2024 Is Looking Up Our Conclusion
Granite’s 2024 guidance confirmed what we believe was fairly widely known:
that supply issues in certain markets are near-term headwinds, beyond
which the SP-NOI outlook gets stronger. Nonetheless, we believe the
increased visibility was welcome. Given large GTA leases maturing in 2025,
and GRT’s commentary of ~40% leasing spreads, the outlook for 2025 is
shaping up to be attractive as well.
We raise our estimates on expectations of continued rent growth, coupled
with occupancy gains in the back half of the year. We remain Outperformer
rated with an $84.00 price target.
Key Points
Q4/23 Results: FFO/unit was $1.27, in line with our estimate and
consensus. Occupancy declined sequentially from 95.6% to 95.0%, reflecting
the U.S. segment (~110 bps sequential decline on a ~300K-sq.-ft. Memphis
property and a ~150K-sq.-ft. Houston property).
2024 Outlook: GRT is forecasting 2024 FFO/unit of $5.30-$5.45,
representing a 7%-10% Y/Y increase, coming in ~3% ahead of consensus of
$5.22 at the mid-point. AFFO/unit is forecast at $4.65-$4.80, a 3%-7% Y/Y
increase and in line with consensus at the mid-point. GRT is also forecasting
SP-NOI growth (ex. FX) to be in the 7%-8% range (2023 SP-NOI growth was
5.1%). Overall occupancy guidance is in the range of 96.5%-97.5% by the
end of 2024.
Leasing Backdrop: While occupancy did slip marginally in the quarter, it is
expected to trend higher in H2/24 and 2025. Renewals came in at a spread
of ~24% over expiring rents. Canadian spreads came in at 176% (two GTA
leases) and the U.S. achieved leasing spreads of 15% on ~2MM sq. ft. GRT
noted that its U.S. markets represent eight of the top nine for full-year 2023
net absorption, led by Dallas, Chicago and Houston. Overall, the demand
environment has improved as tenants are showing greater confidence after a
challenging 2023. Activity appears to be healthiest in the mid-bay,
250,000-500,000 sq. ft. range, and management noted increased activity by
e-commerce users.
Balance Sheet And Liquidity Update: Net debt to total assets was 33%,
relatively unchanged sequentially. Interest coverage was 5.5x, along with
~$1.1B in available liquidity and nearly $9B in unencumbered assets.
Fair Value Update: IFRS cap rate was ~5.24%, up ~40 bps over the past
year. The REIT is not anticipating further declines in fair values, though
noted potentially increasing prospects for distressed sales, which could place
downward pressure on pricing in the near term.