TSX:IIP.UN - Post by User
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retiredcfon Nov 06, 2024 8:07am
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Post# 36298347
TD Upgrade
TD Upgrade UPGRADING TO BUY; SLOWING FUNDAMENTALS MORE THAN PRICED-IN
THE TD COWEN INSIGHT
We view the decline in residential REIT trading prices post the immigration announcement as overdone. Despite the expectation of softer fundamentals, we forecast mid- to high- single-digit SPNOI and AFFO/unit growth for IIP — in line to slightly ahead of peers. With the stock significantly underperforming peers YTD, we now view the valuation as attractive on both an absolute and relative basis.
Impact: NEUTRAL Initial views: here
Upgrading to BUY. With its YTD underperformance (-14.3% vs. 2.9% total return for Canadian peers), we view today's valuation as attractive on both an absolute (28% discount to NAV and 5.2% implied cap rate) and relative basis, with InterRent now trading largely in line with its peers on a forward multiple basis.
Well-positioned to play defense. Although market rent growth has held up well across the portfolio (including strength in Ottawa/Montreal and GTHA), management does expect moderating growth going forward on softer (although still favourable) fundamentals and the likely negative impact from last month's sharply reduced Canadian immigration targets (link). We believe management has multiple levers to pull to maintain mid-single-digit revenue growth, including a temporary shift to a higher occupancy model should industry conditions soften. We view 5%+ revenue growth as very achievable in 2025 (Figure 1). We forecast SPNOI growth of 9.5%/5.2%/6.7% in 2024/2025/2026.
Capital Allocation. Management noted on the call that future acquisition activity would largely depend on the success of dispositions (currently targeting $50mm in asset sales through 2025). With transaction activity beginning to pick up (including increased activity from institutional players), we continue to believe that InterRent is well-positioned to capitalize on opportunities on both the buy side and sell side. We forecast $30mm/$80mm in net acquisitions in 2025/2026. At current levels, we also expect management to be more active on the NCIB. And with a payout ratio in the 70% range, we expect continued annual distribution growth in the 5% range.
Forecasts. Our 2025/2026 FFO/unit estimates decrease modestly 2%/4% on lower NOI assumptions owing to softening fundamentals. Our AFFO estimates are largely unchanged (less assumed stabilized units) and represent y/y growth of 4%/9% in 2025/2026. Our NAV/unit estimate is unchanged at $15.60.
Outlook
We expect InterRent to continue to generate ~5% top-line revenue growth. We assume 3% increases on renewals (guideline plus Above Guideline Increases in some cases). We also assume that as turnover increases, uplifts will slow, and vice versa. Figure 1 shows how this should generate 5%+ revenue increases (assuming flat occupancy). At 96.4%, IIP also has room to move occupancy higher to drive revenue growth.