Updated on April 3rd, 2019 by Josh Arnold
The REIT sector of the stock market is divided into different sub-sectors depending on the operations of the underlying businesses.
Industrial REITs stand out because of their focus on single-tenant properties. While this poses higher vacancy risk than multi-tenant properties, it can also lead to mispriced assets and attractive buying opportunities.
Dream Industrial REIT (DREUF), (DIR.UN.TO) is an industrial REIT, which may not be well-known to investors because it operates primarily in Canada and unfortunately has struggled in recent years.
Indeed, Dream Industrial’s share price was flat for the five-year period ending 12/31/2018. A sharp rally in 2019 has produced strong returns for shareholders year-to-date, and the stock may still make an appealing investment for income investors.
First, Dream Industrial REIT has a strong dividend yield. The trust’s current dividend yield of 5.9% is about three times the average dividend yield in the S&P 500.
You can see the full list of 416 stocks with 5%+ dividend yields here.
Better yet, Dream Industrial REIT also 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.
Monthly dividend payments are very rare in today’s market. We’ve compiled a list of all 41 stocks that pay monthly dividends, which you can access below:
Dream Industrial REIT’s high dividend yield and monthly dividend payments are appealing characteristics for high income investors.
This article will analyze the investment prospects of Dream Industrial in detail.
Business Overview
Dream Industrial is a Canadian-based, industrial-focused real estate investment trust that operates in two broad divisions:
- Multi-Tenant Properties (63% of net operating income)
- Single-Tenant Properties (37% of net operating income)
Dream Industrial’s asset base stands out for being highly diversified, with over 1,300 total tenants.
Source: February 2019 investor presentation, page 20
In addition, its largest tenant is just 3.6% of its total rental revenue, with the top 10 tenants comprising just 17% of total rental revenue.
This diversification is outstanding among other industrial REITs and indeed, among many other types of REITs that have large single customers.
Dream Industrial’s weighted average lease term is also 5.5 years for its top 10 tenants, and 4.1 years for the entire portfolio. This offers the trust a mix of stability and expiring leases that it can charge higher rates on for renewals.
Source: February 2019 investor presentation, page 12
Dream Industrial’s portfolio is a mix of light manufacturing (16%), warehouse and distribution (32%), and flex industrial (52%). The trust’s concentration in Canada is still very high at 83%, with the balance coming from the U.S.
Dream Industrial is in the process of diversifying its asset mix, but it will always be focused in Canada and on industrial properties.
Growth Prospects
Dream Industrial REIT’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 that the trust has had a very strong level of average occupancy since its initial public offering, with an average occupancy of 96% since that time.
Source: February 2019 investor presentation, page 21
Its occupancy rate has improved in recent quarters from already-strong levels as the trust continues to take advantage of strong fundamentals in industrial properties.
Source: February 2019 investor presentation, page 14
Dream Industrial is focusing on the four long-term growth drivers, in addition to future acquisitions that will build and improve its total portfolio.
The trust is heavily concentrated in Ontario and Quebec, areas in which it has experienced great success in terms of renewal spreads in recent years.
It also has contractual rent increases of 1.5% annually, a natural tailwind to rental growth. Occupancy remains very strong and is getting stronger, and it is constantly managing its renewals to capture higher rents as quickly as possible.
Finally, Dream Industrial is building its focus on e-commerce properties because the trust sees powerful, long-term tailwinds in that space.
Source: February 2019 investor presentation, page 37
Dream Industrial sees powerful tailwinds for e-commerce demand and thus, space for fulfillers of that demand in the future. The trust is positioning itself to be a premier provider of space its tenants need to do business in the coming years.
In total, we see Dream Industrial’s growth outlook as quite favorable and supportive of long-term funds-from-operations growth.
Dividend Analysis
Dream pays a current monthly distribution of 5.833 Canadian cents per share on the company’s Canadian listing, DIR.TO. That works out to 70 cents annually in Canadian currency.
In U.S. dollars, Dream has an annualized dividend payout of $0.53 per share, which represents a current yield of 7.8%.
In fact, the distribution has never been cut in the trust’s relatively short operating history, but also hasn’t increased for six years. The stagnant payout is undoubtedly part of the reason why the share price didn’t move for five years.
The dividend payout is well covered by earnings, as 2018 saw FFO-per-share of $0.65. That was down from the prior year, but from a dividend coverage perspective, Dream Industrial is in pretty good shape.
Payout ratios for REITs are always very high because they are required to distribute nearly all of their earnings. At 81% in 2018, Dream Industrial’s payout ratio is fairly low and we view it as safe.
Distribution growth may prove to be elusive, but we do not see a cut anytime soon.
Final Thoughts
Dream Industrial REIT’s high dividend yield and monthly dividend payments are two reasons why the company will stand out to income investors.
With the yield being much lower than it has been in recent years – thanks to the higher share price – investors would do well to seek a lower price before buying Dream Industrial.
The REIT has strong fundamentals, with potential for future growth. But a very sharp rally in 2019 has the stock outside of what we consider value range.
