Dream Industrial REIT Dream Industrial Real Estate Investment Trust

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Dream Industrial REIT (OTC:DREUF) is a unique opportunity that has been caught in the “sell everything at any cost” downdraft. The company comes from “Dream” family and is managed by Dream Unlimited (OTC:DRUNF). In case investors were unaware, this is the same group that managed to sell Dream Global REIT at a scintillating premium a few months back. We give you an overview of this company and explain why we see a 100% total return over the next 5 years.

The company

Dream Industrial started off as a Canada focused industrial REIT but gradually made inroads into the U.S. At the end of 2019, it decided that it was going truly global and bought assets in Europe as well.

Source: Dream Industrial Presentation

While the Canadian market still forms the bulk of the portfolio, the REIT is increasingly diversifying outside its base. It is not done yet as the European portfolio is expected to expand significantly over the years.

Source: Dream Industrial Presentation

A key driver behind this is the relative discrepancy in such asset availability in Europe versus the U.S.

Source: Dream Industrial Presentation

While it may appear to some that Dream Industrial is venturing outside its core areas, nothing could be further from the truth. Management has worked extensively in Europe through its recently sold Dream Global REIT platform and has the right foundation to grow this side of the business successfully.

Current backdrop

In the most recently disclosed Q4-2019 results we can see that Dream Industrial generated 78 cents of funds from operations (FFO).

Source: Dream Industrial 2019 Annual Report

Investors may get alarmed at the year over year drop in these numbers but that was part of Dream’s portfolio transition plan. The idea was to deleverage significantly and then buy more European assets with an even lower cost of debt.

Source: Dream Industrial 2019 Annual Report

That leverage reduction flowed down to the FFO thereby resulting in the decrease of the metric. Although, this was part of Dream Industrial’s long term plan, with the lower leverage it is in a perfect position to take advantage of opportunities in the current turmoil.

Source: Dream Industrial Presentation

Valuation

The company trades at about 10X FFO which is definitely on the low side for quality industrial assets. For Dream Industrial though, we believe that the best measure of valuation is not the FFO multiple, but the price to NAV ratio. Canadian REITs apply IFRS and the book value or NAV per share is a good proxy for approximate liquidation value. At 0.78X, Dream Industrial is trading at a good discount to what those assets are worth.

ChartData by YCharts

One might question whether we should use the NAV number under the current circumstances. There is certainly room for some flux here given the unprecedented problems due to COVID-19. At the same time, we believe that under normal circumstance, a REIT with such low leverage in a favorable sector should trade at a 20-30% premium to the value of its assets. The buffer or gap here is so big that we would not wait until the birds come out to sing to purchase this. Further, we believe that Dream Industrial is using modest cap rates in this low rate environment to value its assets.

Source: Dream Industrial 2019 Annual Report

We would remind investors that Blackstone recently purchased Colony Capital’s (CLNY) industrial portfolio at a sub 4.5% cap rate. While the sale happened prior to the current turmoil that ails the market, Dream Industrial should be able to sell at 6% cap rates when any semblance of normalcy returns to this market.

Potential Negatives

The biggest criticism of Dream Industrial’s portfolio would probably be its extremely short lease term. With a weighted average lease term (WALT) of 4 years is definitely on the lower side of lease lengths.

Source: Dream Industrial 2019 Annual Report

While the 4.1 years can look scary, specially in this environment, Dream Industrial is quite comfortably set for 2020.

Source: Dream Industrial 2019 Annual Report

Only 7.1% of the GLA comes due this year and about half of that has already been renewed.

Source: Dream Industrial 2019 Annual Report

The other potential negative is Dream Industrial’s large exposure to western Canada.

Source: Dream Industrial Presentation

With the drop in oil prices alongside the COVID-19 impact, we can expect more issues there and leasing spreads are likely to be negative in the short term. While industrial vacancy rates in Calgary and Edmonton may move higher, we don’t see them anywhere as problematic as the office space (27.2% & 20.1% vacancy rates in Calgary & Edmonton respectively) in these two cities. Industrial and distribution tenants are also much less likely to move as their occupied spaces are not as fungible as those for office tenants.

Conclusion

The yield has gotten compelling enough that one can take a position and look for good risk adjusted returns.

ChartData by YCharts

As part of its deleveraging strategy, Dream Industrial just issued units at $13.65 recently. That places it in a very comfortable zone to play its cards right in the next 12 months. Five years out investors should look at a NAV in the $13-$14 region coupled with big dividends along the way. Total return potential is over 100% in our view from these levels, with short term downside of 20-25% possible if the slowdown turns out worse than expected. However, we do believe that in this negative and low interest rate environment, governments in all three areas of Dream Industrials asset base (Canada, U.S. and Europe) will do everything to restart the economy and will likely go to far in the other direction with their jolt of stimulus.

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TIPRANKS: Buy.

 

Disclosure: I am/we are long DREUF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: HDO is NOT long DREUF.

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 with a professional who knows their objectives and constraints.

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