Updated on September 26th, 2024 by Felix Martinez
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 4.4% 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.
Business Overview
Dream Office REIT is an open-ended Investment Trust that 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 82% of its portfolio is in Toronto, and the remainder is spread across multiple markets.
Toronto’s office space fundamentals are quite favorable, which is why Dream Office continues to concentrate its investments there.
Source: Investor Presentation
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. While the company’s performance has somewhat improved since, demand for office space remains relatively soft as hybrid working conditions have endured.
The company reported its financial results for the second quarter of 2024, ending June 30. The REIT continues to face challenges in the office sector but remains focused on strategies to improve long-term value. As of June 30, 2024, Dream Office REIT owns 25 active properties and 2 under development, maintaining a gross leasable area of 5.1 million square feet. The total portfolio’s occupancy rate, including committed spaces, rose to 84.3%, while the in-place occupancy rate dipped slightly to 79.2%. Year-over-year, downtown Toronto saw a minor drop in in-place occupancy, declining from 83.6% to 83.0%.
During Q2 2024, the REIT executed leases totaling 194,000 square feet across its portfolio, with significant activity in downtown Toronto and other markets, including Calgary and the Greater Toronto Area. In Toronto downtown, the Trust leased 107,000 square feet at an average rent of $37.41 per square foot, reflecting a 25.8% increase over previous rents. Meanwhile, in other regions, the REIT executed leases for 87,000 square feet at a weighted average rent of $14.73 per square foot, marking a 29.2% increase over previous rents.
Looking forward, Dream Office REIT has several key lease agreements in the pipeline. In Toronto downtown, 97,000 square feet of space is scheduled to commence in 2024, with net rents averaging 4.9% above prior rates. Additionally, the REIT is in advanced negotiations for another 149,000 square feet of leases in the area. In total, the Trust has executed approximately 356,000 square feet of leases across its portfolio since the start of 2024, demonstrating its continued efforts to attract quality tenants despite market challenges.
Growth Prospects
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 ~1.6% 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, allowing the trust to deleverage and afford 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 because the share count has dwindled.
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.
Dividend Analysis
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 $0.74 per share, good for a 4.4% current yield.
Dream cut its distribution in 2017, and the payout has been rather stagnant since then. We don’t see a high risk of a further cut today, given the manageable payout ratio (expected at 63% for 2024). However, we do remain wary of the somewhat shaky fundamentals in the office property market.
We currently expect $1.16 in FFO-per-share for this year. The decline reflects a softer occupancy compared to last year, as well as higher interest rates which are going to suppress the company’s profitability. Still, coverage remains adequate 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 4.2% 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.
Final Thoughts
Dream Office REIT’s high dividend yield and monthly dividend payments make it appealing to income investors. However, its long-term fundamental outlook is rather uncertain in the face of a rising-rates environment, and we see humble 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, but following the stock’s recent decline, the dividend yield is now quite hefty. Further, the current payout is well covered, and we view it as safe, even with softer occupancy levels and rising interest expenses. Overall, though, the stock is not very appealing at this time due to a weak total return potential.
Don’t miss the resources below for more monthly dividend stock investing research.
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