Tuesday, May 27, 2014

Mind the Debt

I received a comment on an old post over the weekend referencing this Financial Times article (subscription required), which states that Dividend Capital's Industrial Income Trust is looking to sell itself for $4 billion.  The comment said I should not have questioned Industrial Income's 2012 revaluation, which at the time - in the midst of the REIT's offering - valued the REIT at $10.40 per share.  The person who posted the comment calculated that Industrial Income Trust, at $4 billion, was worth $18.50 per share.

I read the Financial Times article and Industrial Income's most recent 10-Q, and unfortunately came up with a value well short of $18.50 per share.  You must remember that while Industrial Income may sell for $4 billion, it has just about $1.9 billion of debt, so the net equity is closer to $2.1 billion.  Here is my math:

Value  $4,000,000,000
Debt  $1,914,691,000
Net Equity  $2,085,309,000
Shares Outstanding  $208,135,000
Equity Value Per share  $10.02

Industrial Income raised $2.1 billion in its offering and through its distribution reinvestment - about what a $4 billion sale would recover after accounting for the REIT's debt. 

Industrial Income's first quarter net operating income was $58,292,000.  If you annualize this figure (multiply it by four) and divide by the $4 billion price tab, you arrive at a cap rate of 5.8%.  The 5.8% cap rate seems rich, but maybe the market is pricing in the REIT's 67% lease turnover before the end of 2019, and the potential to sign new leases at higher rates.   I am surprised that at a 5.8% cap rate Industrial Income doesn't have more equity value than $10.02 per share.    The REIT's initial offering costs and over payment of distributions early in its life are real expenses that must eventually be reflected (deducted) in value.

I think it's great Industrial Income is looking sell for $4 billion.  If it can sell its portfolio of industrial properites at a 5.8% cap rate, it should accept this deal without hesitation.

The Financial Times article had a misstatement.  Industrial Income is not a private company.  It is a non-listed public company. 

(Note that my figures are very rough and are shown for general illustrative purposes not to determine an actual valuation.   The actual share price an investor may receive from any Industrial Income sale would likely vary as there are many more considerations than I have listed that would factor into any sale.)

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