Asset Sales And Deleveraging Will Strengthen Financial Position

Key Takeaways

• Selling noncore assets to deleverage aims to improve financial positions and focus growth on the industrial sector, enhancing net margins.
  
• Strong leasing performance, rent escalations, and strategic acquisitions support stable revenue growth and improved net operating income.
  
• Increased interest expenses and higher general costs may strain net margins amidst declining net income and challenging market conditions in leasing and demand.

Catalysts

A growth-oriented real estate investment trust focused on increasing unitholder value through the acquisition of industrial properties located in primary and secondary markets in Canada, and the ownership and management of its portfolio of properties.

• Nexus Industrial REIT is focusing on deleveraging its balance sheet by selling noncore assets, including office and retail properties. This move is expected to strengthen their financial position and concentrate growth on the industrial sector, potentially improving net margins through reduced debt expenses.
  
• The development projects are progressing, with significant properties like the Titan Park development reaching completion, contributing to NOI. Once fully leased, these projects will enhance revenue, with favorable cap rates providing a boost to the company’s overall earnings.
  
• Nexus plans to take advantage of rent escalations and market rent lifts on lease renewals, with current market rents averaging 26% above in-place rents. This strategy is likely to drive revenue growth and improve NOI over time.
  
• There’s a strong leasing performance, reflected by resolved vacancies and leasing at above market rates. The consistent occupancy and embedded rent escalation provide a stable foundation for ongoing revenue growth and improved net operating income.
  
• Nexus’s focus on new acquisitions and high-quality asset acquisition at attractive cap rates suggests potential revenue enhancement and improved earnings as these new properties start contributing to the portfolio.

Nexus Industrial REIT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nexus Industrial REIT's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 25.1% today to 32.4% in 3 years time.
• Analysts expect earnings to reach CA$67.2 million (and earnings per share of CA$0.66) by about February 2028, up from CA$43.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.9x on those 2028 earnings, up from 11.9x today. This future PE is lower than the current PE for the CA Industrial REITs industry at 18.5x.
• Analysts expect the number of shares outstanding to grow by 2.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.9%, as per the Simply Wall St company report.

Nexus Industrial REIT Future Earnings Per Share Growth

Risks

• The decrease in net income due to $121.1 million lower noncash fair value adjustments on Class B LP units and other investment properties, coupled with high net interest expenses, could negatively impact earnings.
  
• The drop in net asset value (NAV) per unit from last quarter indicates potential weaknesses in the asset portfolio that could undermine future earnings.
  
• The increase in general and administrative expenses, mainly due to higher employee costs and legal fees, suggests pressure on net margins.
  
• Interest expenses rose notably, driven by higher debt levels from funding acquisitions and developments, which may impact net margins negatively.
  
• Challenging market conditions in leasing (such as the competition in Hamilton) and potentially softer market demand in some areas, like Montreal, could affect revenue growth.

Valuation

• The analysts have a consensus price target of CA$8.889 for Nexus Industrial REIT based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$9.5, and the most bearish reporting a price target of just CA$8.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$207.6 million, earnings will come to CA$67.2 million, and it would be trading on a PE ratio of 17.9x, assuming you use a discount rate of 9.9%.
  
• Given the current share price of CA$7.3, the analyst price target of CA$8.89 is 17.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.