Growing In All The Right Places Our Conclusion
KMP reported an in-line Q1/24, reflecting double-digit organic growth and a
positive upward revision to its 2024 NOI outlook. We expect a continuation of
the REITs’ successful capital recycling program through 2024, as well as
continued focus on selective development. Increased usage of the REIT’s
NCIB program also remains a viable, and attractive, alternative use of capital
given the recent downturn in the unit price. At an attractive mark-to-market
opportunity within the portfolio of 25-30%, unit turnover will remain a topic of
focus given that a good portion of the portfolio is restricted through rent
control policies.
We maintain our $22.00 NAV estimate and price target, 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: Q1/24 FFOPU was $0.26, in line with both our
estimate and consensus, representing a ~4% increase from the comparable
period. Same-property metrics were positive, with same-property revenue
increasing 5.9% and a 70 bps decrease in same-property operating
expenses, resulting in a 10.3% 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 3.23% compares to the most recent refinancing at
4.32%. KMP has ~$299MM of mortgage debt maturing in 2024 at a 2.89%
weighted average interest rate that will ostensibly increase its financing costs
through 2025.
Balance Sheet And Capital Recycling: Debt/Total Assets was 42.1%, a
decrease of 80 bps since year-end 2023. The REIT continues to focus on
reducing leverage, specifically variable rate debt, through its value-
enhancing capital-recycling program and general operations. Killam expects
to complete a minimum of $50MM of dispositions in 2024, with proceeds
used to reduce variable rate debt exposure, fund future development activity,
for strategic acquisitions, and possibly within its NCIB program. The REIT
had ~$147MM of liquidity at year-end (as measured by undrawn facilities +
current cash).
Outlook Revised: A combination of strong rental rate growth and
moderating expenses produced robust 10.3% SPNOI growth in Q1/24. The
REIT believes this combination is likely to drive NOI growth higher than we
have seen in previous years. As such, management expects to exceed its
initial 2024 NOI growth outlook, revising its 2024 target to 8%.