Topic: How To Invest

High-yielding REIT focuses on German properties

Dream Global

Pat McKeough responds to many requests from members of his Inner Circle, looking for specific advice on the stock market, investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide you with a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle.

Recently we had a question from an Inner Circle member about a Canadian Real Estate Investment Trust that concentrates on properties outside of this country. Dundee International invests in Europe, principally in Germany. Pat looks at the REIT’s initiatives to expand and diversify its portfolio of German properties and examines the effect of the state of the euro and the European economy on Dundee’s prospects.

Q: Pat: Please give me your opinion on Dundee International REIT. Thanks.

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A: Dream Global REIT (formerly Dundee International REIT), $7.65, symbol DRG.UN on Toronto (Units outstanding: 113.0 million; Market cap: $885.0 million;, is a Canadian real estate investment trust that focuses on investing outside the country. It aims to grow by acquiring different types of properties in certain European countries, starting with Germany.

The REIT first sold units to the public in August 2011. Initially, it sold 27 million units for $10 each to raise $270 million. It raised a further $140 million in an issue of debentures.

The trust used the total proceeds of $410 million to help buy a $1-billion portfolio of properties in Germany from Deutsche Post, Europe’s largest postal company. These buildings are located in major cities and towns, often on a central square near the main train or bus station. Deutsche Post now leases back much of the space.

In the first nine months of 2015, Dream Global sold a 50% stake in eight properties to a joint venture partner. It also sold 100% of 54 other properties.

As of September 30, 2015, it owned 214 commercial properties that contain a total of 13.2 million square feet, all in Germany. These buildings had an 86.8% occupancy rate.

Due to the recent asset sales, Dream Global’s revenue in the third quarter of 2015 fell 18.9%, to $49.8 million from $61.4 million a year earlier. Overall cash flow fell 4.5%, to $20.7 million from $21.7 million. Due to more units outstanding, cash flow per share declined at a faster rate of 10.0%, to $0.18 from $0.20.

The sales have also lowered its reliance on Deutsche Post, which accounted for 24.7% of its rental revenue in the latest quarter, down from 29.8% a year earlier.

Dream Global is re-investing the cash from its recent sales in other properties with more attractive prospects. For example, in October 2015 it paid $64.7 million for a multi-tenant office building in Berlin. The building has an occupancy rate of 99%.

In December 2015, Dream Global teamed up with a South Korean pension fund to buy Rivergate, a landmark office building in Vienna, Austria. This was Dream Global’s first purchase outside of Germany. The REIT’s 50% share of the $285 million purchase price was $142.5 million. The property is 95% occupied.

Investment impacted by slow European growth

Investing in Europe adds risk, as the continent is still dealing with slow growth and high government debt. As well, all of Dream Global’s lease payments are in euros, so weakness in that currency hurts the contribution of the REIT’s properties to its revenue and cash flow.

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 9.8 times its forecast 2016 cash flow per unit of $0.78. It pays monthly distributions of $0.0667 a unit; the annual rate of $0.80 yields a high 10.5%.

In the Inner Circle Q&A, Pat examines the outlook for the German economy in which Dundee has the bulk of its properties. He also looks at the REIT’s dependence on Deutsche Post and its plan to  buy properties from distressed European sellers. He concludes with his clear buy-hold-sell advice on this REIT.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

COMMENTS PLEASE—Share your investment experience and opinions with fellow members

Dream Global REIT offers the rewards of a high 10.5% yield and properties in a generally sound Germany against the risks of slow European growth and weakness in the euro. When you consider an investment, do you focus on the risks, or do you look primarily to the rewards? Let us know what you think.

This article was originally published in 2016 and is regularly updated.


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