Our view: GRT’s recent European property tour reinforced our constructive view, with the properties well-located within their respective markets and in regions with solid fundamentals. While the Canadian industrial REITs have lagged this year, and particularly post Amazon’s recent comments (see below), we expect the subsector will continue to post above peer average organic growth, supported by tight conditions and still sizeable mark-to- market opportunities in rents. In short, we believe the pullback in GRT’s units provides a better entry point. Outperform, $110 PT intact.
Key points:
Tour covered good cross-section of assets, including largest property in portfolio. As detailed herein, we toured five assets in the Netherlands (4) and Austria (1), comprising a mix of income-producing and developments. The properties are well-located along key transportation arteries and in markets with strong fundamentals, including several with multi-model access. The tour included Magna Steyr (Austria), the REIT’s largest property and Magna’s largest global site where it produces complete vehicles. The facility has five production lines, with the Fisker Ocean commencing in Q4/22. While the lease is set to mature in Jan-2024, we see a high probability of renewal given the facility’s importance in Magna’s operations. Post renewal, we believe a sale of the property is possible.
Fundamentals sound; asset values should remain well-supported. Despite reductions in forecast European GDP growth, industrial demand in the Netherlands remains solid, supported by growth in on-shoring, logistics, transportation, & online retail. Per JLL, 2021 was a record year of take-up, with logistics vacancy at 1.9% (vs. Europe's 4%), while new supply should slow amid rising costs. Notably, while JLL cited potential cap rate expansion from record lows of ~3%, industrial values should remain well-supported by anticipated rent growth (rents up 5-15% QoQ in GRT’s markets).
Outperform and $110 PT intact; pullback offers a better entry. GRT reports Q1 on May 11 with our FFOPU at $1.03E vs. $1.04E consensus, and $0.93 last year (+12%). The units have posted a -13% YTD total return, trailing the TSX REIT Index (-10%). Notwithstanding solid fundamentals, we believe the material tightening of cap rate spreads to bond yields has partly contributed to the underperformance of GRT and its industrial peers. The subsector has also experienced outsized downward pressure since Amazon’s (GRT’s second largest tenant at 5% of revenue, 17-year WALT) comments on Apr-28 of “excess capacity in our fulfilment and transportation network.” GRT’s down 7% since Apr-28 vs. an average -11% for DIR and SMU, -11% for Bloomberg US Industrial REITs, -7% for TSX REITs, and -7% for the MSCI US REITs. While a slowing economy could moderate industrial demand, we believe tight conditions will continue to support above average rent growth, particularly amid rising replacement costs and the buildout of supply chain resiliency. GRT’s trading at 1% above NAV, slightly below its 5YR average (+4%) and ahead of the sector’s 13% discount