DRM - Dream Unlimited

[Sunrider]

Hello

 

I've had a small tracking position in this for a while but only saw it mentioned in the Dundee thread so I thought it might be useful to start one specifically for this. I was hoping to get views from members that may have done some more thinking about this one.

 

The company largely does property/MLP development across Canada and sits on a lot of land - so of course, the Canadian real estate market is a potential worry. However, if I read this recent presentation right (http://dream.ca/wp-content/uploads/2014/05/Dream_AGM_Presentation_2014.pdf), then it's basically trading at:

 

- just over 2x BV,

- about 8x current earnings; and

- 4x 2016 planned pre-tax earnings.

 

That's perhaps not as cheap as HHC was going for but given the nice land positions they have + a growing asset management business this appears to be attractive.

 

What do you think?

 

Thank you - C.

[bizaro86]

No current position, but I have looked at it.

 

Their most valuable land is around Calgary. Calgary's new (young and popular) mayor has slowed down development of fringe communities dramatically, and increased the amount of money developers pay for servicing the land and associated infrastructure contributions. Dream's land was purchased before the changes, so they'll have to hold it longer and spend more on it than they would have expected.

 

Also, I have serious concerns about the Toronto condo market, not somewhere I'd want to be developing.

 

I love the asset manager though, world's best business and they seem to be growing it.

 

This is probably something you could buy and put away for a few decades and be reasonably happy with the result.

[cashisking]

Dream alternatives trust

 

Perhaps this might fit here. Dream recently purchased the rights to manage a bunch of funds that were run by ROI advisors and combined the assets into a trust structure that is now called Dream Alternatives trust (DRA-u). The assets have significant overlap with Dream Office Reit and the manager of office reit is now taken the reins of DRA. The main attraction (IMO) is the large discount to net asset value (~$9.7ish per unit vs current price of ~$7.1). Current distribution is set at $0.4 per year and should be supported by trust assets by end of year (as per comments on call held a couple of days ago). Thesis would be shrinking discount to NAV and a modest distribution in the mean time while you wait. Superior management of assets by Dream with aim to eventually grow the AUM is the catalyst (they need to close the discount before raising new funds). They seem pretty motivated to do this... The vehicle's tainted history (when run by former manager) is likely responsible for persistent discount to nav. There also could be some spin-off like dynamics here as higher liquidity post conversion has allowed legacy fund holders to exit. The recent call is worth a listen - presentation and call details here http://dream.ca/alternatives/events/event/q2-2014-overall-update-webcast-and-conference-call/

 

Edit: I should also mention that the manager thinks the assets are money-good and is pleasantly surprised with the asset base since taking full control (also as per call).

[saltybit]

What do you guys think of Dream International REIT?

They seem to be closely related to Dream Unlimited (Dream Unlimited is their asset manager) but all the properties they manage so far appear to be commercial real estate in Germany.

[jouni1]

for some reason i am under the impression that canadian real estate is pretty bubbly right now. is this actually the case? i'm not very familiar with the area, all i know i learned from south park.

 

the us had a correction but canada is still going "strong"? some areas believed to be in bubble territory i think.

 

other than that, i love these builders with lots of land and have been reading up on a few south of the us-canada border. the problem is figuring out which ones are being managed correctly.

[Sunrider]

Thanks everyone for your input.

 

No current position, but I have looked at it.

 

Their most valuable land is around Calgary. Calgary's new (young and popular) mayor has slowed down development of fringe communities dramatically, and increased the amount of money developers pay for servicing the land and associated infrastructure contributions. Dream's land was purchased before the changes, so they'll have to hold it longer and spend more on it than they would have expected.

 

Also, I have serious concerns about the Toronto condo market, not somewhere I'd want to be developing.

 

I love the asset manager though, world's best business and they seem to be growing it.

 

This is probably something you could buy and put away for a few decades and be reasonably happy with the result.

[yadayada]

http://www.crackshackormansion.com/

[colinwalt]

Dream Unlimited Corp. Provides Update on Expected Drivers of Future Value to Shareholders

 

https://finance.yahoo.com/news/dream-unlimited-corp-provides-expected-192906014.html

 

"Dream considers most of its non-development-related business lines and assets to be recurring income sources. Under IFRS accounting, certain assets are subject to fair value adjustments while others are carried at a measure of historical or amortized cost in the financial statements. Below is a summary of income and/or cash flow from these assets and their applicable fair value or book value under IFRS accounting. Management is of the view that fair value is significantly in excess of book value for the total assets presented on such terms in the table below."

 

"Dream expects to generate approximately $85 million of incremental shareholders' equity related to condominium projects expected to be completed by 2017, as listed herein. Dream also expects to generate an incremental $40 million of equity upon the completion of over 400,000 square feet of retail development currently underway in Western Canada, although not all of this value will be realized by the end of 2017."

 

"Year to date, the Company has repurchased 867,727 shares under its normal course issuer bid ("NCIB"). In addition, Michael Cooper, our President and CEO has purchased 125,000 shares for his own account over the last few weeks (August 20 to September 14, 2015)."

[KJP]

In 2013, Dundee spun off its real estate assets into Dream.  It's controlled by the CEO, Michael Cooper.  Its businesses are:  (i) managing four public REITs and various private funds; (ii) developing master planned communities in western Canada (Calgary, Regina, Saskatoon and Edmonton); (iii) condo development in Toronto; and (iv) a grab bag of other assets that range from a ski resort (Arapahoe Basin) to an alternative energy fund. 

 

The ability to sell lots for development, oil prices and the company stock price all went down together.  Murray Stahl has been writing about the company for years and there are some interesting things going on at the company.  I won't rehash everything; instead, I'm starting a new thread to pick up a discussion that started on one of the general discussion boards

(all amounts in CAD):

 

Land developers active in Alberta and Saskatchewan. Residential land development is slow due to the crash in oil. The prices of the developers stocks do not reflect any expectation of recovery. Case in point: Dream Unlimited (DRM-T), also Melcor Developments (MRD-T).

 

Perhaps Dream deserves it's own thread, but I have followed it for several years and don't understand the capital allocation, in particular the huge amount of capital they've devoted to buying shares in what ought to be the retail-oriented REITs they manage.

 

The largest part of their shares in Dream Office were obtained in exchange for giving up the management contract. They have been more active in buying shares in Dream Alternatives. I would guess there are a few reasons why they are doing it. One, they want to increase the level of recurring income to balance the volatility of the development business. Two, they see the shares as undervalued. Three, and this applies mostly to Dream Alternatives, they want to be able to demonstrate to the market that they are large investors in their own fund. They have ambitions to grow Dream Alternatives by issuing new equity at NAV. Currently it trades well below NAV. This is a similar strategy that Brookfield uses. Reason number two has been confirmed by management, one and three are my own guesses.

 

Shifting to a more asset-lite, asset management type business would be a coherent strategy.  But I don't think piling money into the public REITs is actually accomplishing much.  To respond to the points above:

 

Dream owns 10.2 million Dream Office units.  (2017 3Q Report at 4)  I believe less than half of those (~4.85 million) were obtained in exchange for the management contract in 2015.  Since the start of 2016, they've spent over $70 million buying Dream Office units.  As you mention, they've also bought a ton of Dream Alternatives and hold units in Dream Global and Dream Industrial.  All told, I believe the current market value of these units is ~$300 million.

 

My capital allocation question is: if Dream itself is significantly undervalued, why is it devoting so much capital to buying units in these REITs, rather than buying back back more of its own shares?  I don't think the three reasons you suggest hold water:

 

(1) Increasing recurring income:  These entities are actually poor vehicles for doing that because they don't have high yields.  In any event, what's more important:  increasing recurring income regardless of return on equity or increasing per share value?

 

(2) They see the shares as undervalued:  Cooper has also said for years that Dream's own shares are undervalued.  So why isn't he buying those back hand over fist?  (Admittedly, they have done some buybacks at the Dream level.)

 

(3) Getting Alternatives to NAV:  I completely agree that Alternatives being able to issue equity would be great and that it needs to be at NAV to do that.  But Alternatives is a yield vehicle, so the natural retail holders want current income.  Dream, however, has stuffed it with development assets that generate no income (at least currently).  That's why it's trading below NAV.  How is Dream buying Alternative units going to change that? 

 

 

[Foreign Tuffett]

In 2013, Dundee spun off its real estate assets into Dream.  It's controlled by the CEO, Michael Cooper.  Its businesses are:  (i) managing four public REITs and various private funds; (ii) developing master planned communities in western Canada (Calgary, Regina, Saskatoon and Edmonton); (iii) condo development in Toronto; and (iv) a grab bag of other assets that range from a ski resort (Arapahoe Basin) to an alternative energy fund. 

 

The ability to sell lots for development, oil prices and the company stock price all went down together.  Murray Stahl has been writing about the company for years and there are some interesting things going on at the company.  I won't rehash everything; instead, I'm starting a new thread to pick up a discussion that started on one of the general discussion boards

(all amounts in CAD):

 

Land developers active in Alberta and Saskatchewan. Residential land development is slow due to the crash in oil. The prices of the developers stocks do not reflect any expectation of recovery. Case in point: Dream Unlimited (DRM-T), also Melcor Developments (MRD-T).

 

Perhaps Dream deserves it's own thread, but I have followed it for several years and don't understand the capital allocation, in particular the huge amount of capital they've devoted to buying shares in what ought to be the retail-oriented REITs they manage.

 

The largest part of their shares in Dream Office were obtained in exchange for giving up the management contract. They have been more active in buying shares in Dream Alternatives. I would guess there are a few reasons why they are doing it. One, they want to increase the level of recurring income to balance the volatility of the development business. Two, they see the shares as undervalued. Three, and this applies mostly to Dream Alternatives, they want to be able to demonstrate to the market that they are large investors in their own fund. They have ambitions to grow Dream Alternatives by issuing new equity at NAV. Currently it trades well below NAV. This is a similar strategy that Brookfield uses. Reason number two has been confirmed by management, one and three are my own guesses.

 

Shifting to a more asset-lite, asset management type business would be a coherent strategy.  But I don't think piling money into the public REITs is actually accomplishing much.  To respond to the points above:

 

Dream owns 10.2 million Dream Office units.  (2017 3Q Report at 4)  I believe less than half of those (~4.85 million) were obtained in exchange for the management contract in 2015.  Since the start of 2016, they've spent over $70 million buying Dream Office units.  As you mention, they've also bought a ton of Dream Alternatives and hold units in Dream Global and Dream Industrial.  All told, I believe the current market value of these units is ~$300 million.

 

My capital allocation question is: if Dream itself is significantly undervalued, why is it devoting so much capital to buying units in these REITs, rather than buying back back more of its own shares?  I don't think the three reasons you suggest hold water:

 

(1) Increasing recurring income:  These entities are actually poor vehicles for doing that because they don't have high yields.  In any event, what's more important:  increasing recurring income regardless of return on equity or increasing per share value?

 

(2) They see the shares as undervalued:  Cooper has also said for years that Dream's own shares are undervalued.  So why isn't he buying those back hand over fist?  (Admittedly, they have done some buybacks at the Dream level.)

 

(3) Getting Alternatives to NAV:  I completely agree that Alternatives being able to issue equity would be great and that it needs to be at NAV to do that.  But Alternatives is a yield vehicle, so the natural retail holders want current income.  Dream, however, has stuffed it with development assets that generate no income (at least currently).  That's why it's trading below NAV.  How is Dream buying Alternative units going to change that?

 

I know nothing about this company, but everything you've said above makes sense. Even if the CEO thinks the shares in the four public REITs are undervalued, he's effectively "trading down" by buying more of the inferior businesses (externally managed REITs) instead of buying back shares in the superior business (the asset manager). I bet this is putting downwards pressure on their ROE as well.

 

At least superficially, it seems like Dream should be doing the opposite: selling off development and "grab bag" assets that the market maybe isn't giving it much credit for in order to become something more akin to a pure play asset manager.

[Rod]

I think it is hard to judge the decision to buy the trusts at this point because the story is not finished yet. We will need to wait and see what happens.

 

Here's a potential scenario: Dream finishes building up a position in the trusts; they turn their attention to large buybacks of their own stock; the two trusts perform very well and prove to be good investments; Dream ups the marketing of Dream Alternatives and highlights their significant ownership position; Dream Alternatives trades up to NAV and allows Dream issue equity and grow that asset management business; the ownership of the trusts adds stability to Dream's income increasing the value of the stock and perhaps allowing for better terms on financing.

 

What Dream has done so far is consistent with the above. I think we will need to see what happens.

[KJP]

I think it is hard to judge the decision to buy the trusts at this point because the story is not finished yet. We will need to wait and see what happens.

 

Here's a potential scenario: Dream finishes building up a position in the trusts; they turn their attention to large buybacks of their own stock; the two trusts perform very well and prove to be good investments; Dream ups the marketing of Dream Alternatives and highlights their significant ownership position; Dream Alternatives trades up to NAV and allows Dream issue equity and grow that asset management business; the ownership of the trusts adds stability to Dream's income increasing the value of the stock and perhaps allowing for better terms on financing.

 

What Dream has done so far is consistent with the above. I think we will need to see what happens.

 

That is one possible scenario, but I agree with FT's take above that they're trading higher for lower quality and that it ultimately will hurt shareholder value at the Dream level.

 

Other things I like about Dream:

 

-There should be a significant ramp in Western Canada NOI as they complete construction on their commercial buildings.  Real NOI is much better than the fair value gains that have been propping up IFRS earnings so far.  These commercial buildings should increase in value as the surrounding communities are built out.

 

-During the Q2 call Cooper explained that over the next 12-18 months then intend to build a few industrial buildings and then "offer" them to Dream Industrial.  Ramping up what is akin to a MLP drop-down business would be a great business model for Dream.

[bizaro86]

If they build enough shopping/commercial, I could see them launching a triple net REIT at some point. Would give them another income stream on the asset management side.

 

I also think the takeout of pure industrial will give dream industrial a boost as that capital looks for a home.

[KJP]

If they build enough shopping/commercial, I could see them launching a triple net REIT at some point. Would give them another income stream on the asset management side.

 

Yes, but that's likely a long time from now, because the time to do it is after the whole MPC is fully built out.  If you do it before then the REIT can become a competitor and you would lose monopoly control of commercial real estate in the MPC.  I believe that is why Howard Hughes hasn't yet dropped its commercial buildings into a REIT.

[bizaro86]

I think scale is a bigger issue than competition. They would be managing the REIT, after all.

 

What does MPC stand for?

[KJP]

MPC = master planned community

[KJP]

I think scale is a bigger issue than competition. They would be managing the REIT, after all.

 

What does MPC stand for?

 

See the MPC slides (e.g., slide 15) from this Howard Hughes presentation to see how the MPC business model is supposed to work:  http://investor.howardhughes.com/Interactive/NewLookAndFeel/4265772/3-5-18-Updated-Q4-2017-Investor-Presentation.pdf

[KJP]

I think it is hard to judge the decision to buy the trusts at this point because the story is not finished yet. We will need to wait and see what happens.

 

Here's a potential scenario: Dream finishes building up a position in the trusts; they turn their attention to large buybacks of their own stock; the two trusts perform very well and prove to be good investments; Dream ups the marketing of Dream Alternatives and highlights their significant ownership position; Dream Alternatives trades up to NAV and allows Dream issue equity and grow that asset management business; the ownership of the trusts adds stability to Dream's income increasing the value of the stock and perhaps allowing for better terms on financing.

 

What Dream has done so far is consistent with the above. I think we will need to see what happens.

 

During the conference call last week, someone essentially asked my question about why they're buying REIT units rather than their own shares.  Cooper said (i) there were limits in their credit agreements that are going to be removed shortly when the renewed credit agreement is in place, so they'll be buying back shares starting in March; and (ii) they can borrow against the REIT units they own, so buying them rather than DRM stock preserves some liquidity in case they need it.  Overall, I think this is more encouraging than my initial take on the company's capital allocation decisions.

[Spos]

With respect to capital allocation, they are spending on i) property development (mostly retail) on the Western Canada land ii) condo projects mostly in Toronto iii) the purchase of Dream Office and Dream Alternatives units and iv) share repurchases (they actually reached the maximum buyback amount in the previous program).

 

I think the Dream Office and Alternatives purchases are more about them being undervalued than for the recurring revenue.  I thought the goal for Dream Office was a sale (you could easily find buyers for downtown Toronto office buildings), but it seems intensification/redevelopment is the game plan in the near term.  Alternatives is becoming more of development-focused (which is interesting for a yield vehicle), but this is a business they like.  I don’t think they care too much about closing the discount to NAV in the near term.  I think they see Alternatives as a vehicle to allow them to make bigger investments as they have done a number of transactions recently where DRM and Alternatives both take stakes in development projects.  Longer term, they might do what they did with Office and internalize the management agreement, but then you would also want a larger discount to NAV.  In the meantime they are getting a base management fee of $10M.

 

One could argue for more repurchases at DRM, but the stock is not all that liquid and float is something around 65% so if you want to be very aggressive, you probably would have to do a tender, which could then easily drive the share price too high.

 

 

[Spos]

Dream Office announced a substantial issuer bid this morning for 10M units at $24.  This is another 13% of units outstanding and 16% of float.  This will move up leverage to ~48% debt to assets, which is still reasonable.

[Rod]

There was a recent interview of Michael Cooper in the Globe and Mail. It was written from the perspective of Dream Office. Dream Unlimited did get a mention... sort of. It was referred to not by name but only as a "side business" like it was some kind of lemonade stand. I find it comical that DRM is so ignored that even a business reporter doesn't bother to mention it by name while writing about the CEO!

[Sportgamma]

One thing I don't get.

 

Redemption Rights

The Series 1 Preference Shares are redeemable at the option of the Corporation or at the option of the

holder for a cash price of $7.16 per Series 1 Preference Share, together with all accrued and unpaid

dividends thereon.

http://www.dream.ca/wp-content/uploads/2018/03/Dream-Unlimited-2018-AIF-FINAL.pdf

 

Yet they have been trading consistently above the redemption rate. It's not unthinkable that the Corp might want to redeem the share.

[Rod]

One thing I don't get.

 

Redemption Rights

The Series 1 Preference Shares are redeemable at the option of the Corporation or at the option of the

holder for a cash price of $7.16 per Series 1 Preference Share, together with all accrued and unpaid

dividends thereon.

http://www.dream.ca/wp-content/uploads/2018/03/Dream-Unlimited-2018-AIF-FINAL.pdf

 

Yet they have been trading consistently above the redemption rate. It's not unthinkable that the Corp might want to redeem the share.

 

I think investors are betting that a redemption is a long way off. I tend to agree.

[Spos]

It looks like they are now looking to get the discount closed on Dream Hard Asset: “We continue to trade at a discount, and we'll work to further reduce it. We're working with analysts, and hope to have coverage soon. We're also meeting with investors and are making progress as we see them invest in our business.”

 

DRA has been repositioning the asset base over the past 18 months, selling most of their investment properties -which provide recurring income- to mostly investing in condo development projects, which do not.  They’ve also bought $56M of Dream Office Units and 10% of the Hard Rock Casino.  The asset base is then A) a condo development portfolio, B) lending portolio C) the remaining income properties (some of which should be redeveloped) and D) renewable power.

 

Unit price $6.90, book value is $8.38 and DRA’s calculation of NAV is $8.90 (they write-up equity investments and the renewable assets to reflect “fair” value).  The yield is 5.8% and for now, is all return of capital.  The dividend is not currently covered by cash flow, but they are committed to keeping it until the development projects start producing income, starting maybe in 2019.  Between cash on hand and the short duration lending portfolio, they should be able to keep paying the dividend.

 

Dream Unlimited has been buying units and participating in the DRIP and now owns ~15%.  DRA repurchases units in dribs and drabs.  Getting into development makes DRA riskier, but between the dividend, the discount to NAV and Dream trying to get the story out, it feels cheap.

 

[Spos]

The share price has fallen a lot since the peak after weak Q2 results and a decrease in guidance the for Saskatchewan land development business.  I think at $8, this is interesting again.  Book value on a stand alone basis (excluding the consolidation of Dream Alternatives) is $8.75.  The biggest adjustments to book value that would need to be made to get to a NAV are:

 

- The asset management business: it’s on the books for $43M, but they have $8.1B of AUM, with $6.4B of that related to management contracts for Dream Global, Dream Industrial and Dream Alternatives.

- The land bank in Western Canada.  Undeveloped land is on the books for $424M ($46K/acre).

- The ski hill.  This is on the books for $24M.  They are expanding capacity here by 40% and by 2020 are expecting EBITDA of $20M vs $10.5 now.

 

If you assume $200M for the asset management business, put a 10x EBITDA multiple on the ski hill ($100M) and put their investments in the other Dream entities at market value ($440M), you’re close to a $12 NAV (this still leaves undeveloped land at book value which significantly understates true value. I don’t make an adjustment here as I don’t have a good idea of what market value should be).  And earnings should increase considerably starting in 2019:

 

-You will get big years in condo completions in 2019 and 2020.

-DRM just got approvals for the Providence (Calgary) and Coopertown communities (Regina) which will increase inventory here starting in 2019.

-The ski hill expansion.

 

Obviously, this is a Canadian real estate play so anything that hurts the industry is a risk here.  The only thing I’d mention here is that a good chunk of NAV is still related to the Western Canada development business and the real estate markets in Alberta and Sask are not as crazy as Vancouver and TO and are not far from long-term averages in terms of affordability (although the consumer is just as indebted as in the rest of the country).