Laying Out Path to $8.50 Unit Price
OUR TAKE: Slightly Positive. We are increasing our target to $7.75 (+$0.50) as our NAVPU increases to $7.65 (+$0.45). We see a roadmap to a NAV of $8.50 (vs $8.00 previously). See Exhibit 1 for details. This would imply total potential upside of +25%.
We recently initiated coverage on PRV with a 129-page report in which we provided a comprehensive update on the Industrial REIT sector. For details, please refer to our reported titled “PKT and PRV Initiations + Re-visiting Investment Thesis for Industrial Real Estate Sector”.
Q4/21 results confirm our investment thesis is playing out. Management increased its IFRS NAVPU 16% q/q as the industrial portfolio cap rate was reduced to 5.6% from 6.0%. In our initiation report (link), Exhibit 28, we show the cap rate spread between primary and secondary industrial markets. We argued that the spread is too wide, and we could see cap rate compression in secondary markets. With MTV (Montreal, Toronto, Vancouver) markets cap rates in 3’s and secondary still in high 5’s, we could see further narrowing of the spread.
See page 3 for details on Q4/21 results. 2021 lease expiries renewed at 10% rental spread. Almost half of 2022 lease expiries also renewed at 10% plus rental spreads. Management expects total 2022 lease expiries will be renewed at a rate similar to last year (i.e. 10%). Management estimates a mark-to-market rent opportunity in PRV’s industrial portfolio of 26%. PRV achieved SP NOI growth of 4.3% in full year 2021 and looks like to achieve 3% to 5% in 2022.
Distribution yield of 6.2% looks attractive: PRV is trading at a 6% discount to NAV and with a 6.2% distribution yield. PRV has one of the highest distribution yields in our coverage universe, with a manageable 87% AFFO payout ratio in 2022E. In fact, PRV is one of the few names with combination of 5%+ discount to NAV and 5%+ distribution yield.
NAV Road-map . We assume a 5.25% cap rate for the industrial portfolio and 5.8% (-20bp) for the overall portfolio. In the initiation report, we highlighted that the industrial cap rate spread between MTV (Montreal, Toronto, and Vancouver) and non-MTV (Halifax, Ottawa, Calgary, Edmonton, Winnipeg) markets has widened to 159 bp currently, vs a long-term average of 78bp. Of PRV’s portfolio, 48% is based in the Maritimes (Halifax, Moncton), 39% in other secondary markets (Winnipeg, Ottawa), and only 15% in MTV markets. With cap rate transactions in the 2s and 3s in MTV, investors are likely to look outside the core for better yields – this could drive further cap rate compression for PRV.
Q4/21 Earnings Summary
PRV recorded FV gains of $0.97/unit in Q4/21, which equates to 13.7% of its current price. IFRS NAVPU increased to $7.27 or up 16% q/q due to re-valuation of its industrial portfolio. Reported AFFOPU in Q4 was in line with expectations. SP NOI grew 5.5% in Q4/21 and 4.3% in full year. 2022 is also looking good as 50% of 2022 lease expiries have been renewed at 10%+ renewal spreads.
PRV offers a distribution yield of 6.3%, which is the second highest within our coverage group. We recently launched coverage on PRV – see link to our 129-page report in which we reviewed the industrial REIT sector as well. We mentioned earlier that PRV is best suited to investors who are looking for higher yield, but could benefit from higher NAV growth as well if the cap rate spread between primary and secondary markets narrows over time.
In-line AFFOPU: Reported AFFOPU of $0.12 in Q4/21 in line with Scotia estimate of $0.117 and consensus estimate of $0.12. FFOPU came in at $0.114, slightly below our estimate of $0.128 and consensus estimate of $0.132. The variance was due to non-cash long-term incentive expenses – this gets added back in AFFO but not in FFO. NOI was in line with our estimate.
IFRS NAVPU grew to $7.27 from $6.26 last quarter (+16% q/q), supported by $58.6M of FV gains ($0.97/unit) in Q4 vs. a $2.6M loss ($0.05/unit) in Q3/21. While FV gains are not broken down by segment, we expect the majority of FV gains came from cap rate compression on the industrial portfolio.
10% rental spreads in 2021 and 2022 so far: Occupancy was down slightly to 98.4% vs. 98.5% in Q3/21. Leasing spreads continue to look good with 97% of leases maturing in 2021 renewed at average renewal spread of 10.2% (previously disclosed) and almost half of 2022 expiries were renewed at a spread of 10.1%.
SP NOI grew +5.5% y/y in Q4/21 (+5.0% excl. bad debt expense), up from 3.5% last quarter. SP NOI growth was led by industrial SP NOI growing 7.3% y/y, followed by retail at 2.9% and office at 2.5%. We think that SP NOI growth acceleration this quarter was partially a function of the larger weighting of industrial in its asset mix (64% of base rent was from industrial this quarter vs. 58% in Q3 and 56% in Q2).
Leverage reduction: Leverage fell to 53.1%, down from 58.2% last quarter and 57.8% at Q4/20. PRV looks to have made good progress toward management’s 50% near-term leverage target this quarter. PRV’s quarterly leverage reduction was helped by its $83M bought deal offering (including private placement from Collingwood Investments) in October. Liquidity at year-end was $51M (includes cash on hand and availability on its credit facility).
Acquisition activity (previously announced): PRV acquired $163M of properties in Q4/21 and $297M for full year 2021. This quarter’s acquisitions consisted of the previously announced 16 property industrial portfolio for a total of $163.2M at a 5.9% weighted average cap rate. The majority of PRV’s acquisition activity this year consisted of industrial properties and PRV has successfully grown its industrial exposure (by base rent) from 49% at Q4/20 to 64% at Q4/21.
Q4/21 Earnings Summary
PRV recorded FV gains of $0.97/unit in Q4/21, which equates to 13.7% of its current price. IFRS NAVPU increased to $7.27 or up 16% q/q due to re-valuation of its industrial portfolio. Reported AFFOPU in Q4 was in line with expectations. SP NOI grew 5.5% in Q4/21 and 4.3% in full year. 2022 is also looking good as 50% of 2022 lease expiries have been renewed at 10%+ renewal spreads.
PRV offers a distribution yield of 6.3%, which is the second highest within our coverage group. We recently launched coverage on PRV – see link to our 129-page report in which we reviewed the industrial REIT sector as well. We mentioned earlier that PRV is best suited to investors who are looking for higher yield, but could benefit from higher NAV growth as well if the cap rate spread between primary and secondary markets narrows over time.
In-line AFFOPU: Reported AFFOPU of $0.12 in Q4/21 in line with Scotia estimate of $0.117 and consensus estimate of $0.12. FFOPU came in at $0.114, slightly below our estimate of $0.128 and consensus estimate of $0.132. The variance was due to non-cash long-term incentive expenses – this gets added back in AFFO but not in FFO. NOI was in line with our estimate.
IFRS NAVPU grew to $7.27 from $6.26 last quarter (+16% q/q), supported by $58.6M of FV gains ($0.97/unit) in Q4 vs. a $2.6M loss ($0.05/unit) in Q3/21. While FV gains are not broken down by segment, we expect the majority of FV gains came from cap rate compression on the industrial portfolio.
10% rental spreads in 2021 and 2022 so far: Occupancy was down slightly to 98.4% vs. 98.5% in Q3/21. Leasing spreads continue to look good with 97% of leases maturing in 2021 renewed at average renewal spread of 10.2% (previously disclosed) and almost half of 2022 expiries were renewed at a spread of 10.1%.
SP NOI grew +5.5% y/y in Q4/21 (+5.0% excl. bad debt expense), up from 3.5% last quarter. SP NOI growth was led by industrial SP NOI growing 7.3% y/y, followed by retail at 2.9% and office at 2.5%. We think that SP NOI growth acceleration this quarter was partially a function of the larger weighting of industrial in its asset mix (64% of base rent was from industrial this quarter vs. 58% in Q3 and 56% in Q2).
Leverage reduction: Leverage fell to 53.1%, down from 58.2% last quarter and 57.8% at Q4/20. PRV looks to have made good progress toward management’s 50% near-term leverage target this quarter. PRV’s quarterly leverage reduction was helped by its $83M bought deal offering (including private placement from Collingwood Investments) in October. Liquidity at year-end was $51M (includes cash on hand and availability on its credit facility).
Acquisition activity (previously announced): PRV acquired $163M of properties in Q4/21 and $297M for full year 2021. This quarter’s acquisitions consisted of the previously announced 16 property industrial portfolio for a total of $163.2M at a 5.9% weighted average cap rate. The majority of PRV’s acquisition activity this year consisted of industrial properties and PRV has successfully grown its industrial exposure (by base rent) from 49% at Q4/20 to 64% at Q4/21.