Q1/24 RESULTS — GROWTH TRAJECTORY REMAINS INTACT; UNDER $70, NCIB BEATS ACQNS
THE TD COWEN INSIGHT
With a slight FFO beat and a conference call that largely dispensed with any minor questions/concerns on the results, we came away from GRT's Q1 with improved confidence in our outlook which includes a 10% forecast AFFO CAGR through 2025. GRT's Q1 guidance update was essentially unchanged – in contrast to negative revisions by some U.S. peers. At today's valuation, GRT remains a top idea.
Impact: NEUTRAL
The minor negative revision to SPNOI growth guidance was all on a slower near-term leasing pace, and management reiterated its year-end committed occupancy target of 96.5%-97.5% (with 96% in-place occupancy being likely). Initial questions around market rents proved unwarranted, as the lower Q1 realizations were all on mix, and committed renewals for future quarters average a very healthy +35% rental rate uplift.
Our largely unchanged forecast reflect management's expectation for 85%-90% retention on 2024 lease expiries (requires ~1.4mm sf of additional commitments), and the wider renewal uplifts in 2025 when the GTA has more representation.
Lease-up of U.S. vacancies (Fig. 6): Since last quarter, GRT has addressed 9% of the 3mmsf of Q4/23 vacancy within the U.S. portfolio, with two leases in Houston and Nashville taking effect in Q2/24. From a market perspective, management is seeing stronger absorption in Dallas, Chicago, Houston, and Atlanta, while Cincinnati, Indianapolis, Columbus, and Memphis are weaker.
Development: Recent completions have reduced the active pipeline to just two remaining smaller developments (in the GTA and NL). Management continues to be patient in activating any of the remaining 2.4mmsf of potential development GLA across Houston, Columbus, and Brantford.
NCIB Trigger Price? GRT's $26mm investment in repurchasing units over the past three weeks continues a pattern since 2022 of activating the NCIB every time the unit price dips below $70 (6.5% implied cap rate, 22% below our NAV). We would consider this a floor valuation both absolutely and relative to U.S. peers.
Portfolio Growth: Besides development, acquisitions remain the key way for GRT to attain greater scale in target markets. Despite selectively bidding, mgmt is yet to see merit
in paying the required prices to clinch deals in the current market and remains patient. Encouragingly, the availability of debt capital to the market appears to be on the rise.
We see Granite as a compelling way to gain exposure to many strong industrial property leasing markets — including U.S. markets. Granite's portfolio of mostly high quality, large bay, logistics-focused assets provide a degree of stability to portfolio metrics such as occupancy and SPNOI growth. AFFO, FFO, and NAV per unit metric growth is supported by a significant mark-to-market opportunity and we see the mark-to-market spread potentially widening further as market rents potentially re-accelerate in 2025. Other factors drawing us to the name include a best-in-class balance sheet along with a management team that has a tendency to meet or exceed expectations.