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Dream Office - trying to understand the implosion FWIW. Entirely opinion and speculation. 1) The focus on the West and suburban might be too narrow. It's costing just as much to lease and maintain the East: As the table shows, it's taking
about 1.1% of assets for the first nine months to hold the fort. Although if the unit price is the fort, it's up in flames. 2)
The "West / suburban is getting zero value at current prices"
commentary might have a flip side. How highly valued is the Toronto
stuff? On the cc the Scotia Plaza NAV cap rate
was indirectly
acknowledged to be 4.65% (the avg for "Toronto downtown" in MD&A is
5.1%). Most of that building is leased long term to
Scotiabank. BNS shares currently have a 4.6% dividend yield. Equity
markets are more volatile than property markets (and REITs are equities
too), but if Scotia is paying I think I'll take the shares over the
lease in terms of total return over the long term from current prices. Track record for office rent growth isn't all that hot for a lot of markets: Dream mgmt's current estimates (chart above is a bit dated): A lot of the estimated market rents for 2015 are near 2001 levels. Another example, the lease for The Bow: That's a pretty small figure, 0.75%. Over 25 years a dollar of rent will grow to $1.21. OTOH, Dream Office's Calgary downtown rents are 7.4% / 3.1% (actual / mkt estimate) below the 2001 level in the table, about a negative 0.5% / 0.2% compound rate over 15 years. Dream's actual Toronto downtown rent is a nickel above 2001 rates. To come back to the dividend versus lease comparison at the beginning, Scotiabank 15 year dividend growth history (2014 AR): And from the 2005 AR to make 15 year picture: How
is it that a low or no growth long term lease (or market rent history) is worth a 20x multiple, i.e. a 5%
cap rate? (And cap rates do not fully reflect capex and ignore G&A
expense.) Scotiabank is still growing earnings,
not as much as it used to do, and not enough for the market to ever give it a
20x P/E multiple, but a no / low growth capital intensive building is worth
almost twice the multiple as the bank? The "West
and suburban" might be getting zero value, but I'm not sure a 20x
multiple on the Toronto downtown stuff underpinning the unit price is
all that reassuring either. If you dig out some old-timey REIT annual reports from the early 2000's
and look at rent per square foot and the cap rates on acquisitions, it can be a bit of an eye opener. In some cases, mostly what's changed is that
REITs are able to pay more for the same dollar of rent because financing
is cheaper. Conditions for the banks have changed over the years as well yet sanity seems to prevail and the P/E stays 10-14x. 3) Valuation of Investment Properties Prior to Q4 2014 report, you would see this: Now you see only this: Maybe it's just coincidence that the change happened at the same time the units began to really meltdown. If you think about the difference between DCF and direct cap, this might be where the bears' perspective lies. If
you look at the table in part 2) for historical asking rents, the
Calgary market is quite volatile. A ten year DCF would capture and price
in that risk, just putting a cap rate on current NOI won't. Average
lease term of five years in a market that can go from $20 to $40 and
back to $20 in 10-15 years - direct cap could easily lead to
overvaluation. And even then, how you guesstimate the terminal value
will still make up a huge chunk of the current value. There's probably a difference between a bear's view of the NOI and mgmt's... 4) Valuation of rents DCF, which D.UN doesn't use anymore, includes the impact of the timing of cashflows. This changes what the rents look like. To cut to the chase a bit: Going w/ (1/3) x $14.94 + (2/3) x $18.37 = $17.23 for the average rent on leases commencing for the quarter. (
$17.23 / 1.08 + ..........+ $17.23 / 1.08^4) = $57.06 = PV per sf @ 8%
discount rate (pick your own) and rounded to 4 year term NPV = value of leases psf - cost of leasing psf = $57.06 - $16 = $41.06 Avg lease term is about 4 years, so $10.26/sf for something akin to net effective rent. Now, put a direct cap on that to get property value. Looked at this way, it's a far cry from the $14.94 (new) and $18.37 (renewal) in the quarterly report. * obviously there are a number of generalizations embedded in this, so take it with a big grain of salt 5) Is something up? Cooper has a history of unusual deals,
i.e. 2007 GE / D.UN split, spin DREAM out of Dundee Corp, spin industrial out of
office, buying ROI Capital and turning it into an in house DREAM fund,
finding a Korean JV partner for DRG, scoring Scotia Plaza was seen as a bit of a coup... if
anything, he's not into stagnancy and since his ten year plus
distribution growth track record for Dream Office can be summed up in
two words: four cents, it's clear he doesn't give a hoot about the
distribution. In 2007 $2.7 billion sold
to GE Real Estate, with $1.5 billion of primarily
Western assets remaining. There's a slightly similar situation today,
with $2.5- 3 billion of coveted downtown Toronto office space and $4-5
billion of office space in the West, East, and suburban GTA, a big chunk
of
which is being described by management and analysts as receiving near
zero value in the market. Is there some hidden motivation to this spin? Far fetched,
assumes unitholders are fools, yes and yes, but look at the NWH/MOB and TN/NPR
mergers that went through - if two "bad" REITs can make a "good" one,
why assume there wouldn't be votes for the reverse: one "bad" REIT can
be cleaved into two "good" ones? |
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Msg # | Subject | Author | Recs | Date Posted |
4751 | Re: Dream Office - trying to understand the implosion | iluvnascar | 1 | 11/30/2015 1:47:36 PM |