Nexus Industrial REIT T.NXR.UN

RBC

[retiredcf]

Their upside scenario target is $14.50. GLTA

March 15, 2023

RBC Dominion Securities Inc.
Jimmy Shan (Analyst)
[phone], [e-mail]
Pammi Bir, CPA, CA, CFA (Analyst)
[phone], [e-mail]
Tom Callaghan, CA, CPA (Analyst)
[phone], [e-mail] Bhaven Shah (Associate)
[phone], [e-mail] Ananthan Vijayakumar, CPA (Senior Associate) [phone], [e-mail] Arete Zafiriou, CFA (Senior Associate)
[phone], [e-mail]

Sector Perform

TSX: NXR-U; CAD 9.82

Price Target CAD 11.00 ↓ 11.50

Nexus Industrial REIT

Flattish 2023 FFOPU growth but progress made to be institutional

Our view: Nexus Industrial REIT (“NXR”) reported a largely in line quarter. We expect ~4% growth in 2023 NOI off Q4/22 run-rate based on robust rent spreads in 2023. NXR’s active acquisition program should high grade portfolio although accretion will likely be flat, while developments won’t kick in until next year. We view positively progress made to become more ‘institutional’ with flat 2023 FFO/unit growth a near term price to pay despite strong rent spreads. Where NXR could surprise on the upside is if it can sniff out great deals in a market where many are on the sidelines. Maintain SP.

Key points:

• Steady growth; big rental lifts on small leasing activity in Q4: SP NOI growth +2%; Occupancy was 97%, flat q/q (retail 90%, office, 84%, industrial 99%). NXR did achieve high re-leasing spreads (+63%) on the small amount of leasing done in Q4 in ON & QC, indicative of rent upside on its 2023 leasing maturities.

• 2023 outlook: ~4% growth in 2023 off Q4/22 run-rate NOI. In 2023, 6% of industrial GLA expires, of which 76% are in ON where we see 60-70% rental lift on expiring rates of ~6 PSF. Overall, we estimate that rent spreads in 2023 to be ~50%, which combined with step ups, and new lease at Richmond BC should drive NOI by 4% off Q4/22 run rate.

• Active acquisitions with $317M bought/under contract, mostly new and in major markets: 1) NXR acquired 532K SF newly built Ford distribution centre in Casselman (near Ottawa) for $116.8M, $220 PSF, 2) NXR has under contract $199.5M at an average 5% cap rate: 140K SF in Burlington (~$375 PSF), 190K SF in Laval (~$344 PSF), 83K SF in Calgary (~$376 PSF) and 325K SF in London (~$155 PSF – below market). NXR is also under diligence on 305K SF in London for ~$55M ($180 PSF). Management indicated acquisitions will be funded with class B units and drawing on new unsecured $375M credit facilities, where rates can be swapped for 5 year fixed at ~5% today.

• Development equally active: 1) NXR will be breaking ground on 100K SF expansion at 1285 Hubrey, London where lease discussion is underway and a 312K SF in Regina where a tenant has been secured on 2/3 of space. Development yields are an attractive 8.75%-10%.

• Finding great deals a potential catalyst: We estimate NXR’s NAV/unit at $11.00 (unchanged), based on a 5.85% cap (+20 bps) vs. reported NAV of $12.19 (-2% q/q) based on a 5.72% (+22 bps q/q). Our price target of $11 (-$0.50) is based on a 5% discount to one-year hence NAV. We view positively progress made to become more ‘institutional’ with ~17% asset growth into newer assets, industrial to >90% and steps taken to be credit rated. We think the near term price to pay is flat FFO/unit growth in 2023 despite strong rent spreads. Where NXR could surprise on the upside is if it can sniff out great deals in a market where many are on the sidelines. Maintain SP.