November 16, 2022
Nexus Industrial REIT A void NXR is keen to fill
Our view: Nexus Industrial REIT (“NXR”) reported steady growth and given next year’s lease maturities are tilted to ON, growth should accelerate. With Summit’s takeout, NXR is looking to fill the void, with a strategy of high grading the portfolio and shifting more to ON and Montreal. The market appears to be already playing the scarcity value, high grading, (target potential?) thesis as NXR now trades at one of the tightest discounts to our NAV estimate in our coverage universe. Maintain SP rating.
Key points:
Operating performance – steady growth: SP NOI growth +2%; Occupancy was 97%, flat q/q (retail 91%, office, 84%, Industrial 99%). Industrial represents 85% of NOI, which should increase to 90% with announced acquisitions/dispositions. Rent spreads were +23% on current and future expiries and +9% on new leases.
Outlook: Our expectation is for a ~4% SP NOI growth in 2023. In 2023 & 2024, a total of 1.4M industrial SF expire at $8.47 in ‘23, and $10.67 in ‘24, with the lease maturities tilted to ON (74% in ‘23 and 50% in ‘24) at rents in the $6-6.75 PSF range. As such, we estimate that rent spreads that could be achieved are ~50% in ‘23 and ~30% in ’24, which combined with step ups could put SP NOI growth in the 4% range.
Capital allocation activity: 1) It is looking to break ground on a 100K SF expansion at 1285 Hubrey, in London and a 300K SF expansion potential in Regina. Development yields are 8-10%; 2) Acquired 3 industrial assets in QC and Cornwall ON for $42M and post quarter, acquired a 436K SF portfolio of 4 industrial assets in Windsor & Tilbury ON for $38M, 7% cap rate, $88 PSF; 3) Sold retail property in Longueuil QC $12M; non-core assets held for sale stood at $43m. NXR is under contract to sell a smaller industrial portfolio in Saskatchewan and its grocery anchored retail asset in Victoriaville, QC. Sale of 3 suburban office assets in QC will be relaunched at a later time.
A void NXR is keen to fill: With Summit REIT soon to be taken out, NXR remains one of the few Canadian pure play industrial REITs. CEO Kelly Hanczyk emphasized a strategy of high grading the portfolio to institutional quality, recycling into newer assets and rotating away from older Alberta assets into Montreal and ON, perhaps even GTA at some point. A major market tilt is likely what investors look for in today’s macro environment. Indeed, the market seems to be already playing the scarcity value, high grading, (takeout?) thesis – since the Summit announcement, NXR trades at one of the tightest discounts to NAV in our coverage universe. We estimate NXR’s NAV/unit at $11.25 (-$0.25), based on a 5.65% cap rate (+10bps) vs. Reported NAV of $12.45, 5.5% cap (+10bps). Our target of $11.75 (-$0.50) is based on a 5% discount to one-year hence NAV. Maintain SP.