Last month Dundee REIT released its fourth-quarter and year-end results, marking the end to a “monumental year for Dundee REIT,” in the words of Chief Executive Michael Cooper.
During 2011, Dundee purchased $1.6 billion worth of assets, raised $629.5 million in four equity offerings over the course of the year, primarily to finance its string of acquisitions. It ended the year with a $2.3-billion market cap, up 53% over the prior year – due to a 41% increase in equity outstanding and the 8% increase in the trading price of Dundee`s units.
Cooper told investors on a conference call following the release of the results that the torrid pace of acquisitions, which will soon make Dundee the country`s fourth-largest real estate investment trust, could play less of a role in future growth. “Although we have grown dramatically by acquisition over the last few years and we anticipate that we will continue to find more opportunities to grow, we expect that internal growth driven by occupancy gains, increased rental rates and operating efficiencies, are likely to provide a more significant contribution to our growth than in the last few years.”
Dundee REIT also kicked off 2012 with the mid-January acquisition of Whiterock REIT in a deal worth more than $500 million.
The Whiterock portfolio, at 7.5 million square feet, is a good fit with Dundee`s current holdings, will reduce its cost base and is expected to generate more value in the form of “accretive refinancing and below market in‐place rents,” Dundee said with the release of its fourth-quarter results.
Cooper added on the REIT`s investor call that the Whiterock purchase will provide “relatively attractive value at a 6.5% cap rate” that rises to an equivalent 6.8% cap rate taking into account savings on transaction costs due to the way the purchase was structure.
With the Whiterock takeover, Dundee is creating a permanent asset disposition team to its management group so that it can continuously evaluate its portfolio and identify assets that should be sold. Dundee plans to sell Whiterock`s retail assets and select office properties, netting an anticipated return of about $150 million, the Dundee REIT CEO said.
Growing Asset Base for 2012
Following the closure of the Whiterock transaction, Dundee will have assets of $6 billion. Even with the sale of certain Whiterock properties, the company predicts a net increase in assets over the balance of the year.
Cooper predicted on the call that the demand for real estate in Canada will continue, driven by historically low interest rates, declining vacancies and higher rents which are raising operating income. As well, the raising appeal of real estate for investors is spurring prices.
“About five months ago we saw a dramatic change in the value of private assets,” Cooper said. “First assets traded a bit below a 5.5(%) yield and now transactions for good quality assets are happening between 4.8 and 5.2% yields.”
Dundee expects that trend has legs. “I think that there will be billions of dollars of assets that actually trade at these prices this year, so the transactions cannot be dismissed as unique,” he said. “Compared to the uncertainty of other investments and the expectation for stable and increasing income from real estate, the returns at these cap rates must provide the allocators of large capital with a compelling investment.”
Cooper told investors that the Canadian economy continues to chug steadily along in slow growth mode, that the federal government is in relatively good shape and making policy changes that are good for the long term prospects of the industry and said the U.S. economy is doing better than most people anticipated which should bode well for the Canadian economy.
His comments echoed those he made at the RealCapital conference in Toronto last week, when he said that the REIT is more focused on internal changes than possible external matters and is focused on building its capabilities to become a much larger entity. “That is for Dundee REIT, with Dundee International (its foreign asset spinoff), we want to diversify, get it to a scale and get some real benefits from the size,” he said.
Cooper said at the conference Dundee REIT is not too focused or worried about what might happen in the future. “We don’t know when those storms are going to hit and it really doesn’t matter. What we do is just deal with the facts that we have. It is a great financing environment, I haven’t seen any lack of liquidity on the debt side in Canada and if it happens tomorrow we have a good debt profile now….If we can’t find anything that works we will either not do anything or sell but we don’t really change our strategy that much.”