The Motley Fool

Should You Buy This Residential REIT for Growth?

InterRent Real Estate Investment Trust (TSX:IIP.UN) has been a fabulous investment. Long-term investments in the residential real estate investment trust (REIT) have seen nearly double the returns of the market.

Specifically, an investment from before the financial crisis of 2008-2009 has delivered annualized rates of return of about 12.6%, while in the same period, an investment in the U.S. market using the S&P 500 Index as a proxy has delivered an annualized rate of return of about 6.5%.

InterRent’s transformation

As noted on its website, “InterRent underwent significant changes through 2010 as a result of the outsourcing of property management late in 2009 and the implementation of the repositioning strategy that management and the board had adopted.”

As a result, the REIT’s funds-from-operations-per-unit was reduced by more than half from 2008 to 2010. Throughout the change, InterRent invested in its buildings, hired and trained new staff and focused on attracting a more desirable tenant base. Along with a private placement that raised $5.4 million, mortgage financing of $22.3 million, and some non-core asset sales in 2010, InterRent has repositioned and transformed itself to allow for more growth.

Distribution

Although InterRent only offers a distribution yield of about 2.5%, the company has been increasing its distribution at an above average pace. From 2014 to 2017, InterRent’s funds from operations per unit increased by about 8.4% per year on average. In the same period, the REIT’s distribution per unit increased by about 7.7% per year on average.

InterRent’s funds from operations payout ratio is estimated to be below 60% this year. So, its distribution is safe.

The REIT offers a distribution reinvest plan that allows enrolled unitholders to reinvest their distributions to buy shares with a 4% discount. That’s a great way for long-term investors to build their positions.

Valuation

It’s estimated that InterRent will grow its funds from operations per unit by 10-11% for the next couple of years. At the recent quotation of about $11 per unit, InterRent trades at a price-to-funds-from-operations multiple of about 25. So, at best the stock is fully valued.

The Bank of Nova Scotia analyst has a 12-month target price of $11.75 per unit on the stock, representing upside potential of about 6.8% and near-term total returns potential of about 9.3%.

Investor takeaway

Shareholders who are looking for above-average growth in the stable industry of residential REIT can consider holding the stock. However, investors looking for an entry point should consider waiting for weakness from the stock that will likely be triggered by a market- or industry-wide pullback. For a reasonable value, consider start building a position at about $8 per unit.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of Bank of Nova Scotia.

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