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OUR TAKE: Positive. We like the transaction (details below) as it is accretive to 2023E FFOPU by ~3%. There is no equity requirement, no impact on leverage, and yet PROREIT improved its competitive positioning in the Halifax Industrial market by teaming up with Crestpoint (a major real estate institutional investor). Post closing of this transaction, PROREIT will own 50% stake in a 41-property portfolio in Halifax (& 1 in Moncton), comprising 3.1M sf of GLA with a total asset value of $455M. We estimate that PROREIT (& Crestpoint) will now own 40% of the leasable space in a key Halifax industrial node, and will become a dominant landlord here. The transaction is accretive to FFOPU; we assume the acquisition at a ~6% cap rate (or $142.5/sf), the portfolio sale at a low-5% cap rate (or $151.5/sf), and PROREIT will earn $1M p.a. of net new asset and property management fees from Crestpoint (for managing the portfolio).
Discounted valuation: Trading at 18% discount to NAV (vs REIT sector at 20% discount) and 11.7x 2023 AFFO. We think current distribution yield of +7% at 88% AFFO payout ratio in 2022E and 84% in 2023E should appeal to income investors. Our target of $7.75 is unchanged and implies ~30% total return upside.
KEY POINTS
Transaction Details: PROREIT and Crestpoint will each acquire 50% interest in 21 industrial properties in Halifax Burnside Industrial Park comprising 1.6M sf of GLA from KingSett at a total purchase price of $228M. At the same time, PROREIT will sell a 50% interest in its currently owned 1.5M sf of GLA at the same Industrial Park to Crestpoint at a total value of $227M. PROREIT will assume a 50% interest in approximately $148M mortgages and pay $40M cash on hand for the acquisition, while Crestpoint will assume 50% interest in $129M mortgages and pay $49M to PROREIT. We assume the incremental $9.5M will be used to pay down debt and therefore the transaction will be net cash-neutral.
Transaction Impact: Our 2022E FFOPU is slightly increased, while our 2023E FFOPU is increased by 3%. Leverage is unchanged at ~51%. The Halifax industrial portfolio has a WALT of 3 years; there is significant mark-to-market rent upside, which is not captured in our model. Teaming up with Crestpoint (part of CCL Group, which has $80B+ of AUM) is a good validation of PROREIT’s platform. Overall, capital recycling is a good way to grow the portfolio in the current market.
Secondary market Industrial portfolio: The transaction further increases the footprint in the Maritime Provinces.
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