Q2/24: FAVOURABLE OUTLOOK INTACT, POTENTIALLY AIDED BY FALLING INTEREST RATES
THE TD COWEN INSIGHT
Post-Q2, DIR remains a top pick, with its highly visible rent and SPNOI growth. DIR's two-thirds Canadian concentration and 46% exposure to urban logistics/light industrial properties (with far less competing new supply) remain key attractive attributes for us. We reiterate our call for an above-average 3-year AFFO CAGR of 6%, including one last big jump in interest costs expected in 2026.
Impact: NEUTRAL
Post DIR's Q2/24 results, our forecast saw minimal downward changes. We reiterate our outlook for accelerating SPNOI and FFO growth in 2025, with 2026 to see strong SPNOI growth but slower FFO growth due to one last big jump in interest costs. (On a positive note, DIR is seeing market interest rates about 50bps lower today vs last quarter.) Our forecast 3-year AFFO/unit CAGR remains above-average at 6%. Our NAV/unit estimate edged 2% higher to $15.90.
Management reiterated all aspects of its outlook, including no changes to 2024 guidance (mid single-digits growth in SPNOI and FFO/unit) with quarterly in-place occupancy dropping once more in Q3 before rising in Q4 to be flat on the year near 96%.
For 2025, management expects accelerating growth in both SPNOI (continued strong rent increases with less occupancy headwinds) and FFO (relatively modest debt refinancing exposure). Management is aiming for further FFO growth in 2026 despite greater interest cost headwinds. Management continues to see the current weakness in Canada's industrial property leasing market being mainly driven by rising sublet availability, which is seen peaking later this year, and is not impacting market rents for DIR's own properties. More specific post-2024 guidance could come at DIR's fall 2024 investor day.
Overall market leasing velocity is expected to continue cooling off (vs. the torrid pre-2023 pace) through year-end, but re-accelerate thereafter as new supply deliveries slow assuming confidence recovers. DIR's property portfolio caters to a highly diverse user base with overall steady demand. On balance, 3PL's continue to give up space while remaining active on the leasing front.
Capital recycling came into full-swing in Q2, with $50mm of dispositions completed, plus another $100mm (including fund interests) underway mostly to end-users. Q2 activity included a partial exit of the Regina, SK market at a 12% premium to FV, where DIR took back a 2-year VTB for 70% of the sale price at a 6.5% interest rate. Two small Dutch assets (<$5mm each) were sold, while DIR aims to reduce some Spain and select large-bay European exposure.