If anyone in the real estate world doubted the Michael Cooper Factor, the Scotia Plaza deal provided definitive proof of its power.
After shelling out billions to expand in countries like Colombia and Chile, the top brass at Bank of Nova Scotia figured they would raise a bundle of cash this year by putting their 68-storey Toronto headquarters up for auction in a scorching real estate market.
The news set off a feeding frenzy in property circles. Scotia Plaza isn’t just any tower. It’s connected to the bank’s heritage headquarters at 44 King Street West, and it hovers over the heart of Toronto’s financial district at King and Bay Streets. The cherry on top for the buyer was that the bank wanted to lease back 60 per cent of the tower once the deal was done.
A prestigious property, a prime location and a gold-plated tenant: the real estate trifecta. All the deep pockets in the commercial real estate business showed up for the auction—Brookfield Asset Management, Oxford Properties, Canada Pension Plan Investment Board.
Then there was Dundee Real Estate Investment Trust, Michael Cooper’s baby. With a market cap of just over $3-billion, it surely is no runt as a REIT—but it looked pretty much out of its league next to CPPIB, which has assets of $170-billion. Most Dundee investors are of the retail variety, REITs being an investment refuge of choice for people like retirees. When the federal government cracked down on income trusts in 2006, the real estate sector got off scot-free, and a safe haven for investors who depend on distributions for income was born.
For some CEOs, a mom-and-pop base would preclude reaching for Scotia Plaza. But Cooper plunged ahead. His final, winning bid was a heart-stopping $1.3-billion, the highest price ever paid for a Canadian office building. H&R REIT picked up one-third of the tab—but it was still Cooper’s deal.
Just a decade ago, the prospect of a REIT winning such a bidding war “was implausible,” says Ira Gluskin, the money manager who co-founded Gluskin Sheff. Cooper surprised even himself. “Honestly, I thought we wouldn’t be in the running.” Yet in one deal, he both redefined the role of REITs and, in Gluskin’s view, “bulletproofed” his portfolio with a gold-plated asset.
The deal capped off a long ascent for Cooper at Dundee. When he started there in 1994, he was just another young striver. Less than two decades later, at age 51, he has well over $10-billion in properties under his control. Even Edward Sonshine, chief executive officer of RioCan, Canada’s biggest REIT, sings Cooper’s praises, admitting that he’s “made some of the most brilliant decisions over the last seven or eight years.”
But getting there took some audacity, a bit of pushing the envelope—it’s a key ingredient of the Cooper Factor.
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After abandoning corporate law, Cooper worked for a Toronto real estate developer during the recession of the early ‘90s. In late 1993, he got a call out of the blue from Ned Goodman, the patriarch of the Dundee group of companies. Goodman explained that the decimated real estate market was due to turn for the better, and he needed someone to run Dundee’s new real estate arm.
Within a few months they were striking deals. Cooper got a whiff of a distressed company that owned reams of land in Saskatchewan but had defaulted on a loan. With two partners, he scooped up half of the company for just $6-million in debt and $1-million in equity. He remained fixated on these types of assets for the next two years, doubling down on land and housing developments in Regina, Calgary and Edmonton.
By 1996, Cooper was sick of the limitations of playing with private money. If he took Dundee public, he reasoned, he could tap into a much wider investor base and grow. That year, Cooper acquired a shell company, Clydesdale Capital Corp., for peanuts and changed the name to Dundee Realty Corp. Suddenly he was the CEO of a public company.
Not bad for a neophyte. “I had zero public-market experience,” Cooper says. “I owned one stock once, for 30 days.”
One of Cooper’s first calls as CEO was to U.S. real estate emperor Sam Zell. Cooper wanted big-name backers to boost his company’s profile, and Zell agreed to a breakfast in New York City. Zell said he didn’t know the Canadian market, and gave Cooper two weeks to come up with a strategy.
Cooper’s concoction: “A Plan for Mr. Zell in Canada.” “That’s how creative I am,” he says with a laugh. “The last paragraph was, ‘What I want from you.’ And it was a quick answer.” Zell invested in January, 1997, boosting Dundee Realty’s equity value to $33-million.
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.
To get the plan passed, Cooper tied its approval to the GE shareholder vote on the deal. If Dundee REIT’s shareholders wanted the 19 per cent premium that GE was offering, they’d have to give Cooper what he wanted. It was a classic case of Cooper pushing the envelope—nothing illegal or improper, but certainly bold.
Five years out, external managers are commonplace. But RioCan, long a stickler on governance, remains a notable critic. “Everybody here at RioCan stands or falls with the success of RioCan,” says CEO Sonshine. “When you’re externally managed, it’s not quite the same.”
Imagine a REIT whose share price is suffering. Does management have much reason to worry if it can buy properties and still make a percentage of the purchase price? It’s “the gift that keeps on giving, if you handle it right,” Sonshine says. However, he acknowledges that Cooper does own a good chunk of Dundee REIT shares himself, so he has some skin in the game.
Asked about the criticisms, Cooper doesn’t hurry on to the next question, but his drawn-out answer doesn’t really offer much. He says he’s focused on creating value–as if any CEO isn’t–and the people around him are totally “engaged and excited”—as if that has anything to do with management fees.
Cooper also notes that Dundee REIT has churned out massive returns for shareholders. True: Whatever time frame you choose, Dundee’s shares are almost always up, save for the worst period of the financial crisis. But then, the whole sector has been hot. And RioCan has returned more than Dundee since 2003, when Cooper created the REIT—a 88 per cent gain, before distributions, versus 75 per cent for Dundee.
The funny thing about this debate is that Cooper’s DREAM doesn’t need boatloads of new money. The private investments Cooper’s made are already wildly successful. That Saskatchewan land deal he struck in 1994? “That was the historic moment for our company,” Cooper says of the holding now held by Dundee Realty, the parent company of DREAM. Goodman believes it’s “probably the best investment I’ve ever made.” In the first nine months of 2012, Dundee Realty sold $147-million worth of land and made a margin of $45-million.
Gluskin, the veteran money manager, and an investor in Goodman’s parent company, Dundee Corp., says the investing public often ascribes Cooper’s worth to his returns in the public markets, but these profits are “chicken shit” compared to what he earns through his 30 per cent stake in Dundee Realty, which has “fantastic” value. (Dundee Corp. holds the remaining 70 per cent. Over the years, Goodman and Cooper have developed quite the bond. At a recent Fraser Institute dinner honouring Goodman, he referred to Cooper as his “fifth son.”)
As for Dundee REIT’s external management fees, Gluskin likens the dilemma to investing in companies that have dual-class share structures, where one class of shares gets voting rights and the others don’t. The investor always has the right to buy or not buy, he says. However, he admits Dundee’s fees are excessive. “We’re paying more than we need to.” But there’s a reason for that. “Well, we’re paying more for Michael Cooper.”
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Since shedding two-thirds of Dundee REIT’s portfolio in 2007, Cooper has fought to rebuild. After the GE deal, the REIT was heavily skewed to the Calgary market—a terrifying liability when oil prices plummeted to $34 (U.S.) per barrel from $145 (U.S.) in less than a year. But after waiting out the economic crisis, Cooper has struck some notable deals. Summer of 2011: Dundee acquires Blackstone’s downtown Toronto office portfolio for $832-million. January, 2012: Dundee acquires Whiterock REIT, another office specialist in the Toronto area, for $608-million. May, 2012: Dundee acquires Scotia Plaza, breaking records. It’s like Cooper can’t help but outdo himself.
But it could all blow up in his face. Canada’s real estate market is starting to cool and some people worry that, as of the Scotia deal, the hotshot CEO has been blindsided by the bubble, just like GE was. Cooper counters by arguing that he wasn’t the only one who saw the value in Scotia Plaza.
In fact, Cooper is such a big believer in the value of office towers that he’s focusing Dundee REIT on office space. After the Scotia deal, its 22.4 million square feet of office space topped Brookfield’s office arm in Canada.
Cooper is also looking beyond the Canadian market. The real estate sector here has been strong for so long that everyone’s piled in and the competition is fierce. He’s got two new babies. One is Dundee Industrial, a REIT he launched last summer to play with a different type of real estate. The other is Dundee International REIT, which has bought properties leased to Deutsche Post, Germany’s post office. Over time, he hopes to rent the buildings out to new tenants (post offices being in shrink mode) while also adding new properties to the mix.
But Germany is just the first step of an emerging master plan that coincides with him recently getting married—in Las Vegas, complete with an Elvis impersonator officiating.
With a new woman, Krystal Koo, by his side, Cooper is now going global. “Dundee REIT has 2 per cent of the world’s economy to buy real estate in,” says Cooper’s friend Brydon Cruise, an investment banker who also sits on International’s board of directors. “Dundee International has 98 per cent plus.”
You thought over $10-billion of real estate could satisfy a man? Not Michael Cooper. “He hasn’t even started,” says Cruise.
Just east of the downtown core, the Distillery District is full of beautiful old buildings, but by the late 1990s it had become rather dumpy. Developers wanted to revamp the area, but a partnership dispute derailed their efforts. Soon after, Cooper bought a 50% stake, and more than 320,000 square feet of commercial space was renovated and leased. Then, Cooper started building condos. The area is now a heritage showcase, a hot spot for events, dining and shopping.
Pan Am Games
Through Dundee Kilmer Developments, Cooper is building the athletes’ village for the 2015 Pan Am Games on the West Don Lands at the mouth of the Don River. Following the Games, Cooper will turn the village into residential properties, woven together with a new college, a YMCA and storefront retail.
King Edward Hotel
Cooper is a partner in plans to redevelop the storied hotel. The revamp will include the addition of more than 100 condos, and classic areas such as the Crystal Ballroom will be renewed. Total costs were expected to top $100 million, some of which went toward overhauling some floors to turn them into residential units.
77 Admiral Road
Naturally, Cooper applies his real-estate acumen in his personal life. When the former German consulate went up for sale in 2006, he scooped it up for $2.9 million. The property, built in 1906, is in the heart of the illustrious Annex neighbourhood. Cooper has hosted myriad parties there, including a gathering in honour of Bill Clinton.
Office towers go up for sale all the time, but rarely one as prestigious as Scotia Plaza, Bank of Nova Scotia’s headquarters. Cooper went up against behemoth pension funds, but somehow came out on top—surprising even himself. The price, $1.3 billion, is the most ever paid for a Canadian office tower. The building is now the largest asset in Dundee’s portfolio, accounting for about 5% of its leasable space.