Real estate investment trusts (REITs) are alternative options for investors seeking to diversify. However, in a high-interest era, residential REITs should benefit the most. Industry experts say the recent interest rate hike by the Bank of Canada to curb inflation will increase mortgage rates and housing costs while adding pressure to the tight rental market.
With housing affordability more challenging in June 2023, demand level will temper, as homebuyers stay on the sidelines. More people will also lean towards renting than owning properties. But from an investment perspective, a top Canadian residential REIT that pays monthly dividends could be an inflation buffer.
Killam Apartment (TSX:KMP.UN) is a screaming buy today for its strong fundamentals and attractive yield. At $17.71 per share, current investors enjoy an 11.08% year-to-date gain on top of the 3.91% dividend. A $30,992.50 position (1,750 shares) in this residential REIT will produce $100.98 in monthly passive income.
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Growth-oriented REIT
The $2.07 billion REIT takes pride in its proven record of strong growth and robust development leasing. Killam acquires high-quality multi-residential assets and invests in joint-venture opportunities to maximize growth potential. As of March 31, 2023, the portfolio comprises 230 apartments (19,484 units), 40 manufactured home communities or MHCs (5,975 units), and nine commercial properties.
In the first quarter (Q1) of 2023, property revenue, net operating income (NOI), and net income rose 9.6%, 12.3%, and 39%, respectively, to $84.9 million, $50.8 million, and $83.5 million versus Q1 2022. The Apartment same-property occupancy rate at the quarter’s end was 98.6%. Its president and chief executive officer (CEO) Philip Fraser said, “Fundamentals in our core markets are stronger than ever.”
Fraser expects the portfolio to maintain healthy revenue and NOI growth in the quarters ahead. Killam’s capital-recycling program aims to dispose of or recycle non-core assets ($100 million to $150 million target) to maximize value, enhance capital flexibility, and strengthen the balance sheet.
For 2023, 450 suites repositioning will translate to $2.5 million in annualized revenue growth. The total opportunity to reposition 5,500 suites should result in $28 million in annualized revenue.
The REIT’s extensive development program is also an important component of its long-term growth plan, and the $1.7 billion development pipeline should support future growth. Killam will have 320 new high-quality suites in the next two years with the completion of three development projects.
Growing market rents
Because of higher-than-normal lease renewals in Q1 2023, the weighted average rental rate increased by 3.8% year over year. The rental rate increase for new tenants that moved in during the quarter was 14.3%. Killam averages 30% to 32% of unit turnover historically, except in the last two years due to the tightening of Canada’s housing and rental markets.
Still, Killam typically generates rental increases by moving rental rates to market or where market demand exists. Management believes that population growth across Canada will drive market rents higher. More importantly, it expects monthly distributions to increase and payout ratios to decrease over time.
High-quality and young portfolio
Killam Apartment is a solid investment prospect if you want exposure to the residential sub-sector of the real estate market. Besides owning Canada’s highest-quality and youngest apartment portfolios, the monthly dividend payouts should be sustainable and rock steady for years.
