InterRent Real Estate Investment Trust T.IIP.UN

Scotia update

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Today Is Not as Bad as It Seems, But May Take Some Time to Sink In

OUR TAKE: Mixed. The Federal Government announced an avg. 22% lower Permanent Resident (PRs) target through 2026 (down an avg. 110k per year; Exhibit 1), while reiterating announced target reductions to Foreign Student permits (Exhibit 2 = August YTD; down 21% y/y) and non-permanent residents in March (target 5% of total population by 2026 vs. 2023A of 6.2% and 7.5% recently; Exhibit 3). Apartment REITs reacted negatively to the news, down an avg. 1.3% vs. flat for sector, despite lagging ~5% since mid-September (Exhibit 4). While the incremental potential rental demand erosion from today’s announcement feels modest (see Exhibit 5), it contributes to potentially negative headlines heading into an election campaign, in combination with investor concerns over asking rent erosion during a seasonally slower period, both of which we discussed in our tactical report on Oct 10th (see Near-Term Apartment REIT Outperformance Looks More Uncertain).

We also refer you to a detailed and thoughtful Oct 21st Scotia Economics report on thoughts over policy implementation (see link; expect a challenge), as well as our Immigration note in March 2024. News-wise, next step = Fall Economic Statement (last year = late November).

KEY POINTS

What to do? We’re leaving our estimates into Q3 reporting, including NAV, with Q3 Apartment Cap Rates generally flat q/q (see link to our CBRE Q3/24 Cap Rate Survey report). While in some ways we think the 10% correction is overdone given our 2025E blended rent growth of 4%-6% (Exhibit 6) reflects an 5% avg. decline in asking rents, market focus returning to solid FFOPU growth (Exhibit 7) and away from asking rents is likely required for a strong recovery to emerge. We’re inclined to keep with our tactical trade for now (on the whole, reallocating a bit of Multi Family into Seniors Housing, Office and select Retail (the latter also sensitive to population growth, but perhaps to a less direct extent) for another 3%-5%. For example, we think CAR (SO) could become more active on NCIB closer to $47 (i.e., 3%-5% lower) given access to an est. ~$600M of net proceeds from the expected MHC sale (link). IIP has also noted potentially using the NCIB on relative unit price underperformance (we think IIP floor remains +/- ~$12.00 on a ~10% AFFO discount to BEI/CAR and 19% discount to NAV).

We estimate every 100,000 PRs = ~50bp of rental demand (i.e., not overly material). As shown in Exhibit 8, the immigration-to-housing start ratio of 5.1-to-1 in 2023 had been higher than anything seen in 33 years (since our data set). Exhibit 5 summarizes our rental demand sensitivity to PR targets, making various assumptions (most notably a 50% home ownership rate and 3.0 people per household). As a result, in isolation, we don’t view today’s incremental announcement as overly negative on the margin, although it does perpetuate the negative headline risk for the Apartment REITs overall, in our view.

Population growth expected to decelerate meaningfully should all the announced policies be implemented; doubts exist. Exhibit 9 summarizes historical and Federal Government forecast population growth, with population erosion of 0.2% in both 2025E and 2026E, before returning to +0.8% in 2027. For reference, Scotiabank Economics’ most recent forecasts assumed 0.8%-0.9% population growth over this horizon. Exhibit 10 compares composition of recent and 2025E-2027E population growth, with the largest variance = expected declines in non-permanent residents (we believe the ~450k in 2025E/2026E includes the ~40% target conversion to PR). See link above for Scotia Economics thoughts on the NPR policy.