Post by
retiredcf on May 10, 2023 12:47pm
CIBC
Have a $15.50 target. GLTA
EQUITY RESEARCH
May 9, 2023 Earnings Update
INTERRENT REAL ESTATE INVESTMENT
TRUST
The Rising Tide Of Rents And Rates
Our Conclusion
Similar to Q4/22 (and indeed the industry), IIP reported a quarter that
juxtaposes strong organic rental growth with increased financing costs. While
headline results were in line on all of the major operating metrics, we note
that FFO per unit was down marginally ~2.3% as a result of a more volatile
(higher) interest rate environment which increased the REITs weighted
average cost of mortgage debt to 3.38% (+16 bps). With a largely stabilized
portfolio occupancy rate of ~97%, operations in rent-controlled markets, and
a management target vacancy rate of ~4% on repositioned suites, we view
near-term growth as predominantly driven by the rate of suite turns, and a
catalyst for capturing the ~30% mark-to-market opportunity.
While we believe IIP can (and will) continue to achieve strong spreads on
turned suites over the short and intermediate term, the REIT’s near-term
rental growth is limited by both regulation and a slowing industry trend on
turnover. We maintain our Neutral rating, which is purely a reflection of a
well-deserved valuation premium that we believe is accurately reflected in
the current unit price relative to its closest peers. Our NAV estimate and price
target remain unchanged at $15.00 and $15.50, respectively, on a 4.25%
utilized cap rate.
Key Points
Earning Results: Q1/23 diluted FFO per unit was $0.13, in line with
consensus estimates. We note that the REIT reported an ~$70MM fair value
gain on investment properties, driven exclusively by increased NOI
expectations, with an unchanged 4.04% IFRS capitalization rate.
Balance Sheet: IIP maintains a conservative leverage profile with a D/GBV
for Q1/23 of 38% (+160 bps) and interest coverage ratio of ~2.5x (vs. 3.3x in
Q1/22). With lenders placing increased priority on borrowers with strong
balance sheets and debt servicing capabilities, we view IIP’s current position
as very conservative and sufficient to cover its existing credit obligations and
covenants.
Debt Position: The REIT has $114.5MM in mortgages payable due in 2023,
representing ~7% of its total obligation. While financing costs have increased
in the quarter as a result of a more volatile interest rate environment, we note
that the REIT is actively managing its mortgage ladder, increasing its share
of CMHC insured mortgages to 83% (vs. 71% in Q1/22) and reducing its
variable rate exposure to ~4% (vs. 16% in Q1/22).
The Slayte In Ottawa: The Slayte, the REIT’s first office conversion project,
continues to experience continued leasing momentum, bringing 17 suites
online and approaching 50% occupancy despite lease-up having mainly
occurred in the slower winter months. Currently, takeout financing is
underway with CMHC