Two of the country's savviest real estate investors are working on an $800-million-plus deal that speaks to very different views of the Alberta real estate market. Dream Office REIT is close to selling its portfolio of 45 Calgary and Edmonton office buildings to Slate Asset Management, according to people familiar with the talks.
Toronto-based Dream, known for bold moves under the leadership of chairman Michael Cooper, has a decidedly downbeat outlook on Alberta. Back in August, Dream wrote down the value of its oil patch portfolio by $748-million, explaining the region has far more office space than corporate clients need and "we now expect that the economic uncertainty and weakness in the Alberta office sector may be prolonged."
The writedown, which came as Dream moved forward with a larger restructuring that is expected to see $1.2-billion in properties sold, amounted to throwing up a "For Sale" sign on commercial buildings in Calgary and Edmonton that are now valued at approximately $890-million.
A few months later, Dream CEO Jane Gavan revealed she was fielding calls from potential buyers. "We initially thought that an improvement in market fundamentals would be required to their demand profiles," Ms. Gavan said in discussing the Alberta properties during a November conference call with investors. "However, we're beginning to see potential opportunities to realize value at a reasonable price."
The winning bid for all or part of the Dream portfolio in Alberta is expected to come from Slate, according to real estate investors involved in the sale process. Toronto-based Slate was launched in 2005 by brothers Blair and Brady Welch, who have built a track record as contrarians, with a 29-per-cent return on the $4-billion they've invested to date. Both Slate and Dream declined comment on market speculation over their plans.
Dream's Alberta buildings qualify as fixer-uppers. Most are B-grade buildings and occupancy rates are at 82 per cent. In contrast, Dream's towers in downtown Toronto, which include a stake in flagship Scotia Plaza, are 97-per-cent leased. Ms. Gavan and her colleagues have made it clear that they expect the over-capacity in Calgary will get worse, as buildings now under construction will increase the inventory of office space by another 10 per cent.
Doom and gloom on Alberta is likely music to Slate's ears. On the company's website, Blair Welch is quoted as saying: "On all of our deals we have had people say 'can't' to us. They say 'Can't be done, can't do that, can't raise money, etc.' At Slate, we don't do 'can't' well."
Slate's past investments show what the company's game plan will be if it does acquire a collection of oil patch properties. The company's first big deal saw Slate team up with U.S. private equity fund Blackstone to snap up 17 buildings in downtown Toronto – all second-tier, unloved buildings – along with 13 properties in other Canadian cities. Over five years, Slate renovated the buildings and signed 800 new leases, upgrades that tripled income from the buildings. Once the work was done, Slate sold the works to a real estate trust for $832-million – at the time, the largest-ever portfolio acquisition by a Canadian REIT. The buyer of the Slate portfolio was a predecessor company to Dream.
If Dream can sell its Alberta properties, and close an additional $330-million in sales that Ms. Gavan said were in the works during the last conference call with investors, the company will emerge from a wrenching restructuring with a rebuilt balance sheet and a narrow focus on premier buildings in downtown Toronto, Montreal and Vancouver.
For Slate, becoming a major landlord in Calgary and Edmonton during a vicious downturn in the energy market would be the latest against-the-grain investment from a team that's made its reputation on contrarian moves.