TDW CommentsQ3/24: RESULTS IN-LINE; DISPOSITIONS
REMAIN ON TRACK
THE TD COWEN INSIGHT
NXR delivered a largely in-line quarter that reinforced the potential for AFFO/unit growth to resume in the near/medium term. With dispositions progressing well and NXR moving closer to a 100% and all-Canadian industrial concentration, we could become more constructive as management executes, and we see the full impact on NXR's trajectory of AFFO/unit growth and debt metrics.
Impact: NEUTRAL
Q3/24 Results. NFFO/unit (f.d) of $0.188 was largely in line with our estimate/consensus and was -5% y/y on higher interest expense.
NXR delivered a solid quarter as industrial fundamentals held steady in the quarter highlighted by +5.6% SPNOI growth (+4.3% across entire portfolio). Management reiterated its mid-single-digit SPNOI growth target for the industrial portfolio in 2024. Leasing activity remains strong and should continue to benefit from rent growth with healthy estimated +26% mark-to-market spreads. By market, Calgary and London are holding steady, while management noted that Montreal and the GTA (including Hamilton-Cambridge-Guelph) have seen some pockets of weakness owing to new supply coming online.
Capital Recycling. Further progress was made on dispositions, with Nexus completing the sale of six office properties (50% interest) in Montreal for $17.25mm (at the REIT's interest). Subsequent to the quarter, Nexus completed the sale of its remaining Old Montreal office portfolio (and a vacant land parcel) and reiterated its $110mm non-core disposition target for H2/24. Several assets marketed for sale remain in various stages of agreements, including the legacy retail portfolio, four non-core industrial assets, and two office assets expected to close by year-end. Given the priority on deleveraging and asset sales, management does not expect to be active on acquisitions in the near term.
Forecasts. Our AFFO/unit forecast has declined slightly for 2024 (lower NOI) and is largely unchanged in each of 2025 and 2026. Our forecast assumes success on both dispositions and development lease-up, and calls for an 8% two-year CAGR in AFFO/unit to 2026. With ~$200mm in total dispositions forecast for 2024-2025 and no new acquisitions, we forecast that Debt/EBITDA will decline to 9.6x in 2025 from 11.4x in 2023. Our $8.40 NAV/unit estimate is -2% q/q.
As the REIT with the highest concentration in Canadian industrial property, NXR has the potential to be a focus name for investors. We see potential for success on dispositions, reducing balance-sheet leverage, meeting/exceeding expectations, and resuming sustainable AFFO/unit growth.
Our Investment Thesis
At ~93% of NOI, Nexus stands out versus its peers as having the highest concentration in the Canadian industrial property market. Given that the industrial portfolio is largely concentrated in secondary markets, we do not expect SPNOI growth to match that of its pure-play industrial peers; however, we expect respectable SPNOI growth of ~4% across our forecast horizon. We believe Nexus is now in a position to deliver sustainable AFFO/unit growth. That said, we will await more consistent performance on this front, along with the execution of its planned dispositions before revisiting our rating.
Base Case Assumptions
Interest rates evolve generally in line with TD Economics' outlook.
Demand for industrial space remains strong, driving modest market rent growth in 2024 before reaccelerating in 2025.
SPNOI growth in line with our medium term base case.
Sale of the retail and office portfolio occurs in the near-to-medium term.
Upside Scenario
Interest rates decline more quickly than anticipated.
Demand for industrial space strengthens more than expected with market
SPNOI growth exceeds our medium term base case.
Nexus sells its retail and office portfolio sooner than expected.
Downside Scenario
Interest rates rise further or remain elevated for longer.
Demand for industrial space weakens, pulling occupancy rates and market rents lower.
SPNOI growth lags our medium-term base case.
Nexus takes longer than expected to sell its retail and office portfolio.
Q3/24 Portfolio SPNOI increased to +4.3% from last quarter’s +3.3%, benefiting from the lease up of 1751-1771 Savage Rd (contributed $1.2mm in NOI).
Industrial SPNOI growth was +5.6% in Q3/24. Industrial estimated market rents were +2.1% q/q to $12.91 (mark-to-market largely unchanged q/q at ~26%). In Q3/24, NXR renewed five industrial tenants (~181,000sf) at +28% uplifts. Management reiterated its mid-single digit SPNOI growth target for the industrial portfolio in 2024.
Portfolio occupancy decreased slightly q/q to 95% (disclosure is rounded to the whole number) versus 96% in Q2/24. Office fell to 67% (versus 73% in Q2/24) owing to the office dispositions, while Industrial and Retail were flat.
Acquisitions
In Q3/24, Nexus completed the previously-announced 62,000sf industrial property acquisition in Sherbrooke, QC for $16.6mm ($268/sf or 6% going-in cap rate). The purchase price was partially satisfied with 456,700 units at $10/unit (45% premium to the then trading price). The remainder was paid in cash. The lease term was for 10 years and features 3% annual escalators.
Dispositions
In Q3/24 and post Q3/24, Nexus completed the sale of six office properties (50% interest) in Montreal for $17.25mm at the REIT’s interest, as well as the remaining Old Montreal office portfolio and an excess land parcel. Management reiterated its $110mm non-core disposition target for H2/24.
Development (Figure 7)
The developments at 190 Glover Rd. (Hamilton) and 1285 Hubrey Rd. (London) were completed with expected yields of 5.9% and 8.0%, respectively. At 190 Glover Rd., the space is currently being marketed. The active development at 70 Dennis Rd. (St. Thomas) remains on track to be completed in Q1/25 (expected yield of 9.0%) and is 100% leased to a mass timber manufacturer “Element5”. In Calgary, the 115ksf development on 102 Avenue SE commenced post-quarter end.