February 20, 2022
Dream Industrial REIT
In solid shape after another transformational year
Our view: Post in-line, yet strong Q4 results, we remain constructive on DIR. Against a backdrop of robust demand, low availability, and rising rents across its target markets, we believe the portfolio remains well-positioned to post another strong year of organic growth. As well, we’re pleased to see a growing focus on value-add development initiatives amid an intensely bid acquisition market. Coupled with the significant advances in DIR’s capital structure over the last several years, we see an attractive entry with the units hovering near NAV parity. Outperform, $19.50 PT (+$0.50).
Key points:
Solid organic growth, with 2022 guidance reflecting more of the same. SP NOI rose a record 7.6% YoY (5.4% YTD) from higher occupancy and rents, with strong gains across the portfolio (+11% US, +8% Canada, +4% Europe). Leasing velocity remains solid, with 1.9MM sf of 2022 expiries addressed since the end of Q3/21 at average new/renewal spreads of ~20% (+30% in Canada, +12% in Europe). Indeed, as inflationary pressures persist, DIR’s portfolio appears well-insulated with market rents ~19% above in-place, annual escalators in CDN leases, and 90% of its European leases indexed to CPI. In short, a strong setup for 2022, with DIR guiding ~7% SP NOI growth.
Another transformational year of acquisitions; role of developments is clearly expanding. DIR closed out the year with another $500MM of Q4 acquisitions, raising the 2021 tally to a record $2.4B (~4.2% cap rate). A further $400MM of purchases are in progress in Canada and Europe. While income-producing acquisitions will likely still garner most of the attention, we expect developments to play a larger role in DIR’s next chapter of growth. Indeed, the project pipeline expanded to ~$500MM, with post-Q4 land purchases in Calgary that will add to the opportunity set. In short, at targeted yields of ~6%, the projects should provide an incremental source of earnings and NAV growth over the next 2-3 years.
Fine-tuning FFO estimates; NAV bumped up. Our 2022E-2023E FFOPU estimates are $0.89 and $0.94 (+$0.01), in line with DIR’s 2022 guidance range of “high-$0.80 to $0.90”, which implies ~8% YoY growth. Our 2021A-2023E CAGR is 7%, relatively in line with its industrial peers (9%) and our coverage universe (7%). We raised our NAVPU to $16 (+$1) from higher forecast organic growth and a lower cap rate on further industrial compression. Our $17.25 (+$1.25) one-year forward NAVPU estimate reflects solid 8% YoY growth.
Maintaining Outperform, PT raised to $19.50 (+$0.50) on the increase in our forward NAV, partly offset by a slight reduction of our target multiple (15% premium to forward NAV vs. prior ~17%). DIR’s trading at 2% above NAV (21x 2022E AFFO/4.4% implied cap rate), below the 13% premium of its industrial peers, but above the sector’s 6% discount. We continue to see an attractive entry point to a name with a strong earnings and NAV growth profile, improving asset quality, below average leverage, and exposure to a preferred asset class with robust fundamentals.