Pauls, who assumed his role on Jan. 1, 2018 after leaving a senior executive role with Denver-based real estate firm PaulsCorp, recently spoke with RENX about Dream Industrial’s growth through its first decade as well as its strategies and outlook.
Pauls said Dream Industrial had a market cap of about $800 million and close to $1.5 billion in assets when he joined. Those figures are now approximately $2.82 billion and $7 billion, respectively.
“We’ve got a great team that can identify opportunities in value and a team that can unlock that value,” said Pauls, who noted that has also garnered great investor support.
“We’ve grown our funds from operations, we’ve grown our total portfolio size and we’ve enhanced our yields just through creating value for the properties we have, as well as identifying new opportunities that have been created for the REIT.”
Dream Industrial’s evolution and growth
Dream Industrial has added density to existing properties and undertaken greenfield development in Canada, the U.S. and Europe.
As of June 30, it owned, managed and operated 257 industrial assets comprising approximately 46 million square feet of gross leasable area. In-place and committed occupancy was 99.1 per cent on that same date.
Sixty-two per cent of Dream Industrial’s portfolio is in Canada, largely in Greater Toronto, Greater Montreal and Calgary.
However, it elected to expand into the U.S. almost five years ago to create scale and access more markets and liquidity — which couldn’t have been achieved by remaining solely in the Canadian market.
The American strategy is to pursue long-term growth alongside institutional partners through a retained 25.35 per cent interest in a private open-ended U.S. industrial fund.
A subsidiary of the trust provides property management, construction management and leasing services to the fund at market rates.
“We’d like to see that fund grow and our participation in that continue to grow,” said Pauls.
Dream Industrial’s European expansion was enabled by Blackstone’s late 2019 acquisition of all the subsidiaries and assets of Dream Global REIT for $6.2 billion.
Much of the Dream Global team moved to Dream Industrial and hit the ground running with a pipeline of deals and opportunities that were previously exclusive to the Dream Global platform.
The European portfolio is primarily located in the Netherlands, Germany and France.
Diversification is valued
The move also enabled Dream Industrial to access European-denominated debt, which was quite a bit cheaper than North American debt, and to diversify its risk.
“Now we’ve got a risk profile that spreads across many tenants, many geographies and even different product types,” said Pauls.
“We have urban logistics, which would be considered last-mile properties. We’ve got large distribution facilities and then we’ve got light industrial and light manufacturing, where there’s a lot of tenant investment in those properties.”
Canadian urban logistics properties are the hottest asset class in the portfolio at the moment, according to Pauls, as that is where Dream Industrial sees the highest rent growth, replacement cost and barriers to entry. Such properties in the Greater Toronto Area (GTA) are where it has the highest opportunities for mark-to-market rents.
Development remains important
Dream Industrial prefers to allocate five per cent of its balance sheet to development, which gives it an opportunity to increase yields and create product it otherwise may not have been able to buy.
Pauls said development yields are in the six per cent range, while yields on intensifying properties the trust already owns are in the high single digits. Both numbers are higher than for buying income-producing properties.
Dream Industrial’s net debt-to-asset ratio is under 30 per cent, but Pauls said it would be happy if that number was in the mid-to-high-30s.
Dream Industrial identifies opportunities to recycle assets within its portfolio and reinvest the proceeds into higher-quality properties that are less management- and capital-intensive.
Unit prices are undervalued
There’s a significant disconnect between the valuations of private and publicly owned real estate companies at the moment, as Pauls said the public markets tend to move on momentum and create a herd mentality.
Dream Industrial’s stock price closed at $11.02 on Oct. 5, not too far off its 52-week low of $10.34 and well below the 52-week high of $17.60.
Pauls sees buying Dream Industrial units as a great opportunity to acquire ownership in quality real estate at below replacement cost and net asset value.
“I feel passionate that we’re undervalued,” said Pauls. “What we’re trying to do is run the company well, deliver good results, create value every day and do the best we can from an operations and management standpoint.”
Unlike some other REITs, Dream Industrial hasn’t bought back any of its own units because it’s using capital for development and intensification.
During the second quarter, construction began on a 154,000-square-foot ground-up development in Caledon in the GTA and a 120,000-square-foot expansion in Montreal.
Dream Industrial is under construction on more than 680,000 square feet of projects across Canada and Europe and is in the final stages of advancing the construction of 800,000 square feet of projects in the near term.
The trust’s development and expansion pipeline totals approximately 3.4 million square feet in land-constrained markets in Canada and Europe.
Positive outlook for the future
Pauls believes real estate is a good place to invest in the current economic environment and that industrial is by far the best asset class due to its stability, the long-term nature of its contracts, the underlying health of its tenants and the strength of its demand.
Pauls expects replacement costs and barriers to entry to continue to rise due to increasing demand for industrial space along with land constraints, rising material costs and labour shortages.
“I think it’s hard to say what’s going to happen with inflation, interest rates and the geopolitical factors that influence economies, but we’re very happy with the asset class that we’re in,” said Pauls.
“We think being in real property is a bit of a hedge against inflationary pressures. We’re happy with where we’re at.”