TD thoughts on Q2 ... the recent bought deal was oversubscribed and also the underwriters went for the extra allotment at $9 . .. this will come back . .
Event
Q2/16 FFO/unit met expectations; however, the results included ~$0.01 of nonrecurring
income.
Recommendation: BUY
Risk: MEDIUM
12-Month Target Price: C$10.00
12-Month Distribution (Est): C$0.80
12-Month Total Return: 24.9%
Impact: MIXED
FFO/unit (f.d.) of $0.20 was essentially flat both y/y and q/q, and was in line
with both our estimate and consensus. However, FFO included ~$0.01/unit of
non-recurring lease termination and other non-recurring income. Year-over-year
results continued to reflect two vacancies (Maersk in January 2016 and Imtech
which declared insolvency in Q3/15). The lease with the City of Hamburg for the
full former Imtech space commences Q4/16.
This was DRG's sixth consecutive quarter of occupancy rate growth.
Occupancy (including lease commitments) rose 30bps q/q and 220bps y/y to
88.3%. In-place occupancy slipped 50bps q/q and rose 20bps y/y to 86.0%.
DRG achieved an 86% tenant retention rate (vs 64% in Q1 and 79% in FY2015).
Overall mark-to-market on rents narrowed to 4% (€10.39/sf market vs €9.95/sf inplace)
from 7% in Q1 with the previously-announced 4.3% CPI-based rental rate
increase on Deutsche Post leases reflected this quarter. With the rent increase,
concentration of gross rental income from Deutsche Post remained unchanged
q/q at 22%.
Strong fundamentals continue in Germany, with average vacancy rates in the "Big
7" office markets declining to 6.1% vs 6.3% q/q.
Capital Activity
Post-Q2, DRG completed a $97.8mm equity offering (10.9mm units @ $9.00).
The previously-announced planned acquisition of two properties in Germany for
~$151.5mm remains on track.
DRG disposed of seven IPO properties for $15.5mm in Q2 ($25.5mm YTD), and
has 12 properties held for sale totalling $30.8mm.
DRG has lender commitments to raise $84.3mm of additional proceeds from
refinancing or increasing the size of existing mortgages. DRG expects the
refinanced mortgages to be priced at 1.3% (vs 2.5% prior) for an average 9-year
term. Also, refinancing discussions are underway on $213mm of mortgages that
would raise $58mm of additional cash proceeds. These financings will result in
meaningful interest cost savings.
DRG will redeem the 5.5% convertible debentures (~$161mm face value) on
September 15, 2016.
Investment properties fair values were written up by $66mm in Q2, driven by cap
rate compression.