Author Topic: DRM - Dream Unlimited  (Read 7845 times)

KJP

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Re: DRM - Dream Unlimited
« Reply #20 on: September 18, 2018, 06:55:12 AM »
And earnings should increase considerably starting in 2019:

-You will get big years in condo completions in 2019 and 2020.
-DRM just got approvals for the Providence (Calgary) and Coopertown communities (Regina) which will increase inventory here starting in 2019.
-The ski hill expansion.


In addition, they are at a low point in very lumpy, but very high margin, development fee revenue in the asset management business.  So, I agree that this year should be on the low side of normalized earnings.

Regarding the book value, I know it's often used for real estate businesses, but how useful is it for a company like Dream that has a large amount of assets (Western Canada land) that not only earn nothing currently, but probably have negative carry due to taxes, etc.?  Put another way, what is the company's ROE if you use a NAV value of ~$12?  Does that ROE justify valuing the company at book value?

I also continue to question the capital allocation, in particular the lack of larger buybacks at the Dream level.  Today's announcement of a 10b5-1 equivalent plan is somewhat encouraging on this issue.




Rod

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Re: DRM - Dream Unlimited
« Reply #21 on: September 18, 2018, 09:15:39 AM »
And earnings should increase considerably starting in 2019:

-You will get big years in condo completions in 2019 and 2020.
-DRM just got approvals for the Providence (Calgary) and Coopertown communities (Regina) which will increase inventory here starting in 2019.
-The ski hill expansion.


In addition, they are at a low point in very lumpy, but very high margin, development fee revenue in the asset management business.  So, I agree that this year should be on the low side of normalized earnings.

Regarding the book value, I know it's often used for real estate businesses, but how useful is it for a company like Dream that has a large amount of assets (Western Canada land) that not only earn nothing currently, but probably have negative carry due to taxes, etc.?  Put another way, what is the company's ROE if you use a NAV value of ~$12?  Does that ROE justify valuing the company at book value?

I also continue to question the capital allocation, in particular the lack of larger buybacks at the Dream level.  Today's announcement of a 10b5-1 equivalent plan is somewhat encouraging on this issue.

In 2017 the land business earned 48M pre-tax and if you include housing the margin rises to $60M. Considering that this represents a depressed level of activity I think you can justify the balance sheet values on this alone. We also haven't seen the high value Calgary land come into development yet. That should start next year.

Spos

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Re: DRM - Dream Unlimited
« Reply #22 on: September 18, 2018, 12:43:07 PM »
In addition, they are at a low point in very lumpy, but very high margin, development fee revenue in the asset management business.  So, I agree that this year should be on the low side of normalized earnings.

Regarding the book value, I know it's often used for real estate businesses, but how useful is it for a company like Dream that has a large amount of assets (Western Canada land) that not only earn nothing currently, but probably have negative carry due to taxes, etc.?  Put another way, what is the company's ROE if you use a NAV value of ~$12?  Does that ROE justify valuing the company at book value?

I also continue to question the capital allocation, in particular the lack of larger buybacks at the Dream level.  Today's announcement of a 10b5-1 equivalent plan is somewhat encouraging on this issue.




I like this question, I think about this as well although I think it gets more complicated with a company like DRM that is involved in different sorts of businesses.  When thinking of ROE, you have to separate asset management and the ski hill from the real estate business.  And you also have to treat the investment properties differently from the development business.  And I think it’s the development business that you are talking about.  ROE here is difficult as earnings are recorded only at the end of the development process, once a lot or condo is sold.  However, value gets created during the development process as well and also if they simply made good investments in land and that appreciates in value.  So, for example, now that they received approval for Providence, that land is worth more.  However, they are not able to write this up under IFRS the same way they can write up investment properties. 

I think the way you can look at it is either ROE over a long period or market value.  FWIW, in their June presentation on pg 47, they talk about a 13% return on their Western Canada business based on sell side fair value of $1.1B (vs. book value of $577M).  I think the 13% is a little high, but I do think the land is worth more than book value.

With respect to buybacks, it would be nice to see more, but I am not too fussed about it.  They’ve been putting capital into buying Dream Office and Dream Alternatives units and into condo development instead of buybacks.  I feel they want to grow the business and maybe Toronto real estate is not where they should be investing, but the CEO owns over 30% of shares, so I take some comfort in that.

Rod

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Re: DRM - Dream Unlimited
« Reply #23 on: September 18, 2018, 01:50:44 PM »
Given the mix of assets with very different earnings recognition time frames, the best way to judge the success of DRM is probably by the annual growth in per share book value. This number is a gross underestimate of NAV but it's change from year to year is, I think, a good proxy for value growth. If per share book value grows at 15 to 20% per year than I think we can say that the company is creating value at an excellent rate. If the number is 5% then not so much.

KJP

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Re: DRM - Dream Unlimited
« Reply #24 on: October 03, 2018, 06:23:27 AM »
Here's another writeup of Dream Unlimited, though it doesn't contain anything new:  http://www.canadianvaluestocks.com/dream-unlimited-corp/
There is, however, a very lucid comment to the post from one of the participants on this thread.

There is also a discussion in the BAM thread of the implications of a GP buying LP/REIT units when there is a holdco discount.  See, e.g., Packer's post #705 in the BAM thread (http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/bam-brookfield-asset-management/700/)
His comments are a much more coherent take on the issue that I was trying to get at earlier in this thread with respect to Dream's large purchases of LP units in Dream Office and Dream Alternatives.

Spos

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Re: DRM - Dream Unlimited
« Reply #25 on: October 04, 2018, 10:19:30 AM »
Thank you for that link.  Yes, the comment to the blog post was quite good.

I do not mind DRM buying the LP units, assuming they are good values (I have an easier time seeing value with Alternatives than Office).  And I think DRM will keep these units for a long time, but I see the CEO less wedded to any asset than the BAM team.  He has made large asset sales in his career.  I would also like to see more buybacks, but I feel I can't be very critical of them in terms of capital allocation.  Performance has been good and unless the real estate market collapses, I think the next couple of years will show much higher profits.

The transactions that I see as possible in the intermediate term for DRM are an IPO/sale of the retail assets and the ski hill.

It looks like close to $1M of shares were bought back in September and they have made no purchases in the LPs since the end of July.

KJP

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Re: DRM - Dream Unlimited
« Reply #26 on: December 17, 2018, 10:13:07 AM »
I believe this theory from the Brookfield thread also applies to the Dream's continued accumulation of Dream Office and Dream Alternative units:


I see the buy at a discount & hope it closes in value investment thesis all the time but it is an illusion.  You will never close the gap. I have yet to find a situation where this occurs because you do not control the asset & there are corporate expenses.  This is not mispricing or discount unless the discount is excessive.  This discount is one reason why BAM has lagged the performance of its subs.  You would expect the asset manager of asset to have better economics & returns than the underlying assets but here you do not.  Why?  The reason is the discount associated with holding the subs & holding large stakes in the subs in the first place.  This is a drag that will only get worse the more investments they make in the subs.  I do agree discounts can be excessive, but to say they should not be there IMO is wrong, misleading & not proven out by market evidence.  Spekulatius pointed out another example of this in the GP/LP structure of MLPs & how eventually the situation became untenable & now they are restructuring.  IMO the same should happen here.

Packer

Spos

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Re: DRM - Dream Unlimited
« Reply #27 on: February 25, 2019, 11:53:28 AM »
Dream Alternatives published its annual report last week.  They are unhappy with the unit price.  They announced a $100M repurchase program over 3 years (~20% of market cap), the cancellation of the DRIP, a review of the distribution policy and that they are looking the sell the renewable asset business.  It's interesting because DRM gets management fees from Alternatives and any unit repurchases decrease that cash flow.  Presumably the pick up in unit price they expect is worth more to them.  Tender offers should be forthcoming here.

DRM is reporting tomorrow.  Would be nice to see a similar announcement, but I am not holding my breath.

KJP

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Re: DRM - Dream Unlimited
« Reply #28 on: February 25, 2019, 12:13:30 PM »
Dream Alternatives published its annual report last week.  They are unhappy with the unit price.  They announced a $100M repurchase program over 3 years (~20% of market cap), the cancellation of the DRIP, a review of the distribution policy and that they are looking the sell the renewable asset business.  It's interesting because DRM gets management fees from Alternatives and any unit repurchases decrease that cash flow.  Presumably the pick up in unit price they expect is worth more to them.  Tender offers should be forthcoming here.

DRM is reporting tomorrow.  Would be nice to see a similar announcement, but I am not holding my breath.

I'm not surprised Alternatives' share price is low.  It was created to be a yield vehicle for retail investors, but once Dream took over management they began to load it up with non-income producing development assets.  That drives down the cash available for distribution, which also likely caused retail investors to push Alternatives' price well below reported NAV, eliminating Dream's ability to grow Alternatives through secondary issuances.  Dream has also been buying alot of Alternatives, which cuts into Dream's actual economic earnings from managing Alternatives.  So, it's not clear why Alternatives even exists. 


Spos

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Re: DRM - Dream Unlimited
« Reply #29 on: February 25, 2019, 12:50:17 PM »
I think it exists because 1) Alternatives is still provides the largest part of the asset management cash flow, 2) DRM can continue to buy Alternatives units at a discount and perhaps most importantly 3) it allows DRM to increase its war chest and participate in more (and larger) investments, whether that is development projects or things like the Hard Rock casino.  The other entities (Dream Office, Global and Industrial) have much narrower mandates than Alternatives.

I think DRM think the decrease in management fees will be more than offset by any increase in the value of their Alternatives stake.  The alternative is that they don't see enough interesting investment opportunities at this point.