TSX:IIP.UN - Post Discussion
Post by
retiredcf on May 10, 2023 1:30pm
TD
InterRent REIT
(IIP.UN-T) C$13.12
Higher Int Costs Weigh on '23 Ests. AFFO Growth to Resume in '24
Event
Forecast update. For our initial thoughts on the quarter, click here.
Impact: NEUTRAL
InterRent delivered an in-line quarter highlighted by +11.4% SPNOI growth. Overall portfolio occupancy increased +140bps to 96.8%, holding steady from Q4 and in line with pre-pandemic levels. Fundamentals remain strong heading into Q2, with management thus far seeing strong leasing activity and lower incentives, a trend which is expected to continue throughout the year. The REIT achieved 7% AMR growth in Q1, with management seeing the possibility of further upward pressure as rental markets remain tight. Management is currently seeing turnover in the mid-20% range, but expects this to decrease to the low-20% range for 2023.
Operating costs to trend down in 2023. While operating costs increased significantly y/y in Q1 (+14% on same property basis), management noted that this was largely timing-related as Q1/22 was lighter than normal due to some costs that were completed in Q4/21, and it expects operating cost growth to begin to slow over the balance of 2023. Our forecast has operating margins improving +100bps in 2023 to 65.2% and a further +60bps to 65.8% in 2024, which compares to pre-pandemic levels at 66%+.
Capital Allocation. On the call, management guided towards more capital being allocated to development and acquisitions of newer properties. With construction costs stabilizing and rents continuing to increase, management views development as an attractive use of capital. That said, the REIT's repositioning program continues to achieve the highest risk-adjusted returns, and management also expects to remain focused on its value-add program.
Forecasts. Our 2023 AFFO estimate decreases 5%, largely on lower NOI margins and higher interest expense. Our 2024 estimate is largely unchanged. We now expect flat earnings in 2023 before resuming low double-digit growth in 2024. Our $16.30 NAV/unit estimate is unchanged.
TD Investment Conclusion
We believe InterRent is well-positioned to capture growing demand in its core markets. We also continue to see earnings and NAV upside through the successful execution of its acquisition, repositioning, and development programs. That said, at current levels we view the units as fairly valued. We are maintaining our HOLD recommendation and lowering our target price to $15.00.
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