PRO Real Estate Investment 8 Convertible Unsecured Subod Debentures T.PRV.DB

BMO analyst update

[CanSiamCyp]

Charging Ahead on Industrial

Bottom Line:

PROREIT extends its acquisition streak with the pending acquisition of 16 industrial assets for $163.2 million at a 5.9% cap rate. The transaction is expected to boost total asset value by over 20% and raise the REIT's weighting to the highly desirable industrial asset class to 63%. PROREIT raised $69.0M through a bought deal equity issuance and an additional $14.3M through a concurrent private placement. Our target price remains $7.25, which implies a 13.4% total return (including a 6.6% yield), and we maintain our Market Perform rating on PROREIT.

Key Points

$163M industrial portfolio acquisition. Management continues to be active on the acquisition front as the REIT is under contract to acquire a portfolio of 16 industrial properties (15 in Atlantic Canada, one in Winnipeg), for $163.2M ($138 psf) or a relatively attractive 5.9% cap rate. Management stated that this transaction is accretive to AFFO/unit on a leverage-neutral basis. The majority of the assets are located in Halifax's Burnside Industrial Park, which is a key logistics hub in Atlantic Canada. The weighted average lease term of 3.3 years should allow for solid organic growth as leases are renewed.

Continuing to grow industrial portfolio. PROREIT has increased the weighting of industrial in its total portfolio from 56.4% to 63.0% of revenue (Exhibits 1 & 2), which in turn reduces weightings to retail (from 30.4% to 26.0%) and office (13.2% to 11.0%).

Retail disposition. PROREIT also announced the disposition of three retail assets located in New Brunswick for a total consideration of $8.1M.

Bought deal equity issuance and simultaneous private placement. Alongside the transaction, PROREIT issued 8.76M units (with an additional 1.3M units through the full exercise of the over-allotment option) at $6.85/unit, for gross proceeds of $69.0M. The REIT also completed a private placement of $14.3M ($6.85/unit) to Collingwood Investments Incorporation, which will retain its 19.23% position in PROREIT. Both offerings closed on October 6.

Estimates unchanged. We updated our model for the industrial portfolio acquisition and our estimates are essentially unchanged. We lowered our utilized cap rate for PROREIT by 10bps to 6.15% to factor in the lower cap rate on the industrial portfolio acquisition. Our NAV/unit estimate is essentially unchanged at $7.19 (from $7.23).

Improved liquidity post transaction. Proceeds from the capital raise will be used to fund the acquisition and repay credit facilities, which will materially improve PROREIT's liquidity