I have taken a large (33%) position in Dream Unlimited $DRM.TO and wanted to take a closer look at the complex business model and portfolio holdings of this undervalued and often overlooked Canadian Real Estate Asset Manager and Developer.
The Dream Unlimited business is currently priced at $25.50/share, has a book value of $33.97/Share and a net asset value of $60/Share. The book value was recorded when the assets were originally purchased resulting in a large gap between book value and current fair market value. Some of the value is also hidden beyond the Dream Unlimited balance sheet.
Exploring this hidden off balance sheet value and the large gap between book value and fair market value is the key to understanding Dream Unlimited and the true value of a share.
Dream Unlimited provides a breakdown of their estimate of fair value adjustment for each asset group below.
The two largest adjustments are for the asset management business ($9.33/share) and the Western Canada Development Land ($9/share) so we should pay particular attention to these assets.
Asset Management Business
BOOK VALUE = $43M
2022 AM Margin $29.4M x 15X Suggested Multiple = $441.2M FMV (+$9.30/Share)
The Dream unlimited universe extends beyond its own balance sheet through asset management agreements and joint ventures. These agreements establish relationships between Dream Unlimited and the four public reits and three private funds that are the core of the asset management division.
The Dream universe is a complex chess board with many pieces. Entrepreneurial CEO Michael Cooper strategically leverages the pieces and creates new pieces (investment vehicles) to compound capital and realize hidden value.
Previous successful chess moves include: JV Summit Industrial Acquisition (2022/2023), Land Expropriation Victory (2022), Launching Dream Residential Reit (2022), Formation of Private Asset Management Business (2021) , Selling Dream Global Reit (2019), Launching Dream Hard Asset Alternatives which is now Dream Impact (2014), Launched Dream Industrial Reit (2012), Launched Dream Office Reit (2003).
Think of Dream Unlimited as a Real Estate Investment Vehicle Factory. It creates these investment vehicles through development and acquisition by leveraging external public and private capital. This process enables Dream to scale recurring asset management revenue streams quickly despite high interest rates and macro economic volatility.
The revenues the asset management division generates are disproportionate to the internal capital it deploys. The incredibly low $43M Book value of the asset management business is a paltry 1.4x of 2022's asset management earnings.
If we look at the history of Dream Unlimited's assets under management (AUM) we can see they have been able to scale at a very fast pace.
Dream Unlimited sold Dream Global Reit for 6.2B to Blackstone in 2019. This sale resulted in a dramatic fall in Assets Under Management however they have already reached a new high in AUM only 2 years from this 6B Sale.
Dream is set to increase AUM again in Q1 2023 with the recent Joint Venture between Dream Industrial Reit $DIR.UN + GIC Singapore's Sovereign Wealth Fund to acquire Summit Industrial $SMU.UN.
This chess move is particularly fascinating as Dream Industrial is only investing 10% of the equity to effectively take control of a direct public competitor and generate asset management fees on the entire portfolio. External capital is enabling fast growth despite a volatile macro economic environment.
Dream Unlimited is able to do this as the institutional demand for hard assets is high in an inflationary environment and institutional capital requires real estate management/development skill and the human capital to effectively invest. Dream Unlimited is extracting economic tolls on external capital that wishes to use its real estate platform.
The asset management agreements also have additional hidden value beyond the current revenue they generate. Some agreements include an incentive fee that grows with the investment vehicle until the vehicle is sold off or the management agreement is terminated. Some agreements also include performance hurdle fees which capture 15% of ffo growth beyond a certain ffo/share target.
The largest hidden value in these asset management agreements is the Dream Industrial incentive fee payable upon the termination of the asset management agreement upon the sale of the Dream industrial portfolio or the termination of the agreement. This fee is currently estimated at $250 million and is secretly compounding with the continued growth of Dream Industrial.
Here is a screenshot from the Dream Industrial asset management agreement with Dream Unlimited.
Interestingly enough Dream Industrial actively chooses to scale its portfolio size through developments and acquisitions vs. allocating capital to buybacks despite an attractive discount to the $17 NAV, or increasing the dividend. On the Q3 earnings call analysts questioned this capital allocation strategy and the management reply that developments and acquisitions were the best use of capital did not sound very convincing to me.
This Dream Industrial capital allocation strategy just happens to increase asset management fees and builds the value of the termination fee for DRM maximizing long term value creation in favor of Dream Unlimited. Investing in the discounted and diversified chess board is more effective than owning a single piece.
In the Dream Universe you are either leveraging the external capital or you are the external capital being leveraged. This incentive fee structure was very effective with the Dream Global Reit sale to Blackstone in 2019. This sale resulted in a $379m incentive fee being paid to Dream Unlimited that was not on its balance sheet.
Recurring Income Portfolio
The Asset Management business represented 23% of the 2021 recurring revenue with owned real estate asset income representing 77% of the income. Development completions and increases in assets under management increase recurring revenue.
"We continue to believe that as the recurring fee revenue stream grows and, among other things, lends a higher degree of stability to operating results that the valuation will ultimately reflect this."
- CIBC Equity Research Aug 12th 2022
Dream Office Reit Shares
BOOK VALUE $521.4M
$15 PRICE x 18.5M Shares = $277.5M FMV
$33.15 NAV x 18.5M Shares = $613M NAV
Dream Unlimited owns 18.5 million shares of Dream office Reit. These shares generated 24% of the 2021 recurring income.
The book value of the dream office shares is significantly higher than the current fair market value. This has been caused by the large gap between the dream office share price and its net asset value. Dream Unlimited still makes a fair value adjustment for the Dream Office and Dream Impact shares of +$2.08/share. This adjustment should be ignored or even reversed to be conservative.
Fair market valuation adjustments aside, the dream office shares are a good long term holding for dream unlimited.
Dream Office Reit ($D.UN) consists of three major asset buckets: Downtown Financial District Office Portfolio + Secondary Market Office Portfolio and a large investment in Dream Industrial Reit.
Dream Office - Financial District Portfolio
The financial district office portfolio is located in the downtown core of Toronto on the literal bullseye of the Canadian real estate dartboard. The office buildings are located around the desirable "U" section of the subway system in the financial district and on top of the PATH underground pedestrian walkway network.
These buildings are renovated older buildings which some investors may consider inferior however the location is hard to beat. The desirability of this location and the scarcity of the land will help Dream Office survive industry headwinds and outperform in the long run.
If you were able to purchase an older office building in the downtown core (unlikely as they are rarely sold) it would not be at a a 50% discount to fair market value. These assets have had some recent challenges however occupancy for the financial district portfolio is at 88.9% with a 4.9 WALT.
Dream Office - Secondary Market Portfolio
D.UN has been selling off the weaker secondary market portfolio since 2015 and using the proceeds to power massive accretive share buybacks doubling down on the financial district portfolio and its investment in Dream industrial.
These are weaker assets with lower occupancies and declining rental rates. They do not represent a significant portion of the Dream Office value and will likely continue to be liquidated to fund buybacks.
Dream Office - Share Buybacks
Any share buybacks that D.UN completes at current prices are extremely effective with a more than 50% discount to NAV enabling D.UN to leverage and benefit from the current office pessimism. The gap between price and net asset value is larger than it has historically been with an average historical buybacks purchase price of $22.
Dream Office's Investment in Dream Industrial
To make things even more fun, Dream Office Reit holds 26,604,306 units of Dream Industrial Reit on its balance sheet. These shares are worth approximately $311M based on the current market price of Dream Industrial and generate a 5.98% yield.
This $311M asset is significant representing a ridiculous 45% of Dream Office's current $686.59M market cap. These shares provide industrial sector diversification and enhance the income generated by Dream Office.
I am attracted to the Dream Office Portfolio and believe it is an excellent core recurring income asset for DRM and a high quality long term holding. Sandpiper and Artis Reit have both made investments in Dream Office Reit hinting at a public/private value disconnect and desirability.
Consistent Share buybacks also have the effect of increasing DRM’s ownership concentration. This is certainly an interesting area on the chess board where we may see some future action.
Arapahoe Basin Ski Hill
BOOK VALUE $33.9M
$10.7M AEBITDA x 13X Multiple = $139.4M FMV (+2.46/S)
The A-Basin Basin Ski Hill consist of 1,428 acres of land in Colorado and was purchased by Dream Unlimited in 1997. Over time Dream Unlimited has invested into the resort modernizing it and increasing profitability. The book value is only 3.16X 2022 Earnings
Distillery District
13 acres compromised of 40 heritage buildings. 800,000 visitors to the Winter Village. 90% GLA occupied by local tenants.88.9% occupancy on 395,000sf GLA. Nestled into the Gardiner Expressway/Don valley Parkway at the south end of Toronto just east of the downtown core.
Development Pipeline
Dream has a 21,000 unit development pipeline for condominiums and purpose-built rental units. 3000 of these units will be completed by 2025. Over the next four years Dream expects to add 6,800 residential rental units to the platform creating a strong portfolio of over 10,000 total rental units.
Urban Development Toronto + Ottawa
Zibi, Ottawa
4m SQFT density, 2000 residential units, 2m square feet of commercial. This development is in both Ottawa & Gatineau connecting the cities over the Ottawa river.
Lebreton Library Parcel, Ottawa
2-Tower impact development in Ottawa - 601 residential units (41% affordable)
31A Parliament, Toronto
3.7m GLA in retail and commercial properties. 21,200 units/purpose-built rental units (total project level)
Quayside, Toronto Waterfront
12 Acre waterfront site planned to include 5 towards and 4300 residential units. Adjacent to 1300 unit victory silos site.
Western Canadian Land
BOOK VALUE $355.4M/8712 Acres = $40,794/Acre
8712 Acres x $80,000/Acre = $697M FMV
On average the land purchased and held for development was purchased in 2011 with a book value of $40,794/Acre. It has had just over a decade to compound and create the gap between fair market value and book value. Dream estimates that the current fair market value is in the range of $80,000 - $120,000 an acre and uses $80,000 for the calculation.
Looking forward I believe this land bank has some strong tailwinds behind it. Energy and Real Estate do well in inflationary environments and the Western Canadian Land Bank benefits from both of these factors. Interprovincial migration is benefiting Western Canadian Provinces as buyers engage in cost of living arbitrage and are attracted to the energy based local economy.
Providence + Alpine Park, Calgary
1600 acres total size, 400 acres commercial space, 13,000 lots + multi-family units. Alpine park is a 476 acre greenfield development connected to the newly-completed $2.2 Billion Southwest Ring Road (highway).
Holmwood + Brighton, Saskatoon
- 2800 acres, 500 acres commercial space, 28,000 lots and multi-family units.
Located on the east side of Saskatoon.
CEO Michael Cooper
Michael Cooper has an excellent performance track record with DRM and is financially aligned with shareholders owning 45% of the shares.
Michael began his career as a lawyer but was attracted to the real estate business and went back to school to get an MBA at Schulich. Cooper trained under Walter Zwig a 50-year real estate career veteran in Toronto from 1986-1993. He then co-founded DRM in 1994 at 32 years old.
I believe he will continue to execute for DRM as he works hard to realize the highest potential in his life’s work. In the past Michael had focused on reinvesting earnings and buying back shares and has only recently begun returning capital to shareholders through a dividend.
During the Q3 earnings call Michael responded to a question about his capital allocation strategy and if he would be buying back more shares below.
"Oh, I think that firstly, we're blacked out, we continue to be blacked out, we've blacked out probably since July 1st. We will be buying back stock. Secondly, the stock has been so volatile. We thought we would reward our shareholders with some cash. I think we're probably going to be a little bit more balanced between providing dividends and buying back stock in the future. So I think it's just more balance, we put a tremendous amount of capital buying back stock in the past, we're going to continue buying back stock, but I think we're also going to focus on providing a decent stream of dividends to our shareholders." - Michael Cooper Q3 2022 Earnings Call
This highlights a shift to a more balanced approach between income and growth and reinforces the dividend growth narrative. Shareholders can likely expect more buybacks as well with such a large discount to NAV.
The majority of this post has been focused on the gap between book value and fair market value. If we focus just on book value you can see Mr. Cooper has been growing the book value/share at a very fast pace from $10 /Share in 2014 to $38/Share in 2022. The declining share count and rising book value is a desirable combination.
Conclusion
Dream Unlimited Reit is a real estate conglomerate structured to have an opportunistic balance between income and growth. The cashflow generated by the recurring income real estate portfolio and asset management business empower growth through the large development pipeline. The large amount of development completions over the next few years will significantly increase the size of the recurring income base and also increase the size of future active development. It’s growing income stream will enable Dream to continue to increase dividends.
This recurring income and development flywheel Is both the engine that powers Dream and a safety feature anchoring dream by building long term cashflows. Dream will continue to leverage external capital through its asset management platform to scale assets under management. This platform enables Dream to create, compound and realize value beyond its balance sheet via long term asset management agreements.
Earnings may be lumpy, occasionally experiencing dramatic increases above the recurring income base when hidden value is realized or new investment vehicles are created.
The Dream Unlimited Universe has a stable of desirable high quality land assets including the western development land, the active development land portfolio, Toronto's Distillery District, the Arapahoe Basin land and the land under the dream office financial district portfolio.
This massive land bank provides a long term investment runway. Dream will continue to leverage this high quality land to generate income, compound capital and realize long term value.
I estimate that $50/Share is the current fair market value for DRM. This factors in a 10% conglomerate discount to the fair market value of the individual assets. The valuation implies the current share price is available at an attractive 49% discount.
I am happy to own this diversified chess board and real estate investment vehicle factory. Looking forward to watching Mr. Cooper finish the game and realizing DRM's potential.
Thanks for reading. A special thanks to Tyler @ Canadian Value Stocks who helped me see the Dream Unlimited value.
To learn more about Dream Unlimited check out some resources below:
Not Investment Advice. Please do your own due diligence.
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