TD 2 Dream Industrial REIT
(DIR.UN-T) C$13.22
Strong Outlook Intact, and Reflected in New 2024 Guidance
Event
Post-Q4/23 outlook update. Initial views: here.
Impact: NEUTRAL
Management's new 2024 guidance met expectations and reflects a
continuation of the industry's strong leasing fundamentals. Mid-single-digits
(i.e., +/- 5%) growth in both SPNOI and FFO/unit are consistent with our forecast
and consensus. The moderation from last year's 11% SPNOI growth reflects a
combination of tougher y/y comps in H1/24 due to the recent occupancy decline,
followed by an acceleration as y/y comps get easier and the portfolio likely restores
some of its recently lost occupancy. If occupancy headwinds do not recur, we
could potentially see higher SPNOI growth in 2025 — a scenario that management
supported on the conference call. We believe a resurgence in tenant demand and
leasing velocity (aided by declining construction activity in the market) could push
occupancy back to recent highs if today's interest rate volatility settles down.
Capital Allocation/Recycling: DIR continues to focus its acquisition efforts within
the Dream-Summit JV ("DSJV") and in the GTA, where six IPP assets (0.9mmsf)
were added in Q4/23, and an additional 10 properties (2.5mmsf) are now under
contract/exclusive negotiations. DIR has continued to invest in the DSJV at a
10% ownership level, enabling it to limit its use of capital and to significantly
enhance returns through the fee arrangement with GIC. DIR is also pursuing
dispositions, although details were not yet available. DIR has not resumed ATM
equity issuance after stopping it last year.
Forecasts. Our forecast revisions are minimal, and we now foresee an AFFO/
unit CAGR of +8% for the next two years, vs. +11% growth in 2023. Our SPNOI
growth forecast (calculated on a q/q sequential basis, and therefore differs from
management's y/y approach) averages +7% in 2024 and +5% in 2025. Interest
costs/unit are forecast to grow at just 16%/2% for 2024/2025, representing a sharp
slowdown from +152% in 2023. We assume Debt/EBITDA will fall to the low-7x in
2025.
TD Investment Conclusion
At 14.7x P/AFFO, we see today's unit price as compelling for investors to gain
exposure to the favourable underlying market fundamentals and DIR's strong growth
track record.