Published by Nick McCullum on June 21st, 2017
High yield investors are primarily looking for three things:
- High Yield
- Dividend Safety & Predictability
- Dividend Growth
It is hard to find investments with a solid combination of all three characteristics. Some asset classes have a much higher probability of delivering on these goals than others.
Real estate investment trusts – or REITs, for short – can be a fantastic source of yield, safety, and growth for dividend investors.
Dream Global REIT (DUNDF) is no exception. The company’s 7.4% dividend yield certainly allows it to satisfy the ‘high yield’ requirement and makes it a member of the elite group of dividend stocks with 5%+ dividend yields.
Dream Global REIT also pays its dividends on a monthly basis, which is rare in a world where the vast majority of companies pay quarterly dividends. There are currently only 29 companies with monthly dividend payments, a trait which helps to satisfy the requirement of ‘dividend predictability’.
Dream Global REIT’s exceptionally high dividend yield and monthly dividend payments make it an intriguing company for dividend investors.
This article will analyze the investment prospects of this REIT in detail.
Dream Global REIT is a Canadian real estate investment trust with globalized operations primarily focused in Germany and Austria.
The trust trades on the Toronto Stock Exchange under the symbol DRG.UN and on the Frankfurt Stock Exchange under the symbol DRG. Dream Global REIT is generally identified in U.S. stock databases with the ticker DRG.UN.TO or DUNDF.
Dream Global REIT is a member of the Dream Unlimited family of Canadian real estate investment trusts, along with:
- Dream Office REIT (D.UN.TO)
- Dream Industrial REIT (DIR.UN.TO)
Dream Global REIT benefits from considerable size and scale as an owner and operator of European real estate.
The trust owns 13.6 million square feet of space divided among 171 properties and trades with a market capitalization of $1.5 billion at current prices. Dream also has an extensive presence in Europe with 8 offices and 60+ employees in the region.
Source: Dream Global REIT June 2017 Investor Presentation, slide 2
From an investment perspective, Dream Global REIT offers investors a very interesting value proposition.
The company has strong asset quality and tenant diversification and occasionally operates within strategic joint venture opportunities with other property operators, allowing Dream to leverage its operating platform and global access to capital.
Additionally, Dream Global REIT recently received its first credit rating from Moody’s, qualifying for an investment-grade Baa3 score.
What stands out about Dream Global REIT is its exposure to international markets, specifically Germany, Austria, and Belgium.
Dream Global REIT’s performance in recent times has been quite strong.
For instance, the trust saw its trust-wide funds from operations increase by 14.1% in the most recent quarter. Dream’s per-share funds from operations increased by 10.0% over the same period a year ago, partially offset by an increase in the number of units outstanding.
Source: Dream Global REIT June 2017 Investor Presentation, slide 3
Looking further back, Dream Global REIT has a strong track record of fundamental business performance.
The trust has managed to meaningfully grow its net asset value, funds from operations, and NAV/unit over time while maintaining a consistently high occupancy rate.
Source: Dream Global REIT June 2017 Investor Presentation, slide 27
Looking ahead, Dream Global REIT’s future growth will be driven by the strong real estate fundamentals in the country of Germany (the country where it has the largest exposure).
Simply put, Germany is a very attractive country to do business. The country has an unemployment rate of 4.0% (amongst the lowest in the E.U.), GDP growth of 1.9% (reaching a 5-year high) and an attractive combination of low vacancy and moderate new property supply.
Source: Dream Global REIT June 2017 Investor Presentation, slide 7
Dream Global REIT’s international exposure is a key component of this stock’s investment thesis and will be the largest contributor to the trust’s growth moving forward.
Competitive Advantage & Recession Performance
Dream Global REIT’s competitive advantage comes from its high-quality, well-diversified investment portfolio with ample exposure to international markets.
The trust has a 90% occupancy rate with a 4.3 year weighted average lease term, and owns a diverse array of properties across many segments of Eastern Europe.
Source: Dream Global REIT June 2017 Investor Presentation, slide 9
Dream Global REIT’s diversification extends to its tenant base. Aside from one large tenant (Deutsche Post, which generates 18.6% of the trust’s gross rental income), the trust’s tenant base is a well-diversified consortium of generally investment-grade businesses.
Some details about the tenant base of Dream Global REIT can be seen below.
Source: Dream Global REIT June 2017 Investor Presentation, slide 8
REITs are not typically as recession-resistant as some sectors of the equity markets such as consumer staples or healthcare stocks.
With that said, Dream Global REIT is well-positioned from a liability perspective in case a recession is imminent.
The trust has minimal debt maturing in the next 3 fiscal years and has a weighted average debt term of 5.8 years. In addition, the net loan-to-value (LTV) ratio on Dream Global’s property mortgages is 48%, which is relatively conservative. Dream weighted average face interest rate is 1.76%.
Source: Dream Global REIT June 2017 Investor Presentation, slide 28
Investors should also keep in mind that while Dream Global REIT has an investment-grade credit rating from Moody’s, its credit rating (Baa3) is the lowest rating that would qualify it as an investment grade security.
In addition, Dream’s globalized business model means that it is naturally sensitive to fluctuations in the CAD-EUR exchange rate, which is another risk factor that investors should keep in mind.
Valuation & Expected Total Returns
Dream Global REIT’s future shareholder returns will be primarily generated from its dividend yield and valuation changes.
Dream Global REIT currently pays a monthly dividend of CAD$0.06667 which yields 7.4% on the company’s current market price of $10.75. Dream Global REIT’s dividend yield is nearly four times as high as the average dividend yield within the S&P 500 and will be the largest contributor to the trust’s total returns moving forward.
The future returns generated from Dream Global REIT’s high dividend yield will be partially offset by the trust’s current valuation. It appears moderately overvalued at current prices.
Assessing the valuation of REITs is different than normal corporations because of the significant non-cash amortization and depreciation charges incurred by these investment vehicles.
So, instead of using the traditional price-to-earnings ratio valuation metric, we can analyze a REIT’s valuation by comparing its current dividend yield to its historical dividend yield. If its current dividend yield is higher than normal, the trust is undervalued; conversely, if its current dividend yield is lower than normal, the trust is undervalued.
The following diagram compares Dream’s current dividend yield to its long-term historical average
Dream Global REIT’s current dividend yield is 7.4% and its long-term average dividend yield is 8.7%.
Based on this, the REIT appears notably overvalued at current prices. It appears that investors are willing to place a premium on the trust’s geographic diversification. This will weigh on the trust’s future shareholder returns.
For REIT or high income investors, this trust’s unattractive valuation suggests that there are better high yielding securities elsewhere on the public markets.
Related: The 10 Best MLPs For High Income
Dream Global REIT’s high dividend yield and monthly dividend payments make it stand out to high yield dividend investors.
However, some due diligence reveals that the trust is slightly overvalued when compared to its long-term average dividend yield.
Existing Dream Global REIT investors should continue to hold this stock to benefit from its attractive geographic exposure; however, investors looking to initiate or add to a stake in this REIT should wait for a more compelling buying opportunity.