A little over a year ago, in late 2015, Dream Office REIT’s (TSX:D.UN) management team was arguing the company was worth at least $32 per share.
Things have changed since then, of course. The trust’s Alberta assets -- which represent close to one third of net operating income -- were wrote down twice. The bulk of the writedowns came in the summer of 2016 after the company reported relatively weak operating results for the region.
The Alberta recession hurt the office tower market, of course. Dream also had to deal with additional supply coming on the market with more to come in 2017 and 2018. It also revealed it was forced to cut rents to retain certain tenants.
After these writedowns, net asset value dropped to just over $20 per share. The trust’s Alberta assets are valued at close to zero on the balance sheet.
Some people are arguing these buildings still have plenty of value. Occupancy is weak, but it’s still above 80%. Alberta will recover. The value of Dream’s real estate there will go up as the province heats up again.
Management has done a nice job selling non-core assets to help bring down the debt. Total debt has fallen from $3 billion to $2.6 billion in the last year alone. Look for it to continue falling in 2017. It also pays an 8% dividend.
An investment in Dream comes down to Alberta’s recovery. When the province’s energy sector returns to growth mode again, the value of Dream’s Calgary properties will likely explode higher. When that happens, Dream shares are potentially worth $30 each. After all, they were worth that much back in 2015.
