Multiple Raised Targets With rising interest rates offsetting its “impressive” organic growth, Canaccord Genuity analyst Mark Rothschild lowered his recommendation for InterRent Real Estate Investment Trust to “hold” from “buy” in response to recent share price appreciation and its current valuation.
The Ottawa-based REIT slipped 1.4 per cent on Tuesday after it reported fourth-quarter 2022 funds from operations per unit of 12.9 per cent, down 5.8 per cent from the same period a year ago and a penny below the analyst’s estimate, which he attributed to “significantly greater-than-forecast interest expense.” He also emphasized “a jump in financing costs of $5.4 million ($0.04 per unit) from refinancing debt at higher rates and greater mortgage debt outstanding.”
“InterRent REIT reported another quarter of robust operating performance, as strong rental rate growth and improvements in occupancy resulted in an 8.4-per-cent rise in same-property NOI [net operating income],” said Mr. Rothschild. “However, financial results were slightly below our expectations as a result of a greater-than-anticipated rise in financing costs given the move in interest rates. As the REIT’s debt is now almost entirely secured at fixed rates, we expect healthy internal growth, largely from raising rental rates on turnover, to drive solid cash flow per unit growth over the next two years, only somewhat offset by the negative impact of higher interest rates.
“During the quarter, InterRent raised its IFRS cap rate by 7 bps to 4.04 per cent, from 3.97 per cent in Q3/22. Driven in part by the increase in the IFRS cap rate as well as a lower estimate of stabilized NOI, the REIT recorded a fair value loss of $108 million ($0.74 per unit) in Q4/22. We continue to utilize a cap rate of 4.55 per cent to value InterRent’s portfolio, and following Q4/22 results, our NAV per unit estimate is now $14.95, from $14.65 previously.”
Mr. Rothschild thinks same-property NOI “remains strong despite rising operating costs” and same-property occupancy continues to make gains. However, he trimmed his 2023 and 2024 estimates based on a greater-than-anticipated rise in interest costs.
His target for InterRent units rose by 25 cents to $15.75. The average target is $15.19.
“Over the past three months, InterRent’s units have generated a total return of 16.6 per cent, compared to the return of 12.7 per cent for its Canadian apartment REIT peers,” he said. “The REIT’s units currently trade at 29.0 times 2023 estimated AFFO, compared to, on average, 22.5 times 2023 AFFO for its peers.”
Others making changes include:
* National Bank’s Matt Kornack to $16 from $15.75 with an “outperform” rating.
“Generally speaking, this quarter was in line with expectations for InterRent as management’s objectives in terms of a lease up in the Montreal portfolio were met,” said Mr. Kornack. “The REIT’s other markets continued to see stronger rent dynamics and pre-pandemic occupancy levels. This drove strong SPNOI growth for the year with an expectation for high single digit performance in 2023. However, the translation of this top line performance will be constrained from an FFO/u standpoint by active mortgage refinancing at longer terms and higher rates in 2022 with further pressure expected in 2023. Management was uncertain on where turnovers would settle in 2023 but suggested they would trend down from the historical 30% average. A downward trending turnover rate as well as the expectation of market rent increases on the back of an extremely tight rental market is expected to keep embedded MTM elevated.”
* Scotia Capital’s Mario Saric to $15.75 from $15.50 with a “sector outperform” rating.
“We maintain our SO rating, with our key estimate changes of down 5 per cent (2024 estimated AFFOPU [adjusted funds from operations per unit]) to up 3 per cent (NAVPU) as strong SSNOI was offset by higher debt costs,” said Mr. Saric. “We’re a bit less constructive since Q4/22, where we cited IIP as our Top REIT pick for 2023, largely due to its 13-per-cent year-to-date price return (vs. 7 per cent and 14-per-cent sector/peer avg.) driving IIP PEG ratio up 0.5 times to 2.6 times (peers up 0.2 times to 4.3 times). In a nutshell, NAVPU and AFFOPU are telling us slightly different things.”
* Laurentian Securities’ Frederic Blondeau to $16.50 from $15 with a “buy” rating.
“Our take: remains well positioned for further organic growth, while management continues to show leadership in the repositioning of the balance sheet,” said Mr. Blondeau. “In our opinion, the REIT remains exposed to exceptionally solid fundamentals across IIP’s core markets. In parallel, the team was able to reposition the balance sheet adequately, transitioning from its previous barbell approach.”
* RBC’s Jimmy Shan to $17 from $16.50 with an “outperform” rating.
* CIBC’s Dean Wilkinson to $15.50 from $14.50 with a “neutral” rating.