Dream Industrial REIT (DIR-UN-T) will sell a 75 per cent interest in 20 U.S. industrial properties to a U.S. industrial fund in a transaction which values the portfolio at $602 million (all figures Cdn).

Dream plans to retain the other 25 per cent stake in the properties through an interest in the fund. The REIT, along with a group of unidentified institutional investors, will be the initial investors in the private, open-ended fund.

“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 per cent of portfolio value in the U.S.,” said Brian Pauls, chief executive officer of the trust, in the announcement Wednesday evening.

“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.”

Dream Industrial to receive $210M in cash

Dream expects to receive $210 million in cash as a result of the transaction, and will transfer approximately $282 million in mortgages (average interest rate of 3.6 per cent) to the fund on closing. The sale is expected to close on July 30.

The 20 properties comprise a total of 29 buildings and 7.3 million square feet. The assets are 98 per cent occupied, with a weighted average remaining lease term of 3.6 years.

Dream says the IFRS carrying value for the portfolio was $583 million as of March 31.

As a follow-up to the portfolio sale, Dream says in the announcement it also plans to sell its three remaining U.S. industrial assets to the fund, raising an additional $40 million in equity. These properties are located in Cincinnati and Indianapolis, as well as an 80 per cent interest in the 24.5-acre Range Road development in Las Vegas.

A Dream Asset Management subsidiary will remain as the investment manager for the fund and will provide fee-based property management, construction management and leasing services.

Dream Industrial also plans to continue to grow its U.S. industrial interests through its 25 per cent stake in the fund. In the announcement, it notes “the trust will continue to pursue long-term growth and upside in the U.S. industrial market . . .”

Dream Industrial’s target markets

“Our geographically diverse portfolio and local acquisition and asset management platforms allow us to effectively allocate capital to the regions which present the most attractive relative returns,” said Alex Sannikov, Dream Industrial’s chief operating officer, in the announcement.

“This transaction allows us to crystallize gains in asset values on our U.S. portfolio, establishes a platform to grow competitively in the U.S. and frees capital to invest in markets that will allow us to continue our trajectory of robust cash flow as well as NAV growth and to position Dream Industrial as the premier industrial REIT in each of our operating markets.”

Following the transaction, Dream Industrial’s net debt-to-assets ratio will be in the mid-30 per cent range, leaving it with acquisition capacity of over $200 million.

A significant portion of its future acquisitions are targeted in the European market, where the REIT recently acquired a $1.3-billion portfolio (comprising almost nine million square feet) from Clarion Partners Europe.

“In Europe, we have significantly increased scale and with our recent transformational acquisition, have established a comprehensive pan-European platform that will allow us to execute on our asset management strategies to drive NAV per unit and cash flow growth, while continuing to lower our cost of debt,” Sannikov said in the announcement.

“In Canada, the trust’s largest operating region, we will continue to grow in our target markets of Ontario and Quebec, with over $300 million of assets that have closed or been contracted in these markets thus far in 2021.

“Private market pricing for stabilized industrial properties in these markets continue to exceed record levels and we will remain opportunistic in sourcing properties that are attractive against our target hurdles and screen well against economic rent and replacement cost.

“Where pricing exceeds those indicators, we will aim to develop new buildings and redevelop existing buildings to create a better portfolio.”

Dream Industrial REIT is a Toronto-based trust which owns and operates a global portfolio comprising over 38 million square feet of gross leasable area in key markets across North America and Europe as of June 30.