Key points:
Proposed transaction marks a major step forward in European strategy.
The ~$1.3B price tag reflects a low-4% going-in cap rate. As detailed here- in, in our view, the transaction yields several benefits to DIR including 1)a significant expansion of its size, scale, and capabilities in Europe, 2) an advancement in portfolio quality (newer generation, higher clear heights, less management intensive properties), 3) organic growth and value-add opportunities from below market rents and a substantial 1.1MM sf of potential intensification, and 4) modest FFOPU accretion. Our constructive view is partly tempered by the decline in exposure to Canada, our preferred industrial market, to ~51% of portfolio value (from 69%), with Europe rising to 37% (from 14%), and the US falling to 12% (from 17%).
Leverage moves up, but frankly still in good shape. DIR expects to fund the acquisition with 1) the $288MM subscription receipt offering, 2) $150MM of available cash, 3) $500MM of assumed debt, and 4) $350MM from credit lines (which we expect will be replaced with unsecured debt at rates of <1%). The REIT is also in advanced talks on dispositions and JV strategies that should repatriate ~$250MM of equity at values above IFRS, mostly from the US (we estimate ~$500MM of gross dispositions). Layering on $300MM of forecast acquisitions later in the year, we see pro-forma D/GBV rising to a still healthy ~36% by Q4/21 (~7.5x D/EBITDA) from 29% at Q1, in line with DIR’s mid to high-30% target range.
FFO estimates creep up. Our 2021E-2022E FFOPU are $0.78 (+$0.01) and $0.84 (+$0.01) with revisions for the European portfolio acquisition, equity offering, the additional acquisitions and dispositions noted above, and higher leverage. Our 2019A-2022E FFOPU CAGR is 2%, below its industrial peers (7%), albeit with a solid pick-up in 2021 (11%) and 2022 (8%). Our $13/$13.50 current/forward NAVPU estimates are unchanged.
Outperform, $15 price target intact with no change in our forward NAV or target multiple (10% premium to forward NAV). DIR is trading at 6% above NAV (21x 2021E AFFO/5.3% implied cap rate), below the 18% premium of its Canadian listed industrial peers and the 20% premium of US industrial REITs, but ahead of the 1% discount of our broader universe. At current levels, we continue to see an attractive risk-adjusted return supported by DIR’s improving growth profile, advances in portfolio quality, increasing size and scale, robust industrial fundamentals, and healthy balance sheet.