Dream Industrial Real Estate Investment Trust appears poised to benefit from “robust” market fundamentals in the Greater Toronto Area, according to Desjardins Securities analyst Kyle Stanley.
“In addition to DIR’s ability to mark 10–15 per cent of its portfolio to market each year as leases mature (70-per-cent upside in Ontario), it also benefits from 4–5-per-cent annual rent steps on new leases, which supports ongoing elevated revenue and SP NOI [same property net operating income] growth,” he said.
In a research note titled ‘Party in the GTA’, Mr. Stanley said he sees the REIT in a beneficial positIon in the area, which he calls “one of the tightest industrial markets in North America” following a recent property tour.
“DIR is seeing the most robust pockets of demand for the small- to mid-bay space that we toured in the north and west GTA,” he said. “The smaller form factor is attractive to tenants of all sizes, it can serve as a last-mile distribution solution and there is limited new supply of smaller-footprint space. Management highlighted several recent leasing transactions on smaller bay spaces with starting rental rates of more than $20 per square foot across the GTA. DIR’s average in-place rent across many of the nodes we toured ranged from $6–9/sf, which implies a 2–4 times rent lift opportunity on expiring leases.”
“The GTA is the fifth-largest industrial market in North America; however, its 1.1-per-cent vacancy rate positions it as second-tightest, behind only Montreal. According to Colliers, demand for space in the GTA has stabilized following the rapid acceleration brought on by the pandemic; however, the expectation is that demand should continue outstripping new supply. Rent growth in the GTA, while an elevated 35 per cent year-over-year, trails six of the top 10 markets; at $18.50/sf, net rent in the GTA is also among the most affordable across North America. In our view, this supports incremental rent growth upside over time.”
Despite “healthy” operating results, Mr. Stanley thinks DIR trades at a discounted valuation, reiterating a “buy” recommendation and $18 target. The average target on the Street is $17.31.
“DIR’s FFO yield spread (vs the BoC 10-year) is currently 385 basis points, 100bps wider than the peak (287bps) achieved in April 2022,” he said. “We do not believe a wider spread is warranted today given DIR’s performance over the last year and its growth outlook (10-per-cent two-year FFOPU CAGR [funds from operations per unit compound annual growth rate). If DIR were to trade at its peak FFO yield spread today, it would imply a unit price of $16.50 (17-per-cent return upside).”