Dream Global REIT
(DRG.UN-T) C$9.98
Strong Fundamentals Help Push Q1 FFO +13%; Acquisitions on Track
Event
DRG reported Q1/17 FFO/unit (f.d.) of $0.22, a 13% increase y/y, and matching both
our estimate and consensus. AFFO/unit (our calculation, including currency hedge)
of $0.21 was a penny ahead of our estimate and increased 14% y/y.
Impact: SLIGHTLY POSITIVE
Strong fundamentals continue to drive operational improvements, with
positive space absorption and rising occupancy for the ninth consecutive quarter.
Two sizeable acquisitions expected to close late in Q2. DRG is currently in
exclusive negotiations on two properties totalling close to the same €200mm (~C
$299mm) amount that was in discussion back in March. Assuming a 6% average
cap rate, we forecast the acquisitions to be accretive to AFFO, with an expected
levered AFFO yield of close to 10%. This would fully deploy the $115mm
proceeds from DRG's recent equity offering.
Expecting resolution soon on Deutsche Post's (DP) 2018 lease expiry.
Exposure to the DP 2018 lease expiry fell to 12.9% of GRI (and should fall below
12% after the upcoming acquisitions). Based on past experience, we remain
confident that a solid majority of the space will be renewed.
Estimates tweaked; NAV increased. Our forecast calls for AFFO growth
(including the currency hedge) of 10% and 3% for 2017 and 2018, respectively.
Our NAV/unit increased $0.40 to $10.90, largely on the stronger euro.
TD Investment Conclusion
DRG remains well-positioned with an overall high-quality asset base, a dominant
presence in the strongest markets, and a seasoned, internal property management
and leasing platform with the proven ability to create value, in our view.
DRG units are attractively priced, at a discount to both our NAV and its own EPRA
NAV, a discounted valuation versus the German peers, and offering one of the
highest yields in our coverage, at 8.0%.
We believe DRG's recent initiatives:
1) the commencement of trading on the Frankfurt Stock Exchange;
2) newly-introduced Euro currency option for the monthly distribution;
3) enhanced EPRA reporting metrics; and
4) recent Moody's credit rating, will help DRG gain a wider audience with European investors and should help narrow the discount between DRG's valuation and its German peers.
We are maintaining our BUY recommendation and raising our target price to $11.00 from $10.50.