Q2/24: RESULTS OVERALL IN-LINE; CANADA LEASING SPREADS REACH NEW HIGH
THE TD COWEN INSIGHT
Q2 results were broadly in-line with us & consensus, with the 70bps q/q further moderation of in-place occupancy consistent with mgmt's Q1 outlook. SPNOI growth slowed to +5.0% y/ y (YTD +6%), with 9% higher rents offset by 3% lower occupancy. As occupancy stabilizes, SPNOI growth should strengthen, in our view. Development leasing is producing more favourable NOI yields.
Event: Reports Q2/24 Results (Exhibits on pages 2 & 3)
Impact: NEUTRAL
FFO/unit and AFFO/unit (our calc.) were largely flat y/y as higher interest expense offset NOI growth.
Committed occupancy was -100bps q/q to 95.4% while in-place occupancy was -70bps
to 95.0% (including a 100ksf expected tenant departure in Europe). Per last quarter's outlook, tenants were expected to give back some space in Q2 and Q3. Encouragingly, lease commitments entered into post-Q2 would have added 50bps to the reported occupancy rate. We look for mgmt's updated outlook commentary on the conference call.
Leasing velocity remains solid with 2.4mmsf completed since Q1. Rent spreads averaged +56% over expiring rents, with Canada at +80% (including one sizeable GTA renewal at +260%) and >3% annual embedded contractual rent growth.
Progress on Developments Lease-Up: New completed & conditional leases on active developments exceeded 500,000sf. The newly built, 209,000sf Courtney Park (GTA) project is now 100% leased at $20.95/sf on average (with 4% annual bumps), providing a 6.6% NOI yield (+30bps vs budget). The Balzac (Calgary) development reached completion and is now 70%-leased (including conditional deals) at average rents exceeding $12/sf (with 3% annual bumps) to provide NOI at least 30bps above the 6.1% budgeted yield.
Dispositions Begin Closing: The previous $100mm pipeline of disposition activity now includes $50mm that has closed, including a portfolio in Regina, SK and two small assets in Europe. We estimate the cap rate to be 7.5% and believe proceeds can be redeployed at a similar total return (i.e., lower initial yield with much higher growth), while raising asset quality.
Balance Sheet: Leverage (Debt/Assets) was -20bps q/q to 35.9%, while annualized Debt/ EBITDA declined 0.4x q/q to 8.1x. Available liquidity was steady q/q at ~$596mm. DIR refinanced its maturing $200mm Series B debenture with a 5-year unsecured term loan at a 4.014% effective coupon with a cross-currency swap (~50bps savings vs the old debenture). Post-Q2, DIR extended a $200mm term loan (4.85% effective rate) by two years to March 2028.
Conference call is at 11:00 am (1-844-763-8274;