June 20, 2019

Dundee Real Estate Investment Trust (D-U)

The Dundee Real Estate Investment Trust (D-U) is one of the favourite investment trusts in Canada.  Although it is classified as a “diversified” REIT, it is really only diversified in terms of geography.  Dundee does provides unit holders with income from Canada’s many different regions, but the properties they own are definitely focused in the area of urban and suburban, office and industrial buildings, and are disproportionately balanced towards Toronto.  They believe that these sectors offer investors the most consistent returns on their investment dollars.  Dundee’s portfolio contains hardly any residential holdings.  All together, the Trust owns over 16 million square feet of leasable commercial real estate across Canada.  Like most Canadian REITs, Dundee (D-U) seeks to acquire commercial properties that will pay long-term income streams.  The goal is then to pass these profits on to unit holders, while taking advantage of Canada’s special tax status for real estate investment trusts.

 

Dundee recently wrapped up the purchase of several downtown office buildings throughout Toronto.  In total, the Trust purchased 29 separate buildings from Blackstone Real Estate Advisors LP and Slate Properties Inc, for almost $850 million.  Many of the buildings are strategically located in Toronto’s gamed financial district.  Blackstone was looking to unload the assets along with most of their other Canadian holdings.  It has been speculated that some of buildings (which were sold as a package deal) will not fit with Dundee’s (D-U) overall plans, and therefore will be flipped in order to lower the net acquisition price by over $100 million.  Bruce Traversy, a Senior Vic President at the Trust stated, “The linchpin of the whole portfolio is the position in downtown Toronto.”  While some investors have been scared off by the Toronto market, and the recent struggles on the city’s manufacturing sector, Dundee appears to be unfazed.  The portfolio of properties has an occupancy rate above 90% and the average less term is a healthy 4 years.  This was the largest acquisition of office real estate by any Canadian REIT on record.  When combined with Dundee’s (D-U), record-setting commercial real estate sale in 2007, Dundee has established itself as a premier landlord within the Greater Toronto Area, and Canada in general.

 

Dundee (D-U) looks like a great way to invest in Canadian commercial real estate.  They have recently re-financed much of their debt with TD, and the bank reported that the Trust had a very conservative debt profile.  With roughly $600 million in mortgage debt, at an average interest rate of 4.9%.  The REIT has a debt-to-enterprise value of 50% and has claimed that it intends to keep the value between 48% and 54%.  I believe this leverage is fairly healthy for a Trust the size of Dundee (D-U).  Right now the Dundee REIT is trading around $31.50.  It has a market cap of about $1.75 billion, and an annual dividend of $2.20.  This gives the Trust a yield of 7% and a Price-to-Earnings ratio of 20.23.  Dundee (D-U) also offers a great Dividend Re-Investment Plan (DRIP).  When unit holders choose to have your dividends automatically reinvested in the REIT they receive a 4% discount on the public unit price.  While the DRIP plan is very appealing, I hesitate to invest in a Trust that is so dependant on downtown Toronto.