Battered by tumbling investor confidence in Alberta companies, and hamstrung by heavy cash outlays for the foreseeable future, Dream Office REIT has unveiled a stunning strategic shift.
Late Thursday, the real estate investment trust, which is one of Canada's largest office tower owners, announced sweeping plans to slash its distribution by one-third, top up its credit facility to $800-million and unload at least $1.2-billion worth of properties over the next three years.
The ambitious strategy is something investors and analysts have been looking for. Partly because 20 per cent of Dream's portfolio is in Alberta, spooked investors had sent its units tumbling 60 per cent from their peak in 2012. The REIT must also spend hundreds of millions to upgrade and maintain its buildings and pay its distribution. Cash was getting so tight that it looked likely Dream would need to borrow in order to fund its monthly payout next year. Slashing the distribution saves roughly $80-million annually.
The changes come as some of Canada's biggest REITs reposition themselves. Last spring, Calloway REIT bought SmartCentres from Mitch Goldhar for $1.2-billion to create one of Canada's largest retail landlords, and right before Christmas, RioCan REIT announced plans to sell its entire U.S. portfolio for $2.7-billion.
The broad sector is also under siege from changing investor perceptions. Coming out of the financial crisis, REITs were one of the hottest things investors bought, sending their values soaring. But since May, 2013, these same investors have feared the effect of interest-rate increases in the United States and that's sent the broad S&P/TSX capped REIT index down 19 per cent.
Across the REIT sector, which includes everything from industrial properties to apartment buildings, office towers are now some of the least-coveted assets because they are capital intensive, meaning they require constant maintenance and upgrades, and because there are fears of overbuilding. "The office sector in this kind of environment is very poorly placed," Dream founder Michael Cooper said in a January interview.
REITs with Alberta exposure are in an even tougher spot. Mr. Cooper acknowledged there is the chance some tenants who have signed up to lease space in new towers may not be around, or may be acquired, by the time the development is ready. "This is a messed-up time," he said.
Because the Alberta market is so challenging, Dream isn't looking to sell any properties there. "Right now it feels as if Alberta's frozen," Mr. Cooper said on a conference call Friday.
Uncertainty about the province's outlook has arguably made investors overly irrational about the situation. In a presentation Friday, Dream argued that this panic has sent its stock down tumbling to 50 per cent of its assets' gross book value, adding that the "value of our Toronto portfolio alone is more than our current trading price." It's especially frustrating because the REIT now has less exposure to Alberta than it did during the financial crisis, yet investors give it less love than they did in 2008.
One of Dream's chief goals now is to assure investors it has ample liquidity. The asset sales – which are targeted at properties in the Greater Toronto Area suburbs, Ottawa and Vancouver – will help pay down debt, and the REIT has full discretion on how it uses any funds from its renegotiated $800-million credit facility.
While Alberta's woes have weighed on other REITs, so far Dream is the only one that's had to take such dramatic action. Boardwalk REIT has roughly 70 per cent of its properties in energy-focused cities, which has sent its stock tumbling 35 per cent from the peak in late 2014, but its distribution is much less onerous relative to Dream's and the REIT also has less debt. Investors enthusiastically supported Dream's new strategy, sending the units 13 per cent higher on Friday.