One of the sectors I think has been thrown out with the bathwater, at least during this most recent period of turmoil, has been the real estate sector. A range of real estate investment trusts (REITs) and other companies related to the construction sector have been beaten down primarily as a result of interest rates. This makes sense. When interest rates stay higher for longer (as they have of late), activity in this important sector can slow down.
That said, I think certain companies within this space have been beaten down too much by Mr. Market and are worth a look. One such company I’ve been bullish on for some time is Dream Industrial REIT (TSX:DIR.UN).
Here’s why I think Dream Industrial’s 18% decline over the past year is likely overdone, and why I see this value stock trending higher over the long term.
Impressive fundamentals and growth upside
When most investors think about real estate as an asset class, they think of defensiveness. Makes sense. Indeed, most investors aren’t in the real estate game for the gains they’ll accumulate over decades, but rather the protection against inflation this asset class provides.
Given heightened inflation concerns right now, that should make this asset class more attractive. That would be my argument, anyway.
But it’s also true that investors have reason to be concerned. Funds from operations, net operating income, and rental renewal rates (occupancy rates) have deteriorated of late across the board, providing some investors with pause.
On these fronts, Dream Industrial’s recent report highlights relative strength that I think is worth considering. The company saw 5.8% FFO growth, 3.1% NOI growth and strong net income growth over this past quarter, which many analysts are attributing to its ability to grow organic earnings. In this environment, I’d argue that’s the most important fact to consider.
Don’t forget about the dividend
The other key attribute that makes Dream Industrial among the top REITs on my list right now is the trust’s 6.5% dividend yield. This monthly distribution has remained robust over time and is well-covered by the company’s underlying cash flows.
Of course, things could change on this front, and there are always risks for investors to consider when it comes to investing in any sector. But given the defensive nature of industrial real estate as a whole (if we’re planning on having an e-commerce-driven economy long-term, warehouses close to city centres are going to become even more valuable), there’s a lot to like about how Dream Industrial is positioned right now.
