This Canadian REIT’s high yield is built in Europe

A Member of Pat McKeough’s Inner Circle asked him about a Canadian REIT that does most of its business outside the country.

Almost all of Dream Global REIT’s properties are in Germany and the Netherlands. Economic conditions in both countries suggest rental income is secure in the short term. Revenue and cash flow jumped in the latest quarter, and the yield is a high 5.6%. Still, the company’s acquisition strategy adds risk, notes Pat, and weakness in the euro can erode revenue and cash flow.

Q: Pat: What do you think of Dream Global REIT? Do you think it’s a buy?

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A: DREAM GLOBAL REIT (symbol DRG.UN on Toronto; is a Canadian real estate investment trust that invests in commercial properties in Europe, particularly in Germany and the Netherlands.

Dream Global has interests in 257 commercial properties for a total of 19.5 million square feet of leasable area. Of these properties, 144 are located in Germany, 111 in the Netherlands, and one each in Vienna, Austria, and Brussels, Belgium. Overall, as of March 31, 2018, the REIT had an 89.2% occupancy rate.

It first sold units to the public in August 2011 at $10 each. Through the sale of 27 million units, Dream Global raised $270 million. An issue of unsecured loan certificates, or debentures, helped it raise an additional $140 million.

The REIT used the proceeds to acquire a $1 billion portfolio of properties in Germany from Deutsche Post. These buildings are located in major cities and towns, often on a central square near the main train or bus station. Deutsche Post continued using these buildings and Dream Global was able to negotiate the renewal of 2.5 million square feet of leased space, or 90% of the total.

In May 2017, the trust then spent $143.2 million to purchase Airport Plaza, a multi-tenant office complex located next to the Brussels International Airport.

Its next major investment was in July 2017 when Dream Global acquired a portfolio of office properties in the Netherlands valued at $963.3 million.

That same month it also purchased Bollwerk, a fully occupied, multi-tenant office building in Stuttgart, Germany, for $133.8 million.

In December 2017, the REIT next acquired M22, a fully occupied commercial property in Berlin, Germany, for $31.6 million.

Dividend stocks: Industry vacancy rates in Germany at 15-year low

As a result of these purchases, the asset value of Dream Global’s investments jumped 56.7%, to $4.7 billion in 2017 from $3.0 billion in 2016.

In the three months ended March 31, 2018, the REIT’s revenue rose 72.4%, to $70.5 million from $40.9 million a year earlier. Cash flow rose 63.6%, to $47.6 million from $29.1 million. Cash flow per unit increased at the slower rate of 18.2%, to $0.26 from $0.22. That’s due to more units outstanding as a result of the REIT’s acquisitions in the second half of 2017.

Last year, industry vacancy rates in Germany reached the15-year low of 4.5%. In 2017, the Dutch office sector also saw its lowest vacancy rate in 10 years—11.7%. This year, in 2018, GDP is expected to grow 2.3% in Germany and 2.9% in the Netherlands. That suggests the REIT’s rental income is secure over the short term.

However, all of Dream Global’s lease payments are in euros, so weakness in that currency hurts their contribution to revenue and cash flow.

The REIT’s acquisition strategy, which it plans to continue, also adds to risk.

However, Germany’s economy is the largest in the European Union and the fourth-biggest in the world. It’s also the most prosperous and stable country in Europe. Moreover, now is a good time for Dream Global to continue to buy properties from distressed European sellers.

The REIT trades at 13.7 times its projected 2018 cash flow of $1.05 per unit. It pays monthly distributions of $0.0667 a unit for an annual rate of $0.80. That yields a high 5.6%.

Inner Circle recommendation: Dream Global REIT is okay to hold.

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