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 announced a monthly distribution of CAD 0.05667 per unit, which will be paid on October 15, 2020.

Q2FY20 Financial Highlights: Killam announced its quarterly results, wherein the company reported Property revenue to CAD 64.899 million, depicting a growth of 9.6% y-o-y. Net operating income stood at CAD 41.516 million, reflecting a growth of 10.7% on y-o-y basis. Net income plunged to CAD 21.509 million, reflecting a steep fall of ~74% from CAD 82.789 million recorded in the previous corresponding quarter. The decline was primarily due to the result of higher fair value gain of CAD 73.062 million on investment properties recognized in Q2FY19. Funds from Operations (FFO) per unit, during the quarter stood at CAD 0.26, reflecting a growth of 4% on y-o-y basis. Growth in FFO was driven by the improved NOI resulting from strong same property performance along with positive impact from the recent acquisitions and development properties. The Company reported AFFO per unit at CAD 0.22, grew 10% from the previous corresponding quarter. Due to the current pandemic, the company waived the collection of rental increases on lease renewals beginning with the April 2020 rental payment.

Q2FY20 Income Statement 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 Based (Illustrative)

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

Stock Recommendation: The stock corrected ~10% in the last one year. Historically, Killam does not have arrears more than 0.4% of revenue collection, while management does not expect a material increase in this trend for the second half of FY20, which is commendable. During Q2-2020, Killam offered a rent deferral program to assist residential tenants facing financial hardship due to COVID-19, and the company is working with residents on a case-by-case basis. We believe the above steps would help the enhance the relationship with the clientele, which is likely to benefit the company in the long-term. 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. Further, at the last traded price, the stock was offering a dividend yield of 3.91%, which is lucrative considering the current interest rate environment. We have valued the stock using Price to earnings-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, 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. Considering the aforesaid facts, we recommend a 'Buy' rating on the stock at the closing market price of CAD 17.4 on September 21, 2020.

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

InterRent REIT

InterRent REIT (TSX: IIP.UN) is a growth-oriented real estate investment trust engaged in increasing Unitholder value and creating a growing and sustainable distribution through the acquisition and ownership of multi-residential properties.

The company announced its distribution of CAD 0.025833 per Trust unit, for the month of September, payable on October 15, 2020.

The company reported that it has entered into an agreement to acquire a portfolio of five concrete mid-and high-rise apartments located in Southwestern, Ontario at a price consideration of CAD 170.7 million. The acquisition will be financed with a combination of cash and new mortgage debt and would likely to be closed in the month of September 2020.

Q2FY20 Financial Highlights: InterRent announced its quarterly results, wherein the company reported operating revenues of CAD 4.3 million, reflecting a 12.3% y-o-y growth over Q2FY19. However, the group witnessed a 230-bps y-o-y decline in the occupancy of the overall portfolio to 93%. Net Operating Income, during the quarter, stood at CAD 24.8 million, up 7.8% on y-o-y basis. NOI margin declined by 260 basis points from the previous corresponding quarter to 63.7%. The decline was on account of the inclusion of ~CAD 0.9 million of extra costs related to COVID-19 pandemic. The quarter was marked by a fair value gain on investment properties amounting to CAD 16.0 million. Net income was reported at CAD 22.7 million, declined CAD 14.1 million from Q2FY19 due to a higher non-cash fair value loss on unit-based liabilities and Class B unit liability. Funds from Operations (FFO) increased 13.7% on y-o-y basis to CAD 1.8 million.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: The group might face a delay or default in rent collection owing to COVID-19 pandemic.

Valuation Methodology: Price/Earnings Based (Illustrative)

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

Stock Recommendation: The IIP.UN stock corrected ~19% so far this year. The company reported impressive rent collection level during the month of April, May and June, which is encouraging looking at the current environment. The company reported a rent deferral agreement to only 0.25% of the residential tenant, which indicates the business resiliency. The company has ample liquidity with CAD 112.8 million in cash along with CAD 182 million under credit facilities and CAD 50 million available under committed revolving term loan facilities, which seems sufficient to cater to the near-term requirements. Further, the recent acquisition of the five real-estate properties is likely to improve the company’s business prospects. To-date, mortgage financings and renewals have progressed on schedule with no significant delays noted as a result of COVID-19. We have valued the stock using Price to Earnings-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (residential and commercial REITs) median on next twelve months (NTM) basis. Considering the aforesaid facts, we recommend a 'Buy' rating on the stock at the closing market price of CAD 12.62 on September 21, 2020.

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

Disclaimer

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