May 13, 2024
Granite Real Estate Investment Trust
We like the direction of travel, with good first steps
Our view: In the context of normalizing industrial fundamentals, GRT’s Q1 results were encouraging. Positive traction in occupancy over the next few quarters, particularly in the US, is a likely prerequisite for stronger sentiment to form. Still, progress made post-Q1 is a step in the right direction. Add on a solid balance sheet that creates plenty of optionality, GRT sets up well for higher rates from our lens. Outperform, $89 PT.
Key points:
Operating metrics holding up in the face of broader slowing. SP NOI was +4.9% YoY from higher rents and expansions, partly offset by higher vacancy. Notably, in-place occupancy was flat sequentially at 95% (-280 bps YoY), notwithstanding rising availability per CBRE in the US (+50 bps QoQ to 5.3% vacancy; availability 7.7%) and Canada (+50 bps QoQ to 3.7%). Indeed, GRT’s US in-place occupancy was stable at 92.2%, after four successive quarters of erosion, with US committed rising ~70 bps on the back of 273K sf of recent leasing (overall committed occupancy +40 bps to 95.4%). As well, the moderation of leasing spreads to +10% was anticipated due to Magna’s Graz renewal. Looking ahead, GRT reiterated its call for ~97% committed occupancy by year-end. However, as in-place will likely lag a bit, 2024 quarterly average SP-NOI guidance was tweaked down to the low-end of its +7-8% outlook. With 1.2MM sf of leases in talks, 85-90% anticipated retention, and solid +35% spreads achieved on leases expiring post-Q1 (2024 YTD spreads +16%), we see guidance as achievable.
Nothing wrong with being patient with capital. In Q1, GRT completed its $85MM (6.8% yield), fully leased project in Brantford, ON. The remaining pipeline has narrowed to $73MM, including $21MM of expansion completions this year. The remainder relates to site plan work, although management reiterated it has no plans to undertake speculative projects. Frankly, we’re comfortable with the focus on preserving capital in the near-term. Indeed, compelling strategic or distressed opportunities could surface, while selectively buying back units puts capital to work at accretive pricing (18% below NAV/6.2% implied cap rate).
Forecasts reflect solid growth. Our 2024E-25E FFOPU increase to $5.36 (+ $0.03) and $5.66 (+$0.04) on slightly higher NOI, with our 2024E relatively in line with the $5.38 mid-point of GRT’s unchanged guidance (AFFO guidance range trimmed 1% on higher capex/leasing costs). Our 2023A-25E CAGR is a solid 7%, ahead of its CDN industrial peers (4%) and in line with its US comps (6%). Our NAVPU rose to $87 (+$1), with 1YR FWD NAVPU at $94.
Outperform, $89 PT intact. GRT’s trading at 18% below NAV (15x 2024E AFFO), in line with its CDN comps (19% NAV discount) and below its US counterparts (11% discount). We see a compelling entry point to a name in a preferred subsector with a solid growth profile, strong balance sheet, proven track record, and capacity for further distribution upside.