Granite REIT
(GRT.UN-T, GRP.U-N) C$76.29 | US$56.08
Strong AFFO Growth Intact Despite Slower Lease-up
Event
Post-Q2/23 forecast update (initial views here)
Impact: MIXED
Market Rents Continue to Grow: Despite the moderation in leasing velocity back to still strong pre-pandemic levels, market rents are still increasing. Further, despite higher interest rates, asset values are showing signs of stabilization and increasingly being supported by rising replacement costs (this was cited with regard to Prologis' recent portfolio acquisition). With new supply starts down 40%-75% y/y, we see leasing markets being set up for a stronger 2024.
Occupancy Outlook: The drop in headline occupancy to 96.3% was uncharacteristic for Granite and not indicative of any ongoing trend. The cause was a confluence of a large, expected US non-renewal and new US developments coming online still early in their lease-up stages. Exhibit 2 details Granite's four large US availabilities, lease-up of which will drive overall portfolio occupancy for the next few quarters (they represent over 80% of portfolio-wide vacancy). With leasing demand stronger for sub-400,000sf users and depending on rent differentials, Granite may choose to sub-divide one or both of the two larger buildings. With a highly stable tenant base and strong balance sheet, Granite is well-positioned to be patient and wait for optimal lease-up solutions, in our view.
Forecast/NAV: We revised our 2023-2024 FFO/unit and AFFO/unit estimates 3% lower on average, placing our new 2023 FFO/unit estimate in the middle of management's unchanged $4.90-$5.05 guidance range. Besides the earlier- than-expected Q2 vacancy, forecast revisions also include a slower lease-up of vacant space and a weaker USD outlook. Our model assumes in-place occupancy reaches 98% by Q2/24. Interest cost expectations fell slightly based on management's expectation of refinancing the $400mm November 2023 debenture maturity at 4.75% and a reduced utilization of the credit facility. Our forecast two- year AFFO CAGR is still well above-average at 11%, driven by solid SPNOI growth and strong rental increases and relatively low exposure to debt that needs to be refinanced/repriced. Our NAV/unit estimate is -1.6% to $95.00.
TD Investment Conclusion
With a double-digit forecast AFFO/unit CAGR, a high-quality portfolio and tenant base, and a strong track record, we see today's valuation at ~16x P/AFFO (FTM) and 80% P/NAV as compelling.