Analysts update Canaccord Genuity analyst Mark Rothschild expects Dream Office REIT (D.UN-T) to continue to feel the impact of the “considerable pressure on office fundamentals at this time,” emphasizing “there is no visibility on when a firm recovery will take hold.”
“After divesting most of its western Canada and suburban portfolio, Dream Office is now heavily exposed to downtown Toronto which represents 82 per cent of its value,” he said. “The assets are well-located and many have been recently improved. However, vacancy in the downtown Toronto office market has risen materially and the REIT’s cash flow has been under pressure. Net effective rents are down dramatically, and it will likely take a number of years for this to improve.”
Despite an improvement in occupancy, Mr. Rothschild expects a “challenging leasing environment” to persist in the near term.
“For Dream Office, occupancy currently stands at 80.9 per cent, a 70 basis points quarterly sequential improvement, but down 70 basis points from 81.6 per cent in Q2/22. Vacancy is unlikely to drop in the near-term, although cash flow stability is aided by the REIT’s position in Dream Industrial.”
“In the near-term, the most material concern is the REIT’s exposure to WeWork, which is the REIT’s ninth largest tenant (represents 2.3 per cent of annual rental revenue). WeWork recently expressed doubt of the ability to continue as a going concern due to continued losses and is working on renegotiating some of its leases. WeWork is the sole tenant of Dream Office’s 357 Bay Street property in Downtown Toronto, which comprises 65,000 sf with a remaining lease term of 12.3 years. As a result of WeWork’s financial distress, there is clearly greater risk that the lease may be terminated or renegotiated, which would negatively impact the REIT’s cash flow.”
Trimming his net asset value assumption, Mr. Rothschild lowered his target for Dream Office units to $11.75 from $13, maintaining a “hold” recommendation. The average is currently $14.31.
“Over the long term, we believe the portfolio is significantly more valuable than the current unit price, although with sluggish office fundamentals expected to persist, we remain cautious,” he said.