Dream Office REIT D-UN-T, once one of Canada’s leading real estate investment trusts, is slashing its monthly distribution in half, as higher interest rates bite and management comes to terms with a slower return to office than originally envisioned.
The payout cut, announced late Thursday, will conserve $19-million annually for Dream Office. The REIT’s total occupancy now sits at 82 per cent, down from 90 per cent at the start of 2020 and in line with the national office average, according to real-estate consultancy CBRE.
“With all the news and all the frustration around offices, it’s better to keep cash,” said Michael Cooper, the REIT’s chief executive officer, on a conference call with analysts.
Dream Office units were down 11.4 per cent in mid-morning trading on the Toronto Stock Exchange on Friday as investors absorbed the news.
A decade ago, Dream Office was the envy of many commercial landlords, with quality skyscrapers in major cities such as Toronto and Calgary. But the past decade has been humbling for the REIT, which first struggled after oil prices crashed in 2014, when Calgary’s office market was hit hard. It has also struggled since the COVID-19 pandemic erupted, as office vacancies across Canada are rising because tenants choose either to not renew their leases or they ask for only a fraction of the space they used to rent.
Dream Office has tried different tactics to boost its market value, including buying back millions of units, but little has worked. The REIT’s units closed at $9.10 on Thursday, the same level they traded for in December, 2008 in the thick of the global financial crisis, according to Refinitiv.
Because the price is so low, the units were yielding 14 per cent annually, and management decided it would be better to slash the distribution.
For years, office landlords have publicly expressed optimism that white-collar workers would scale back their remote work and return to the office. But over the past six months, Mr. Cooper has turned more vocal about accepting a paradigm shift for the sector, arguing that many offices will have to be converted to residential buildings, which remain in high demand.
Many office towers are older buildings that need many millions of dollars worth of upkeep to make them desirable to new tenants, who tend to want the best and newest properties. But because property values have dropped so much, Mr. Cooper doesn’t think the payback will be worth it.
“Probably 30 per cent of the space in downtown Toronto requires a ton of money, a lot of investment and it’s questionable if you put the investment in that the building will be worth enough to justify it,” he told The Globe in September.
Allied Properties REIT AP-UN-T, another major publicly-traded office landlord, has also changed its tune of late. Two weeks ago, the REIT reported a $510-million write-down on its property portfolio, which management attributed to a tough economic environment. Management also cautioned that earnings this year could be flat to down 5 per cent, which dented any hope for a quick rebound in office building vacancies.
Mr. Cooper remains hopeful that, in the long run, some office buildings will be converted to residential towers, helping to restore their values. But his plans to do so in downtown Toronto are taking much longer than he would hope. On Thursday’s conference call, he said the city is studying the issue but wants to put together a master plan before permitting widespread approvals.
Dream Office – formerly known as Dundee REIT – has slashed its distribution in the past, but since then it has tried to reposition itself by selling properties and focusing on being a top-tier landlord in downtown Toronto.
For a while, it seemed to work. In 2023 two Canadian office REITs – Slate Office REIT SOT-UN-T and True North Commercial TNT-UN-T – both slashed their dividends by at least 50 per cent, and Dream Office didn’t. But only one year later, Dream is now in the same boat.
Tim Kiladze