Our view: Our constructive outlook on DIR is intact post Dream Office’s recent sale of 12.5MM DIR units for $178MM ($14.20/unit; stake reduced to 4.9% from 9.4%) and Q1 results that were ahead of our call. We’re encouraged by the double digit start to organic growth, which coupled with a resilient outlook puts DIR in solid shape to hit the top end of its guidance. Importantly, the Summit JV and a growing development pipeline provide visibility into incremental sources of earnings and NAV upside. In short, we like the setup at these levels. Maintaining Outperform, $17 PT.
Key points:
Organic growth off to strong start; 2023 should hit top end of guidance. SP NOI increased a solid 13% YoY from higher rents and occupancy. Regionally, growth hit double-digits in both Canada (+14%) and Europe (+12%), while the US lagged (+3%). Leasing spreads were exceptionally strong at 41% YTD, incl. 49% in Canada and 13% in Europe (and +150% in SMU JV), while in- place occupancy edged up to an elevated 98.1% (+20 bps QoQ). Supported by strong demand across regions, markets rents that are 37% above in- place (and rising), and CPI-indexation on a substantial portion of European leases, DIR expects to hit the top end of its +8-10% SP NOI growth guidance.
Eyeing investments through Summit JV, with ability to juice returns. A preference for deploying capital through the Summit JV seems logical in our view, given DIR’s ability to boost returns through fee income and robust Canadian industrial fundamentals. Notably, DIR intends to allocate up to $300MM of equity capital to the JV over the next several years, with DIR’s interest ranging from 5-25% on future investments (vs. current 10%). Management noted that GTA acquisitions are under review. Developments are also getting attention with ~$200MM of projects slated for delivery over the N18M at attractive mid-6% unlevered yields. With leverage at DIR’s target mid-30% range, we believe dispositions in the $50MM-range are possible over the coming quarters.
Growth stacks up well. Our 23E/24E FFOPU are $0.97 (+$0.01)/$1.02, with revisions for higher SP NOI growth, the Summit JV, and favourable F/X, partly offset by higher interest costs. Our 2022A-24E CAGR is a solid 7%, close to its industrial peers (6%) but ahead of the sector (4%). Our 2023E is slightly above DIR’s unchanged “mid-$0.90” guidance. We raised our NAVPU to $16 (+$0.50) on higher NOI, partly offset by a higher cap rate, with our $17.50 (+$0.50) 1YR FWD NAVPU reflecting solid 9% YoY growth.
Outperform, $17 PT with the increase in our forward NAV offset by a slight reduction of our target multiple (~3% discount to forward NAV vs. prior parity). DIR is trading at 12% below NAV (17x 2023E AFFO/5.7% implied cap rate), relatively in line with its industrial comps (14% NAV discount) and ahead of our universe (23% discount). We see an attractive entry point, supported by robust industrial fundamentals, a solid growth profile, and expanding pipeline of value creation opportunities.