Later this year, the S&P Dow Jones Indices and MSCI will be adding a new sector – real estate – to the current Global Industry Classification Standard structure, changing the current GICS structure to 11 sectors from 10. (Real estate is currently under the financials sector.)
The creation of this new sector – which will include most real estate investment trusts – highlights the importance for investors to consider including REITs as an asset class within a diversified portfolio.
Discussed below is newly created REIT Killam Properties, which converted from a corporation at the start of the year.
The REIT
Halifax-based Killam Apartment REIT is a residential landlord owning apartment properties and manufactured home communities (MHC). At year end, Killam had a portfolio of 176 apartment properties, which represented 89 per cent of the REIT's net operating income (NOI). Killam also owned 35 manufactured home communities, accounting for 9 per cent of Killam's NOI. The remaining 2 per cent of NOI is from a small portfolio of commercial properties.
A geographical breakdown of Killam's apartment portfolio shows that Nova Scotia and New Brunswick are the dominant regions, representing 37.2 per cent and 21.8 per cent, respectively, of total NOI at year end. Ontario represented 14 per cent, Newfoundland and Labrador came in at 7.9 per cent, Prince Edward Island was at 6.2 per cent and Alberta was at 2.2 per cent.
Key attributes
- Market leadership: Killam is the largest residential landlord in Atlantic Canada with a market share of approximately 14 per cent of multifamily rental units.
- Solid fundamentals: Management conservatively anticipates NOI growth of between 1 per cent and 3 per cent in 2016. Last year, same-property NOI growth was 4.2 per cent, and funds from operations (FFO) per unit increased 9.7 per cent.
From 2011 to 2014, FFO per unit was relatively stable, between 69 cents and 72 cents.
The apartment occupancy rate improved to 95.5 per cent in 2015, and same-property apartment rents increased 1.3 per cent year-over-year. Management is targeting rent increases of approximately 1.5 per cent in 2016. Killam's MHC occupancy rate was high, at roughly 98 per cent.
- Property growth: Management is disciplined in making acquisitions. For 2016, management has targeted a minimum of $50-million in acquisitions, with a desire to diversify its portfolio by purchasing newer properties outside of Atlantic Canada with a focus on Ontario and Alberta. Killam is also developing properties with land available for future development projects.
- Economic growth: The Conference Board of Canada is forecasting 2016 economic growth in Nova Scotia will exceed 2 per cent. Halifax is anticipated to benefit from Irving Shipbuilding’s $25-billion, 25-year contract to build navy ships. Last year, 36 per cent of the REIT’s NOI was from Halifax.
Distribution policy
The trust pays its unitholders a monthly distribution of 5 cents a unit, or 60 cents yearly. This equates to an annualized yield of approximately 5 per cent. Management has maintained the distribution at this level since early 2014.
In 2015, the adjusted funds from operations (AFFO) payout ratio was 88 per cent.
Valuation
According to Bloomberg, Killam is trading at a price-to-FFO multiple of approximately 13 times the 2017 consensus estimate. This is relatively close to its five-year historical average. On a price-to-AFFO basis, the stock is trading at 15 times the 2017 consensus estimate.
The consensus FFO per unit estimate is 85 cents in 2016, up more than 7 per cent year-over-year from 79 cents reported in 2015. FFO per unit is anticipated to rise to 88 cents in 2017. The consensus AFFO per unit estimate is 74 cents in 2016, up from 68 cents reported in 2015, and forecast by the Street to reach 77 cents in 2017.
Analysts' recommendations
This small cap REIT is well covered by the Street. There are eight buy recommendations, one sector perform, or hold, recommendation, and there are no sell recommendations. The average one-year price target is $12.17, implying the unit price is nearly fully valued. Target prices range from a low of $11.75 to a high of $13.
Chart watch
Over the past 2 1/2 years, this unit price has been showing little in the way of upward or downward movement, consolidating principally between $10 and $11, and recently broke above a major overhead resistance level.
The next area of resistance is around $12. There is downside support around $11, near the 50-day moving average.
The bottom line
For income investors seeking stability, this REIT is one in which to consider accumulating a position, particularly on price weakness.
I strongly encourage readers to consult a financial adviser, and to do their own proper due diligence before taking any investment action.
The author does not personally own units in the REIT mentioned in this story.
Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market.