Dream Office REIT Earnings: Dream or Nightmare?

Dream Office Real Estate Investment Trust (TSE:D.UN), owner of a commercial portfolio of office buildings across Canada, is set to report its second-quarter earnings on Aug. 5, 2021, after the market closes. The management team will host a conference call to discuss second-quarter results the following morning at 10 a.m. ET. (See Dream Office REIT stock chart on TipRanks)

The trust owns well located, high-quality office properties in major urban centers across Canada, with a focus on downtown Toronto. The portfolio includes assets in irreplaceable locations in one of the finest office markets in the world.

The global pandemic hit office landlords particularly hard as businesses moved to a remote work environment, creating significant uncertainty for the commercial office space market.

As Ontario’s vaccination rates continue to rise and the province enters Step 3 of its reopening plan, restrictions are being loosened, and there is a growing expectation that some companies will require employees to return to the office.

However, there is also a growing movement within companies to allow for a permanent, hybrid work environment whereby employees will be able to work from home as well as the office. Large companies such as RBC and Sun Life have already released how they will approach the return to work, by focusing on flexibility with some in-office days. Whether or not this will change CEOs’ strategic views on the amount of required office space long term, remains uncertain.

Dream’s stock price reflects this uncertainty, as it has not recovered with the broader market. The stock is currently around 40% below its pre-pandemic high of C$36.80. Over the next few quarters, Dream Office REIT must show progress as COVID restrictions are eased and vaccination rates rise, in order for the stock to make a recovery.

Let’s take a closer look at what analysts are expecting for the company’s Q2 print.

Earnings Preview

Analyst’s are expecting Dream Office REIT to report Funds From Operations Per Unit (FFOPU) of C$0.38. The company didn’t provide specific guidance for the quarter.

Prior Period Results

In the previous quarter, the company reported FFOPU of C$0.38, compared to C$0.39 in the prior-year quarter. The results were in line with consensus. In addition, comparative properties’ NOI decreased by 11.1%, or C$3.5 million, over the prior year comparative quarter. This was primarily driven by lower parking revenues of C$1.1 million across the portfolio as a result of city lockdown restrictions.

Factors to Look For

Occupancy rates are in focus as Dream Office REIT continues to see weakness in occupancy on a year-over-year basis. It slipped from 89.2% in Q1 of 2020 to 85.8% in Q1 of this year.

There are, however, some green shoots. The company reported a slight sequential improvement in occupancy last quarter of 60 basis points. Also, the Other Markets region saw significant improvement which helped offset continued erosion in downtown Toronto. Overall, the company will need to show a trend of sequential improvement in order to garner support for its stock.

CBRE Group (CBRE), a commercial real estate services company, put out their Q2 report on the Canadian Office market where they discussed current trends. They reported seeing increased office activity across the country, with reopening plans, tours and renewal discussions on the rise as tenants prepare for their return to office in the second half of the year.

Moreover, vacancy rates across Canada are seeing slight improvement: “Market conditions are steadily improving and showing signs of rounding the corner as office vacancy rates rose by their smallest quarterly amount since the onset of the pandemic,” wrote CBRE.

This should bode well for Dream Office REIT, as increased activity and improving market conditions could help the lagging downtown Toronto market, to which Dream has significant exposure.

RBC Capital Markets Analyst Pammi Bir believes the stock could present an interesting entry point for long-term investors. He calculates a Dream Office REIT Net Asset Value Per Unit (NAVPU) of C$26.50, implying a discount of approximately 16%. Pammi also notes that uncertainty around the near-term outlook for office fundamentals could continue to weigh on the valuation. He is, however, encouraged by the progress Ontario is having in vaccinations, which could help office fundamentals gain traction into the second half of the year.

Investors will be watching office REITs report their results to see if last quarter’s sequential improvement was sustainable.

Analyst Recommendations

On July 19, 2021 National Bank Analyst Matt Kornack raised his price target for Dream Office REIT to C$24 from C$23 and maintained his Outperform rating on the shares.

Bottom Line

Office REITs can be seen as a recovery trade or “vaccine trade” as vaccinations pick up and employees potentially return to the office environment.

It remains uncertain whether or not companies will require employees to return to the office or embrace a hybrid working environment in the long run. As we move beyond COVID, Dream Office REIT will have to display the true value of its irreplaceable properties through improved operating results.

On TipRanks, D.UN has a consensus rating of Moderate Buy, based on four Buy, two Hold, and 0 Sell ratings. The average Dream Office REIT price target is C$24.58, suggesting a possible 12-month upside of 10.9%. D.UN closed trading yesterday at a price of C$22.2 per share.

Disclosure: Sean Tascatan held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.