Dream Global REIT: 7.4% Monthly Dividend, but Modestly Overvalued

The Canadian company can provide international exposure, but its valuation leaves much to be desired

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Jun 21, 2017
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(Published by Nick McCullum on June 21)

High-yield investors are primarily looking for three things:

  • High yield.
  • Dividend safety and predictability.
  • Dividend growth.

It is hard to find investments with a solid combination of all three characteristics. Some asset classes have a much higher probability of delivering on these goals than others.

Real estate investment trusts – or REITs, for short – can be a fantastic source of yield, safety and growth for dividend investors.

Dream Global REIT (DUNDF, Financial) (TSX:DRG.UN, Financial) is no exception. The company’s 7.4% dividend yield certainly allows it to satisfy the high-yield requirement and makes it a member of the elite group of dividend stocks with 5%-plus dividend yields.

You can see the full list of all 416 stocks with 5%-plus dividend yields here.

Dream Global REIT also pays its dividends on a monthly basis, which is rare in a world where the vast majority of companies pay quarterly dividends. There are currently only 29 companies with monthly dividend payments, a trait which helps satisfy the requirement of dividend predictability.

You can see the full list of monthly dividend stocks here.

Dream Global’s exceptionally high dividend yield and monthly dividend payments make it an intriguing company for dividend investors.

Business overview

Dream Global is a Canadian real estate investment trust with globalized operations primarily focused in Germany and Austria.

The trust trades on the Toronto Stock Exchange under the symbol DRG.UN and on the Frankfurt Stock Exchange under the symbol DRG. Dream Global REIT is generally identified in U.S. stock databases with the ticker DRG.UN.TO or DUNDF.

Dream Global REIT is a member of the Dream Unlimited family of Canadian real estate investment trusts, along with:

Dream Global benefits from considerable size and scale as an owner and operator of European real estate.

The trust owns 13.6 million square feet of space divided among 171 properties and trades with a market capitalization of $1.5 billion at current prices. Dream also has an extensive presence in Europe with eight offices and over 60 employees in the region.

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Source: Dream Global REIT June 2017 Investor Presentation, slide 2

From an investment perspective, Dream Global offers investors a very interesting value proposition.

The company has strong asset quality and tenant diversification and occasionally operates within strategic joint venture opportunities with other property operators, allowing Dream to leverage its operating platform and global access to capital.

Additionally, the company recently received its first credit rating from Moody’s, qualifying for an investment-grade Baa3 score.

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Source: Dream Global REIT June 2017 Investor Presentation

What stands out about Dream Global is its exposure to international markets, specifically Germany, Austria and Belgium.

Growth prospects

Dream Global’s recent performance has been quite strong.

For instance, the REIT saw its trust-wide funds from operations increase by 14.1% in the most recent quarter. Dream’s per-share funds from operations increased by 10% over the same period a year ago, partially offset by an increase in the number of units outstanding.

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Source: Dream Global REIT June 2017 Investor Presentation, slide 3

Looking further back, Dream Global has a strong track record of fundamental business performance.

The trust has managed to meaningfully grow its net asset value, funds from operations and net asset value per unit over time while maintaining a consistently high occupancy rate.

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Source: Dream Global REIT June 2017 Investor Presentation, slide 27

Looking ahead, the company’s future growth will be driven by strong real estate fundamentals in Germany (the country where it has the largest exposure).

Simply put, Germany is a very attractive country to do business in. It has an unemployment rate of 4% (among the lowest in the European Union), GDP growth of 1.9% (reaching a five-year high) and an attractive combination of low vacancy and moderate new property supply.

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Source: Dream Global REIT June 2017 Investor Presentation, slide 7

Dream Global’s international exposure is a key component of this stock’s investment thesis and will be the largest contributor to the trust’s growth moving forward.

Competitive advantage and recession performance

Dream Global’s competitive advantage comes from its high-quality, diversified investment portfolio with ample exposure to international markets.

The trust has a 90% occupancy rate with a 4.3-year weighted average lease term and owns a diverse array of properties across many segments of Eastern Europe.

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Source: Dream Global REIT June 2017 Investor Presentation, slide 9

The REIT’s diversification extends to its tenant base. Aside from one large tenant (Deutsche Post (XTER:DPB, Financial), which generates 18.6% of the trust’s gross rental income), the trust’s tenant base is a well diversified consortium of generally investment-grade businesses.

Some details about the tenant base are below.

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Source: Dream Global REIT June 2017 Investor Presentation, slide 8

REITs are not typically as recession-resistant as some sectors of the equity markets, such as consumer staples or health care stocks.

With that said, Dream Global is well positioned from a liability perspective in case a recession is imminent.

The trust has minimal debt maturing in the next three fiscal years and has a weighted average debt term of 5.8 years. In addition, the net loan-to-value (LTV) ratio on Dream Global’s property mortgages is 48%, which is relatively conservative. Dream's weighted average face interest rate is 1.76%.

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Source: Dream Global REIT June 2017 Investor Presentation, slide 28

Investors should also keep in mind that while Dream has an investment-grade credit rating from Moody’s, its credit rating (Baa3) is the lowest rating that would qualify it as an investment-grade security.

In addition, Dream’s globalized business model means it is naturally sensitive to fluctuations in the Canadian dollar-Euro exchange rate, which is another risk factor investors should keep in mind.

Valuation and expected total returns

The company’s future shareholder returns will be primarily generated from its dividend yield and valuation changes.

Dream Global currently pays a monthly dividend of six cents, which yields 7.4% on the company’s current market price of 10.75 Canadian dollars ($8.06). The REIT’s dividend yield is nearly four times as high as the average dividend yield within the S&P 500 and will be the largest contributor to the trust’s total returns moving forward.

The future returns generated from Dream Global’s high dividend yield will be partially offset by its current valuation. It appears moderately overvalued at current prices.

Assessing the valuation of REITs is different than normal corporations because of the significant non-cash amortization and depreciation charges incurred by these investment vehicles.

So instead of using the traditional price-earnings ratio valuation metric, we can analyze a REIT’s valuation by comparing its current dividend yield to its historical dividend yield. If its current dividend yield is higher than normal, the trust is undervalued; conversely, if its current dividend yield is lower than normal, the trust is undervalued.

The following diagram compares Dream’s current dividend yield to its long-term historical average

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Source: YCharts

Dream Global’s current dividend yield is 7.4% and its long-term average dividend yield is 8.7%.

Based on this, the REIT appears notably overvalued at current prices. It appears investors are willing to place a premium on the trust’s geographic diversification. This will weigh on its future shareholder returns.

For REIT or high-income investors, this trust’s unattractive valuation suggests there are better high-yielding securities elsewhere on the public markets.

Final thoughts

Dream Global’s high dividend yield and monthly dividend payments make it stand out to high-yield dividend investors.

Some due diligence, however, reveals the trust is slightly overvalued when compared to its long-term average dividend yield.

Existing Dream Global investors should continue to hold this stock to benefit from its attractive geographic exposure; however, investors looking to initiate or add to a stake in this REIT should wait for a more compelling buying opportunity.

Disclosure: I am not long any of the stocks mentioned in this article.