For recent years months I have been attempting to determine if Dream Office Investment Trust (TSX:D.UN) is really a safe investment. Sometimes it paid an incredibly high 14.7% yield, which many predicted was not sustainable according to where its real estate assets are located.
Those predictions were right. Management announced it would be cutting its dividend by approximately 33% from $0.1867 per share to $0.125. Nobody likes a dividend cut, but the reality was quite simple: Dream Office couldn’t afford to pay those sorts of yields.
Ever since oil prices started to tumble, there’s been concern that Dream’s assets in Calgary, Alberta, were not going to be in a position to generate nearly as much revenue as they been on yesteryear. In 2015 funds from operations were $2.83. That’s expected to drop approximately $2.20 and $2.30 in 2016. The yield would have been $2.24 for the year, which couldn’t be paid.
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Fortunately, since the yield continues to be cut, the organization is in a far greater position to withstand future problems. And to be sure that the clients are completely secure, it’s also looking to sell non-core assets worth $1.2 billion within the next 3 years.
Dream also revealed that it had strong leasing commitments across the country. In Calgary specifically, it announced that 200,000 sq ft have been leased. While occupancy did drop to 91.3% from 91.5%, many investors expected it to be much worse.
Think about value
But here’s what investors have to think about: based on management, the web asset value per share is $32.78. If we would calculate the value of all of the properties the company owns, the stock should be trading in excess of $32.
Yet it trades just under $20 per share. This is a 40% discount which i believe investors should be seeking to make the most of. I’ve no doubts that the stock is going to continue rising now that the hard C but right Cdecision to chop the yield has been created. Investors will be convenient knowing that Dream can afford to pay its dividends.
Here’s things i expect over the next year.
Dream will sell some of their assets to bring in more money. If investors won’t value the buildings, they’ll definitely value cash on the books. But along with that, I expect management to start buying back shares. If investors still discount the shares, Dream might as well lessen the number, that will boost the earnings per share.
All told, I expect 2016 to become a excellent year for Dream Office. It made the challenging decision to cut its dividend, but now that it has, the company can focus on increasing value because of its investors. And on the way, investors can still get a lucrative yield that is now very secure. So yes, I believe this stock is definitely safe now and should be looked at by investors.
Fool contributor Jacob Donnelly has no position in almost any stocks mentioned.
The original form of this short article can be seen at www.fool.ca
