Dream Residential Real Estate Investment Units DRREF

Raymond James Q3 2024 - Dream Residential

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Dream Residential REIT  (DRR.U-TSX) 

Real Estate | Residential

3Q24 Results: A Beacon of Stability in a Slow Growth Environment

Recommendation

Dream Residential REIT (DRR) reported 3Q24 FFO of ~$0.18/unit, in-line with our expectations (our and consensus estimate: ~$0.18/unit), and unchanged from 3Q23.

Maintains its 2024E SP-NOI Growth Guidance in the Low-to-Mid Single-digit Range YoY: DRR generated 3Q24 SP-NOI growth of +2.5% YoY. DRR’s same-property revenues grew by +3.0% YoY in 3Q24 mainly due to higher AMRs YoY, partly offset by a +3.6% increase YoY in operating expenses. As a result, DRR’s 3Q24 SP-NOI margin declined -30 bps YoY to ~51.1%. As part of its 3Q24 release, DRR maintained its 2024E growth guidance range of +3%-5% YoY (vs. +4.2% YoY in 2024 YTD).

Generating Slightly Positive Blended Average Rent Spreads in New and Renewal Leases Signed: DRR’s estimated average embedded MTM rent growth opportunity across its US MFR portfolio was +8% at September 30. DRR’s blended AMR increase realized in its 3Q24 leasing activity was +2.5%, reflecting an average lease renewal rent spread of +4.5% (tenant retention ratio: ~54%), while achieving similar average rents within new leases (turnover rate: ~46%). DRR completed 42 suites upgrades in 3Q24, including 26 units in DFW, TX (~62% of upgrades), 8 suites in Oklahoma City, OK (~19% of upgrades) and 8 units in Cincinnati, OH (~19% of upgrades), with average +6.9% rent leasing spreads achieved for DRR’s renovated suites. In light of challenging market conditions, DRR expects completed suite renovations in 2024 to fall below DRR’s targeted range of 200 suites, as the REIT prioritizes renewals in a slower US MFR leasing environment.

US MFR JV Investment Acquisition Prospects Remain Relatively More Limited in the Current Environment: We believe DRR may benefit from existing relationships held by its strategic sponsors, Dream Unlimited (DRM), and Pauls Capital, LLC (Pauls). Pursuing a JV investment strategy could allow DRR to pursue larger strategic US MFR portfolio transactions that can better diversify its US MFR portfolio, while augmenting its levered total returns by generating additional property management fee income. DRR is expected to target stabilized MFR cap rates in the high 6% or low 7% range for any contemplated acquisition opportunity pursued. However, on its 3Q24 call, DRR noted that US MFR acquisition opportunities remain ‘limited and sparse’, which is translating into a slower potential JV transaction pipeline in the current environment.

Key Takeaway

While we view DRR as deeply discounted to its underlying real estate value, there appears to be more limited potential positive catalysts in this current slower growth environment available to DRR that we believe could help materially reduce its NAV/unit estimate discount valuation. Ultimately, we believe that enhancing DRR’s trading liquidity is strategically important to widen its investor base. However, we expect that any near-term attempt by DRR to improve its trading liquidity could result in some short-term dilutive pain due to DRR’s higher cost of equity capital.

Valuation

DRR trades at 11.1x 2025E AFFO (US MFR peers: ~19.1x), ~38% below our $11.50 NAV estimate (7.00% cap rate), and yields 5.9% (2025E AFFO payout: ~66%). DRR also trades at an ~9.2% implied cap rate or ~$82k per suite. Our $7.75 target for DRR equals ~12.0x 2025E AFFO (unchanged), below ~21.0x for its TSX-listed MFR peers due to its low liquidity & external mgmt structure.