Dream Industrial Real Estate Investment Trust T.DIR.UN

TD

[retiredcf]

Have a $16.00 target. GLTA

Q3/24: 2025 GUID. COULD CONFIRM A TURNING POINT; ASSESSING DEBT REFI HEADWIND

THE TD COWEN INSIGHT

Q3 results gave us more evidence of a pending near-term positive inflection point, though more clarity should come with formal 2025 guidance next Feb. Capital recycling continues to achieve strong pricing — well above those implied by unit prices of DIR and peers. Despite DIR's well-known interest cost headwind, today's trading valuation feels like a trough and a good opportunity to buy.

Impact: NEUTRAL

Forecast: We revised our 2025-2026 per-unit estimates 1%-2% lower, mainly on
slightly lower rent spreads offset by a lower unit count (timing pushed back on assumed resumption in ATM use). Our forecast now calls for a 6% AFFO/unit CAGR for the two years through 2026. Our debt exhibit (Fig. 7) shows the potential impact from refinancing all $1.7bln of DIR's remaining ultra low-cost debt (matures between Feb. 2025 and June 2027). The majority of the estimated $0.17/unit total interest cost headwind is embedded in our 2026 estimate (about $0.10/unit), while the remainder would be fully reflected by FY2028. Despite this, we continue to see potential for positive annual FFO/unit growth to continue in each of 2027 and 2028.

Inflection Point Coming? Market dynamics and DIR's operations are nearing what we see as a positive inflection point. Following an aggregate 300bps decline over the past six quarters, occupancy stabilized in Q3 and is expected to again in Q4. (This includes the loss of the former Summit II REIT's 5th largest tenant.) Canadian market stats (which include the impact of sublet space) have yet to show this, but commentary has become more constructive.

With supply decelerating and leasing demand beginning to rise, we believe SPNOI growth likely hit a trough in Q3 and will accelerate meaningfully next year. With DIR's strong in- place rent growth this year, mgmt's estimate of the embedded portfolio-wide mark-to- market has begun to narrow (we calculate +28% now vs +34% in Q4/23). After vacancy rates start falling, we see potential for market rent growth to re-accelerate — perhaps in H2/25. About half of DIR's assets are in the GTA and GMA, where barriers to entry prevent supply from getting in the way of a tightening market.

Today's trading valuation (13.6x 2025E P/AFFO, 82% P/NAV, 6.3% implied cap rate) feels like a trough, and seems to reflect the backward-looking deceleration in SPNOI growth, but also DIR's aforementioned interest cost headwind. Not only do we see a favourable upside/ downside in DIR units at current levels, but also an opportunity to buy into a preferred long- term property segment and proven platform.

SPNOI growth of 3.3% slowed from 5.0% in Q2 due to a moderation in growth of both Canadian and European in-place rents. As DIR laps easier quarters on occupancy into 2025, we expect SPNOI growth to reaccelerate.

Committed occupancy of 95.5% and in-place occupancy of 95.1% were both +10bps q/ q—despite management's expectation for occupancy to decline again in Q3 (before rising in Q4). Robust leasing volumes likely brought forward some commencements from later quarters, which enhances visibility into Q4 and 2025.

Market Rent Growth: Canadian market rents were +1% q/q and +3% y/y to $14.20 (+37.5% vs. in-place rents), while European rents were +1% q/q and +4% y/y at €6.07 (+7.6 vs. in-place rents). Management expects market rents in Toronto/Montreal to begin accelerating in 2025.

Leasing velocity remains solid with 1.9mmsf completed since Q2. Rent spreads over expiring rents moderated to +25% vs +56% reported last quarter. Spreads in Canada narrowed to 39% from 66% in H1; Europe spreads were steady at 10%. With the portfolio-wide lease M-T-M holding fairly steady q/q in the +30% range, we attribute this quarter's narrower leasing spreads to an unusually larger mix of leases expiring at higher rents.

Notable recent leases include 3 in Ontario totaling 250,000sf (including the final 70,000sf at the Abbotside dev't) with starting rents ranging $18.00/sf-$18.50/sf and 3.5%-4.0% annual increases. DIR also signed a 10-yr lease for 296,000sf at its development in Balzac (Calgary) with a starting rent of $9.75/sf. All rents are in line with initial budgets.