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Note: All amounts discussed are in Canadian dollars. This was written pre-market on May 13, 2022.

We have covered Dream Industrial Real Estate Investment Trust (OTC:DREUF) in the past. Since our last article, the stock is up slightly, and this has been about in line with the broader markets.

The challenge is, of course, to always weigh where the price is relative to the value. Last time we were neutral as we did not think that the price offered a spectacular entry point relative to the risk and reward. We believe that might have changed. Allow us to explain.

Dream Industrial owns 239 industrial and logistical assets across North America and Europe.

The bulk of these assets are in Canada, though the company has aggressively expanded in Europe recently.

The portfolio is well diversified by geography as well as by type, and Dream Industrial holds some of the best assets in key positions.

If you recall our last coverage, we had shown how the funds from operations (FFO) and adjusted funds from operations (AFFO) had declined between 2018-2020. This was the result of a methodical exercise emphasizing equity over debt. The payout ratio was elevated, but we still gave it the lowest risk rating for a cut on our proprietary Kenny Loggins' scale. We were right in our analysis, and Dream Industrial fired on all cylinders in 2021.

Each of those points is a worthy achievement, but we want to focus on the 19% rent spreads leading to a 7.6% year-over-year increase in net operating income (NOI). Keep in mind that rent spreads only occur on a fraction of the properties when they come up for renewal. Hence, a 19% rent spread only creates a 7.6% year-over-year change in NOI.

The momentum carried over in the same fashion in Q1-2022. The company reported a 16% increase in FFO per unit. We would note the commentary in the conference call on the leasing spreads in both Europe and Canada.

Occupancy across our portfolio remained strong at nearly 99%, about 150 basis points higher than the prior year, and our leasing momentum continues to be robust. Since the beginning of the year, we have signed approximately 2.8 million square feet of leases across our portfolio. In Europe, we signed 1.2 million square feet of leases at an average leasing spread of 16%. In Canada, we have signed 1.6 million square feet of leases at an average spread of nearly 25%. Contractual rent steps is an important driver of steady same-property NOI growth.

Source: Q1-2022 Conference Call

Based on these trends, we think it is highly likely that the REIT exits 2023 at a $1.00 FFO per share run-rate.

At our purchase price of $13.50, Dream Industrial appears relatively cheap at 13.5X 2023 FFO numbers. Using the 2023 consensus estimates, Prologis (PLD), which we think is a worthy comparative, trades at close to 23X FFO. Rexford Industrial (REXR) is still at close to 30X FFO. Summit Industrial REIT (OTC:SMMCF), a great Canadian peer, is now at 21X 2023 FFO. Granite REIT (GRP.U) is dual listed in Canada and US and has a great European presence as well. That one trades at 18X 2023 FFO estimates. Investors might be wondering why is there such a huge discount, and we believe the market may be uncomfortable with the financing strategy. While Dream Industrial has a Canadian and European presence, it has structured its debt base almost exclusively in Europe.

That is the reason it is paying 0.83% weighted average interest rates on its debt. Now this debt is relatively short-dated and the weighted average term to maturity is 3.8 years.

So therein lies the rub. If European interest rates really take off, and one could argue that to some extent they have, then Dream Industrial refinancings may be a tad more expensive. On the plus side, this extreme reliance on European funding for all of its debt has had a brilliant side effect. Its debt has gotten cheaper in Canadian dollars.

Dream Industrial is too cheap now, regardless of how you slice it. Yes, interest rates are going up, and the company will have to pay more. Based on the leasing spreads we are seeing, we would not lose a wink of sleep on it. The REIT also has a short weighted average lease maturity number and the rents are significantly below market rates. The $1.9 billion of debt is also counterbalanced by $4.5 billion of unencumbered properties and a payout ratio moving towards 70% in 2023. So again, we don't see an issue. The stock trades at a 15% discount to its own IFRS NAV and is bargain-basement territory.

It also offers a comfortably large yield, and we think investors should consider this for both income and growth. Dream Unlimited Corporation (OTC:DRUNF) did a great job selling one of our previous holdings, Dream Global (OTC:DUNDF) in 2019, and we think this one could go a similar route.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

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Disclosure: I/we have a beneficial long position in the shares of DREUF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: We are long Granite REIT's bonds.