DRM - Dream Unlimited

[Rod]

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).

 

That is a good summary. One quibble, I think the BV per share is $8.90 at Q2 not $8.75. Also I think you can add extra value for the Toronto land. I believe that much of it was bought at a low cost basis.

[Spos]

That is a good summary. One quibble, I think the BV per share is $8.90 at Q2 not $8.75. Also I think you can add extra value for the Toronto land. I believe that much of it was bought at a low cost basis.

 

I think I might have just taken the goodwill out of book value. 

 

I agree about the Toronto land that BV is too low, I am just not able to figure out how much of their land is already built on, being developed, how much of it is zoned/not zoned, or just sitting there.  In Q2, they sold a property in the Distillery district for $10.2M, on which they had a BV of $0.8M.  I just don't know how many other such properties they have.

[Rod]

That is a good summary. One quibble, I think the BV per share is $8.90 at Q2 not $8.75. Also I think you can add extra value for the Toronto land. I believe that much of it was bought at a low cost basis.

 

I think I might have just taken the goodwill out of book value. 

 

I agree about the Toronto land that BV is too low, I am just not able to figure out how much of their land is already built on, being developed, how much of it is zoned/not zoned, or just sitting there.  In Q2, they sold a property in the Distillery district for $10.2M, on which they had a BV of $0.8M.  I just don't know how many other such properties they have.

 

One, very rough way to value the land is to take the number of condo units in the pipeline, which is stated as 10,000, but I believe only about 2,000 is DRM's share, then multiply by the average size of a unit, say 750 sq ft, giving you 1.5M sq ft of unit area, then multiply by the cost of land per buildable square foot, which is around $200 currently in downtown Toronto. This $200 number is what you get when you divide the current cost of land by the total square feet of the units in a high rise condo to be built on that land. 1.5M square feet times $200 gives you $300M for an estimated land value.

 

On DRM's balance sheet, book value includes historical cost of land plus construction costs already incurred. So I guess you would have to see if you could back out the construction cost and then what's left would be historical land cost. If this was, say $100M, then you would know that there is $200M of current land value missing from BV.

[KJP]

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.

 

 

In addition, they are at a low point in very lumpy, but very high margin, development fee revenue in the asset management business.  So, I agree that this year should be on the low side of normalized earnings.

 

Regarding the book value, I know it's often used for real estate businesses, but how useful is it for a company like Dream that has a large amount of assets (Western Canada land) that not only earn nothing currently, but probably have negative carry due to taxes, etc.?  Put another way, what is the company's ROE if you use a NAV value of ~$12?  Does that ROE justify valuing the company at book value?

 

I also continue to question the capital allocation, in particular the lack of larger buybacks at the Dream level.  Today's announcement of a 10b5-1 equivalent plan is somewhat encouraging on this issue.

 

 

 

[Rod]

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.

 

 

In addition, they are at a low point in very lumpy, but very high margin, development fee revenue in the asset management business.  So, I agree that this year should be on the low side of normalized earnings.

 

Regarding the book value, I know it's often used for real estate businesses, but how useful is it for a company like Dream that has a large amount of assets (Western Canada land) that not only earn nothing currently, but probably have negative carry due to taxes, etc.?  Put another way, what is the company's ROE if you use a NAV value of ~$12?  Does that ROE justify valuing the company at book value?

 

I also continue to question the capital allocation, in particular the lack of larger buybacks at the Dream level.  Today's announcement of a 10b5-1 equivalent plan is somewhat encouraging on this issue.

 

In 2017 the land business earned 48M pre-tax and if you include housing the margin rises to $60M. Considering that this represents a depressed level of activity I think you can justify the balance sheet values on this alone. We also haven't seen the high value Calgary land come into development yet. That should start next year.

[Spos]

In addition, they are at a low point in very lumpy, but very high margin, development fee revenue in the asset management business.  So, I agree that this year should be on the low side of normalized earnings.

 

Regarding the book value, I know it's often used for real estate businesses, but how useful is it for a company like Dream that has a large amount of assets (Western Canada land) that not only earn nothing currently, but probably have negative carry due to taxes, etc.?  Put another way, what is the company's ROE if you use a NAV value of ~$12?  Does that ROE justify valuing the company at book value?

 

I also continue to question the capital allocation, in particular the lack of larger buybacks at the Dream level.  Today's announcement of a 10b5-1 equivalent plan is somewhat encouraging on this issue.

 

 

 

 

I like this question, I think about this as well although I think it gets more complicated with a company like DRM that is involved in different sorts of businesses.  When thinking of ROE, you have to separate asset management and the ski hill from the real estate business.  And you also have to treat the investment properties differently from the development business.  And I think it’s the development business that you are talking about.  ROE here is difficult as earnings are recorded only at the end of the development process, once a lot or condo is sold.  However, value gets created during the development process as well and also if they simply made good investments in land and that appreciates in value.  So, for example, now that they received approval for Providence, that land is worth more.  However, they are not able to write this up under IFRS the same way they can write up investment properties. 

 

I think the way you can look at it is either ROE over a long period or market value.  FWIW, in their June presentation on pg 47, they talk about a 13% return on their Western Canada business based on sell side fair value of $1.1B (vs. book value of $577M).  I think the 13% is a little high, but I do think the land is worth more than book value.

 

With respect to buybacks, it would be nice to see more, but I am not too fussed about it.  They’ve been putting capital into buying Dream Office and Dream Alternatives units and into condo development instead of buybacks.  I feel they want to grow the business and maybe Toronto real estate is not where they should be investing, but the CEO owns over 30% of shares, so I take some comfort in that.

 

[Rod]

Given the mix of assets with very different earnings recognition time frames, the best way to judge the success of DRM is probably by the annual growth in per share book value. This number is a gross underestimate of NAV but it's change from year to year is, I think, a good proxy for value growth. If per share book value grows at 15 to 20% per year than I think we can say that the company is creating value at an excellent rate. If the number is 5% then not so much.

[KJP]

Here's another writeup of Dream Unlimited, though it doesn't contain anything new:  http://www.canadianvaluestocks.com/dream-unlimited-corp/

There is, however, a very lucid comment to the post from one of the participants on this thread.

 

There is also a discussion in the BAM thread of the implications of a GP buying LP/REIT units when there is a holdco discount.  See, e.g., Packer's post #705 in the BAM thread (http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/bam-brookfield-asset-management/700/)

His comments are a much more coherent take on the issue that I was trying to get at earlier in this thread with respect to Dream's large purchases of LP units in Dream Office and Dream Alternatives.

[Spos]

Thank you for that link.  Yes, the comment to the blog post was quite good.

 

I do not mind DRM buying the LP units, assuming they are good values (I have an easier time seeing value with Alternatives than Office).  And I think DRM will keep these units for a long time, but I see the CEO less wedded to any asset than the BAM team.  He has made large asset sales in his career.  I would also like to see more buybacks, but I feel I can't be very critical of them in terms of capital allocation.  Performance has been good and unless the real estate market collapses, I think the next couple of years will show much higher profits.

 

The transactions that I see as possible in the intermediate term for DRM are an IPO/sale of the retail assets and the ski hill.

 

It looks like close to $1M of shares were bought back in September and they have made no purchases in the LPs since the end of July.

[KJP]

I believe this theory from the Brookfield thread also applies to the Dream's continued accumulation of Dream Office and Dream Alternative units:

 

 

I see the buy at a discount & hope it closes in value investment thesis all the time but it is an illusion.  You will never close the gap. I have yet to find a situation where this occurs because you do not control the asset & there are corporate expenses.  This is not mispricing or discount unless the discount is excessive.  This discount is one reason why BAM has lagged the performance of its subs.  You would expect the asset manager of asset to have better economics & returns than the underlying assets but here you do not.  Why?  The reason is the discount associated with holding the subs & holding large stakes in the subs in the first place.  This is a drag that will only get worse the more investments they make in the subs.  I do agree discounts can be excessive, but to say they should not be there IMO is wrong, misleading & not proven out by market evidence.  Spekulatius pointed out another example of this in the GP/LP structure of MLPs & how eventually the situation became untenable & now they are restructuring.  IMO the same should happen here.

 

Packer

[Spos]

Dream Alternatives published its annual report last week.  They are unhappy with the unit price.  They announced a $100M repurchase program over 3 years (~20% of market cap), the cancellation of the DRIP, a review of the distribution policy and that they are looking the sell the renewable asset business.  It's interesting because DRM gets management fees from Alternatives and any unit repurchases decrease that cash flow.  Presumably the pick up in unit price they expect is worth more to them.  Tender offers should be forthcoming here.

 

DRM is reporting tomorrow.  Would be nice to see a similar announcement, but I am not holding my breath.

[KJP]

Dream Alternatives published its annual report last week.  They are unhappy with the unit price.  They announced a $100M repurchase program over 3 years (~20% of market cap), the cancellation of the DRIP, a review of the distribution policy and that they are looking the sell the renewable asset business.  It's interesting because DRM gets management fees from Alternatives and any unit repurchases decrease that cash flow.  Presumably the pick up in unit price they expect is worth more to them.  Tender offers should be forthcoming here.

 

DRM is reporting tomorrow.  Would be nice to see a similar announcement, but I am not holding my breath.

 

I'm not surprised Alternatives' share price is low.  It was created to be a yield vehicle for retail investors, but once Dream took over management they began to load it up with non-income producing development assets.  That drives down the cash available for distribution, which also likely caused retail investors to push Alternatives' price well below reported NAV, eliminating Dream's ability to grow Alternatives through secondary issuances.  Dream has also been buying alot of Alternatives, which cuts into Dream's actual economic earnings from managing Alternatives.  So, it's not clear why Alternatives even exists. 

 

 

[Spos]

I think it exists because 1) Alternatives is still provides the largest part of the asset management cash flow, 2) DRM can continue to buy Alternatives units at a discount and perhaps most importantly 3) it allows DRM to increase its war chest and participate in more (and larger) investments, whether that is development projects or things like the Hard Rock casino.  The other entities (Dream Office, Global and Industrial) have much narrower mandates than Alternatives.

 

I think DRM think the decrease in management fees will be more than offset by any increase in the value of their Alternatives stake.  The alternative is that they don't see enough interesting investment opportunities at this point.

 

 

[wisowis]

Dream Global REIT getting sold to BlackStone for $6.2 billion:

https://www.globenewswire.com/news-release/2019/09/16/1915639/0/en/Dream-Global-Real-Estate-Investment-Trust-Announces-Agreement-to-Be-Acquired-by-Real-Estate-Funds-Managed-by-Blackstone-in-a-6-2-Billion-Transaction.html

 

As part of the deal, Dream will receive nearly 400 million dollars.

 

As part of the Transaction, DAM [ Dream Asset Management ("DAM"), a subsidiary of Dream ] will receive an aggregate of $395.2 million with respect to the REIT's obligations under the AMA. One of the considerations in arriving at the negotiated separation payment was the incentive fee, which has a calculated value of $379 million under the AMA.

[colinwalt]

https://horizonkinetics.com/wp-content/uploads/Dream-Unlimited-One-Pager_March-2020.pdf

 

Some key points... lightly edited...

 

Our investment thesis for the company has always been rooted in the belief that the market value of its assets and its asset management business far exceeded what was reported on the company’s balance sheet.

 

There have been a number of recent transactions that have highlighted for the first time that our thesis is not only correct, but that the valuation upside is potentially much greater than we had estimated.

 

Dream Global REIT, a publicly-traded entity managed by Dream that was sold to Blackstone in September 2019. Dream earned C$379 million as its management incentive fee (relative to Dream’s market capitalization at the time of approximately C$850 million).

 

Sold a large block of undeveloped land. The sale will generate proceeds of C$84 million. ... the land portfolio ... is held at original cost, yet, as this transaction shows, the current market value for even its undeveloped land can be multiples (in this case, a 190% increase when adjusted for the retained interest) of the original purchase price.

[colinwalt]

https://renx.ca/dream-unlimited-continues-with-strategic-changes/

[wisowis]

Hi all, just wanted to share this new(ish) blog post from Tyler: http://www.canadianvaluestocks.com/dream-unlimited-2/

[bizaro86]

Good piece, thanks for sharing.

 

Although I'd have to nitpick about Alpine Park being 20 minutes from downtown. When the ring road connects, it might be 20 minutes from downtown in the middle of the night during a pandemic. But not during the day - the 201 makes access to the deep SW way better, but the routes from the west side into downtown (Bow Trail, 17th Ave, even Crowchild with a bit of backtracking) are all already saturated with traffic during the day, and they'll just get worse with all the extra traffic on them from the deep SW folks coming up the ring road.

 

I think the desirability of that land is exaggerated as well. Its separated from the rest of the city by the Tsuu T'ina reserve which is directly to the north. While the ring road goes through the reserve now, nothing else ever will. The argument about the distance to the mountains also rings hollow to me. Folks living there will probably take the ring road past half of Calgary's population to get to the Rockies, so it isn't a unique selling point for that neighborhood, imo. (They could drive around the reserve on 22 but that would be slower, I think). A great reason to live in Calgary, absolutely, but not specifically Alpine Park. A neighborhood like Crestmont would be at least 25 minutes closer to the mountains.

 

Anyway, I probably shouldn't quibble but that part of the piece felt very much like a view of Calgary land from someone not familiar with Calgary. I do own DRM and think its cheap, for roughly the same reasons in the piece.

 

Edited to add: my ratio of nitpicking to praise in this post is way off my opinion of the writeup. It really was good - I especially liked the bit about the industrial incentive fees. The hurdle growing at 1/2 CPI is pretty nice from a DRM perspective, and will absolutely help them make a huge gain there.

[Rod]

Good piece, thanks for sharing.

 

Although I'd have to nitpick about Alpine Park being 20 minutes from downtown. When the ring road connects, it might be 20 minutes from downtown in the middle of the night during a pandemic. But not during the day - the 201 makes access to the deep SW way better, but the routes from the west side into downtown (Bow Trail, 17th Ave, even Crowchild with a bit of backtracking) are all already saturated with traffic during the day, and they'll just get worse with all the extra traffic on them from the deep SW folks coming up the ring road.

 

I think the desirability of that land is exaggerated as well. Its separated from the rest of the city by the Tsuu T'ina reserve which is directly to the north. While the ring road goes through the reserve now, nothing else ever will. The argument about the distance to the mountains also rings hollow to me. Folks living there will probably take the ring road past half of Calgary's population to get to the Rockies, so it isn't a unique selling point for that neighborhood, imo. (They could drive around the reserve on 22 but that would be slower, I think). A great reason to live in Calgary, absolutely, but not specifically Alpine Park. A neighborhood like Crestmont would be at least 25 minutes closer to the mountains.

 

Anyway, I probably shouldn't quibble but that part of the piece felt very much like a view of Calgary land from someone not familiar with Calgary. I do own DRM and think its cheap, for roughly the same reasons in the piece.

 

Edited to add: my ratio of nitpicking to praise in this post is way off my opinion of the writeup. It really was good - I especially liked the bit about the industrial incentive fees. The hurdle growing at 1/2 CPI is pretty nice from a DRM perspective, and will absolutely help them make a huge gain there.

 

Alpine Park will be about a 25 minute drive to Bragg Creek directly west on 22x. Across 22x is the Cross Conservation Area and very close is Fish Creek PP. All of these will be accessible at any time without going through city traffic. That alone would make it excellent for me.

 

How does Tsuu T'ina land separate it from anywhere? I don't see that. The reserve is on the extreme west side of the city and the ring road goes straight north through it.

[bizaro86]

The ring road will help a lot with the land being isolated by the reserve. However, I think it is unlikely much will get developed on the reserve beyond maybe some retail (around the Costco) which means that there will be few amenities to the North,  and West of the land. South will probably develop over time.

 

It would be convenient for Bragg Creek, but I wouldn't call that the mountains, personally (even though it's very nice). If you wanted to go to Canmore/Kananaskis/National Parks from there I think the fastest way (at full ring road buildout) would be 201 North to 1 west. A huge percentage of Calgary will have faster access to highway 1 west than this land. Anyway, as mentioned was just a nit. They'll be able to sell that land, and people will buy the houses. Turning that into cash is definitely a big catalyst here.

[Rod]

The ring road will help a lot with the land being isolated by the reserve. However, I think it is unlikely much will get developed on the reserve beyond maybe some retail (around the Costco) which means that there will be few amenities to the North,  and West of the land. South will probably develop over time.

 

It would be convenient for Bragg Creek, but I wouldn't call that the mountains, personally (even though it's very nice). If you wanted to go to Canmore/Kananaskis/National Parks from there I think the fastest way (at full ring road buildout) would be 201 North to 1 west. A huge percentage of Calgary will have faster access to highway 1 west than this land. Anyway, as mentioned was just a nit. They'll be able to sell that land, and people will buy the houses. Turning that into cash is definitely a big catalyst here.

 

I agree. If you want the fastest access to the premier mountain areas you probably would be better off in the west end near Hwy 1 than Alpine Park. Even so, when I lived near Hwy 1 I still went to Bragg Creek far more often than Canmore, mostly because getting to Canmore is a pretty long drive no matter where in Calgary you are. There’s a big benefit in having a place that is close and “good” even if there are better places twice as far. The Alpine Park to Bragg Creak trip is short enough that you could do it daily if you wanted.