Tag: AX

Dream Office REIT SIB

An interesting financial gamble just commenced yesterday evening.

Dream Office REIT (TSX: D.UN) owns 28 properties (2 under construction), and currently about 63% of the square feet is lease-able in downtown Toronto. The consolidated portfolio is 80% occupied (84% with commitments), with the Toronto segment at 88%.

Just like other office REITs, D.UN’s unit prices have gotten killed over the past year for well-known reasons.

On D.UN’s balance sheet, their primary assets are $2.39 billion in investment properties, and about 26 million (effective) units of Dream Industrial REIT (TSX: DIR.UN) (fair market value: $383 million at March 31, 2023). There is also about $1.27 billion in debt. Some of the debt is secured with the DIR.UN equity. The net equity is $1.5 billion, and with 52.2 million diluted units outstanding, gives a net asset value of about $29/unit.

They announced they will be selling about half (12.5 million units) of their DIR.un for $14.20 a piece ($177.5 million gross) and then commence a SIB for 12.5 million of their own REIT (24% of diluted units outstanding) for $15.50/unit. This is $194 million gross.

A typical bought deal would cost about 4% of the gross, so D.UN is paying about $7 million for this transaction, plus another amount for the legal fees for the SIB, so let’s round it to a $200 million dollar transaction.

D.UN shot up from $12.61 to around $15.00 per unit today in response – clearly some arbitrage potential being priced in.

The $200 million dollar question is (and this applies to all of these office REITs) whether the $2.4 billion in properties on their balance sheet is actually worth $2.4 billion.

If so, Dream is trying to buy dollars for half-dollars.

If the properties are worth 71% of the stated value, then the proposition is break-even at best (not factoring in the leverage factor and lost income from the ownership of DIR.un).

If the properties are worth less than 71% of the stated value, then this is a value-destroying proposition.

Another interesting factoid is that Artis REIT (TSX: AX.UN) and related entity Sandpiper jointly own about 6.8 million units of Dream Office REIT. Will they tender?

This will be interesting to watch. I have no skin in the game here – in general, I am adverse to deeply leveraged entities in our existing macroeconomic environment.

The gong-show at Artis REIT

There’s a lot that’s happened over the weekend in the Canadian finance world, so I’m just going to do some more quick posts.

Artis (TSX: AX.UN) has consistently shown on the top tiers of my investment screens, but I’ve avoided them for some reasons that Sandpiper is bringing up – it was very obvious that the top management was mostly entrenched and very handsomely compensated. The property portfolio itself was a hodge-podge and did not seem in any manner to be exceptional (either negatively or positively), with roughly half of it in the USA and half in Canada (by NOI), and mixed usage.

A couple years ago (November 2018), Artis invoked a somewhat different capital allocation strategy, where they cut their distribution by nearly half and initiated a common unit buyback, coupled with asset divestitures. This threw away a bunch of capital in exchange for increasing the debt. One act of capital allocation lunacy was throwing a ton of money away by redeeming their G-series preferred shares for par (June 2019) when the market value was around 80 cents on the dollar.

Artis almost managed to sell itself off, highly rumoured to Morguard (March 2020), but this thing called COVID-19 derailed things. There was also clear disagreement on the proposed transaction (resulting in a Trustee resigning shortly after). I’d speculate management leaked the news to either kill the deal or to induce higher bidding among the rumoured suitors.

Finally, in September they announced a “debt reduction initiative” (which contradicts the leveraging strategy they took in November 2018) and a spin-off of their retail properties.

This apparently was the last straw for Sandpiper, which launched a proxy battle and had a special unitholders’ meeting called.

Today, Sandpiper announced they have 35% unitholder support for their slate of trustees, which is likely to result in them sealing the deal against management if it comes to a vote in said meeting. Given that 62% of unitholders voted in the September 2020 annual general meeting, controlling a 35% block is likely to be a majority of votes.

Management set a very late date for the requested special meeting (February 23, 2021), which gives them time to maneuver around, but they are likely to make it as painful as possible for the existing unitholder base before they make an ungraceful exit. There is a possibility that they will do a golden handshake deal to end things quicker. Either way, when the change occurs it will take a considerable amount of time for new management to unwind the entrenchment of the soon-to-be outgoing management.

No positions, but this is a fascinating case from a corporate governance perspective.