Investing in quality real estate investment trusts, or REITs, can help you gain exposure to another asset class and further diversify your portfolio. Generally, REITs own, acquire, and operate properties that are rented out to tenants. These properties generate stable cash flows, a portion of which is distributed to shareholders in the form of dividends, making REITs attractive to income-seeking investors.
One quality REIT that has generated steady returns to shareholders since its IPO (initial public offering) is Killam Apartment REIT (TSX: KMP.UN). The stock went public in January 2016 and has since surged over 85%. After adjusting for dividends, cumulative returns are much higher at 161%, compared to the TSX gains of 131%.
Despite its outsized returns, Killam Apartment stock trades 18% below all-time highs and offers shareholders a forward yield of 3.65%. Let’s see if this REIT is a good buy right now.
An overview of Killam Apartment REIT
Valued at $2.3 billion by market cap, Killam Apartment REIT is a Canada-based REIT that owns, operates, and develops apartments and manufactured home communities (MHCs). It has a $5 billion real estate portfolio in major Canadian provinces, including Ontario, Alberta, British Columbia, and Atlantic Canada.
Killam aims to increase funds from operations, or FFO, by increasing earnings from its existing portfolio and expanding via accretive acquisitions while developing high-quality properties in core markets.
How did Killam Apartment REIT perform in 2023?
In 2023, Killam increased net operating income by 8.3% year over year due to strong market fundamentals in core markets and solid operating performance across business segments. Its same-property net operating income (NOI) rose by 7.8% in 2023 as the NOI for the apartment portfolio grew by 7.6%, offset by a 3.5% growth from the MHC portfolio. Killam’s commercial portfolio grew NOI by a stellar 15.8% in 2023.
Killam Apartment emphasized its capital-recycling program last year, increased its capital flexibility, and strengthened its balance sheet. The net proceeds from dispositions totalled $168.7 million, which was used to lower variable debt and fund active developments. At the end of 2023, Killam’s variable rate debt accounted for 3% of total debt, down from 9.8% in 2022.
Killam added 415 new units to its portfolio in 2023, and its expansion efforts should contribute positively to its earnings growth in the future. The REIT reported a robust occupancy rate of 98.5% in the fourth quarter (Q4) of 2023.
Killam’s adjusted FFO per unit in Q4 stood at $0.23. Comparatively, it pays a monthly dividend of $0.058 per share, translating to a payout ratio of 75.6%, which is not too high.
Killam Apartment REIT stock is a good buy
Around 35% of the NOI earned by Killam is generated from properties developed in the last 10 years. The company has a track record of solid operating performance with 38 consecutive quarters of positive NOI growth. Armed with a conservative balance sheet and sustainable debt metrics, Killam’s geographic diversification helps it generate 53% of its revenue from the 13 largest cities in the country.
The TSX stock trades at 19.8 times trailing earnings, which is not too steep, given Killam’s growth story is far from over.
