Dream Industrial Real Estate Investment Trust T.DIR.UN

RBC

[retiredcf]

August 1, 2023

Dream Industrial REIT
Q2 results a bit ahead; fundamentals sound

TSX: DIR.UN | CAD 14.20 | Outperform | Price Target CAD 17.00

Sentiment: Neutral

Our view: DIR reported Q2/23 FFOPU of $0.25, slightly above RBC/Street at $0.24E/$0.24E and up from $0.22 last year (+14% YoY). On balance, results were largely in line with our call, with the +$0.005/unit spread driven by lower G&A and interest costs. Operationally, a strong quarter with robust leasing spreads and solid organic growth, despite some occupancy slippage. Still, we are a bit surprised by the resumption of the ATM use, with the units still trading well below IFRS NAV (proceeds used to pay down higher-cost debt). More colour expected on the call, along with an update to 2023 guidance. Conference call on Wednesday, August 2, at 1PM ET (1-800-319-4610).

Highlights:

• Excluding expansions, SP NOI rose a strong 9.2% (+10% YTD), mainly from higher rents. Including expansions, SP NOI was +11.4% YoY (+12.3% YTD), led by Canada (+12.1% YoY), then Europe (+11.4%) and the US (+2.4%). In Canada, ON led (+19.4%), followed by QC (+8.5%) and W. Canada (+4.9%).

• Committed occupancy fell to 98% (-60 bps QoQ, -110 bps YoY), with Canada at 97% (-100 bps QoQ), Europe at 99.3% (flat), US at 95.6% (-260 bps QoQ), and Summit JV at 99.5% (+30 bps QoQ). In-place declined to 97.6% (-50 bps QoQ, -100 bps YoY).

• Solid leasing spreads. Since Apr-2023, DIR has leased 1.4MM sf at blended new/renewal spreads of 47%, including +61% in Canada and +4% in Europe (Summit JV spread at +125%). Market rents for the portfolio are ~37% above in-place.

• IFRS NAVPU was flat QoQ at $16.97 (+2% YoY). IFRS cap rate edged up to 5.82% (+10 bps QoQ, +75 bps YoY) vs. the current 5.6% implied cap. In Q2, DIR booked a net $2MM portfolio fair value gain.

• Putting capital to work in Summit JV. Including post-Q2 activity, the JV acquired three GTA properties, including two land sites (47 acres) and a 150K sf income property. With talks in progress to buy another 0.9MM sf, DIR expects its equity investment to total $25MM at a going-in yield on equity of 7.5% (including fee income) on income properties, with upside as market rents are ~40% above in-place.

• Progress on developments. In Q2, DIR completed a 154K sf project in Caledon, ON at a target ~7% unlevered yield. Active projects in Canada total $359MM at a 6.4% unlevered yield, with a further 1.8MM sf of projects in the Summit JV.

• Debt/GBV at 36% (+20 bps QoQ, +650 bps YoY), debt/EBITDA at 9x (-0.3x QoQ, +1.2x YoY). Liquidity totals $243MM from cash and undrawn lines. However, post-Q2, DIR resumed use of its ATM, issuing $53MM of equity (3.7MM units at $14.28/unit; ~5.6% implied cap rate). With proceeds used to pay down its lines (at 7% interest rate), D/GBV drops ~70 bps.