Tag: DRM

The DREAM preferred share comes to an end

Dream Unlimited (TSX: DRM) had a class of preferred share (TSX: DRM.PR.A), which by virtue of their split from Dundee Corp (TSX: DC.A) had an unusual characteristic – it had a par value of $7.16/share, and was redeemable by the company or the shareholder at any time. In the meantime, it paid out a quarterly coupon of 12.53 cents per share, or 7% on par. The company retained an option to redeem the preferred shares for their own stock at 95% of a prior trading range of DRM stock or cash (or a $2 floor).

This preferred share has been trading for quite some time, and by virtue of DRM’s relatively stable balance sheet, was never in threat of suspending its dividend.

As such, yield-hungry investors could use this preferred share as a cash parking vessel. Even better yet, the dividends that were paid were eligible dividends which would qualify for the dividend tax credit in non-registered accounts. Over time, however, DRM.PR.A became over-utilized and started to trade at a significant premium to par:

The peak was on August 31, 2019 when some poor soul paid $7.56/share for this, or a 40 cent per share premium over par value. This investment would have taken over three quarters of dividends in order to pay itself off. Indeed, at this price the current yield would have been 6.63% for a perpetual investment.

All good things, however, come to an end. Today, DREAM Unlimited announced a substantial issuer bid on their common shares and also the following paragraph:

The Company also intends to redeem all of its outstanding First Preference shares, Series 1. As at November 11, 2019, there were 4,005,729 Preference shares, series 1, issued and outstanding. They may be redeemed at the option of Dream, at any time, at a price of $7.16 per share, plus all accrued or unpaid dividends up to but excluding the redemption date.

As such, one of the best cash parking vessels on the TSX will be off the ledgers. I would expect the shares to crash 4% tomorrow in trading. Fortunately I sold the last of my DRM.PR.A in 2018.

To my knowledge, there is only one other financial instrument that trades in a similar manner, which is Birchcliff Energy’s preferred shares (TSX: BIR.PR.C) which are redeemable by the holder as of June 30, 2020. They also give out a 7% coupon. They are also trading above par. Although the premium is very modest at present, when adjusting for the dividend dates it effectively makes these shares at a tiny discount. There is more balance sheet risk with Birchcliff given its spacing in the natural gas industry, hence why it is not trading wildly above par value at present, in addition to a potential share conversion price at a floor of $2/share (Birchcliff common closed at $2.21 today). I’ve held some of these since February 2016.

Asset stripping in inter-corporate relationships

Whenever researching companies that have control over other corporations, it is quite important to pay attention to signs of agreements between both entities that are to the benefit of one or another. Today’s example is fairly textbook.

This news release from Dream Asset Management (TSX: DRM) hit my mail feed this morning:

TORONTO, April 23, 2019 (GLOBE NEWSWIRE) — Dream Unlimited Corp. (TSX: DRM) (TSX:DRM.PR.A) (“Dream”) announced today that Dream Asset Management Corporation (“DAM”) has agreed with Dream Hard Asset Alternatives Trust (the “Trust”) and Dream Alternatives Master LP (“Master LP”) that until December 31, 2020 the management fees payable to DAM pursuant to the management agreement of the Trust will be satisfied in units of the Trust (“Units”) valued at the recently reported net asset value per Unit of $8.74 for purposes of determining the number of Units to be issued, subject to the receipt of required regulatory approvals and unitholder approval at the upcoming meeting of unitholders of the Trust to be held on June 17, 2019. DAM has agreed to accept Units in satisfaction of the management fees in order to increase its ownership stake in the Trust and to preserve the business’s cash to support the cash distributions by the Trust while the Trust seeks to increase the market value of the Units by offering to purchase Units. As of the close of business on April 22, 2019, DAM and its joint actors own 13,386,072 Units representing approximately 18.6% of the issued and outstanding Units.

Notably, Dream Unlimited and Dream Hard Asset Alternatives (TSX: DRA.UN) are run by the same management team. When skimming through the financials of DRA, the bulk of their portfolio consists of various real estate ventures ($118 million), equity-accounted for investments in the real estate sector ($133 million), commercial/development lending ($144 million), income properties ($224 million, notably shared with two other related Dream entities), a solar and wind power asset ($130 million), and finally some cash ($47 million). On the liability side, they have $195 million in loans outstanding, most of it ($123 million) mortgage loans.

Book value is $592 million. Trust units outstanding are 72.6 million, so the NAV at the end of December 2018 is $8.15/share. (I know the above release cited a $8.74 NAV – this is reconciled on page 2 of the MD&A but it is not terribly relevant to this post).

The trust reported $8.3 million in operating income, plus another $3.3 million in interest income, for a total of $11.6 million before taxes (note as a non-REIT trust they would pay a tax on income distributions, but since those distributions are mostly return of capital at this point the taxation is entirely within the consolidated portions of their asset portfolio – a great future CPA taxation topic I would be more than happy to write about!). At their stated distribution rate of 40 cents per unit, they would require $29 million a year to pay this.

The summary is that they are holding onto a lot of private assets and while they can likely be liquidated in the medium term (especially the real estate holdings), in the short term they are distributing more cash than they are able to generate without selling such assets. They are not in a desperate situation and have the luxury of time to optimize matters.

Likely due to the controlled ownership situation, coupled with the illiquidity of their underlying portfolio, they are trading at a discount. Before today’s announcement they were trading at $7.20/unit, so they were about 11% under the GAAP book value, and around 18% using management’s revised NAV estimate.

At the same day, DRA announced:

As part of its strategic plan announced on February 20, 2019 to enhance unitholder value, management and the Board confirm that the units of the Trust are an attractive investment opportunity and are committed to deploy up to $100 million towards its unit buyback program (representing just under 20% of current market capitalization). Providing further clarity on the execution and timing of the unit buyback program, the Trust now intends to make three offers to unitholders in accordance with applicable securities laws, the first of which is expected to be made on or about July 15, 2019 for approximately 4 million units at an offer price of $8.00 per unit and two subsequent offers will be made in 2020 for $30 to $35 million of units at prices of at least $8.25 and $8.50, respectively, for a total buyback of $100 million of units prior to the end of 2020. These buybacks compare to the closing price of the units on the TSX of $7.17, as of April 18, 2019. The exact number of units that the Trust offers to purchase and the timing of such purchases will be determined by the Trust at the time of launching such offers subject to the receipt of the expected proceeds from capital recycling and the trustees’ obligation to act in the best interests of unitholders. The Trust has been advised that Dream Asset Management Corporation, the Trust’s asset manager and an 18.6% unitholder does not intend to tender any units to such offers.

In this release is a non-binding promise to initiate a partial tender at prices above current market value.

DRM’s entitlement in 2018 was $13.6 million. By opting to receive units at $8.74 compared to today’s market value (currently $7.70/unit), assuming prices, the management fee, and NAV remains constant, DRM has opted to graciously donate about $1.6 million to the unitholders of DRA. While this is not a gigantic amount of capital in relation to the sizes of the entity, it does give a hint as to where management is prioritizing the reception of its capital allocation.

This is another example of how a related party transaction is a red-flag show stopper with regards to an equity investment prospect. Dream Unlimited is relatively cheap in theory, but to invest in it you have to completely in for the ride with regards to the whims of management (the control character is Michael Cooper). This has not prevented me in the past, however, from investing in what used to be the best and nearly risk-free 7% eligible dividend in the form of (TSX: DRM.PR.A), but sadly the market has gotten smart about it and management should be calling it when they wish to realize the quickest 9.2% pre-tax use of capital.

Hat tip to Tyler on Twitter for this one. I had intended to write about this when it hit my inbox, but I saw that he wrote about it first.

DREAM Unlimited and Birchcliff Preferred Shares – cash-like with higher yield

I’ve written in the past about DREAM Unlimited 7% preferred shares (TSX: DRM.PR.A) and the situation still applies today. They, along with Birchcliff 7% preferred shares (TSX: BIR.PR.C) are the only holder-retractable preferred shares trading on the entire Canadian stock market.

They are both trading slightly over par value.

In the case of Birchcliff, the preferred shares only become retractable on June 30, 2020. As such, the implied yield to retraction is around 6.14% (assuming CAD$25.50/share and not factoring in the accrued dividend). You would receive eligible dividends over the next three years and a capital loss upon retraction. The underlying corporation, while somewhat leveraged, is quite well positioned if you assume the North American natural gas market is not going to evaporate. There is also some upside catalyst to the business fundamentals (not to the preferred shares!) if North America finally gets a liquefied natural gas plant on the Pacific Coast, but this is not likely to happen since price spreads have narrowed significantly over the past couple years.

Liquidity on Birchcliff preferred shares is not the greatest – but if you float an ask at the ambient price level you will likely get hit a few hundred shares at a time.

In the case of DREAM, the premium is not extreme when factoring in the amount of accrued dividend (at the closing price of $7.29/share, implies a 6.88% yield with a risk of an immediate capital loss if the company decides to redeem at $7.16/share). It has been quite some time since they have traded at a discount to par, and this is likely due to scarcity of shares – shares outstanding have decreased from 4.87 million at the end of 2015 to 4.01 million at the end of 2016, and this trend is likely to continue. Holders are probably waiting for the inevitable call by the company to redeem the preferred shares. But until this happens, holders receive an eligible dividend of 7% on their preferred shares.

Likewise with Birchcliff, liquidity with DREAM preferred shares is not good. However, there is usually daily activity on the shares and the spreads are typically within pennies. In a financial panic, however, that liquidity might fade and in a quick trading situation you might get a price a percent or two below par value.

There is conversion risk – the company can choose to redeem the preferred shares in DREAM equity, to a minimum of $2/share or 95% of the market price (which is the standard 20 business day VWAP, 4 days before the conversion provision, as defined in section 4.09 on page 68 of this horrible document). With the common shares trading at $6.60 and the business fundamental not being terrible, the risk seems to be quite low that preferred shareholders will leave this situation with anything less than par value.

I have some idle cash parked in both instruments. I consider them a tax-advantaged cash-like instrument and do like the fact that they are margin-able at IB (Birchcliff at 50% and DREAM at 33%!). This is much better than putting the money in a Home Capital Group GIC (earn 2% fully-taxable interest income AND have the privilege of losing principal when they go insolvent)!

Does anybody out there know of any similar situations that relate to US-denominated preferred share securities that are “cash-like” in nature?

Dream Unlimited Preferred Shares

With the calamity hitting the preferred shareholders of Dundee Corp (of which I narrowly escaped), I have long noticed that their spinoff corporation, DREAM Unlimited (TSX: DRM) has a similar situation going on with their own preferred shares.

You will have to dig through SEDAR and look for a May 31, 2013 document that is 8783kb in size and go to page 60 of 141 in the PDF document for a legal definition of what these preferred shares are. They made it so convenient as the documents are not even made searchable with the usual control-F function on Adobe Acrobat.

They trade as DRM.PR.A and they are retractable by the corporation at $7.16/share, and redeemable by the shareholder at $7.16/share, in both cases with accrued dividends (7% coupon on a $7.16 par value). Redemption and retraction are given with at least 30 calendar days of notice.

Unlike Dundee Corp, there is no ability for DREAM Unlimited to sneak a shareholder-hostile proposal to scrap the redemption feature without a significant sweetener – if they did so, you can “vote” by exercising your redemption rights and get your money 30 days later instead of voting your shares against such a hypothetical proposal.

The only risk is the underlying corporation, DREAM Unlimited, elects to pay the redemption with common shares. The provision is 95% of the typical 20 day volume weighted average price scheme that is common to a lot of other offerings out there, or $2/share if this is the higher price. DREAM Unlimited common shares are trading at $7/share and with a market capitalization of $526 million, so a dilution of $36.7 million is not going to hammer the common shares below $2 if they tried an equity redemption – you’d likely be able to get out above par value in such an instance. The underlying business is not prone to “gap risk” (i.e. this isn’t some biotechnology company that will drop 70% one day due to a failed clinical trial), but it is in real estate development – this means that any of their properties that are not in Alberta or Saskatchewan, should be relatively stable (at least until you can get your redemption money in 30 days time).

In typical Dundee fashion, however, while the corporation is reporting considerable GAAP profits, their cash flow statements leave much to be desired. They do have ample liquidity in the meantime, having negotiated a $175 million million first-line facility with the banks expiring June 2018 and also $200 million of spare capacity on their operating line of credit which expires on June 2017. There is easily enough room to pay for a redemption of preferred shares – indeed, the fact that the preferred shares occupy a $36.7 million hole on their balance sheet probably forces them to be more conscious about this liability. I wonder why they haven’t even just bitten the bullet and redeemed this expensive capital.

In other words, the market value of this preferred share issue is going to be anchored around the $7.16/share mark as investors are able to skim off a 7% eligible dividend until such time the corporation bites the bullet and finally redeems the shares. If it goes too below $7.16, it is an easy arbitrage to buy below $7.16 and instantly redeem if you believe there is any sense of credit risk. It is as close to a risk-free 7% as it gets.

I note that the preferred shares were trading as low as $7.00 today and this was likely fueled by some investor out there getting his RBC Margin account spontaneously liquidated – it wasn’t a trivial amount either, around 40k shares worth. About 30,000 of them traded at $7.00 and somebody redeeming them back to the corporation at $7.16 made the easiest CAD$5000 on the planet. Ordinarily DRM.PR.A is not an actively traded stock and with all of the stress occurring in the marketplace, what may be “risk-free” isn’t as liquid as cold hard cash!

Anyway, I bought some shares at $7.00 today.