Dream Global REIT: A Low-Risk Company With An 6.74% Yield

Summary

• Exposure to Europe with low risk.
• Relatively safe 6.74% distribution yield.
• Safe and expected to growth in the coming years.

It has been more than two years since I started investing and a bit more than two and a half years since I found a great passion for the stock market and the world of investing. Now that I am 20 years old, I started building a portfolio of companies that I like and that I think have a great future ahead of them. Since a lot of my investments are growth companies to mitigate my risk, I wanted to invest in companies that are less risky than my other investments.

I found out about Dream Global REIT (TSX: DRG.UN), (OTCMKTS: OTC:DUNDF) from one of the services offered by the Motley Fool Canada.

Nowadays, the market rises to new records every couple of weeks. People who speculate about the future of the market fall into two different camps: the bear market and the bull market. Thus, it is hard to find an investment that will be good in the bear market as well as in the bull market. Well, I believe Dream Global REIT is an excellent investment with great upside and a relative safe distribution yield for the next couple of years, especially better than cash or gold.

Dream Global REIT is a real estate investment fund focused on the commercial office market and industrial market in Germany and the Netherlands. The most prominent market for Dream Global is Germany with about 70% of their portfolio. Germany has a solid economic growth and has a very low-interest-rate compared to Canada and the United States. The same goes for Netherlands. The second biggest market is the Netherlands, with about 20% of their portfolio. Dream Global has been acquiring more and more property every year since its IPO.

Source: Company Presentation

This year alone, they have acquired 135 properties to expand in the Netherlands. With interest rates near 0%, Dream can make more acquisitions without worrying about paying a significant interest on their loan. With the recent addition of buildings in the Netherlands, Dream Global now owns 282 properties. About 80% are offices building, and 20% are industrial. All the industrial buildings are in the Netherlands thanks to its recent acquisition.

Source: Company Presentation

The overall occupancy rates are about 90.7%, but it is much lower in the Netherlands. During the coming year, Dream Global can improve the occupancy in the Netherlands which currently stands at 82%. By bringing the occupancy rate of its Netherlands portfolio at the same level as its German portfolio, the management can improve the company bottom line. The average lease term for Dream Global’s portfolio is 4.9 years, and ~90% of it lease have annual rent escalator built in or indexed to inflation.

Source: Company Presentation

Dream Global has 1809 different tenants for its properties. The biggest is DHL with 9.5% of its portfolio. It is worth noting that the position DHL holds in Dream Global REIT portfolio is quite high, but I don't think there is a big risk that DHL will be going out of business anytime soon.

Source: Company Presentation

DHL percentage has been decreasing every year since its IPO with the help of its acquisitions, which is a good thing for Dream Global REIT. If in the future DHL closes its doors or decides to move all their offices (which have very low chances of happening), it will hurt less to the bottom line than in 2011, when DHL was using 85% of Dream Global properties.

Source: Company Presentation

Opportunity

With rising rents, increased occupancy, the ability to make acquisitions with low-interest rates, and their recent entry in Belgium, I expect Dream Global to grow in the coming years.

Dream Global has properties in countries in Europe where the unemployment rates are low, and their GDP growths are higher than the rest of Europe.

Source: Company Presentation

If Dream Global continues to find exceptional proprieties and to acquire them at low rates, it can achieve a better return on their investment than its debt, which is almost guaranteed.

Source: Company Presentation

If management can improve occupancy rates for their Netherlands portfolio, which is currently standing at 83%, it will help the REIT's bottom line without spending a lot of money.

Risk

One of the biggest risks is that economic crises can reserve the positive trends that are present in Germany and the Netherlands.

Currency rate can also impact the company since its dividend is given in the Canadian Dollar. I am a bit worried about the AFFO payout ratio, which was over 100% the last two years. However, I believe the AFFO payout ration will decrease in the coming years since, the last two years, Dream Global had a lot of acquisitions.

The last risk is the percentage of DHL in Dream Global's properties portfolio, which is a bit more than I would like.

My 2 cents

I believe Dream Global is a fantastic REIT with an incredibly low cost of capital, a solid rent growth, and improved occupancy rates that should lead to a strong cash flow growth and a relatively safe 6.74% distribution yield. The only thing that worries me as an investor in Dream Global is if the economic situation in Germany and Netherlands, which are the biggest markets for Dream Global, take a downturn. And Dream Global has beautiful buildings, which is always a plus in my book.

Analyst’s Disclosure: I am/we are long DUNDF. 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.

Before investing in any companies, please do your own research.

Comments

[Balal Rasool]

Sorry BoomBoom99 if it felt misleading, it was not intended. I am looking for changing the yield on the article. I initially wrote 6.74%, but, while reading articles about Canadain companies that I follow, I noticed the yield was always of the OTC Markets so I decided to write the yield shown on SeekingAlpha (http://bit.ly/2BnZR1b) which was 8.69 when I was writing the article. Sorry if it felt misleading. Any other feedback will be really appreciated. Thanks

-Balal

[Trapping Value]

Just one quick point.
You mentioned the currency risk, but they are hedged for the next 30 months using EUR/CAD forwards so that will not be an issue.

[joesmith323]

@Trapping

There is currency risk out past the 30 month hedge period but that is one of the reasons I bought DRG.UN. I want the Euro exposure.

[Trapping Value]

I do want Europe exposure, but I am indifferent to Euro exposure.
They keep extending their hedges keeping their forward hedges at the same level, but of course if Euro weakens a lot they may have to reconsider whether they hedge into that or risk riding it out.

[Trapping Value]

"Relatively safe 8.69% distribution yield"
The yield is 6.74%, I get small differences due to a lag between article being published, but that is a big and misleading error.

[joesmith323]

Probably the result of dividing a Canadian dollar distribution by a US dollar price for DUNDF. It happens more often than it should on Seekingalpha.

On the positive side the article seems to be generally well written.

I am long DRG.UN. I hold it in my tax deferred account so I don't have to worry about the nature of distributions. I like that it gives me some European and Euro exposure without having to worry about with holding tax etc.

[Trapping Value]

It was the yield shown on SA couple of days back on the OTC price.
That is usually incorrect.
I am not sure how the yield is calculated but it is not the exchange rate adjustment.
Dream global does all the hard work for you, right on their home page.
http://bit.ly/2s0Bm7U

[Balal Rasool]

At the time of writing, the yield was 8.69% for DUNDF. It took time to review and to publish the article since it was my first time. And, yes the distribution yield for DRG.UN is 6.74%. Sorry if it felt misleading, it was not intended. Thanks for the feedback. I will keep this in mind next time I am writing. We always learn from our mistakes.

[anthonymaw]

I'm long Dream Global REIT myself too but it's worth noting for tax purposes that the returns are a combination of dividends, capital gains and occasionally return of capital.

[Balal Rasool]

Thanks for reminding about taxes issues that come with holdings like Drem Global REIT. I didn't think of that since my holding in Dream Global REIT is in a free tax saving account.