Our view: On the back of Q1 results that were modestly ahead of our call, our positive view on GRT is intact. Fundamentals are in solid form, with organic growth set to accelerate on stronger leasing momentum. As well, the development program is making good progress, providing an incremental source of earnings and NAV upside. Coupled with a solid balance sheet and disciplined capital allocation, we continue to see an attractive risk adjusted return. Outperform, $103 PT intact.
Key points:
Look for organic growth momentum to build. SP NOI increased 5.4% YoY from higher rents on new/renewal leasing and contractual escalations. Looking ahead, GRT reaffirmed its 6.5-7.5% organic growth outlook, with leasing spreads expected to accelerate from the +3% registered in Q1. Indeed, to date, GRT has renewed ~85% of its 2023 lease expires at average +20% spreads. On remaining 2023 maturities, GRT expects to achieve +28% spreads, and +20-22% on 2024 expiries left to address. While management cited a more cautious sentiment among tenants, it expects occupancy to rise to ~98-99% by year-end (vs. 97.8% Q1), aided by lease-up of recent acquisitions and developments. Supported by resilient demand (e.g., 3PL, on-shoring production), we see guidance as achievable.
Good development progress; some wood to chop on leasing. Including Q2 activity, GRT made solid progress on developments, with $333MM (2.4MM sf) completed at a decent 5.9% unlevered yield. As well, it closed its $107MM (5.4% target yield) forward purchase of a 1MM sf spec project in Avon, IN. Of the total 3.4MM sf, 53% is leased, leaving some work to do on the rest. That said, management cited strong tenant interest, with leasing at Avon expected by the end of this year. With the remaining pipeline down to $168MM, new projects could be set to advance, although we expect a disciplined approach. Notably, 730K sf of approvals are in progress in Brantford. As for acquisitions, GRT cited limited compelling opportunities.
Earnings estimates edge up; solid growth profile. Our 2023E/24E FFOPU are $5.02 (+$0.06)/$5.31 (+$0.10), with revisions for higher NOI (partly F/X driven), offset by higher G&A, interest costs, and current taxes. Management maintained its 2023 FFOPU guidance at $4.90-5.05, but expects to be at the higher end of the range. Our 2022A-24E FFOPU CAGR is a solid 9%, ahead of the 5% of its industrial peers and the sector. Our NAVPU held steady at $90 as higher NOI was offset by a higher cap rate, while our $97 one-year forward NAVPU reflects strong 8% YoY growth.
Maintaining Outperform, $103 PT. GRT’s trading at 10% below NAV (18x 2023E AFFO/5.5% implied cap rate), relatively in line with its industrial peers (12% NAV discount), but ahead of the sector (23% discount). We continue to see a good entry to a name in a preferred asset class with robust fundamentals, an attractive growth profile, strong balance sheet, and ample capacity for consistent distribution growth.