TSX:IIP.UN - Post Discussion
Post by
retiredcf on May 11, 2022 9:04am
RBC Report
Their upside scenario target is $24.50. GLTA
Outperform
TSX: IIP.UN; CAD 12.57
Price Target CAD 20.00 ↓ 22.00
InterRent REIT
Solid Q1; Private equity math easily pencils out at current valuation and interest rate
Our view: InterRent REIT (“IIP”) reported a solid Q1 despite higher utility costs. SP NOI growth of +12% is at pre-pandemic pace. At an implied cap rate of 4.6%, we believe regulatory and interest risks are more than priced in. If we put our private market hat on, IIP’s valuation implies that little growth is needed to achieve a reasonable levered IRR based on current interest rate. Reiterating Outperform; adjusting PT to $20 from $22.
Key points:
Operating performance: SP-NOI growth was +12% (SP-revenue +10%, SP-expense +6%). SP-Occupancy increased to 96.4%, +480 bps y/y. IIP managed to improve SP NOI margin to 62.8%, +120 bps y/y, despite higher utility costs. Operating costs as a percentage of revenue declined 100 bps y/y, more than offsetting higher utility costs (gas usage +6% y/y and higher rate +31%). On the hydro side, IIP has ~83% of portfolio sub-metered where hydro costs are borne by tenants. IIP’s culture (and staff training) focused on cost control was evident in the quarter.
Outlook: Estimated MTM rent potential now sits at +25% (+20% in Q4/21). Regionally, its key GTAH markets are at 2.4% vacancy; GMA at 4.9% and Ottawa area 5.2%. There is some reliance on students in its Montreal and Ottawa portfolios. To this end, foreign students study permits increased 41% in Jan/Feb 2022 vs. last year. Return to in-person learning and immigration accelerating, combined with the lag effect of its active repositioning program, bode well for H2/22.
Capital allocation: IIP closed on two tuck-in Vancouver acquisitions for $13m (50% equity interest), expecting high-single-digit IRRs. IIP announced an NCIB – given the outsized discount, we would not be surprised to see IIP buy back units although there is an ongoing “healthy debate”. There are four active developments totaling ~1,550 suites at share (3 in Ottawa and 1 in Burlington) – no incremental value in our NAV. Leverage: IIP made meaningful progress in extending debt term to 4.5 years (3.6 years in Q4/21), with CMHC debt now 71% of total debt.
Estimate changes: 22E FFO unchanged; 23E down slightly-higher interest. What is the market pricing in? IIP trades an implied cap rate of 4.63%
or $279K/suite. At this valuation, a private market investor with a 10-year hold period would need to assume an annual NOI growth of only 2.4% to generate 8% levered IRR, a generous 500 bps over 10-year bond yield. This assumes interest cost of 3.75% at 50% LTV. 2.4% equates to IIP marking its portfolio to market over 10 years, with no other increase!
Maintaining Outperform rating: Our NAV estimate is unchanged at $17.00. Our price target of $20 (previously $22.00) is based on a 10% premium to our one-year forward NAV. The premium balances the upside in NOI and the potential upward pressure on cap rates if interest cost continues to rise.
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