First Look: Increasing Weighting to Industrial; Q2/22 In-Line

Bottom Line:

PROREIT reported Q2/22 results that were in-line with expectations. With the close of the joint venture with Crestpoint, as well as the disposition of nine retail properties in Western Canada subsequent to quarter-end, PRO REIT has increased its weighting to industrial to 68% of base rent or 80% of GLA. We reaffirm our constructive outlook on PROREIT, as its majority weighting to industrial along with its exposure to essential retail are both net positives.

Key Points

Q2/22 results in-line. Q2/22 FFO/diluted unit was $0.13, +28.5% from $0.10 in the year-ago quarter, in-line with BMOe of $0.13, and a penny shy of consensus of $0.14.

Reported Q2/22 SPNOI +0.8% y/y, +2.2% normalized. The SPNOI growth was driven by higher occupancy in the industrial and retail segments, rent steps and higher rents on renewals in the industrial segment, partially offset by lower SPNOI in the office segment from a one-time adjustment of $0.1M and increased vacancy in two office properties. Excluding the one-time adjustment, SPNOI was +2.2%.

Occupancy and retention remains strong. Occupancy at quarter-end Q2/22 was fairly stable at 98.3%, -20bps both sequentially and y/y. Retention continues to be strong YTD as 81.8% of 2022 lease maturities were renewed at a healthy average leasing spread of +12.9%.

Small fair value gain. In Q2/22, PRO REIT recorded a fair value gain of $0.8M ($0.01/ unit) in its investment portfolio, after receiving nine external appraisals. The REIT's IFRS cap rate was unchanged sequentially at 5.7%.

Joint venture with Crestpoint completed. On August 5, PRO REIT closed its 50-50 JV transaction with Crestpoint, where the JV acquired 21 properties in Halifax for $228M from a third party, and PRO REIT sold a 50% interest in 21 industrial properties (all but one in Halifax) to the JV for $114M. For a further breakdown of the transaction, see our note.

$19M retail portfolio disposition. Subsequent to quarter-end, PRO REIT entered into an agreement to sell a nine-property portfolio of non-core retail properties in Western Canada for $18.8M. Proceeds will be allocated to repay related mortgages and part of a term loan, and it is expected to close in September.