Nexus Industrial REIT A void NXR is starting to fill
Our view: Nexus Industrial REIT (“NXR”) raised $81M (net) at $10.30/unit to acquire three new assets in GTA, GMA and SW ON. We estimate the transactions to be ~6% dilutive to 2023E FFO/unit and ~2% dilutive to NAV estimate. However, the assets are quality-accretive and combined with two other assets previously under contract, NXR’s asset base will grow by ~ $340M (~20%) in new industrial assets in H1/23. In the context of a public market soon lacking a liquid pure play Canadian industrial REIT, we see the moderate dilution as a slight price to pay to high-grade its portfolio. Maintain SP.
Key points:
3 new acquisitions announced: NXR will acquire 2 assets under construction in the Greater Toronto Area and Greater Montreal Area totaling 330K SF. The assets are 32” clear heights, single-tenanted on 7 year terms, and expected to be acquired/completed in H1/23. NXR will also acquire a 305K SF property in SW ON, which includes a 160K SF expansion, and is also single-tenanted with a 10-year lease. Combined, the three new acquisitions total $173M, with a 4.9% going-in cap rate (SW ON $182 psf, GTA $374 psf, GMA $344 psf), and average rent escalator of 3.2%.
High-grading strategy underway: As articulated in its recent call, NXR is looking to high grade the portfolio, recycle into newer assets and rotate from older Alberta assets into Montreal and ON. The acquisitions include its first fully-owned asset in the GTA. Including two previously-announced new assets set to close in H1/23, NXR will add ~$340M of new assets (~20% of existing asset base) in H1/23.
Estimating modest near term dilution: The deals are being financed with $81M equity offering and to-be-issued $26M Class B units at $10.30/unit, and rest from assumed and new debt. With a WACC of ~6.5%, we estimate the overall transactions to be ~6% dilutive to FFO/unit in the near term. 2023E FFO/unit is reduced to $0.81 from $0.86, 2024E FFO to $0.86 from $0.91. Over the long term, the transactions should be neutral to modestly accretive as we estimate an unlevered IRR of 6.5%-7.2% given the 3.2% rent escalator. Pro forma LTV remains largely unchanged at 48% (on our estimated gross value). On an NAV basis, the equity offering and pending Class B equity raises are ~2% dilutive to our NAV/unit, which is now $11 (- $0.25). The $10.30 issue price implies a 17% discount to Q3/22 reported NAV/unit of $12.45 and 8% discount to our prior NAV estimate of $11.25.
Filling the void: We expect NXR to continue with its strategy of high grading the portfolio both in terms of quality and location with a view to fill the pure-play Canadian industrial void. There will likely be a near term price to pay for moving up the quality curve and in our view, not an unreasonable move in the context of a public market lacking an investable pure play CDN industrial REIT. Our target of $11.50 (-$0.25) is based on a 5% discount (unchanged) to one-year hence NAV. Maintain SP.