From TD this morningDream Industrial REIT (DIR.UN-T) C$16.11 Finalizes Creation of U.S. Fund, Retaining a 25% Interest Sam Damiani, CFA Nick With-Seidelin, (Associate)
Event Last night, DIR agreed to final terms on the previously announced plan (link) to create a private U.S. industrial fund through the contribution of a 75% interest in its U.S. portfolio. Closing with regards to 20 properties totalling 7.3mmsf ("Seed Portfolio") is scheduled for July 30 (July 1 effective date), generating $210mm of net cash. The remaining three assets (in Cincinnati, Indianapolis, and the Las Vegas development project) will close at a later date, raising net cash proceeds to $250mm. The REIT will retain a 25% interest in the private fund, alongside a group of institutional investors (which we believe will be subject to a separate management agreement with Dream Asset Management). The transaction was unanimously approved by a special committee of independent Trustees. Our existing forecasts already reflect this transaction.
Impact: SLIGHTLY POSITIVE
Crystallizes Attractive Returns: Over a three-year average hold-period, DIR has achieved a levered IRR of 19% (12% unlevered). Asset Monetization without Costs: The transaction does not result in any brokerage fees, debt breakage penalties, or other costs being payable by DIR, and the transaction effectively defers any potential incentive fee (under the asset management agreement) that might have otherwise been triggered. The existing secured debt (with a 3.6% average interest rate) is being transferred to the new fund, thereby saving an estimated $30mm of yield maintenance costs.
Seed Portfolio Valuation: The portfolio is valued at US$480mm (US$66/sf, ~5.75% estimated cap rate), being US$15mm or 3.2% above Q1/21 IFRS carrying value. The transaction reduces net leverage back down to the mid-30% range (following the rise to ~40% estimated at June 30 with the recent European portfolio acquisition). DIR's pro forma fair value geographic mix is estimated to become 55% Canada, 40% Europe, and 5% U.S. (see the exhibit).
The U.S. fund also:
Enables DIR to achieve significant scale in all regions, without the large U.S. market overwhelming the geographic mix;
Enhances returns through the addition of property management fee income, thereby facilitating the pursuit of higher quality/lower-yielding assets that typically offer superior long-term growth potential; and
Allows DIR to more efficiently allocate debt across regions.