Nexus Industrial REIT T.NXR.UN

Desjardins Research Report

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From Kyle Stanley, Michael Markidis and Alex Leon

‘Another one’—near-term candidate to become the next pure- play industrial REIT

The Desjardins Takeaway

We are increasing our target to C$13.00 (from C$11.00) on the back of 2Q21 results (see Express Pulse for details). The increase primarily reflects updated NAV work supported by (1) a slightly improved NOI profile, and (2) cap rate compression, driven by industrial transactions completed in 2021 to date. Despite generating a 62% ytd total return (vs 28% for the TSX REIT index), we believe upside remains as NXR should continue benefiting from multiple re-rating toward industrial peers.

Highlights

Not done yet. Announced/completed industrial acquisitions totalling ~C$300m ytd have driven the pro forma NOI contribution from industrial assets to ~73%, all but achieving the initial 75% target. With ~C$100m of acquisition capacity and the planned disposition of seven office and retail assets (>C$100m in value), management has set a new near-term target of a ~90% industrial weighting. Conference call commentary suggests the industrial acquisition pipeline remains deep, although competition for the assets is fierce. NXR’s access to non-marketed transactions (potential for ~C$300–400m of assets available from the London vendor), secondary market focus and year-to-date track record inspire confidence in its ability to achieve its external growth targets and become a pure-play industrial REIT.

The right time to own industrial. NXR realized a C$68m FV gain during the quarter (+C $1.10 to BVPU) on the back of (1) industrial cap rate compression in many of its markets, particularly in Ontario and Quebec, and (2) the ~C$14m net revaluation gain on the Richmond sports facility as it nears substantial completion. As a result, we have revised our weighted average cap rate assumption by 65bps to 5.75% to reflect these positive industrial valuation markers. Combined with a slight improvement in our NOI outlook, our NAV increases ~14% to C$11.50.

Valuation

NXR trades at a 5.6% implied cap rate (5% premium to our NAV). Our C$13.00 target is based on a 10–15% NAV premium (was 5–10%) and equates to ~15.5x our 2022 FFO estimate. Our expanded target multiple reflects (1) elevated demand for industrial assets, and (2) recent M&A in the Canada-listed industrial REIT space.