Dream Office Real Estate Investment Trust (TSX: D.UN) is a Canada-based open-ended real estate investment trust. The Company is focused on owning, leasing, and managing office properties in urban centers across Canada, with a focus on downtown Toronto. Its segments include Toronto downtown, Mississauga and North York, and Other markets. It has a portfolio of approximately 30 properties with a total gross leasable area (GLA) of 5.3 million square feet.

Investment Rationale

• An Income Play: The company is yielding higher with a dividend yield of 4.6%, significantly better than the TSX Composite median dividend yield of 3.15%. Moreover, despite the yield on Treasury bonds have gone up in the wake of increasing inflation stoking expectations, Central Government’s interest rates are still quite low and as the economy is in the recovery phase from COVID-19 led distortions, interest rates would continue to remain lower. Also, US Federal Chief recently stated that despite higher yields over higher inflation expectation, the interest rate would be around the current level, as the money supply is quite essential to bring things back to normal. Therefore, high yielding stocks with consistency in dividend payment tend to remain in the investor’s limelight, especially among income-seeking investor. Dream Office Real Estate Investment Trust shares are yielding significantly higher as compared to investment grade Government Bond Yield, and at the same time, the company has consistently distributed dividend to its unitholders regardless of the business cycle over the past 10-years.

Dividend History. Source: Refinitiv (Thomson Reuters)

• FY20 Witnessed Increase in Weighted Average Net Rent: During 2020, the trust executed leases totalling ~500,000 square feet across the portfolio at a weighted average net rent of approximately CAD 29.91 per square foot, which is 32.6% higher than the weighted average expiring net rent on the same space. Of that total, approximately 450,000 square feet were leased during the COVID-19 period from April 1, 2020, to the end of the year. The majority of these leases commence in 2021 and 2022. To date, the trust has already secured commitments for approximately 70% of the 2021 total portfolio lease expires.

• Bullish Price Trend: Dream Office Real Estate Investment Trust shares are hovering in a bullish price zone. Recently, the stock registered a crossover and moved above the crucial long-term support level of 200-day SMA. Since then, its shares have consistently traded above its long-term support of 200-day SMA, which implies it is a bullish technical indicator in the stock. Moreover, the stock also traded well above the short-term support levels supported by a volume spurt, with a 5-day average daily traded volume was 56% higher against the 30-day average daily traded volume, which implies a strong upside momentum in the stock. The leading momentum indicator, Moving Average Convergence Divergence (MACD), is rising, with the positive spread between 12-day EMA and 26-day EMA, and MACD oscillator hovering above the 9-day SMA signal line, which is another bullish signal.

Technical Price Chart (as on March 08, 2021). Source: Refinitiv (Thomson Reuters)

• Industry Leading ROE: The company reported industry-leading Return on Equity in the FY20, with the company's return on equity stood at 11.9% and the industry median stood at 4%. Also, the company's ROE has risen from 8.5% in FY19 to 11.9% in FY20, which suggests that the company is increasing its profit generation without needing as much capital. It also indicates how well a company's management deploys shareholder capital. Also, an industry above ROE reflects a competitive advantage against the peers.

Source: Refinitiv (Thomson Reuters)

• Diversified and Healthy Tenants Mix: As illustrated in the chart below, the Trust has a diversified and healthy tenant mix. Moreover, the Trust’s top ten tenants make up more than 38% of gross rental revenue, and 50% of their top tenants have credit ratings of A or higher.

Source: Company Filing

• Risk Associated to Investment: Since March 2020, the COVID-19 pandemic continues to cause significant economic and social disruptions to Canadian residents and businesses. A resurgence in the COVID-19 cases could lower transient parking revenues across the portfolio as a result of city lockdown restrictions and lower weighted average occupancy.

Financial Highlights: Q4FY20

Source: Company Filing

• During the fourth quarter of FY20, Net rental income decreased by CAD3.1 million relative to the prior year comparative periods primarily due to lower transient parking revenues as a result of parking lot closures from city lockdown restrictions across the portfolio, COVID-related provisions net of the effect of government programs and asset sales during the prior year.
• On a full-year basis, Net rental income decreased by CAD 14.6 million. However, this was partially offset by the net rental income pick-up on a Toronto downtown property acquired in September 2019 and the lease commencement at the completed property under development (357 Bay Street in Toronto).
• For the three months ended December 31, 2020, diluted FFO per unit was flat year-over-year as the effects of the lease commencement at the completed property under development (357 Bay Street in Toronto) (+CAD 0.01), and savings on general and administrative expenses, interest savings on lower borrowing costs and other items (+CAD 0.04) were offset by lower comparative properties NOI, the net impact of COVID-19 related provisions and adjustments during the current year (-CAD 0.05).
• During the quarter under consideration, comparative properties NOI decreased by 4.1%, or CAD 1.2 million, when compared with the prior quarter, predominately driven by lower weighted average in-place occupancy in Other markets; in particular, at Saskatoon Square, there were 39,000 square feet of early termination since the beginning of this quarter to accommodate a new technology tenant seeking to take early occupancy for a term of over 15 years, partially offset by 8,900 square feet of new leases taking occupancy during the quarter.
• As of December 31, 2020, the REIT’s NAV per unit was CAD 28.69, compared to CAD 28.17 on September 30, 2020, and CAD 26.70 on December 31, 2019, up to CAD 0.52 or 1.8% and CAD 1.99 or 7.5%, respectively. The Q-o-Q increase in NAV per unit of CAD 0.52 was primarily due to cash flow retention from operations (diluted FFO net of distributions) and incremental income from the investment in Dream Industrial REIT, coupled with unit buyback program at prices below the NAV per unit.
• The year-over-year increase in NAV per unit of CAD 1.99 was primarily driven by fair value uplifts in Toronto downtown investment properties totalling CAD 60.7 million, supported by third-party appraisals on seven investment properties, representing 26% of total investment properties fair value, along with the effect of the unit buyback program.
• In Q4FY20, the Trust completed its redevelopment project on time and on a budget as part of the strategy to transform 357 Bay Street in Toronto into a best-in-class boutique office property. The single-tenant took occupancy of the 65,000 square foot building on November 1, 2020, and commenced rental payments.
• As of December 31, 2020, the Trust had over CAD 148 million of available liquidity, approximately CAD 245 million of unencumbered assets and a level of debt (net total debt-to-net total assets) of 41.1%. During the fourth quarter of 2020, the Trust closed on a CAD 44 million mortgages secured by a property in downtown Toronto for a seven-year term with an annual interest rate of 3.17%.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 53.36% of the total shareholding shares of the company. Cooper (Michael J) and Sandpiper Group are among the investors with outstanding position of 26.59%, and 9.17% respectively. Institutional Ownership in the company stood at 35.40% and strategic ownership stood at 27.02%.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: The company is witnessing gradual recovery across the segments. We expect parking revenues to improve significantly in next few quarters led by fall in COVID-19 cases and faster rollout of vaccines, which would help to brings things back to normalcy. Also, 357 Bay Street redevelopment project is now complete, and it was part of trust’s strategy to transform 357 Bay Street in Toronto into a best-in-class boutique office property. The single tenant took occupancy of the 65,000 square foot building on November 1, 2020 and commenced rental payments.

Further, despite a challenging 2020, the trust’s witnessed a 32.6% increase in weighted average net rent. Further out of total, approximately 450,000 square feet were leased during the COVID-19 period from April 1, 2020 to the end of the year. The majority of these leases commence in 2021 and 2022.

The stock has a proven track record of dividend distribution over the past several years and offering a decent dividend yield amid a low interest rate environment. Moreover, the technical indicators are suggesting a potential upside in the stock from the current levels.

Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 21.54 on March 08, 2021. We have considered Allied Properties REIT, RioCan REIT, Cominar REIT and others comparable companies as a peer group for the comparison purpose.

1-Year Price Chart (as on March 08, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at March 9, 2021 price as well.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.