InterRent REIT
(IIP.UN-T) C$14.49
Downgrading to HOLD from Buy on Valuation Event
Forecast update and downgrading InterRent REIT to HOLD from Buy. For our initial thoughts on the quarter, click here.
Impact: NEUTRAL
Our downgrade is purely a valuation call relative to the REIT's closest peers.
On a P/Forward AFFO basis, the REIT, at 29.7x, is trading at a 43% premium to its Canadian apartment peers, compared with 20% average over the last 10 years (Exhibit 8). Historically, we have viewed InterRent's premium relative valuation as justified due to its historical above-average AFFO/unit (+6% 10-year CAGR versus peers at +3%) and NAV/unit (+10% 10-year CAGR versus peers at +5%) growth. However, looking ahead, we expect more modest growth from InterRent relative to its peers, with our forecast assuming an average AFFO/unit growth of ~5% over 2023/2024 versus 7% for its peers.
Although we are downgrading InterRent, we remain positive on its outlook.
With a significant recovery in the REIT's GMA market (occupancy +630bps q/q to 95.9%), overall occupancy of 96.8% is now in line with pre-pandemic levels, which, in our view, positions the REIT well to capitalize on strong demand fundamentals in 2023. We expect revenue growth to remain solid on the back of a 30% mark-to- market opportunity (albeit with lower turnover versus historical norms), and expect further tailwinds from immigration, along with the return of young professionals and foreign students in the REIT's core markets. We expect revenue growth to continue to outpace inflationary pressure, with an expectation of y/y utility costs, in particular, to ease in 2023. This all lead to our SPNOIG forecast of 7.6%/5.2% in 2023/2024.
Forecasts. Our 2023/2024 AFFO estimates increase ~4%, largely on higher NOI. Our $16.30 NAV/unit estimate is ~4% higher.
TD Investment Conclusion
We believe InterRent is well-positioned to capture growing demand in its core markets. We also continue to see earnings and NAV upside through the successful execution of its acquisition, repositioning, and development programs. That said, we view the current premium versus its peers as unjustified, given the more modest growth we expect from the REIT going forward. On this basis, we are downgrading InterRent REIT to HOLD from Buy, while increasing our target price to $16.00 from $14.50.