DREAM INDUSTRIAL REIT DOWNGRADED

Dream Industrial REIT was downgraded to hold from buy at TD Securities as a result of its exposure to the weakening Alberta economy.

Analyst Sam Damiani noted that Dream has a fully covered cash distribution yield above nine per cent and the stock is trading at a net-asset-value discount of 23 per cent, but the company’s exposure to Western Canada is a concern.

Dream gets approximately 33 per cent of its net operating income from Alberta, and has a 39-per-cent weighting in the west (including Saskatchewan).

Damiani noted that rents in the Calgary industrial market are down almost 15 per cent in 2015, and are approaching their 2009 lows.

Meanwhile, overall market availability is still reasonable at slightly above six per cent, but that’s approaching the highest level since 2009.

“Recent quarters have shown a softening in Alberta’s industrial market, and given the persistent drop in energy commodities, we believe that the trend will remain weak for at least the next year or two,” the analyst told clients, cutting his price target on Dream to $8.50 from $10.

Damiani doesn’t anticipate industrial occupancy rates dropping to 20082010 levels, when Dream’s predecessor RE IT saw a brief dip to 89 per cent. However, he wouldn’t be surprised to see a decline of five or six per cent in Alberta, where Dream’s committed occupancy currently stands at 97 per cent.

The analyst noted that this would account for a two-per-cent reduction in the REIT’s overall occupancy, which is partly why he expects average funds from operations to grow marginally in 2016, but decline three per cent in 2017.