Dream Office Real Estate Investment (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.

Key Highlights:

• Declining occupancy rate: The company suffered a decline in the overall occupancy rate in Q1FY22 when compared to the occupancy rates in pcp. During Q1FY22, the in-place and committed occupancy rate declined to 85.0% of the total portfolio as compared to 87.2% in Q1FY21. Also, the in-place occupancy rate for the total portfolio of the company was at 81.7% in the reported period (Q1FY22) which is lower than 85.8% in pcp. The decline in the occupancy rate is a major drawback as the company derives its revenue majorly from such rental properties.

Source: Company presentation

• Poor debt management: In Q1FY22, the group didn’t manage its debt component efficiently when compared to the previous comparable period. The increased burden of debt on the books is a major concern, especially in the scenario of rising interest rates.

Source: Refinitiv, Analysis by Kalkine Group

• Poor liquidity: The group reported a decrease in its cash and cash equivalents to CAD 8,302 million during Q1FY22 against CAD 30,497 million in Q1FY21. Further, the cash flows from operating activities also declined to CAD 23,721 million in the same period (Q1FY22) when compared with the cash flows from operating activities of CAD 26,229 million in Q1FY21. The poor liquidity raises concerns about the company’s ability to meet its day-to-day operational expenses along with carrying out the expansionary plans as well.

Valuation Methodology (Illustrative): EV/ Sales based

Analysis by Kalkine Group

Stock Recommendation:

The company reported a decrease in the net rental income to CAD 25,863 million in Q1FY22 as compared to CAD 26,271 million in pcp. Further, the decline in the in-place occupancy rate of the total portfolio to 81.7% in the same period (Q1FY22) against the in-place occupancy rate of 85.8% in the pcp, is a serious drawback for the company. The declining cash and cash equivalent balances along with lower cash flow from operations, and poor debt management in Q1FY22, also weights concern, about how the company will manage its operations and finances during the rising interest rates scenario  On the valuation front, the stock is measured on the EV/ Sales based relative valuation multiple and the stock is offered at 11.6x as compared to the industry (residential and commercial RETIS) median of 9.2x, depicts the stock is still overvalued. We have considered Nexus Industrial REIT, True North Commercial REIT, etc as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock of D.UN at the last closing price of CAD 19.07 on June 16, 2022.

One-Year Technical Price Chart (as of June 16, 2022). Analysis by Kalkine Group

Note: The reference data has been partly sourced from REFINITV

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