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FFO GROWTH TO ACCELERATE IN H2/24 AND INTO 2025
THE TD COWEN INSIGHT
Developments in lease up weighed on Killam's Q1/24 results (likely the lowest FFO growth among peers), but this should reverse in H2/24 and provide a nice tailwind to 2025 FFO growth. From a fundamentals' perspective, Killam delivered a solid start to the year with double-digit SPNOI growth and an upward revision to its 2024 full-year outlook to 8%+ (previously 6%+).
Impact: NEUTRAL
Management estimated that its developments in lease up were a $1.2mm drag ($0.01/ unit or 4%) on Q1/24 results. This should begin to reverse in Q3/24 as the assets stabilize and add ~$3mm in FFO (~$0.027/unit) in 2025. Operating fundamentals remain strong, with Killam achieving +10.4% SPNOI growth versus the +7.6% average over the past four quarters. Although turnover is expected to continue trending lower in 2024, the current mark-to-market remains elevated (~25%), which should allow Killam to achieve strong uplifts and deliver on its increased 8%+ SPNOI target for the year. We continue to view Killam as well-positioned to benefit from improving demand fundamentals and forecast 9.2%/7.0% SPNOI growth for 2024/2025. Management has lowered its suite renovation target to 300 for 2024 (2023: 345 completed) as strong market fundamentals both decrease turnover and allow for the ability to achieve market rent growth without the need for a full-suite repositioning.
Capital Recycling. With the post-quarter sale of Woolwich in Guelph (84-unit apartment building) for $19.2mm, Killam is on track to meet its $50mm disposition target for the year. Management noted that future dispositions would likely be focused on its Atlantic Canada portfolio, and it has already identified potential assets. Management does not anticipate being active on the acquisition front in the near term.
Developments. With the recent initiatives put forth in the Housing Accelerator Fund (including allowing for increased density and faster approvals), management's commentary suggested that it could start several additional developments over the next few years. The developments next up in Killam's pipeline are lower cost (mix of geography and type of build). As such, management would be open to using either conventional construction financing or government ACLP funding.
Forecasts. Our 2024 AFFO/unit estimate is down 2% on higher interest expense and G&A, while our 2025 estimate is unchanged. Our NAV/unit is +1.4% to $22.20.
Our Investment Thesis
Overall, we expect strong apartment fundamentals across Killam's portfolio over the medium term to drive high-single-digit AFFO/unit growth. Killam's portfolio, which is largely concentrated in Atlantic Canada, in our view, stands to benefit from the strong population growth/in-migration seen in the region in recent years, which should drive continued demand for apartments rentals in the region. We expect that growth in per-unit metrics will also be driven by a sizable exposure to the strong Ontario market. We expect portfolio quality to improve going forward, with proceeds from non-core dispositions being redirected to new developments in Killam's target markets.
