InterRent REIT: Solid And Expensive (IIP.UN)

All values are in CAD unless noted otherwise.

InterRent Real Estate Investment Trust (IIP.UN) (OTC:IIPZF) owns and operates multi-residential real estate in urban markets across Ontario and Quebec.

Source: 2020 Q1 Presentation

Based on its most recent results, the bulk of its NOI is derived from major hubs, namely, Montreal, Ottawa, and Hamilton.

Source: 2020 Q1 MD&A

Its main focus is to create growth and value for its unitholders with strategic acquisitions and sustainable distributions. Mind you, the yields from this REIT are not stuff that dreams are made off, however, they do have a history of increasing the distributions each year from 2012 onwards.

Over time, the REIT has provided a safe and stable income flow for the savvy investor looking for solid total returns.

As we look for a discount along with value in all our purchases, we have not paid much attention to this one over the years. It has briefly traded in the discount zone over the years, however, has sadly flown under our radar even at those times.

Although still commanding a premium over NAV, it has come down from the stratosphere due to the recent turmoil. We take a look and see if we would like to wet our feet now or be ready to, should the market bestow us with a lower price point.

Debt Maturities And Interest Coverage

We start with debt analysis as apartment REITs are notorious for taking on excessive leverage. InterRent has about $280 million in mortgages maturing by end of next year.

Source: 2020 Q1 MD&A

The REIT assured its investors that the year to date renewals and financings have proceeded unhindered by COVID-19. That is to be expected with 77% of their mortgages backed by the government, i.e. CMHC. They also have $150 million in unused credit facilities ready to go to backstop any problems with the remaining 23% of renewals. Furthermore, at the end of Q1, they had $100 million in unencumbered assets and were in talks for an additional $50 million in credit facilities. It appears that they have plenty of cushion to ride out the COVID-19-induced uncertainty for some time to come.

Operationally, InterRent enjoys a healthy interest coverage aided by its efforts at deleveraging and its ability to escalate to market rents on its repositioned properties.

In general, we want to see this ratio over 2.5X for apartment REITs and InterRent meets this easily.

COVID-19 Operational Update

On May 5, alongside releasing its Q1 results, InterRent also provided an update relating to COVID-19’s impact on its operations. Approximately 98% of the rent was collected for April which was typical for a normal month. They had entered into rent deferral arrangements with 0.25% of their tenants. The REIT put a pause on rent increases, which is understandable considering the circumstances.

Due to the implementation of additional protocols and procedures to maintain clean and safe premises, the REIT also increased the wages of their front line workers by $4 to compensate them for the increased tasks. All except emergency CAPEX has also been postponed.

In the same update, InterRent also announced its decision to buy back up to 11.5 million of its outstanding units for which it received TSX’s blessing. This will enable it to take advantage of the market lows when the market price does not appropriately reflect the book value of the units. We think this buyback will however not happen unless we see a sub-$10 price in the future.

By now, almost all of the companies have had a COVID-19 update concurrent or close to their Q1 results. While this gives us some rudimentary data, everyone is anxiously awaiting the financial and operational data for the whole of Q2 to get a better visibility on where their investments stand. We travel in the same boat and likewise hope not to get seasick after the Q2 results.

Valuation

This is still the biggest concern with buying InterRent. At almost 27X this year’s expected funds from operations (FFO), investors are really banking on inflation to do the job for them to deliver returns via NAV gains. Don’t get us wrong, the company is solid and the assets are fairly valued here. Hence, on a NAV basis, the investor is not paying much of a premium. But this is what happens when you buy low-cap rate/high-quality properties. Leverage does not create much further FFO drive as the difference between cost of debt and property cap rate is low. For a detailed analysis of how this works, please see our previous article. So, at a minimum, we want to buy this under NAV so as to create some buffer for appreciation potential.

Conclusion

InterRent has adequate interest coverage to withstand a short-term drop in NOI, and it also has sufficient liquidity to meet its financing obligations. The management is as solid as they come with sufficient insider ownership to elicit more confidence in the stock.

Source: Inc Research Inc.

Its distribution also enjoys the lowest danger level rating on our proprietary Kenny Loggins Scale, even in this climate.

A low danger rating implies a less than 15% probability of a dividend cut in the next 12 months.

It used to be extremely expensive prior to the pandemic, and now it is just expensive. We are uncertain whether we would like to buy at this point just for its modest, albeit stable yield without hope for a juicy capital gain. Hence, we put this one in our basket of “wait and watch” securities and will be all over it like white on rice should it reach our buy point of $12, without any major disruptions to the underlying fundamentals. Thanks to Mr. Market’s inevitable yo-yo between euphoria and depressive states, there will be plenty of similar bargains out there, if not this one.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

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