Apartment rent +5.8% y/y. Rent growth on turnover was 19.6%. Renewal spread was 3.7% for a blended spread of +5.4% - blended spread should improve through the year with higher turnover rate in summer leasing season.
2024 SP NOI growth target/guide increased to 8%+ from 6%+ (last quarter’s guide proved too conservative). KMP expects turnover rate to stay above 17% and as such, 20% rent growth on turnover combined with 3.7% renewal rate increase implies rent growth of 6-7%. Assuming more inflation cost increases of ~4%, NOI growth should land in the 8% range which we think is realistic and achievable. MTM rent opportunity sits at 28%. Our tracking of KMP’s April listed rents show 0.48% further improvement over March & KMP indicated seeing continued steady pace of rent growth. Moreover, 3 assets in lease up (Nolan Hill II 45% leased, Governor 75%, Civic 66 88%) should add $3.4M ($0.027/unit) of FFO in 2025.
Capital allocation: KMP acquired two Halifax assets for $11M ($220K/suite) and Calgary land for $3M (next to an existing KMP’s asset). In 2024, KMP is looking to sell at least $50M. Post quarter, it sold 84-unit apartment in Guelph for $19.2M ($229K/unit). KMP broke ground on Eventide, a 55- unit Halifax project ($34M) with a 4.5-5.0% development yield. The Carrick development ($83.5M) in Waterloo is underway (4-4.25% yield), and is setting up for its next wave of development activity (Calgary, Waterloo, Halifax) given better economics from Fed’s various initiatives.
Attractive valuation, both relative and absolute: KMP trades at an implied cap rate of 5.8%, p/suite of $210K and 16x 2025E AFFO, ~3x discount to peers. We continue to think that a tighter discount is warranted given increased diversification, MTM rent opportunity, higher renewal rent in NS, leverage at low end of peers (net debt/EBITDA 10.2x, debt/assets 42%) and relatively low total capex spend. Our NAV/unit of $22 (+5%) is based on a cap rate of 5.1% (+5bps), vs reported pre-tax BV/unit of $24.18 (+4.4% q/ q), based on 4.62% (+0bps q/q) cap rate for apartment and 6.04% (+0bps q/q) for MHC. Our target of $24 (+2%) is based on parity (unchanged) to forward NAV. Maintain OP.
