Dream Residential REIT pulls off rare IPO in an ugly market to bet on surging U.S. rental housing

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Dream Residential REIT, the latest company to be spun out of Michael Cooper’s property empire, beat the odds and completed its US$125-million initial public offering in an ugly market. Expanding its portfolio in these turbulent times may require just as much magic.

When the real estate investment trust launched a US$160-million IPO in Canada in early April, stock markets were already on edge because of expected interest-rate hikes, and because Russia’s invasion of Ukraine was still fresh. Despite the uncertainty, Dream Residential, run by chief executive officer Jane Gavan, found a way to raise the money needed to acquire its initial portfolio.

At the outset, Dream Residential will own 16 multiresidential properties in Oklahoma, Texas, Kansas, Kentucky and Ohio. Seventy per cent of its portfolio will be located in Greater Oklahoma City and Dallas-Fort Worth.

But to do so, the deal size had to be cut to US$125-million, and the IPO was priced at US$13 a share, the low end of its marketing range.

Dream Residential, which starts trading Friday, resembles what Mr. Cooper and his long-time business partner Ms. Gavan did in 2011 when they launched Dream Global REIT to capitalize on cheaper property values in Europe after the 2008 global financial crisis. At the time, they raised money to acquire a portfolio of Deutsche Post properties in Germany, and then added to it with subsequent acquisitions over time.

This time, Dream Residential’s IPO proceeds will be used to acquire properties that are currently owned by another of Mr. Cooper’s companies, as well as by a joint venture Mr. Cooper created with a business partner.

The IPO’s market timing is also substantially different than that of Dream Global’s. In 2011, it was possible to take advantage of strong equity markets in Canada, which allowed the REIT to raise cash to buy European properties at discounted prices.

Dream Residential, meanwhile, starts trading as REITs are struggling because interest rates are rising. It will also have to grow by acquiring properties at likely premium prices. The U.S. real estate market is currently soaring, akin to Canada’s during the first two years of the pandemic.

In an interview, Ms. Gavan said Dream Global’s success only looks like such a sure thing now. (The REIT was sold to Blackstone for $3.3-billion in 2019.)

“In hindsight, it looks obvious,” she said, but when Dream Global launched, “we felt like we were running into a burning building.” At the time, Europe was awash in a sovereign-debt crisis, and some very smart people thought the euro would not survive as a currency.

Dream Residential also has some strong economic fundamentals working in its favour. In the U.S., the percentage of young adults aged 25 to 34 years old who are living with parents now sits at 16 per cent, above the 12-per-cent historical average. This group is one of the most likely to look for rental housing – particularly with house prices rising.

Market rents in the regions where Dream Residential now owns properties are also above its portfolio’s existing rents. The REIT expects a 12-per-cent average rent increase when a tenant moves out.

However, Dream Residential faces competition from a few rivals who are already listed in Canada and operate similar businesses, albeit sometimes in different locations, including Toronto-based Tricon and Arkansas-based BSR REIT, which went public on the Toronto Stock Exchange in 2018.

Despite some geographic overlap, Ms. Gavan said Canadians often underestimate the size of the U.S. market. The Greater Oklahoma City metropolitan area alone has 1.42 million people.

Unlike the dominant Canadian apartment REITs, such as CAP REIT and Minto Apartment REIT, the properties Dream Residential owns aren’t high-rise apartment buildings – they are what are known as “garden-style” apartments that tend to look like blocks of townhouses.

Investing in such properties has been lucrative for those who are already in the business. Despite the recent market correction, BSR’s units are still up roughly 35 per cent since the start of the pandemic, and Tricon’s stock is up 40 per cent.

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