CIBCEQUITY RESEARCH
August 11, 2022 Earnings Update
GRANITE REIT
Fundamentals Intact, Guidance Reiterated
Our Conclusion
Fundamentals continue to stay strong with low availability driving rent growth
and a considerable amount of capital looking to be deployed in the near term.
While uncertainty generally looms over cap rates, upward revision in rents
has acted as an offset to fair value reductions. Nonetheless, we view the
write-down in the quarter as a prudent move by the REIT. We leave our
4.75% cap rate unchanged but lower our NAV to $93.00 (from $96.00) after
adopting a more conservative NOI run-rate. We correspondingly lower our
price target to $98.00 (from $102.00).
Key Points
Q2/22 Results: FFO per unit was $1.09, close to our estimate and
consensus of $1.07/unit. Management guided to the higher end of 3.5%-
4.5% SPNOI growth for 2022 and reiterated 2022 FFO/unit guidance.
Operations: GRT recorded SPNOI growth of 3.6% (excluding the impact of
foreign exchange). SPNOI improved on higher rents from CPI indexation,
fixed rent increases, and U.S. leasing performance. Excluding foreign
exchange impacts, growth was led by 5.8% in the U.S., 2.3% in Canada, and
1.8% in each of Germany and the Netherlands, while Austria grew by 0.7%.
GRT has renewed 1.6MM sq. ft. at an average lift of ~27% and expects to
get a 60% lift on the remaining maturities.
Transactions: During the quarter, Granite acquired two income-generating
distribution facilities (one property with a seven-year lease term at a 4.5% in-
going yield and the other with a 15-year lease term at a 5% in-going yield),
totalling ~0.2MM sq. ft. for ~$39MM. Subsequent to quarter-end, Granite
closed on its acquisition of a ~0.5MM sq. ft. modern distribution facility in
Tilburg, Netherlands for ~$101MM (~€75MM). The property has been leased
for a 10-year term with an in-going yield of 3.2%. Granite also disposed of an
income producing property in the Czech Republic for gross proceeds of
~$32MM (~€23MM). Two income producing properties in Canada and the
U.S. were classified as held for sale during the quarter (combined fair value
of ~$156MM).
ATM and NCIB Programs: During the month of April, Granite issued ~120k
units at an average price of $98.84/unit. Net proceeds totalled ~$11.6MM.
Between June 15 and July 4, 2022, Granite repurchased ~450k units at an
average price of $78.90/unit for ~$35MM.
Cap Rate Tracking: IFRS cap rate was 4.5% (vs. our 4.75% estimate), up
~20 bps from last quarter and unchanged over the past six months.
Canadian cap rates increased to 3.36% (from 3.22%), U.S. to 4.38% (from
4.10%), Austria to 8.14% (from 8.03%), Germany to 4.96% (from 5.13%),
and the Netherlands to 3.97% (from 3.84%).