TD Report InterRent REIT
(IIP.UN-T) C$13.84
Solid Fundamentals to Drive Double-Digit FFO/unit Growth in 2024
Event
Forecast update.
Impact: SLIGHTLY POSITIVE
Solid Q4 results were driven by healthy +10.5% SPNOI growth and a rebound
in occupancy to 97% (representing the highest year-end occupancy since 2018).
Leasing fundamentals remained strong, with the REIT achieving +3.3% on renewals
and +21% on new leases in 2023. Management expects similar growth in both
metrics for 2024. 2023 turnover was 24.8%, which is high versus peers in similar
geographies, and attributed to the location of InterRent's assets (i.e. at 15%,
InterRent's student tenant base is tops among peers). Q4 operating expenses
benefited from warmer weather (6% decline in utility costs), which should also aid
Q1/24.
For 2024, management expects to achieve high-single to low-double-digit SPNOI
growth on the back of 6%-8% revenue growth. Our forecast has 8.0%/7.2% SPNOI
growth for 2024/25.
Capital Recycling. Following the Q1/24 sale of five properties in Quebec ($46mm
or $205k/suite; mid-4% cap rate), InterRent remains on track to meet its target of
$75mm in net disposition proceeds. While transaction activity remains slow due
to a challenging financing environment, management has begun to see increased
interest from private capital buyers for its smaller assets, and expects bid-ask
spreads to narrow over the course of 2024. Conference call commentary suggests
management will focus future dispositions on properties with smaller mark-to-market
upside. Our forecast includes $50mm in unannounced dispositions for 2024.
On acquisitions, management noted it would likely structure any near-term
opportunities in the form of JV partnerships (given its current cost of capital),
and would consider both “vintage” communities and newer assets with value-add
opportunities.
Forecasts. Our 2024/25 AFFO/unit estimates increase 4%/5% on higher NOI,
partially offset by higher interest/G&A expense. Our $15.00 NAV/unit estimate is +4%
on higher NOI.
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 capital allocation programs. That said, at current levels, we view the
units as fairly valued on a relative basis.