Dream Industrial REIT (Trust) has agreed to sell 20 of its U.S. assets (29 buildings in total) (seed portfolio) to a private open-ended U.S. industrial fund for approximately C$210 million in cash and an approximately 25% retained interest in the fund.
Dream Industrial REIT, together with a group of institutional investors, will be the initial investors in the fund.
A subsidiary of Dream Asset Management Corporation (DAM) will be the investment manager of the fund and Dream Industrial will continue to pay fees on its 25% interest in the fund under its current asset management agreement with DAM.
Dream Industrial said the seed portfolio comprises 29 buildings totalling 7.3 million square feet. The portfolio is 98% occupied with a weighted average lease term of 3.6 years.
“Since announcing our U.S. expansion strategy in July 2017, we quickly assembled a high-quality U.S. portfolio that has attracted significant institutional interest and allowed us to achieve our targeted allocation of 20% of portfolio value in the U.S.,” said Brian Pauls, Chief Executive Officer of the Trust.
“This transaction represents the next chapter of our growth in the U.S. alongside our institutional capital partners and provides a valuable recurring revenue stream from the new property management platform. Further, it allows the Trust to continue to grow in attractive U.S. industrial markets, improving overall portfolio quality and diversification, while maintaining an enhanced geographic mix,” he added.
The seed portfolio, including customary closing adjustments is estimated to be approximately US$480 million, exceeding its current IFRS carrying value of approximately US$465 million as at March 31, 2021.
As part of the transaction, the Trust will transfer to the fund approximately US$225 million of secured mortgages with an average interest rate of 3.6%, saving over US$30 million in estimated yield maintenance costs that it would typically incur in a marketed sale of its entire U.S. portfolio; and
The Trust is expected to realize an unlevered Internal Rate of Return (IRR) of approximately 12% and a levered IRR of 19% on the seed portfolio since these assets were acquired, on average, approximately over the past three years, significantly exceeding the Trust’s return hurdle.
The transaction is expected to generate approximately C$210 million of equity proceeds for the Trust. Following the closing of the Transaction, the Trust expects to sell its remaining U.S. assets to the fund, comprising two properties located in Cincinnati, Ohio and Indianapolis, Indiana, as well as its 80% interest in the 24.5 acre Range Road project in Las Vegas, Nevada. Overall, the Trust expects to repatriate approximately C$250 million of equity from the transaction.