Our view: Post a slight Q1 shortfall vs. our call, we remain constructive on DIR. Occupancy will likely average out at flat for 2024 amid normalizing industrial fundamentals, yet the organic growth setup remains solid supported by a substantial mark-to-market opportunity on expiring leases. Complemented by anticipated development completions and its private capital partnerships, we see attractive earnings & NAV growth that stands out better than most at a very reasonable price. Outperform, $16 PT.
Key points:
Organic growth outlook sticks, with leasing spreads carrying the load.
SP NOI rose a healthy 6.4% YoY, as higher rents more than offset lower occupancy. Notably, new/renewal leasing spreads remain robust at 43%. No doubt, new supply, rising sub-lease space (particularly among 3PL users), and slower leasing have continued to push broader market availability higher. Indeed, DIR expects some further occupancy slippage over the next couple quarters (vs. -30 bps QoQ to 95.7% at Q1/24), before reverting higher in Q4 (could see quarterly swings of +/- 50-100 bps). Still, supported by a significant ~32% gap between market and in-place rents, DIR upheld its mid-single-digit % 2024 SP NOI growth guide, with an acceleration anticipated next year. We see guidance as achievable, particularly with ON and QC comprising nearly 50% of maturing GLA through 2025 where market rents are ~90% above in-place levels.
Developments garnering most of the attention from capital; some recycling ahead too. DIR emphasized a focus on completing its $340MM project pipeline over the next 18 months, where target unlevered yields remain attractive at ~6.6%. Of note, 0.5MM sf of leases were signed/in final stages, including the remaining 40% of the 200K sf at its Mississauga project at similar terms as the lease announced last quarter (i.e., $21/sf net, plus 4% annual steps). The Summit JV is also active, with ~$180MM of YTD acquisitions across 0.8MM sf and more in the pipeline (DIR share at 10%; high-6% mark-to-market cap rate). On funding, we’re pleased to hear that talks are in-progress on $100MM of non-core dispositions.
Forecasts reflect solid growth. We tweaked our 2024E-25E FFOPU to $1.01 (-$0.01) and $1.10 (-$0.01), with revisions mainly for JV related income. We expect earnings momentum to accelerate in 2025, with our 2023A-25E CAGR at a strong 6%, ahead of its industrial peers (4%) and our coverage universe (2%). Our current and one-year forward NAVPU estimates are unchanged at $15.50 and $17.50, with the latter reflecting 13% YoY growth.
Maintaining Outperform, $16 PT. DIR is trading at 16% below NAV (6.4% implied cap rate/15x 2024E AFFO), ahead of its industrial peers (21% NAV discount) and the sector (24% discount). Overall, we continue to see an attractive entry to a name in a preferred subsector with strong fundamentals, a solid earnings and NAV growth profile, improving asset quality, and multiple channels to create value.