Killam Apartment Real Estate Investment Trust

Killam Apartment Real Estate Investment Trust (TSX: KMP.UN) is a Canada based “REIT”, which specializes in the acquisition, management and development of multi-residential apartment buildings, manufactured home communities (MHCs) and commercial properties in Canada.

Key Highlights 

• Rental Rate Growth Continues:In Q3 2020, same property rental rates were up 3.1% against, Q3 2019. Despite the current economic environment, demand remains strong for units on turnover with trust achieving 5.2% rental rate growth on the regular unit turns during Q3-2020. Rental rate growth was the primary contributor to apartment revenue growth of 1.8% for the quarter.

Source: Company Presentation 

• Steady rent collection: Despite a slowdown in the overall economy, the trust posted an impressive collection rate in Q3 2020, which remained healthy for October. The company also participated in the federal CECRA program and reported the only CAD 0.1 million of revenue reduction in the previous quarter, which is noteworthy.

Source: Company 

• Healthy Financial metrics: The trust generated strong financial growth in the recent past, with 33% of NOI generated from apartments built in the last 10 years, a key positive. The company reported a 12.5% CAGR during FY15 to FY19 in its total assets, while the net operating income grew at a CAGR of 9.2% during the same time frame. Debts, in term of assets reduced to 43% in FY19, from 56% in FY15. We believe the momentum to continue in the foreseeable future, as the company had CAD 850 million of development pipeline to support future growth.

Source: Company Presentation 

Financial Overview of Q3 2020 (In thousands of CAD)

Source: Company 

• In Q3 2020, the Company posted a slight growth in its property revenue to CAD 66.6 million, compared to CAD 63 million in the previous corresponding period.
• NOI stood at CAD 43.4 million in Q3 2020, compared to CAD 41.3 million in Q3 2029.
• The Company's net income fell to CAD 37.5 million in the reported quarter, compared to 46.8 million in Q3 2019. The prime reason behind the fall in net income was lower fair value adjustment in investment properties. 

Risks associated with investment

The company's revenue and operating results depend significantly on the occupancy levels and rent collection. Any fluctuation in the occupancy level and rent collection would affect the group’s performance. 

Valuation Methodology (Illustrative): Price to Earnings 

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

Stock recommendation 

The company's same-property NOI growth has been impacted by the COVID-19 pandemic, mainly due to the waiving of rental increases, delays in distribution of rental increase notices, and a reduction in revenue from seasonal resorts. Despite these constraints, demand for apartments remains robust, and the company continues to execute on its value-enhancing initiatives. Management is seeing stable to increasing market rents across most of its portfolio, which is expected to lead the top-line growth. We expect an improvement in the rent collection and a decline in provisions, which would further support the company's overall performance. Therefore, based on the above rationale and valuation, we have given a "Buy" rating at the closing price of CAD 17.67 on January 15, 2021. We have considered InterRent Real Estate Investment Trust, Canadian Apartment Properties Real Estate Investment Trust, Allied Properties Real Estate Investment Trust, etc. as a peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Morguard Corporation

Morguard Corporation (TSX: MRC) is a real estate company that acquires, owns, and develops properties in Canada and the United States. The group operates through three business segments, namely investments in real property, ownership in real estate investment trusts (including Morguard REIT and Morguard North American Residential REIT), and real estate advisory services and portfolio management.

Key Updates:

• Improved rent collection: The third quarter of FY20 witnessed a higher rent collection of 92.2%, as compared to 86.1% in Q2FY20, which is noteworthy. We believe the momentum to continue in the coming days, supported by improved retail and office occupancy rates. Moreover, the company has a diversified real estate portfolio, and we expect a stable cash flow in the coming days.
• Ample liquidity and prudent capital management: The company has decent liquidity levels of CAD 688 million, which includes CAD 230 million of cash balance and CAD 458 million under revolving credit facilities, which seems to be sufficient to fund its working capital and capital expenditures. Moreover, the group has cut-down its capital expenditures to ensure ample liquidity, which is a key positive.

Q3FY20 Financial Highlights:

• MRC announced its quarterly results, wherein total revenue was reported at CAD 251.469 million, lower than CAD 298.291 million in the previous corresponding period (pcp). The decline was primarily due to a steep decline from hotel revenues (CAD 21.780 million versus CAD 65.525 million in pcp), which was primarily due to the social distancing measures combined with travel restrictions.
• The group posted a slide in the net operating income at CAD 130.268 million, as compared to CAD 150.059 million in Q3FY19. The decline was due to a lower topline, coupled with higher property operating expenses (CAD 91.373 million versus CAD 83.538 million in pcp).
• The company reported net loss attributable to common shareholders at CAD 4.606 million, higher than a loss of CAD 1.180 million in pcp.
• The company posted a cash balance of CAD 230.145 million, while total assets were recorded at CAD 11,466.149 million.

Source: Company Reports

Risk: Due to the work from home culture and strict social distancing norms, the office and retail segments reported setbacks in the recent past, which dampen the overall occupancy rate. Continuation of the above trend would affect the overall performance of the company.

Valuation Methodology (Illustrative): Price to Earnings based

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

Stock Recommendation:

The Canadian economy is the verge of a revival, and is showing gradual improvement, with job-markets continues to strengthen, which depicts the gradual return of consumer and investor confidence. The residential segment of the company reported stable performance, amidst the ongoing economic cycle, and we believe the segment would continue to improve supported by improved per capita incomes. Going forward, we expect the hotel segment to post better performance as the government has lifted the restrictions. We have valued the stock using Price to Earnings-based relative valuation method and have arrived at a lower-double-digit upside (in percentage terms). For the said purposes, we have considered industry (financials) 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 115.05 on January 15, 2021.

MRC 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.