| FFO per unit up 1.4%. For Q4/23, PRO REIT (PRO) reported FFO per unit of $0.12, up 1.4% year-over-year, and in line with expectations. Same-property NOI increased 7.5% or $0.02 per unit, as leasing spreads were up an impressive 46% in 2023 (82% in Q4/23). Largely offsetting was greater interest expense from refinancing debt at higher rates and the REIT’s exposure to variable rate debt (3% of total debt). The REIT’s weighted average interest rate on mortgage debt rose 18 bps year-over-year to 3.88%. For the full year 2023, FFO per unit was $0.43, down 12.3% from $0.49 in 2022. Same-property NOI growth of 1.7%, or $0.01, was more than offset by higher interest expense as mentioned above, as well as a 40% or $0.03 increase in G&A costs. A substantial portion of the G&A should not be recurring as it was related to the retirement of the previous CEO. While the REIT continues to divest non-core assets to increase focus on the industrial asset class, we expect FFO per unit growth to pick up reflecting the strong leasing spreads. Internal growth picks up as rental rates rise. After increasing 0.7% in the first three quarters of 2023, same-property NOI growth accelerated to 7.5% in the quarter, as leasing spreads remained strong throughout the year and occupancy improved. The increase in the quarter was driven by same-property rental rate growth as leasing spreads in 2023 were 45.6%. · In the industrial portfolio (74% of SPNOI), same-property NOI rose 7.9% in the quarter. The growth was driven by greater same-property rental rates as leasing spreads were 52.3% in 2023 and 82.2% in Q4/23. Partially offsetting was an 80 bps drop in same-property occupancy from 98.3% in Q4/22 to 97.5% in Q4/23. · In the retail portfolio (18% of SPNOI), same-property NOI increased 1.8%, driven by same-property rental rate growth and a 40 bps improvement in occupancy from 97.1% in Q4/22 to 97.5% in Q4/23. In 2023, retail property leasing spreads were 9.4%. Financial forecast: Following year-end results that were in line with expectations, we continue to forecast FFO per unit of $0.51 for 2024 and $0.54 for 2025, equating to growth of 19.1% and 7.4%, respectively. We expect FFO per unit growth to be driven by greater same-property rental rates from capturing wide leasing spreads in the industrial segment, partially offset by greater interest expense from refinancing debt at higher interest rates, and the dilutive impact of asset sales. Valuation and recommendation: We continue to utilize a cap rate of 6.75% to value PRO’s portfolio and, following year-end results, our NAV per unit estimate is now $7.01 (from $6.58). Our target price, which is set at a ~10% discount to our NAV estimate, increases to $6.50 (from $6.00), and we continue to rate PRO REIT a BUY. PRO currently trades at an implied cap rate of 7.7%, or a 25.1% discount to our NAV estimate. This compares to the weighted-average discount of 14.4% for its Canadian industrial REIT peers. On a cash flow multiple basis, PRO is currently trading at 10.5x our estimate of 2025 AFFO compared to, on average, 13.9x 2025 AFFO for its peers. |