TSX:IIP.UN - Post by User
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retiredcfon Aug 10, 2022 3:38pm
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Post# 34886086
RBC
RBCTheir upside scenario target is $22.00. GLTA
InterRent REIT
Q2 slightly weaker; Positive fundamentals remain; Buyers on vacation
Our view: InterRent REIT (“IIP”) reported slightly weaker Q2, with FFO/unit of $0.13, +5.6% y/y vs. RBC/Consensus of $0.14/0.14. Main variances were higher G&A due to ESG initiatives and team build out and slightly lower NOI primarily driven by sequential drop in Ottawa, which appears to have bounced back. The occupancy slip does not change our view on the positive NOI growth outlook. Market is implying a cap rate on IIP that will likely prove too conservative. Maintain OP rating.
Key points:
Operating performance – Ottawa occupancy slipped sequentially but has since improved; MTL lagging somewhat from foreign students: SP-NOI growth was +9% (SP-revenue +9.5%, SP-expense +10%). SP NOI margin slipped modestly to 63.8%, -30bps y/y. SP-Occupancy was 95.6%, +340 bps y/y, -80bps sequentially. Ottawa area was the main reason for the sequential drop (93.3%, -150bps) due to summer turnover and timing of return to work downtown, while MTL occupancy remained lower (95% vs. 97-98% for rest of regions) somewhat impacted by delayed foreign students. However, IIP noted that Ottawa has bounced back in July and seeing more student traffic in Montreal.
Outlook – Occupancy slip does not change our positive outlook: Estimated MTM rent potential now sits at +27% vs. +25% in Q1/22, +20% in Q4/21. May saw net new immigration of +61%; Study permits were +37% YTD May 2022. We continue to expect a strong NOI growth outlook, outpacing inflation in coming months.
Capital allocation – new asset in Brossard is unlike the typical value-add acquisition we are used to seeing, but IIP noted ability to drive yield going forward. IIP closed on a newly built asset in Brossard, Montreal for $109M ($430K/suite) on a JV basis (we think mid 3 cap). The asset was funded under the CMHC MLI Select program which allows for more flexibility and higher LTV (61%). Nothing filed on the NCIB front, which we think would occur on asset sales. There are four active developments totaling ~1,960 suites with yields in the 4.2-5.15% range. IIP extended debt term to 4.8 years with CMHC debt now 73% of total debt, and variable exposure at 7%.
Buyers are out there, but have taken the summer off. IIP noted that a lack of transaction volume does not mean a lack of interest in the space, rather a reflection of buyers’ uncertainty on how to price assets given volatility in cost of debt. IIP thought that cap rates could rise marginally (10-20 bps) if rates stay where they are. Our NAV of $15 (-$0.25) is based on a cap rate of 4.15% vs. IFRS cap rate of 3.83%. The market is pricing IIP at ~4.5% cap (vs. 3.5% in late 2018 when 10 year GOC bond yield was ~2.5%). Our 2022E/2023E FFO are $0.54/$0.58 (-$0.03/-$0.02). We are introducing our 2024E FFO at $0.64. Our price target of $18 is based on a 10% premium to our one-year forward NAV. Maintain OP.