TD - Q2 analysis - price target increased to $10.50 Recommendation: BUY
Risk: MEDIUM
12-Month Target Price: C$10.50
Prior: C$10.00
12-Month Distribution (Est): C$0.80
12-Month Total Return: 28.1%
Event
DRG reported Q2/16 FFO/unit (f.d.) of $0.20, a 2% increase y/y, and in line with both
our estimate and consensus. AFFO/unit (our calculation, excluding currency hedge)
of $0.18 also met our estimate and increased 10% y/y.
Impact: SLIGHTLY POSITIVE
Financing activity to skew Q3; however, our outlook remains intact.
Management has maintained its 2016 FFO/unit guidance of $0.80-$0.82. Q3
is expected to be affected by temporary excess cash balances (the recent
$97.8mm equity raise), and Q4 will benefit from refinancing savings (mortgages +
redemption of the 5.5% convert) and accretion from the two pending acquisitions.
2017 FFO & AFFO growth will benefit from the full-year impacts of refinancing
savings, the Deutsche Post (DP) CPI rent increase, lease-ups of the former
Imtech (100% leased to City of Hamburg) and Maersk spaces (management is
confident that it will be done by early-2017), plus the ongoing redevelopments/
intensifications. Management has provided 2017 AFFO guidance that it would
be "comfortably above" the distribution, which we interpret to be ~$0.81-$0.82.
Our new 2018 forecast shows unchanged y/y AFFO/unit, as we have modelled
10% of DP's 2018 lease expiry being immediately vacated (see pages 3-4 for
details). We remain comfortable with the risk, and next year we expect to hear
more guidance from management.
We have increased our NAV/unit estimate to $10.30, as we do not believe that
previously we, or the consensus at $9.76 (~14% discount to DRG's IFRS Value),
had been fully reflecting DRG's property portfolio value.
TD Investment Conclusion
DRG remains well-positioned with its high-quality assets, a dominant presence in
Germany, and a seasoned, internal property management leasing platform with the
proven ability to create value. DRG units are attractively priced, at a discount to
NAV and offering one of the highest yields in our coverage at 9.1% (covered by our
2017E AFFO), and benefiting from the strengthening fundamentals in Germany. We
are maintaining our BUY recommendation and increasing our target price to
$10.50 from $10.00.