The sale of Dream Global Real Estate Investment Trust provides a healthy payday for Michael Cooper’s holding company as the real estate titan pivots toward private capital in a new era for the industry.
Blackstone Group Inc. is buying Dream Global REIT for $3.3-billion in cash, and as part of the deal the private equity giant is paying $395-million to end Dream Global’s asset management contract with Mr. Cooper’s partially-controlled holding company, Dream Unlimited Corp.
That additional payment will flow to the holding company, whose shares jumped almost 17 per cent on Monday. Mr. Cooper runs the Dream family of real estate companies and he is the largest shareholder of Dream Unlimited, with a 36-per-cent stake.
Mr. Cooper said in an interview that the $395-million, plus the proceeds from Dream Unlimited’s sale of its 2.5 per cent stake in Dream Global, will go to pay down debt at the holding company, as well as buy back shares and seed new investments. He envisions a new future for the company that may include making it look more like Brookfield Asset Management Inc. or Blackstone – publicly traded companies that operate as private equity owners.
“We think that, right now, private money is beating public money in terms of its competitiveness,” he said. “Pension funds, private equity investors, high-net-worth investors, a lot of them have a much better opportunity to buy properties than public companies can.”
Blackstone, for example, took Pure Industrial Real Estate Trust private in 2018 for $2.5-billion in cash, plus assumed debt, and now it is buying Dream Global. Canada Pension Plan Investment Board, Quebec’s Ivanhoé Cambridge and other domestic pension funds are making multibillion-dollar real estate investments at home and abroad.
With so much demand, publicly traded real estate trusts have a harder time competing for key commercial properties. “Public companies are not trading well enough to issue equity to buy assets at today’s market prices,” Mr. Cooper said.
BMO Nesbitt Burns analyst Jenny Ma calculated that Blackstone’s $3.3-billion purchase price, at $16.79 a share, equates to a 18.5-per-cent premium to Dream Global’s closing price on Friday, but it amounted to a 6.6-per-cent discount to the REIT’s net asset value.
This difference exists because the net asset value was “based on a going-concern assumption and therefore did not contemplate fees payable to the external asset manager upon a change in control,” she wrote in a note to clients.
Mr. Cooper oversees the Dream portfolio of real estate companies, which includes Dream Global REIT, Dream Office REIT and Dream Industrial REIT. His majority-owned Dream Unlimited holds everything from undeveloped land in Western Canada to a ski resort in Colorado.
Dream Unlimited is also the parent company of Dream Asset Management Corp., which manages the real estate for some of the corporate family’s REITs. These relationships are governed by lucrative external contracts.
Asset managers often earn a number of fees for their work. Typically, they make a base annual fee, calculated as a percentage of a REIT’s historical cost of assets. For Dream Global, this fee was 0.35 per cent annually. Asset managers also earn acquisition fees – often 0.5 per cent to 1 per cent of a property’s purchase price – as well as capital expenditure fees for hard construction costs.
Dream also paid its manager an incentive fee, which was akin to a performance fee that hedge funds earn for delivering superior returns. This category comprised the bulk of the payment from Blackstone – $379-million of the $395-million.
External management contracts have attracted scrutiny of late because they are often financially rewarding to their owners. Rival real estate companies have also ended their own contracts in recent years, including H&R REIT, Milestone Apartments REIT and Summit Industrial Income REIT, and they have all had to pay tens or hundreds of millions to do so.
Asked about the structure of these contracts, Mr. Cooper said Dream Global is getting rid of its own through the sale – however, he acknowledged that Dream Industrial REIT still has a contract with Dream Asset Management.
Dream Global shareholders must vote on the transaction, and support from two-thirds of them is needed for approval.
If the deal is completed, Mr. Cooper will start thinking in more concrete terms about Dream Unlimited’s future. The company was born out of Dundee Real Estate Asset Management, a property management company overseen by Mr. Cooper and majority owned by financier Ned Goodman. At the moment, it holds an array of assets.
“We are just getting started on coming up with a business plan for how we are going to grow,” he said. “It will take us a long time to get going at it. To get a good company, it takes a while to build it out. I think that is where our next growth is.”
Dream Global chief executive Jane Gavan will relinquish her position if the Blackstone deal closes, meaning the real estate industry will lose one of its handful of female chief executives. However, she is also the president of Dream Asset Management and Mr. Cooper said he was talking to Ms. Gavan about growing the asset management business. He expects to start fundraising next year.
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