Investing in real estate investment trusts, or REITs, allows you to gain exposure to the commercial and residential real estate sector at a low cost. Generally, REITs own and operate a portfolio of properties that are leased or rented out to tenants. The rental income earned by REITs is then distributed to unitholders via dividends after accounting for operating and interest expenses.
However, acquiring properties is capital intensive, and the majority of REITs fuel their growth plans by taking on additional debt. Additionally, the recent spike in interest rates has increased interest payments for REITs, resulting in an erosion of profit margins.
Most REITs have a high dividend payout ratio, making investors wary as it reduces the flexibility of companies to navigate the macro environment amid quantitative tightening measures.
Dream Industrial REIT (TSX:DIR.UN) is a Canada-based REIT that currently offers shareholders a dividend yield of 5.64%, given its annual payout of $0.70 per share. In the last ten years, Dream Industrial stock has returned 174% to shareholders after adjusting for dividends, outpacing the gains of the TSX index, which has returned 112% in this period.
Despite its outsized gains, Dream Industrial stock is down 29% from all-time highs, allowing you to buy the dip. Let’s see if this high-yield REIT is on sale right now.
The bull case for Dream Industrial REIT stock
Valued at $3.55 billion by market cap, Dream Industrial REIT owns, manages, and operates a portfolio of 322 industrial assets totalling 70.6 million square feet of gross leasable area in Canada, the U.S., and Europe.
With $7.9 billion in total assets and an in-place occupancy rate of 97.2%, Dream Industrial has increased the number of assets to 322 in the third quarter (Q3) of 2023, up from 258 in the year-ago period. Its widening portfolio of cash-generating assets has allowed Dream Industrial to report rental income of $84.5 million in Q3, compared to $72 million in the prior-year quarter.
Despite higher interest rates and inflation, Dream Industrial reported funds from operations, or FFO, per share of $0.25 in Q3, up from $0.22 in the same period in 2022. Given it pays a monthly dividend of $0.0583 per share, it has a payout ratio of 70%, which is not too high.
Dream Industrial has transacted 1.2 million square feet of leases across its portfolio since the end of Q2 at an average rental rate spread of 41% over prior or expiring rents. It estimates market rent to exceed average in-place rents across the Canadian portfolio by 48%, with an average contractual annual rent rate growth of more than 2.8%.
What is the target price for Dream Industrial stock?
Dream Industrial continues to evaluate investments, which should help improve its cash flow growth profile over time while preserving balance sheet flexibility. The recently announced Dream Summit joint venture (JV) provides a new source of growth capital for the REIT, allowing it to pursue strategic acquisitions and strengthen its leasing fee vertical.
In Q3, the Dream Summit JV acquired a 19-acre land site and a 150,000-square-foot income-producing property in the Greater Toronto Area. Prior to Q3, the JV acquired four additional income-producing assets totalling 600,000 square feet.
Its solid development pipeline might allow Dream Industrial to end 2024 with adjusted earnings of $1 per share. So, the TSX dividend stock currently trades at 12.4 times forward earnings, which is very cheap. Analysts remain bullish and expect Dream Industrial stock to surge 28% in the next 12 months.
