TSX:NXR.UN - Post by User
Post by
incomedreamer11on Oct 26, 2023 8:27am
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Post# 35701710
Scotia comments
Scotia comments
We Don't Expect a Distribution Cut
OUR TAKE: Mixed. NXR unit price was down ~5% yesterday (vs sector down ~2%) on no news as such. NXR has come under pressure lately with stock down ~24% (vs sector down 12%) since beginning of Sep’23. As a result, NXR distribution yield is now in double-digits at 10.4%. At this price, market has raised questions on its distribution sustainability. We updated our model and our 2024 AFFOPU is reduced by 5% mainly due to higher interest expenses. Our revised 2024E AFFO payout ratio is now 98% (vs 92% previously). While payout ratio is elevated, we don’t see a distribution cut in the near-term. Exhibit 1 shows names with higher distribution yield and their payout ratios. NXR’s variable-rate debt exposure has come down (Exhibit 2). While its leverage (Exhibit 3) remains elevated, there is no need to adjust distribution at this time. We note potential disposition of Sandalwood portfolio (~$120M) could right-size the leverage. Exhibit 4 – NXR is now back to trading like a Diversified REIT (and not Industrial REIT). Maintain our SO rating but reduce our target to $9.00 (-$2.00) as we reduced our NAVPU to $9.75 (-$1.05). Some patience required on the name.
KEY POINTS
Valuation Update: NXR is now trading at 9.5x 2024 AFFO multiple (Exhibit 5). Larger peers, GRT at 14.5x and DIR at 13.2x. NXR is now trading somewhere between Diversified REITs (at ~9x) and Retail REITs (at ~11x multiple). Needless to say, due to balance sheet concerns, NXR has stopped trading like an Industrial REIT. We think Sandalwood portfolio disposition (if that happens) can reduce leverage Debt/Assets to 47% from 49% currently (56% based on our NAV).
Model Update – Leverage remains elevated although variable-rate debt exposure has come down: Exhibit 2 – we provide names with higher variable-rate debt exposure. NXR exposure is now down to 6% of total debt versus 26% a few months back. Pro forma acquisitions in Q3/23, we estimate $410M drawn on credit facility. We surmise ~$350M have been fixed while the remaining amount is still on variable-rate. For modeling, we use 5.7% p.a. all-in interest rate for the debt. We note $65M of Credit facility and a similar $65M of mortgages are coming due in 2024 (12% of total debt). We assume 6.5% interest rate on debt renewals and 7% on new debt related to acquisitions/ developments. We expect no rate cuts in 2024 and as such think conservative in our approach. Even based on current interest rates, we don’t see AFFO payout ratio exceeding 100% and therefore don’t expect a distribution cut. Our NAV is reduced to $9.75 (-$1.05) as we now use a cap rate of 6.1% (+25bp) and provide no upside on developments.