Updated June 17, 2021 by Bob Ciura
Real Estate Investment Trusts or REITs offer investors a practical opportunity to participate in the economic boom in real estate. REITs have grown in popularity over time as income investors seek alternative strategies to generate portfolio income.
A side effect of the growing popularity of REITs is the emergence of specialized REITs that only focus on a sub-sector of the real estate industry. For example, Dream Office REIT (DRETF) is the largest pure office REIT on the Canadian market with a dominant position in office real estate.
The Dream Office share has a high current dividend yield of 4.2%. And the dividends are paid monthly instead of the traditional quarterly payout.
Monthly dividend stocks are rare. You can download our full list of Monthly Dividend Stocks (along with relevant financial metrics like dividend yields and payout ratios) which you can access below:
The combination of Dream Office REIT’s dividend yield and monthly dividend payments is sure to grab the attention of high income investors.
This article analyzes Dream Office REIT’s investment prospects in detail.
Dream Office REIT is Canada’s largest pure office REIT. The trust has a market capitalization of ~ $ 970 million at current market prices. It is part of the Dream Unlimited family of real estate trusts, which includes Dream Industrial REIT (DREUF).
Dream Office has a high concentration of office properties, particularly in Toronto. About 68% of the portfolio is in Toronto, 14% in Montreal and Ottawa, and the rest is spread across multiple markets.
It is Property isInterests include 5.5 Million square meter feet gross rental area of 30 properties, which contain 28 Office properties, and twhere properties are in development. Dream Office has leases with 500 Tenant across Canada, a couple of it is larger tenants iinclude: Government of Canada (8.2% of rightVenue), Government of Ontario (11.4%) ad State Street Trust (5.4%).
Toronto has pretty good office fundamentals, which is why Dream Office continues to focus its investments on this.
Source: Investor Presentation
This is a significant change from a few years ago when the portfolio was more diversified. Dream Office has taken the bold step significantly decreasing its geographical diversification, but there are very good reasons for it.
Toronto has tremendously strong office space fundamentals, including low (and declining) vacancy rates. This helps drive prices up, and that’s why Dream bet big on Toronto.
The company struggled over the past year as office space was one of the hardest hit property areas due to the coronavirus pandemic. Dream Office is on the way to recovery. On Can6ththe, 2021 Dream Office releases Q1 Results. Diluted FFO per share decreased 2.6% to $ 0.38.
Net rental income fell 9% $ 26.3 Millions like Q1 Comparative properties NOI decreased 11% year–over–Year. Meanwhile NAV per share elevated light to $ 28.73. Total portfolio in–Occupancy decreased to 85.8% from 89.2% in the year–before period.
While the short-term environment continues to be challenging for Dream Office, we believe that as the business climate normalizes, the company will grow again. We expect FFO-per-share to grow by ~ 8.4% annually over the next five years.
Dream’s growth prospects depend on high occupancy rates in Toronto and rising rental prices. The Trust has put in place a strategic plan to capitalize on its new focus in Toronto and invest in the future. As part of that plan, the trust sold billions of dollars in non-core assets, shrinking its portfolio, and generating cash in the process. It took advantage of this transformation to improve unit prices and increase its presence in downtown Toronto.
The result was a much smaller portfolio, but one that has a much larger rental base, allowed the trust to deleverage, and gave it the ability to reduce the number of shares in the trust. As a result, not only has the balance sheet improved, but the funds-from-operations per share and the number of shares have also decreased.
Go forward we expect disruption from the coronavirus pandemic and the growing work–of–Home movement to to weigh on Results this year and next before fundamentals recover in subsequent years. Given the considerable Exposure to high quality Toronto assets and a relatively low payout ratio should it be able to weather the storm better than that some like-minded people
In short, while Dream Office may not see large growth numbers in the coming years, it is well positioned to continue growing organically from higher base rents. Toronto office space fundamentals are more than sufficient to support this growth.
Dream Office currently pays a monthly dividend of $ 0.833 per share ($ 1 per share annualized). In US dollars, this equates to an annualized payout of about $ 0.81 per share, which translates to a current yield of 4.2%.
As mentioned earlier, Dream cut its payout in 2017, and the payout has stagnated ever since. Given the manageable payout ratio (66% expected for 2021) and the favorable fundamentals, we don’t see a high risk of a further cut today.
We currently expect FFO per share to be $ 1.17 this year, reflecting the negative impact of the COVID-19-related weakness. However, coverage of the current dividend is still strong, so we don’t see any further cuts necessary.
Note: As a Canadian stock, US investors who invest in the company outside of a retirement account will be charged a 15% dividend tax. Check out our guide to Canadian taxes for US investors here.
The 4.2% dividend yield is high enough to attract income investors. This is especially true of the fact that Dream pays shareholders monthly rather than quarterly.
Dream Office REIT’s high dividend yield and monthly dividend payments make it attractive to income investors. The long-term fundamental outlook is also quite favorable, and we see moderate growth in the years to come.
The 2017 dividend cut is imminent for investors as the yield is much lower than it used to be on Dream Office stocks. But the current payout is well covered, and we consider it safe even with COVID-19 impacts. Overall, the stock is moderately attractive to income investors.
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