CA - Being Bullish On REITs We Feel Nexus Industrial REIT Has Room To Run

2023-05-15 14:43:14 ET

Summary

• Industrial REITs make for great investment as they could house the Amazons and Teslas of the future.
• Nexus is at the right valuation at the moment with a P/FFO figure at 11.99, considerably lower than other notable REITs.
• For the dividend alone, this investment makes a lot of sense.

The recent price declines of Nexus Industrial REIT ( NXR.UN:CA ) gives shareholders a buying opportunity for the impressive 6.69% dividend yield.

The industrial REIT sector is filled with nice bargains that have a bullish outlook . Across the border in the United States, the large-cap Prologis ( PLD ) and mid-cap EastGroup Properties ( EGP ) are trading at P/FFO valuations above 20x. Nexus, on the other hand, is currently attractively valued with a P/FFO figure of 11.99.

Nexus may just be the pick for those who are looking for significant current yield mixed in with growth. Value investors also have plenty of factors to like about this stock as you'll see in this article.

Why Industrial REITs?

We did recommend a commercial REIT with a retail focus. However, we feel industrial REITs are an even better option. In the long-term, there is a good chance for investors to see good gains from this type of REIT. If you were to look at the gains that Amazon ( AMZN ) - warehouses, fulfillment centers - and Tesla ( TSLA ) - manufacturing - have made, it makes a lot of sense to explore this investment option.

Growth and Income Play

Passive income investors will love Nexus Industrial because the REIT continues to grow its portfolio and pay a monthly dividend that has kept increasing.

Nexus Industrial is a moderate buy as deemed by six Wall Street analysts as illustrated by MarketBeat. There is a possible upside in the stock price of 25.6% according to various price targets. Nexus is a leading dividend payer with a relatively high yield. The cash dividend payout ratio ('TTM') stands at 80.54%. This figure has declined slightly in the past couple of months, which is quite encouraging.

At current prices, Nexus appears to be undervalued. It is trading at 13.9% below Simply Wall ST's estimate of its fair value. Additionally, revenue is projected to grow 12.38% per year. As it is, earnings have grown 37.7% annually over the past 5 years.

FFO and AFFO have gone up significantly. When looking at per unit amounts , the FFO per unit - basic and diluted - have gotten a boost. The normalized FFO per unit - basic and diluted - has decreased, though. AFFO per unit has dropped. In terms of normalized figures, AFFO per unit both basic and diluted have fallen. Nonetheless, the financial picture does look good with NOI for the year ended December 31, 2022 coming in at $95.8 million. This figure is $39.9 million higher than the prior year NOI of $55.9 million. A majority of the incremental NOI came from acquisitions ($38.2 million).

There have been some large-scale acquisitions done by the company in the past year. The most recent one being a newly constructed 532,000 square foot distribution center located in Casselman, Ontario. The total capex for this was $116.8 million. Nexus is focusing a lot of its acquisitions in Canada's primary markets of Ontario, Alberta and Quebec. This is in line with its existing geographic mix which features a property composition concentrated in these three provinces. You can refer to the image below taken from the MD&A - Q4 2022.

Nexus is well-diversified, with top 10 tenants, including Loblaw (LBLCF), representing just under 40% of its total portfolio ABR (annual base rent). Rental rates have kept rising in most of the markets that the REIT is present in. There has actually been unprecedented demand for warehouse and logistics space mainly due to the pandemic which hurried up structural changes in goods distribution.

Dividends

Nexus pays a relatively high 6.69% dividend yield compared to its Industrial REIT peers. The dividend has stayed the same over 3 years after it was increased by an astounding 300% in February of 2021, and comes with a fairly safe 82.65% payout ratio. Is there room for further increases? This article makes the case that it could be possible.

For one thing, in the US, REITs are required to pay out at least 90% of the profits as dividends. Now we weren't able to find the Canadian regulations, so we are going to assume that there must be some similarity as it relates to this. Therefore REITs make for great income plays.

Looking forward the REIT should continue to see vigorous growth, as supported by trends in the industrials space. It's also well-positioned for a sustained inflationary and rising rate arrangement in 2023, as demonstrated by its strong growth in rental rates on new leases, suggesting pricing power. Furthermore, higher interest rates increase the replacement cost of its properties, thus making them more valuable. Last year, central banks including the Bank of Canada increased interest rates aggressively in an effort to combat inflation. This is indicative of the macro environment going forward.

Risks

In its risk analysis, the debt is an issue as operating cash flow does not cover it well enough. The dividend safety may be argued to be questionable too. Earnings may drop by an average of 37.4% per year over the next 3 years, according to forecasts.

Conclusion

For the income alone, investors will love the stock. While you're not going to get the yields that Chinese REITs offer, it is always best to invest in North American stocks in our view. Some of the REITs exposed to China are Sasseur REIT and Dasin Retail Trust with yields at 9% and 44.24% respectively. However, there is an issue of reliability in the statistics issued in Asian markets and also the difficulty in moving money across. For now, Nexus provides the yields that are really tough to beat.

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