Dream Industrial Real Estate Investment Trust T.DIR.UN

TD 2

[retiredcf]

Dream Industrial REIT

(DIR.UN-T) C$14.54

Well-positioned for Inflationary Times Like This

Event

Post-Q1/22 update (initial views: link).

Impact: SLIGHTLY POSITIVE

Ideal Inflation Hedge. DIR's results and management commentary on the conference call reaffirmed our view of the industrial property sector as an ideal way for investors to achieve strong performance during periods of inflation such as today. Yields on DIR's development projects are, thus far, intact (even after upward revisions earlier this year), as cost increases are generally being matched by market rent growth. DIR's meaningful upward 2022 SPNOI growth guidance revision (to 8-10% from an already strong 7%-plus previously) is the result of both robust market rent growth, but also the inflation-based rent indexation built into 90% of DIR's European leases.

Amazon Immunity. In regard to Amazon's revelation of overcapacity within its fulfilment operations, DIR's management believes the bulk of its issues are in the larger and more rural-based warehouses – which is not the REIT's focus. Rather, DIR's small- and mid-sized box focus in more urban/last-mile locations should be relatively less affected by any rising vacancy in the bulk distribution sector. Further, other key sources of space demand (e.g., food/beverage and re-shoring of supply chains) should provide at least some buffer against any deceleration/reversal by Amazon or its competitors.

Forecast/Guidance: Besides the higher SPNOI growth outlook, management's updated guidance included the weakened euro (vs. Canadian dollar) and an intention to use lower leverage (mid-30s D/GBV instead of upper-30ss). All these netted out to leave the 2022 FFO/unit guidance unchanged at "high $0.80s-$0.90". That said, assuming currency headwinds are temporary and market volatility settles down, DIR's underlying fundamental earnings growth potential has clearly improved, and could result in upward revisions later this year or in 2023, in our view.

NAV Raised. DIR's NAV is largely unaffected by the weakened euro since its European assets are largely offset by euro-denominated debt. Our new $16.60 NAV/ unit estimate is +4% on an 8bps lower cap rate and higher NOI run-rate.

TD Investment Conclusion

At a 12% discount to our/consensus NAV, we see compelling value in today's unit price. Our $19.50 target price offers a 39% potential total return