Our view: Notwithstanding GRT’s in line results, we believe US occupancy slippage is weighing on investor sentiment. From our lens, however, GRT continues to screen well in a “higher for longer” world. Indeed, a sizeable leasing pipeline, attractive leasing spreads, and slowing new construction starts should set up 2024 for stronger operating traction. As well, the balance sheet is in solid form with below average leverage and near-term debt maturities addressed. Bottom line, we see an attractive spot to build positions. Maintaining Outperform, $86 PT (-$11).
Key points:
2024 SP NOI growth guidance points to a strong year – just need to get some leasing done. Q3 SP NOI was +7% YoY (+5.7% YTD) from higher rents and expansions, partly offset by higher vacancy. Renewal leasing spreads were impressive at +33% (+21% YTD), incl. +206% in Canada and +43% in the US. However, occupancy dropped to 95.6% (-70 bps QoQ) on further US slippage (-110 bps to 93.3%). Indeed, leasing velocity has slowed amid new supply and elevated economic uncertainty. Importantly, however, GRT has already renewed ~75% of 2024 lease expiries at a ~14% spread (including 5MM sf in Graz), with ~20% spreads anticipated on the balance. As well, with talks in progress on ~2MM sf of new and renewal leasing, GRT expressed confidence in US occupancy recovering “strongly” in 2024, particularly at its completed developments. GRT expects 2024 SP NOI growth to exceed 2023 (approx. low-to-mid-6%), with our call at 6-7%.
Capital aimed at existing projects, but NCIB might get some attention too. Active developments are modest at $151MM (6.6% unlevered yield), most of which is pre-leased. The focus remains on leasing up completed US projects, which we recently toured in October. With ~69% of the GLA leased, GRT expects to have the balance addressed over the next several months. New speculative starts are unlikely, while visibility on acquisitions is low. Unit repurchases are under consideration, a modest level of which we’re comfortable with; still, we also see merits of keeping dry powder.
Growth still looks pretty healthy. Our 2023E-25E FFOPU are $4.93 (-$0.04), $5.24 (-$0.06), and $5.45 (-$0.06) with revisions for development leasing, higher interest costs, and higher taxes. Our 2YR CAGR is a decent 5%, modestly below its CDN (7%) and US (7%) peers, but ahead of our universe (3%). Our current/one-year forward NAVPU estimates declined to $86 (- $4)/$93 (-$4), mainly on a higher cap rate (+25 bps).
Outperform, PT lowered to $86 (-$11) on our lower forward NAVPU and a lower target multiple (~8% discount to FWD NAV vs. prior parity), as sector valuations have retreated amid higher rates. GRT is trading at 25% below NAV (14x 2024E AFFO/6.4% implied cap), ahead of its CDN peers (-30% P/ NAV), but below its US comps (-13%). For a name with a strong growth profile, solid balance sheet (with minimal near-term debt maturities), and ample capacity for distribution growth, we see a compelling entry point.