There are few things that worry me more about a company than whether or not its dividend–the income that investors earn for being long-term holders–is safe. Unfortunately, we have to analyze whether the dividend that Dream Global REIT (TSX:DRG.UN) distributes is safe or if investors should be concerned about a potential cut.
The reason this question comes up is because its dividend is 100% of its funds from operation. Think about that for a second. Every dollar it has in funds from operation, it distributes in dividends. It brings $0.80 per share in and it sends $0.80 per share out.
So on the surface, that is very risky. What if it loses a tenant? What if it miscalculated how much it was going to collect in rent? Obviously, it’s important to pay attention. Fortunately, it’s not all bad.
For those who don’t know, Dream Global owns more than 200 office and mixed-use properties in Germany with recent exposure to Austria. These properties comprise 13.5 million square feet. It’s part of the family of Dream REITs, such as Dream Office Real Estate Investment Trst, a company I’ve talked about extensively on Fool.ca.
Dream Global only went public back in August 2011, but since then it has paid the $0.80 per share to investors, which is actually an encouraging sign. The company knew what it could pay, and it has made that payment every single month to investors.
Another encouraging sign is that Dream Global is diversifying its tenants. When it went public, 85% of the REIT’s annual gross rental income came from Deutsche Post, a courier and mail company based in Germany. Since then the company has been able to push that down to 22%. While that’s still too much, that’s a really big improvement. Its other tenants include Google Germany GmbH, the governments of Hamburg and Dusseldorf, and multiple other entities.
A slight negative for the company is that its occupancy rate is only 88%. Each percentage point–or even basis point–it goes up, the stronger the company. It already owns the real estate, so empty space is never good for the company. The good news is that it used to be much lower, so Dream Global has been doing what it can to fill its buildings.
And there are certain macro-effects that help Dream Global. Across the entire European Union, Germany has the lowest unemployment rate at 4.5%. And that’s actually one of the reasons why I like Dream Global as much as I do. By being based out of Germany, it benefits from the strong German economy. And there is some potential, with the aftermath of the Brexit, that more companies will move to Germany, increasing the potential for Dream Global to get new tenants.
At the end of the day, Dream Global carries inherent risks, like paying out 100% of what it brings in. However, it’s been doing that for five years and has never missed a payment, and it is increasingly becoming more diversified. If it can continue to reduce the outsized amount of annual gross rental income it generates from Deutsche Post and continue signing up new tenants, this could be a great company.
Right now, I believe the dividend is safe.
