Dream Office REIT

Dream Office REIT (TSX: D.UN) is a Canada-based open-ended real estate investment trust, which focuses on owning, leasing and managing office properties in urban centres across Canada, focusing on downtown Toronto. The trust holds a portfolio of approximately 30 properties with a total gross leasable area (GLA) of 5.3 million square feet.

Key highlights 

• An Income Play: The group continues with a healthy record of dividend payment. Recently, it announced a monthly dividend of CAD 0.0833 per unit payable on April 15, 2021. Moreover, at the last traded price, the stock was offering a dividend yield of 4.74%, which is decent considering the current interest rate dynamics.

Source: Refinitiv (Thomson Reuters)

• Robust rent collection: Despite the headwind, the REIT’sresilient office portfolio resulted in strong rent collection figures in 2020. On a monthly basis, the group consistently kept this ratio above 95%, which is admirable.

Source: Company

• Favourable 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 95.7% in Toronto Downtown, which is a key positive.

Source: Company

Financial overview of FY 2020

Source: Company

• In FY2020, the trust reported a net rental income of CAD 112.9 million, compared to CAD 127.5 million in the previous corresponding period, primarily due to lower transient parking revenues due to parking lot closures from city lockdown restrictions across its portfolio.
• Income from continuing operations stood at CAD 177.2 million compared to CAD 125.8 million in FY 2019. The rise in income was primarily due to fair value adjustments in financial instruments for CAD 65.8 million.
• Net income reported by the trust in FY2020 stood at CAD 177.2 million, compared to CAD 117.3 million. The increase was mainly due to the above-discussed factor of fair value adjustments.

Risks associated with investment

The Trust's revenue and operating results depend significantly on the occupancy levels and rent collection. Any fluctuations in occupancy levels and business volumes, competition from other players, and general economic conditions would affect the group’s performance.

Valuation Methodology (Illustrative): EV to Sales

Note: All forecasted figures and peers have been taken from Thomson Reuters

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. The group also expects an improvement in parking revenues, once lockdown restrictions are lifted and traffic to its properties improves. Furthermore, the stock offers a dividend yield of 4.74%, which is decent considering the current interest rate dynamics. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 21.10 as on April 6, 2021. We have considered Allied Properties REIT, SmartCentres REIT, RioCan REIT. as the peer group for the comparison.

1 Year Daily Price Chart (As on April 6, 2021) Source: Refinitiv (Thomson Reuters)

Mainstreet Equity Corp.

Mainstreet Equity Corp. (TSX: MEQ), is a Canada-based real estate company, which is focused on the acquisition, redevelopment, repositioning, and management of mid-market rental apartment buildings. The company generates revenue from rental income and others.

Key highlights

• Robust operating matrix:The company reported continued growth over the years, which indicates business resilience. In the recent past, due to lower consumer income and a rise in the unemployment rate, most of the real estate companies witnessed decline in their rent collection along with shrinkage in the profitability. However, the group maintained a healthy rent collection of 98% in January 2021.

Source: Company

• Consistent asset growth: The Company is generating higher net asset value over the years, indicating constant appraisal in its assets over the year. In Q1 2021, the appraised value stood at CAD 2.19 billion, while the gross book value was CAD 1424.

Source: Company 

• Aims to improve liquidity: The company believes that its new growth opportunities would be supported by the strong liquidity position. Recently, it acquired 210 units at a total value of CAD 22 million and entered the Winnipeg market. The current cash balance is approximately CAD 100 million, and the management is confident on achieving its target liquidity position of CAD 242 million in the fiscal year 2021.

• Retirement of COO: Recently, the Company announced that Mr Johnny Lam, the Corporation's COO would be retiring from the Company upon reaching the age of 65, being April 20, 2021. The Company expects a very smooth transition period. 

Financial overview of Q1 2021

Source: Company

• In Q1 2021, the company posted rental revenue of CAD 38.6 million, increased by 5% against CAD 36.7 million in the previous corresponding period, the rise in revenue was mainly due to the continued growth of the company’s portfolio as the average number of units owned increased by 5% over the year.
• Net operating income stood at CAD 23.1 million, against CAD 23.3 million in Q1 2020.
• In the reported quarter the company posted Net loss of CAD 5.3 million, against a net profit of CAD 5.6 million in Q1 2020. The net loss was primarily due to change in fair value. 

Risks associated with investment

Various economic reasons like, lower consumer spending, higher unemployment rate might increase the vacancy rate, which would lead to lower operating performance, and the company might witness a weak rent collection.

Valuation Methodology (Illustrative): EV to Sales

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

Despite extremely challenging operating conditions in Q1 2021, the company managed to maintain funds from operations at the same level as the previous year, while achieving a slight improvement in FFO per share and a 5% growth in rental revenue. Furthermore, we believe with a gradual revival in the overall economy; the rental market is expected to recover in the foreseeable future. Moreover, the group aims to improve its liquidity position from approximately CAD 100 million to CAD 242 million in 2021. Therefore, based on the above rationale and valuation, we suggest a “Buy” recommendation on the stock at the closing price of CAD 82.790 as on April 06, 2021. We have considered Boardwalk Real Estate Investment Trust, Storagevault Canada Inc, Allied Properties Real Estate Investment Trust, etc. as the peer group for the comparison.

1 Year Daily Price Chart (as on April 6, 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.