2 income trusts to buy

Here are two featured income trusts to buy from Investor’s Digest of Canada’s recent survey of 50 of the most widely-covered income trusts in Canada.

Dream Office REIT (TSX—D.UN)

The growth path goes through downtown Toronto.

Dream Office REIT is well positioned for the return to the downtown office and CIBC World Markets analysts Scott Fromson and Dean Wilkinson believe the return is a matter of when, not if.

The REIT’s downtown Toronto portfolio represents roughly 66 per cent of the company’s overall 5.2 million square feet of gross leaseable area and around 80 per cent of net operating income.

Dream Office’s properties are well suited for a wide range of tenants. ‘Traditional’ Class A office towers attract professional services firms, while mid-rise, historic ‘boutique’ buildings appeal to creative-class companies.

Representing just 25 per cent of downtown Toronto’s gross leaseable area, but almost 60 per cent of the region’s vacant space, many of these buildings have been renovated and re-positioned and are ready for smaller tenants, including those in high-growth and early-stage technology and financial technology.

Dream Office has a good track record of driving incremental value from redeveloping older properties. However, Messrs. Fromson and Wilkinson see significant upside from large-scale redevelopment and repositioning of multi-use projects at 250 Dundas St. W., 212-220 King St. W. and the ‘Golden Mile’ projects. These projects should be reflected in Dream Office’s valuation as it achieves development milestones.

The REIT’s reasonable 41.2 per cent leverage, roughly $440-million Dream Industrial REIT stake and potential property sales support growth opportunities, such as capital investment, acquisitions and buybacks. The analysts initiate coverage of Dream Office with an “outperformer” recommendation.

“We believe the REIT is a good way to gain exposure to the operational recovery of the Canadian office space, which is still in its early stages, and see a continuing disconnect between the REIT’s favourable investment characteristics and current valuation levels. We see the REIT’s funds from operations growth opportunities as threefold.

“Firstly, near-term lease-up opportunities in downtown Toronto’s ‘boutique’ properties have been renovated and recapitalized. Secondly, redevelopment projects will add to longer-term unit value as the REIT meets milestones, and lastly funds from operations growth leveraging the solid balance sheet and asset sales,” comment Messrs. Fromson and Wilkinson.

Brookfield Infrastructure Partners (TSX—BIP.UN; NYSE—BIP)

Brookfield Infrastructure Partners LP announced the final results of its tender offer for Inter Pipeline Ltd. and an agreement to fully acquire Inter Pipeline.

The company reported that following the payment for the Inter Pipeline shares tendered to its offer, Brookfield and its co-investors will own around 76.4 per cent of Inter Pipeline’s common shares.

Based on Inter Pipeline shareholders’ cash and share elections, Brookfield noted that it and its co-investors would issue a total of roughly 22 million Brookfield Infrastructure Corp. shares and exchangeable limited partnership units, while the remaining Inter Pipeline shares tendered to the company’s offer will be acquired for cash.

Brookfield and co-investors also announced that it had entered into an arrangement agreement whereby it will acquire 100 per cent of Inter Pipeline’s common shares. The terms of the arrangement are similar to Brookfield’s previous tender offer for Inter Pipeline. A special meeting for Inter Pipeline shareholders and closing of the transaction is expected in fourth-quarter 2021.

Now that Brookfield has entered into an agreement to fully acquire Inter Pipeline, IA Securities analyst Naji Baydoun is electing to reflect the potential valuation impact of this acquisition into their valuation work for the company. Mr. Baydoun is maintaining a “strong buy” recommendation as he views Brookfield as a unique and diversified way for investors to play the broad long-term infrastructure theme.

“With access to a global, large-scale infrastructure investment platform, defensive cash flows, visible and sustainable organic cash flow growth, potential upside from accretive mergers and acquisitions and attractive income characteristics, we continue to see Brookfield as a standout growth vehicle for long-term shareholders,” comments the analyst.

Brookfield Infrastructure Partners is an infrastructure investment firm, with ownership interests in more than US$60 billion worth of utilities, transport, midstream (energy), and data assets located in the Americas, Europe, and Asia Pacific. The company is a sponsored entity of Brookfield Asset Management, which itself has US$600 billion of managed assets.

This is an edited version of an article that was originally published for subscribers in the October 1, 2021, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

Investor’s Digest of Canada, MPL Communications Inc.
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