Maintains Outlook, 2025 Even More Promising Our Conclusion
Despite the near-term headwinds as new supply hits the market, rent
spreads continue to come in strong and are a major driver of growth in 2024,
while occupancy is likely to stay stable (barring some fluctuation in the
interim). As underlying fundamentals remain solid, albeit with a more
balanced supply-demand dynamic, DIR units have underperformed the
sector YTD, which we chalk up to a broader moderation in sentiment around
industrial REITs as we turn the corner on some exceptional years. At a ~21%
discount to NAV and an above-average FFO growth outlook, we view DIR
units as attractively valued.
Key Points
Q1/24 Results: DIR reported Q1/24 FFO/unit of $0.24, close to our estimate
and consensus of $0.25. The variance to our estimate was from lower NOI,
and higher interest costs, which were partially offset by higher interest
income. SPNOI ex. foreign exchange was a robust +7.1% (6.4% excluding
expansions), headlined by +16.4% in Quebec. In-place and committed
occupancy increased 20 bps Q/Q to 96.4% as a vacancy in France was
leased. Occupancy Y/Y was down from 98.6%, largely on transitory
vacancies and a recently completed Caledon development project. DIR
continues to expect to re-lease the vacant spaces at significantly higher
rates.
Outlook Intact And Improving In 2025: DIR reiterated its guidance of mid-
single-digit growth in each of SPNOI and FFO/unit, and high-single-digit
percentage growth in in-place rents. The REIT expects occupancy to remain
flat by year-end, with a fluctuation of ~50-100bps in the interim. Looking
forward to 2025, management expects an acceleration in NOI and FFO/unit
growth, helped by contribution from developments.
Leasing Colour: There is some bifurcation in user demand, as mid-bay
assets below 200,000 sq. ft. are seeing strong interest with DIR noting
certain requirements for >1MM sq. ft. Small-bay assets continue to benefit
from lack of supply. In Europe, many markets remain supply-constrained,
driving upwards pressure on rents, though not to the same extent as
Canada.
Balance Sheet And Liquidity: Net debt to total assets was 36.1%, stable on
both a sequential and Y/Y basis. Interest coverage was 5.5x and DIR had
~$609MM in available liquidity (up from ~$492MM as of Q4/23), with access
to an additional $250MM via an accordion on its unsecured credit facility.
DIR is in advanced discussions to refinance the $200MM 2024 debenture
with an unsecured euro-denominated term loan at a rate that is 50bps below
the maturing rate.