Our view: Post a decent Q4 finish and outlook, we remain constructive on GRT. Indeed, guidance for 2024 SP NOI growth and FFOPU were ahead of our call, supported by a confident view on leasing. We think investors need some convincing and getting some leases over the line should help, particularly in the US. Still, given the quality of its assets, attractive leasing spreads, slowing new starts, and tenants building supply chain resiliency, we see support for operating traction to build. Outperform, $89 PT (+$3).
Key points:
SP NOI guidance calls for 2024 acceleration – just need to deliver. SP NOI rose a healthy 4.7% YoY (+5.1% YTD) from higher rents and expansions, partly offset by higher vacancy. Leasing spreads were strong at +24% (+22% YTD). However, erosion in the US (-110 bps to 92.2%) once again drove overall occupancy lower to 95% (-60 bps QoQ, -460 bps YoY). Still, GRT remains confident on 2024 leasing, particularly in the US. Traffic picked-up in Q1, with 1.5MM sf of new (~0.5MM sf) and renewal leases in talks. As well, 74% of 2024 lease expiries are addressed (including 33% of US), with renewal spreads at ~15%. All said, 2024 guidance reflects quarterly average SP NOI growth of +7-8%, with occupancy rising to ~97% by year-end on stronger 2H/24 traction. Leasing up US vacancy will play a major role, but we see guidance as achievable given the quality of its assets.
Finishing what’s on its plate first, before going for seconds. GRT’s active projects totalled $157MM at Q4, with unlevered yields at a decent 6.7%. The pipeline has narrowed since, with the Jan-2024 completion of its $85MM fully-leased first phase in Brantford. GRT also leased 30K sf of its 50K sf expansion in Ajax. Importantly, management emphasized it does not plan to start any new speculative projects, with its focus on leasing existing vacancies. Hard to argue from our side, as we see occupancy and SP NOI growth as key unit price drivers this year. Keeping some dry powder for potential acquisitions from distressed sellers also doesn’t hurt.
We raised our 2024E/25E FFOPU to $5.33 (+$0.09)/$5.62 (+$0.17) for higher NOI and lower G&A. Our 2024E is slightly below the $5.38 guidance mid-point, with our 23A-25E CAGR at a strong 6%, in line with its CDN (7%) and US (7%) peers, but ahead of the sector (3%). Our NAVPU is unchanged at $86, with our one-year forward NAVPU rising to $94 (+$1).
Outperform, PT to $89 (+$3) on the increase in our forward NAV and a higher target multiple (5% discount to FWD NAV vs. prior ~8% discount) on improved sector valuations. GRT’s trading at 16% below NAV (15x 2024E AFFO/6.1% implied cap), above its CDN comps (21% NAV discount), but below its US counterparts (2% discount). We see an attractive entry to a name with a strong growth profile, solid balance sheet, and plenty of room for distribution growth.