The evolution of the hybrid work model continues to present significant uncertainty for the future of office properties like those owned by Dream Office REIT. However, the trend appears to be here for the long term. Meanwhile, the trust yields a high 4.4% and its distribution appears sustainable.
The stock trades at just 7.8 times the company’s free cash flow, which is about half the price of comparable competitors in its industry.
DREAM OFFICE REAL ESTATE INVESTMENT TRUST (Toronto symbol D.UN; www.dream.ca) owns 27 office properties, including two under development. The downtown Toronto market supplies 75% of rental revenue and accounts for 82% of the portfolio’s value.
The REIT consolidated its units on a 1-for-2 basis in February 2024. However, to conserve cash for debt repayments, Dream did not adjust the monthly distribution of $0.08333, effectively cutting the payment by 50%. The $1.00 annual rate nonetheless yields 4.4%.
In the second quarter of 2024, distributions accounted for 27% of the REIT’s cash flow.
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In the three months ended June 30, 2024, the REIT’s overall revenue increased 7.9%, to $27.3 million from $25.3 million a year earlier. That’s due to higher rents on new leases and renewals. As well, its occupancy rate at the end of the quarter was 84.3%, up from 83.9% a year earlier.
However, cash flow fell 15.1% to $14.9 million from $17.5 million due to the partial sale of its stake in Dream Industrial REIT (Toronto symbol DIR.UN), which owns industrial properties in North America and Europe. It used the proceeds to buy back units, which is why cash flow per unit rose 8.6% in the quarter, to $0.76 from $0.70.
The units now trade at a reasonable 7.8 times Dream Office’s likely 2024 cash flow of $2.88 a unit.
Prices of top REITs we recommend, including RioCan REIT and Choice Properties REIT, have jumped since June 2024. That’s mainly because the Bank of Canada has cut its benchmark interest rate three times since June, from 5.00% to 4.25%.
Traditionally, REITs, Utilities and so on are said to benefit when interest rates fall—for example, they have a lot of debt, and lower rates make it less expensive to raise money and refinance existing debt—and to fund new development projects.
As well, their shares, which typically offer high yields, compete with fixed-income instruments for investor interest. Lower fixed-income yields boost the attractiveness of high-yielding REITs.
All in all, we think now is a good time to buy the top REITs we recommend.
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I don’t think buying reits presently is a good investment
Prices of top REITs we recommend, including RioCan REIT and Choice Properties REIT, have jumped since June 2024. That’s mainly because the Bank of Canada has cut its benchmark interest rate three times since June, from 5.00% to 4.25%.
Traditionally, REITs, Utilities and so on are said to benefit when interest rates fall—for example, they have a lot of debt, and lower rates make it less expensive to raise money and refinance existing debt—and to fund new development projects.
As well, their shares, which typically offer high yields, compete with fixed-income instruments for investor interest. Lower fixed-income yields boost the attractiveness of high-yielding REITs.
All in all, we think now is a good time to buy the top REITs we recommend.