Office REITs are currently presenting an intriguing opportunity despite the challenges faced by the sector in recent years. The office market showed signs of recovery in 2024, and that should continue into 2025.
Many REITs are trading at significant discounts to their net asset value, but have high-quality properties in prime locations. The potential for increased demand as companies encourage a return to office work further bolster the sector’s prospects.
Meanwhile, Dream Office REIT trades at a reasonable 6.5 times the company’s projected cash flow.
DREAM OFFICE REAL ESTATE INVESTMENT TRUST (Toronto symbol D.UN; www.dream.ca) owns 27 office properties, including one under development. The downtown Toronto market supplies 77% of rental revenue and accounts for 82% of the portfolio’s value.
Dream consolidated its units on a 1-for-2 basis in February 2024. However, to conserve cash for debt repayments, Dream did not adjust the monthly distribution of $0.08333; that effectively cut the payment by 50%. Nonetheless, that $1.00 annual rate currently yields 5.8%.
The REIT has now agreed to sell its 438 University Ave. office tower in the heart of downtown Toronto for $105.6 million.
The 20-storey class-A 438 University tower is directly connected to the St. Patrick station on the Toronto subway system. It contains 322,835 square feet of space and was 93% occupied when the building was listed for sale early in 2024.
To facilitate the transaction, Dream said in its announcement that it had secured agreements to relocate approximately 17,000 square feet of tenants from the building to vacant space in Dream’s other downtown Toronto properties.
Dream did not identify the buyer, but a published report points to a government agency. The largest tenant at 438 University Ave. is currently Infrastructure Ontario, which is leasing 59% of the space.
Dream will continue to manage the property, having secured an agreement to continue with these services for the next three years.
Meanwhile, moving several existing tenants to other Dream properties is expected to increase operating income in those buildings by over $1 million annually. It will also decrease vacant space in the buildings.
Dream Office REIT: Robust cash flow growth signals a strong performance
In the three months ended September 30, 2024, the REIT’s overall revenue increased 3.9%, to $26.1 million from $25.1 million a year earlier. That’s due to higher rents on new leases and renewals. As well, its occupancy rate at the end of the quarter was 84.5%, up from 84.3% a year earlier.
Cash flow rose 10.5%, to $15.0 million from $13.6 million due to higher rent from the early occupancy of its 366 Bay project, which was completed ahead of schedule. Cash flow per unit gained 10.0%, to $0.77 from $0.70.
The units now trade at a reasonable 6.5 times Dream Office’s likely 2025 cash flow of $2.66 a unit.
Recommendation in Power Growth Investor: Dream Office REIT is a buy.
