What came next put Dundee Realty on the map. When Prudential Insurance Co. of America auctioned off its Canadian real estate portfolio in 1997, Cooper took a run at it. Most 30-something guys with 30-something million in equity would never consider bidding on a portfolio worth hundreds of millions. But Cooper was hell-bent on trying, in part because he understood the optics of having big names like Goodman and Zell backing him. And in part because audacity is his specialty.
Shocking everyone, Dundee made it to the auction’s final round with giants Oxford Properties Group and TrizecHahn. Cooper lost, but the market got the message: This guy is serious.
Serious, but small. To make a mark, Cooper needed to beef up his portfolio. So he acquired troubled German player Lehndorff Tandem Group for $240-million in 1998, more than doubling the value of Dundee’s real estate assets to $1.1-billion.
The negotiations were classic Cooper. Jane Gavan, now a business partner of Cooper’s, was corporate counsel for Lehndorff at the time. She recalls Cooper, long-haired and in ripped jeans, walking into a boardroom. “Here he was, this kid, with all these senior German businessmen.” Somehow he won them over. “His humour is disarming,” Gavan says. “He’s a genius, but he’s very, very funny.”
With Lehndorff under his arm, Cooper was ready to rock—and then he was quickly put back in his place. The technology bubble caught him off-guard, and Dundee Realty’s shares plummeted. “In real estate, it became obvious that the best you could do was barely okay.” So he did just that.
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By 2003, Cooper was desperate to do something big. That spring, he proposed splitting Dundee Realty in two. One arm would convert to a real estate investment trust and hold the safer properties, enabling it to pay the steady monthly distributions that investors craved. The other arm would go private and acquire more speculative assets, like the land that Cooper had bought in Saskatchewan.
The plan peeved much of Bay Street. To take the riskier assets private, Cooper had to pay off Dundee’s shareholders, and he offered them crumbs—$3 per share. RBC Dominion Securities, hired to offer an independent opinion, deemed Cooper’s price “financially inadequate,” arguing that shareholders deserved at least double Cooper’s offer.
A war of words ensued in the media, but Cooper got his way. And then most people forgot about the fight. Between 2003 and 2007, REIT shares skyrocketed. In just four years, Dundee’s value more than doubled, soaring 125 per cent. By 2007, takeover rumours were rampant, and when General Electric’s real estate arm bid $2.4-billion to buy Dundee REIT’s entire Eastern Canadian portfolio—two-thirds of the company—Cooper jumped at the chance.
Industry insiders universally acknowledge the brilliance of this deal. GE, like so many others, thought real estate values would keep soaring. Cooper and his team cashed out at what turned out to be the bubble’s peak.
Despite his aggressive style, you won’t hear much public criticism of Cooper. Analysts who watch the sector are muzzled by the investment-banking side of their firms because they desperately want to be in Cooper’s next deal. But the GE deal was one of the rare instances where people did not bite their tongues.
The furor stemmed from a key difference between how some REITs account for their expenses compared to corporations. At the latter, all costs–machinery, administration, salaries and the like–are deducted from revenues to arrive at a pretax profit. REITs can tweak the formula: They start with their revenues (lease payments from tenants) and then subtract costs like the interest they pay on their mortgages. But some expenses, like salaries, can be paid for differently. Rather than account for them inside the REIT, the trust can pay a flat fee to an external manager.
This outside group is often paid a percentage of the REIT’s total assets. If a REIT owns $100-million worth of properties, it might pay 0.25 per cent of that amount, or $250,000, each year to the external company. The structure arguably makes for efficiency, especially if the outside group manages a few different REITs, because then each trust doesn’t need its own team. But the trouble here was that Cooper himself ran the external manager. And the fees he asked for went above and beyond the reasonable, by industry standards. He wanted a base management fee of 0.25 per cent of Dundee REIT’s asset value annually, plus all sorts of other fees. Every time Dundee REIT issued new stock, he wanted 0.25 per cent. Every time Dundee bought a new building, he wanted a percentage of the total cost. For a deal the magnitude of Scotia Plaza, his firm, Dundee Real Estate Asset Management (DREAM), could net millions. Over the first nine months of 2012, when the Scotia Plaza deal closed, the REIT paid its external manager just shy of $25-million.