RE:RE:valuation modelGood comments, and I can feel your bullishness.
I agree with you on your comments on my valuation and the future potential on some assets. However, as a conservative investor, I tend to write off anything that is not generating cashflow at the moment. I perfer to not factor in any upside from development and future density. Actually, a cap rate of 4.5%-5% incorporate some of the non cash-generating assets. I understand the potential long term value creation potential of those assets, but we are currently in a downturn of the office market+ high interest rate environment. I'm valuing today's d.un in the most conservative way.
I agree with you on the office fundamentals. I read a lot of articles about hybrid work, and the occupancy will go down maybe another 1-2% (maybe even less than this), but that will be it. Companies started to realize the value of in-person contacts to improve productivity.
There will be some deliveries of office buildings until mid 2025 and almost no new construction is being planned. This is usually a sign of the bottom of the cycle. Reason for being bullish for sure.
The real problem for me here is the interest rate and the cap rate. The macro risk outweighs micro risk here in my opinion. Dream office management was right to buy back shares and create values, but they could not foresee the interest rate to go up to 5% and this is out of their control, this is just the real estate market.
Anyways, thanks for your input, and that being said, at cap rate of 7% excluding any upside on vacant space and future density, or, another way to look at it, a 7-8X FFO at a share price of 12$/share, this thing can go up a lot if both micro and macro environments normalize.
Cheers.
colombuss wrote: Ill briefly come out off my hide to comment on your post.
I made the same calculation error as you. BUT this model valiues vacant sq feet at NIL.
Dream Office collects 70 cad pr sq foot, only roughly 30 CAD are net and used for their intenal caprate calculation, this is a conservative model, caprates in books are real net return. And since Toronto caprates are booked at 5,35%, if you want to correct to ex 7%, you could calculate it on basis off a 50% LTV like around a 30% discount and double it up because off the LTV, so a 60% discount to NAV, beeing down to approx 14 CAD pr unit. Caprates in suburbs are higher, we just use same discount, allover.
To use a caprate higher than 7 % for newly renovated CBD offices, with residential development possibilities, will in my view not be realistic.
I also believe that in your calculation model, the allready approved residential element, which is not immaterial to this reit, will also be valued at NIL.
We are talking 3,5 mill sw feet off approved residential permits, most off it in Scarborough. Its the subburb with the highest growth in residential rental rates, alone around 20%, in the last year.
I believe these residential rights are worth between 100-200 CAD pr feet, for permits alone, thats 350-700 mill. CAD.
What can I say about the Dream Offiice Investor presentation?
Well for 20 years Dream Office has bought back units at prices above the present, so they have been a poor indicator as an insider. Could it be that they are a poor indicator again on thier recent sales? Lets hope.
But the truth is nobody knows in wich degree people return to their offices, Dream Office has been optimistic in all conference calls since 2020, and now turn bearish, however calling a top in vacancy, and then 5 years flat line. It will hardly be right, one way or another.
Offices under construction, are beeing turned into Life science buildings, Dream Office is planning to convert 3 to mixed use, many are following. After 2025 office construction will be at a standstill.
Im calling off beeing bullish, but I will not be surprised to se a real lack off quality CBD offices in 2027.
Now people are having their crystal ball out, real occupancy is only around 52%, meaning employees actual office use, we need this to go up, but has it ever been 100%.
If everybody wants Friday off, can companies save office space on this? How? I dont see it.
Employment in Toronto rose 3% in the last 12 months.
If we see employees 65% back in the office, its going to be logistically challenging for companies to save more than the 10% on space, they already have effectuated.
Construction costs on multifamily have risen around 78% since 2018, in the last 1-2 years the costs off fitting office suites has rosen 100%. Shortages off labour has hit hard. Materials too.
Is it realistic that this extra leasing costs off now 50 cad pr sq foot will persist? Or will construction costs come down. Or will vacancy decrease? And costs then come down?
Anyways iff we say that the 50 cad pr sq foot persists the next 5 years as pr presentation how much should we write off as a consequence? Shall we take it off rent, and the adjust building values according to the new income, and caprates, or shall we just knock off a flat 50 cad pr sq foot in overall portefolio value? I dont know. Rather the last.
But hidden in this flat 5 year forecast, is also a peak in vacancy rates, and that rental rates will stay constant at around 30 cad net, even with occupancy staying put in the low eighties.