24 January 2017 Real Estate InterRent REIT H117 Mid to Large Cap Top Pick Conservative Value-Add Play IIP.un-TSX: $7.25 Buy $8.65 Target Event: We are naming InterRent REIT as our Mid to Large Cap Top Pick for the REIT sector. Conservative Underpinnings: We continue to feel those REITs with strong balance sheets, conservative payout ratios, and the ability to reprice or grow income faster than debt will be best suited to any inflationary periods brought about by current market volatility. We are therefore introducing InterRent REIT as our Mid to Large Cap Top Pick for H117. Despite being a value-add play, buying older buildings and adding cap-ex and operational acumen to create value, InterRent has historically been a conservative and defensive REIT holding. This is best evidenced by its 3.36% yield and highly conservative 64% payout ratio. That conservative bent does not pick up the massive NAV uplift potential of the REIT and we feel that the market has not given full value to its current assets, nor has it given value to the significant, though difficult to quantify, development and intensification pipeline of IIP.un. Over the last year-and-a-half InterRent has continued to high-grade its portfolio with a fairly steady divestiture of many of its secondary and tertiary located assets. We expect that the REIT will continue to sell some of these secondary assets in 2017 and over time divest itself of the majority of its secondary and tertiary market assets. Most of these assets are stabilized, with InterRent having created significant value over the length of its ownership. Dispositions crystalize these gains and allow the REIT to redeploy capital where it can once again add more significant value. Over time, we expect an overall net neutral to marginally positive pace of acquisitions and dispositions where the REIT will slowly continue to grow its asset base in its core Greater GTA/Golden Horseshoe, National Capital Region and Montreal markets. The REIT also has a significant development, redevelopment and intensification pipeline. That pipeline has not been fully quantified by either the REIT s management or the public markets and it is therefore difficult to give a hard value to this potential. We do feel, however, that it is truly significant in scale and scope. What both of the longer-term value add approach and the significant (re)development pipeline have in common is that of time horizons and valuation horizons. We value the Net Asset Value of InterRent REIT, and all REITs in our coverage universe, through a cap rate applied to forward 12-month NOI. The value add created by buying a building in need of significant cap-ex and with significant operation efficiencies available are never fully picked up in this calculation as it is often a two- to three-year process. Development or intensification potential, which may not happen for a number of years, are similarly undervalued. For a long term and patient investor, we feel that in InterRent s case these disconnects are too large to ignore. InterRent is a stable, conservative REIT as it stands now but it has the ability to create anything but conservative returns through NAV growth. Projected Return: 19.3% Valuation: 22.8x TP/FFO (F2016) Market Data Market Capitalization $522.5 Units S/O (M) 72.2 Float S/O (M) 67.4 Yield 3.2% Total Debt (M) (1) $689.8 Debt/GBV (1) 56.3% Average Volume (3mo) 122,650 52 Week Range ($) $6.35 - $8.65 Financial Metrics FY-Dec 31 Quaterly FFO Q1 Q2 Q3 Q4 2015 $0.07A $0.09A $0.10A $0.09A 2016 $0.08A $0.10A $0.10A $0.11E 2017 $0.10E $0.11E $0.12E $0.11E Annual 15A 16E 17E FFO $0.35 $0.38 $0.44 AFFO $0.31 $0.34 $0.38 Current Multiples P/FFO 20.6x 19.1x 16.5x P/AFFO 23.8x 21.3x 19.1x Target Multiples Target/FFO 24.6x 22.8x 19.7x Target/AFFO 28.4x 25.4x 22.8x Distribution $0.22 $0.22 $0.22 AFFO Payout 72% 65% 58% NAV Estimate $7.60 Company Description InterRent owns a portfolio of properties comprising of 8,362 units as of March 31 st, 2016. The REIT s properties are predominantly in Ontario with some exposure to Quebec. The majority of the Ontario properties are located the Greater Golden Horseshoe area. 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 Jan-16 Mar-16 May-16 Jul-16 Sep-16 v-16 Volume (M) Price Source: CapitalIQ, Company Reports, Echelon Wealth Partners (1) As of last reported quarter $9.0 $8.5 $8.0 $7.5 $7.0 $6.5 $6.0 $5.5 $5.0 $4.5 VALUATION Maintain Buy Rating and Target of $8.65 We maintain our Buy rating and 12-month price target of $8.65. Our NAV estimate is $7.60, a discount to our price target, which reflects the value of InterRent s platform and value creation potential. Our 2017 FFO estimate is $0.44 and our 2017 AFFO is $0.38. Our target is 22.8x 2017 AFFO. Page 1 of 5
Millions Millions Stock Price ($) InterRent REIT (IIP.un-TSX) 24 January 2017 InterRent REIT (, $7.24) - Data Sheet January 20, 2017 Geography Portfolio Recommendation Rating: BUY 3% Eastern Ontario 12% Target: $8.65 16% GTA Last Price: $7.24 6% Hamilton/Niagara Price Return: 19.5% Yield: 3.2% 18% Montreal rthern Ontario Total Return: 22.7% 30% rthern Ontario National Capital Region Montreal Eastern Ontario 11% GTA Western Ontario Hamilton/Niagra 4% National Capital Region - Ottawa Stock Price / Volume Chart Average Rent Total Occupancy $9.00 1.4 $1,100 99.0% 1.3 1.2 $1,050 98.0% $8.00 1.1 $1,000 1.0 97.0% $7.00 0.9 $950 96.0% 0.8 $900 $6.00 0.7 0.6 $850 95.0% $5.00 0.5 $800 94.0% 0.4 0.3 $750 93.0% $4.00 0.2 $700 0.1 $650 92.0% $3.00 0.0 $600 91.0% Q2 2011 Q2 2012 Q2 2013 Q2 2014 Q2 2015 Q2 2016 Q2 2011 Q2 2012 Q2 2013 Q2 2014 Q2 2015 Q2 2016 Market Data As of 20/01/2017 Key Financial Metrics (C$) TSX Quaterly FFO Q1 Q2 Q3 Q4 Echelon Target Price $8.65 2015 $0.07A $0.09A $0.10A $0.09A Closing Price Date 20/01/2017 $7.24 2016 $0.08A $0.10A $0.10A $0.11E 52-Week High $8.65 2017 $0.10E $0.11E $0.12E $0.11E 52-Week Low $6.35 Annual 14A 15A 16E 17E Market Cap ($M) $522.54 FFO $0.33 $0.35 $0.38 $0.44 NAV $7.60 AFFO $0.28 $0.31 $0.34 $0.38 Current Price Premium/Discount to NAV -4.7% Current Multiples Debt/GBV 54.9% P/FFO 21.9x 20.6x 19.1x 16.5x Average Rate 2.72% P/AFFO 25.9x 23.7x 21.3x 19.1x Current Distribution (p.a.) $0.23 Target Multiples Current Distribution Yield (p.a.) 3.2% Target/FFO 26.2x 24.6x 22.8x 19.7x Consensus 3 Mo. Ago Current Return Target/AFFO 30.9x 28.4x 25.4x 22.8x Rating: Outperform Outperform Distribution $0.20 $0.22 $0.22 $0.22 Target: $8.53 $8.22 14% AFFO Payout 73% 72% 65% 58% Median: $8.50 $8.00 10% Capital Stack Debt Chart High: $9.00 $9.00 24% $2,500 Low: $8.00 $7.75 7% $300 2.90% Mortagages and 2.81% NAV/Share: $7.53 $7.52 2.80% Debt Balances $2,000 $250 AFFO/Share: $0.26 $0.26 2.65% ($) 2.64% 2.70% $1,500 $200 Consensus Distribution 2.64% 2.51% 2.60% Sector Outperform/Buy 8 $1,000 $150 2.45% Total Weighted 2.50% Average Sector Perform/Hold 5 $500 $100 2.40% Interest Rate Sector UnderPerform/Sell 0 $0 $50 2.30% (%) Top Inst. Ownership Shares % Held Mortgages Credit Investment Cash $0 2.20% Weighted Sentry Investments Corp. 6.94 9.6% and loans Facilities Properties Average Mawer Investment Management Limited 4.07 5.6% payable 1832 Asset Management L.P. 3.18 4.4% (%) Comparables Price Performance Fiera Capital Corporation 1.13 1.6% Interest Rate 3 Month Price Performance 6 Month Price Performance 12 Month Price Performance Hsbc Global Asset Management (Uk) Limited 0.89 1.2% First Asset Investment Management Inc. 0.84 1.2% TSX:KMP.UN TSX:KMP.U N TSX:KMP.UN Middlefield Capital Corporation 0.73 1.0% Middlefield Limited 0.53 0.7% Intact Investment Management Inc. 0.45 0.6% TSXV:RUF. Ssq, Life Insurance Company Inc - Asset Managem 0.33 0.5% TSXV:RUF.U TSXV:RUF.UN UN N Company Description -4% -2% 0% 2% 4% 6% -20% -15% -10% -5% 0% 5% 10% 15% Comparables Financial Metrics Ticker Unit Market Cap (M) Debt/GBV Yield AFFO Payout Ratio Killam Apartment REIT TSX:KMP.UN $11.85 $849.13 53% 5.1% 81% Recent Financings Size (Millions) Mainstreet Equity Corp. $33.25 $295.37 52% N/A N/A Feb-11-2015 Equity Offering $75.00 Pure Multi-Family REIT TSXV:RUF.UN $6.50 $365.82 57% 5.8% 83% Mar-11-2013 Equity Offering $73.07 InterRent Real Estate Investment Trust $7.24 $522.54 55% 3.2% 64% Dec-16-2011 Equity Offering $43.40 0% 5% 10% 15% 20% 25% 30% InterRent owns a portfolio of properties comprising of 8,362 units as of March 31 st, 2016. The REIT s properties are predominantly in Ontario with some exposure to Quebec. The majority of the Ontario properties are located the Greater Golden Horseshoe with other major strongholds in Ottawa and South Volume (M Shares) Rob Sutherland, Analyst 416.933.3353 rob.sutherland@echelonpartners.com Source: Echelon Wealth Partners Inc., Company Reports and Filings, Capital IQ te: All prices as of Market close 20/01/2017 Page 2 of 5
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U.S. Disclosures: This research report was prepared by Echelon Wealth Partners Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. Echelon Wealth Partners Inc. is not registered as a broker-dealer in the United States. The firm that prepared this report may not be subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. ANALYST CERTIFICATION Company: InterRent REIT IIP.un:TSX I, Rob Sutherland, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report. IMPORTANT DISCLOSURES Is this an issuer related or industry related publication? Does the Analyst or any member of the Analyst s household have a financial interest in the securities of the subject issuer? If Yes: 1) Is it a long or short position? Yes; and, 2) What type of security is it? Common shares Does the Analyst or household member serve as a Director or Officer or Advisory Board Member of the issuer? Does Echelon Wealth Partners Inc. or the Analyst have any actual material conflicts of interest with the issuer? Does Echelon Wealth Partners Inc. and/or one or more entities affiliated with Echelon Wealth Partners Inc. beneficially own common shares (or any other class of common equity securities) of this issuer which constitutes more than 1% of the presently issued and outstanding shares of the issuer? During the last 12 months, has Echelon Wealth Partners Inc. provided financial advice to and/or, either on its own or as a syndicate member, participated in a public offering, or private placement of securities of this issuer? During the last 12 months, has Echelon Wealth Partners Inc. received compensation for having provided investment banking or related services to this Issuer? Has the Analyst had an onsite visit with the Issuer within the last 12 months? Has the Analyst been compensated for travel expenses incurred as a result of an onsite visit with the Issuer within the last 12 months? Has the Analyst received any compensation from the subject company in the past 12 months? Is Echelon Wealth Partners Inc. a market maker in the issuer s securities at the date of this report? Issuer Yes Yes Page 3 of 5
RATING DEFINITIONS Buy Speculative Buy Hold Sell Under Review Tender Dropped Coverage The security represents attractive relative value and is expected to appreciate significantly from the current price over the next 12 month time horizon. The security is considered a BUY but in the analyst s opinion possesses certain operational and/or financial risks that are higher than average. The security represents fair value and no material appreciation is expected over the next 12-18 month time horizon. The security represents poor value and is expected to depreciate over the next 12 month time horizon. While not a rating, this designates the existing rating and/or forecasts are subject to specific review usually due to a material event or share price move. Echelon Wealth Partners recommends that investors tender to an existing public offer for the securities in the absence of a superior competing offer. Applies to former coverage names where a current analyst has dropped coverage. Echelon Wealth Partners will provide notice to investors whenever coverage of an issuer is dropped. RATINGS DISTRIBUTION Recommendation Hierarchy Buy Speculative Buy Hold Sell Under Review Restricted Tender Number of recommendations 33 23 5 0 2 2 1 % of Total (excluding Restricted) 52% 36% 8% 0% 3% Number of investment banking relationships 8 5 0 0 0 2 0 % of Total (excluding Restricted) 62% 38% 0% 0% 0% PRICE CHART, RATING & PRICE TARGET HISTORY InterRent Real Estate Investment Trust () $10.00 $9.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 Oct 13 Feb 14 Jun 14 Oct 14 Feb 15 Jun 15 Oct 15 Feb 16 Jun 16 Oct 16 Price PT revision Date Target Rating 22 Oct 2013 $6.25 BUY 13 May 2014 $6.40 BUY 12 v 2014 $6.65 BUY 6 Mar 2015 $7.10 BUY 11 Mar 2016 $7.50 HOLD 6 Apr 2016 $8.00 BUY 5 May 2016 $8.00 HOLD 2 Aug 2016 $8.60 HOLD 20 Sep 2016 $8.75 BUY 9 v 2016 $8.65 BUY Coverage Initiated: Oct 22, 2013 Data sourced from: Capital IQ Page 4 of 5
Toronto Wealth Management 1 Adelaide Street East, Suite 2000 Toronto, ON M5C 2V9 416-572-5523 Ottawa Wealth Management 360 Albert Street, Suite 800 Ottawa, ON K1R 7X7 1-877-967-5866 Victoria Wealth Management 730 View Street, Suite 210 Victoria, BC V8W 3Y7 1-877-978-9300 Saskatoon Wealth Management 402-261 First Avenue rth Saskatoon, SK S7K 1X2 306-667-2282 Toronto Capital Markets 130 King Street West, Suite 2500 Toronto, Ontario M5X 2A2 416-649-4273 Calgary Wealth Management 350-7th Avenue SW, 19th Floor Calgary, AB T2P 3N9 403-218-3144 Oakville Wealth Management 1275 rth Service Road, Suite 612 Oakville, ON L6M 3G4 289-348-5936 Tokyo Capital Markets Holland Hills Mori Tower; RoP #603 5-11-1 Toranomon, Minato-Ku, Tokyo, 105-0001, Japan +81.90.1470.1684 Montreal Wealth Management and Capital Markets 1000 De La Gauchetière St. W., Suite 1130 Montréal, QC H3B 4W5 514-396-0333 Vancouver Wealth Management and Capital Markets 1055 Dunsmuir St. Suite 3424; P.O Box 49207 Vancouver, BC V7X 1K8 604-647-2888 London Wealth Management 495 Richmond St., Suite 830 London, ON N6A 5A9 V8W 3Y7 519-858-2112 Page 5 of 5