TSX:DIR.UN - Post by User
Post by
savyinvestor333on May 04, 2022 7:06am
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Post# 34653966
Scotia Report Positive
Scotia Report Positive
Q1/22 Glance: After two days of sell-off, Here Comes the Catalyst for Unit Price Rebound
OUR TAKE: Positive. DIR unit price is down 12.4% in the last three days (vs REIT sector down 7.1%). DIR is screening ‘very cheap’ to us at a 15% discount to NAV (Exhibit 3), 5% distribution yield and 16x 2023 AFFO multiple. Post strong Q1 results, we expect a rebound in unit price to its IFRS NAVPU of $16.48 in the near-term.
Slightly ahead: Q1/22 FFOPU came in at $0.219 vs $0.188 last year, vs Scotia estimate of $0.212 and consensus estimate of $0.216. NOI came in slightly ($0.5M) ahead of our estimate. FFOPU increased +16.0% on y/ y basis in Q1/22 driven by +10.0% y/y SP NOI (constant currency) growth and over ~$2B acquisition activity. Management has previously provided strong 2022 guidance of ~10% growth in FFOPU and 7% growth in SP NOI – we expect DIR to reiterate the guidance on the conf call tomorrow (at 11 a.m. EST) – this should further support the unit price here.
IFRS NAVPU increased 8.9% q/q to $16.48 vs $15.13 last quarter. DIR recorded sizable FV gains on Investment Properties of $360.7M or $1.39/unit driven by ON and QC. Overall, IFRS cap rate at 4.92% vs 5.02% last quarter. ON and QC portfolios are still carried at high-4% cap rate range for IFRS purposes. Private market has moved to sub-4% cap rate. We should continue to see more FV gains ahead. It is difficult to digest that unit price has reduced to sub-$14.00 in two days.
Very strong rental spreads at 21.3% in 2022: Since end of Q4, DIR has addressed 2.8M sf of 2022 expiries: 1.6M sf in Canada done at spread of 25% and 1.2M sf in Europe done at spread of 16%. This is higher than the leasing activity completed in 2021 i.e., 3.6M sf of leases in Canada at spread of 21% and 1.2M sf in Europe at 10.5%. Note: 2022 lease expiries in Europe has reduced significantly to 0.8M sf now vs 2.76M sf at the start. Also, important to note that annual rent escalator in Canadian portfolio is 2.5%, and 90% of leases in European portfolio are indexed to CPI.
Portfolio occupancy (in-place and committed) was up 50bp q/q in Q1 at 98.7% (and up 150bp y/y). Occupancy increased in all Canadian regions (ON, QC and AB) while it remained flat in Europe at 99%. Clearly, leasing demand has been strong, and we are surprised by the price action (sell-off) in the last few days.
SP NOI (constant currency) grew 10.0% y/y in Q1/22 driven by 5.6% y/y rental rate increase and 270bp y/y occupancy expansion: The growth was driven by ON at 18% and QC at 14% while Europe accelerated to 5.5% (from 3.9% last quarter).
20% Mark-to-market (MTM) rent opportunity as of Q1/22: DIR’s MTM opportunity improved this quarter, with market rents in Canada ~30% higher than in-place rents, led mostly by ON with 48.0% MTM opportunity. European MTM opportunity at 6.0%.
Leverage and acquisition activity: See our recent note for more details – DIR has completed $116M of acquisitions in Q1/22 and $110M in Q2/22 so far. In addition, there is acquisition pipeline of $500M which was previously disclosed. We note that DIR has already raised $230M of equity and $200M of Debenture financing and together with available cash, is fully funded to close all the expected acquisitions. Pro forma acquisitions, we expect leverage to remain under 35%. Significant Development pipeline is at 3.5M sf (vs 3.3M sf last quarter).
| Exhibit 1 - SP NOI Growth (Constant Currency) Growth Came in at 10.0% Y/Y While Occupancy Grew Slightly to 98.7%. |
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| Source: Company reports; Scotiabank GBM. |
| Exhibit 2 - Mark-to-Market Rental Opportunity Continues to Get Better. Market Rents Are ~20% Above In-Place Rents in DIR's Portfolio (vs. ~16% in Q3/21). |
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| Source: Company reports; Scotiabank GBM. |
| Exhibit 3 - DIR is Now Trading at almost 5pt Discount to REIT Sector vs. Average of 7pt Premium in the Last Two Years and Peak-Pandemic Premium Spread of 20pt. |
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