RBC Comments
No surprises. 2023 was identified as a transition year by RBC when Q4 was released.
May 15, 2023
Nexus Industrial REIT
SP NOI growth tracking as expected
Our View: Nexus Industrial REIT (“NXR”) reported a largely in line quarter, with SP NOI growth tracking 4% as per prior guidance. NXR estimates its portfolio MTM at +22% and is benefitting from robust leasing spreads in its ON and QC assets. That said, with a portfolio average lease term of 7 years, it will take some time to realize on the market rents. As such, we expect FFO/unit growth to be largely flattish this year although quality of portfolio and industrial focus are improving given a flurry of predominantly brand new industrial assets closing near term. Maintain SP.
Key points:
SP NOI growth tracking 4% as per prior guidance: SP NOI growth was +4.4%, benefitting from +65% re-leasing spreads on 194K of leasing (mostly ON), free rent last year from its New Brunswick Office property and contract rent step ups. Occupancy was 97%, flat q/q (retail 91%, office 82%, industrial 99%).
2023 outlook: 4% of industrial GLA expires for balance of the year, of which 77% are in ON where we see 60-70% rental lift on expiring rates of $6.60 PSF. Moreover, new lease at Richmond BC should drive NOI by a further $0.7M by Q3. Portfolio MTM is estimated at +22% (AB -0.3%, SK +12%, ON +50%, QC +35%). That said with a portfolio lease term of 7 years, it will take time to realize on market rents. NXR noted that London is seeing rents in the $11-12 range (vs. $10 not long ago) and demand remains strong.
Acquisition activity - $221M to close in the next few months: NXR acquired 532K SF newly built Ford distribution centre in Casselman for $116.8M. It also disposed of its retail property in Victoriaville QC for $40M and acquired a 247K SF London industrial asset for $36M. 4 more industrial properties are set to close by August totaling 964K SF, $221M.
Development activity: 3 projects underway totaling 523K SF, $87M at 7.9% yield to be completed by H1/24; There is another 1.1M SF under planning stages, in St Thomas, Windsor, London, Hamilton and Calgary.
Leverage: Debt/GBV was 47.3%. NXR has $200M undrawn on its credit facilities and $455M of unencumbered asset pool and continues to build its unencumbered pool to position for credit rating and unsecured debt market. NXR used its credit facility to close on the Casselman asset and as of Q1, $115M of the $244M credit facility drawn is hedged.
Valuation: We estimate NXR’s NAV/unit at $11.00 (unchanged), based on a 5.8% cap (-5 bps – reflecting the Casselman acquisition) vs. reported NAV of $12.13 (-0.5% q/q) based on a 5.62% (-10 bps q/q). Our target of $11 (unchanged) is based on a 5% discount to one-year hence NAV. Notwithstanding large leasing spreads, we expect FFO/unit growth to be largely flattish this year although quality of portfolio and industrial focus are improving. Maintain SP target of $11.00.
Valuation
Our $11.00 price target is based on units trading at a 5% discount to our $11.50 NAVPU one-year hence, which implies a 16x multiple to our 2023E AFFOPU. We believe our target valuation multiple reflects: 1) strong fundamentals relative to other property classes; 2) limited means through which to gain exposure to industrial real estate; and 3) the composition of secondary market assets compared to industrial peers. Based on relative risk-adjusted return expectations, we rate the REIT’s units Sector Perform.
Upside scenario
Our $14.50 upside scenario assumes that NOI growth exceeds our forecast by ~2%, cap rates compress by 25 bps, and units trade at a 10% premium to our NAV per unit one year hence. In this scenario where cap rates are compressing and NOI is exceeding our forecast, we think a higher P/NAV multiple would be warranted.
Downside scenario
Our $7.50 downside scenario assumes that NOI growth falls short of our forecast by ~2%, capitalization rates increase by 25 bps, and units trade at a 25% discount to our NAV per unit one year hence. In this scenario where cap rates are expanding and NOI is falling short of our forecast, we think a lower P/NAV multiple would be warranted.