CIBC Raise TargetEQUITY RESEARCH
May 11, 2023 Earnings Update
GRANITE REIT
Stability, Meet Growth
Our Conclusion
Granite started the year off on the right foot with a very strong Q1 result,
aided by F/X and development completions, offset by a modest decrease in
occupancy (although at just under 98% occupancy, that may be splitting
hairs). Granite boasted a ~2.7MM sq. ft. increase in overall GLA with
contributions from developments, expansions, and acquisitions. With overall
market availability increasing slightly due to new supply outpacing demand in
certain markets, we note that GRT expects this trend to reverse going into
2024, where it expects to have virtually all of its GLA leased.
We note the long-term secular tailwinds, specifically the reshoring of
manufacturing that will continue to absorb new supply, driving demand for
industrial assets. We raise our FFO and AFFO estimates, while increasing
our cap rate modestly from 5.00% to 5.25%. We remain Outperformer rated
with a $93.00 NAV (from $92.00) and $98.00 price target (from $95.00) as
we project a stronger NOI run-rate, more than offsetting the higher cap rate.
Key Points
Q1/23 Results: FFO per unit was $1.25, ahead of our estimate of $1.20. We
note the main contribution to the beat came from foreign exchange
(~$0.06/unit), along with contributions from development completions
somewhat offset by slightly lower-than-expected occupancy.
Operations: GRT recorded SP-NOI growth of 5.4% (excluding the impact of
foreign exchange). SP-NOI improved on higher rents from CPI indexation,
fixed rent increases, and favourable leasing performance in Canada, the U.S.
and Germany. Excluding foreign exchange impacts, growth was led by 8.3%
in Canada, 6.3% in the Netherlands, 6.1% in the U.S. and 5.0% in Germany,
while Austria grew by 0.6%.
Transactions: During the quarter, Granite closed on its forward purchase of
two completed industrial properties in Avon, Indiana, compromising ~1MM
sq. ft. for total proceeds of $106.9MM (US$79.0MM). GRT sold one ~0.2MM
sq. ft. U.S. incoming-producing property for total proceeds of $24.7MM. We
note that one Canadian incoming-producing property with a fair value of
$17.5MM was held for sale at quarter-end.
Balance Sheet And Liquidity Update: Net debt to total assets was 32%,
unchanged sequentially but up 7% Y/Y. We note the strong interest coverage
ratio of 6.6x, along with ~$1.1B in available liquidity and nearly $9B in
unencumbered assets. We also note that the credit facility has been
extended to March 31, 2028.
Cap Rate Tracking: The IFRS cap rate was ~5.0%, up ~10 bps from last
quarter and up ~70 bps over the past year. Cap rates increased to 3.65%
(from 3.51%) in Canada, 4.99% (from 4.84%) in the U.S., 5.66% (from
5.63%) in Germany, and 4.83% (from 4.53%) in the Netherlands, while they
compressed to 7.83% (from 8.15%) in Austria