February 25, 2019
Dream Global REITBetter all around; more to come
Our view: Dream Global REIT’s ("DRG") Q4/18 results met our expectations. 2018 was a year in which organic growth accelerated and Management made very good strides in improving the portfolio and financial metrics. Underpinned by broadly supportive property market fundamentals in Germany and Holland, we see more improvements in store for 2019. We reiterate our Outperform rating and $15 price target on DRG's units.
Key points:
Results – DRG’s Q4/18 FFO/unit of $0.259 was +3% YoY from Q4/17’s $0.252 and in-line with our $0.255E. 2018 FFO/unit of $1.04 was +9% over 2017’s $0.95.
Strong underlying performance and trends – 2018 was a good year, with solid organic growth (+6.6% SPNOI in Q4/18 ; +4.3% for 2018), higher occupancy (Q4/18 leased area of 91.4%, +60 bps QoQ and +330 bps YoY; SP leased area of 91.1%, +210 bps YoY), higher in-place and market rents, reduced financial leverage (43%; -140 bps QoQ and -6pp YoY), progress on non-core asset sales ($146MM), core- and value-add acquisitions ($435MM), and value-enhancing activities.
The 2019 objective: to “take advantage of [fundamental] tailwinds and continue driving every aspect of [DRG’s] business” through:
1) Continued strong organic growth – Management believes the business can deliver 2019 SPNOI of +4%-5%, supported by: 1) additional occupancy increases, primarily in the Dutch portfolio; 2) mark-to-market capture via strong leasing spreads across core German markets, and, 3) executing upon value-add activities;
2) Continued high grading – This year’s objective is to sell all or most of the remaining 45 non-core properties (carried at $127MM at Q4/18). Commencing in 2014, this program has included the disposition of some 240 buildings for ~$700MM. The objective is to reinvest the proceeds into value-add projects and some new acquisitions. Regarding the latter, DRG has assembled a nice roster of ten projects and it sees the opportunity to invest approximately €60MM in value-add initiatives over the next two years. DRG is hinting that it may acquire some more industrial properties this year.
3) Continued improvements in the balance sheet and corporate liquidity – A key financial objective for 2019 is to secure additional liquidity so that the REIT can repay its ($221MM) term loan credit facility in early 2020. Based upon current interest rates, the repayment of this debt could result in interest rate roll-down and hence lower interest expense in 2020.
FFO estimates unchanged – Our 2019E-20E remain $1.05/$1.08. DRG has guided towards “about $1.06 to $1.07" for 2019.