What do you get when you cross, “ridiculously oversold,” “massively undervalued,” “kickass dividend covered by earnings” and “huge stock buyback that eliminates shares at this crazy low level”?
You get TSE:D.UN, which is as perfect as a stock can be.
If Dream Office was liquidated tomorrow, its assets sold at a 10% discount (a MASSIVE discount for real estate!), all of its debts repaid and fees accounted for, each shareholder would get around $24 per share:
- Net asset value: $7.023B MINUS 10% = $6.3B
- Total debts: $3.59B
- Liquidation fees: $0.1B
- Shares outstanding: 107.7M
- NAV per share: $24.24
In other words, there is no logical reason, none whatsoever, that D.UN should ever trade below $24. Keep in mind a 10% devaluation on real estate assets is practically unheard of in Canada, at least when you consider the massively diversified company that Dream Office possesses all over Canada (most of it high quality):
With a hugely diversified portfolio, most of it performing quite well, Dream Office trades today as an almost-bankrupt company, yet its 12.5% distribution is more than sustainable and the unit trades almost at a 50% discount to its $33 implied NAV per share.
“It doesn’t take ten years of studying finance to understand Dream Office is an incredible bargain at today’s price”
Okay, people blame it for having offices in Calgary where apparently it’s all about oil and every single oil company is about to go bankrupt. However, only 6% of Dream’s tenants are mining, oil AND gas:
Even if half of oil companies renting with Dream went bankrupt and somehow Dream couldn’t re-lease those properties, it would just represent 4% of all revenues of Dream.
“Based on current valuation, even if every single propety Dream Office had in Alberta was obliterated by a volcano, the company would still be undervalued”
Don’t believe me? Here:
There. I cannot put it more plainly then that. Even if Dream sold all of its Alberta properties for $0, it would STILL be worth well above its current $18 price tag.
And it’s not like Dream is losing money in Alberta neither. With $117M in NOI, it represent roughly 25% of its net operating income, but this includes Edmonton which is less oil-heavy. Thus, the only reason Dream crashed so much (over 50%!) is because of Calgary. Sure, some might point to the softening market in Toronto (where Dream is concentrated), but the fact remains the office market is going pretty strong in Ontario, with a solid economy helped by a low CAD.
One could argue, perhaps, that the crashing economy in Calgary (or, rather, the perceived crash, as Calgary, will affect rents in general. Some people claim the situation is so desperate in Calgary the entire province is going to crash, even though oil crashed to $20 during the financial crisis and the city did just fine.
But even if the most pessimistic scenario played out, what would be the effect? Well:
Oh no! Not a 1% GDP contraction! This is a disaster!!!! How are we going to survive this! Half the buildings in Calgary are going to be empty!
Perhaps worse, Dream has very little direct exposure to oil companies that might go bankrupt and thus be unable to pay rent. In fact, look at important renters operating in the oil field:
Enbridge Pipelines – 248,577 sq feet
ATCO Group – 146,942 sq feet
Cenovus – 140,605 sq feet
Conex Rental Corp & Flint Energy – 113,801
These are not junior players: these are massive blue chip companies that survived a major oil crash already and are capitalized well-enough to survive a downturn. In fact, to find a junior company, you have to look at the 27th most important renter Dream has:
Penn West – 27th
The other renters by sq feet operating in the oil industry are:
Encana – 57 th
Canadian Energy Service – 67th
Precision Drilling Corp – 97th
Saxon Energy Services – 116th
That’s it. That’s the exposure to oil “Dream Office” has. Of its 9 oil companies renting a non-insignificant amount, 5 are blue chips, 2 are diversified/services and 2 are really juniors with a real risk of bankruptcy. That’s it, that’s the giant risk that everyone is panicking about: the 27th most important renter Dream office has.
Of course, let’s forget all the offices rented to AAA renters, banks, governments and so on. For the average Wall Street trader, these apparently don’t matter.
Seriously though, the “crash” in Canada is way overblown and based mostly on propaganda and fear-mongering. I looked at Alberta’s economy:
The entire energy sector is 25% of the GDP. It’s not nothing, obviously, but it’s not like one year of lower oil prices is going to create the next meltdown. And you know, it’s not like Oil is never going to recover
Everyone knows the current price per barrel is not sustainable. Eventually, it’s going to recover – probably even spike above $100 again. I mean, it’s not like people are never going to need oil and gas again, and you can bet the Saudi is not too happy about selling its oil at less than half of what they were selling it at a year and a half ago.
Alberta has survived some oil price crashes. It will survive this one.
But what about vacancies!
I spent days looking at the following tables hoping it would help unravel the mystery of Dream Office’s plummetting value:
So out of 21M square feet, 10% expire next year, 18% in 2017, 15% in 2018, 10% in 2019 and 47% thereafter?
Where’s the issue?
I’ve looked far back in time and, on average, Dream office renews or leases between 600,000-800,000 sq feet per quarter. In fact, they renewed 1M square feet last quarter:
Robust leasing activity: Leasing activity continues to be strong with approximately 1.0 million square feet of transactions completed during the quarter.
So this would translate to around 2.4M-4M in renewal per year on average. Is it just me or it covers the coming expiries quite well?
But but but rent erosion!
Overblown by a MASSIVE amount. Right now, Dream pays a 12.5% distribution that is 100% sustainable. Even if Alberta rents crashed 20%, the distribution would be sustainable (100% AFFO payout ratio). Sure, the economy in Alberta should have affected TSE:D.UN – but not from $39 to $17 a share! The new share price is simply insane; in my entire life, I cannot think of a single company offering such an amazing yield that was covered by earnings.
And about “rent erosion”…
Would it help if i said the renewal rates are HIGHER as well?
$18.28 per square feet when compared to $18.24 the same quarter last year. In fact:
All their “in-place net rent” are lower than the actual market rent! This is just insane!
There is WAY too much panic when it comes to TSX: D.UN
There is much more I could say about Dream Office. I could talk about the end of the management agreement, which is immediately accretive to the AFFO (adjusted fund from operation), but I want to conclude by talking about…
… the share buyback!
What should a good company do when its shares are oversold and undervalued? Buy them back, of course! And D.UN is doing just that, buying back 25,000 a day. From an average volume of 100,000, this means 8% of all transactions are D.UN buying back its shares!!!! INSANE!
Eventually, the short sellers will run out of steam
Short sellers have been attacking canadian real estate for close to three years now, failing horribly. Prices are still going up and their imaginary “bubble” is nowhere to be found. One day, it will be enough and their little game of crashing stocks with bullshit made-up articles based on hearsay, rumors and guesses will stop, and canadian housing companies will recover. I think they are at their last stretch here and I am actively investing in high-quality REITs like D.UN, CUF.UN, AX.UN and so on.
D.UN should consider suspending its DRIP program and selling some properties to buy back more shares. The current price is just silly – it reminds me of when CPG traded at $12CAD, only to bounce back 50% in something like 3 days. WAY oversold under any scenario and situation.
If I had guys, I would place 100% of my money in D.UN. That’s just how much I love it. Imagine the huge paycheck I would get every month! Oh man that is tempting. Still, I have to remain disciplined – never more than 5% of my money in one company.
Overall, I really don’t understand why Dream Office crashed so much. I usually don’t like to invest in companies that I don’t understand, but in this case, I cannot a single reason not to buy Dream Office. I mean, there is nothing: no big debt coming to maturity, no rising interest risk, no huge vacancies, no lawsuit problems, no bad properties (Dream Office properties are mostly high-quality), etc. This situation kind of reminds me of myself when I invested in Apple back when it fell below $400 three years ago: it made no sense, just like today’s drop in Dream Office.
But perhaps even better is the fact that, with the end of the tax selling season (morons trying to balance their gain to save on taxes, because you can’t do that in November for some reason) and the beginning of RSP/TFSA season (people investing in high dividend stocks for their retirement in January), I think this is the best possible time to invest in Dream Office. Simply said, no matter how you look at Dream Office, it is massively oversold.
Based on all those elements and the “panic” that surrounds canadian real estate, I think it has bottomed out and I plan on making this my biggest position in my portfolio. And with a >1% return per month, what’s not to like in it anyway?