Observations on possibility of a distribution cutFirst, a bit of background that is critically important to understand. Especially to those posters expecting a rate cut of 50%.
A REIT is not a company. A REIT does not pay dividends. A company, let's say RBC, pays dividends from profits after paying taxes. A company has no obligation to pay dividends. If RBC makes $5/share and decides to pay a dividend equivalent to 50% of that amount, they can do so. If the decide to suspend the dividends for whatever reason, they can do so. Why? Because they pay taxes on their earnings before dividends get paid out. They can pay out whatever dividend they want, or none at all.
A REIT is a very different beast. A REIT does not pay income taxes as long as they distribute their earnings to unit holders. They MUST distribute their earnings to remain a tax free entity. So the distribution policy of a REIT is not at all like a company. They cannot cut the distribution based on current yield. They can only adjust distributions based on earnings.
For or those of you who believe a cut of 50% is in order, what you are effectively saying is that DREAM's future AFFO will be half of what it currently is.
From what I am reading, analysts are projecting AFFO of $2.17 in 2017, slightly below current year actuals. That is a far cry from $1.12.
I see nothing that would suggest any rate cut is warranted let alone a 50% cut. To put it in perspective, a $0.07 cut in the distribution ($2.24 current less $2.17 future projection) represents about $7.5 million per year. I believe DREAM could find that amount through operating cost efficiencies and possible interest rate savings. Plus they should look at a significant unit buyback. Any combination of these measures will get 2017 earnings per unit back to where they are now.
So, with information that is currently public, I see no reason for DREAM to even consider adjusting its current distribution. They have the cash flow to support it and they have the CRA rules that REQUIRE it.
I would appreciate your thoughts on my observations.
Marc