Scotia comments on valuation
InterRent REIT (IIP, SO, $12.50) – Brad Cutsey, President & CEO
Fundamentals. IIP has historically focused on rent growth over occupancy gains, given that the vast majority of the portfolio is rent-controlled. However, in the face of new supply in select markets, IIP highlighted the willingness to concede in-place rent growth to occupancy gains by offering incentives in select markets. That said, IIP continues to have 27% of MTM embedded in its portfolio which could actually materialize faster as market rents come down, which could drive 5% SSREV growth in 2025. In terms of NOI margin, IIP believes the top-line growth might exceed opex growth in 2025 (although not as aggressively as last year) thanks to solid investments in its technological platform that will drive operating efficiencies. On the regulatory front, IIP believes the worst is behind the industry when it comes to Canadian policies, but most of the uncertainties are now coming from south of the border. Undoubtedly, U.S. tariffs could have a major impact on the Canadian economy, and we have shown that real GDP growth is the biggest driver of private market transactions, which in turn drive CAD REITs valuation higher (see our note). As such, if tariffs are not imposed and the Canadian economy remains stable and uncertainties disappear, we could see increased private market transactions dissipating IIP’s 30% NAV discount driving 25%+ upside. Given the external factors that are driving such a large discount to NAV, IIP thinks that it’s an opportunistic time to sell assets in the private market and use the proceeds to buy back units at more attractive valuation. This strategy effectively reduces the size of the REIT (which is a challenge to manage on its own), while setting up the REIT for the next stage of its growth.
Capital allocation. Following multiple dispositions in 2024, over $100M of net proceeds were used to pay down debt and IIP is now comfortable with its current balance sheet. As it sits today, IIP believes that the most attractive use of its FCF is unit buybacks. IIP would be interested to deploy capital in a very attractive acquisition opportunity if it comes up, although at $10/unit, it’s hard to overlook the value proposition of unit buybacks. At ~$10/un, IIP trades at an implied cap rate of 5.6% vs. its IFRS cap rate of 4.3% and our estimated NAV cap rate of 4.6%. IIP is a net seller in 2025 and is confident it can exceed $50M of net proceeds from dispositions, given multiple disposition candidates currently at different stages of negotiation.
InterRent REIT (IIP, SO, $12.50) – Brad Cutsey, President & CEO
Fundamentals. IIP has historically focused on rent growth over occupancy gains, given that the vast majority of the portfolio is rent-controlled. However, in the face of new supply in select markets, IIP highlighted the willingness to concede in-place rent growth to occupancy gains by offering incentives in select markets. That said, IIP continues to have 27% of MTM embedded in its portfolio which could actually materialize faster as market rents come down, which could drive 5% SSREV growth in 2025. In terms of NOI margin, IIP believes the top-line growth might exceed opex growth in 2025 (although not as aggressively as last year) thanks to solid investments in its technological platform that will drive operating efficiencies. On the regulatory front, IIP believes the worst is behind the industry when it comes to Canadian policies, but most of the uncertainties are now coming from south of the border. Undoubtedly, U.S. tariffs could have a major impact on the Canadian economy, and we have shown that real GDP growth is the biggest driver of private market transactions, which in turn drive CAD REITs valuation higher (see our note). As such, if tariffs are not imposed and the Canadian economy remains stable and uncertainties disappear, we could see increased private market transactions dissipating IIP’s 30% NAV discount driving 25%+ upside. Given the external factors that are driving such a large discount to NAV, IIP thinks that it’s an opportunistic time to sell assets in the private market and use the proceeds to buy back units at more attractive valuation. This strategy effectively reduces the size of the REIT (which is a challenge to manage on its own), while setting up the REIT for the next stage of its growth.
Capital allocation. Following multiple dispositions in 2024, over $100M of net proceeds were used to pay down debt and IIP is now comfortable with its current balance sheet. As it sits today, IIP believes that the most attractive use of its FCF is unit buybacks. IIP would be interested to deploy capital in a very attractive acquisition opportunity if it comes up, although at $10/unit, it’s hard to overlook the value proposition of unit buybacks. At ~$10/un, IIP trades at an implied cap rate of 5.6% vs. its IFRS cap rate of 4.3% and our estimated NAV cap rate of 4.6%. IIP is a net seller in 2025 and is confident it can exceed $50M of net proceeds from dispositions, given multiple disposition candidates currently at different stages of negotiation.