TSX:IIP.UN - Post by User
Post by
retiredcfon Aug 03, 2023 9:44am
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Post# 35570873
RBC
RBCTheir upside scenario target is $21.00. GLTA
Q2 in line; 2024 to see better conversion rate of NOI to FFO growth
Our view: InterRent REIT (“IIP”) reported FFO/unit of $0.134, +2.3% y/ y, vs. RBC/consensus of $0.13/$0.13. Q2 SP NOI growth of 15% was the highest registered since 2018. We expect 2024 to see better conversion rate of NOI growth to FFO growth as interest expense drag becomes less impactful. Rental demand conditions remain strong and our latest data suggest continued rent growth in July. We believe the IIP portfolio MTM opportunity is closer to 40%, a differential important for valuation consideration. IIP is starting to sell assets in the private market and buying back stock, a positive move in our view. Maintain OP.
Key points:
SP NOI growth highest since 2018 at +15% (SP-Rev +9.7%; SP-Exp +1%) – this is after last year’s +8.9%. SP-Occupancy: 95.4% (-150 bps q/q, +30bps y/y). SP-AMR: $1,523, +1.7% q/q, +6.5% y/y. Breadth in y/y rent growth ranges between +5% (MTL, Ottawa) and +8 to +9% (GTAH & Vancouver). SP-NOI margin: 66.3%, +300bps y/y. IIP saw good cost control in Q2 with opex up by only +0.6% y/y (comped against higher labour cost last year).
Outlook: IIP estimates its portfolio mark-to-market (MTM) rent opportunity at 30%+. We believe it is closer to 40% (see our recently- published RBC ElementsTM: Canadian Apartment Rent Tracker). IIP expects turnover rate in the low 20% for 2023 (Q2 mid 20%). IIP is adding revenues through unit build outs on underutilized space and leasing up newly office- converted The Slayte property currently 60% leased.
A consistent theme in the ap’t sector – selling assets in the private market and buying back stock: IIP will be selling a 54 unit property in Ottawa for $11.5M ($213K/suite) and has so far acquired $2M units at an average price of $12.71/unit. IIP is looking sell further ~$200M, with proceeds to be allocated to NCIB, pay down credit facility and developments.
2024 interest expense could turn into slight tailwind: 2023 is bearing the brunt of the negative impact of debt being repriced higher. However, 2024 will see $213M of debt maturing at 5.23%, of which 36% is variable-rate mortgages being refinanced with CMHC fixed rate debt. D/GBV was 37.7%; variable exposure 5%; avg interest 3.43% / 4.9 year term.
Valuation: Our NAV of $15 is based on a cap rate of 4.25% (+5bps) vs. IFRS BV/unit of $18.10 (+0.7%), based on a cap rate of 4.07% (+3bps). Given the growing embedded MTM opportunity, we note that year 1 cap rate can be somewhat misleading as the difference between fully stabilized cap rate and going in cap rate can be material while turnover plays a key role in the valuation calculus. IIP trades at an implied P/Suite of <$300K, implied cap rate of 4.6% on year 1 NOI and ~6.25% on fully MTM NOI. Our price target of $17.00 is based on a modest 2.5% premium to forward NAV, premium reflecting large MTM opportunity despite uncertainty in asset pricing.