Dream Office Real Estate Investment Trust

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.

Key Highlights:

• Impressive Dividend Yield: The company has distributed consistent dividends to its shareholders, backed by stable cash flows over the past 10 years. Moreover, the stock was offering a lucrative dividend yield of ~4.73% amid the low interest rate environment.

10 Years Dividend Payout (Source: Company Report)

• Favorable Demographics: The majority of the company’s properties are located across Toronto region, wherein the population growth and employment growth are expected to remain elevated in the coming years, which would further support the demand for office properties. Notably, in 2019, almost 30% of Toronto’s population were international immigrants, and the rate is expected to increase in the coming days, backed up by favorable opportunities for immigrants within Canada. Moreover, the company is developing properties across 250 Dundas St. West, 212-220 King St. Wes and 2200 Eglinton Ave. East, which is expected to be in the limelight in the years to come.

Source: Company Presentation

• Stable Rent Collection amidst turbulent times: The viability of a business can be understood when it performs even in an unfavorable economic scenario. Notably, the company has maintained a healthy rent collection during the last one year which indicates operational resiliency.

Source: Company Presentation

FY20 Financial Highlights:

• The trust announced its full year result wherein the company posted a net rental income of CAD 112.942 million, lower than CAD 127.575 million in FY19. The decline was due to lower transient parking revenues on account of city lockdown restrictions and lower weighted average occupancy across other markets, partially offset by higher weighted average net rental rates in Toronto downtown.
• During the period, general and administrative costs stood lower at CAD 9.757 million v/s CAD 10.846 million in pcp, while interest from debt reduced to CAD 43.089 million, as compared to CAD 50.561 million in pcp.
• Fair value adjustments, internal leasing costs and net gains on transactions stood higher at CAD 83.908 million, v/s CAD 9.836 million in FY19.
• The company reported a net income of CAD 177.276 million, higher than CAD 117.320 million in pcp.

FY20 Income Statement Highlights (Source: Company Report)

Risks: Recent trend of the increasing ‘Work from home’ would likely to pose a threat to the company’s operating model. Moreover, any fluctuation in rent collection would affect the group’s financial performance.

Valuation Methodology (illustrative): EV to Sales Based

All forecasted figures and peers have been taken from Thomson Reuters. 

Stock Recommendation:

The company delivered a 24% IRR to its unitholders since its inception in 2003, which indicates impressive operational performance. The company is using the latest technology, ‘Lane’, which helps property owners to unlock the full value of their assets and provides a better experience to the rent payers. Notably, since the introduction of ‘Lane’, the platform grew from five clients within two countries to thirty-five clients with more than three-hundred workplaces across eight countries and in twenty major cities. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like SmartCentres Real Estate Investment Trust, Crombie Real Estate Investment Trust etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 21.13 on April 30, 2021.

One-Year Price Chart (as on April 30, 2021). Source: Refinitiv (Thomson Reuters)

Mainstreet Equity Corp

Mainstreet Equity Corp (TSX: MEQ) is residential real estate company which focuses on the acquisition, redevelopment, repositioning, and management of mid-market rental apartment buildings.

Key Updates:

• Growth in Assets supported by Prudent Strategies: Over the years, the company has registered a consistent growth in its Gross Book Value and Appraised Value supported by the implementation of several strategies such as transforming a single asset into a network of apartment complexes and several cost efficiencies like reduction in the cost of having multiple property maintenance contracts and creating higher brand presence and reducing advertising costs etc., which supported the company’s cash flows.                

Source: Company Presentation

• Impressive Outlook Amidst Economic jolt: For FY21, the company’s operations are expected to improve due to a slide in interest rates and low rates of acquisition. The workforce-affordable rental housing is expected to remain immune to the economic cycles due to the rising population trend in Calgary (~1.9%) and Edmonton (~1.8%), which was higher than the average country’s population of 1.1% in 2020. Moreover, in addition to this, the federal government has extended the immigration targets to 1.2 million in the next three years. This would support the overall demand for rental housing. Moreover, the company is targeting to boost its liquidity position to CAD 242 million.

Q1FY21 Financial Highlights:

• MEQ announced its quarterly result, wherein the company posted total rental and ancillary revenue of CAD 38.494 million, higher than CAD 36.695 million in the previous corresponding period (pcp). The increase was aided by higher rental revenue from Alberta, Saskatchewan and British Columbia.
• Net operating income (NOI) stood at CAD 23.077 million, marginally lower from CAD 23.288 million in pcp, due to a higher property operating expense (CAD 15.417 million v/s CAD 13.407 million in pcp).
• The quarter was marked by lower general and administrative expenses (CAD 2.646 million v/s CAD 2.816 million in pcp), while financing costs was slightly higher at CAD 9.173 million v/s CAD 9.122 million in pcp.
• The company reported a net loss of CAD 5.287 million, as compared to a net profit of CAD 5.576 million in pcp. The loss was primarily attributable to an expended loss from change in fair value (loss of CAD 17.986 million v/s a loss of CAD 8.308 million in pcp).

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: In Q1FY21, the company has reported an increase in vacancy to 8.6%, higher than 5.9% in Q1FY20 and 8.0% in Q4FY20. This remains a key concern for the company, and the continuation of the above trend is likely to dampen the company’s performance.

Valuation Methodology (illustrative): EV to Sales Based

All forecasted figures and peers have been taken from Thomson Reuters.

Stock Recommendation:

In order to improve its performance, the group is acquiring several underperforming properties and renovating them in order to bring them as per the current market rents. The above strategy is encouraging as it is turning the low yield properties into high yield ones which are leading to higher cash flow generation. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like InterRent Real Estate Investment Trust, Killam Apartment REIT and Landmark Infrastructure Partners LP etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of MEQ at the last closing price of CAD 81.55 on April 30, 2021.

One-Year Price Chart (as on April 30, 2021). Source: Refinitiv (Thomson Reuters)

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.