Killam Apartment Real Estate Investment Trust

Killam Apartment Real Estate Investment Trust (TSX: KMP.UN) is an open-ended mutual fund trust. The group specializes in the acquisition, management, and development of multi-residential apartment buildings and manufactured home communities (MHC). KMP.UN has three main operating segments, Apartment segment, MHC segment, and Other segments. 

Key Highlights:

• Strong Financial Metrics: The company generated strong financial growth in the recent past with 33% of NOI generated from apartments built in the last ten years, which is a key positive. The company maintains a conservative balance sheet approach with optimum capital flexibility. The company reported a 12.5% CAGR during FY15 to FY19 in its total assets while net operating income grew at a CAGR of 9.2% during the same time frame. Debt, in terms of assets reduced to ~43% in FY19, from ~56% in FY15. We believe the momentum to continue in the foreseeable future, as the company has CAD 850 million development pipeline to support future growth.

Financial Metrics (Source: Company Presentations)

• Stable Rent Collection: Despite a slowdown in the overall economy, the group posted an impressive collection rate in the recent past. The company participated in the federal CECRA program and reported only CAD 0.1 million of revenue reduction in the previous quarter, which is noteworthy.                   

Rent Collection Trend (Source: Company Reports)

Q3FY20 Financial Highlights:

• The group announced its third-quarter results, wherein the company posted a higher Property revenue of CAD 66.653 million, as compared to CAD 63.020 million in the previous corresponding period (pcp).
• Income before income taxes stood lower at CAD 42.968 million, from CAD 55.537 million in Q3FY19, primarily due to a slide in fair value adjustment on investment properties (CAD 14.718 million versus CAD 35.846 million in Q3FY19).
• Net income stood at CAD 37.465 million, lower than CAD 46.839 million in pcp.
• The company reported a cash balance of CAD 17.339 million, while total assets stood at CAD 3,636.098 million.

Quarterly Financial Metrics (Source: Company Presentation)                  

Q3FY20 Income Statement HIghligts (Source: Company Reports)

Risk: Due to the cOVID-19 pandemic, the consumer spendings took a hit on account of lower-income. Thus the group might witness a fall in the rent collection, which would likely to dampen the overall performance of the company.

Valuation Methodology (Illustrative): Price to Earnings based

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendation:

Killam has a robust development pipeline. Seventy per cent of Killam's development pipeline is outside Atlantic Canada. Killam targets yields of 4.75% - 5.50% on developments, 50–150 bps higher than the expected cap-rate value on completion. Building out the CAD 850 million pipeline at a 100bps spread should create approximately CAD 200 million in NAV growth for unitholders. Further, at the last traded price, the stock was offering a dividend yield of 3.9%, which is decent amid low interest rate environment.

We have valued the stock using P/E based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Granite Real Estate Investment Trust, InterRent Real Estate Investment Trust etc. Hence, we recommend a 'Buy' rating on the stock at the closing market price of CAD 17.38 on November 19, 2020.

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

InterRent Real Estate Investment Trust

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

The Board of Directors announced a monthly distribution of CAD 0.027125 per Trust unit, payable on December 15, 2020.

Key Highlights:

• Stable Occupancy Rate: The Group reported its September occupancy rate at 92.1%, stood above 90% mark, which is commendable looking at the current economic downturn. The management highlighted several positive factors like higher foreign students and governments permission for higher immigration, etc. The group is focusing on long-term growth aspects by not buying occupancy by significantly lowering asking rents.
• Strong Rent collection above 99%: In the recent past, the company has reported a robust rent collection during the month of July 2020 to September 2020, which stood at par with the average rent collection. Due to the COVID 19 pandemic, the company entered into a rent deferral agreement with only 0.30% of its residential residents, which is impressive considering the current economic scenario.

Q3FY20 Financial Highlights:

• The group declared its quarterly results, wherein the company posted operating revenues at CAD 39.719 million, reflecting a growth of 5.6% on y-o-y basis. The increase was driven by higher average monthly rent per suite at CAD 1,302, from CAD 1,248, a year ago.
• The company reported its net income at CAD 32.506 million, significantly lower than CAD 69.489 million in Q3FY19 due to  lower fair value gain on investment properties, partially offset by the higher non-cash fair value gains on unit-based liabilities and Class B unit.
• The occupancy rate, for the month of September 2020, stood lower at 92.1%, against 95.5%, a year ago.                       

Q3FY20 Financial Highlights (Source: Company Reports)

Risks: A fall in the consumer disposable income might lead to an increase in the deferred rent, which could take a toll on the company’s profitability.

Valuation Methodology (Illustrative): Price to Earnings based

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendation:

The stock corrected 10% so far this year, due to a temporary, weak sectoral scenario on account of COVID 19 pandemic. However, the stock was up ~21% in the last one month and outperformed the benchmark index by~10%. The stock closed above its support level of 30-days, 50-days and 100-days Simple Moving Average (SMA), indicating a bullish trend. The company intends to provide Unitholders with sustainable and growing cash distributions through investing in a diversified portfolio of multi-residential properties.

We have valued the stock using P/E based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Killam Apartment REIT, European Residential REIT etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 13.76 on November 19, 2020.

IIP.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.