Granite REIT
(GRT.UN-T, GRP.U-N) C$74.45 | US$55.03
Q3/22 First Look: Occupancy Back Over 99%; Distributions Raised Event
Granite reported Q3/22 results and announced its 11th consecutive annual distribution increase at +3.2%. Conference call is at 11:00 a.m. (800-748-2715).
Impact: SLIGHTLY POSITIVE
Our Take: The occupancy rebound in Q3 and further lease-up of the development pipeline represents solid progress in the face of macro concerns, and the shift in capital allocation has been swift with almost no acquisition activity and over $150mm invested in unit repurchases YTD.
FFO vs. Estimate (Exhibit): Q3/22 FFO/unit of $1.08 was (-1% q/q, +9% y/y) and slightly above/below our estimate/consensus of $1.06/$1.09. We had forecast weaker currencies and a disposition (which did not occur).
Operations:
Portfolio occupancy bounced back as expected, rising to 99.1% and retracing 130bps of last quarter's 190bps decline. As expected, the lease at Granite's 605,000sf Fort Worth, TX development commenced during Q3/22. Portfolio occupancy otherwise was stable in Q3/22.
SPNOI growth (constant currency) was +3.2% (+2.7% YTD), led by Germany, Netherlands and Canada (GTA).
Magna revenue concentration was 26% (Q2/22: 28%).
Development Pipeline:
Granite's development pipeline progressed well in the quarter with higher rents driving stabilized yields up ~20bps on average (now 5.9%). A new lease (to a division of Oshkosh Corporation, NYSE:OSK) for the entire 844,000sf development in Murfreesboro, TN brings pre-leasing on the aggregate 3.66mmsf active pipeline to 66%. Additionally, a new lease was signed for the remaining space at the 0.3mmsf Altbach, Germany (delivered Q2/22).
Balance Sheet:
Granite recorded fair value losses of $229mm ($480mm since Q1/22), almost completely reversing the $491mm gain in Q1/22. The overall cap rate was +20bps in Q3 (+38bps since Q1/22), more than unwinding the -23bps in Q1/22. Rent growth, particularly in the GTA, provided an offset. The Q3 cap rate revisions were mostly in Germany and the USA, and on Distribution/E-Commerce properties.
Since last quarter (and including post-Q3 activity), YTD NCIB unit repurchases jumped to $155.5mm (2.17mm units @ $71.80/unit) from $35mm. Net leverage was 29% (Q2: 28%).
Liquidity stands at $1.27bln, including the full $1bln credit facility which was paid down with proceeds from a new three-year US$400mm term facility (coupon fixed at 5.016% via interest rate swap).