On today’s Breakouts report, there are 41 stocks on the positive breakouts list (stocks with positive price momentum) and six securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a REIT that may soon surface on the positive breakouts list - Dream Industrial Real Estate Investment Trust (DIR-UN-T). Year-to-date, the unit price has rallied 21 per cent. However, analysts believe the positive price momentum is far from over. The Trust has a unanimous buy recommendation with a forecast total return of 27 per cent (including the 5-per-cent yield) over the next 12 months.
A brief outline on the Trust is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The REIT
Toronto-based Dream Industrial REIT holds a portfolio of 321 industrial properties located in North America and Europe.
As at March 31, the annualized gross rent breakdown by space usage was 72 per cent distribution and warehousing, 18 per cent light industrial, 5 per cent office, 1 per cent cold storage and 4 per cent other.
In terms of the industries served, the annualized gross rent breakdown was 21 per cent logistics, 14 per cent consumer goods, 13 per cent food and beverage, 8 per cent diversified industrials, 6 per cent residential, 6 per cent auto, 5 per cent technology, 4 per cent paper, printing and packaging, and 23 per cent other.
Investment thesis
- Industry leader. One of the largest owners of Canadian industrial real estate assets.
- High single-digit FFO (funds from operations) per unit growth anticipated.
- Longer-term growth driven by its development pipeline - greenfields/new developments, expansions, and redevelopments of existing properties.
- Diversified tenant base, industry exposures and geographic exposures.
- Tailwinds with rising rents, limited supply and high occupancy.
- Reasonable valuation.
- Attractive yield.
- Reliable distribution. Conservative payout ratio.
Quarterly financial results and outlook
On May 2, the Trust reported solid first-quarter financial results. Funds from operations (FFO_ per unit came in at 25 cents, a penny above the Street’s expectations, and up from 22 cents per unit reported during the same period last year. In the first-quarter, same-property net operating income (NOI) increased 13 per cent year-over-year. Same-property NOI from the Canadian portfolio increased 14 per cent year-over-year, led by strength in Ontario (up 22 per cent). Same-property NOI from the European portfolio rose 12 per cent year-over-year. The overall occupancy rate stood at 98.6 per cent (in-place and committed). As of March 31, the net debt-to-assets ratio was 36 per cent up from 31.7 per cent reported last quarter given the acquisition of Summit Industrial Income REIT completed in Feb.
On the earnings call, chief executive officer Brian Pauls provided a positive outlook, “Looking forward, all our growth drivers remain intact. Demand for industrial space has stayed strong through the volatile economic environment. With availability in the low single-digit range across all our markets, we continue to see a strong organic growth for DIR’s portfolio. The overall macroeconomic sentiment in Europe has improved considerably over the last few months. Occupier fundamentals continue to be strong with the rising rents and low supply.”
At the 2023 annual general meeting held last month, president and chief operating officer Alex Sannikov noted, “The outlook remains robust. Market rents are nearly 40 per cent higher than our in-place rents. And as leases roll [roll-over], we expect to capture this significant upside.” Lease expirations over the next few years are: 7 per cent of gross leasable area (GLA) in 2023, 10 per cent in 2024 and 13 per cent in 2025.
Management targets same-property NOI growth in 2023 to come in at the upper end of its guidance of between 8 per cent and 10 per cent.
Distribution policy
Dream Industrial REIT pays its unitholders a monthly distribution of 5.833 cents per unit, or 70 cents per unit yearly. This equates to a current annualized yield of 5 per cent. The Trust has maintained its monthly distribution at 5.833 cents per unit since 2013.
Analysts’ recommendations
According to Bloomberg, this mid-cap REIT with a market capitalization of $3.85-billion has a unanimous buy recommendation.
The firms providing research coverage on the REIT are: Canaccord Genuity, BMO Nesbitt Burns, CIBC World Markets, Desjardins Securities, Echelon Wealth Partners, iA Capital Markets, Laurentian Bank, National Bank Financial, Raymond James, RBC Dominion Securities, Scotiabank, and TD Securities.
Revised recommendations
After the Trust released its first-quarter financial results in May, three analysts raised their target prices.
- ·Canaccord’s Mark Rothschild to $16.50 from $16.
- National Bank’s Matt Kornack to $18.50 (the high on the Street) from $18.
- Raymond James’ Brad Sturges to $17.75 from $16.75.
Financial forecasts
The consensus FFO per unit estimates are 98 cents in 2023, rising to $1.03 in 2024. The consensus AFFO (adjusted funds from operations) per unit estimates are 86 cents in 2023 and 92 cents in 2024.
Financial forecasts have remained fairly steady in recent months. At the beginning of the year, the consensus FFO per unit estimates were 95 cents for 2023 and $1.00 for 2024.
Valuation
The REIT is commonly valued by analysts on a price-to-net asset value (NAV) basis. The REIT is trading at a discount to its NAV. As of March 31, the NAV stood at $17.03, up 3 per cent year-over-year.
According to Bloomberg, the REIT is trading at a price-to-FFO multiple of 14.5 times the consensus 2023 estimate, below its five-year historical average of 15.5 times.
Its industry peer Granite Real Estate Investment Trust (GRT-UN-T) historically trades at a slight premium compared to Dream Industrial REIT. Granite REIT is currently trading at a price-to-FFO multiple of 15.6 times the consensus 2023 estimate.
The average one-year target price for Dream Industrial REIT is $17.17, implying the unit price has 22 per cent potential upside over the next 12 months (a potential total return of 27 per cent if you include 5 per cent yield). Target prices are concentrated ranging from a low of $16.50 to a high of $18.50.
Insider transaction activity
In the second quarter, no buying or selling activity was reported by insiders.
Chart watch
Year-to-date, the unit price has rallied 21 per cent, outperforming the S&P/TSX real estate [sector] index, which is up just 1 per cent. Dream Industrial REIT is the third best performing security out of 21 members in the S&P/TSX real estate index.
In terms of key resistance and support levels, the REIT faces initial resistance around $15 and after that around $16. There is a major ceiling of resistance around $17.50, near its all-time closing high of $17.43 set in Nov. 2021. Looking at the downside, the unit price has initial technical support around $13, near its 200-day moving average (at $13.11). Failing that, there is support around $12.
ESG Risk Rating
According to Sustainalytics, the Trust has an environmental, social and governance (ESG) risk score of 10.8 as of Nov. 4, 2022. A risk score of between 10 and 20 reflects a “low risk” rating.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
This report should not be considered an investment recommendation.
Jennifer Dowty