Home » Investing » A TFSA Investor’s Dream: This REIT Is a Must Buy for 2023
Here’s why Dream Industrial REIT could generate good returns in your TFSA this year and beyond.
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Brian is an investment writer and a Chartered Financial Analyst. He is an investing enthusiast who has been a regular contributor to The Motley Fool Canada since 2017. He is also a contributor to TipRanks (www.tipranks.com). His work has been featured on InvestorPlace (www.investorplace.com) as well. You can follow Brian on Twitter @brianparadza
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Investors looking for reliable passive income and potential capital growth in 2023 may want to check out Dream Industrial Real Estate Investment Trust (TSX:DIR.UN). The Canadian real estate investment trust (REIT) is well primed to rock one’s real estate or dividend portfolio. Its upcoming strategic transaction could unlock immediate growth in distributable income in 2023. I’m bullish on DIR units as a monthly-pay dividend play that may grow investors’ capital this year.
Going into the fourth quarter of last year, Dream Industrial REIT held a portfolio of 258 properties totaling 46.5 million square feet of gross leasable area located in Canada, Europe, and the United States. Its properties are primarily distribution and urban logistics centres in high demand in a post-COVID-19 pandemic era.
High tenant demand at Dream Industrial REIT’s properties
Companies are moving to own and control a larger proportion of their supply chains post the horrible shortages and logistics nightmares of 2021. Tenants are willing to pay top rent for logistics and distribution facilities. So not surprisingly, Dream Industrial REIT had a strong occupancy rate of 99% going into the fourth quarter of 2022.
Most noteworthy, DIR reported some of the best leasing deals during the past year. The trust properties were highly sought. Dream Industrial REIT renewed leases and signed new rent agreements at rental rates 38.6% higher than expiring rents. Its portfolio’s in-place base rents exceeded market rents by nearly 30% during the third quarter of last year.
High occupancy and strong rent bargaining power are desirable qualities for a landlord. Dream Industrial REIT passes the cash flow benefits to its investors while still empowered to develop more in-demand properties in its geographic markets.
And the trust recently signed on a new development partner with deep pockets.
Key Joint Venture and Summit II acquisition accretive deals for DIR investors
Dream Industrial REIT’s recent joint venture with a Singapore sovereign wealth fund GIC could open immense growth opportunities for the trust. The JV will acquire all the assets of a star competitor Summit Industrial Income REIT (Summit II) in a $5.9 billion all-cash transaction. Parties could close the deal during the first quarter of this year.
Although DIR’s equity share in the joint venture will be a minority of 10%, the trust will offer asset management services to the JV at prevailing market rates. Management expects the deal to be immediately accretive to Dream Industrial REIT’s funds from operations (FFO).
How could it not? The acquisition of Summit Industrial Income REIT will double DIR’s scale of its Canadian industrial portfolio under management. Further, the deal brings a new source of regular income. It could also increase DIR’s total development pipeline from 6.5 million square feet to 11.1 million square feet on a 100% basis.
Further, DIR will manage 69 million square feet across Canada, the U.S.A., and Europe, including 32 million square feet on behalf of its institutional clients in North America. The trust had a 46.5-million-square-feet footprint in September last year. It could become the largest industrial property manager in Canada. Income from property management and leasing fees may increase over time as the net rental income of the properties grows.
Dream Industrial REIT’s long-term growth prospects will be stronger given Summit II’s strong growth profile. It has generated more business for itself while adding a new source of growth capital to its portfolio of potential financial partners. The two JV partners could work together on new growth projects in DIR’s areas of expertise, an area in which the Dream team has more than 25 years of experience
Should you invest?
An investment in Dream Industrial REIT units could earn you $0.058 per unit every month in income distributions. The distribution should yield 5.44% for 2023. The distribution seems well covered as it comprises only 78.9% of the trust’s funds from operations during the first nine months of last year. Further, DIR units appear significantly undervalued. The trust recently estimated its net asset value per unit at $17.05. The market currently prices DIR.UN units at a 25% discount to their NAV.
Perhaps it’s time to buy the dip and stash the high-quality REIT in a tax-free savings account (TFSA) before units recover throughout 2023. REITs do well in a TFSA. Their income distributions are generally taxed at your marginal tax rate. They may offer better returns in a TFSA.
I'm Brian Paradza, a Chartered Financial Analyst and an investment writer with a demonstrated track record of expertise in the field of finance. My contributions to reputable platforms like The Motley Fool Canada and TipRanks reflect my commitment to delivering insightful analysis and informed investment recommendations. My work has also been featured on InvestorPlace, highlighting my ability to provide valuable insights into various investment opportunities.
Now, let's delve into the article discussing Dream Industrial Real Estate Investment Trust (TSX:DIR.UN) and why it is touted as a must-buy for TFSA investors in 2023.
Dream Industrial REIT Overview: Dream Industrial REIT is a Canadian real estate investment trust with a robust portfolio comprising 258 properties totaling 46.5 million square feet across Canada, Europe, and the United States. The focus of its properties lies in distribution and urban logistics centers, strategically positioned to meet the high demand in a post-COVID-19 era.
Strong Fundamentals: As of the fourth quarter of the previous year, Dream Industrial REIT boasted an impressive 99% occupancy rate, a testament to the high demand for its properties. Companies, seeking to strengthen their supply chains after the challenges of 2021, are willing to pay a premium for logistics and distribution facilities, contributing to the trust's strong leasing deals.
Leasing Success and Financial Performance: Notably, DIR reported leasing agreements at rates 38.6% higher than expiring rents, showcasing its properties' desirability. The trust's in-place base rents exceeded market rents by nearly 30%, indicating strong bargaining power. This advantageous position allows Dream Industrial REIT to pass cash flow benefits to investors while maintaining the ability to develop sought-after properties.
Key Joint Venture and Summit II Acquisition: A recent joint venture with the Singapore sovereign wealth fund GIC is a significant move for Dream Industrial REIT. This venture, valued at $5.9 billion in an all-cash transaction, involves the acquisition of assets from Summit Industrial Income REIT (Summit II). Despite DIR's minority equity share of 10%, the trust's asset management services to the JV are expected to be accretive to its funds from operations (FFO).
The acquisition doubles DIR's scale in the Canadian industrial portfolio and enhances its total development pipeline. This strategic move positions Dream Industrial REIT to become a major industrial property manager in Canada, managing 69 million square feet across North America and Europe.
Financial Outlook and Valuation: Investors considering DIR.UN units for their TFSA portfolios may find the monthly income distribution of $0.058 per unit attractive, with a projected yield of 5.44% for 2023. The distribution appears well covered, comprising only 78.9% of the trust's FFO during the first nine months of the previous year.
Furthermore, DIR.UN units seem undervalued, with the trust estimating its net asset value per unit at $17.05, while the market prices the units at a 25% discount to their NAV. This valuation gap suggests a potential buying opportunity for investors looking to capitalize on the recovery throughout 2023.
Conclusion: Considering the strong fundamentals, strategic joint venture, and undervaluation, investing in Dream Industrial REIT units for TFSA portfolios could be a compelling opportunity. The trust's long-term growth prospects, backed by Summit II's growth profile, position it as an attractive option for investors seeking reliable passive income and potential capital growth in 2023 and beyond.
