Updated on May 6th, 2022 by Quinn Mohammed
Real Estate Investment Trusts, or REITs, give investors a hands-off way to participate in the economic upside of real estate. REITs have grown in popularity over time as income investors seek alternative strategies to generate portfolio income.
One side effect of the growing popularity of REITs is the emergence of specialized REITs, focusing on only one sub-sector of the real estate industry. For example, Dream Office REIT (DRETF) is the largest pure-play office REIT in the Canadian market, with a dominant position in office properties.
Dream Office stock has a high 4.0% current dividend yield. And, its 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 will surely catch the eye of high income investors.
This article will analyze the investment prospects of Dream Office REIT in detail.
Dream Office REIT is an open-ended Investment Trust which acquires and manages predominantly office properties in major urban areas throughout Canada, but primarily in downtown Toronto. The trust has a market capitalization of $1 billion at current market prices. It is part of the Dream Unlimited family of real estate trusts, which also includes Dream Industrial REIT (DREUF).
Dream Office has a high concentration in office space properties in Toronto specifically. Approximately 90% of its portfolio is in Toronto, with 3% in Calgary, and the remainder spread across multiple markets.
Its ownership interests include 5.5 million square feet of gross leasable area from 30 properties, which include 29 office properties, and one property under development. Dream Office has leases with just under 430 tenants across Canada, a few of its larger tenants include: Government of Ontario (11.0% of revenue), Government of Canada (8.2%), and International Financial Data Services (3.4%).
Toronto has quite favorable fundamentals for office space, which is why Dream Office continues to concentrate its investments there.
Source: Q1 2022 Quarterly Report
This is a significant change from just a few years ago, when the portfolio was more diversified. Dream Office has taken the bold step of significantly decreasing its geographic diversification, but it has very good reasons for doing so.
Toronto has tremendously strong fundamentals for office space, including low (and declining) vacancy rates. This helps drive pricing higher and is why Dream has bet big on Toronto.
The company struggled in 2020, as office space was one of the hardest-hit areas of real estate due to the coronavirus pandemic. In 2021, results rebounded materially. And in 2022, Dream Office continues on its path toward recovery.
On May 5th, 2022, Dream Office released Q1 results. Diluted FFO-per-share increased by one penny in constant currency to C$0.39 per share. Net rental income fell 1.5% to C$25.9 million, as Q1 comparative properties NOI decreased 4.8% year-over-year. Meanwhile, NAV per share increased sequentially to C$32.63. Total portfolio in-place occupancy decreased to 81.7% from 85.8% in the year-ago period.
While the near-term environment remains challenged for Dream Office, we believe the company will return to growth as the operating climate normalizes. We expect annual FFO-per-share growth of ~1.8% per year over the next five years.
Dream’s growth prospects depend upon high occupancy rates in Toronto, as well as rising rent prices. The trust put in place a strategic plan to capitalize on its new concentration in Toronto and invest for the future. Under this plan, the trust sold billions of dollars of non-core assets, shrinking its portfolio, and generating cash proceeds in the process. It used this transformation to improve unit pricing as well as enhance its exposure to downtown Toronto.
The result has been a substantially smaller portfolio, but one that has a much higher rent base, allowed the trust to deleverage, and afforded it the ability to reduce the trust’s share count. This has not only improved the balance sheet, but its funds-from-operations per share as well as the share count has dwindled.
Going forward we expect disruption from the coronavirus pandemic and the growing work-from-home movement to weigh on results this year and potentially beyond. Given the company’s considerable exposure to high quality assets in Toronto and fairly low payout ratio, it should be able to weather the storm better than some peers
In short, while we don’t see Dream Office as producing huge growth numbers in the coming years, it is well-positioned to continue to grow organically from higher base rents. Toronto’s office space fundamentals are sufficient to support this growth.
Dream Office currently distributes a monthly dividend of C$0.833 per share (C$1 per share annualized). In U.S. dollars, this represents an annualized payout of roughly $0.78 per share, good for a 4.0% current yield.
As mentioned, Dream cut its distribution in 2017, and the payout has been stagnant since then. We don’t see a high risk of a further cut today given the manageable payout ratio (expected at 43% for 2022) and favorable fundamentals.
We currently expect $1.83 in FFO-per-share for this year, reflecting an overall improvement compared to when the pandemic struck. And, coverage is still strong on the current dividend, so we don’t see further cuts as necessary.
Note: As a Canadian stock, a 15% dividend tax will be imposed on US investors investing in the company outside of a retirement account. See our guide on Canadian taxes for US investors here.
The 4.0% dividend yield is likely high enough to entice income investors. This is particularly true with the fact that Dream pays shareholders monthly instead of quarterly.
Dream Office REIT’s high dividend yield and monthly dividend payments make it appealing to income investors. Its long-term fundamental outlook is favorable, but we see only low levels of growth in the coming years. Additionally, shares appear overvalued at current prices, which would weigh on total annualized returns.
The 2017 dividend cut looms large for investors as the yield is much lower than it once was for Dream Office stock. But the current payout is well covered, and we view it as safe, even with COVID-19 impacts. Overall, though, the stock is not very appealing at this time due to a weak total return potential.