Dream Office REIT DIR-UN-T, once one of Canada’s leading real estate investment trusts, is preparing for a slower return to the office than originally expected due to the impact of rising interest rates. Dividends have been cut in half.
The dividend cut announced late Thursday will save Dream Office $19 million a year. REITs’ total occupancy rate is now 82%, down from 90% at the beginning of 2020 and in line with the national office average, according to real estate consultancy CBRE.
“With all the news and all the dissatisfaction around the office, it’s better to hold on to cash,” Michael Cooper, the REIT’s chief executive, said on a conference call with analysts.
Ten years ago, Dream Offices were the envy of many commercial landlords, with high-quality skyscrapers in major cities like Toronto and Calgary. However, the past decade has been tough for REITs. It first struggled in 2014 when oil prices collapsed and Calgary’s office market took a big hit. Additionally, office vacancies are increasing across Canada as tenants choose not to renew leases or claim only part of the space they previously rented, resulting in COVID-19 The company has struggled since the pandemic broke out.
Dream Office tried various strategies to increase its market value, including buying back millions of units, but to little effect. REIT units closed Thursday at $9.10, the same level they traded in December 2008 at the height of the global financial crisis, according to Refinitiv.
Because the price was so low that each unit had an annual yield of 14%, management decided it would be better to cut the distribution.
Office landlords have long publicly expressed optimism that white-collar workers will scale back on remote work and return to the office. But over the past six months, Cooper has increasingly embraced a paradigm shift in the sector, arguing that many offices still need to be converted into much-needed residential buildings.
Many office towers are older buildings that require millions of dollars worth of maintenance costs to make them attractive to new tenants, who tend to seek the best and newest properties. But Cooper doesn’t think the repayments are worth it because real estate values have fallen so much.
“Probably 30 per cent of the space in downtown Toronto requires a lot of money and a lot of investment, but even with that investment, it’s questionable whether the building is worth enough to justify it. ” he told the Globe in September.
Allied Properties REIT AP-UN-T, another major publicly traded office landlord, has recently changed its tune. Two weeks ago, the REIT reported a $510 million writedown on its real estate portfolio, which management blamed on the difficult economic environment. Management also warned that revenue this year could be flat to down 5%, dashing hopes that office building vacancies would recover quickly.
Mr. Cooper remains hopeful that in the long term, some office buildings will be converted into high-rise residential buildings and their values will be restored. But his plans to do so in downtown Toronto are taking much longer than he had hoped. On a conference call Thursday, he said the city is considering the issue but wants to finalize a master plan before granting broader approvals.
Dream Office (formerly known as Dundee REIT) has cut its distribution in the past, but has since strengthened itself by selling properties and focusing on becoming a premier landlord in downtown Toronto. is trying to re-establish its position.
Things seemed to work for a while. In 2023, two Canadian office REITs, Slate Office REIT SOT-UN-T and True North Commercial TNT-UN-T, both cut their dividends by at least 50 per cent, while Dream Office did not. . But just one year later, Dream is in the same position.