Dream Industrial Real Estate Investment Trust DREUF

TD

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Have a $15.00 target. GLTA

EXPECTED VALUATION REBOUND SUPPORTED BY 2025 "SUPPLY VACUUM"

THE TD COWEN INSIGHT

Recent investor meetings we hosted with management confirmed a strong operating environment, which drives our upper-single-digit forecast SPNOI growth. This also reinforced our expectation of market occupancy and rent growth trends to rebound next year coinciding with a "supply vacuum". AFFO/unit growth is seen accelerating in 2025, then slowing in 2026, with most low-cost debt refinanced by then.

Impact: NEUTRAL

Investment Thesis/Outlook: DIR remains a top pick, with its highly visible rent and SPNOI growth and two-thirds concentration in the strong Canadian industrial property market. DIR also has relatively high exposure to the urban logistics and light industrial segments (46% of portfolio value) which has seen far less competing new supply. Wide upside to market rents and contractual rent steps drive our 8% forecast AFFO/unit CAGR to 2025. But we expect interest cost headwinds to mute growth in 2026, reducing our three-year forecast AFFO/ unit CAGR to a still-healthy 6%. For DIR, $1.9bln or 64% of total debt matures between 2025 and 2027, with an average current coupon of just 1.2%, representing nearly all the REIT's remaining ultra low-cost debt that was arranged through cross-currency interest rate swaps when bond yields were at their lowest. We highlight that post-2026, we expect only minimal remaining interest cost headwinds, representing just 5% of our 2026E FFO estimate and spread over the subsequent two years.

Investor sentiment has waned for Industrial-focused REITs due to moderating rent growth, a shaky macro backdrop, occupancy declines, and supply pressure. These concerns do
not appear to consider the fact that new competing construction starts have stalled and the projects under active development have fallen sharply across most Canadian markets (Figure 2; e.g. to 1.5% in the GTA from the 2.2% peak).

These concerns, together with negative overall REIT sector sentiment, have put pressure
on DIR's unit price, resulting in negative unit price returns similar to the REIT index (-11% one-year return), despite DIR's strong relative growth profile. This has pulled DIR's valuation down to what we see as exceptionally compelling levels of 13x FTM P/AFFO — not seen since 2017 and down from the 22x peak in 2021. DIR's current trading price implies a cap rate of 6.4% on the property portfolio, up 200bps vs. where DIR traded in late 2021.

Forecast Revision. We have tightened up our interest expense modelling, resulting in minor tweaks to our FFO/unit and AFFO/unit estimates. We have also introduced our 2026 forecasts, which call for 1% y/y AFFO/unit growth, with strong NOI growth being mostly offset by higher interest expense from the debt-refinancing activity described on page 1. That said, our three-year AFFO/unit CAGR to 2026 remains healthy at 6%.

DIR's $3bln of debt carries a weighted average coupon of just 2.5%, which represents a headwind for FFO growth as refinancings are expected to be priced at meaningfully higher rates. DIR achieved 50bps of savings upon refinancing the $200mm debenture maturing this month (4.5% existing coupon). Although we were encouraged to see ECB and BoC make their inaugural rate cuts, the consensus outlook for longer-duration government bond yields does not call for meaningful declines over the next couple of years.

Highlights from Investor Meetings

Leasing Activity. Although DIR is seeing overall sustained strong leasing activity, today's high interest rates are motivating some tenants to defer their expansion/relocation decisions. Particular strength is evident in the sub-200,000sf category in urban locations, where there has been relatively little directly competing new supply. Relative softness is being seen from 3PL users.

Rents. DIR continues to achieve new and renewal rents that are in line with the growth budgeted for 2024, with the main difference from a year ago is that lease execution takes more time. For example, DIR leased up the remainder of the CourtneyPark development in the GTA at $21/sf vs. $20/sf achieved last year on the initial lease. In addition, a 200ksf tenant in the GTA recently agreed to a 300% renewal rent increase. DIR remains confident in the re-acceleration of market rents in 2025, when falling construction (see Figure 2 below) is expected to create a “supply vacuum” and help force vacancy rates back down.

Difference vs. Market Reports. Like many property owners, DIR's experience compares favourably with market rent surveys by some leasing/property brokerages, which tend to base their market rent estimates on the spaces that are available for lease at a point in time (including sublet spaces, which usually attract lower rents compared with directly available spaces).

Embedded Contractual Rent Step-ups. DIR continues to embed higher contractual rent increases into new and renewal leases, ranging from 4%-plus in the GTA, 3.5% in Montreal, and 3%-plus in Calgary. Rent escalations on European leases remain tied to inflation. These enhance the level and visibility of future SPNOI growth.

JVs Continue to Support Portfolio Growth. DIR expects to continue investing with GIC to expand the Canadian portfolio, with $500mm of assets already acquired since the Summit privatization. New acquisitions are increasingly likely to go outside the GTA, potentially into new markets. With the unit price well-below NAV, we expect DIR to continue limiting its acquisition activities to those with existing or new JV partnerships. We could also see DIR expanding its portfolio in Europe, with anything of size being limited to a JV relationship so long as the unit price remains well below NAV.

Investment Landscape. Foreign capital continues to seek investments in Canada's industrial property sector. In addition to GIC partnering with DIR in Canada, other foreign investors active in Canada currently include TPG and Prologis. We note that DIR + partners (e.g. GIC) are one of Canada's largest industrial property owners/managers with a 45mm square foot portfolio.