InterRent Real Estate Investment Trust’s (IIP.UN-T) valuation “fails to capture” [its] strong 2023 organic growth prospects,” according to Raymond James analyst Brad Sturges.
“We are upgrading InterRent REIT to a Strong Buy from an Outperform rating, to reflect: 1) strong and improving Canadian multifamily rental (MFR) fundamentals that can support InterRent’s above-average 2023 organic growth prospects; 2) InterRent’s historical track record of generating above-average SP-NOI [same property net operating income] and AFFO [adjusted funds from operations] per unit growth year-over-year; 3) its attractive relative valuation discount to its NAV estimate and to its historical average P/AFFO multiple; and 4) the potential for InterRent to be a privatization / M&A candidate given the high-quality nature and intensification/development opportunity inherent within its Canadian MFR real estate portfolio.”
Mr. Sturges thinks Ottawa-based InterRent is set to benefit from further tightening in the Canadian multi-family residential leasing conditions, which he said is driven by the federal government’s increased immigration targets as well as a rise in foreign students returning to urban areas.
“We believe the conclusion of The Feds’ Canadian MFR sector review, combined with a limited operating and taxation impact for InterRent, could be a material near-term positive catalyst,” he said.
The analyst reiterated a $15.75 target for InterRent units. The current average is $14.85.
“InterRent currently trades at an approximately 22-per-cent discount to its NAV estimate of $15.50, compared to a historical premium of 4 per cent over the past 5 years,” he said. “Further, InterRent trades at 25 times 2023 estimated AFFO, which is 6 times turns lower than its 5-year historical average. While InterRent also trades at an 8 times P/AFFO premium to its Canadian MFR peers (historical average: 8 times), we believe InterRent’s premium valuation is warranted given its historical track record of delivering above-average SP-NOI, AFFO/unit and NAV/unit growth year-over-year.”