Killam Apartment Real Estate Investment Trust

Killam Apartment Real Estate Investment Trust (TSX: KMP.UN) is one of Canada's largest residential landlords, owning, operating and developing CAD 3.4 billion portfolios of apartments and manufactured home communities.

The Company recently issued 4,036,500 Units in a public offering, including 526,500 Units on the exercise of an Over-Allotment Option at a price consideration of CAD 17.10 per Unit for gross proceeds of ~CAD 69.0 million. The Group would use the above funds to repay the amount outstanding on its credit facility amounting ~CAD 40 million.

Q2FY20 Financial Highlights: KMP impresses with its top-line numbers, wherein failed to retain the momentum in its bottom-line. Property revenue grew 9.6% y-o-y to CAD 64.899 million while net income plunged to CAD 21.509 million, reflecting a steep fall of 74% on y-o-y basis. The decline was primarily attributable to a higher fair value gain on investment properties recognized in the previous corresponding quarter. During the quarter, the Group generated Funds from Operations (FFO) per unit at CAD 0.26, 4.0% higher than the previous corresponding quarter. Increase in the FFO was underpinned by the increase of NOI from strong same property performance coupled with a positive impact from the recent acquisitions and development properties. The Company reported AFFO per unit at CAD 0.22, up 10% from the previous corresponding quarter. Net operating income increased to CAD 41.5 million, reflecting a growth of 10.7% on an annual basis.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: In case of further restrictions on account of COVID19 pandemic, the Company might see challenges in rent collection, primarily from the commercial businesses that are categorized under ‘non-essentials’. Also, the Group might face pressure on residential rent collection on account of higher unemployment.

Valuation Methodology: P/E Multiple Based Relative Valuation (illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of KMP.UN corrected ~4% so far this year.  The Company intends to reduce its debt levels from the recent equity offering, which is encouraging. Further, this offering provides additional capital flexibility and increases the acquisition capacity to over CAD200 million, which is a key positive and would help the group in acquiring properties in falling real-estate prices. The group stated that with active development and acquisition pipelines, it expects to continue to execute its strategy of developing high-quality properties, expanding the portfolio and diversifying geographically. Recently, the Company added 156 new apartment units to its BC portfolio at a price of CAD 60.0 million, with an all-cash yield of 4.35% on an annualized basis. The property is in the lease-up stage and is currently 90% occupied, which is impressive looking at the current economic scenario. The group stated that rent collection remained strong during the quarter, and the group collected 98.3% of the rent in July as well. The management does not expect a material increase in rent default. Further, at the last traded price, the stock was offering a dividend yield of 3.8%, which is lucrative considering the current interest rate environment. We have valued the stock using the P/E multiple based illustrative relative valuation and have arrived at a target upside of double-digit (in percentage terms). We have taken peers like Canadian Apartment Properties Real Estate Investment Trust, Allied Properties Real Estate Investment Trust and WPT Industrial Real Estate Investment Trust for the purpose. Considering the aforesaid facts, current trading levels, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 18.10 on 11 August 2020.

KMP.UN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

SmartCentres Real Estate Investment Trust

SmartCentres Real Estate Investment Trust (TSX: SRU.UN) is a Canada based real-estate company, which engages in development, leasing and property development of shopping centres, residential rental buildings, retirement homes, office buildings and self-storage facilities.

Q2FY20 Financial Highlights: SRU.UN declared its quarterly results, wherein the company reported Net rental income and other of CAD 105.638 million as compared to CAD 125.782 million in the previous corresponding period (pcp). The decline was majorly attributable to a lower rental from investment properties and other coupled with an increase in property operating costs. The quarter was marked by higher general and administrative expense and higher earnings from equity-accounted investments. However, the business witnessed steep correction in property rates, and the company recorded a loss from fair value adjustment on revaluation of investment properties at CAD 197.364 million, as compared to an income of CAD 4.015 million in pcp. Net loss and comprehensive loss stood at CAD 133.674 million as compared to a profit of CAD 95.513 million in pcp. Cash and cash equivalents stood at CAD 532.078 million, while total assets were recorded at CAD 10,382.902 million at the end of the second quarter of FY20. Cash flows provided by operating activities was lower at CAD 125.511 million as compared to CAD 133.349 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group might witness headwinds from lower rent collection due to the closure of several non-essential businesses, which would dampen the cash flow of the company.

Valuation Methodology: P/E Based Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock corrected ~32% so far this year amid volatility in the equity market on account of COVID 19 pandemic. Amidst the ongoing downturn, the company reported an impressive occupancy rate of 97.8%, as compared to an occupancy rate of 98% in the previous corresponding quarter. The company has esteemed clientele like Walmart Canadian Tire, Loblaws, Metro, Dollarama, Sobeys, etc., which suggest that the chances of default are lower. The company has a strong relationship with industry-leading retailer Walmart and has partnership across 115 locations with full grocery and pharmacy, which is expected to lead to a stable rent in the coming days. Further, around 60% of the rental revenue comes from tenants who are offering 'essential services' and are opened fully or partially, ensuring stable cash flows for the business. The company is undergoing through three construction activities at VMC with its partners, Penguin and CentreCourt Developments. The company expects earnings of ~CAD 50.0 million from the first two properties from Q3FY20 while the company further expects ~CAD 20.0 million from third properties from FY21 onwards. At the last traded price, the stock is offering a lucrative dividend yield of ~8.9%, which is encouraging from an income investor's point of view. We have valued the stock using the P/E multiple based illustrative relative valuation method and have arrived at a target upside of double-digit (In percentage terms). We have taken peers like First Capital Real Estate Investment Trust, RioCan Real Estate Investment Trust etc. for the purpose. Considering the current trading levels, stable occupancy levels, we recommend a 'Buy' rating on the stock at the closing market price of CAD 21.17 on 11 August 2020.

SRU.UN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.