Our view: Normalizing industrial fundamentals have taken the wind out of the subsector’s sails, while bond yield volatility certainly hasn’t helped either. In DIR, though, we continue to see an attractive mix of above sector average growth and a discounted valuation. Indeed, we believe the pieces remain in place for organic growth to accelerate in 2025, particularly with a heavy dose of Central Canadian leases rolling over the N15M where in- place rents remain well below market levels. Outperform, $16 PT.
Key points:
We still like the setup for next year. Excluding expansions, SP NOI rose 3.2% YoY (+4.8% YTD) as lower occupancy was more than offset by higher rents. In-place occupancy edged up to 95.1% (+10 bps QoQ, -180 bps YoY) aided by the transfer of an asset to developments, while leasing spreads moderated to +25%. Stepping back, while industrial fundamentals are normalizing, we believe these are strong operating metrics by any measure. As well, echoing comments of its peers on recent calls, signs of rebuilding momentum are emerging. Increasing RFPs for larger space requirements, sublease space inflecting lower, rising activity in parts of Europe, and users getting off the sidelines on improved macro visibility should collectively support stronger leasing. Considering ON/QC comprise ~50% of expiring GLA to Q4/25 with a ~78% mark-to-market opportunity on in-place rents, along with easing new supply, we continue to see support for stronger SP NOI growth next year, above DIR’s mid-single-digit % guide for 2024.
Good progress on developments; recycling some capital too. In Q3, DIR leased the remaining 70K sf at its $40MM Caledon development, while rents also commenced at its $70MM Mississauga project, with yields averaging an attractive 6.8%. Leasing also advanced in Balzac, AB. In short, progress is encouraging, with DIR’s $340MM active pipeline (6.5% target yields) providing a visible channel of earnings and value upside. Funding is being partly sourced from non-core dispositions, with $24MM of assets sold at 16% above book value, while the Summit JV also sold a GTA asset for $49MM ($380/sf). As for acquisitions, $226MM of CDN assets are under contract through its JVs ($35MM at DIR share), at high-6% mark-to-market cap rates on income properties (may include an entry into Vancouver).
Forecasts reflect solid growth. Our 2024E-26E FFOPU are unchanged at $1.00, $1.10, and $1.13, with minor revisions in NOI and interest costs. Our 2024E-26E CAGR is a solid 6%, a bit below its industrial peers (8%) but ahead of our universe (4%). Our current/1YR FWD NAVPU remain at $15.50 and $17.50, with the latter reflecting 13% YoY growth.
Maintaining Outperform, $16 PT. DIR is trading at 16% below NAV (14x 2025E AFFO/6.5% implied cap), relatively in line with its industrial peers (14% NAV discount) and the sector (17% discount). At current levels, we see an attractive entry to a name with a solid growth profile, healthy balance sheet, improving portfolio quality, and multiple value-creation levers.