Our View: InterRent REIT’s (“IIP”) quarter saw a good recovery in its Montreal occupancy and entered the seasonally weak Q1 with 97% occupancy, the highest level since COVID. IIP continues to maintain SP NOI growth at the higher end of its peer group, including a significant 30%+ mark-to-market rent opportunity. However, refinancing mortgages at higher rates and replacing previously cheap credit facilities with CMHC debt will eat into 2023 FFO/unit growth. We maintain our OP rating as we expect +11% 2024 FFO/unit, a better reflection of strong fundamentals.
Key points:
Montreal occupancy has recovered nicely: SP NOI growth: +8.4% (SP-Rev +8.7%; SP-Exp +9.2%). SP-Occupancy was 97%, +110bps q/q, 80bps y/y driven primarily by its MTL portfolio which improved to 97.1%, +600 q/q, +250bps y/y. SP-AMR: $1,456, +6% y/y. IIP entered the seasonally weak Q1 with overall occupancy at 96.8%, which is the highest since COVID. IIP noted Jan/Feb rental demand remained strong.
2023 outlook – high single digit NOI growth: SP NOI growth outlook is at the higher end of the sector driven by its repositioning activities, its rent strategy in a market characterized by return to office, return of foreign students and high immigration levels. Mark-to-market rent opportunity sits at 30%+. Turnover rate is expected to be in the mid to low 20% range. Op cost growth is expected to be +4 to +6%, property tax +3 to +4%, and utility expense is tracking slightly lower than Q1/22 given milder Jan/Feb and lower natural gas prices.
Higher interest expense is muting 2023 FFO growth: Mortgage refinancing at higher rates (current CMHC debt is in the low to mid 4%) and replacing its previously cheap credit facilities with longer term debt are the main drivers of higher y/y interest expense relative to peers and more muted growth in 2023. However, the balance sheet is now with a debt term of 5.2 years (vs. 3.6 last year), variable-rate exposure is < 5% and available liquidity is $323M with nothing drawn on its credit facilities. Average interest rate is 3.22%, +14 bps q/q, +84bps y/y.
Quiet capital allocation activities: IIP reiterated its intention to get cost certainty before proceeding with its 3 development projects. IIP also noted that the investment market is thawing somewhat, is starting to see more products and could acquire assets with JV partners.
Muted 2023 FFO growth; better 2024 growth more in line with fundamentals: Our NAV of $15.00 (+$0.25) is based on a cap rate of 4.2% (unchanged) vs. IFRS BV/unit of $17.49 (cap rate of 4.04%, +7bps q/q). Our price target of $17.00 (+$0.50) is based on a 2.5% premium (unchanged) to our forward NAV. While 2023 will likely see muted growth, 2024 should look better (+11%) as the negative y/y impact of interest expense subsides