In a stunning strategic shift for one of Canada's largest office tower owners, Dream Office REIT is slashing its distribution and putting $1.2-billion worth of properties on the block.
Emerging from the financial crisis, Dream Office was heralded as one of Canada's top-tier REITs, which drew attention for flashy deals such as the joint acquisition of Scotia Plaza for $1.3-billion – the highest price paid for a Canadian office tower. And with a sizable portion of its portfolio in Alberta, Dream rode the energy wave.
However, the REIT has been hammered since investors started to fear the effect of interest rate increases in the United States, which first hit the market in May 2013. The units have fallen even faster since energy prices started to crater, and are now down 60 per cent from their post-crisis peak in 2012.
To free up cash, Dream Office – formerly known as Dundee REIT – is slashing its dividend by one-third to $1.50 per unit. The trust has also negotiated a new $800-million credit facility, for which it has complete discretion over how to use the funds. Such easy access to debt should help calm any investors who worry about any liquidity issues.
Dream Office is also looking to sell at least $1.2-billion worth of assets, or at least 15 per cent of its portfolio, over the next three years. Dream believes its units are currently trading at a 50-per-cent discount to their net asset value – meaning investors are only willing to pay roughly half of what Dream says they are worth. By selling some properties to external buyers for good prices, investors may see these assets are worth more than they currently believe.
The dramatic moves shine a new light on Dream Office founder Michael Cooper, who, until recently, was thought by many to be capable of doing no wrong in the real estate world. Dating back more than a decade, his track record of smart asset sales and spinoffs had scored incredible returns for investors.
But even he acknowledged the past year has been tough. In a recent interview, he described the current commercial real estate environment as "grinding, painful and humbling."
Mr. Cooper has long stressed the importance of liquidity and maintaining a good balance sheet during downturns. He speaks from experience, having watched real estate developers go bust during the early 1990s because they were cash-strapped. That philosophy seems to be a key factor of the new strategic review.
"With our new $800-million revolving credit facility in place, together with our relatively low level of leverage (48 per cent net total debt-to-gross book value) and a disposition program intended to fund further debt reductions and potentially units repurchases, we believe that the trust will have a stronger and more flexible balance sheet," Dream Office said in a statement. Proceeds from any asset sales will go toward paying down debt.
The assets for sale are largely located in the Greater Toronto Area suburbs, Ottawa and Vancouver. Notably, Alberta assets are not on the block – likely because buyers are harder to find.
"Right now it feels as if Alberta's frozen," Mr. Cooper said on a conference call Friday. "There's a dance going on" between buyers and sellers, and everyone is timid to be the first to transact. I don't think this is the time to be a pioneer," he said of Dream's intentions in that market.
It's equally hard for investors to show courage. "If you're at a pension fund or a pension fund adviser, it'd be pretty tough to take an Alberta [property] to your asset committee," Mr. Cooper added.