Redeveloping apartments for a profit

Around this time next year, InterRent REIT (IIP.UN) will be celebrating its tenth year as a publicly traded real estate investment trust.

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.

“IIP has shown tremendous repositioning expertise and is set up for extremely strong growth in 2016 … as a result of their efforts over the last two years, especially with the Bell Street project (LIV) [in Ottawa].”

InterRent’s 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.

“We look for the worst buildings in the best locations … buildings that we feel have been neglected from a maintenance perspective,” says Brad Cutsey, president of InterRent.

Building conditions matter

“Typically the landlord is doing the best job they can do, but they don’t have the same kind of access to capital as we do, given that we’re a public company,” he says. That’s a benefit, he notes, to the largely dominant private multifamily rental landscape in Canada.

“We have the advantage of being able to keep our buildings in better conditions,” says Cutsey.

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

In its recently released third-quarter results, InterRent reported a net income of  $25.5 million, an 84.1% per cent increase from the $10.4 million earned in last year’s 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.

It hasn’t 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 “repositioning strategy” in 2010.

The three-year plan

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

Among its substantial new investments in buildings (structures and suites). InterRent’s change in 2010 also included recruiting and training new staff, and focusing on attracting a more desirable tenant base.

For Cutsey, a new hire himself (April 2015), his staff plays a vital role in pushing the company towards success.

“What I’m quite excited about is the team that we have in place. We’ve added some really key team members over the last couple of years. We’ve taken some of our rising stars and moved and promoted them into different positions. From what we’ve seen so far they’re really taking the ball and running with it,” he says.

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.

“At the end of the day, in order to operate buildings and generate a profitable return, it really is a people’s business,” he says.

“We’re 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.”

Campus recruiting

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.

Cutsey says new employees are typically asked to commit two years to the company as a “customer care coordinator,” which is essentially a leasing professional.

“After employees have shown commitment and we’re happy with heir performance, we typically want to find out what [aspect of the business] they’re interested in, so we can keep them in the company and keep them engaged and try to lay the path for them,” says Cutsey.

“We really believe the future of our company lies within the young generation that are coming out of university,” he says.

InterRent’s focus on its strategy and team has landed it as Dundee Capital Market’s “Top Pick” for investors to “buy” in Blondeau’s 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.

“Given the still very fragmented multifamily markets in Canada, there is ample room for IIP to continue to grow,” says the analysis. Dundee Capital Markets says it expects InterRent will “continue to generate value for their unitholders.”

The analysis adds that “since taking over in 2009, management has a tremendous track record of creating value through re-positioning and re-development.”

Analyst approval

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.

“I’m very excited, some of the last acquisitions we’ve made have been quite sizeable and we’re really optimistic about the upside potential of those buildings,” says Cutsey, adding that the company will be working steadily on these projects over the next few years.

With the success of the LIV redevelopment, whose lease-up phase is well underway, Dundee Capital Markets says it believes “the 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.”

Jonathan Kelcher, chief financial analyst at TD Securities, specified a “hold” recommendation in his November 13th, 2015 InterRent REIT action notes.

InterRent has “one of the better near-term earnings growth profiles in our coverage universe,” he writes. “A large part of this growth is contingent on the REIT leasing up its LIV development and achieving forecasted financial performance.”

TD Securities has set a twelve-month target price of $7.00 for InterRent’s units. Dundee Capital Markets has set one of $7.75.


*”Unstabilized Properties” means the properties owned directly or indirectly by the Trust from time to time for a continuous period for two years or less.