For those looking to for income, there are few assets better than real estate. And one of the best times to buy real estate is when no one else wants it, because you can get some really great deals for the assets.
When it comes to REITs, it can be very easy to compare the value of the assets to the share price to determine how much of a discount the stock is trading at. And when it comes to Dream Office Real Estate Investment Trst (TSX: D.UN), if you were to buy shares of this stock, you’d be looking at a nearly 43% discount.
According to management, the value of all the real estate that it owns should have the stock trading at $32.78 per share. Yet it trades under $19 per share. It’s important to understand why this is occurring.
Back in February, the company was forced to cut its dividend by 33% to $0.125 per share from $0.1867 per share. Each year, the company paid out $2.24 per year in dividends and brought in $2.83 to work with. The company only expected to make between $2.20 and $2.30 in 2016, so if were on the low end of that, the $2.24 would have been too much to spend. Therefore, cutting the dividend to $1.50 a year is more manageable.
But this scared investors into thinking that the company was dangerous because a lot of its biggest assets are in Calgary, an oil-rich part of the country. Investors weren’t worried when oil prices were high, but when they dropped, they grew concerned.
Ultimately, if investors aren’t going to value the company based on its assets, management can make a couple of moves to reward those who do.
The first thing it intends to do is sell upwards of $1.2 billion in non-core assets over the next three years. If the market views these assets at a 43% discount, management can sell it for much higher and then use that money to make the company stronger.
The first plan would be to pay down some of the debt it currently has. Its 48% debt-to-asset ratio is not debilitating, but reducing debt is always a solid way to keep the company strong, especially if times ever get worse in the future.
The other plan is to start buying back shares. When there is a big difference between the value of the assets and the share price, management is incentivized to reduce the total pool of available shares. This is great for investors because it’ll increase the size of each investor’s holdings and also create an opportunity to increase the dividend.
When there is fear in the market, share prices can sometimes trade at a significant discount to the value of the assets of the company. Buying when there is fear is a great way to maximize earnings. Getting a 7.92% yield in a monthly dividend is a great way to continue acquiring more shares of this stock as the markets keeps this stock depressed.
