Nexus Industrial REIT T.NXR.UN

RBC Report

[retiredcf]

Their upside scenario target is $14.50. GLTA

July 18, 2022

Sector Perform

TSX: NXR-U; CAD 9.51

Price Target CAD 12.25 

Nexus Industrial REIT

Consolidating a hot sector in less crowded markets; Initiating at Sector Perform

Our view: We are initiating coverage of Nexus Industrial REIT (“NXR”) with a Sector Perform rating and a $12.25 price target. NXR focuses on secondary Canadian and Western Canadian markets. We view NXR as a promising, emerging small cap industrial REIT led by a veteran CEO, that has successfully pivoted to the industrial segment by acquiring assets on an attractive cost basis. Our rating reflects a lower relative return profile to its Canadian industrial peers and a macro environment in which investors are more likely to tilt to a major market focus.

Key points:

• NXR provides investors with a Western Canada and secondary market play on the industrial sector. Investment highlights include: 1) Going in cap rates that can be achieved in its target markets are typically higher than larger urban markets given lower long term growth profiles and lower competition for assets. That said, some of its key markets, like London ON, have seen outsized market rent growth recently, as they play catch up to the strong fundamentals in major markets, and markets like Edmonton have inflected after a few years of sluggish growth; 2) Despite increasing concerns on slowing consumer demand and a potential recession, we expect continued favourable demand/ supply picture in the near term given low market availability rate (~2.7%) and construction activity in NXR’s key markets (~2% of inventory); 3) NXR saw a multiple re-rate following pure-play industrial pivot, with the well- bought London portfolio in early 2021 being a key turning point.

• Initiating coverage at Sector Perform, reflecting risk/return profile relative to industrial peers. Our SP rating reflects: 1) NXR’s lower relative return profile versus its industrial peers, 2) a near-term macro environment where investors are more likely to tilt to a major market focus, and 3) an AFFO multiple discount to Canadian-centric peers that appropriately reflects NXR’s lower relative growth profile (21A-23E AFFO CAGR of 7% vs. 14%, estimated SP NOI growth of 3% vs. 6% in 22/23), higher debt level (Q1/22 net debt/GBV of 45% vs. 25%), higher exposure to secondary markets and ownership of retail/office assets (16% vs. 3%, albeit declining). Over the medium to long term, we believe positive re-rating is possible with increased scale and further well- priced acquisitions, better-than-expected organic growth, lower relative leverage metrics as the REIT gains scale and a broader sector recovery.

• Valuation & Target: We estimate NXR’s NAV per unit at $11.75, based on a 5.5% cap rate on forward NOI. We believe cap rates are biased upwards. NXR trades at -19% to NAV in line with Canadian-centric industrial peer group (Dream Industrial and Summit), and 12x 2023E AFFO vs. peers at 19x. Our one-year price target of $12.25 is based on units trading at parity to our NAV/unit estimate one year hence and equates to 15x 2023E AFFO/unit. Key risks: Rising interest rates, inability to grow or reliance on capital markets to grow, secondary market exposure during downturns.