TSX:IIP.UN - Post by User
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retiredcfon Nov 06, 2024 8:41am
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Post# 36298419
RBC
RBCTheir upside scenario target is $19.00. GLTA
Outperform
TSX: IIP.UN; CAD 11.24
Price Target CAD 15.00 ↓ 16.50
InterRent REIT
Moderating NOI growth expectation
Our view: We have moderated our SP NOI growth expectation for 2025/2026 to +5% (vs. 8.7% in Q3) under the assumption of flat population growth over next two years and more slack in the rental market. IIP took an uncharacteristically cautious tone on the call and as such, market sentiment is likely to stay cautious near term. That said, the lower expected growth appears priced in. IIP trades at a 26% discount to our NAV (5.2% implied cap) at a time when cap rates are stabilizing and interest rate expense is less of a headwind. PT $15 (-9%); maintain OP.
Key points:
A good SP NOI print that the market appears to be looking past: SP NOI growth was +8.7% (SP-Rev +7.9%; SP-Exp +6.3%). Revenue growth was driven by SP-occupancy at 96.4% (+20bps q/q, +120 bps y/y) and SP-AMR of $1,686, +1.7% q/q, +5.6% y/y. AMR growth was consistent across all of its markets at 5-6% with Vancouver strongest at 7%. Encouraging was the sequential occupancy uptick, albeit modest, to 96.4%.
Management took a cautious tone on the call citing lots of unknowns, including the fact that we have never seen negative population growth before, whether immigration targets will be realized, the impact of unwinding of pent-up demand from prior years’ imbalance and the potential for higher turnover rate – see our general thoughts on the potential impact. In the end, the only conclusion from IIP is rent growth will moderate, but the question of by how much remains unclear.
We have moderated our NOI growth assumption to 5% in 2025/2026 (vs. high-single digit): Underlying our assumption are further ~5% market rent decline and slight occupancy decline. We see a dynamic of moderately higher turnover rate at slightly lower rent spread playing out in the next two years. Rent growth on turnover was +11.4% vs. prior 4 quarters of +16.1%, +20.3%, +17.2%, and +20.7%. T12M turnover rate was 24%. Portfolio-wide MTM rent spread was +27% (vs. +30%). Our tracking of IIP’s October asking rents show +2.6% y/y.
Buying new: IIP acquired a 50% interest in a 248-suite, 2023-built downtown Montreal asset for $53.5M ($432K/suite) with Crestpoint. The building is exempt from rent control for 5 years.
Valuation: A change in growth expectation usually drives more volatile price action as the market sorts out the ‘new norm’ and investors rotate out. While sentiment could stay negative near term, we believe the lower growth is generally priced in as the CDN apartment REIT sector is trading at a multiple spread in line with (or narrower than) the historical average to other sub-sectors. Our NAV estimate of $15 (unchanged) is based on a cap rate of 4.4% (unchanged) vs. IFRS BV/unit of $17.05 (-3% q/q), based on cap rate of 4.34% (+9bps q/q). Our price target of $15 (-9%) is based on a 5% discount (vs. parity) to forward NAV. Maintain OP.