TSX:IIP.UN - Post by User
Post by
retiredcfon Aug 11, 2024 2:02pm
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Post# 36173558
RBC
RBCTheir upside scenario target is $20.50. GLTA
August 7, 2024
InterRent REIT
Forecasting double-digit FFO growth still
Our view: We expect high-single-digit SP NOI growth in 2024/2025. Questions on the call focused on decelerated pace of turnover spreads at +16%, which IIP attributes to mix. The spread should naturally decelerate over time as pace of market rent growth cannot continue to exceed in-place rent growth. Notable is $5M of unit buyback (first in about 10 years). With interest expense less of a headwind, we forecast FFO/unit growth of +13%/ +11%/+7% in 2024/2025/2026. Although we think its premium valuation to peers may not return to the same extent as pre-Covid years, we see good upside with NOI growth driving NAV.
Key points:
Y/Y growth remains healthy: SP NOI growth was +9.7% (SP-Rev +7.6%; SP- Exp +3.3%). Revenue growth was driven by SP-occupancy at 96.2% (-60bps q/q, +70 bps y/y) and SP-AMR of $1,658, +1.3% q/q, +6.8% y/y. AMR growth was consistent across all of its markets. Opex and taxes were +5%, utilities -3%, resulting in SP-NOI margin of 67.7%, +130 bps y/y. Early indications in student leasing activity suggest not much different than the past.
Outlook: We expect high-single-digit SP NOI growth in 2024/25, driven by 6-7% revenue growth and 3-4% expense growth. Rent growth on turnover decelerated slightly to +16.1% vs. prior 4 quarters of +20.3%, +17.2%, +20.7% and +23.8%, which IIP attributes to higher turnover mix in Ottawa (which are mostly stabilized). Over time, we think spreads should naturally decelerate as pace of market rent growth cannot continue to exceed (and it isn’t exceeding) average in-place rent growth. Turnover rate in Q2 was 5% (trailing 12M 24%). MTM rent spread remains at +30%. Interest is less of a headwind (current 5 yr debt of 3.5-3.6% vs. in-place debt at 3.4%).
Capital allocation – $48M cash + $225M facilities available: 1) Asset sale: Sold 497 suites in Aylmer for $92M ($185K/suite) and 27 suites in Ottawa for $5.5M ($204K/suite); 2) NCIB: IIP bought back $5M @ $12.33/ unit; 3) four developments in pipeline, with 360 Laurier (office conversion) and Richmond & Churchill in Ottawa at more advanced stages; 4) 15% of portfolio at various stages of renovation; capex spend ~27% lower in H1/24.
Will outsized premium valuation return? This is a question we sometimes hear from investors. We note that in 2018 and 2019, when its premium valuation to peers was among the highest (Exhibit 7), its quarterly SP NOI growth outperformance averaged 670 bps. In the last 5 quarters, outperformance averaged 180 bps. In the current tight market where peers have also done well, one can argue that the rewards of its value-add strategy outshine less. That said, we continue to see good upside with healthy SP NOI growth driving NAV given prospect of cap rate stabilization. Our NAV estimate of $15 (unchanged) is based on a cap rate of 4.4% (unchanged) vs. IFRS BV/unit of $17.64 (-0.8% q/q), based on cap rate of 4.25% (+8bps q/q). Our price target of $16.50 (unchanged) is based on parity to forward NAV. Maintain OP.