Canaccord - maintains BUY and increases PT to $11.75 Dream Global REIT (DRG.UN-T) is continuing its transformation toward owning a “high-quality and well located” portfolio, according to Canaccord Genuity analyst Mark Rothschild.
In a research report summarizing his recent tour of Toronto-based Dream’s property in Vienna, Austria as well as its holdings in Germany, Mr. Rothschild said the REIT has taken advantage of the recent availability of desirable properties as well as low borrowing rates in Germany. He notes the REIT has announced $1.3-billion in acquisitions since the end of 2013, adding 3.9 million square feet in gross leasable area (representing 25-per-cent growth) to its portfolio.
“We believe that if these properties were located in large Canadian markets which carried similar fundamentals, the REIT would be of greater interest to many Canadian REIT investors and would receive a superior public market valuation,” he said.
Mr. Rothschild also emphasized that the REIT’s recent lease extensions with Deutsche Bank has markedly improved its cash flow stability.
“While the REIT’s exposure to DP has declined considerably, the upcoming 2018 lease expiries had, in our view, represented some risk to cash flow,” he said. “Therefore, the announcement last week regarding these leases should be viewed positively. On June 21, the REIT announced that Deutsche Post has agreed to renew the leases for 70 properties expiring in 2018 which total 2.5 million square feet of gross leasable area and represent 90 per cent of the expiring GLA. On an [net operating income] basis, the REIT has replaced 89 per cent of the income and there is further potential upside as we expect the REIT to sign direct leases with Postbank at some of the properties that will be vacated by Deutsche Post. Following these lease extensions, the average lease term to maturity of the REIT’s portfolio has increased to 5.1 years, from 4.3 years as of quarter-end Q1/17. Of the properties being vacated, much of the space has a higher use as residential, and could be redeveloped.”
Mr. Rothschild said expects “healthy” cash flow growth in the future as signed leases and recent acquisitions take effect.
“Furthermore, the focus on acquiring higher-quality assets as well as the strong demand for office properties in Germany should also allow for NAV growth over time. Reflecting the continued high-grading of the portfolio, and more importantly, the increased cash flow stability following the lease renewals with Deutsche Post, we have lowered our utilized cap rate for the REIT’s portfolio to 5.5 per cent (from 5.8 per cent). Consequently, our NAV [net asset value] estimate increases to $11.68 per unit (from $10.48).”
With that change to his NAV projection, his target price for units of the REIT rose to $11.75 from $10.50. The analyst consensus price target is $10.72, according to data from Thomson Reuters.
He maintained a “buy” rating.