Killam Apartment REIT T.KMP.UN

RBC 2

[retiredcf]

Their upside scenario target is $27.50. GLTA

November 7, 2024

Killam Apartment REIT
A relatively more constructive 2025 outlook

Outperform

TSX: KMP.UN; CAD 18.42

Price Target CAD 23.50 ↓ 24.50

Our view: KMP’s preliminary 2025 outlook was a relatively constructive one. Yes, there is rent pressure at the high end of the market, yes there will be some rental incentives & occupancy slippage in some markets. But, KMP’s low in-place rents, healthy MTM cushion, above-normal (albeit lower than ’24) renewal rate growth and 2-4% expense growth suggest that 5-6% SP NOI growth looks attainable. In the meantime, the immigration- driven selloff has resulted in the stock trading at an implied cap rate within a stone’s throw (<75bps) to certain commercial REIT peers – a buy opportunity. Price target moves to $23.50 (-4%). Reiterate OP.

Key points:

Modest occupancy slippage in certain markets but overall operating metrics remain strong: SP NOI growth was +7.4% (SP-Rev +5.9%; SP-Exp +2.6%). General opex grew +3.6%, property tax +5%, offset by lower utilities -4%. SP NOI margin: 68.7% (+100 bps y/y). Apartment SP-Occupancy was 97.9% (-30bps q/q, -50 bps y/y), the slippage driven by London (student- driven, now full), Calgary (downtown) & Victoria. SP Apartment rent +7.2% y/y. 2024 SP NOI growth target/guide maintained at 8%+. Rent growth on turnover was +20.5% vs. last 4 quarters at +20.2%/+19.6%/+19.8%/+16.8%. Renewal spread was 4.7% for a blended spread of +7.7%.

Market rent trends – Atlantic Canada doing relatively better: KMP noted softening trends in Western Canada (particularly Calgary) and at the higher end of ON markets, stable in NS and accelerating across rest of Atlantic Canada. Affordability challenges leading to higher incentives in select markets. Our tracking of its October asking rents shows -0.2% over Sep.

A relatively constructive 2025 outlook: Renewal rate is expected to decline slightly from 2024 (+4.3% YTD) but stay above historical average (~2%). There is a potential cap in NB at 3%. MTM rent opportunity of +22% provides a good cushion even if market rents decline. And if the top end of market sees rent pressure, KMP expects to be protected by its low in- place monthly rents of $1,443 in Halifax. Moreover, ~70% of its markets have non-permanent residents as % of population of 5% or less. All said, if we assume 20% of suites turn at +15% rent growth (vs. 20% in Q3) and renewals at 3.5% (vs. 4.7% in Q3), and occupancy drops 50 bps, revenue growth is in the 5% range. Assuming expenses grow at 2-4%, NOI growth of 5-6% looks attainable. We are modeling +6% FFO growth in next two years.

The relative sell-off of apartment names on the back of the immigration news presents an opportunity. KMP’s implied cap rate of 5.7% is within a stone’s throw (<75 bps) of some of the retail, industrial and yes... office REITs. Our NAV/unit of $22.50 (unchanged) is based on a cap rate of 5.15% (+5bps), vs. pre-tax BV/unit of $25.51 (+2% q/q), based on 4.6% cap rate for apartment and 6.0% for MHC. Our price target of $23.50 (-4%) is based on a 5% discount (vs. parity) to forward NAV.