Middlefield is Dreaming Big With a Leading REIT

Dean Orrico, president of Middlefield Group, explains why its award-winning fund has significant exposure to Dream Unlimited.


Since the Bank of Canada commenced its interest rate hikes in early 2022, REITs have encountered significant challenges. The rise in borrowing costs, a decline in asset values, and the unpredictability in the property market have led numerous investors to reassess their investment approaches, increasingly favoring cash and fixed-income investments instead.

However, as fundamentals across the sector remain strong, numerous leading Canadian REITs provide yields that are highly competitive and also offer the potential for upside in their stock prices. This includes REITs that are anchored by solid retail powerhouses as well as those concentrating on industrial properties or residential buildings.

A Dream Holding

Having managed specialized REIT investment funds, independent equity income manager Middlefield Group boasts a history of over 40 years in the field. For more than 10 years, the company has had holdings in major real estate companies known for their consistent operational income, minimal debt, and increasing dividend yields.

Dean Orrico, president of Middlefield, shone a light on Dream Industrial REIT (DIR.un), a top-10 holding in Middlefield’s dedicated real estate funds. The firm’s real estate-focused mutual fund, Middlefield Real Estate Dividend Class, has won the Refinitiv Lipper Fund Award for best real estate fund for two years running (Best Fund over 5 Years in the Real Estate Equity category).

Orrico, in a roundtable discussion with Michael Cooper, founder of the Dream Group of Companies, delved into the REIT’s latest acquisition and future prospects.

Approximately a year ago, DIR.un, alongside GIC from Singapore, acquired Summit REIT, significantly enhancing their Canadian footprint. Of the acquisition, Cooper noted, “Industrials are in great shape,” with actual market rates exceeding their initial projections. This upbeat assessment suggests a robust industrial real estate market in Canada, with specific growth contributions from Alberta as its rental rates begin to climb.

Cooper said, “We’ve seen improvements in many rollovers, with market rates exceeding our projections. Across the country, the industrial sector is robust. Our development projects are progressing successfully, although the surge in rental prices has moderated from previous, unsustainably high levels. Additionally, Alberta is making a stronger contribution as rental rates begin to align more closely with other areas. Overall, the performance has been excellent.”

Strong Fundamentals Despite Current Valuation

Orrico touched upon the disparity between private and public valuations of real estate investments and the fact that DIR.un in particular is trading at a substantial discount to what the business is worth.

While absolute building values remain stable, cap rates and rent increments can fluctuate, influencing private market valuations. In the public sphere, rising interest rates have led to a divergence between intrinsic value and market performance, as investors gravitate toward seemingly safer government yields.

Reflecting on DIR.un’s impressive roster of industrial assets spanning Canada, the US, and Europe, Orrico said it was noticeable that the distribution had remained fairly stable, at around 70 cents per unit, for quite some time. He asked, “With the payout ratio improving and the quality of assets enhancing, how does this influence your approach to distributions?” This question becomes particularly pertinent when considering alternatives such as guaranteed investment certificates (GICs).

Cooper responded, “For a considerable period, the international perspective has been that Canada’s payout ratios are excessively high. Consequently, Canadian REITs, across the board, have been focused on lowering these payout ratios rather than significantly increasing dividends. However, with the rise in yields of risk-free alternatives, there might be a shift in this trend. Specifically, Dream Industrial REIT, which we often discuss, could potentially see an uptick in its dividend distribution.”

Switch Gears To Residential

Dream Residential REIT’s IPO 18 months ago marked a significant expansion into the US residential market. Cooper reflected on the successful IPO despite challenging market conditions, and the solid performance of the business since.

“The business has performed strikingly well, where rental income has been strong. Currently, we’re operating with about 25 percent debt, which provides a robust security buffer. The debt is set to mature around 2027 or 2028, aligning with our initial expectations, so there haven’t been any significant deviations in that area,” said Cooper.

When Orrico asked about the housing crisis in Canada, Cooper acknowledged the material impact of the removal of HST from purpose-built rentals, but emphasized that rising debt costs counterbalanced these measures. He predicted that increased government intervention would be necessary to address the acute housing shortage.

To Office Space Conundrum

Orrico and Cooper discussed the evolving office market landscape, particularly in the wake of the pandemic.

Cooper found determining the future trajectory of office spaces was challenging and problematic. Older buildings are likely to face difficulties in attracting tenants, while there is a growing demand for new, modern spaces.

He said, “Although major space users like banks are reducing their footprint, we anticipate a resurgence in office demand. The trend toward hybrid work will likely bring more people back to offices, particularly mid-week. However, we’re seeing a need for more amenities and larger spaces for company-wide activities.

“An equilibrium is expected, with occupancy rates surpassing current levels but potentially not reaching the highs of 2019. Similarly, the cost to attract tenants might not return to 2019 levels, but will improve from where it stands now. While office buildings are currently out of favor, we expect more clarity and better valuation opportunities as the situation evolves.”

The Shift to Purpose-Built Rentals

In addressing the housing shortage, office spaces have been repurposed. Orrico asked, “In areas like the GTA, where condo development is prevalent, it appears that 50 to 70 percent of condos are entering the rental market. Do you think this trend will persist as a viable solution, or is there a growing need for more purpose-built rental properties?”

Cooper responded, “Initially, condos weren’t designed for this, but they became a key source of new housing supply thanks to small landlords who purchased them for rental purposes.

“A significant advantage of purpose-built rentals is their permanent presence in the rental market, coupled with professional management. This approach eliminates the risk of tenants being displaced for personal use of the property. Consequently, I anticipate a continued increase in professionally managed, purpose-built rental properties.”

Financing REITs With Tougher Rates

Orrico highlighted that access to financing plays a key role in the performance of a REIT. He probed the health of the Canadian debt markets and their influence on real estate financing, referencing US trends for comparison.

Cooper said, “Canada’s banking system has proven its strength, as evident in the 2008 financial crisis and again in recent times. Unlike in the US, where assets are often returned due to non-recourse loans, Canadian banks tend to work with owners to renew leases, since our loans are recourse-based and typically involve lower borrowing amounts. This has contributed to a robust financial environment. Most people in Canada are able to secure the expected level of debt financing. We’re very fortunate here in Canada.”

Orrico concluded, “We’re big owners of Dream – and happy owners.”

Key Reasons to invest in the Middlefield Real Estate Dividend Class Fund:

  • an award-winning fund with leading long-term performance and tax-efficient monthly distributions
  • a high-conviction, diversified portfolio of commercial real estate companies operating in the industrial, data centre, retail, health care, cell tower, office, and residential sectors
  • real estate performs well in both low and rising interest rate cycles and is also a proven hedge against inflation

Middlefield strategies with a key focus in real estate:

Middlefield Real Estate Dividend ETF (MREL: TSX)
Middlefield Real Estate Dividend Class (F Series: MID600)
Real Estate Split Corp. (RS: TSX)
Middlefield Sustainable Real Estate Dividend Fund (MSRE.UN: TSX)




Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. You will usually pay brokerage fees to your dealer if you purchase or sell units/shares of investment funds on the Toronto Stock Exchange or other alternative Canadian trading system (an “Exchange”). If the units/shares are purchased or sold on an Exchange, investors may pay more than the current net asset value when buying and may receive less than the current net asset value when selling them. There are ongoing fees and expenses associated with owning units or shares of an investment fund. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the fund in these documents. Mutual funds and investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Certain statements in this disclosure are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may”, “will”, “should”, “could”, “expect”, “anticipate”, “intend”, “plan”, “believe”, or “estimate”, or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained herein are based upon what Middlefield Funds and the portfolio manager believe to be reasonable assumptions, neither Middlefield Funds nor the portfolio manager can assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

This material has been prepared for informational purposes only without regard to any particular user’s investment objectives or financial situation. This communication constitutes neither a recommendation to enter into a particular transaction nor a representation that any product described herein is suitable or appropriate for you. Investment decisions should be made with guidance from a qualified professional. The opinions contained in this report are solely those of Middlefield Limited (“ML”) and are subject to change without notice. ML makes every effort to ensure that the information has been derived from sources believed to reliable, but we cannot represent that they are complete or accurate. However, ML assumes no responsibility for any losses or damages, whether direct or indirect which arise from the use of this information. ML is under no obligation to update the information contained herein. This document is not to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument.

Subscribe to Our Insights!
Flyout Form
Subscribe for MCT Updates
Flyout Form UK