Our view: Post a strong Q4 finish, our outlook for GRT remains constructive. Supported by continued strength in leasing, fundamentals are in solid shape, with organic growth accelerating and 2023 guidance raised. The development program is also making a stronger mark on earnings and value creation as deliveries ramp up. In short, with multiple levers of growth and a discounted valuation, we think GRT sets up well in an environment where macro visibility remains in short supply. Outperform, PT to $103 (+$3).
Key points:
View from the ground looks pretty strong. SP NOI growth accelerated to 6% (+3.4% YTD) on strength across regions. With occupancy effectively full, higher rents are carrying the load. Despite a slowing economy, GRT noted demand erosion has yet to appear. Indeed, development leasing advanced, Q4 leasing spreads were strong at +24% (19% YTD), 80% of 2023 lease expiries are addressed at ~20% spreads, and GRT is targeting ~20% lifts on remaining 2024 expiries. Also, Magna’s lease extensions in Graz addressed ~55% of 2024 maturities at a ~9% spread with no capex/TIs (see Feb-1/23). Even with 1MM sf (~1.7% of GLA) of coming vacancy, GRT raised 2023 SP NOI growth guidance by 50 bps to 6.5-7.5%, a level we see as achievable.
Developments making a mark, while acquisitions could be set to rise. In Q4, GRT completed its Murfreesboro, TN, project, raising 2022 completions to $223MM. Notably, since late 2021, GRT has delivered 2.8MM sf of developments at a healthy 6.4% unlevered yield. Looking ahead, management noted capital remains earmarked for projects-in-progress and new phases on existing sites, although acquisition opportunities are also surfacing. The current project pipeline totals $427MM ($124MM left to spend) across 2.9MM sf at ~6% target yields (1.7MM sf completed in Q1/23; mostly leased). As for funding acquisitions, we believe the lease extensions at Graz open the door to a potential sale of the assets, particularly if investment markets firm up.
Estimates raised. Our 23E/24E FFOPU are $4.96 (+$0.28)/$5.21 (+$0.28), with revisions for higher SP NOI, completed projects, and favourable F/X. Our 2023E is relatively in line with the $4.98 mid-point (+12% YoY) of GRT’s guidance, with our 2022A-24E CAGR at a solid 8%, ahead of the 5% of its peers and our universe. Our $90 NAVPU is intact as higher NOI was offset by a higher cap rate. Our one-year forward NAVPU rose to $98 (+$3) on higher NOI (partly from Graz lease extensions), implying strong 9% YoY growth.
Maintaining Outperform, price target raised to $103 (+$3) on the increase in our forward NAV. GRT’s trading at 9% below NAV (19x 2023E AFFO/5.3% implied cap rate), below its industrial peers (6% NAV discount), but ahead of the sector (16% discount). We see current levels as an attractive entry point to a name with a solid earnings and NAV growth profile, below average leverage, a sizeable pipeline of value-creation opportunities, and capacity for further distribution growth.