MENU

First Brexit… then Trump… Now, it’s time for Pro

Is your portfolio really prepared for what’s coming next?

To help investors like you navigate this historically uncertain — yet high-flying — market and prepare for an inevitable downturn, we’re re-opening our Motley Fool Pro Canada service to a select few new members for a short time.

To discover how Pro Canada could help you to increase your upside potential… reduce your downside risk… and earn paycheque-like income in the process, simply click here — before the small number of spots we have left are all gone!

Why Dream Office Real Estate Investment Trst Is My Largest Position

After recently adding to my position in Dream Office Real Estate Investment Trst (TSX:D.UN), I realized something. The troubled REIT had quietly become my largest position at approximately 8% of my total portfolio.

You’d think I’d be uncomfortable with this. After all, Dream’s troubles are almost legendary at this point. Office space in Calgary, Dream’s largest market, is about as popular as ice on the North Pole. This led the company to both cut its dividend back in February and take a massive write-down on the value of its Alberta portfolio with second-quarter earnings just a couple of weeks ago.

But I don’t think things are nearly as bad as the market thinks. Here are the three main reasons why I’m very long this name and will continue to be so until it recovers to highs previously set in 2012.

Patience

One of the biggest advantages the individual investor has over portfolio managers and hedge fund gurus is the ability to be patient. We can hold out-of-favour stocks until they recover. Portfolio managers run the risk of investors pulling out if their portfolio has too many warts.

In the company’s latest quarter, net asset value was impaired from more than $30 per share to $23 per share, a write-off entirely because of the value of its Alberta portfolio. Overall, in 2016 the trust has decreased the value of its Alberta holdings by 45% from $1.68 billion to $930 million.

The company doesn’t see things recovering anytime soon, either. Occupancy in the province sunk from 89% in 2015 to 84% this year. That’s a big drop.

But at the same time, I doubt it’s really a drop that justifies a 45% decrease in asset prices. Occupancy is down 5% but values are down 45%? That seems like a bit of an overreaction to me.

It won’t happen this year or probably even next year, but eventually Alberta will recover, and so will the value of office towers in the province. Management will then write up the value of assets, giving shareholders who had the patience to get in today a nice reward.

Catalyst

Dream’s management team is making the prudent move of selling assets in more favourable locations to help shore up the balance sheet.

Out of the $1.2 billion in assets identified as part of this plan, $437 million has been sold by the end of Q2 with an additional $130 million either under contract or in advanced negotiation.

The cash from these deals will be used to pay down debt, creating financial flexibility. Management has been somewhat tight-lipped about what they plan to do with the cash. Perhaps they’ll go shopping in locations like downtown Toronto–places the market likes. Or maybe the company will go contrarian, hoping to pick up some bargains in Alberta.

Either way, the market will likely embrace this plan, which will hopefully allow shares to trade closer to their $23.64 net asset value.

Get paid to wait

Dream needed to cut its dividend. The payout ratio was approaching 100% with economic conditions deteriorating. And freeing up cash to put towards debt repayment is a prudent move.

The new payout of $0.125 per share each month should be sustainable even if things from Alberta continue to get worse. Funds from operations for the first six months of 2016 have been $1.33 per share, giving the company a payout ratio of just 56%. That’s exactly what dividend investors like to see.

Thanks to weakness in the share price, the dividend yield is an eye-popping 9.2%. That’s a key reason why I’m so exposed to the stock.

I look at it this way. If I get paid $1.50 per share to own the stock and it takes five years to go from $16.39 per share to $35 per share, I have a total return of $26.11 per share. Dividends of $7.50 per share make a big part of that gain, and I can use them to invest in other opportunities along the way.

Should you buy?

I think Dream Office REIT shares will be worth much more five years from now. But saying that, I also believe the ride up will be a rocky one. Risk-adverse investors may want to skip this opportunity.

Stock buy alert hits astounding 96% success rate!

The hand-picked investing team inside Stock Advisor Canada recently issued a buy alert for one special type of "bread-and-butter" stock where The Motley Fool U.S. has banked profits on 23 out of 24 recommendations. Frankly, with an astounding 96% success rate that has delivered average returns of 260%, chances are this new pick could deliver life-changing returns as well. Because the team at Stock Advisor Canada fully embraces the same time-tested investing philosophies that have led to countless Motley Fool winners globally. So simply click here to unlock the full details behind this new recommendation and join Stock Advisor Canada.

*96% accuracy includes restaurant stock recommendations from Motley Fool U.S. services Stock Advisor, Rule Breakers, Hidden Gems, Income Investor and Inside Value since each services inception. Returns as of 5/27/16.

Fool contributor Nelson Smith owns shares of Dream Office Real Estate Investment Trst.

NEW! This Stock Could Be Like Buying Amazon In 1997

For only the 5th time in over 14 years, Motley Fool co-founder David Gardner just issued a Buy Recommendation on this recent Canadian IPO.

Stock Advisor Canada’s Chief Investment Adviser, Iain Butler, also recommended this company back in March – and it’s already up a whopping 57%!

Enter your email address below to claim your copy of this brand new report, “Breakthrough IPO Receives Rare Endorsement.”

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.