U.S. Property Tour: Digging The Developments
Our Conclusion
We recently had the opportunity to tour several of Granite REIT’s
developments in Indianapolis, Dallas/Fort Worth, Houston and Nashville.
Granite’s assets are strategically located in markets experiencing economic
growth and favourable demographics. Prospects for newly delivered
developments are solid and occupancy is anticipated within the targeted
lease-up window. Lease-up times have extended relative to recent quarters
but due to the upward move in rents, management is expecting, or has
leased at, rents that are well above proformas.
One recurring theme across the toured assets was the stickiness of the
tenant base, as reflected by 1) the fact that the significant capital tenants
have invested into their sites and 2) how critical the locations are for tenants
to address target markets and access labour. We believe this lends a highly
enduring quality to GRT’s portfolio.
We walked away with better visibility into development leasing and expect a
significant portion of vacancy to be addressed by 2024. We maintain our
Outperformer rating and $93 price target.
Key Points
Progress On Development Lease-up Appears Imminent: The Veterans
Drive developments in Indiana reflect ~46% of the vacancy in the U.S.
portfolio, and are inside the lease-up window. The Highway 109 development
in Nashville, TN reflects ~15% of the vacancy in the U.S. Management noted
healthy prospects for the site from a wide array of users (e.g., medical,
automotive and apparel). GRT also has the flexibility to demise the space to
widen the pool of potential users. About 30% of U.S. vacancy pertains to a
known departure in Shepherdsville, KY, for which there is less visibility on re-
leasing although market rents are ~20% above expiring.
Development Pipeline Status: Having recently delivered several major
developments, GRT’s active projects totaled ~$131.5MM at Q2/23. The
410,000 sq. ft. build-to-suit facility in Brantford, ON is the largest component
and completion is expected in Q1/24. Following this, we expect GRT to
proceed with obtaining entitlements but to pause on kicking off new projects
until there has been some progress on the occupancy front. Land held for
development can accommodate ~2MM sq. ft.
Q3 And What To Expect: We expect a no-surprise quarter and a
continuation of strong leasing trends. Given the move in interest rates
however, and GRT’s proactive approach to fair value revisions, we would not
be surprised to see write-downs in the quarter. For every 25bps increase in
cap rates, our NAV declines by ~7%