CIBCEQUITY RESEARCH
November 10, 2022 Earnings Update
INTERRENT REAL ESTATE INVESTMENT
TRUST
Distributions: Another Year, Another Increase
Our Conclusion
IIP reported an in-line quarter and continues to display, as expected, strong organic growth and positive leasing momentum. The REIT continues to capitalize on the current tight rental market, increasing AMR to $1,462 (+6.9%) while simultaneously ramping up portfolio occupancy (+120 bps to 95.6%) while simultaneously reducing the use of rebates. The combination of the above culminated in further NOI margin expansion, which improved 200 bps to 66.5%. While inflation did impact earnings (+16.6% in operating costs), strong top-line growth more than offset these pressures.
Coming into the quarter, IIP’s debt stack was an area of focus for us (the
REIT had an ostensibly short average term to maturity during a period of low rates). As of quarter-end, IIP has actively refinanced its obligations,
decreasing its variable rate exposure from 14% to 6%, and immunizing the balance sheet from future shocks owing to higher interest rates. Additionally, the REIT increased its annual dividend for the 11th straight year to $0.36 annually (+5.3%; we had modeled in a 5% increase). Indeed, despite having raised its distribution on a yearly basis, its payout ratio continues to improve to 52.1%, an improvement of ~980 bps and below its peer average of ~65%.
We are maintaining our Neutral rating, reflecting the warranted valuation
premium between IIP and the domestic peers. Reflecting the current rate
environment, we increase our cap rate modestly to 4.25% and
correspondingly lower both our NAV estimate and price target to $14.50
(from $15.00), reflecting NAV parity, and introduce our 2024 estimates.
Key Points
Earnings Results: Q3/22 diluted FFO per unit was $0.14, in line with
consensus estimates, but slightly short of ours ($0.15). We note the REIT
recorded a ~$5.7MM fair value gain on investment properties, and a
capitalization rate of 3.97% (+14 bps since last quarter).
Balance Sheet: D/GBV for the quarter was 37.4%, a slight increase from
34.4% in Q3/21. Additionally, the REIT reported ~$200MM in available
liquidity (as measured by undrawn facilities and cash on hand), with
~$129MM of debt maturing in the remainder of 2022 (~7.8%), and an
additional $238MM maturing in 2023 (~14.4%). Currently, IIP’s debt has a
weighted-average term to maturity of 4.8 years and a cost of debt of 3.08%.
Growing The Distribution: The REIT announced an increase of its annual
distribution to $0.36 (+5.3%), effective November 2022. This marks the 11th consecutive year that the REIT has grown its distribution by 5% or more.
ESG Achievements: The REIT continues to be a leader in ESG, reporting a 10% increase in its 2022 GRESB score compared to 2021. Additionally, IIP maintained its “Green Star” rating, signalling continued strong ESG
performance across the company.