Opinions
Joshua Varghese
InterRent REIT
IIP.UN-T
BUY
Oct 08, 2024
Stock price when the opinion was issued
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Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. Reducing debt levels over time. Payout ratio at a sustainable rate. Risk of no rent raise policy to continue. Primarily focused on Toronto and Montreal. Unlock Premium - Try 5i Free
There is lots of value here due to a supply and demand imbalance leading to big growth in rents. There are 400 to 500 thousand new Canadians arriving annually in the next couple of years with not enough space for them. Also foreign students who stayed away during the first two years of the pandemic are returning
You won't go wrong with either. Thinks highly of management for both. Both are concentrated in Ontario. IIP.UN is smaller, more nimble, with a focus on Toronto-Ottawa-Montreal and a growing presence into Vancouver. CAR.UN gives exposure to GTA and across Canada. If he had to choose, he'd pick IIP.UN with its 25% discount to private market value, lots of value in the portfolio.
Once he realized interest rates weren't going to stay at zero, he scaled out of real estate from 22% down to 5%. He held onto industrials, but sold this one. Really likes the company, but is waiting until interest rates tick down again. Very interest-sensitive investments.
Compelling level. Pursues a value-added strategy, whereby you can get above-rent-control rents by improving properties. Great track record on this. Exposure to student population, with lower rents. Immigration question has unduly punished residential REITS. Over 20% discount to NAV, attractive.
It did miss cash flow per unit estimates in the Q3. Not by a lot, but a miss is a miss (15.9c vs 16.1c expected). The yield curve, despite Bank of Canada rate cuts, has still managed to shift upward. The recent government moves on immigration likely has some investors worried. Canada's population will actually likely decline for a couple of years now. Finally, IIP has had a premium valuation for some time. Even now it is above the peer group average at 17X cash flow. We would consider it a HOLD but it is getting interesting here. It historically has been one of the better REITs.
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Long-term, yes, for residential REITs, like apartment ones. They also benefit from more immigration. This leads to higher rents. InterRent, Minto and CAP are his preferreds in this space. CAP is the biggest, and they hold a super-quality portfolio that they've been upgrading in recent years. All these are focused in Ontario. but they benefit from lower interest rates. A caveat: Ottawa is slowing immigration to Canada, which feeds demand for apartments. Expect choppiness, but these are good holds.