InterRent Real Estate Investment Trust

InterRent Real Estate Investment Trust (TSX: IIP.UN) is a real estate investment trust focusing on the acquisition, ownership, management, and repositioning of multi-residential properties. The company operations are carried out through the region of Canada.

Key highlights 

• Portfolio acquisition in Metro Vancouver: Recently, the Company together with Crestpoint Real Estate Investments Ltd announced the acquisition of 15 properties in Metro Vancouver, for a combined purchase price of CAD 292.5 million and each owing 50% interest in the acquisition portfolio. The acquisition is expected to close on January 28, 2021. With this acquisition, we believe that the company would get a unique opportunity to acquire critical mass and scale in Vancouver, Canada’s third-largest rental market. The Vancouver rental market has historically demonstrated strong fundamentals. Over the past five years, the average vacancy rate has been at or below 1.1% and rental rates have grown at a CAGR of 5.9% per year.  

• Steady occupancy rates along with rising average monthly rent: The group reportedoccupancy of 92.1% for September 2020, standing above the mark of 90%, which looks commendable considering the current economic condition. The average monthly rent across the portfolio for September 2020 also increased to CAD 1,302 per suite from CAD 1,248 in September 2019. The management also believes that strong rental demand would return once immigration and in-person University classes return to more normalized levels.

• Healthy financial stats:The group collected over 99% of residential rents in Q3 2020, and the current trend is also in line on a sequential basis. Based on healthy rent collection and increased average monthly rent, the group is maintaining robust financial health. Th group reported an increase in Funds from Operations by CAD 1.2 million to 17.1 million in Q3 2020. The group is holding a cash balance of CAD 38.5 million as on September,30,2020, besides the aggregate credit limit of CAD 292 million.

Financial overview of Q3 2020 (In CAD Thousands)

Source: Company 

• In Q3 2020, the company reported revenue of CAD 39.7 million, as against CAD 37.6 million in the previous corresponding period. The increase in revenue was primarily due to higher average monthly rent per suite at CAD 1,302 from CAD 1,248, a year ago.

• NOI in Q3 2020, stood slightly higher at CAD 26.2 million, compared to CAD 25.7 million in the previous corresponding period. 

• Net income in Q3 2020, decreased by CAD 37 million and stood at CAD 32.5 million, as against CAD 69.4 million in Q3 2019. This difference was due primarily to a lower fair value gain on investment properties. 

Risks associated with investment

A fall in the consumer disposable income might lead to an increase in the deferred rent, which could take a hit on the company’s profitability. 

Valuation Methodology (Illustrative): Price to Earnings 

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation 

Recently, the company announced the acquisition of 15 properties in Metro Vancouver, and we believe that the Company would get a unique opportunity to achieve critical mass and scale in Vancouver, Canada's third-largest rental market. Strong cash flows and healthy rent collection rates have demonstrated the resiliency of the business. With strong demand anticipated, on factors such as international students and the government's revised increase in forecasted immigration, and the trend towards lower turnover, the group focuses on long-term rental growth and value creation. We have valued the stock using a PE-based relative valuation method and have arrived at a higher double-digit upside (percentage term). Hence, we recommend a "Buy" rating at the closing price of CAD 14.64 on January 20, 2021. We have considered Canadian Apartment Properties Real Estate Investment Trust, Artis Real Estate Investment Trust, WPT Industrial Real Estate Investment Trust etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

DREAM Unlimited Corp.

DREAM Unlimited Corp. (TSX: DRM) is a real estate company which operates across segments like Asset management; Stabilized income-generating assets; Urban development - Toronto and Ottawa and Western Canada community development. 

Key Highlights:

• Strong Bullish Indicator: At the last closing price, shares of DRM traded above the short-term and long-term support levels of 30-days, 50-days, 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish price trend in the stock. Moreover, DRM shares crossed over its 21-day EMA and managed to trade above it in the last 3 trading sessions, which is another bullish indicator. Also, the leading momentum indicator 14-day RSI is hovering in a neutral zone and mostly tilted towards the overbought territory.

Technical Chart (as on January 20, 2021). Source: Refinitiv (Thomson Reuters)

• Improved Performance from Development segment: The group reported a strong momentum from its development business and generated revenue and a net profit of CAD 44.3 million and CAD 3.6 million, respectively, which grew by CAD 11.6 million and CAD 4.4 million, respectively against the same quarter of the previous financial year. The increase was primarily driven by growth in acre sales volumes within Western Canada and the specific condominium occupancy mix, as compared to the prior corresponding period.

• Secured fund for affordable housing project at Zibi: The group has received a loan of CAD 10 million from the CMHC Innovation Fund, for the company’s upcoming affordable housing project at Zibi, a 34-acre mixed-use waterfront community along the Ottawa River. The above funding is expected to be used for affordable housing units for various blocks within the multi-phase development that includes over 4.0 million sq.feet of density including more than 1,000 residential units and over 2.0 million sq.feet of commercial space.

Q3FY20 Financial Highlights:

• DRM announced its quarterly results, wherein the company posted revenue of CAD 60.485 million, lower than CAD 64.069 million in the previous corresponding period (pcp).
• Gross margin stood lower at CAD 10.418 million, as compared to CAD 19.439 million in Q3FY19, primarily attributable to lower revenue and combined with a higher direct operating expense (CAD 50.067 million versus CAD 44.630 million in pcp).
• The group posted a loss before income taxes of CAD 6.640 million, as compared to an income of CAD 30.255 million in pcp. The decline was due to a higher expense from adjustments related to Dream Impact Trust units amounting CAD 10.946 million, as compared to an income of CAD 2.831 million in pcp. Lower general and administrative expenses and a decline in interest expense partially supported group’s performance.
• The corporation reported a net loss for the period at CAD 4.653 million, as compared to net earnings of CAD 27.167 million in pcp.
• The group reported a cash and cash equivalent of CAD 174.967 million, while total assets were recorded at CAD 2,877.666 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Due to the ongoing pandemic, the group reported lower income from the Broadview Hotel on account of restricted operations. Continuation of the above trend would hinder the company’s overall performance.

Valuation Methodology (Illustrative): Price to Earnings

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The group reported an improved cash balance of CAD 175 million in Q3FY20, higher than CAD 139.5 million in Q2FY20, implies improved liquidity position to weather the ongoing challenges amid the current economic slowdown.  The group has a healthy product pipeline backed by sufficient funding and is expected to generate improved business prospects in the foreseeable future. Moreover, regardless of economic slowdown, the company has consistently paid a dividend to its shareholders. Recently, on November 19, 2020, the company announced a final dividend of CAD 0.06 per share paid on December 31, 2020. We have valued the stock using NTM Peer’s Average P/E based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Forestar Group Inc, Howard Hughes Corp etc. Considering the aforesaid facts, current price movements, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 20.98 on January 20, 2021.

1-Year Price Chart (as on January 20^th, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.