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Dream Unlimited (OTC:DRUNF) is primarily an asset manager of real estate assets based in Canada. The business is a very high quality one, where the company receives significant fees for managing the Dream family of REITs on long-term contracts. Asset management is not a very capital-intensive business, and one that is very valuable. The company trades with greater liquidity in Canada under the symbol [TSX:DRM]. As it reports in Canadian dollars and primarily operates in Canada, all figures in this report are in Canadian dollars unless otherwise noted.
Dream Unlimited is diversified among a variety of real estate asset types. It owns units in two REITs and one trust, all of which it manages under management contracts.
- Dream Industrial REIT (OTC:DREUF) [TSX:DIR.UN] owns industrial real estate in Canada, and has recently started buying it in the USA as well.
- Dream Office REIT (OTC:DRETF) [TSX:D.UN] owns office buildings across Canada. 29% owned
- Dream Hard Asset Alternatives Trust (DDHRF) [TSX:DRA.UN] is an alternatives vehicle, which owns assets including power generation, real estate, and loans. 26% owned
Dream Unlimited manages all of these entities in exchange for fees (except for Dream Office) and expense reimbursements, and owns a stake in all of them. It also owns a great deal of land in Western Canada. It develops that land into lots, which it sells, as well as builds houses, retail space, and multi-family space. They also own land in Toronto where condominiums are being built, as well as some miscellaneous assets (ski resort, small power assets, etc).
Since my previous piece on the firm nearly three years ago they sold off a previously owned REIT (Dream Global) and were paid a significant amount for the asset management contract.
I am going to analyze and value Dream Unlimited piece by piece, because the different segments have completely different business drivers and appropriate valuation methods.
Recent History and Background
I think management has done a relatively good job on the capital allocation front. They issued shares at $31.40 in 2014 (adjusted for share consolidation), and did buybacks well below that price, including over 10% of the firm repurchased so far this year. With the current share price of $20.21 being considerably below book value, repurchases are extremely accretive here. Trust in management is important, because the CEO controls Dream Unlimited, with a 40% interest in the traded shares and 99% interest in multiple vote shares. Regular shareholders would have tag along rights if control of the company was sold, which is a bit of an offset. I’m not a fan of multiple voting shares in general, but feel the current value outweighs the negative implications.
Management has also been willing to sell assets when that has made sense (vs empire building) which I think is an important consideration. This has included selling one of their managed/partially owned REITS, the former Dream Global REIT. Dream Unlimited received $395 MM of separation payments as part of that transaction. In my previous piece, I valued the public asset management agreements at $456 MM for all of them, and they sold one for nearly the entire amount. That suggests my previous estimate of 20x earnings is conservative, but I’m going to keep the metric as I prefer to leave a bit of a margin of safety.
On the asset sale side of things, they have also recently sold their power business for $70.2 MM, nearly half of which was profit on the sale. I had hoped they might be able to build another managed subsidiary out of this segment, but the profits on sale are nice.
Finally, they have done well through the COVID-19 pandemic, collecting 88% of rent in the 2nd quarter. The one segment that was badly affected was their ownership of the Arapahoe basin ski area, which had to end its season early.
Western Canada Land Development
This division was the original backbone of the firm, but has begun to wane in importance in recent years. The economy in the areas they operate has been poor for a number of years, largely due to continued low oil prices, which are a major driver of the area’s economy. There are some green shoots in this division, however, as they have recently broken ground on a new neighborhood in Calgary. By pre-selling the initial 36 acres of lots, they indicated they will be able to complete site servicing here without injecting more capital into the division. My sense is that they have this business in harvest mode – they aren’t putting new capital into buying new land, and have been strategically selling parcels to other developers. They recently (but pre-COVID-19) sold a 480 acre pre-development parcel in Calgary for $84 MM. That is $175,000 per acre for a pretty big parcel of land.
That parcel was probably slightly closer to development than their average piece of land, but they also have some land that is further down the road to development, and that increases the present value dramatically. Therefore, I’m going to haircut the $175,000 per acre price by 50%. While somewhat arbitrary, it acknowledges that not all the land will be salable immediately. I will only apply this valuation to the 8,600 acres that are in the large master planned communities (at varying stages of approval), leaving the 500 other acres unvalued and in the “margin of safety” bucket.
That suggests a value of $752 MM for their land development business. They have an inexpensive operating line secured by the assets of this segment with $278 MM in capacity (undrawn, but used for letters of credit with municipalities to guarantee development expenditures). Given the low loan-to-value Canadian banks are likely to lend on undeveloped land, that suggests the valuation here is reasonable.
My favorite line of business is their asset management business. They are the manager of three other public companies (listed above) and are also starting up private real estate funds. That will allow them to begin collecting fees from private investors (pensions, family offices, etc) if they can gain scale in that business. They have indicated they don’t expect their private asset management to be profitable immediately, so I’m not adding any value for it, but mention it as a possible catalyst to the upside.
The public asset management is profitable now. They demonstrated the potential for large gains when they sold the Dream Global management contract (and the REIT!) but I’m going to value this as a going concern, which is more conservative.
The asset management business had $4.8 MM of net margins during the first half of 2020. They also had $2.5 MM of fees from Dream Alternatives in the first six months of 2020, which are eliminated under consolidation because they consolidate Dream Alternatives. Since they don’t own 100% of Dream Alternatives I’m de-consolidating it for my valuation and marking it at market prices, so the management fee can be added back. I’ll assume $2.0 MM of that is margin, so $6.8 MM of margin in the first half of 2020.
I’m going to annualize that figure and assume $13.6 MM of margins from this business going forward. While I would normally use a full trailing year, that would include some margins from Dream Global (which they sold) and so this is more accurate. I think a 20X multiple for an asset manager with permanent capital is appropriate, so I’m marking this segment at $272 MM.
There is also potential upside here, as Q2 especially was a terrible quarter for this business. Because they earn fees for managing developments, and development activity largely stopped due to COVID-19, their fee stream was down considerably. If it recovers (which seems likely) this estimate will be conservative.
Dream owns 17.6 MM units in Dream Office and 16.3 MM units in Dream Alternatives. They also control Dream Industrial, but that control stake is held in Dream Office, as Dream Industrial was a spin-out from Dream Office. At current market prices of $19.53 CAD and $5.11 CAD those stakes are worth $427 MM. I’m going to use the market prices here, which I think is reasonable as anyone who felt either entity was dramatically overvalued could always hedge that exposure out. These entities have both had their share price decrease dramatically as a result of COVID-19, so there is possibly some upside in these values as well.
Arapahoe Ski Hill
One of Dream Unlimited’s very first assets was the Arapahoe ski resort. The resort is more of a local’s hill, with no lodging at the base. It is also one of the highest ski resorts in the country, and that, combined with its orientation gives it one of the longest seasons in the country – most often open from October to June. It is also one of the closest resorts to Denver, which provides it with another advantage – that of travel time. The combination of these factors seem to me to provide it with significantly less risk from climate change than many of the other ski resorts, for a few reasons. The first is that the higher elevation and longer season mean that even if the world were to get warmer (something I’m mentioning as a risk but would prefer not to argue about) it would have a shorter ski season, while other resorts might find their season eliminated. The second reason is their relatively lower overhead. Because they aren’t supporting a huge infrastructure and depend less on fly in traffic than the mega-resorts in the area, they are less susceptible to any reductions in travel demand as a result of COVID-19.
The mountain’s earnings naturally vary with snowfall, but have been growing steadily over time (until their recent COVID-19 shutdown). In 2019 they had net margin of $6.1 MM from the ski hill, which I think is a reasonable go-forward estimate for post-2020. 2019 was affected by a change to their pass plan that pushed more skiers to visit later in the season (and the late season was cancelled due to COVID-19) so I think it’s a reasonable go-forward number. I’ll use a 10X multiple on that number for conservatism given that demand for leisure activities is somewhat unsure in the near term, suggesting a value of $61 MM for this segment.
Condominium Development in Ontario
Dream Unlimited is a developer of condominium properties in Toronto and Ottawa. This is likely the most controversial segment of their operations from a valuation point of view, because of the prevailing view that the Toronto housing market is in a bubble. I don’t particularly disagree with this view, and the material increases in Toronto housing prices over the last few years have benefited the company, as it has been able to turn its Toronto assets into cash quickly and at good margins. I’m going to value their condominium inventory at their balance sheet value of $268 MM. I think this is conservative, because they have regularly had significant positive margins on development. Thus, even if the housing market contracts in their markets, it seems likely they will be able to recover their cost basis in these assets. This also excludes the significant value they have in land held for development for condominiums, which makes it a conservative mark.
This segment is properties they have developed or purchased as long term investments. This includes grocery anchored strip centers on neighborhoods they have developed in Western Canada. They also recently added a stake in a Dallas apartment complex.
Book value of these assets (after de-consolidating Dream Alternatives) is $375 MM. They have used average capitalization rates of 5.2%-5.7% when estimating fair value of these properties. That seems at least directionally reasonable given the quality of the assets, so I’m going to use that value.
Cash and Debt
The company has $32 MM of cash on their balance sheet, and $703 MM of debt. They also (subsequent to their last quarter) sold their investment in a private fund for $70 MM, so I’ll add that to their cash balances as well. So for cash and debt I’ll subtract $601 MM.
Any time I do a sum of the parts analysis I like to acknowledge that the firm has ongoing G&A. Dream (net of Dream Alternatives) had G&A of $1.2 MM last quarter, or $4.8 MM annualized. Because I’m not deducting that anywhere else, I think it is reasonable to capitalize it and deduct it as its own segment. I doubt G&A goes down (it rarely does) so I’m going to use a 20X multiple, for a $96 MM deduction.
The company has a grab bag of other assets, which are on their balance sheet as “Other Financial Assets” and “Equity Accounted Investments.” I’m going to remove their stake in Dream Office and the fund they sold, both of which I accounted for earlier. What’s left is mostly mortgages on properties they have sold and equity stakes in development assets. This includes some of their best assets, like the Distillery District in Toronto, so it needs to be included. However, there isn’t really enough information to do a fair value here. I’m going to arbitrarily haircut this by 30%.
The biggest risk here is probably that COVID-19 impairs their various assets. They are diversified, with assets ranging from retail real estate to condominium development to a ski hill, but they could all be affected by COVID in various ways. If condominium living falls out of favor that would hurt them, as would a long recession in Western Canada (from COVID-19 induced low oil prices). If people stop travelling/skiing that would hurt that segment. However, I think their diversification helps them, and their assets tend to be on the less affected side of each segment. As an example, a locals ski hill is probably better than a destination resort, and grocery anchored strip centers are probably the best form of retail.
The biggest risk is probably a recession in Western Canada, as that segment is still the largest portion of the business by value.
Source: Author’s Analysis
The sum of the parts works out to over $35 CAD per share, which is very attractive upside given their current share price of $20.34 CAD. The vast majority of the debt is secured by specific properties, so they are very much under-leveraged. They have been buying back stock, which is very value accretive at the current prices. Also, their expansion into private asset management is hurting current results (due to startup costs) but has the potential to be a very lucrative line of business.
Michael Cooper controls the firm through multi-voting stock, which means that trusting their execution is important here. However, they have navigated the pandemic well and he is well aligned with significant ownership. I think in this case the value of the owner-operator exceeds the loss of control, but obviously different investors will have different views on that.
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Disclosure: I am/we are long DRUNF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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