Ask Michael Cooper, the chief executive officer of Dundee Real Estate Investment Trust , where the money’s at, and you’ll get an unequivocal answer: office towers.
The management team at Dundee is so enamoured by the office market that they’ve transformed their portfolio of office and industrial properties into one that is almost solely focused on offices. They already scooped up Whiterock REIT earlier this year, and now with two-thirds of Scotia Plaza in the bag, they’ve made office towers 80 per cent of Dundee’s gross leasable area.
This emphasis is only going to get stronger. Dundee has already started a strategic review of its industrial portfolio – code for looking to sell most, or all, of it – and on the company’s last conference call, Mr. Cooper said that Dundee is “identifying assets that no longer fit our business plan and [intends]to replace them with assets that will better support our long-term growth strategy.” Out with industrial, in with more office.
To put the REIT’s current office portfolio in context, its 22.4 million square feet now edges out Brookfield Canada Office Properties’ 21 million square feet. Dundee is going big, or going home.
To get its hands on Scotia Plaza, Dundee, along with its partner H&R REIT , had to pay $1.27-billion, amounting to a going-in capitalization rate of 5.2 per cent. That’s low, for sure, but it isn’t as drastic as the sub-5 per cent rumours that had been floating around before the final terms came out.
As for financing, Dundee and H&R are selling $650-million of seven-year mortgage bonds, which are backed by Scotia Plaza. The final interest rate on these will be set near the closing date, but the effective rate won’t be higher than 3.45 per cent.
Dundee is also issuing $300-million in new equity, bringing its total stock offering over the past six months to $675-million.
As lead managers of all three deals, TD Securities has profited handsomely from this business – however, it had to share the top line of the new financing with Scotia Capital.
The big question now is whether Dundee’s transformation will pan out for unitholders. Scotia Plaza is already 99.5 per cent leased, so there isn’t much room for growth there. For that reason, it appears that Dundee is more focused on rents. Scotia Plaza’s current weighted average in-place office rent is about $31.45 per square foot, more than 10 per cent below estimated market rates. Once the lease renewals come up, the REIT seems to be certain that it will be able to charge much more.
But that all depends on the Canadian economy staying hot, relative to other countries at least, and no model is going to be able to predict that.