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InterRent remains positive in slow transaction market

Ottawa-based REIT continues suite upgrades, office-to-apartment conversions

InterRent REIT is part of a joint venture which is converting a former office building at 360 Laurier Ave. in Ottawa to apartments. (Rendering courtesy CLV Group))
InterRent REIT is part of a joint venture which is converting a former office building at 360 Laurier Ave. in Ottawa to apartments. (Rendering courtesy CLV Group))

Despite posting a net loss of $54.56 million in its third quarter ended Sept. 30, there were positive messages coming from InterRent Real Estate Investment Trust’s top executives during its Nov. 1 webcast and conference call to discuss its financial results and business initiatives.

The REIT increased its number of rental residential units in Ontario and Quebec by 155 from a year earlier to 12,728, while its average monthly rents rose by 7.8 per cent to $1,576. Including properties that InterRent (IIP-UN-T) owns in joint ventures, it owned or managed 13,879 units at the end of the quarter.

Net operating income rose by four per cent to $40.29 million while the occupancy rate dropped by 40 basis points to 95.2 per cent.

“We continue to strategically accept slightly higher vacancy to position ourselves for optimal revenue growth, particularly considering the industry-wide trend of reduced turnover,” said chief operating officer Dave Nevins, who noted that fourth-quarter leasing has been strong and that year-end occupancy should surpass 96 per cent without compromising average monthly rental growth. 

“We were pleased to see strong leasing momentum in our Montreal portfolio, which accounts for about a quarter of our total portfolio,” said president and chief executive officer Brad Cutsey. 

“Vacancy in the greater Montreal region decreased by 380 basis points year-over-year driven by sustained recovery in downtown and urban locations.” 

InterRent attributes the net loss to fair value adjustments related to cap rate expansions in its portfolio. The REIT’s Q3 weighted average cap rate used across the portfolio was 4.22 per cent, up 15 basis points from Q2 2023.

InterRent has strong liquidity

Ottawa-headquartered InterRent is in a strong financial position to execute on its growth strategies with $268 million of available liquidity and a debt-to-gross book value of 38.6 per cent.

Twenty per cent of the units in the portfolio were at various stages of a repositioning program, which had $23.4 million in investment as of Sept. 30. That represents significant future potential for rental growth. 

“InterRent has spent a lot on capital expenditure programs through the years and we've always believed we should always be maintaining and bringing our new communities to a certain level,” said Cutsey.

“That said, I think a lot of the heavy lifting within our portfolio, as far as capital going into building improvements and whatnot, has been dealt with.”

Office-to-apartment building conversions

Ottawa’s The Slayte, InterRent's first office conversion project at 473 Albert St., has completed its interior construction and all of its rooftop amenities are now accessible to residents. Leasing has been robust and occupancy of its 158 units exceeded 84 per cent by the end of October.

The REIT is advancing 360 Laurier, its second office conversion project in downtown Ottawa. InterRent has a 25 per cent ownership stake in the project, which will deliver 139 residential units and 1,736 square feet of retail space upon completion in the third quarter of 2025.

“We've taken on this project with pride and confidence alongside a trusted partner, CLV Group, and a respected institutional partner,” Cutsey said.

“Building on the valuable experiences and lessons learned from The Slayte, we are well-prepared to make the new project a success.” 

Development activity

InterRent’s Richmond & Churchill development in Ottawa will offer 177 residential units and 11,591 square feet of commercial space when it’s completed in the first half of 2027.

The REIT owns a 25 per cent stake in the Burlington GO Lands project, an 8.5-acre site comprised of three parcels of land in Burlington that will be developed in two phases and deliver 2,515 residential units and about 40,000 square feet of commercial space by 2032.

Brookfield Property Group and CLV are InterRent’s partners in the project.

InterRent also owns a 50 per cent share in Ottawa’s 900 Albert, a transit-oriented three-tower mixed-use development which is proposed to include 1,241 residential units and 511,608 square feet of commercial space.

Trinity Development Group and CLV are the development partners for the 3.6-acre site.

“Our development pipeline is important to us and we remain committed to contribute to the solution for Canada's housing shortage by introducing much-needed housing suites to the market,” Cutsey noted.

“Nevertheless, we're acutely aware of the persistent challenges we face, including rising hard and soft costs, along with constraints on financing.” 

Dispositions difficult in current conditions

InterRent completed the sale of a 54-unit property in Ottawa for $11.5 million during the quarter.

While the REIT has identified other assets in its portfolio that align with its strategic disposition criteria, the investment community has been cautious and deal volumes have been muted. 

“The assets we’ve earmarked are assets that have below target IRRs (internal rates of return) over the next five years relative to our corporate IRR,” said Cutsey. “There’s still quite good cash flow and, quite honestly, there's still a pretty good growth profile.

"It just doesn't meet our overall growth profile so it makes sense to recycle that capital.”

There’s no need to sell any assets, given the strength of InterRent’s balance sheet, so the REIT will only dispose of them if it receives the right offers.

Cutsey said InterRent is at various stages of negotiations regarding dispositions, but selling remains challenging and he doesn’t expect to announce deals any time soon.

“The investment market really is frozen, as well as development,” Cutsey said. “Everybody has pens down on all sides right now.”

InterRent very selective with acquisitions

While there are acquisition opportunities for those with a well-capitalized balance sheet, InterRent will be very selective about pursuing them until it sees where its cost of capital will stabilize.

“There's a lot of volatility right now in the cost of equity and the cost of debt, and we're very mindful of that,” Cutsey explained.

“We're also very happy with our organic growth and the runway that we believe we have in our portfolio by just harvesting our internal growth.”

All in all, Cutsey is happy with InterRent’s performance and its prospects moving forward.

“Despite recent interest rate fluctuations and economic uncertainties, we are confident that the strong fundamentals that underpin our robust operational performance will continue to serve as tailwinds in the foreseeable future,” said Cutsey.

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