TSX:IIP.UN - Post by User
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retiredcfon May 13, 2024 8:29am
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Post# 36036438
RBC 2
RBC 2Their upside scenario target is $20.50. GLTA
May 10, 2024
InterRent REIT
Let's not waste an opportunity
Our View: Double digit NOI growth continued and we expect high-single to low-double-digit NOI growth in 2024. The bigger message, in our view, was that acquisition opportunities are surfacing but with cost of capital a limiting factor, IIP is working ‘within the confines’ of existing cash. We think it needs to be said that today’s investment environment seems conducive for REITs like IIP to play offence and IIP has a good track record of creating significant value with value-add opportunities. Maintain OP.
Key points:
Double digit SP NOI growth continued: +11.7% (SP-Rev +7.8%; SP-Exp +1.2%): Revenue growth was driven by SP-occupancy at 96.8%, -20bps q/ q, +10 bps y/y and SP-AMR of $1,635, +3.2% q/q, +7.1% y/y. AMR growth was consistent across all of its markets. Taxes were +9%, utilities -11%; opex +4%. SP-NOI margin was 65.2%, +230bps. Vancouver is expected to see more units removed off line for repositioning. Capex spend was ~20% lower y/y but pace of decline not likely to sustain through the year.
Outlook: we continue to expect 6-8% revenue growth and high-single to low double digit SP NOI growth. Rent growth on turnover was +20.3% vs. 17.2% in Q4/23, 20.7% in Q3/23, 23.8% in Q2/23. One variable is students (~15% of IIP’s tenants) and August is when student leasing activity typically occurs. While the foreign student permits issued are lower than last year, they are not lower than 4 years ago for students scheduled to leave, and as such, incremental impact should be fairly limited over next two years. Our tracking of IIP’s April listed rents shows +0.28% growth over March.
Capital allocation – selling to buy: IIP sold 5 properties in Cote-Saint-Luc, Quebec for $46M ($205K/suite, mid-4% cap) and post Q1 sold 497 suites in Gatineau (and land) for $92M ($185K/suite). It could sell another ~$50M.
Let’s not waste an opportunity: CEO Brad Cutsey made it clear that it is not looking to raise equity at this level and remains disciplined working ‘within the confines’ of existing cash. The message was equally clear that there are interesting opportunities surfacing (a-la Starlight portfolio) where it could scale its portfolio and create NAV growth given that value-add is in its DNA. We agree: 1) the investment market set up is one where we think REITs should play offence, 2) IIP is the most likely candidate to buy value-add, 3) IIP has a good track record in creating value with value-add opportunities. Indeed, that was its genesis with FFO/unit compounding significantly in the early years when value-add assets comprised the bulk of portfolio. Unfortunately today, the limiting factor is cost of capital.
Valuation: Our NAV estimate of $15 (unchanged) is based on a cap rate of 4.4% (unchanged) vs. IFRS BV/unit of $17.79 (+0.5%), based on a cap rate of 4.17% (-4bps). Our price target of $16.50 (unchanged) is based on a parity to forward NAV. Maintain OP.