Killam Apartment REIT T.KMP.UN

RBC

[retiredcf]

September 27, 2024

It's fairly sunny in Halifax
Property tour takeaways with Killam and CAP REIT

Event: We toured some of Killam Apartment REIT’s (“KMP”) and CAP REIT’s (“CAP”) properties in Halifax this week. We summarize the key takeaways below.

Key Takeaways:

Killam (Halifax = ~32% of apartment NOI)

• A developer mindset: What was evident from the tour was that 1) KMP’s portfolio sits on acres of land prime for development as the city continues to grow. Several of these assets were acquired many years ago on an attractive cost basis. Examples of such assets include Harlington Crescent Apartments which sits on 16 acres of land, Victoria Gardens in Dartmouth on 10 acres of land with 1,400+ units possible across multiple phases, 2) KMP has strategically taken a long term view and assembled land, especially in the city centre, that can be developed over time (e.g., Eventide – 55 units currently underway, Medical Arts – 200 units, Hollis – 100 units). Portfolio wide, excess density totals 4,165 units. In Halifax, it totals 623 (at least the initial phases) and this existing density is not included in its IFRS values. Target development yield on most projects is ~5%.

• Not running into affordability ceiling yet: The rent affordability in Halifax relative to other major cities has been a contributor to its recent population growth (+4.1% in 2023). While we think KMP owns some of the best assets in the peninsula (including recently completed, fully leased luxury 12-unit The Governor), KMP’s properties in Halifax run across varying price points. Over half of its Halifax portfolio has an average monthly rent of <$1,500 and ~2/3 <$1,750. With average market rent in the $2,500 range (and KMP is not seeing any meaningful slowdown), its Halifax portfolio MTM sits at +32% which should allow it to continue to drive growth on turnover. On renewals, there is a rent cap of 5% in Nova Scotia, which was extended until Dec 2027.

  CAP (Halifax = ~7% of CDN apartment NOI)

• Portfolio mix: CAP’s Halifax portfolio can be characterized by a balanced mix of high rises of older vintages (1970s) well located in the peninsula, surrounding the Citadel National historic site and newer more recently acquired assets both in the peninsula and in the suburb of Bedford. Given this mix, there is not a lot of excess density.

• MTM upside: As expected, the embedded MTM rent upside is higher in the older assets in the city centre (35% to 50%) while the newer assets (built in the 2000s) has MTM in the 15% to 25% range. One notable property, Harbour View, a historically troubled asset that has been turned around, has a 77% MTM upside.

• CBRE presentation: 1) Recent trades are in the 4.5% cap range for new builds ($400K-430K/suite, $390K for suburban), 2) Replacement cost today sits at ~$400K to mid-500K/suite.

• Bigger picture message by CAP: This year, CAP has been a net seller to the tune of $1B+ once the MHC portfolio sale is closed in Q4. Moreover, CAP will be receiving a special distribution of $172M from ERES on its recently-announced €748M portfolio sale. CAP is willing to sacrifice earnings growth for lower leverage from asset sales, which on a proforma basis, would be in the mid-30% vs. 41% as of Q2/24. (note that our 2025 estimate does not yet include the MHC or ERES portfolio sale). The acquisition market seems to be improving with some institutional players coming back and as such, CAP believes that its window of opportunity to buy newer assets at attractive prices is likely narrowing.

  Overall - Halifax:
  • A few cranes out there: One can’t help but notice the presence of a few cranes across Halifax, a reflection of the meaningful population growth of the last two years and a generally pro-development city including the lending environment. Clearly, supply risk is always one to watch especially when a city is growing fast.

• Here is where we stand today:
Currently under construction are ~11K units (9.5K apartments, representing 17% of existing rental universe of 56K). In the last decade, starts have averaged just under 3K.

•  In 2023, starts were just under 5K (~4K apartments) and YTD August 2024, starts average ~4K.

•  Against the new supply, Halifax CMA population grew ~20K in 2023, ~17K in 2022, implying ~9K and ~8K, respectively, of new housing was needed in the last two years. As such, there has been a  material deficit over the last two years.

•  Going forward, if the ~11K units being constructed are delivered over the next two years, it would  imply that a population growth of ~12K per year (vs. ~20K in 2023, ~17K in 2022) is required for demand/supply to be in balance. As such, we expect the Halifax market to be, at worst, a balanced market in the near term.