REITs (real estate investment trusts) are still generally considered four-letter words in the US, but in Canada, there’s some real excitement in the sector, writes the staff of Income Trust Insider at Investor’s Digest of Canada.
Dundee REIT (Toronto: D.UN) wants to buy that part of Whiterock REIT (Toronto: WRK.UN) it doesn’t yet own.
Whiterock’s top brass have OK’d the deal. And Whiterock unit holders should do the same, say both Brad Cutsey and Yashwant Sankpal, analysts at Dundee Capital Markets in Toronto.
Cutsey and Sankpal view Dundee REIT’s asking price—$16.25 a unit—as attractive. They also think Dundee gives Whiterock unitholders the chance to invest in an attractively priced large-cap REIT on a tax-deferred basis.
Dundee’s offer is a 13.6% premium to Whiterock’s closing price of $14.30 on January 16. Whiterock units, obviously fueled by Dundee’s offer, have since soared. Dundee’s asking price also represents a 10.1% premium to the analysts’ previous price target of $14.75 a unit.
Cutsey and Sankpal, meanwhile, have nothing but praise for the deal. Not only, they note, does Whiterock’s portfolio fit in snugly with Dundee’s, but the purchase immediately adds 5 cents a unit to the latter’s adjusted funds from operations.
In addition, the deal gives Dundee’s unitholders—both existing and potential—increased trading liquidity, along with improved portfolio diversification. Other benefits are a strengthened tenant base, valuable in-place relationships, and ready-to-use economies of scale.
But will the deal actually close? Both analysts think so. For starters, they note, it’s a friendly transaction, having been OK’d by the boards of both REITs. Moreover, deal protection has been provided. Then, too, Whiterock’s joint venture partner has not only approved the transaction, but has waived its rights as well. Perhaps most important, there’s a commitment by Toronto-Dominion Bank (TD) to finance the deal to the amount of $375 million.
For their part, Sankpal and Cutsey are pegging Dundee’s funds from operations at 28, 34, 33, and 34 cents a unit for the first, second, third, and fourth quarters of 2012, respectively. For the same reporting periods, the analysts’ estimates for FFO per unit for 2013 are 35, 36, 35, and 35 cents, respectively.
For its third quarter, Whiterock hauled in net operating income of $19.6 million—an increase of 33.3% year over year. Funds from operations, however, were lower, sliding to 27 cents from 30 cents a unit, while adjusted FFO fell 3 cents to 24 cents a unit.
For the nine months ended September 30, Whiterock’s net operating income climbed 34.9% to $52.2 million, while FFO rose a nickel to 90 cents a unit. Adjusted funds from operations, not surprisingly, were also higher, jumping to 82 cents from 74 cents a unit.
Based in Toronto, Whiterock boasts 10.2 million square feet of gross leasable area, having a fair-market value of $1.8 billion. For the third quarter, ended September 30, Dundee REIT saw its net operating income climb to $95.6 million from $69.9 million.
Funds from operations were also higher, increasing to $58.3 million, or 64 cents a unit, from $41.9 million, or 60 cents a unit, for the similar period in 2010. For the nine months ended September 30, Dundee’s operating income jumped 59.3% to $183 million, while FFO rose 68.6% to $111.2 million, or $1.95 a unit.
Headquartered in Toronto, Dundee REIT rosters 117 office properties, totaling about 16.5 million square feet, in which the REIT has a 92% stake.
Besides Nova Scotia, Quebec, and Ontario, Dundee’s properties are located in Saskatchewan, Alberta, British Columbia, and the Northwest Territories. The REIT also has 54 industrial properties representing roughly 3.7 million square feet in Montreal, Toronto, and Calgary, among other Canadian cities.
Cutsey and Sankpal may have given their blessing to Dundee’s bid for the remaining units of Whiterock. But they seem equally gung-ho over a revised offer by Cominar REIT (Toronto: CUF.UN) for the outstanding units of Canmarc Real Estate Investment Trust (Toronto: CMQ.UN).
Cominar’s new bid ($16.50 a unit), they note, represents a 24% premium to the latter’s closing price ($13.28) before Cominar made its original offer last fall.
Indeed, both analysts, along with their colleague, Michael Brodie, say they’d be surprised if another company now topped Cominar’s revised offer. In the meantime, they believe there’s a strong likelihood the deal will go through, given that Canmarc’s trustees, as well as its management, are accepting the new bid.
Moreover, the deal is a good fit for Cominar, a Quebec City-based REIT focused mainly in Quebec. For one thing, say the analysts, Canmarc gives Cominar a national platform from which to grow Cominar’s business.
Then, too, the deal helps diversify Cominar’s focus on Quebec, where it’s now that province’s biggest owner of commercial property. The analysts also note the deal gives Cominar a bigger footprint in the retail sector, as well as economies of scale usually associated with a big-cap national REIT.
Another plus? The deal has the backing of such financial heavyweights as the National Bank of Canada, the Bank of Montreal, and Caisse Centrale Desjardins. In addition, Canmarc’s roster of properties complements Cominar’s holdings.
Not surprisingly, Cutsey, Sankpal, and Brodie are continuing to rate Cominar as a “buy/medium risk.” They’re also sticking with their 12-month price target of $24.50 a unit.
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