The perfect TFSA REIT: A 4.2% Yield With Monthly Paycheques

If you’re looking for monthly income in Canada, real estate investment trusts (REITs) are often the way to go.

As I wrote in my previous article on Granite REIT, monthly-pay common stocks in corporations are hard to come by. When you find such stocks, you usually discover that they are small pipelines and financials.

In the world of REITs, on the other hand, high yields and monthly payouts are quite common. In this article, I’ll explore another REIT with a roughly 4.2% paid monthly.

Killam Apartment REIT

Killam Apartment REIT (TSX: KMP.UN) is a Canadian apartment REIT. It buys and develops apartment buildings, and leases them out to Canadians who need homes. It also owns some manufactured home communities (i.e., trailer parks). In the manufactured home communities, the business model is renting out the land, not the trailers themselves.

One thing that distinguishes Killam Apartment REIT from the competition is the locations where it chooses to build properties. Whereas many Canadian apartment REITs stick with Toronto and Vancouver, Killam is truly geographically diversified. It has properties in Halifax, St. John’s, Moncton, Victoria and beyond. This diversification has proved valuable in the last year or so, because the rental markets in the biggest urban centres have been fairly weak, while many in small to medium-sized cities have been growing.

Growth

Speaking of growth, let’s take a look at Killam’s recent growth metrics.

In the trailing 12-month period, KMP.UN grew its revenue, funds from operations (FFO) and adjusted FFO (AFFO) at the following rates:

• Revenue: 3.9%.
• FFO: 4.24%.
• AFFO 5%.

Over the last five years, the REIT’s growth rates in revenue and adjusted net income were 7.6% and 10.9%, respectively. Obviously not a red-hot growth track record here, but as I’ll show in a later section, KMP.UN trades at multiples that do not “require” much growth.

Profitability

Going by profit metrics, KMP.UN appears to be doing well. Such metrics include:

• A 40% FFO margin.
• A 62.1% EBITDA margin.
• A 61.9% operating income (EBIT) margin.
• A 67% gross profit margin.
• A 2.7 times interest coverage ratio (the ideal range for this metric is between two and three, so Killam is in the desirable range here).

Overall, KMP.UN looks quite profitable.

Valuation

Now, I mentioned previously that KMP.UN is not growing much. That is certainly the case. However, the REIT is not valued in such a way that demands much growth. It trades at these multiples:

• 0.66 times book.
• 14 times cash flow.
• 13.8 times FFO.
• 16 times AFFO.

The inverse of any these multiples is far higher than Canadian treasury yields at any maturity. So, assuming the earnings and funds from operations can be maintained, then KMP.UN is a buy.

Income potential

Last but not least, we can look at KMP.UN in terms of dividend potential. The REIT pays a dividend of $0.06 per month, or $0.72 per year. The REIT cost $17.09 at the time of this writing. So, the yield was 4.2%, and a person investing $100,000 into the REIT would get $4,122 per year back in dividends, if the price didn’t change.