Echelon Echelon Capital Markets analyst David Chrystal believes Dream Industrial REIT’s “superior organic growth profile and high-quality globally diversified portfolio merit a premium valuation.”
While he thinks that premium will be “tempered by the REIT’s external asset management structure,” he initiated coverage with a “buy” recommendation, seeing the Toronto-based REIT as a “an opportunity to invest in historically tight industrial real estate fundamentals through the largest publicly listed portfolio of Canadian industrial assets.”
“Historically, industrial real estate has been a steady, defensive asset class delivering modest rent and price growth,” said Mr. Chrystal. “However, secular trends – accelerated by the COVID-19 pandemic – have driven a significant increase in demand for industrial space. Among these trends are (1) rapid growth in e-commerce, (2) rise of same-day delivery, (3) supply chain disruption, and (4) re-shoring/near-shoring. We expect these trends will sustain elevated demand for industrial space, particularly in North America and Western Europe.”
In a research report titled Surfing a Secular Wave, the analyst thinks the current “significant” mark-to-market opportunity should drive organic operating income growth moving forward, while its joint venture structures “support external expansion and growing stream of fee income.”
“Management estimates that current market rents are approximately 35-40 per cent above in-place rents, owing to outsized exposure to the exceptionally tight Greater Toronto Area (GTA) and Greater Montreal Area (GMA), which represent more than 70 per cent of Canadian GLA,” he said. “High double-digit lifts on Q422 leasing activity within the REIT’s Canadian portfolio showcase the significant upside in marking expiring leases to market. On the back of a 10.5-per-cent increase in same-property NOI in 2022 (constant currency), management is guiding toward a similar level of growth in 2023. Should market rents remain flat (or continue to trend higher), we could see the REIT post several years of organic growth in the low double digits.”
“DIR’s portfolio includes investments in three JVs, most notably a 10-per-cent interest in a JV established to privatize Summit Industrial REIT earlier this year. JV structures allow the REIT to acquire interests in large portfolios alongside major institutional partners while reducing capital outlay and risk. Additionally, the REIT earns property management fees from the entire asset base, thereby enhancing return on equity. We believe that in the near term, external growth will focus on expanding existing JVs.”
He said a target of $17 per unit, which equates to a potential 12-month total return of over 18 per cent. The average on the Street is $16.89.