CIBCHave the lowest target. GLTA
EQUITY RESEARCH
May 10, 2022 Earnings Update
INTERRENT REAL ESTATE INVESTMENT
TRUST
The Valuation Lags The Growth
Our Conclusion
IIP reported an in-line quarter with fundamentals that continue to remain
“best in class”, with above-average organic growth and positive leasing
momentum. A combination of strong top-line growth and prudent cost
management has resulted in SP-NOI and NOI margin expansion of +120 bps
and +90 bps, respectively. While IIP does indeed continue to have strong
fundamentals, investor sentiment has shifted (and rightfully so) towards
macro-economic and geopolitical issues, particularly that of rising interest
rates and inflationary concerns – and a wholly unwarranted (in our opinion)
concern over potential regulatory headwinds. On the rate environment, IIP
has ~23% of its mortgage balance maturing in 2022, and while a portion of
this has already been refinanced, borrowing costs are still expected to
increase. The much more opaque impact is investor expectations (and
indeed private market transactions) around cap rates as we look out one
year and beyond. Given the current economic environment, we are (perhaps
conservatively) increasing our applied cap rate to 4.00% (from 3.75%), which
results in a slight decrease in our NAV to $15.50 (from $16.50). Applying an
unchanged ~10% premium to our NAV, we derive our price target of $17.00
(from $18.50).
Key Points
Earnings Results: IIP reported an in-line Q1/22 FFOPU of $0.13,
representing an impressive 16.7% increase from the comparable period in
2021. Total portfolio occupancy improved +420 bps Y/Y to 95.5%, driven by
strong leasing activity across all major regions, notably the Greater
Vancouver Area and Greater Montreal Area. Business fundamentals also
remain robust, with collection rates coming in at 99% for the quarter, along
with strong rental lifts across all its operating markets (4%-9%). The REIT
also reported a FV gain of $65.8MM as a result of its IFRS cap rate
compressing 4 bps to 3.82%, primarily due to the addition of properties
acquired in Q4/21.
Acquisition Update: After an active 2021, IIP continues to grow its portfolio
through the beginning 2022, acquiring 57 suites in the Greater Vancouver
Area through joint ventures for a total cost of $25.6MM ($12.8MM at IIP’s
ownership interest).
Debt And Liquidity Position: As at Q1/22, IIP’s D/GBV remained stable at
36.4% compared to 32.7% in Q1/21. IIP continues to refinance its debt,
extending its weighted-average maturity from 3.6 years to 4.5 years with a
portfolio weighted-average cost of debt of 2.51% (which we note is a 13 bps
increase sequentially). Liquidity also remains strong at $132.2MM, with total
undrawn credit facilities of $131MM and cash and cash equivalents of
$1.2MM.