TSX:GRT.UN - Post by User
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retiredcfon Nov 08, 2024 9:31am
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TD 2 (Raise Target)
TD 2 (Raise Target) Q3/24: RENT GROWTH, STRONG BALANCE SHEET DRIVE PEER-LEADING NOI AND FFO GROWTH
THE TD COWEN INSIGHT
Post GRT's Q3 results and conference call, our outlook remains intact. Visibility to a recovering pace of leasing demand has improved, despite the U.S. election and lingering fallout from the past three years of interest rate increases. GRT remains a top pick for its track record and trajectory in SPNOI and FFO growth, its balance sheet, and current absolute and relative valuation.
Impact: NEUTRAL
Forecast: After reflecting a slower occupancy recovery, recent debt refinancings, and updated currency assumptions, our 3-year forecast AFFO/unit CAGR remained intact at 9%. We now assume absorption of 50bps in Q4/24, 120bps in 2025, and 100bps in 2026 (ending at 97.0% in-place occupancy). To be clear, rental rate is by far the main driver of NOI growth – not occupancy. To that point, our forecast assumes 33% average new/renewal leasing uplifts and 2.5% annual contractual steps, driving 6%-7% SPNOI growth in 2025 and 2026.
GRT executed an early 5-year extension of Wayfair's lease for 773,000sf near Toronto's airport (we estimate a doubling of the rent). This locks in 1% portfolio-wide NOI growth for GRT, spread over 2025-2026. GRT also renewed the 500,000sf lease at 1451 Allpoints Ct (Indy market) that was close to expiry.
With the newly announced 307,800sf lease, GRT has now back-filled 580,000sf of vacancy, which represents 19% of the US-portfolio vacancy at January 2024. True Value Co.'s chapter 11 filing in October (2% of GRT's rents; pending takeover could be a resolution) and Nautilus/Bowflex's Q2 bankruptcy (478,000sf in Columbus, OH) show that occupancy won't move in a straight line. Today, there remains 2.9mmsf of US vacancy (5% of total GLA).
General: BV/Share reflects IFRS fair value/unit (TDS Calculation). Market Cap on basic units.
Mgmt's commentary affirmed the increasingly constructive narrative on leasing momentum that we have been hearing since the summer. This somewhat paused around US election nervousness in recent weeks, with GRT seeing a pending lease transaction fall away in the 11th hour (a green energy firm was about to take 631,000sf in Louisville). That said, the re-shoring trend by US manufacturing and related firms is firmly back in focus, which should help boost demand for most categories of industrial/warehouse space.
We raised our target price to $93 on a roll-forward to 2026E P/AFFO, and reiterate GRT as our top industrial REIT pick. We find the valuation compelling at 14.6x 2025E P/AFFO and a 6.3% implied cap rate. GRT's multiple is 36% below U.S. peers, whose trading valuations have underperformed over the past couple months.
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 reaccelerate 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.