(Published by Nick McCullum on June 22)
The real estate investment trust sector of the stock market is divided into different subsectors depending on the operations of the underlying businesses. These subsectors include:
- Health care REITs
- Apartment REITs
- Office REITs
- Industrial REITs
Industrials REITs stand out because some of their assets are single-tenant properties. Single-tenant properties pose higher vacancy risk than their multi-tenant counterparts, which can lead to investor pessimism and mispriced assets – buying opportunities for value investors.
Dream Industrial REIT (TSX:DIR.UN, Financial) is one example of a real estate trust that operates specifically in the industrial sector.
This stock, however, is not well known among the investment community since it operates specifically in Canada and has a poor track record of delivering total returns. Dream Industrial’s stock price has declined by nearly 20% over the past five years.
With that said, the company may still make an appealing investment for high-income investors. There are two reasons for this.
First, Dream Industrial has an exceptionally high dividend yield. The trust’s current dividend yield of 8% is more than four times as high as the average dividend yield in the S&P 500.
Dream’s high dividend yield qualifies it to be a member of the short list of stocks with 5%-plus dividend yields.
You can see the full list of 416 stocks with 5%-plus dividend yields here.
Better yet, the REIT actually delivers its dividends on a monthly basis.
For retirees and other investors that rely on dividend payments, monthly dividends are far superior to the traditional quarterly payment schedule. Unfortunately, monthly dividend payments are very rare in today’s market.
You can see the full list of all 29 stocks that pay monthly dividends here.
Dream Industrial’s high dividend yield and monthly dividend payments make it appealing for high-income investors.
Business overview
Dream Industrial is a Canadian real estate investment trust that is focused on the industrial sector.
The company operates in two broad divisions:
- Multi-tenant properties (68% of net operating income).
- Single-tenant properties (32% of net operating income).
Dream Industrial’s asset base stands out for being highly diversified, with 1,305 total tenants. Unsurprisingly, the the average square footage per unit in the trust’s single-tenant properties is much higher than in its multi-tenant counterparts (82,000 compared to 8,000).
Source: Dream Industrial REIT May 2017 Investor Presentation
The company is a member of the Dream Unlimited family of real estate trusts, along with:
- Dream Office REIT (TSX:D.UN, Financial)
- Dream Global REIT (TSX:DRG.UN, Financial)
Dream Office had a 25% stake in Dream Industrial at the time of its last quarterly financial report.
Growth prospects
Dream Industrial’s growth depends on the ability to issue new units or debt and invest the proceeds of these capital markets transactions into high-quality industrial real estate assets.
The trust is also highly dependent on its ability to source new tenants and renew existing leases in its property portfolio.
With that in mind, investors should note the trust has had a very strong level of average occupancy since its initial public offering, with an average occupancy of 94.2%.
Source: Dream Industrial REIT May 2017 Investor Presentation
Looking ahead, Dream Industrial’s growth will also be driven by the strength of the Canadian industrial real estate market. The aggregate size of the industry along with a snapshot of its geographic distribution can be seen below.
Source: Dream Industrial REIT May 2017 Investor Presentation
For contrast, Dream Industrial’s existing real estate portfolio is shown in the following diagram.
Source: Dream Industrial REIT May 2017 Investor Presentation
It is clear from comparing these two maps the trust has a significant opportunity to expand in British Columbia, Ontario and the eastern provinces. Dream also has the potential to meaningfully increase its exposure to the Saskatchewan market.
Aside from entering new markets, Dream Industrial's growth will also be driven by growth in Canadian economic output.
After a tough 2016, due to low oil prices and significant wildfires in some of the country’s most prolific oil-producing regions, Canada's GDP is starting to pick up again. The country’s economic growth will be the ultimate driver of the trust’s revenues.
Source: Dream Industrial REIT May 2017 Investor Presentation
Competitive advantage and recession performance
Dream Industrial’s competitive advantage comes from its size and scale as one of Canada’s largest pure-play industrial real estate trusts.
Dream also benefits from its considerable geographic diversification.
The company has a presence in five of the country's most economically important markets:
- Nova Scotia
- Alberta
- Saskatchewan
- Ontario
- Quebec
Each province’s contribution to net operating income can be seen below.
Source: Dream Industrial REIT May 2017 Investor Presentation
As an industrial REIT, Dream may be prone to economic downturns that particularly effect industrial companies. The recent decline in oil prices comes to mind.
With that said, Dream Industrial has been actively focusing on de-risking its business model in recent years.
This can be seen by looking at the company’s debt to total assets ratio, which has been steadily declining in recent years.
Source: Dream Industrial REIT May 2017 Investor Presentation
The company also benefits from a staggered debt maturity profile.
With the exception of 2019 (when the company has an issue of debentures due), the trust’s debt matures evenly across the coming years.
Source: Dream Industrial REIT May 2017 Investor Presentation
Since Dream Industrial was founded in 2012 (when it was spun off from Dream Office REIT), the company was not a publicly traded entity at the time of the last economic downturn. This means the company has no track record of performance through a recession.
With that said, I would expect the company’s performance during future recessions to be in line with the performance of the average REIT unless the recession is particularly hard on industrial companies. In that case, Dream Industrial’s performance will likely be worse than the average REIT due to its industrial exposure.
Valuation and expected total returns
As a REIT, Dream Industrial is required by law to pay out the vast majority of its net income as dividends. Thus, the trust’s total returns will be composed primarily of its current dividend yield and its future valuation changes. Funds from operations growth will play a smaller role in the company’s future returns.
Dream Industrial currently pays a monthly dividend of 5.8 cents, which yields 8% on the company’s current stock price of 8.78 Canadian dollars ($6.64).
To assess the REIT’s valuation, it is most practical to compare its current dividend yield to its historical dividend yield.
Normally, investors would assess a company’s valuation based on the price-earnings ratio, price-book ratio and other valuation metrics, but this is not applicable to REITs because of the considerable non-cash amortization and depreciation charges they incur.
With that in mind, the following diagram provides a comparison of Dream Industrial’s current dividend yield to its long-term historical average.
Source: YCharts
The company’s current dividend yield is slightly below its long-term average. Therefore, the company is likely trading around fair value. Right now represents a historically reasonable time to initiate or add to a stake in Dream Industrial.
The remainder of the trust’s future shareholder returns will come from growth in its per-share funds from operations.
Between 2013 and 2016, Dream Industrial grew its adjusted funds from operations per unit (the equivalent of earnings per share for a REIT) from 74 cents to 79 cents, equivalent to a compound annual growth rate of 2.2%.
I believe growth of around 2% per year is likely going forward, which gives investors a shot at double-digit total returns after accounting for Dream’s 8% dividend yield.
Final thoughts
Dream Industrial’s high dividend yield and monthly dividend payments are two reasons why the company will stand out to high-income investors.
Some due diligence reveals the company’s dividend yield is in line with its historical averages (indicating it is trading near fair value) and that the trust has a very diversified asset base.
This stock may merit investment for investors looking for exposure to a pure-play industrial REIT.
Disclosure: I am not long any of the stocks mentioned in this article.
