Opinions
Steve Belisle
Dream Office REIT
D.UN-T
COMMENT
May 18, 2016
Stock price when the opinion was issued
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Premium contentPremium contentPremium contentIn very different sectors. Both trade at wide discount to NAV. Neither has catalysts on horizon. CSH.UN at risk of cutting distribution, which is not being covered due to lower occupancy. CSH trustees see growth coming, but can it recover occupancy levels lost during Covid? He's watching that, as it's hard to invest in the face of a possible cut. D.UN is in an extremely tough sector. Office space, globally, has suffered with work from home. Office sector is not dead, but vacancy rates are in high teens and climbing. A good operator, Dream still owns good office buildings, especially in Toronto.
Investors really do not like commercial office companies right now. D.UN has an 80% in-place occupancy rate, down from year end (0.8%) and down 1.5% from last year's comparable quarter. It is priced well, but there are risks here, and its small size adds risk as well. We would see it as a higher-risk hold.
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It has been a tough environment for REITs in general, although industrial REITs have been holding up better than the rest. DIR.UN has a strong free cash flow yield, it offers a distribution yield of 5.4%, and has a high occupancy rate of 96%. Its FFO/debt ratio has been climbing over the years, signalling its funds from operations have been growing relative to its debt load. We would be comfortable buying DIR.UN for a long-term hold.
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There is a lot of pressure on their portfolio. They have exposure to Calgary, and that market is weak, not only because of oil, but also there was a lot of new supply coming in. When new supply is coming onto the market on the office side, they tend to lease very well because it is brand-new and looks good, so older buildings tend to perform poorly. That has been impacting this company. There is a lot of value in the name. It is trading at a huge discount to NAV. For a long-term investor who thinks things are going to recover, this could be a good buy, but he sees a lot of risks. Dividend is greater than 7%, but he thinks they will try to hang onto it.