InterRent Real Estate Investment Trust

Transcription

1 Institutional Equity Research Earnings Update May 12, 2014 Stock Rating: Sector Performer Sector Weighting: Market Weight mo. Price Target $6.25 IIP.UN-TSX (5/9/14) $5.66 Key Indices: None 3-5-Yr. AFFO Gr. Rate NA 52-week Range $4.83-$6.58 Units Outstanding 57.5M Float 57.3M Units Avg. Daily Trading Vol. NM Market Capitalization $325.5M Distribution/Distr. Yield $0.20 / 3.5% Fiscal Year Ends December Net Asset Value $6.25 per Unit 2014 RETURNS LT Debt $371.4M Preferred Nil Common Equity $377.7M Convertible Available No FFO Per Share Prev Current 2013 $0.35A 2014 $0.41E $0.37E 2015 $0.47E $0.44E P/FFO x x 15.3x x 12.9x Real Estate InterRent Real Estate Investment Trust It Was A Cold Quarter Q1/14 FD FFO was $0.07/unit, down -12.5% from $0.08 last year, and below our $0.09 estimate. The decrease in FFO resulted from a decrease in stabilized NOI of 2.5%, driven by an increase in stabilized economic vacancy of 1.9% and an 8.4% increase in stabilized operating expenses. Average occupied monthly rent/suite increased to $938 at Q1/14 from $931 at Q4/13 and $888 a year earlier. Average occupancy, excluding Bell Street, was 96.4% for Q1/14, down 160bps from a year ago. The REIT has ~ $1.0 million in above guideline increases in various stages of application. Debt/GBV assets was 48.7% at Q1/14, marginally up from 47.4% in Q4/13 and well below the REIT's limit of 75.0%. IIP's interest coverage was a strong 2.62x (rolling four quarters) in Q1/14, down from 2.66x last year. At $5.66, IIP trades at 15.3x our 2014E FFO, a ~9% discount to our $6.25/unit NAV estimate (at a 5.75% cap rate), and yields 3.5%. Our 12- to 18-month price target is $6.25 (from $6.50) in line with our NAV. We continue to rate InterRent Sector Performer. Stock Price Performance AFFO Per Share 2013 $0.30A 2014 $0.36E $0.32E 2015 $0.41E $0.38E P/AFFO x x 17.7x x 14.9x Company Description InterRent is a growth-oriented owner and operator of multi-family apartment homes, owning over 70 properties comprising 6,103 units, mainly in Ontario with several properties located in Montreal. Dean Wilkinson, CFA Alex Avery, CFA, MRICS Brad Sturges, CFA Sumayya Hussain Source: Re uters All figures in Canadian dollars, unless otherwise stated CIBC World Markets does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. See "Important Disclosures" section at the end of this report for important required disclosures, including potential conflicts of interest. See "Price Target Calculation" and "Key Risks to Price Target" sections at the end of this report, where applicable. Find CIBC research on Bloomberg, Reuters, firstcall.com CIBC World Markets Inc., P.O. Box 500, 161 Bay Street, Brookfield Place, Toronto, Canada M5J 2S8 (416) and ResearchCentral.cibcwm.com

2 InterRent REIT Sector Performer IIP.UN-TSX 5/12/2014 $5.66 Per Unit Dean Wilkinson, CFA ( ) month Price Target: $6.25 Per Unit Alex Avery, CFA, MRICS ( ) REITs Current Yield: 3.5% Brad Sturges, CFA ( ) Sector Weighting: Market Weight Market Capitalization ($ mlns): $325.5 Sumayya Hussain ( ) Price Target Calculation & NAV CIBC 2014E FFO: $0.37 Target Multiple (2014E FFO): 16.5x-17.0x CIBC Price Target: $6.25 Implied Month Total Return: 14% Company Description CIBC NAV(E): $6.25 Strategy Premium/(Discount) To NAV: (9%) The REIT's primary objective is acquiring, maintaining, improving and managing multi-unit residential income-producing properties. Cap Rate: 5.75% The REIT hopes to own a large and diverse portfolio where in no single asset is more than 15% of GBV. The REIT primarily focuses on the Ontario multi-residential real estate market and on mid-sized population markets targeting working and middle class, long term Total Return renters. InterRent is an active acquirer in this market with fragmented and aging ownership providing significant opportunities for YTD strategic acquisitions. Price Return 64.5% 2.3% 5.8% Yield 4.3% 3.6% 1.6% Investment Thesis: Sector Performer Total 68.8% 5.9% 7.4% SOLID SP-NOI PERFORMANCE: InterRent continues its strong financial trajectory with its stabilized properties (properties owned continuously for 24 months prior to the beginning of the period) clocking 12 consecutive quarters of positive growth y/y. However, REIT Management Mike McGahan, Chief Executive Officer and Trustee Curt Millar, Chief Financial Officer higher vacancy led to a decrease in SP NOI in Q1/14 of 2.5%. INCREASING DISTRIBUTION: The REIT in 2013 increased monthly distributions by two-thirds, highlighting management's confidence in the stability of their portfolio's cash-flows. AFFO payout at Q1/14 stood at ~62%, we believe this leaves management with enough scope to increase distributions in the near future and drive yields towards 5% from the current ~3.5% levels. Earnings Summary Financial Metric 2013A 2014E 2015E Funds From Operations $0.35 $0.37 $0.44 Comparable Company Table YoY Change 16.7% 5.7% 18.9% FFO MULTIPLES 2013A 2014E 2015E InterRent 16.2x 15.3x 12.9x Adjusted FFO $0.30 $0.32 $0.38 Peer Group x 11.3x 10.8x YoY Change 20.0% 6.7% 18.8% AFFO MULTIPLES 2013A 2014E 2015E Debt Maturity & Liquidity Profile (At Q1/14) InterRent 18.9x 17.7x 14.9x Mln Peer Group x 13.0x 12.3x Mortgages (Avg. Mat. ~4.5 yrs) $112.0 $45.4 $13.5 Note 1 : BEI.UN, MRG.UN, MST.UN, TN.UN and RUF.U. Credit Facilities/Bank Debt $9.9 $6.2 $0.0 Total $121.9 $51.6 $13.5 Weighted Avg Interest Rate 3.3% Leverage Summary LEVERAGE SUMMARY Q1/14 Q1/13 Limit Cash & Equivalents $0.4 EBITDA Interest Coverage: 2.6x 2.7x n/a Undrawn Credit Facilities $16.9 IFRS D/GBV (ex. conv. debt): 49% 40% 75% Total Liquidity $17.3 Recent Portfolio Occupancy History Geographic Breakdown (At Q1/14) Year Q1 Q2 Q3 Q4 No of % of AMR % N/A N/A N/A Region Suites Suites C$ % 96.0% 96.4% 96.4% Eastern Ontario, ON % % 96.6% 98.6% 97.8% Greater Toronto Area, ON % 1, % 95.1% 96.6% 96.6% Hamilton/Niagara, ON % % 87.8% 94.7% 97.4% Northern Ontario, ON % % 93.8% 94.2% 93.2% NCR, Ottawa, ON* 1, % % 95.7% 96.2% 94.8% Western Ontario, ON 1, % 850 Recent Same Portfolio Cash-NOI Growth Montreal, QC % 829 Year Q1 Q2 Q3 Q4 Total/Wtd Avg 6, % (2.5%) N/A N/A N/A *excludes un-rentable suites % 5.5% 2.3% 1.5% % 15.2% 12.7% 10.5% % 38.2% 26.9% 17.2% 2010 n/a n/a n/a n/a 2009 n/a n/a n/a n/a Source: Company reports and CIBC World Markets, Inc. InterRent is a growth oriented owner and operator of multi-residential properties within the provinces of Ontario and Quebec. The REIT's core markets are London, Sarnia, Ottawa and Hamilton. As of Q1/14 end, the REIT portfolio had 6,103 suites. STRONG BALANCE SHEET: The REIT's total liquidity as of Q1/14 is a comfortable ~C$17.3 million providing adequate financial flexibility and stability. 2

3 Q1/14 Results Q1/14 fully diluted (FD) funds from operations (FFO) was $0.07/unit, down 12.5% from $0.08/unit last year and below our estimate of $0.09/unit. The decrease in FFO/unit resulted from a decrease in stabilized NOI of 2.5%, driven by an increase in stabilized economic vacancy from 1.9% at Q1/13 to 3.8% at Q1/14 (excluding the un-rentable suites at the firm s Bell Street property) and an 8.4% increase in stabilized operating expenses. The shortfall to our estimates can be explained by the accelerated removal of rental income associated with the REIT s development of its Bell Street property located in Ottawa ahead of our expectations, slightly lower occupancy on the remaining stabilized portfolio and lower-than-anticipated operating margins due to a greater sensitivity to the impact of cold weather that we had anticipated. Additionally, during the quarter the REIT was impacted by a fire at one of its properties located in the Hamilton/Niagara area which resulted in the loss of 17 rental units for the period; while the properties were fully covered by insurance for loss and business interruption we believe it will be some time before the property will be generating cash flow. In the interim, losses are fully covered for a period of one year pursuant to the REIT s insurance coverage so the financial impact is expected to be nil. InterRent has successfully vacated all suites in the Bell Street property at quarter end, a necessary step in completing the redevelopment cost effectively and in a timely manner. We had assumed the removal of tenants would progress through Q2; the accelerated nature of this process should allow for the redevelopment and re-leasing to occur somewhat ahead of our expectations and result in the full impact of the improved cash flow early in We estimate the spread between in place rents and the renovated asking rents could be in excess of $200/ month, which could drive an incremental estimated $1 million annually to NOI at 97% occupancy. Average occupancy across the portfolio, excluding the 444 un-rentable suites at Bell Street and the 17 suites in Hamilton, in Q1/14 was 96.4% flat from Q4/13, while down 160 bps from last year. Average occupied monthly rent per suite increased to $938 in Q1/14, up from $888 a year earlier and $931 last quarter. Exhibit 1. Average Monthly Rent vs. Economic Vacancy Source: Co mpa ny re ports 3

4 Average NOI margin was marginally down Y/Y at 53.1% in Q1/14 vs. 56.9% last year. While we anticipated some degradation in margins for the period on account of extreme weather, the impact was greater than we had anticipated and will, in all likelihood, carry on marginally in Q2. NOI increased on a dollar basis from $7.43 million in Q1/13 to $8.4 million in Q1/14 on higher revenues (+23% Y/Y); however, higher expenses offset these gains (+32.1%), contributing to margin erosion. The 2.5% decrease in stabilized NOI also had a deleterious effect. Acquisitions and Dispositions In Q1, the REIT closed its acquisition of an apartment property in Ottawa comprising 2 1-bedroom, 28 2-bedrooms and 24 garden homes, for $7 million (5.75% going in cap rate). The purchase will be financed through a conventional first mortgage. IIP also acquired a parcel of land adjacent to its Bell Street property for $2.5 million which is being used as a parking lot. Financial Position Debt/GBV assets was 48.7% at Q1/14, up marginally from 47.4% in Q4/13, and well below the REIT s limit of 75.0%. With a low cash balance ($0.3 million), the REIT s near term liquidity requirements will be entirely met from operating cash flows and undrawn credit facilities (assuming no issuances of equity or debt instruments) to which InterRent has available ~$17 million of combined capacity across two demand and two term facilities. InterRent has $112 million of debt maturing over the course of 2014 at an average rate of 2.65%, a cost we believe to approximate current rates on CMHC financing. We would expect not to see a material interest savings on the renewal of such debt as much of it is tied to redevelopment properties and is expected to be re-financed on similar short term durations until such properties are fully stabilized and re -financed under longer term conventional CMHC insured mortgages. EBITDA interest coverage was a strong 2.62x (rolling four quarters), down from 2.66x last year. The weighted-average interest rate on the REIT s debt was 3.30% at Q1/14, down slightly from 3.31% at Q4/13 and down 21 bps from 3.51% last year. The REIT s weighted average term to maturity on debt was approximately 4.5 years at Q1/14, down slightly from 4.7 years in Q4/13. CMHC backed debt dropped slightly from 68% in Q4/13 to 67% at quarter end. Investment Outlook InterRent continues to implement its strategy of re-working undermanaged assets and adding value through active management and capital improvement programs. The REIT is now well underway on its most significant repositioning project to date, the complete renovation of the ~440 unit Bell Street property located in Ottawa which is anticipated to be complete by late 2014 and expected to increase average monthly rental rates at the property from the low $800 level to in excess of $1,000/month, while at the same time increasing the assets operating margin as mechanical systems are updated and made more efficient. The REIT continues on its plan to implement individual hydro sub-metering across its portfolio which has the impact of significantly reducing utility expenses. As of March 31, infrastructure was in place in 4,033 of the REIT s suites to track hydro consumption in order to be able to pass on hydro charges directly to tenants. As a result of the initiative, 1,396 tenants currently pay 4

5 utilities direct to the local utility, 1,189 pay directly to the REIT and an additional 1,448 will be moved to hydro extra leases when the suites turn over. We continue to estimate that the annualized impact of the REIT s successful implementation of the sub-metering program will have an approximate $1 million impact to the REIT s bottom line upon completion. In addition, the REIT has approximately $1 million in applied above guideline rental increases (AGIs) that have yet to be booked, and should be realized over the next months ($0.5 million in the remainder of 2014, $0.3 million in 2015 and $0.2 million in 2016). As we have alluded to in the past, major re-development of income producing properties tend to, all else being equal, result in a somewhat lumpy earnings profile, particularly when compared to fully stabilized portfolios, which tend to be more common in multi-family REITs. We anticipate the eventual completion of the work on the REIT s Bell Street property will mark the return to the acquisition market, as the REIT successfully places its largest re-positioning project to date behind it and seeks accretive uses of its available liquidity (D/GBV of 48.7%). We would expect that any near term (next 12 months) acquisitions could result in a short term drag on cash flows as the assets are repositioned, however the long term track record of management has been very successful in acquiring undermanaged assets, repositioning them and maximizing value. InterRent represents an attractive and defensive investment with a very strong balance sheet, stable and growing operating and financial results, and a discounted valuation relative to NAV, which we currently estimate at $6.25 per unit at a 5.75% cap rate (down from $6.50). Our 2014 FFO and AFFO estimates are reduced from $0.41 and $0.36/ unit respectively to $0.37 and $0.32 on slightly lower occupancy assumptions which are more in line with the portfolio s current stabilized occupancy. Carrying forward a modestly reduced occupancy assumption, we reduce our 2015 FFO/AFFO estimates to $0.44 and $0.38 respectively from $0.47 and $0.41 respectively. We continue to rate InterRent REIT Sector Performer, balancing the REIT s strong FFO/AFFO growth outlook and low leverage with an above -average valuation and below-average yield. Price Target Calculation At $5.66, InterRent trades at 15.3x our 2014E FFO, a ~9% discount to our $6.25/unit NAV estimate (at a 5.75% cap rate), and yields 3.5% (~62% 2014E AFFO payout ratio). Our 12- to 18-month price target is $6.25 (from $6.50) or approximately 16.5x 17.0x 2014E FFO. We continue to rate InterRent REIT Sector Performer. Key Risks To Price Target Risks include the potential for an unanticipated increase in interest rates, an unexpected deterioration in residential leasing conditions, and a diversion of investors capital flows away from high-yielding real estate equities toward other asset classes. 5

6 Our FFO estimates are shown below: 1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. Yearly 2013 Current $0.08A $0.09A $0.10A $0.08A $0.35A 2014 Prior $0.09E $0.10E $0.11E $0.11E $0.41E 2014 Current $0.07A $0.09E $0.10E $0.11E $0.37E 2015 Prior $0.47E 2015 Current $0.44E Our AFFO estimates are shown below: 1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. Yearly 2013 Current $0.07A $0.08A $0.08A $0.07A $0.30A 2014 Prior $0.08E $0.09E $0.10E $0.10E $0.36E 2014 Current $0.06A $0.08E $0.09E $0.10E $0.32E 2015 Prior $0.41E 2015 Current $0.38E 6

7 IMPORTANT DISCLOSURES: Analyst Certification: Each CIBC World Markets research analyst named on the front page of this research report, or at the beginning of any subsection hereof, hereby certifies that (i) the recommendations and opinions expressed herein accurately reflect such research analyst's personal views about the company and securities that are the subject of this report and all other companies and securities mentioned in this report that are covered by such research analyst and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report. Potential Conflicts of Interest: Equity research analysts employed by CIBC World Markets are compensated from revenues generated by various CIBC World Markets businesses, including the CIBC World Markets Investment Banking Department. Research analysts do not receive compensation based upon revenues from specific investment banking transactions. CIBC World Markets generally prohibits any research analyst and any member of his or her household from executing trades in the securities of a company that such research analyst covers. Additionally, CIBC World Markets generally prohibits any research analyst from serving as an officer, director or advisory board member of a company that such analyst covers. In addition to 1% ownership positions in covered companies that are required to be specifically disclosed in this report, CIBC World Markets may have a long position of less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest. Important Disclosure Footnotes for InterRent Real Estate Investment Trust (IIP.UN) 2g CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from InterRent Real Estate Investment Trust in the next 3 months. 7

8 Important Disclosure Footnotes for Companies Mentioned in this Report that Are Covered by CIBC World Markets Inc.: Stock Prices as of 05/12/2014: Boardwalk REIT (2g, 7) (BEI.UN-TSX, $63.16, Sector Performer) InterRent Real Estate Investment Trust (2g) (IIP.UN-TSX, $5.66, Sector Performer) Milestone Apartments REIT (2a, 2c, 2e, 2g) (MST.UN-TSX, $10.37, Sector Outperformer) Morguard North American Residential REIT (2g) (MRG.UN-TSX, $10.48, Sector Outperformer) Pure Multi-Family REIT LP (2a, 2c, 2e, 2g) (RUF.U-V, US$4.74, Sector Outperformer) True North Apartment REIT (2g) (TN.UN-TSX, $8.06, Sector Performer) Important disclosure footnotes that correspond to the footnotes in this table may be found in the "Key to Important Disclosure Footnotes" section of this report. 8

9 Key to Important Disclosure Footnotes: 1 CIBC World Markets Corp. makes a market in the securities of this company. 2a This company is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months. 2b 2c 2d 2e 2f 2g 3a 3b 3c 4a 4b 4c 5a 5b 6a CIBC World Markets Corp. has managed or co-managed a public offering of securities for this company in the past 12 months. CIBC World Markets Inc. has managed or co-managed a public offering of securities for this company in the past 12 months. CIBC World Markets Corp. has received compensation for investment banking services from this company in the past 12 months. CIBC World Markets Inc. has received compensation for investment banking services from this company in the past 12 months. CIBC World Markets Corp. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. This company is a client for which a CIBC World Markets company has performed non-investment banking, securities-related services in the past 12 months. CIBC World Markets Corp. has received compensation for non-investment banking, securities-related services from this company in the past 12 months. CIBC World Markets Inc. has received compensation for non-investment banking, securities-related services from this company in the past 12 months. This company is a client for which a CIBC World Markets company has performed non-investment banking, non-securities-related services in the past 12 months. CIBC World Markets Corp. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months. CIBC World Markets Inc. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months. The CIBC World Markets Corp. analyst(s) who covers this company also has a long position in its common equity securities. A member of the household of a CIBC World Markets Corp. research analyst who covers this company has a long position in the common equity securities of this company. The CIBC World Markets Inc. fundamental analyst(s) who covers this company also has a long position in its common equity securities. 6b A member of the household of a CIBC World Markets Inc. fundamental research analyst who covers this company has a long position in the common equity securities of this company. 7 CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by this company. 8 An executive of CIBC World Markets Inc. or any analyst involved in the preparation of this research report has provided services to this company for remuneration in the past 12 months. 9 A senior executive member or director of Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World Markets Corp., or a member of his/her household is an officer, director or advisory board member of this company or one of its subsidiaries. 10 Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World Markets Corp., has a significant credit relationship with this company. 11 The equity securities of this company are restricted voting shares. 12 The equity securities of this company are subordinate voting shares. 13 The equity securities of this company are non-voting shares. 14 The equity securities of this company are limited voting shares. 9

10 CIBC World Markets Inc. Price Chart No rating history data found for InterRent Real Estate Investment Trust 10

11 CIBC World Markets Inc. Stock Rating System Abbreviation Rating Description Stock Ratings SO Sector Outperformer Stock is expected to outperform the sector during the next months. SP Sector Performer Stock is expected to perform in line with the sector during the next months. SU Sector Underperformer Stock is expected to underperform the sector during the next months. NR Not Rated CIBC World Markets does not maintain an investment recommendation on the stock. R Restricted CIBC World Markets is restricted*** from rating the stock. Sector Weightings** O Overweight Sector is expected to outperform the broader market averages. M Market Weight Sector is expected to equal the performance of the broader market averages. U Underweight Sector is expected to underperform the broader market averages. NA None Sector rating is not applicable. **Broader market averages refer to the S&P 500 in the U.S. and the S&P/TSX Composite in Canada. "Speculative" indicates that an investment in this security involves a high amount of risk due to volatility and/or liquidity issues. ***Restricted due to a potential conflict of interest. Ratings Distribution*: CIBC World Markets Inc. Coverage Universe (as of 12 May 2014) Count Percent Inv. Banking Relationships Count Percent Sector Outperformer (Buy) % Sector Outperformer (Buy) % Sector Performer (Hold/Neutral) % Sector Performer (Hold/Neutral) % Sector Underperformer (Sell) % Sector Underperformer (Sell) % Restricted 5 1.4% Restricted % Ratings Distribution: Real Estate Coverage Universe (as of 12 May 2014) Count Percent Inv. Banking Relationships Count Percent Sector Outperformer (Buy) % Sector Outperformer (Buy) % Sector Performer (Hold/Neutral) % Sector Performer (Hold/Neutral) % Sector Underperformer (Sell) 2 4.5% Sector Underperformer (Sell) % Restricted 1 2.3% Restricted % Real Estate Sector includes the following tickers: AAR.UN, ACC, ACR.UN, AP.UN, AX.UN, BEI.UN, BOX.UN, BPO, BRE, CAR.UN, CHP.UN, CRR.UN, CSH.UN, CUF.UN, CWT.UN, D.UN, DIR.UN, EXE, FCR, GRT.UN, HLP.UN, HOT.UN, HR.UN, IIP.UN, INN.UN, KMP, LW, MR.UN, MRG.UN, MRT.UN, MST.UN, NPR.UN, NWH.UN, PAR.UN, PLZ.UN, REF.UN, REI.UN, RLC, RMM.UN, RUF.U, RYL, SMU.UN, TN.UN, WIR.U. *Although the investment recommendations within the three-tiered, relative stock rating system utilized by CIBC World Markets Inc. do not correlate to buy, hold and sell recommendations, for the purposes of complying with NYSE and NASD rules, CIBC World Markets Inc. has assigned buy ratings to securities rated Sector Outperformer, hold ratings to securities rated Sector Performer, and sell ratings to securities rated Sector Underperformer without taking into consideration the analyst's sector weighting. Important disclosures required by IIROC Rule 3400, including our system for rating investment opportunities and our dissemination policy, can be obtained by visiting CIBC World Markets Inc. on the web at under 'Quick Links' or by writing to CIBC World Markets Inc., Brookfield Place, 161 Bay Street, 4th Floor, Toronto, Ontario M5J 2S8, Attention: Research Disclosures Request. 11

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