August 14, 2023
Nexus Industrial REIT
Q2 in line; Valuation looking more interesting
Our view: Nexus Industrial REIT (“NXR”) reported an in line quarter, with SP NOI growth tracking at 4.3% as expected. We are modeling 4%/5.3% SP NOI growth in 2024/2025. Its acquisition activity continues to be about high-grading the portfolio. On leverage, NXR is close to capacity with $89M undrawn on its facilities and is looking to lower debt from asset sales. Our SP rating balances its positive MTM outlook and its high-grading strategy with a difficult environment to grow by acquisitions. That said, valuation is looking more interesting with wider than historical spread to large cap peers.
Key points:
SP NOI growth tracking 4.3% as expected: There was a small amount of leasing activity in Q2, which saw -17% lease spreads primarily from one AB lease rolling down. Occupancy was stable at 97%, flat q/q (retail 88%, office, 82%, industrial 99%).
2023 & 2024 outlook: 2% of industrial GLA expires in H2, most of which is in ON where rental lifts are ~55%. Moreover, new lease at Richmond BC should drive NOI by a further $0.75M in Q4. Portfolio MTM is estimated at +24%. ON and QC have the highest upside (+51%/+30%), yet also have higher WALTs at 7 and 10.8 years, respectively. As such, it will take some time for the rental lifts to fully play out. We are modeling 4%/5.3% SP NOI growth in 2024/2025.
Q2 acquisition activity continues to be about high-grading portfolio: NXR acquired two London and one Laval industrial assets for a total of $157M, and acquired a Burlington asset for $48M post Q2. It also sold a retail asset in Victoriaville QC for $41M. Industrial accounted for 89% of total Q2 NOI and should increase to 91% post these transactions. Moreover, NXR has $120-130M of office on the market and is also looking to buy assets by issuing Class B units (similar to its London purchases). Development: 3 projects totaling 523K SF, $87M at 7.9% yield to be completed by H1/24.
Leverage: Debt/GBV was 48% (+70 bps q/q). NXR used its credit facility to fund its Q2 acquisitions and has $355M (of ~$440M) drawn on its credit facilities. $218M were at variable rate (7%). NXR is monitoring the rate environment and has not yet locked in the rates (fixed rates are ~5.75-6%).
Valuation looking more interesting: We estimate NXR’s NAV/unit at $10.75 (-2%), based on a 6.0% cap (+20 bps) vs. reported NAV of $12.49 (+3% q/ q) based on a 5.99% (+37 bps q/q). Our price target of $10.50 (-$0.50) is based on a 10% discount (in line with LTA) to one-year hence NAV. Our SP rating balances its positive MTM outlook and its high-grading strategy with a difficult environment to grow by acquisitions given cost of capital. That said, valuation is looking more interesting – NXR’s implied cap rate of 6.8% is 100bps wider to DIR.U (vs. 30 bps wider in early 2023), not unlike several other small cap REITs vs. their larger peers.