The work-from-home trend is dying down, which means many Canadian workers are going back to the office. GDI Integrated Facility Services Inc. and Dream Office REIT are benefitting from the return to office space.
GDI Integrated Facility Services (TSX—GDI)
Desjardins Capital Markets analyst Frederic Tremblay reports for the second quarter of 2022, GDI Integrated Facilities delivered elevated organic growth across all segments, strong contributions from recently acquired companies, and healthy profitability.
GDI Integrated Facility Services operates in the outsourced facility services industry.
Revenue grew 41 per cent year-over-year to $526 million. That led to $37 million in EBITDA (earnings before interest, taxes, depreciation and amortization), which equates to year-over-year growth of 11 per cent for the second quarter.
Looking ahead, not only does Mr. Tremblay continue to believe that Canadian janitorial margins will not decline to pre-pandemic levels, but he now forecasts that they will be “higher for longer” given slow return-to-the-office dynamics.
In Technical Services, the supply chain issues are moderating faster than he had anticipated, which he says, better positions GDI to execute on a record backlog. That’s thanks to improvements in the supply chain observed by management at the end of the second quarter.
“While GDI’s clients in most industries are operating at levels comparable to pre-pandemic norms (e.g. retail, manufacturing, education, health care), its clients in the Canadian office market are executing their return to in-person work at a slower pace than previously anticipated. With another four-to-six quarters left before offices reach their ‘new normal’ activity levels (and considering GDI’s ability to limit margin erosion from the COVID-19 peak so far), we believe that our prior forecasts were too conservative,” Mr. Tremblay states.
“We are raising our adjusted EBITDA margin forecast for Janitorial Canada to 9.7 per cent in 2023 (was 9.2 per cent). After 2023, we still do not expect the margin to return to pre-pandemic levels of six-to-seven per cent, thanks to the mix of services provided and efficiencies gained by GDI.”
The analyst raises his target price by 50 cents to $64 a share, and reiterates a “buy” recommendation and “average” risk rating.
Dream Office REIT (TSX—D.UN)
Founded in 2003, DREAM Unlimited Corp. is one of Canada’s most experienced and diversified public real estate entities. Subsidiary Dream Office Real Estate Investment Trust owns and manages 29 office properties across Canada.
Those assets consist of 5.5 million square feet of leasable area in urban and suburban locations with approximately 80 per cent of its portfolio value in Toronto. The fair value of the REIT’s portfolio is about $2.6 billion.
DREAM also develops and manages residential, industrial and retail properties across Canada, the U.S. and Europe. Dream Ventures invests in technology and other alternatives while Dream Private Equity is a private institutional asset manager.
For the second quarter of 2022, National Bank of Canada analysts Matt Kornack and Anthony Bogdan maintain their previous “sector perform” recommendation for Dream Office REIT but increase their target unit price for it from $19 to $20. Kornack notes their target represents an eight per cent discount to their net asset value (NAV) and represents an approximately 19-times fiscal 2023 adjusted funds from operations (FFO) multiple.
“Dream’s results were in line from a funds From Operations (FFO) per unit standpoint and a bit better than our forecasts from a net operating income perspective,’’ said Kornack. “Dream management noted occupancy expectations have remained consistent”. Dream expects the variance on earnings will be made up in the first half of 2023 as tenants, particularly more complex restaurant tenants, are taking longer than normal signing leases and building out their space.
Messrs. Kornack and Bogdan note Dream’s management didn’t claim any certainty on office usage trends in the near future, but they remain optimistic about the urban workspace’s future. “We still think the markets will take an income oriented approach to valuing office assets based on near-term earnings potential vs. placing a premium on locations and/or density,” noted Mr. Kornack.
On the quarterly analysts call Dream management highlighted some key figures for their fall business activity expectations. They’ve observed about 50 per cent of the private sector tenants have returned to the office but the public sector has lagged. Through discussions with both client types Dream expects a more rapid return to the office after Labour Day.
The analysts warned the momentum on office return remains in question for non-client facing back-office roles which continue working remotely. However, Dream management anticipates higher office usage, driven by client facing businesses, to translate into continued improvement in occupancy. To encourage greater numbers returning to the office, Dream has invested heavily in their tenants’ comfort through health and safety capital expenditures.
This is an edited version of an article that was originally published for subscribers in the September 2, 2022, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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