Post by
hawk35 on Nov 12, 2024 6:23pm
RBC Comments
November 12, 2024
Nexus Industrial REIT
Price Target $9.00 from $8.50
Steady progress on several key fronts
Our view: Nexus Industrial (“NXR”) reported FFO/unit (normalized) of $0.188, vs. RBC/Consensus estimates of $0.184/0.183. NXR is making steady progress on three key fronts: 1) Payout ratio improved to 101% vs. 108% in Q2; 2) More office assets were sold furthering its pure play industrial status; and 3) 2025 is a relatively big year for lease renewals at large spreads – we estimate 5.5% SP NOI growth, with growth supplemented by development activity, resulting in 2025E FFO growth of +10%. Valuation looks fair on a relative basis, trading at a tighter discount than LTA vs. industrial peers. PT to $9.00 (+6%). Maintain SP.
Key points:
SP NOI growth accelerated slightly to +4.3% driven mostly by the inclusion of the Belvedere Club lease in Richmond BC (industrial SP NOI +5.6%). Sequential increase of +3% was also driven by lease up from vacancies at two sites in London and Calgary and acquisitions. Industrial occupancy was 97% (+0 bps q/q). Retail & office occupancies were 88% & 67%, respectively.
2025 – Opportunity to capture large renewal spreads: We are modeling 5.5% NOI growth in 2025 driven primarily by rent growth on renewals. 10% of industrial leases mature next year with 60% of the leases in ON expiring at $6.91 PSF (vs. ~$12 PSF market). We estimate renewal spread of +60% in 2025. Portfolio wide MTM rent opportunity stands at 26% (25% in Q2), with ON and QC having the most upside at 45% & 32%, respectively. NXR noted market rent softening in Cambridge/Guelph and Montreal while London remained strong.
Development activity to supplement NOI growth next year: NXR has completed 3 development projects in Q2/Q3 (Regina, London, Hamilton) and one (St. Thomas) to be completed by Q1/25, totaling $136M with an average yield of 8%. The Hamilton property is the only remaining one to be leased – expected to be leased by Q1/25 at slightly lower rent. We estimate incremental NOI/FFO contribution from Q3 to be $1.8M/$0.9M per quarter.
Capital Allocation activity: 1) Acquisitions: None new announced; 2) Asset Sales: NXR sold 6 50%-owned MTL office assets for $17.3M at share. Assets held for sale amount to $104M at various stages of agreement comprising mostly retail & office. 94% of Q3 NOI was in industrial – proforma held for sale assets, almost all will be in industrial, cleaning up its pure-play story.
Valuation looks fair on a relative basis: We estimate NXR’s NAV/unit at $10.00 (+5%), based on a 6.25% cap (-15 bps) vs reported NAV of $13.06 (-1% q/q) based on a 5.8% (0 bps q/q). Our price target of $9.00 (+6%) is based on a 15% discount to one-year forward NAV, discount in line with LTA. NXR trades at an implied cap of 6.7% (40bps wide to peers), 12.4x 2025E AFFO, 2.3x lower than peers, which is tighter than 3x historical average.