Our view: Post Q4 results that modestly exceeded our call, our constructive view is intact. Supported by low availability and rising market rents, we believe DIR’s in solid shape to continue delivering robust organic growth in the year ahead. As well, the acquisition of SMU moves the ball further down the field strategically, significantly improving DIR’s competitive positioning among Canadian industrial players. Bottom line, we see a good mix of value and growth. Maintaining Outperform, PT raised to $17 (+$1.50).
Key points:
Impressive organic growth; guiding a repeat performance in 2023. Q4 SP NOI rose a solid 9.6% YoY, with the +10.5% full year print exceeding the top end of DIR’s guidance. Regionally, the REIT’s firing on all cylinders, with Canada out front (+12% Q4 SP NOI) on double digit advances in ON and QC. Leasing spreads remain exceptionally strong at approx. +60%. Despite slowing economic activity, DIR noted demand remains robust from diverse user groups (e.g., 3PL, e-commerce, manufacturers), including in Europe where the macro picture has improved. Coupled with market rents that are ~38% above in-place and CPI indexation on the majority of its European leases, DIR guided 2023 SP NOI growth at a solid +8-10%.
Summit Industrial: modest near-term accretion, more down the road. DIR guided $0.01-0.02 of FFOPU accretion in 2023 from its JV acquisition of Summit (SMU; Feb. 17E closing), in line with our low-single digit % estimate (see Nov-7 note). As we noted, we see several strategic merits from the deal, incl. an expansion of its CDN footprint, a larger development pipeline, and a new source of capital to pursue growth. Importantly, with SMU’s rents well-below market (~50% leasing spreads in 2022) and anticipated property management and leasing fees, we see a runway for earnings accretion to accelerate. Developments are also in focus, with $218MM of projects underway at healthy 6.6% yields. As for funding, we expect dispositions to pick-up with pro-forma leverage at DIR’s target mid-30% range.
Estimates raised; forecasts reflect solid growth. Our 2023E-24E FFOPU are $0.96 (+$0.04) and $1.02 (+$0.07) with revisions for stronger organic growth and the SMU transaction. Our 2023E is relatively in line with DIR’s “mid-$0.90” guidance range (approx. +7% YoY). Our 2022A-24E CAGR is 7%, modestly ahead of its industrial peers (5%) and our universe (5%). We raised our NAVPU to $15.50 (+$0.50) on higher NOI, with our $17 (+$0.50) one-year forward NAVPU reflecting solid 10% growth.
Maintaining Outperform, PT raised to $17 (+$1.50) on our higher forward NAV and a higher target multiple (forward NAV parity vs. prior 5% discount). DIR’s trading at 5% below NAV (5.2% implied cap rate/18x 2023E AFFO), in line with its industrial peers (3% NAV discount), but ahead of the sector (13% discount). We see an attractive entry to a name with a solid growth profile, healthy balance sheet, and growing pipeline of value-creation opportunities, supported by robust industrial fundamentals.