InterRent Real Estate Investment Trust T.IIP.UN

IIP update from Raymond James

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InterRent Real Estate Investment Trust  (IIP.UN-TSX) 

Real Estate | Residential

3Q24 Results: New OP2 Rating w/ Moderating ST Growth; Attractive Valuation w/ a Longer View

Recommendation

InterRent REIT reported 3Q24 FFO in-line at $0.16/unit, and up +9% YoY from $0.15/unit in 3Q23.

Lack of Short-term Visibility with Respect to MFR Leasing Demand as Recent Canadian Foreign Immigration Policy Changes Take Effect: On its 3Q24 call, InterRent noted that it expects Canadian market MFR rent growth conditions to moderate, particularly in higher-supply markets, or where market rents may have peaked. In particular, InterRent noted that larger households and the greater number of co-living arrangements could be negatively impacting Canadian housing formation in the short-term, which may further slow Canadian MFR leasing demand. In addition, as near-term visibility for Canadian MFR leasing demand fundamentals has become more challenging, InterRent did suggest on its 3Q24 call that its same-store revenue guidance range of +5-7% YoY could further moderate if Canadian housing formation remains slow.

Moderating Rent Growth Realized upon Suite Turnover in 2024 YTD; Embedded Rent MTM Growth Opportunity could Provide Longer-term SP-NOI Growth Cushion: InterRent’s 3Q24 SP-NOI growth of +9% YoY was driven by +8% same-property revenue growth YoY, and an +40 bps expansion YoY in its SP-NOI margin. In 3Q24, the REIT generated same-property average rent growth of +6% YoY (vs. +7% in 2Q24). Further, InterRent signed 1,279 leases in 3Q24, realizing a +11% average rent mark-to-market upon suite turnover (annualized TTM turnover rate: ~24%), which falls below its recent realized rent gain range upon suite turnover of +16-21% in the past 5 quarters. The estimated gap between the REIT’s in-place rents and forecast market rents was ~27% at Sept-30 (down from close to a +30% rent MTM growth estimate at June 30).

Thirteenth Consecutive Year of at Least a +5% or More Increase in its Monthly Distribution Rate: Effective in November, InterRent's board of trustees approved an increase in the REIT's monthly distribution rate to $0.033075/ unit (or $0.397/unit annually), up from $0.0315/unit (or $0.378/unit annualized). Going forward, we estimate InterRent’s 2025E AFFO payout ratio to be ~69%, which we believe provides capacity for future increases in its monthly distribution rate.

Key Takeaway

The Canadian Federal Government’s announced policy changes with respect to lower permanent and non-permanent resident targets in the next 2 years could result in slower Canadian population growth YoY, and softer near-term Canadian MFR leasing conditions. Our new Outperform rating (prior: Strong Buy) for InterRent balances the combination of an expected moderation in Canadian MFR leasing demand fundamentals, and its near-term SP-NOI and AFFO/unit growth prospects, with the REIT’s deep NAV/unit discount valuation, and positive long-term underlying demand and supply fundamentals within its key Canadian urban MFR markets.

Valuation

InterRent trades at 19.5x 2025E AFFO (large-cap Cdn MFR peers: ~18.2x), ~25% below our $15.00 NAV estimate (4.50% cap rate), and yields 3.5% (2025E AFFO payout: ~69%). InterRent trades at an ~5.3% implied cap rate, or ~$270k/suite. Our new $14.00 target price equals ~24.5x of 2025E AFFO (prior: ~25.0x), or generally in-line with its Cdn MFR REIT peers.