Our view: Post in line Q2 results, we remain constructive on DIR. No doubt, the normalization of industrial fundamentals is well underway. Indeed, occupancy will likely slide a bit more in the months ahead. Taking a step back, though, we continue to see a solid setup for organic NOI and FFOPU growth to accelerate through 2025. As well, we’re encouraged by progress on developments, providing an incremental source of growth, while an active capital recycling program is moving asset quality up the curve. Bottom line, we see an attractive entry. Outperform, $16 PT intact.
Key points:
Organic growth in good shape, even with occupancy slide; pace should build next year. Excluding expansions, SP NOI rose 4.7% YoY (+6% YTD), as higher rents more than offset lower occupancy. Notably, leasing spreads accelerated to +56%, while in-place occupancy fell to 95% (-70 bps QoQ, -260 bps YoY). As fundamentals continue to normalize, occupancy will likely slip a little further in Q3. Yet, supported by demand from broad-user groups (e.g., manufacturing, distribution, food/beverage), DIR sees occupancy rising by year-end to prior year levels (~96%). All said, considering 50% of GLA maturing through 2025 is in ON and QC with an ~80% mark-to-market opportunity on in-place rents, coupled with an anticipated easing of new supply pressures, we see good support for DIR’s unchanged mid-single-digit % 2024 SP NOI growth guide, with an acceleration teed up for next year.
Capital recycling on the agenda, with proceeds earmarked for portfolio high-grading. In Q2 and Q3-to-date, DIR sold $50MM of non-core assets in SK and Europe at a ~5% cap rate (on market rents), or ~11% above IFRS values. Amid good demand from users, a further $50MM of sales are in discussions in Canada and Europe. We expect proceeds to be redeployed into the development program and its private capital JVs. On the former, DIR made good progress with $88MM of substantially completed projects in Q2 and post-Q2, along with 550K sf of new/conditional leasing. The remaining active pipeline totals ~$200MM, with completions through 2025 at attractive 6.6% unlevered yields.
Still see decent growth. Our 2024E-25E FFOPU are $1.00 (-$0.01) & $1.10, with our 2026E introduced at $1.13. Revisions reflect lower NOI (partly from dispositions), largely offset by lower net interest costs. Our 2023A-25E CAGR remains strong at 6%, relatively close to its industrial peers (5%) and ahead of the sector (3%). Our current and one-year forward NAVPU are intact at $15.50 and $17.50, with the latter implying 13% YoY growth.
Maintaining Outperform, $16 PT, with no change in our FWD NAV or target multiple. DIR is trading at 17% below NAV (6.5% implied cap/14x 2025E AFFO), in line with its industrial comps and above our universe (22% NAV discount). We continue to see a discounted entry point to a name with a strong growth outlook in a preferred subsector, healthy balance sheet, improving asset quality, and multiple avenues to create value.