Dream Industrial REIT
Additional thoughts on the DIR/GIC proposed acquisition of Summit Industrial (SMU.UN)
TSX: DIR.UN | CAD 11.51 | Outperform | Price Target CAD 15.50
Sentiment: Positive
Our view: As noted in our earlier comment, we view the $5.9B (including assumed debt) proposed acquisition of SMU by the GIC (90%)/DIR (10%) JV as positive for SMU and DIR, and the Canadian industrial peers. As a reminder, we estimate the $23.50/unit offer price for SMU reflects a ~3.3% going-in implied cap rate (before fee income DIR expects to generate), ~$257/sf, a 31% premium to our $18 SMU NAVPU (20% premium to Street’s $19.66 NAVPU), 21% premium to SMU’s $19.46 IFRS BVPU, and 32x 2023E AFFO. Aside from modest estimated earnings accretion, the transaction expands DIR’s Canadian footprint (53% CDA/41% EUR/6% US GLA at owned interest vs. 50%/44%/6% prior), grows its property management income stream, expands its development pipeline to 11MM sf (at 100%; from 6.5MM sf), and provides a new source of capital to pursue Canadian growth through the JV. At a 6.1% implied cap rate (23% below NAV), we continue to see current levels on DIR as attractive.
Our initial estimates suggest low-single-digit % FFOPU accretion in 2023. In addition to the mark-to-market opportunity on SMU’s portfolio (market rents are ~57% above in-place at Q2), we believe DIR’s expected property management and other fee income, coupled with low-cost debt are playing a key role in Management’s expectation for 2023 FFOPU accretion. Notably, DIR’s cost of new debt is ~4% (after swapping into EUR), with the JV assuming SMU’s debt at ~2.7%. Looking ahead, we expect earnings accretion to improve as leases are marked-to-market on expiries (5.5-year lease term), coupled with growing fee income. We estimate DIR’s pro-forma D/GBV rises to the mid-30% range (from 29%), in line with its target range, and still below sector levels.
More details to come in the transaction circular, though probability of interloper seems low, in our view, given the premium valuation, an all-cash deal, a credible buyer group, and a difficult market for leveraged buyers. We expect further transaction details to surface from the circular (incl. background, break fees, potential tax consequences), which we expect will be released in the next couple weeks.