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March 9, 2022
Outperform
TSX: GRT.UN; CAD 91.59; NYSE: GRP
Price Target CAD 110.00
Granite Real Estate Investment Trust
Q4 in line; operationally sound, another round of portfolio mark-ups, and putting capital to work Impact: Neutral
Our view: Granite delivered another in-line, yet operationally firm quarter. Fundamentals are in solid shape with a nearly full portfolio, healthy leasing spreads, and strong organic growth. Continued strength in the industrial backdrop and investor demand drove another sizeable round of portfolio value gains, pushing GRT’s IFRS BVPU up 6% sequentially. Capital deployment remains active with $510MM of acquisitions, while recent financing activities should generate modest annual interest savings. Importantly, the balance sheet remains in solid form with low leverage and plenty of liquidity. Conference call Mar-10 at 11 am ET (1-800-918-9578).
First impression
Q4 results in line: Granite reported Q4/21 FFOPU of $1.02, in line with RBC/Street at $1.00E/$1.01E, and up from $1.00 last year (+1% YoY).
SP NOI growth (cash basis): +4.0% YoY (+2.5% YTD)
Occupancy: 99.7% (+50 bps QoQ, + 10 bps YoY)
2021 new and renewal leasing spreads: 10%
IFRS BVPU (pre-tax): $90.10 (+6% QoQ, +29% YoY). IFRS cap rate 4.53%
(-24 bps QoQ, -108 bps YoY) vs. our 4.9% NAV cap rate/4.6% implied cap.
Net debt/GAV: 25% (+200 bps QoQ). Available liquidity: $1.4B
Magna: 29% of annualized revenue (-200 bps QoQ, -700 bps YoY)
Results in line; another sizeable round of fair value gains. Variances to our forecasts were minor as higher F/X gains were partly offset by slightly lower NOI and higher G&A. In Q4, GRT recorded $349MM ($5.30/unit) of net portfolio fair value gains ($1.3B YTD) on lower cap rates and higher market rents in the GTA, US, and Europe. The gains were partly offset by $45MM ($0.68/unit) of Q4 unrealized F/X losses on CAD strength relative to the USD and EUR (unrealized F/X losses total $160MM YTD).
Organic growth in good shape across regions. Constant currency Q4 SP NOI increased a healthy 4% YoY, mainly from higher rents via contractual increases, re-leasing and renewals in the US, Canada, and the Netherlands, and the expiry of free rent. Regionally, the US led (+5.3% YoY Q4 SP NOI), followed by Europe (+3.5%), and Canada (+2.8%). Including F/X impacts, Q4 SP NOI was -0.3% YoY (-1.6% YTD). To date, GRT has renewed 68% of 2022 lease maturities.
Active pace of deal flow, plus refinancing savings. Including Q4/21 and 2022 transactions, GRT acquired $510MM of properties at a ~4% cap rate in the Netherlands ($142MM), Germany ($140MM), the US ($127MM), and the GTA ($101MM). In Feb-2022, GRT terminated $350MM of its $500MM principal, 2028 cross currency interest rate swap (CAD for USD debt) and entered a new cross currency interest rate swap (CAD for EUR debt) at a substantially lower interest rate, generating $5.5MM of annual interest savings (~$0.08/unit; ~2% of our current 2022E FFOPU) vs. a one-time $6.6MM settlement cost
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