Our view: GRT’s Q1 results reinforced our constructive view. We expect organic growth to run at a healthy clip and are encouraged by progress on the development pipeline, particularly given better-than-anticipated rents. Indeed, while we acknowledge potential economic deceleration could moderate industrial demand, we expect rent growth to remain strong supported by low availability, rising replacement costs, and tenants building out supply chain resiliency. Bottom line, we think GRT checks the boxes for rising rates with low leverage and attractive growth on offer in AFFO, NAV, and distributions. Maintaining Outperform and $110 PT.
Key points:
Good start to the year, with ~4% SP NOI growth guidance intact. SP NOI rose 4.6% YoY mainly from higher rents. Looking ahead, GRT upheld 2022 guidance at 3.5-4.5%, with short term vacancies anticipated in the US. Frankly, with 99.7% occupancy and robust leasing spreads, we welcome the opportunity to unlock some value. Renewal spreads are tracking well at ~11% to date, with a solid +20% anticipated on the remaining 2022 expiries. For 2023, GRT noted spreads should rise to ~20-25% with the bulk of expiries in the US, creating the potential for SP NOI to accelerate.
A more cautious tone on capital. Capital deployment is off to a good start, with $334MM of YTD investments (4% cap rate). Still, given evolving capital markets, GRT emphasized a near-term focus on the $640MM of development/purchase commitments and leasing-up projects, rather than large scale acquisitions. Notably, solid progress was made in Fort Worth, with the 0.6MM sf project leased at rents above underwriting, pushing the yield up 90 bps to an attractive 6.7%. We expect capital recycling to also pick-up, with GRT citing $120MM of US assets being prepped for sale.
Attractive growth on offer. Our 2022E-23E FFOPU are $4.32 (+$0.01) and $4.67 (+$0.02) with revisions for higher organic growth, partly offset by lower acquisitions, higher interest rates, and a weaker EUR. Our 2022E is relatively in line with GRT’s $4.35 guidance (unchanged $4.31-4.43 range). Our 2021A-23E CAGR remains at a solid 9%, a bit ahead of its industrial peers (7%) and well above the sector (5%). Our NAVPU increased to $94 (+ $4) on higher organic growth and a slightly lower cap rate, although further compression will likely prove challenging amid rising debt costs. Our $99 (+ $4) one-year forward NAVPU reflects healthy 5-6% YoY growth.
Maintaining Outperform, $110 PT, with the increase in our forward NAV offset by a lower target multiple (~12% forward NAV premium vs. prior ~17%) as sector valuations dial back. GRT’s trading at 6% below NAV (22x 2022E AFFO/4.8% implied cap), in line with its Canadian industrial peers (5% NAV discount), but ahead of its US comps (13% discount) and our universe (14% discount). Overall, we see an attractive entry point supported by a solid growth profile, expanding development program, below average leverage, and robust outlook for industrial fundamentals.