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Should Dividend Investors Buy Dream Global REIT for its High Income?

Ever dream of owning commercial properties in Europe? You can do that easily in the comfort of your home right now by investing in Dream Global REIT (TSX:DRG.UN). This real estate investment trust is managed by the same team that manages Dream Office REIT (TSX:D.UN). Since its initial public offering in 2011, Dream Global REIT has focused on growing its commercial properties portfolio in Germany’s major cities.

Dream Global REIT is diversified
In particular, Dream Global zoomed in on seven key cities: Hamburg, Munich, Frankfurt, Stuttgart, Dusseldorf, Berlin, and Cologne. Dream Global REIT receives 67% of its gross rental income from these top office markets. Dream Global’s portfolio consists of 266 properties making up about 14.8 million square feet of gross leasable area.

Other than its geographical diversification in different cities, Dream Global REIT also has diversification in its tenant base. Its tenants include AIG, BNP Paribas, ERGO Insurance Group, Google, Imtech, and the state of Bavaria.

What makes Germany real estate a good investment?
In addition to being the largest economy in the Eurozone, Germany is also the world’s fourth largest economy. Since 2007, Germany’s unemployment rate has reduced from more than 9% to 4.5% by the end of 2014. Furthermore, German mortgage rates are relatively low compared to recent history, which has helped in increasing the investment volume for commercial real estates.

Is Dream Global REITs distribution safe?
Dream Global REIT only has a short few years of history, but it reflects similar distribution behaviour as Dream Office REIT. Dream Global pays out monthly distributions that equal an annual yield of 8.3%.

It doesn’t have a pattern of raising its distributions, but its payout ratio sits at 92%, which is relatively high compared to other REITs. I don’t expect Dream Global to raise its distribution in the near future. On the plus side, its distribution looks to be reliable. Investors who do not need the income right now can opt to reinvest the distributions at a 4% discount.

Risk
Dream Global’s top tenant, Deutsche Post, makes up 29.5% of its total annualized gross rental income. Management recognizes that it’s risky to rely too much on any one tenant, and has steadily reduced its reliance on Deutsche Post over the past three years (at one time it represented 85% of gross rental income!).

What can investors expect in the future?
Dream Global has sold some properties in the recent past, and redeployed the capital into buying high quality properties, so I don’t anticipate an increase in its distribution in the foreseeable near future.

Analysts estimate a one-year target price of $10. It currently costs $9.78 per unit. If they are correct, that would give you a 2.2% gain from capital appreciation. Add in the 8.2% yield, and you could see a total return of about 10%. So, Dream Global REIT is essentially fairly valued today with most of its returns expected to come from its distributions.

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Fool contributor Kay Ng owns units in Dream Global REIT.

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