Dream Industrial Stock: 5.5% Yielder Nearing Our Buy Point (TSX:DIR.UN:CA)

All values are in CAD unless noted otherwise.

Dream Industrial Real Estate Investment Trust (TSX:DIR.UN:CA) (OTC:DREUF) holds a portfolio of 327 industrial properties located in Canada, Europe and the US. These properties span around 71.4 million square feet and comprise distribution, urban logistics buildings and light industrial structures.

While the REIT manages all of the portfolio assets, it does not necessarily own a 100% of them. Some of them they only manage, and that number is reflected in the difference between the “Total GLA” and the “Owned GLA” in the above table. Dream Industrial is headquartered in Canada with majority of its assets located at home base, with Europe taking second place.

The REIT’s exposure to the US is via a private industrial fund. Our protagonist distributes 5.83 cents on a monthly basis, making the yield on the current price ($12.69) around 5.51%.

We have covered this industrial REIT play several times on this platform. While it has received a buy or even a strong buy rating a few times, we were neutral on it during our last review of it last November. We could hardly find any fault with its Q3-2023 numbers:

Dream Industrial Real Estate Investment Trust has been achieving fantastic spreads on new rentals and renewals over the last few quarters. That is because the overall portfolio rent is below the collective market average. This, we believe, more than offsets the interest rate risk which every business, especially REITs, are subject to currently and will be for the next little while. The dough that the new leases and renewals will bring also helps us deal with the (small but non accretive) unit issuances by Dream in recent times. We also believe that the capitalization rates that this REIT uses are within the realm of reality.

Source: Dream Industrial: We Got The Pullback We Wanted

The price at the time was $12.33, and it was trading at a 22% discount to its tangible book value. We had previously bought the dip at $11.76 and decided to sit tight unless we got a chance to buy more below $11.50. The stock did not dip to our buy point and while it under performed the broader market, it made a decent buck for its investors (which includes us).

Q1 results are not published yet, but we have the 2023 annual report overdue for a review. So that is what we shall do today.

Q4-2023

Dream Industrial wrapped up a strong year with its fourth quarter results. Funds from operations (FFO) increased by 3.9% and that was despite some solid headwinds from rising interest expense. Same property net operating income (NOI) vaulted higher by 9.6% and occupancy stayed strong at 96.2%.

There was one major vacancy which is lined up for redevelopment and following that it is anticipated that will re-leased at a higher rate.

While the income statement looked solid, Dream Industrial did take a hit on its NAV as it increased cap rates to reflect market conditions. NAV was about 25 cents lower per unit versus last year as cap rates crossed 6% on the portfolio. The REIT still trades at a nice discount to this reduced NAV, suggesting that the market is pricing more pain ahead.

Outlook

The REIT guided for mid single digit percentage increase in same property NOI for 2024. That rate of increase of NOI should allow for a similar increase in FFO per share. What the market still has an issue with, is the how the weighted average debt maturity is set up here. At 2.7 years, this is still a very low term and the weighted average interest rate is still at 2.35%.

Over time this interest rate will move higher. In fact, Dream Industrial did utilize its ATM facility to issue units below NAV last year to pay off some of its highest interest rate debt (floating rate credit facility). The counterargument to all of these problems is that when measured relative to its NAV, the debt load is modest. We are referring to the 36% number in the slide below.

We will also like to point out that thanks to that debt paydown, it now has close to half a billion in liquidity. It retains an investment grade credit rating and the risks are low that it will get into any difficulty outside of a severe recession. Its current interest coverage is also at 6.0X. This offsets to some extent the very low weighted average interest rate (which is bound to rise over time). The leases are also well below the market rates and rollovers should produce steady bumps for the near future at least. Finally the dividend is running at 70 cents and estimates are for over a $1.00 in FFO in 2024. Again, there is flexibility across the structure, despite Dream Industrial having played a bit fast and loose with its debt maturity profile.

Verdict

We own a little bit of Dream Industrial. We had bought it on a swoon in 2023. The amount is far smaller than what we currently own in two other industrial REITs, Granite REIT (GRT.UN:CA) and Nexus REIT (NXR.UN:CA). We favor the two for different reasons relative to Dream Industrial. Granite has a better balance sheet relative to Dream Industrial. While we are paying a fraction more, we like the relative setup better for Granite.

We also see the REIT as more focused and it places less emphasis on growing the asset base. Dream Industrial’s management via Dream Unlimited (DRM:CA) likely plays a role in how rapidly it has tried to expand recently.

As shown above in our price to tangible book value metric, Nexus is just way too cheap (less than 0.5X) and that is our largest position. At present, we continue to rate Dream Industrial a “hold”, though we are moving our “Buy Under” price to $12.25 to account for rolling forward of our estimates for 2024.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult a professional who knows their objectives and constraints.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.