Canadian REIT Stocks

Dream Office REIT – Initial Coverage $TSE:D.UN

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – March 2017.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Dream Office REIT (TSE:D.UN) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Dream Office Real Estate Investment Trust (the Trust), formerly Dundee Real Estate Investment Trust, is a Canada-based open-ended investment trust. The Trust’s segments include Western Canada, Calgary downtown, Calgary suburban, Toronto downtown, Toronto suburban, Eastern Canada and Other. It is engaged in building and maintaining a diversified portfolio of office properties in Canada, based on an established platform, and providing cash distributions to unitholders and managing distributions over time. The Trust’s portfolio consists of central business district and suburban office properties, located in urban centers across Canada, including Toronto, Calgary, Edmonton, Montreal, Ottawa and Vancouver. Its ownership interests include over 170 office properties (approximately 200 buildings) and approximately one redevelopment property. The Trust owns approximately 23.4 million square feet of gross leasable area (GLA). The Trust is managed by Dream Asset Management Corporation (DAM).

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Downloadable PDF version of this valuation:

ModernGraham Valuation of TSE-D.UN – April 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $2,100,635,071 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.00 Fail
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -401.37% Fail
6. Moderate PEmg Ratio PEmg < 20 -4.52 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 0.93 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.00 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -1,455.50 Fail
3. Earnings Stability Positive EPS for 5 years prior Fail
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Fail

Stage 2: Determination of Intrinsic Value

EPSmg -$4.41
MG Growth Estimate -4.25%
MG Value $0.00
Opinion Overvalued
MG Grade D+
MG Value based on 3% Growth -$63.99
MG Value based on 0% Growth -$37.51
Market Implied Growth Rate -6.51%
Current Price $19.95
% of Intrinsic Value N/A

Dream Office Real Estate Investment Trst does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability or growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of earnings stability or growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $4.06 in 2013 to an estimated $-4.41 for 2017. This level of negative earnings does not support a positive valuation.As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Dream Office Real Estate Investment Trst revealed the company was trading above its Graham Number of $0. The company pays a dividend of $1.56 per share, for a yield of 7.8%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was -4.52, which was below the industry average of 51.63, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-24.38.

Dream Office Real Estate Investment Trst scores quite poorly in the ModernGraham grading system, with an overall grade of D+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$24.38
Graham Number $0.00
PEmg -4.52
Current Ratio 1.00
PB Ratio 0.92
Current Dividend $1.56
Dividend Yield 7.84%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2016
Total Current Assets $431,662,000
Total Current Liabilities $433,257,000
Long-Term Debt $2,321,530,000
Total Assets $5,486,516,000
Intangible Assets $0
Total Liabilities $3,114,751,000
Shares Outstanding (Diluted Average) 110,041,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate -$7.99
Dec2016 -$7.99
Dec2015 -$0.51
Dec2014 $1.48
Dec2013 $4.30
Dec2012 $2.98
Dec2011 $6.06
Dec2010 $4.37
Dec2009 $0.60
Dec2008 $0.50
Dec2007 $19.94
Dec2006 $0.35
Dec2005 $0.16
Dec2004 $0.18
Dec2003 $0.71
Dec2002 $0.69
Dec2001 $1.71
Dec2000 $0.72
Dec1999 $0.56
Dec1998 $1.04
Dec1997 $0.80

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate -$4.41
Dec2016 -$1.73
Dec2015 $1.89
Dec2014 $3.33
Dec2013 $4.06
Dec2012 $3.60
Dec2011 $4.70
Dec2010 $4.40
Dec2009 $4.38
Dec2008 $5.59
Dec2007 $6.84
Dec2006 $0.34
Dec2005 $0.45
Dec2004 $0.66
Dec2003 $0.90
Dec2002 $0.97
Dec2001 $1.07

Recommended Reading:

Other ModernGraham posts about the company

None. This is the first time ModernGraham has covered the company.

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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