InterRent Real Estate Investment Trust T.IIP.UN

TD

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InterRent REIT

(IIP.UN-T) C$13.31

Solid Revenue Growth; Lower NOI Margins Weigh on Forecast

Event

Forecast update. For our initial thoughts on the quarter click here.

Impact: NEUTRAL

While Q2 results were slightly below expectations, revenues were largely in line. The miss on NOI was attributed to higher-than-expected operating costs. NOI margin of 63.7% compared to TDS forecast of 65.6%. SPNOI was still a robust 8.9%. Portfolio occupancy was down 40bps q/q, however we expect to see a pick-up in Q3, consistent with the REIT's historical trends. Management expects Ottawa to rebound, though was somewhat cautious about the bounce back in the Montreal market, largely owing to uncertainty around the number of international post- secondary students. We anticipate inflationary related cost pressures will persist. However, we believe these should be at least partially offset by revenue growth, which should in turn continue to drive solid SPNOI growth (management expects to stay in the 64%-64.5% NOI margin range based on the current cost environment). While we are cautious around a potential economic slowdown, we do not foresee a meaningful deterioration in fundamentals as a result.

While the portfolio IFRS cap rate was left essentially unchanged at 3.83% q/q, management noted their expectation for an increase in H2/22 (likely 10-25bps), once there has been more transaction activity and bond yields have stabilized. We left our NAV cap rate unchanged this quarter at 3.72%, after having raised it 12bps in June.

Capital Allocation. The REIT has earmarked several assets for disposition, though it will wait for pricing that meets its expectations (formal marketing has not begun). Disposition proceeds are expected to be directed towards developments and potentially its NCIB.

Forecast. Our AFFO/unit estimates decline ~4%, largely to reflect slightly lower revenue growth (slowing economic environment), lower margins and higher G&A. We are also introducing our 2024 estimates. We expect low-single digit AFFO/unit growth over our forecast period. Our $16.50 NAV/unit estimate is +1%.

TD Investment Conclusion

We believe InterRent is well-positioned to capture the growing demand in its core markets. We also continue to see significant earnings and NAV upside through the successful execution of its acquisition, repositioning, and development programs. We are reiterating our BUY recommendation and $15.50 target price.