{"id":4118,"date":"2015-12-24T12:39:56","date_gmt":"2015-12-24T17:39:56","guid":{"rendered":"http:\/\/www.cusjc.ca\/ottawainsight\/?p=4118"},"modified":"2017-11-19T20:53:05","modified_gmt":"2017-11-20T01:53:05","slug":"redeveloping-apartments-for-a-profit","status":"publish","type":"post","link":"http:\/\/www.cusjc.ca\/ottawainsight\/?p=4118","title":{"rendered":"Redeveloping apartments for a profit"},"content":{"rendered":"

Around this time next year, InterRent REIT (IIP.UN) will be celebrating its tenth year as a publicly traded real estate investment trust.<\/strong><\/p>\n

The company has seen a steady growth in its value ever since, and according to Frederic Blondeau, head of real estate research and chief financial analyst at Dundee Capital Markets in a recent REIT sector presentation, it will only keep growing.<\/p>\n

\u201cIIP has shown tremendous repositioning expertise and is set up for extremely strong growth in 2016 \u2026 as a result of their efforts over the last two years, especially with the Bell Street project (LIV) [in Ottawa].\u201d<\/p>\n

InterRent\u2019s business model focuses on the repositioning and redevelopment of multifamily properties. It does this by purchasing properties that it believes are under-managed and have the potential to increase their value.<\/p>\n

\u201cWe look for the worst buildings in the best locations \u2026 buildings that we feel have been neglected from a maintenance perspective,\u201d says Brad Cutsey, president of InterRent.<\/p>\n

Building conditions matter<\/strong><\/span><\/p>\n

\u201cTypically the landlord is doing the best job they can do, but they don\u2019t have the same kind of access to capital as we do, given that we\u2019re a public company,\u201d he says. That\u2019s a benefit, he notes, to the largely dominant private multifamily rental landscape in Canada.<\/p>\n

\u201cWe have the advantage of being able to keep our buildings in better conditions,\u201d says Cutsey.<\/p>\n

Landscaping, upgrading units and common areas, installing energy efficient appliances and lighting, all work to increase property value while also reducing operating costs.<\/p>\n

In its recently released third-quarter results, InterRent reported a net income of\u00a0 $25.5 million, an 84.1% per cent increase from the $10.4 million earned in last year\u2019s third quarter. This growth is attributed mostly to reduced operating costs over the past year, brought about by rent price increases, and the conversion of unit hydro to sub-metering in order to be able to pass on charges to tenants.<\/p>\n

It hasn\u2019t always been like this for InterRent. In 2009 the company outsourced its property management to CLV Property Management Group, and followed up its transformation with its new \u201crepositioning strategy\u201d in 2010.<\/p>\n

The three-year plan<\/strong><\/span><\/p>\n

It currently operates across most of Ontario and Quebec. According to Cutsey, InterRent typically takes about three years \u2013 as opposed to the average of 4-5 in Ontario \u2013 to reposition buildings, turning over new tenants and increasing rents charged in the process.<\/p>\n

Among its substantial new investments in buildings (structures and suites). InterRent\u2019s change in 2010 also included recruiting and training new staff, and focusing on attracting a more desirable tenant base.<\/p>\n

For Cutsey, a new hire himself (April 2015), his staff plays a vital role in pushing the company towards success.<\/p>\n

\u201cWhat I\u2019m quite excited about is the team that we have in place. We\u2019ve added some really key team members over the last couple of years. We\u2019ve taken some of our rising stars and moved and promoted them into different positions. From what we\u2019ve seen so far they\u2019re really taking the ball and running with it,\u201d he says.<\/p>\n

While some may see the availability of apartments to buy as an issue for REITs, Cutsey says that for him, its making sure the company is able to retain its best players.<\/p>\n

\u201cAt the end of the day, in order to operate buildings and generate a profitable return, it really is a people\u2019s business,\u201d he says.<\/p>\n

\u201cWe\u2019re always constantly challenged on finding and making sure we have the positions that our up-and-coming rising stars can grow in to, and satisfy their thirst for their own career advancement.\u201d<\/p>\n

Campus recruiting<\/strong><\/span><\/p>\n

Cutsey says the company does the majority of its recruiting through universities; looking for young, energetic potential employees, who may or may not have experience with real estate.<\/p>\n

Cutsey says new employees are typically asked to commit two years to the company as a \u201ccustomer care coordinator,\u201d which is essentially a leasing professional.<\/p>\n

\u201cAfter employees have shown commitment and we\u2019re happy with heir performance, we typically want to find out what [aspect of the business] they\u2019re interested in, so we can keep them in the company and keep them engaged and try to lay the path for them,\u201d says Cutsey.<\/p>\n

\u201cWe really believe the future of our company lies within the young generation that are coming out of university,\u201d he says.<\/p>\n

InterRent\u2019s focus on its strategy and team has landed it as Dundee Capital Market\u2019s \u201cTop Pick\u201d for investors to \u201cbuy\u201d in Blondeau\u2019s November 2015 multifamily REIT property analysis. According the analysis, InterRent acquired more than 1,500 suites so far in 2015, almost 1,000 more than in 2014, bringing the total portfolio to 8,300 suites.<\/p>\n

\u201cGiven the still very fragmented multifamily markets in Canada, there is ample room for IIP to continue to grow,\u201d says the analysis. Dundee Capital Markets says it expects InterRent will \u201ccontinue to generate value for their unitholders.\u201d<\/p>\n

The analysis adds that \u201csince taking over in 2009, management has a tremendous track record of creating value through re-positioning and re-development.\u201d<\/p>\n

Analyst approval<\/strong><\/span><\/p>\n

In September, InterRent announced a $51 million acquisition in Hamilton, a $21 million acquisition in early November, and a most recent $21.6 million acquisition deal in Montreal that will close in March 2016.<\/p>\n

\u201cI\u2019m very excited, some of the last acquisitions we\u2019ve made have been quite sizeable and we\u2019re really optimistic about the upside potential of those buildings,\u201d says Cutsey, adding that the company will be working steadily on these projects over the next few years.<\/p>\n

With the success of the LIV redevelopment, whose lease-up phase is well underway, Dundee Capital Markets says it believes \u201cthe REIT is set to embark on a new leg of growth through more redevelopments, with acquisition capacity to buy another $100 million of unstabilized* properties in addition to the recent acquisitions.\u201d<\/p>\n

Jonathan Kelcher, chief financial analyst at TD Securities, specified a \u201chold\u201d recommendation in his November 13th<\/sup>, 2015 InterRent REIT action notes.<\/p>\n

InterRent has \u201cone of the better near-term earnings growth profiles in our coverage universe,\u201d he writes. \u201cA large part of this growth is contingent on the REIT leasing up its LIV development and achieving forecasted financial performance.\u201d<\/p>\n

TD Securities has set a twelve-month target price of $7.00 for InterRent\u2019s units. Dundee Capital Markets has set one of $7.75.<\/p>\n

 <\/p>\n

*\u201dUnstabilized Properties\u201d means the properties owned directly or indirectly by the Trust from time to time for a continuous period for two years or less.<\/i><\/p>\n","protected":false},"excerpt":{"rendered":"

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