Dream Office Real Estate Investment Trust T.D.UN

Scotia comments after conference

[incomedreamer11]

Focus Shifts to June AGM and Potential Asset Dispositions

OUR TAKE: Neutral. We maintain our SP rating post a Q1 that beat us by $0.03 (in-line with the Street), with the variance almost entirely due to a “seasonally-low” G&A expense (NOI was in-line; Exhibit 13), which should increase q/q. Our key estimates and assumptions are largely intact, with the exception of NAVPU estimates (down 11% on a higher cap rate; Exhibits 1-2). Exhibit 3 compares estimate changes to AP and broader sector (D NAVPU revisions were worse but FFOPU/AFFOPU were better). While in-place occupancy fell 270bp q/q (committed -90bp q/q; Exhibit 6), it should recover in short order with already completed leasing. See page 6 for our summary of the Q1 results (no Initial Glance was published, nor was there a conference call). Based on client queries, in contrast to Allied Properties (where focus is on occupancy and distribution), investor focus on Dream appears squarely on ability to sell assets (438 University, 212 King, etc.) to improve liquidity and lower financial leverage, which remains high (Exhibit 4), with the June 12 AGM perhaps providing an update (if not, we think Q2 results in August, despite slower summer months).

KEY POINTS

What’s changed since we last wrote? As shown in Exhibit 2, we lowered our 2024E and 2025E occupancy forecast to 79.5% and 81.6%, respectively, on large occupancy decline in Q1 and softening market (see our Office note). We also adjusted our 2024E and 2025E leasings spreads lower to 0% and 3%, respectively, which drove our SP NOI growth lower to 1% and 3%, respectively. We cut our Current and Forward NAVPU by 11% on 17bp higher cap rate (similar to AP).

Looks relatively reasonable on AFFOPU but quite cheap on NAV (similar trend to broader CAD REIT space). Despite our 11% cut to our NAVPU, D continues to trade at a significantly steeper discount to NAV relative to AP (37% vs. 25%), while the 10.6x/10.2x 2024E/2025E P/AFFO is higher (9.2x/9.3x for AP). As we have shown in our Q4 Initial Glance, our sum-of-the-parts analysis now points to a valuation of $18.50-$20.00 ($9.50-$11.00 for DIR units + $3.50 for PUDs + $5.50 for the remaining AFFO at 5.0x).