Dream Office Real Estate Investment Trst (TSX:D.UN) now yields 14%!
Unfortunately, the dreamy payout is due to the collapse of the unit price and is not the result of a boost to the distribution.
Why is the market killing this REIT?
The wrath of falling oil prices
Dream Office REIT rents out more than 24 million square feet of office space in 176 buildings across Canada.
The portfolio has an average occupancy rate of 93%, and its prime holdings lie in 26 properties located in downtown Toronto. The flagship building, Scotia Plaza, is one of the top office properties in the country and is responsible for 15% of Dream Office REIT’s total net operating income (NOI).
The remaining buildings in Toronto’s downtown core kick in another 15% of the NOI, so a significant part of the company’s funds from operations comes from buildings that should remain in high demand.
The situation in Alberta is another story.
Dream Office REIT gets 26% of its NOI from the province with 18% coming from Calgary and 8% from Edmonton.
Energy companies are slashing staff at an incredible pace, and that is resulting in significant empty space in Calgary’s office towers. In order to mitigate the losses, some companies are sub-leasing space for as low as 50% of the original contract.
That’s not a good sign for the owners of the buildings, especially if their contracts with customers are coming up for renewal in the next few years. Energy companies will not renew and companies operating in other industries will demand huge discounts to stay.
Dream Office REIT’s investor presentation says 10.2% of its total leasable area, or about 2.5 million square feet of space will come up for renewal in Calgary and Edmonton in the next three years. The company owns 2.7 million square feet of space in Calgary, so a large chunk of that is going to be under pressure in the near term.
Competition is tough enough right now, but five new office buildings are under construction in Calgary, and those developments are expected to dump another two million square feet of space on the market in the same time frame.
Should you buy Dream Office REIT?
The company owns fantastic assets, and the energy market will eventually recover. The risk for investors is that the stock continues to slide and the company gets taken out at a much lower level before shareholders get a chance to benefit from a rebound.
With Alberta’s troubles threatening to hit the broader Canadian economy, Dream Office REIT’s properties in other areas of the country could start to be affected.
The shares have already fallen more than 40% in the past 12 months and continue to hit new lows. The yield looks tempting, but investors should probably avoid this falling knife.