TSX:GRT.UN - Post by User
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retiredcfon May 13, 2022 9:05am
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Post# 34680888
TD 2
TD 2Maintain their $115.00 target. GLTA
Granite REIT
(GRT.UN-T, GRP.U-N) C$86.79 | US$65.64
Rare Disconnect Between Fundamentals and Valuation
Event
Post-Q1/22 update (initial views:link).
Impact: NEUTRAL
Strong SPNOI Growth Outlook Reiterated. The strong SPNOI growth in Q3- Q4 2021 continued in Q1/22 with +4.6% (with some help from expired free rent). Guidance for 2022 SPNOI growth was reiterated at 3.5%-4.5%, and for 2023 management raised its expected renewal rent uplifts to 20%-25% (previously ~15%). We believe Granite is ideally positioned to capture today's rising rents since lease expiries are at elevated levels through the end of 2024 (aggregating 40% of total portfolio GLA, and nearly triple the pace of the last three years). We also remain confident in Magna renewing its medium-term Special Purpose leases that are expiring (see here for highlights of our recent property tours).
Capital Recycling Remains in Focus. With $1bln-plus of liquidity and targeting increased disposition activity in 2022, we believe Granite can comfortably self-fund the $0.5bln of capital committed to development activities and forward purchases. Additionally, Granite remains focused on stepping up capital recycling, including disposing two properties in the U.S. (~US$120mm) potentially in the near-term.
Amazon Impact. Management expects the slowdown in demand from Amazon will not noticeably impact market vacancies and rental rates. This held true in 2021 when Amazon did meaningfully reduce activity, because others quickly filled-in the gap. Additionally, with sub-3% U.S. nationwide vacancy and new construction that has proven unable to keep pace with demand, we believe any imbalance between absorption and new supply will not likely be noticeable.
Upcoming Catalysts. Of Granite's 5.7mmsf of developments and forward property commitments scheduled for completion over the next 18 months, over 40% is now pre-leased (last quarter: 29%) including a new 0.6mmsf lease at a materially higher rent than budgeted. We remain confident this pipeline will continue to experience strong lease-up over the near-term. By Q1/23, we expect to hear confirmation of the extension of Magna's leases totaling 5mmsf in Graz, Austria.
TD Investment Conclusion
Granite's forward P/AFFO multiple is down to ~21x (close to pre-pandemic levels, before market rents skyrocketed) and the current 14% NAV discount is a historical exception other than March 2020. We believe the risk/reward profile has rarely been more compelling.