Outlook Still Healthy Following An Exceptional Few Years Our Conclusion
While 2024 will bring some moderation in very strong fundamentals for
industrial generally, DIR’s outsized presence in ON and QC still allows for
impressive rent growth. We believe electing to prioritize rents is the right
strategy, as the supply influx likely corrects towards the end of the year and
into 2025. We maintain our Outperformer rating.
Key Points
Q4/23 Results: DIR reported Q4/23 FFO per unit of $0.24 (a 3.9% increase
Y/Y), in line with our estimate and consensus. SPNOI ex. foreign exchange
was a robust +9.6% (7.8% ex. expansions), headlined by +14.1% in Ontario.
In-place and committed occupancy decreased 100 bps Q/Q to 96.2%.
Occupancy was impacted by an anticipated ~225k sq. ft. vacancy (Port of
Montreal), a recently completed development in Caledon, and expected
expiries in Europe. DIR expects to re-lease the space at significantly higher
rates.
2024 Outlook Released: DIR is guiding to mid-single-digit percentage
growth in each of SPNOI and FFO/unit, and high-single-digit percentage
growth in in-place rents. The REIT expects occupancy to stay stable in
H1/24, while the middle and back half of the year would see the bulk of the
growth. Growth will largely be driven by ON and QC, while lease-up of
vacancy in Europe will be the main driver in that region.
Supportive Leasing Environment: Lease-up timeframes are generally
longer as DIR continues to aim for market-leading rates. DIR noted
significant requirements in the 80,000-200,000 sq. ft. range in the GTA, with
more demand for move-in ready space. Escalators on leasing in the GTA are
also continuing to hold in in the 4%-4.5% range. In Europe, Spain has lagged
Germany, France, and the Netherlands, on increased supply; however, the
region continues to witness a scarcity of small-bay, urban product.
Balance Sheet And Liquidity: Net debt to total assets was 36.0%, a ~4.3%
increase Y/Y, largely related to the acquisition of Summit Industrial Income
REIT. Interest coverage was 6.0x and DIR had ~$491.9MM in available
liquidity, with access to an additional $250MM via an accordion on its
unsecured credit facility. DIR did not utilize its ATM program this quarter
(previously raised ~$107MM, ~7.5MM units at $14.27 per unit). Subsequent
to the quarter, DIR completed a $200MM unsecured debenture issuance at a
~5.26% yield to maturity. Proceeds will be utilized to reduce the amount
outstanding on the credit facility and to repay existing mortgages.
Cap Rate Tracking: Weighted-average IFRS cap rate was 6.06%,
expanding ~15 bps Q/Q. NAV/unit decreased ~2% when compared to Q4/22.