Dream Office Real Estate Investment Trust (TSX: D.UN) is a real estate investment trust that acquires, manages, and leases primarily central business district and suburban office properties in urban areas throughout Canada. The majority of the company's real estate portfolio, in terms of revenue generation, is located in the Canadian province of Ontario. The province of Alberta also brings in a sizable percentage of revenue. The company generates nearly all of its revenue in the form of rental income from mid- to long-term lease agreements with tenants.

Key Highlights

• Robust cash rent collection: Despite the headwind, the REIT’sresilient office portfolio resulted in strong rent collection figures. On a quarterly basis, the group consistently kept this ratio above 97%, which is admirable. Even in the month of April 2022, the REIT collected 98.0% of its rent.

• Favorable macro-environmental trends:Strong forecasted employment and population growth are expected to continue to contribute to healthy office demand. The trust holds a high concentration of well-connected assets in Downtown Toronto, leaping the forecasted Canada numbers along with a committed occupancy rate of 88.6% in Toronto Downtown, which is a key positive.      

• Well-diversified and Strong Tenant Base:The occupancy rate in Q1 2022 remained stable at 85.0 percent, consistent with the prior consecutive period. Its external tenants include provincial and federal governments, as well as a diverse spectrum of big, high-quality multinational firms, including Canada's main banks and small to medium-sized enterprises around the country. The top ten tenants account for roughly 38% of gross rental revenue, and 50% of the top tenants have credit ratings of A- or better, which is a critical positive since it gives stability and safety buffer to receivables.

• Stable occupancy: Despite the challenges faced by the evolving events attributable to the pandemic, the REIT’s occupancy level stood firmly at 85.0% in Q1 2022, compared to Q4 2021 at 85.5%. In Toronto downtown, net rents increased quarter-over-quarter due to rent steps and higher rates on new leases, however, in other markets, net rents decreased slightly relative to Q4 2021 due to lower rates on new and renewed leases.    

• Strong Liquidity: The Trust relies on cash flows generated by activities to fund continuing operating and interest obligations. The Trust had CAD 279.6 million in available liquidity as of March 31, 2022. Furthermore, the Trust possesses unencumbered assets worth CAD 169.6 million that might be offered as security for additional borrowings.    

• An income play: The trust has reported a stable dividend payment over the years, aided by consistent cash flows. Recently, it announced its April 2022 monthly distribution of CAD 8.333 cents per REIT Unit, which it paid on May 13, 2022, to unitholders. The stock offered a dividend yield of 4.30%, which seems lucrative considering the current interest rate scenario, which would attract several investors looking for a consistent income stream.
  

Financial overview of Q1 2022 (in thousands of Canadian dollars)

Source: Company Filing 

• Steady investment properties revenue: The group’s investment properties revenue in Q1 2022, was CAD 49.6 million compared to CAD 49.5 million in the prior year comparative quarter. Overall, the increase was primarily due to higher rents on renewals and new leases in Toronto downtown, higher weighted average occupancy in other markets.

• Slightly higher investment properties operating expenses: An investment properties operating expenses in the reported period of Q1 2022, were CAD 23.8 million compared to CAD 23.2 million in the prior year comparative quarter. Overall, the increase was primarily driven by higher operating costs and the effect of government support received in the prior year.

• Robust increase in other income: The trust posted healthy other income of CAD 43.1 million in Q1 2022, against CAD 14.4 million in pcp, mainly due to elevated share of net income from investment in Dream Industrial REIT.
  

• Income before income tax and discontinued operation stood much higher in Q1 2022, at CAD 52.4 million against CAD 11.3 million in pcp, on the back of strong other income and controlled expenses.

• Elevated net income: Due to above discussed rationales the REIT’s net income swelled to CAD 52.2 million in Q1 2022, against CAD 10.1 million in pcp.
  

Top-5 Shareholders

The company’s top 5 shareholders hold around 48.87% of the total shareholding, where Cooper (Michael J) is the biggest shareholder, who owns 29.38% of total outstanding shares. Additionally, the company's institutional ownership stood at 31.22%, while the strategic entities ownership stood at 43.26%. Higher institutional and strategic entities holding boosts the confidence in the mind of retail investors.

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

Risks associated with investment

The Trust's revenue and operating results depend significantly on the occupancy levels and rent collection; hence, the group is subject to general business risks. These risks include government regulation, fluctuations in occupancy levels and business volumes, competition from other players, and general economic conditions. 

Stock Recommendation

Despite the challenges brought by the pandemic on the real estate industry, the company's operating and financial results demonstrated the resilience of its portfolio, driven by the strong performance and robust rent cash collection. The strong forecasted employment and population growth are expected to continue to contribute to healthy office demand. Furthermore, the trust continues to anticipate that many companies will return their employees to the office during 2022 and, with that, leasing activity and traffic flow to its properties will improve and the comparative properties NOI and parking revenues will begin to normalize, which is a significant plus.

Moreover, the stock offers a dividend yield of 4.30%, which is decent considering the current interest rate dynamics. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the last closing price of CAD 23.43 as on May 16, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on May 16, 2022). Source: REFINITIV, Analysis by Kalkine Group

*Recommendation is valid on May 17, 2022, price as well. 

 Technical Analysis Summary

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