Get 9-13% Yields From These Dreamy REITs

Which Dream empire REIT should you buy today? Dream Office Real Estate Investment Trst’s (TSX:D.UN) 12.6% yield is enticing, but you could get safer yields from two others…

| More on:
The Motley Fool

When thinking about getting rental income, the companies that come to mind from the Dream Unlimited Corp. empire are Dream Office Real Estate Investment Trst (TSX:D.UN) or Dream Global REIT (TSX:DRG.UN).

Well, that’s not a surprise.

Although, they are all managed by Dream Unlimited Corp., Dream Office and Dream Global have bigger scales than Dream Industrial Real Estate Invest Trst (TSX:DIR.UN). But which one should you buy today for a safe yield?

Dream Office REIT

Dream Office has office property assets worth $7.5 billion, equating to 24 billion square feet of gross leasable area (GLA). About 71% of the REIT’s net operating income (NOI) comes from central business districts.

Its top 20 tenants have an average credit rating of AA- and include quality businesses such as Bank of Nova Scotia, Bell, Enbridge, the federal government, and multiple provincial governments.

Why is it so cheap?

Dream Office’s price of $17.8 is 40% below its consensus net asset value (NAV) of $29.7. This is likely because 26% of its NOI is from Alberta. However, Dream Office also gets 30% of its NOI from downtown Toronto where it has a 98% occupancy rate.

Is its 12.6% distribution safe?

The REIT’s strong occupancy rate of 92.8%, staggered lease maturities, and rental growth should keep its distribution safe. Additionally, its adjusted funds from operations (AFFO) payout ratio is around 95%.

Dream Global REIT

Dream Global has German office property assets worth $2.6 billion, equating to 13.2 million square feet of GLA. The REIT focuses its investments in seven major cities that include Hamburg, Munich, and Frankfurt.

Germany is a good place to invest because it is the Eurozone’s largest economy and the world’s fourth-largest economy. It also posts one of the lowest unemployment rates in the Eurozone.

Dream Global is trading at a discount compared with its peers.

Is its 9.8% distribution safe?

The REIT’s occupancy rate of 86.8% at the end of September has improved from 2014’s occupancy rate of 85.3%. When you consider that average in-place rents have increased by 7% since the fourth quarter of 2014, its distribution is safer than it was in 2014.

Dream Industrial REIT

Dream Industrial has industrial property assets of $1.7 billion, equating to 16.9 million square feet of GLA across 220 properties. Two-thirds of its portfolio is multi-tenant, offering opportunities for rental growth. Additionally, its NOI is diversified as no tenant contributes over 3.6%.

Dream Industrial has balance across building types: 42% of GLA is in warehouse and distribution, 39% is in flex industrial, and 19% is in light manufacturing.

What’s more to like is that new supply is only expected to be 1%. Also, it has limited exposure to oil and gas related tenants, which make up 3.3% of GLA. Although 24% of GLA is in Alberta, its Alberta portfolio has a high occupancy rate of 97%.

Based on consensus NAV, Dream Industrial is trading at a discount of 24%.

Is its 9% distribution safe?

The REIT has an occupancy rate of 94.6% and average remaining lease terms of 4.3 years. Also, about 95% of NOI is situated in key urban locations close to major transportation infrastructure.

Dream Industrial’s AFFO payout ratio has come down to 85% in the third quarter of 2015 from 2012’s 94.1%. Adding that Dream Industrial forecasts AFFO to grow 4% by the end of this year, its distribution of 9% at $7.80 per unit is safe.

Tax on the income

REITs pay out distributions that are unlike dividends. Distributions can consist of other income, capital gains, foreign non-business income and return of capital. Other income and foreign non-business income are taxed at your marginal tax rate, while capital gains are taxed at half your marginal tax rate.

The return of capital portion reduces your adjusted cost basis. This means that that portion is tax deferred until you sell your units or until your adjusted cost basis turns negative. So, if you buy REIT units in a non-registered account, you’ll need to track the change in the adjusted cost basis. The T3 that you’ll receive will help you figure out the new adjusted cost basis.

Of course, each investor will need to look at their own situation. For instance, if you have room in your TFSA, it doesn’t make sense to have investments in a non-registered account to be exposed to taxation.

In conclusion

Although yielding a few percentage points less, I think Dream Industrial and Dream Global offer safer yields than Dream Office today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of DREAM GLOBAL REIT, Dream Office Real Estate Investment Trst, and Bank of Nova Scotia (USA).

More on Dividend Stocks

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »

sale discount best price
Dividend Stocks

1 Dividend Stock Down 11 Percent to Buy Right Now

Do you want a great dividend stock down 11% that can provide years of growth potential? Here's one heavily discounted…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Are you looking for dividend stocks to buy right now? Here are two top picks!

Read more »

edit Taxes CRA
Dividend Stocks

Tax Time: How to Keep More of Your Money

Nearly everyone hates paying taxes, although Canadians can lessen the financial pain with the right tax strategies.

Read more »