A group of equity analysts on the Street revised their recommendations for Summit Industrial Income REIT after Monday’s announcement of its $4.5-billion sale to GIC, Singapore’s giant sovereign wealth fund, in a joint venture withDream Industrial REIT
Canaccord Genuity’s Mark Rothschild thinks the deal looks “fair” compared to other recent transactions in the real estate sector, pointing to Blackstone’s US$3.1-billion acquisition of WPT REIT in November of 2021 and Prologis’ US$23-billion acquisition of Duke Realty last month.
“Though the mark-to-market of rental rates is substantial, and Summit is poised to grow cash flow dramatically over the next few years, we believe the offer is attractive for Summit unitholders, and expect the transaction to close successfully,” he said.
“The transaction represents an implied cap rate of 3.4 per cent or a 19.5-per-cent premium to consensus NAV. Additionally, the offer price equates to a 31.1-per-cent premium to the unaffected unit price and a one-year forward AFFO multiple of 29.3 times AFFO.”
He believes the agreement is “positive” for Summit’s Canadian industrial REIT peers, particularly Granite REIT (GRT.UN-T), Parkit Enterprise Inc., Dream Industrial REIT (DIR.UN-T) and Nexus Industrial REIT (NXR.UN-T).
“Additionally, we note that Choice Properties derives 16 per cent of total NOI from industrial properties. We believe this transaction highlights that while it might be difficult to confidently assign cap rates for properties in most asset classes, there remain large pools of capital looking to acquire industrial properties and capture the large spread between market rental rates and in place rents,” he said.
“Rental rates for industrial properties in Canada’s largest markets have increased substantially over the past few years as availability is extremely low. Among public Canadian REITs, Summit has the greatest exposure to the tightest markets where fundamentals are robust. The REIT derives 54.5 per cent of same-property NOI from properties located in Ontario, which are largely located along major transportation routes inside and surrounding the GTA.”
Mr. Rothschild moved his recommendation to “hold” from “buy” with a $23.50 target to reflect the acquisition price, up from $22. The average on the Street is $22.54.
Others making changes include:
* Desjardins Securities’ Kyle Stanley to “tender” from “buy” previously.
“In our view, SMU has long been an M&A candidate; however, interest rate volatility and its negative 24-per-cent year-to-date price-only return made a near-term transaction less probable,” he said. “In the context of the current financing environment, we believe the proposed $23.50 per unit is fair, supported by the fact that the stock peaked at $23.89 on November 4, 2021 (approximately 2 per cent above the deal price), at a time when we believed a takeout was being priced in.”
* CIBC World Markets’ Dean Wilkinson to “tender” from “neutral” with a $23.50 target, up from $21.
* Raymond James’ Brad Sturges to “market perform” from “outperform” with a $23.50 target, up from $23.