Dream Office Real Estate Investment Trust T.D.UN

Alternate Symbol(s): DRETF

Dream Office Real Estate Investment Trust (the Trust) is an open-ended real estate investment trust. The Trust owns central business district office properties in various urban centers across Canada, with a focus on downtown Toronto. The Trust owns and manages 3.5 million square feet of office land in downtown Toronto. Its objectives include managing its business and assets to provide both yield and growth over the longer term. Its properties are located across Adelaide Place, Toronto; 30 Adelaide Street East, Toronto; 438 University Avenue, Toronto; 655 Bay Street, Toronto; 74 Victoria Street/137 Yonge Street, Toronto; 36 Toronto Street, Toronto; 330 Bay Street, Toronto; 20 Toronto Street/33 Victoria Street, Toronto; 250 Dundas Street West, Toronto; 80 Richmond Street West, Toronto; 425 Bloor Street East, Toronto; 212 King Street West, Toronto; 357 Bay Street, Toronto; 360 Bay Street, Toronto; 350 Bay Street, Toronto; 56 Temperance Street, Toronto; and 6 Adelaide Street East, Toronto.

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Dream Office Real Estate Investment Trust > Scotia comment on transaction

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Post by incomedreamer11on Jun 21, 2023 8:51am

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Post# 35506755

Scotia comment on transaction

Lower-Than-Expected Fill Rate Could Challenge Near-Term Sentiment

OUR TAKE: Slight Negative. Dream Office announced preliminary SIB results late last night. Recall the SIB = 12.5M units at $15.50 for $194M, largely funded by the sale of 12.5M DIR units at $14.20. The SIB= ~25% of total (Class A and Class B) units o/s. D closing price last night is ~5% below the offer price. We estimate 64% of total units (Class A and B) were tendered, resulting in a relatively-low 39% fill rate. For reference, some recent real estate SIB fill-rates = 100% for BPY in Sept/20 (link) and 86% for D’s last SIB at $24.00 in May/18 (link; DRM did not participate).

While we’re fine with the “strategic trade” implemented by Dream Office (D units for DIR units) and had already reflected the positive AFFOPU/NAVPU accretion (2%-3%) from a full SIB (see our note), we chose “Slight Negative” given the relatively low fill rate + optics surrounding Dream Unlimited tendering most of its ownership position at 49% of Q1/23 D IFRS NAVPU of $31.50 may add to broader existing negative Office REIT sentiment. Our intact estimates = 29% NTM total return vs. 31% for sector.

As a reminder, we are hosting our 13th Annual Office Lunch Panel this Thursday in Toronto, including Dream Office, Brookfield, and CBRE.

The math. A total of 32.1M units were tendered, equating to ~64% of total units o/s, including Class A and B units owned by the parent, Dream Unlimited (DRM; not rated). Assuming that DRM, Artis and Sandpiper tendered a vast majority of units held, we estimate the “tender participation rate” for other D unitholders (i.e., non DRM, AX and Sandpiper) was notably less at sub-30%. We estimate the $15.50 price = an implied cap of 7.6%, above current debt costs, in our view (mid-6%ish). We’re leaving our estimates intact, heading into Q2 reporting and release of Q2 private market cap rate reports (expected in the next 2-3 weeks).

The magnitude of DRM participation is surprising to us. DRM had noted plans to participate in the SIB, although the magnitude was unclear (i.e., would be determined closer to June 19th). We had thought the disclosure (which we found interesting) could have been strategic in nature and in part driven by the existence of Artis (AX.un, SP, $9.00) and Sandpiper as unitholders (5.6M and 1.9M units, respectively, per Bloomberg). We estimate a vast majority of DRM’s ~40% ownership interest in D was tendered (pro-forma disclosed at ~33%). While that in-and-of-itself is not a challenge, doing so at 49% of Q1/23A D IFRS NAVPU ($31.50) may prove optically challenging in the short-term, in our view. While we don’t cover DRM, we had estimated ~$110M of additional desired liquidity on an NTM basis based on public disclosure, consistent with expected SIB gross proceeds.