Pat McKeough responds to many requests from Members of his Inner Circle for advice on specific investments as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle Members. And each week we offer you a report on one of the stocks profiled in these Q&A sessions. We give you Pat’s buy-hold-sell recommendation as well as his analysis of the stock. This is part of the specific buy, hold and sell advice we offer you in our daily posts. Every week you get “A Stock to Sell” on Monday, “Best Canadian Stocks” on Tuesday, and “U.S. Stock Picks” on Thursday.
This week an Inner Circle member asked us about several real estate investment trusts (REITs) that focus on industrial properties. Dream Industrial REIT, formerly Dundee Industrial REIT, owns buildings spread fairly evenly across Canada. Pure Industrial REIT also owns buildings across the country, but with almost half of them in Ontario. Both host a number of well-established tenants. Pat looks at the revenues and cash flow generated by these two REITs and their ability to sustain their distributions and high dividend yields.
Q: Hi, Pat. I have a significant weighting in real estate investment trusts, including these two industrial REITs: Dream Industrial REIT and Pure Industrial REIT. Can you please comment on industrial REITs in general and these specifically? Thanks.
A: We haven’t found any industrial REITs we recommend as buys, but some are okay to hold as part of a well-balanced portfolio. Here’s a look at the REITs you asked about:
Dream Industrial REIT (symbol DIR.UN on Toronto; www.dreamindustrialreit.ca), owns industrial properties across Canada.
On May 5, 2014, Dundee Industrial REIT changed its name to Dream Industrial REIT.
As of September 30, 2014, the trust owned 220 buildings containing 17.0 million square feet of leasable area. Dream Industrial has 30% of its leasable area in Ontario, 28% in Western Canada, 25% in Quebec and 17% in Eastern Canada.
The trust’s largest tenants by square footage are Spectra/Premium Industries, TC Transcontinental, Glenow Windows & Doors, Molson Breweries, The Brick Warehouse, Royal Group, Clean Harbors Industrial, United Agri Products Canada, Nellson Nutraceutical Canada and Array Canada.
In the three months ended September 30, 2014, Dream Industrial’s revenue rose 6.5%, to $40.3 million from $37.8 million a year earlier. Cash flow gained 4.0%, to $14.3 million, or $0.20 a unit, from $13.7 million, or $0.19.
The trust’s occupancy rate is 95.5%. It pays a monthly distribution of $0.05833 a unit, for an 8.3% annual yield.
We view Dream Industrial REIT as okay to hold.
Pure Industrial boosts growth with aggressive takeover strategy
Pure Industrial REIT (symbol AAR.UN on Toronto; www.piret.ca), owns industrial properties across Canada.
As of September 30, 2014, the trust owned 166 buildings containing 15.2 million square feet of leasable area. Pure has 47% of its leasable area in Ontario, 18% in Alberta, 16% in B.C., 4% in Manitoba, 2% in Quebec, 1% in Saskatchewan, 1% in New Brunswick and 11% in the U.S.
The trust’s largest tenants by square footage are FedEx, TransForce, Container World, Best Buy Canada, Tervita, HBC, Advance Engineered Products, Acklands-Grainger, PFB Corporation and Weldco-Beales.
In the three months ended September 30, 2014, Pure’s revenue rose 10.5%, to $36.0 million from $32.6 million a year earlier, mostly due to acquisitions. Cash flow gained 9.8%, to $16.6 million from $15.1 million. However, cash flow per unit fell 18.2%, to $0.09 from $0.11, as the trust increased its shares outstanding by 60% to pay for acquisitions.
Pure’s occupancy rate is a high 97.7%. It pays a monthly distribution of $0.026 a unit, for a 7.0% annual yield.
The trust continues to grow by acquisition: in the first three quarters of 2014 it bought 20 properties in six different transactions for a total of $374.2 million. In all, these buildings contain 3.4 million square feet. In 2013, it bought another 77 properties through 11 transactions for a total of $595.8 million. That added another 6.0 million square feet.
Two parts of Pure’s business add significant risk: its rapid growth by acquisition—it has more than quadrupled the number of properties it owns since the end of 2010—and its reliance on economically sensitive industrial tenants.
However, the trust is geographically diversified, and its largest tenants are large, well-established companies. That helps temper its risk.
We view Pure Industrial REIT as a hold for aggressive investors only.
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Pat McKeough responds to many requests from Members of his Inner Circle for advice on specific investments as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle Members. And each week we offer you a report on one of the stocks profiled in these Q&A sessions. We give you Pat’s buy-hold-sell recommendation as well as his analysis of the stock. This is part of the specific buy, hold and sell advice we offer you in our daily posts. Every week you get “A Stock to Sell” on Monday, “Best Canadian Stocks” on Tuesday, and “U.S. Stock Picks” on Thursday.
