Short-term Fluctuations Do Not Alter Long-term Growth Our Conclusion
As leasing volumes and spreads fluctuate quarter-to-quarter, rents are
continuing to hold in, and Granite is capturing decent lifts on renewals. Units
have slightly underperformed the sector YTD, and an improving occupancy
outlook for 2025 should improve sentiment. Keeping our cap rate
unchanged, we raise our NAV and price target to $85.00, from $84.00.
Trading at a ~17% discount to our NAV, we view valuation as attractive, in
particular as FFO/unit growth expectations into 2025 are well ahead of the
sector.
Key Points
Q1/24 Results: Q1/24 FFO of $1.30/unit was in line with our estimate and
slightly above consensus of $1.27. Occupancy was stable sequentially at
95.0%, across all markets.
2024 Outlook: GRT left its 2024 FFO/unit forecast of $5.30 to $5.45
unchanged, while also maintaining its SPNOI outlook (ex. FX) of 7% to 8%.
GRT now expects SPNOI at the lower end of this range, due to revised
leasing assumptions for certain availabilities. AFFO/unit forecast was revised
modestly downwards (~1%) from $4.65–$4.80/unit to $4.60–$4.75/unit, on a
~$3MM increase in AFFO-related capex, which was previously expected to
occur in 2023.
Leasing Backdrop: Occupancy remained stable this quarter and
management expects it to trend higher in 2025. Committed occupancy was
95.4%. Renewal spreads were ~10% over expiring rents. The U.S. achieved
leasing spreads of 12% on ~1.4MM sq. ft. and Austria achieved 10% leasing
spreads on ~5MM sq. ft. To date, ~79% of 2024 expiries have been renewed
at 16% spreads, which is slightly muted by the Graz renewal. Future
renewals totaling ~1.3MM sq. ft. have seen an increase of ~35%. GRT noted
that its U.S. markets continue to broadly outperform on a net absorption
basis, led by Dallas, Chicago, Houston, and Atlanta. The REIT has also
renewed nearly 90% of the expiries within its European portfolio (~950k sq.
ft.), along with ~300k sq. ft. of new leases during the quarter for the Houston,
Nashville, and Ajax developments at higher-than-budgeted rates.
Balance Sheet And Liquidity Update: Net debt to total assets was 32%,
ticking marginally down on a sequential basis. Interest coverage was 5.4x,
along with ~$1.1B in available liquidity and nearly $9B in unencumbered
assets.
Fair Value Update: IFRS cap rate was ~5.26%, up ~25bps over the past
year.