Dream Office REIT (OTC:DRETF) has been one of the most punished REITs out there, as the stock has been free falling over -62% since its high in 2012 to its low in January 2016. The company slashed its dividend by 33% recently, as management plans to free up more cash for debt repayment, and the repurchase of more shares. The stock has captured the attention of deep value investors including myself, as there looks to be huge value here with the P/B at an absurdly cheap 0.6. I believe the new lowered dividend will be sustainable, and Dream's debt will not be a problem going forward, as they have plenty of top-tier real estate assets which they plan to sell in order to raise money to either pay off debt or buy back shares while paying shareholders their very bountiful 7.3% yield.
After a 33% dividend cut, the new dividend is sustainable and unlikely to be cut further
Dream cut its dividend earlier this year, as the stock has fallen so much as to have an "accidentally high yield" of nearly 15%. With such a ridiculously high yield like that, it was inevitable that the dividend would soon or later be cut, and I believe cutting the dividend as soon as possible was the best decision for Dream and its shareholders for the long run. Dream simply could not sustain its high dividend payment as the oil rout and 2015 Canadian recession caused major headwinds for its Albertan tenants that could no longer afford to pay rent to Dream. If Dream continued paying such a dividend, then Dream would be bleeding cash from its bottom line and its debt would continue to be a major concern, as Dream has a considerable amount of debt for a REIT with a debt-to-equity ratio of 0.7. The new dividend yield of 7.3% looks to be more sustainable now, since Dream can now build up cash to solidify its weak balance sheet, and raise enough cash to repay all of its debt, while still being able to afford to pay its shareholders its dividend.
Dream to liquidate non-core property assets to raise money to pay off debt
As a part of Dream's plan to solidify its bottom-line, Dream is also planning to liquidate over $1.2 billion worth of real estate assets that management deems is "non-core" to its business. This will allow Dream to pay back its large amount of debt, so that it can have a more reasonable debt-to-equity ratio that is more in line with the REIT industry average. Dream will also be able to buyback its shares since they are ridiculously discounted at current levels. Management clearly has a plan to get Dream's balance sheet back in order and I believe any woes will be easier for them to overcome with this stronger bottom-line.
Valuation and Conclusion
Dream looks have several major tailwinds that could propel its stock price this year. The Canadian economy looks to be coming out of a recession, as it reported positive growth for January, which is a good sign for Alberta-based REITs specifically, due to a large number of real estate owned in the heart of commodity producers. Dream owns fantastic properties in the core of Canada's major cities, these are incredible assets that are trading at a huge discount right now, and will inevitably be strong again once the Canadian economy gets going again. With a P/B of 0.6 which is almost half of its five-year historical average P/B of 1.0, contrarians should strongly consider initiating a position on Dream as the four-year selloff looks to be coming to an end as Dream has been giving investors better guidance for 2016 with a solid balance sheet strengthening plan in place. As the Canadian economy recovers from its 2015 bear market, I believe Dream and other Canadian REITs with Alberta exposure like H&R REIT (OTCPK:HRUFF) will soar, and patient investors can collect a fat 7.3% yield while waiting for the stock to rally in the latter part of this year.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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