Rent spreads remain strong: PRV continued to print impressive net rent spreads in Q2/22: 35% for the industrial portfolio and 24% for the total portfolio. Management believes they can push spreads even further in Burnside, as PRV owns ~40% of the inventory in that market after JV and the weighted average lease term in this node is only ~3 years. Also, 700k sf of leases maturing in 2022 were renewed at 12.9% over the maturing rent for those leases.
Subsequent to this quarter, PRV announced disposition of nine non-core retail property portfolios (94k sf) in Western Canada for gross proceeds of $18.8M. The transaction is expected to close in September, and proceeds will be used to pay down debt. On a pro forma basis, the industrial segment is now expected to constitute 80% of GLA.
See page 5 for details on Q2/22 results. PRV achieved SP NOI growth of 0.8% (2.2% excluding a one-time adjustment for the office segment) in Q2/22. SP NOI in industrial grew 4.7% y/y in Q2/22 and retail by 3.2%, while office SP NOI was down by 19.4%. The decrease in Office SP NOI was mainly due to a one-time adjustment of $137k related to a prior period, in addition to increased vacancy in two of the eight properties. Update on leverage: D/GBV = 51.3% in Q2 vs. 58.2% last year.
Q2/22 Earnings Summary
FFOPU was largely in line. IFRS NAVPU was largely flat at $8.00 as cap rates were unchanged q/q. SP NOI growth was slightly muted at 0.8%, but key Industrial segment was strong at 4.7%. 2022 is looking good so far, as 82% of 2022 lease expiries have been renewed at ~12% renewal spreads.
Big news was JV with Crestpoint, but it was previously announced: Post-Q2, PRV owns a 50% stake in a 41-property portfolio in Halifax (and one in Moncton), comprising 3.1M sf of GLA with a total asset value of $455M. In June, we published a detailed note on this transaction and mentioned that PRV will now become a dominant landlord in the Halifax industrial market.
PRV offers a distribution yield of 6.8%, the second-highest within our coverage group. We recently launched coverage on PRV – see link to our 129-page report in which we reviewed the industrial REIT sector, as well. We believe that PRV is best suited to investors who are looking for higher yield but who could also benefit from higher NAV growth if the cap rate spread between primary and secondary markets narrows over time.
Largely in-line quarter: Reported FFOPU of $0.127 in Q2/22, slightly below our estimate of $0.138 and the consensus estimate of $0.136. The variance was due to higher G&A and interest expenses. NOI was in line with our estimate.
IFRS NAVPU grew to $8.00 from $7.94 last quarter (flat q/q), supported by $0.8M of FV gains in Q2 vs. a $40.3M gain ($0.67/unit) in Q1/22. FV gains were muted due to unchanged capitalization rates this quarter.
12.9% rental spreads 2022 so far: Occupancy was down slightly to 98.3% vs. 98.5% in Q1/22. Leasing spreads continue to look good, with 82% of leases maturing in 2022 renewed at average renewal spread of 11.9% (vs. 68% done at 11.9% last quarter).
SP NOI grew +0.8% y/y in Q2/22, down from 2.7% last quarter. SP NOI growth was led by industrial SP NOI growing 4.7% y/y, followed by retail at 3.2% and office at -19.4%. Slowdown in SPNOI growth can be attributed to the decrease in office asset class occupancy compared with the same period in 2021 (86.7% in Q2/22 vs. 91.6% in Q2/21).
Leverage was flat this quarter: Leverage stayed at 51.3%, the same as last quarter and lower than 58.2% in Q2/21. PRV has made good progress toward management’s 50% near-term leverage target this year. PRV has no significant mortgage debt coming due in 2022. Liquidity at quarter-end was $31.8M (includes cash on hand and availability on its credit facility).