Canadian Urban Industrial Developments Will Secure Robust Tenant Demand

Key Takeaways

• Embedded rent escalations, high tenant demand, and modern asset acquisitions drive revenue growth, enhancing portfolio quality and reducing earnings volatility.
  
• Development of state-of-the-art facilities and strong balance sheet management enable flexible, accretive investment and long-term earnings expansion.
  
• High vacancy and leasing risks, downward asset revaluation, and reliance on nonrecurring income sources may undermine revenue stability, margins, and long-term value growth.

Catalysts

Nexus is 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.

• Significant embedded rent escalation in long-term leases, as evidenced by new contracts featuring annual rent steps and substantial rent lifts on renewals (such as the 38% increase and the move from $3/ft to $7/ft on recent leasing), is set to drive sustained same-property revenue and NOI growth over the next several years.
  
• Successful capital recycling-disposing of noncore or legacy assets while acquiring high-quality, modern industrial properties in strategic urban Canadian hubs-positions the portfolio to benefit from higher tenant demand driven by supply chain re-localization, supporting long-term rent growth and asset appreciation (impacting revenue and NAV).
  
• Ongoing development and near-term completion of new, state-of-the-art industrial and small-bay facilities in urban and high-growth regions (Calgary, St. Thomas, Hamilton, Kelowna, and Richmond) are bringing on new, higher-yielding assets that enhance revenue and scale, with stabilized cash flows and double-digit project ROIs supporting future earnings growth.
  
• Minimal vacancy risk evidenced by high pre-leasing rates for developments and rapid backfilling of vacated spaces, along with strong tenant demand in core markets, enables consistent occupancy and absorption, underpinned by ongoing e-commerce expansion and urbanization trends (supporting revenue and reducing earnings volatility).
  
• Extension and upsizing of the credit facility, combined with debt reduction from property sales and lower interest expense, provide balance sheet flexibility to pursue further accretive investments and development projects, enhancing net margins and positioning the REIT to capitalize on institutional interest in the industrial real estate sector.

Nexus Industrial REIT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nexus Industrial REIT's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.3% today to 38.4% in 3 years time.
• Analysts expect earnings to reach CA$77.9 million (and earnings per share of CA$0.66) by about September 2028, up from CA$29.2 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 14.2x on those 2028 earnings, down from 18.9x today. This future PE is lower than the current PE for the CA Industrial REITs industry at 15.2x.
• Analysts expect the number of shares outstanding to grow by 0.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.27%, as per the Simply Wall St company report.

Nexus Industrial REIT Future Earnings Per Share Growth

Risks

• The company has vacant and hard-to-lease properties in secondary markets such as the 115,000 sq ft Glover Road property in Hamilton and the Peavey Mart location in Red Deer, highlighting exposure to weak tenant demand and the risk of elevated vacancy rates in less robust markets, which could negatively impact revenue stability.
  
• While new development projects are being completed, several face leasing risks with some still unleased at substantial cost outlays; if these remain vacant, ongoing carrying costs and lack of rental income will put pressure on net margins and reduce earnings contribution from new assets.
  
• Nexus saw a significant net loss this quarter ($7.6 million versus a $43.5 million profit last year), largely due to negative fair value adjustments on investment properties and Class B units, suggesting the portfolio is subject to downward revaluation risk in a changing interest rate or property market environment, which could impact stated asset values and depress NAV per unit over time.
  
• The overall weighted average cap rate increased and NAV per unit slipped, indicating valuation pressure in its property portfolio; continued capitalization rate expansion across the sector-often correlated with persistent high interest rates-would likely further compress property values and potentially decrease long-term earnings and unit price appreciation.
  
• The company's recurring growth in net income and funds from operations is currently being partially maintained by nonrecurring factors (e.g., lease termination income, tenant reimbursement for capital improvements, opportunistic asset recycling) rather than strong, broad-based organic rent growth, which could lead to revenue and margin volatility if these sources dry up or replacement tenants are not secured quickly in future downturns.

Valuation

• The analysts have a consensus price target of CA$8.312 for Nexus Industrial REIT based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$202.6 million, earnings will come to CA$77.9 million, and it would be trading on a PE ratio of 14.2x, assuming you use a discount rate of 10.3%.
• Given the current share price of CA$7.73, the analyst price target of CA$8.31 is 7.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.