An Inner CircleMember recently asked Pat McKeough about the prospects of a Canadian REIT that does most of its business outside the country. In Pat’s response, he notes that the trust, which acquired substantial properties in Germany, has generated strong cash flow and a high dividend yield, but incurs risk with an acquisition strategy heavily concentrated in Europe.
Q: Hi Pat: May I have your opinion of Dream Global, please? Many thanks.
A: DREAM GLOBAL REIT, (symbol DRG.UN on Toronto; www.dream.ca/global) is a Canadian real estate investment trust that focuses on investing outside the country. It aims to grow by acquiring different types of properties in certain European countries, starting with Germany.
The REIT first sold units to the public in August 2011. Initially, it sold 27 million units at $10 each to raise $270 million. It raised a further $140 million in an issue of unsecured loan certificates, or debentures.
The trust used the total proceeds of $410 million to help buy a $1 billion portfolio of properties in Germany from Deutsche Post. That’s the largest postal company in Europe. These buildings are located in major cities and towns, often on a central square near the main train or bus station. Deutsche Post remains its largest tenant.
As of March 31, 2017, Dream Global owned 169 commercial properties that contain a total of 12.9 million square feet. All of them are in Germany, except one in Austria. These buildings had a 90.1% occupancy rate. The trust recently added to its holdings with a property in Belgium (see below).
Due to the recent asset sales, Dream Global’s revenue in the first quarter of 2017, fell 3.1%, to $58.0 million from $59.9 million a year earlier. However, overall cash flow rose 24.0%, to $27.4 million from $22.1 million. Due to more units outstanding, cash flow per share rose at a slower rate of 10.0%, to $0.22 from $0.20.
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Dividend Stocks: REIT spends $143 million on Brussels office complex
Dream Global will take the cash from its recent sales and reinvest it in other properties with more attractive prospects. In May 2017, it bought Airport Plaza, a multi-tenant office complex located in Brussels, Belgium. The purchase price was $143.0 million. Airport Plaza is home to high-profile tenants, including Samsung, Levi Strauss, Air Products, Estee Lauder, Sanofi, McDonalds, Chevron and NN Belgium (the insurance arm of ING). The property is next to the Brussels International Airport. The building has an occupancy rate of 97%.
Investing in Europe adds risk, as the continent is still dealing with slow growth and high government debt. As well, all of Dream Global’s lease payments are in euros, so weakness in that currency hurts their contribution to the REIT’s revenue and cash flow. On the other hand, recent months have seen more money flowing into European stocks and some increase in strength for the euro.
Another risk factor for Dream Global is that 80 of Deutsche Post’s 128 leases expire in 2018. The REIT expects to report the results of its lease negotiations soon, but believes it will retain Deutsche Post for the majority of the spaces it leases. As well, the recent asset sales have lowered its reliance on that tenant. In the latest quarter, Deutsche Post accounted for 18.6% of Dream Global’s rental revenue; that’s down from 22.0% a year earlier.
The REIT’s acquisition strategy, which it plans to continue, also adds to risk.
However, Germany’s economy is the largest in the European Union and the fourth-biggest in the world. It’s also the most prosperous and stable country in Europe. Moreover, now is a good time for Dream Global to continue to buy properties from distressed European sellers.
The REIT trades at 13.1 times its forecast 2017 cash flow per unit of $0.80. It pays monthly distributions of $0.0667 a unit; the annual rate of $0.80 yields a high 7.6%.
Inner Circle recommendation: Dream Global REIT is okay to hold.
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