Our view: After several years of portfolio repositioning, de-leveraging, and challenges in Western Canada, DIR has finally hit its stride. As we look ahead, we see plenty of reasons to remain constructive, including 1) accelerating organic growth, 2) strong AFFOPU & NAVPU growth profiles, 3) a solid balance sheet, 4) an expanding development program, and 5) portfolio quality that’s notably improved. At current levels, we see an attractive risk-adjusted return. Reiterate Outperform, PT to $15 (+$1).
Key points:
Major strides in leasing underpin solid organic growth outlook. In 2021, DIR has completed 2MM sf of leasing at +20% spreads over prior rents, while also incorporating 2.4% annual rent steps. The strong rent growth, coupled with significant leasing completed in 2H/20 propelled Q1/21 SP NOI up 3.1% YoY. With ~440K sf (1.5% of GLA) of committed leases, we see good support for in-place occupancy to rise to ~97% in the coming months. Combined with anticipated rent growth, our 2021E reflect solid +4% SP NOI (vs. mid-single digit growth guidance), followed by 2-3% in 2022E.
Portfolio quality continues to move up the curve; developments ramping up too. Year-to-date, DIR has completed $315MM of acquisitions in Canada (77% of total), Europe (18%), and the US (5%) at a ~4.5% cap rate. As the majority is modern distribution/logistics space (30’ clear heights), with below markets rents (~10%), and select opportunities for intensification, we believe the additions enhance portfolio quality. We’re also encouraged by progress on developments, with 700K sf underway in Las Vegas, Montreal, and the GTA, and 600K sf in planning. Notably, DIR also acquired 30 acres of land in Brampton, ON for $35MM ($1.2MM/acre) with plans for 550K sf of logistics pace. With targeted unlevered yields of 6-8%, we expect the projects to drive incremental NAVPU growth.
AFFOPU estimates tweaked, NAVPU raised. Our 2021E/2022E AFFOPU are $0.67 (-$0.03)/$0.72 (-$0.02) with reductions for less favourable F/X, higher G&A, and cash drag as the $201MM (at $13.55/unit) April equity raise is deployed, partly offset by additional acquisitions and lower interest costs. Our 2020A-2022E AFFOPU CAGR is a solid 10%, ahead of its industrial peers (7%) and our broader universe (3%). Our 2021E FFOPU reflects 10% YoY growth, in line with DIR’s unchanged guidance. Partly aided by a 25 bps cap rate reduction, our NAVPU increased to $13 (+$0.50), with our $13.50 (+$0.25) one-year forward NAVPU reflecting healthy 4% YoY growth.
Maintaining Outperform, PT raised to $15 (+$1) on the increase in our forward NAV and a higher target multiple (10% premium to forward NAV vs. prior 5% premium). DIR is trading at 9% above NAV (21x 2021E AFFO/5.2% implied cap rate), below the 23% premium of its industrial peers and above our universe's 1% discount. Supported by an attractive growth profile, robust industrial fundamentals, below average leverage, and improving portfolio quality, we continue to see an attractive risk-adjusted return.