Going through the attic I found a genie's lamp. When I rubbed it and the genie came out, he uttered those magic words. You get one wish…
Although I thought I was dreaming, I thought I'd better ask for something really good but still realistic enough so as not to attract attention from the people around me. I asked for a security that yielded 10% and had at least 50% capital appreciation upside. Essentially, I wanted a security that was mispriced by at least 50%. Properly valued it would have been a 5% yield (double the price hence half the yield).
The magic genie was splendid and prepared to grant my wish. Just before uttering the magic words, he stopped himself and asked "Why use your wish when you can just buy units of Dream Office Real Estate Investment Trust (OTC:DRETF)?"
I was in awe. Dream Office REIT went under the acronym D.UN on the Toronto Stock Exchange. I quickly asked to postpone my wish and investigate further.
Pulling out the financial on the IR website, the numbers were all in Canadian dollars. It seemed pretty simple. The stock currently trading at $18.50 per share yielded 8% and had tangible book value of $29.34 per share. The first thought was something had to be wrong - either lots of Goodwill or an unsustainable dividend yield. The genie had to be completely wrong…Or so I thought.
Looking further through the financials, I realized the dividend rate had already been cut in 2016 and backing out the one-time items from 2015, the current payout given its AFFO projections were more than sustainable. This was for real. The estimate of the new distribution rate would be approximately 67% of AFFO.
Continuing down the checklist, the total number of shares (or units) had to be increasing at a rapid pace. This could become a problem which could spiral out of control quickly. To my surprise this had already been taken care of. In the February 18th, 2016 press release, Dream announced the suspension of the DRIP plan, meaning no more dividends could be re-invested - translation: no more new units would be issued from the re-investment of distributions.
Addressing the NAV
The company has put together a 3 year strategic plan in order to close the gap between the share price and the NAV, calculated as (Assets - Liabilities - Goodwill) / (Shares outstanding) worked out to the following (as of March 31st, 2016):
(6,585,909 - 3,242,523 - 0) / 113,971 = $29.34
All numbers in Canadian dollars.
Currently, the stock price is hovering around $18.50.
Part of the 3 year plan set out by management has been to close the gap between the current share price and the NAV of $29.34. Management however reports the estimated NAV at $30.31 as they account for minority ownership interests in Dream Global REIT (DRG.UN on the Toronto Stock Exchange) and Dream Industrial REIT (DIR.UN on the Toronto stoke change) differently. At this time, I do not expect Dream Global REIT to be liquidated by Dream Office REIT as Dream Global REIT is also trading at a substantial discount to tangible book value.
The expectations are the company will sell off non-core assets and either pay down debt or continue their share repurchases. In 2015, the purchased and retired shares totaled 4,486,473 units, amounting to $105.1 Million. The average repurchase price was approximately $23.43. (As a reminder, all amounts are in Canadian dollars).
Looking at the other tools available to Dream, the company has extended their credit line to $800 Million and a number of office buildings deemed as "non-core" have been identified and are in the process of being sold in order to focus on core properties. The proceeds from these divestitures are to buyback more units and hopefully contribute to closing the gap from $18.50 to $29.34.
Dream Office REIT also owns approximately 24% of Dream Industrial Real Estate Investment Trust (DIR.UN on the Toronto Stock Exchange). This investment is due to the spinoff of industrial properties several years ago to allow the office REIT to focus on office real estate and the separate industrial REIT to focus on industrial properties. Currently DIR.UN trades at approximately tangible book value, opening the door for Dream Office REIT to raise further cash by disposing of their stake in DIR.UN should they so choose.
Most recently, there was a news report that part of Toronto Scotia Plaza owned by Dream REIT could potentially be sold. Currently, Dream owns 66.67% and may sell 16.67% bringing their interests to an even 50%. This could raise a significant amount of capital to continue share buybacks or the repayment of debt.
With a number of tools at their disposal, the management of Dream Office REIT have no excuses. At an 8% yield and tangible book value of almost $30, the dream has been found at a price of $18.50 CDN, it's called Dream Office REIT. I just hope the genie lets me make another wish.
A quick word on currencies
As a Canadian investor, the currency is not an issue for me. For many investors south of the border however, the current strength of the US dollar vs. the Canadian dollar may provide an excellent buying opportunity. As Canada is a major exported of oil, there may be a positive correlation (I believe) between the price of oil and the strength of the Canadian dollar. If you agree, this may be an excellent time to take a good look.
Special thanks to Canadian Dividend Growth Investor who put together a similar article in February with a number of the same points. The market has had 4 months to digest the news and see the plan in action. It may only be a matter of time before the market really believes in the turnaround and we head for $30 per share.
Disclosure: I am/we are long DRETF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long D.UN on the Toronto Stock Exchange.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.