Dream Industrial: Reviewing 2020 With Perfect Hindsight
Summary
- We have written about this REIT several times in the last year.
- Today, we analyze the overall 2020 numbers and provide our take.
- Key points we look at are the increasing payout ratio and the decreasing FFO per share.
- I do much more than just articles at Conservative Income Portfolio: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »
All values are in CAD unless noted otherwise.
Last time we wrote on Dream Industrial Real Estate Trust (OTC:DREUF), we decided not to add to our small position as the market price was above our buy point.
Dream has been swept away from our original buy point by the wave of popularity currently being enjoyed by the Industrial REITs. We have a tiny position left on this and we are holding it. We might get a chance to get a bigger position in, once things normalize in this sector.
Source: Dream Industrial: The One That Got Away
Yes, things are not back to normal yet, and yes, the price is still above our original buy point. We will however, go over the most recent results and share our thoughts on our favorite (albeit at the right price) industrial REIT of the north.
The REIT
Dream Industrial owns and operates a 177 property/27.3 million square feet portfolio comprising distribution, urban logistics and light industrial properties across North America and Europe.
Source: 2020 Annual Report
The 177 properties house 271 industrial buildings and are primarily comprised of distribution and urban logistics centers, with light industrial properties bringing up the rear.
Source: 2020 Annual Report
The REIT's 1,100 tenant base is well diversified at the industry level, notably with "Diversified" Industries making the highest single sector allocation at 14%.
Source: 2020 Annual Report
This REIT set up shop in 1994, and till 2016 their presence was confined to Canada. In 2017 they started venturing into the US, adding Europe to the mix since then. Unsurprisingly, they have been on a expansion tear since 2017 almost doubling their value along the way.
Source: December 31, 2020 Factsheet
And this growth endeavor is only gaining momentum going by the $355 million in acquisitions completed or under negotiations by mid-first quarter in 2021.
Next, let us check out the how it fared in 2020. We start with rent collection, the metric that has swelled in importance for REITs since March 2020.
Rent Collection
While Dream Industrial has a roster of over 1,100 tenants, around 77% of the annual rent collection is from 290 of them.
Source: December 31, 2020 Factsheet
Their top 10 tenants brought in around 14% of the gross rental revenue as at Dec. 31, 2020.
Source: 2020 Annual Report
Investors should expect to see Amazon (AMZN) make an entry to this list this year based on leases of around 416,000 square feet signed subsequent to 2020.
The industrial sector landlords overall did very well last year with the rise in e-commerce due to COVID-19 restrictions. Dream Industrial was no different and had a solid rent collection record with minor write offs relating to the CECRA program in the second and third quarters.
Source: 2020 Annual Report
The Q2 and Q3 rent remaining to be collected has seen a marked improvement from 0.9% and 1.8% respectively, from the Q3 financial report. The rent collection for January 2021 is as of February 16 2021, when the Q1 results were released.
Lease Renewals
Dream Industrial had an occupancy level of 95.6% at December 31, 2020, which it has hovered around for the last few years. The overall weighted average lease term was 4.1 years, remaining unchanged from the prior two years, despite the addition of Europe to the mix in 2020.
Source: 2020 Annual Report
As at mid February 2021, 8.5% of additional leases were coming up for renewal by end of the year.
Source: 2020 Annual Report
Their tenant retention ratio was 75.5% for the year, again in line with the prior few years managing a healthy overall rental spread for the spaces that came up for renewal during the whole of 2020 and the first month of 2021.
Source: 2020 Annual Report
Western Canada, put the dampener on the Canadian portfolio as it had been grappling with the poor performance of oil for the last few years when COVID-19 came along to join the party. With the recent recovery in oil prices, this part could finally catch up to the rest of the portfolio and provide a boost to NAV and cash flow.
Funds From Operations or FFO
While the total FFO increased compared to 2019, the annual FFO per unit saw a decline. This was despite an increase in same property net operating income.
Source: Q4-2020 Press Release
We saw the REIT favor more equity in its expansion mix and that had the effect of reducing FFO per share.
Debt Maturities and Liquidity
In pursuit of its strategy to reduce the cost of debt, the REIT early discharged around $310 million dollars of mortgages from January 2020 to February 1, 2021. These were funded with the proceeds from the equity issuances during this period.
The REIT was bestowed with an investment grade credit rating by DBRS in the fourth quarter of 2020. This allowed them access lower rates, which was reflected in the highest drop in average interest rates compared to prior quarters.
Source: 2020 Annual Report
As expected, the positive impact was also observed in their interest coverage ratio. Also noteworthy is the 10-fold increase in their unencumbered asset pool compared to 2019.
As far as 2021 is concerned, they have about $131 million of debt coming up for renewal.
Source: 2020 Annual Report
At Dec. 31, 2020, Dream Industrial had an undrawn revolving credit facility of $383 million, cash and cash equivalents of around $255 million and a massive unencumbered asset pool of $1.4 billion. It should have no problems dealing with the upcoming maturities by refinancing or using its liquidity to repay them. One other point we would add here is that Dream financed its European assets at ridiculously low rates (2024 and 2025 maturities). They raised $450 million in Q4-2020 at an average rate of 0.65%. This refinancings can boost FFO per share, even if the REIT has a bias towards equity financing in its growth plans.
Distributions
The monthly distributions remain unchanged at $0.05833 but the yield has been coming down due to the price action in this sector.
Data by YCharts
The payout ratio has been creeping up on this REIT some of which is the by product of it deleveraging in the last few years, funding it by equity issuances.
Source: Compiled From REIT Annual Reports
The distributions have remained unchanged for a long time, and the annual payout ratio now approaching 100%. As evident from the information, this is more the function of the first two quarters of 2020, with the REIT reducing the ratio each subsequent quarter. We maintain the same rating as our previous piece on this REIT.
A low danger rating implies a 0-15% probability of a distribution cut in the next 12 months.
Conclusion
Dream Industrial continues to perform as expected. Investors are getting a high-quality asset class, but with no dividend growth. Added to that is the fact that FFO per share has actually been steadily moving lower over time, thanks to an equity based financing model. This arguably does reduce the risk to investors, but it's also now makes a dividend increase virtually impossible. Dream still trades cheaper compared to peers like Granite Real Estate (GRP.U) and Summit Industrial Income REIT (SMMCF). You can see this on price to NAV and price to FFO. But the difference is now lower compared to the massive gap we saw in October 2020, thanks to Dream delivering above average returns.
Data by YCharts
With perfect hindsight, that was the point to step in an increase our position but we failed to do that. This continues to be a "bond-like" REIT with low growth possibilities. The only significant upside in our view may come from a sale to external parties. Even that upside looks small thanks to the REIT trading at a small premium to its own computed NAV. We maintain a hold on this one.
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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This article was written by
Analyst’s 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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