The Kids Are Alright Our Conclusion
True to form, IIP reported another in-line quarter, highlighted by strong
leasing (as the Slayte conversion hits 90%) driving increased occupancy and
healthy rental gains, which drove another quarter of margin growth. In a
trend that we see as innately durable, demand for residential rental housing
continues to provide a positive tailwind for all apartment operators as a
chronic undersupply of available housing, coupled with rapidly increasing
home ownership costs, expands the propensity to rent.
While we recognize that IIP units are trading below their historical average
valuation, the units trade at a deserved premium, in our view, compared to
domestic peers. As such, we remain Neutral rated, but are increasing our
NAV to $15.00 (from $13.50) and price target to $15.00, reflective of the
current (and potential) rate environment and improved and prudent cost
management (accompanied by industry-wide growth).
Key Points
Earnings Results: IIP reported diluted FFO per unit of $0.14, in line with
consensus and our estimate. Same property proportionate NOI increased
~11% Y/Y, driven by a 140 bps increase in SP NOI margins and a 20 bps
increase in SP occupancy to 97%. Lease-up at the REIT’s inaugural office
conversion community, The Slayte, exceeded 90% this month.
Disposition Activity: During the quarter IIP disposed of five non-core
properties located in Quebec, totalling 224 suites, for ~$46M or $250k per
suite. Net proceeds amounted to ~$22M and have been used to reduce
variable rate debt exposure which is immediately accretive.
Balance Sheet: The REIT ended 2023 maintaining a strong financial
position, with D/GBV at 38.1%, a decrease of 20 bps Y/Y, and total liquidity
of ~$252MM at quarter-end (as measured by cash and available facilities).
Subsequent to quarter-end the REIT successfully financed ~$184M of
maturing mortgages at an average rate of 4.25%. This compares to the
expiring rate of 6.06%.
Debt Rolls: IIP has ~$281.2MM (~17%) in mortgages maturing through
2024 at a weighted average interest rate of ~5.6%. Given the interest rate
achieved on financing subsequent to quarter-end and the higher expiring rate
on 2024 maturities, we estimate the 2024 debt roll will provide a small
tailwind (the only such entity among our coverage in this enviable position).
The REIT has an additional ~13% of debt maturing in 2025 at a weighted-
average interest rate of 3.25%. While this is below the most recently
achieved refinancing rate, if the market does play out as most economists
expect, then the REIT stands to benefit from a decrease in rates by 2025,
minimizing any material refinancing risks