DBRS Limited (DBRS Morningstar) notes Dream Industrial Real Estate Investment Trust’s (Dream Industrial or the REIT; rated BBB with a Stable trend by DBRS Morningstar) proposed portfolio acquisition of European logistics properties and capital recycling announced on May 20, 2021. In its announcement, the REIT described (1) a proposed transformative portfolio acquisition of European logistics properties valued at $1.3 billion (the European Acquisition), (2) an equity offering of $287.5 million subscription receipts (including the underwriter’s overallotment option), (3) capital recycling initiatives related to its U.S. portfolio expected to net $250 million in equity, and (4) funding of the balance of the European Acquisition, among others ($231.5 million under contract or in exclusivity at March 31, 2021), with cash on hand and assumed and incremental debt (together with the European Acquisition, the Transactions). The above-noted subscription receipts represents the right of the holder to receive, upon closing of the European Acquisition, one unit of the REIT.
Should the Transactions close as described, DBRS Morningstar is of the view that the Transactions would be accretive to Dream Industrial’s qualitative business risk assessment profile. Upward revisions to Dream Industrial’s business risk assessment profile would be supported by (1) the European Acquisition, which consists of a 8.9 million square feet gross leasable area of institutional quality pan-European modern logistics assets located in key industrial markets including France, the Netherlands, and Germany, 100% leased to large quality tenants, and (2) the REIT’s continued growth into a sizable owner-operator of industrial real estate generating in excess of $200 million EBITDA annually (pro forma the Transactions).
DBRS Morningstar is of the view that the aforementioned improvement in Dream Industrial’s business risk assessment profile would be offset by deterioration in the REIT’s financial risk assessment profile. Pro forma the European Acquisition or all of the Transactions, as presented in the announcement, DBRS Morningstar anticipates that Dream Industrial’s leverage as measured by total debt-to-EBITDA will deteriorate such that the REIT will be operating in the 10 times (x) range in the near to medium term from 7.1x at the last 12 months ended March 31, 2021 (LTM), before improving thereafter. DBRS Morningstar anticipates Dream Industrial’s EBITDA interest coverage will remain strong in the 5x range from 4.98x LTM, as the REIT continues to swap Canadian-dollar-denominated debt underwritten in Canada for euro-denominated debt at very low rates supported by its European assets. DBRS Morningstar also considers the potential for enhancements to Dream Industrial’s financial flexibility as the REIT progresses toward a largely unsecured debt capital stack; however, the aforementioned elevated leverage levels may limit Dream Industrial’s financial flexibility and constrain the ratings on an interim basis until leverage improves.
DBRS Morningstar expects to revisit the ratings at or about the time of the European Acquisition close. DBRS Morningstar is of the view that the European Acquisition or all of the Transactions are credit neutral should they close, consistent with DBRS Morningstar’s current understanding and expectations.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry (April 23, 2021; https://www.dbrsmorningstar.com/research/377358) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).
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