April 2, 2019
Dream Global REIT
Surfacing NAV; agreement to sell Offenbach am Main (Frankfurt) for €35.5MM
Our view: Dream Global REIT (“DRG”) has agreed to sell a re-zoned redevelopment property located in Offenbach for a significant premium to its IFRS value. The sale is consistent with DRG’s strategy to add value to its redevelopment properties through rezoning and intensification, and dispose of assets where the HBU is largely residential. We like the deal. We reiterate our Outperform rating and $15 price target on DRG’s units.
Key points:
Binding agreement to sell Marienstrasse 80, Offenbach am Main for €35.5MM – DRG has entered into a binding agreement to sell a property located at Marienstrasse 80, Offenbach am Main (in the Greater Frankfurt Area, to the southeast) for €35.5MM. The property is an 11,900 m2(128,200 sf) irregular-shaped site with a vacant, oddly configured five- storey 10,600 m2 (114,000 sf) mixed-used office/distribution building that was formerly leased (until July 2018) to Deutsche Post. DRG had worked with local planning authorities to develop a concept providing for ~25,800 m2 (~278,000 sf) of mixed-use residential area. The transaction represents the sale of the site to a government-sponsored housing provider at a value of €1,375/m2 ($127/sf) of approved density. The transaction is expected to close in Q3/19 subject to customary closing conditions. We estimate that the sale will necessitate the repayment of ~€5MM of debt, thus liberating net cash proceeds of ~€30MM.
Surfacing NAV – The sale price equates to >3x DRG’s Q4/18 IFRS carrying value of ~€10MM. As such, it should surface NAV of ~€25MM or ~€0.13/ unit (~$37MM or ~$0.19/unit). While not significant in relation to DRG’s aggregate Q4/18 NAV of ~€2.0B or €10.28/unit (~$3.1B or $16.05/unit), this single and modest-size transaction is indicative of the types of value- surfacing opportunities that we believe may continue to be “mined” from the portfolio over time through redevelopment, intensification, and conversion to alternative uses.
Immediately earnings accretive; more so with future re-deployment – The property had been essentially vacant for nine months. DRG has indicated that the property was generating an annualized NOI deficit of approximately €0.5MM. Thus, it was a “drag” on earnings. The intention is to redeploy the capital into the acquisition of high-quality properties in target markets. Assuming reinvestment at a 5% future stabilized return, we estimate a total potential incremental annualized earnings impact of ~€1.5MM (~$2MM or ~$0.015/unit).
FFO estimates unchanged – Our 2019E/20E FFO remain $1.05/$1.08. Management has previously guided toward “about $1.06 to $1.07” for 2019. We believe this sale was incorporated with the guidance.
$15 price target and Outperform rating reiterated.