Summary:

Dream Unlimited (TSX: DRM), a well-known real estate asset manager and development company, currently trades at a discount to fair value and fits well into the “Cheap Asset” bucket in an investing playbook. While it is difficult to argue that management is of phenomenal quality or there are significant reinvestment opportunities, the underlying business is still relatively healthy and trades at a large gap to fair value. To be clear, this is mainly a reversion to NAV play. The following points sum up the investment thesis for Dream Unlimited:

High quality fee stream from Asset Management Business: Dream holds the management contracts for three listed Dream REITs (Global, Industrial, and Alternative) and manages approximately $7.9bln in fee generating assets. This fee stream is very high margin (+80%), is recurring, and is relatively stable. Furthermore, there is an opportunity to grow underlying AUM in listed REITs (particularly in the Global REIT) and grow the asset management business. This is severely under recognized in the current market price.

High quality land ownership in Western Canada provides long runway for cash flow generation: Dream currently owns approximately 10,000 acres of land in Western Canada with only about 224 acres currently under development. Although Dream’s land and housing development business has struggled in recent years as a result of general economic weakness in Western Canada, the company’s massive undeveloped land portfolio provides an approximate 30-40 year runway of cash flow generation.

Simply too cheap: On a conservative sum of the parts valuation, I believe the business is worth $11/share (36% margin of safety). Of this $11/share fair value, I believe the land ownership accounts for about $5.50/share in value while the asset management business (including the equity ownership in listed REITs) accounts for about $6.60/share in value. Current valuations completely ignore the possibility for growth in the asset management business and recovery in the housing development business so any additional growth is essentially a free option.

1.0 – Business Description:

As we will see in the description below, Dream Unlimited is by no means a simple business to understand, which I believe is part of the reason why the valuation gap exists today.

Dream Unlimited is a Canadian real estate company that operates through four main segments: Development (includes land development, housing development, condo and mixed use development, and retail development), Asset management services, Investment and recreational properties, and Energy and Infrastructure investments. The following graphic describes the firm’s structure:

1.1 – Development Business:

1.1.1 – Land and Housing Development:

Under Dream’s land and housing development businesses, the company acquires raw land and develops Master Planned Communities which include single and multi-family dwellings and retail/commercial properties. Dream currently holds a total of 9,442 acres of land in Western Canada and is held at a cost of $575mln on the balance sheet. Of the 9,442 acres owned by Dream, about 224 acres are currently under development while the remaining 9,218 acres are either awaiting zoning approval or simply held for development.



1.1.2 – Condominium & Mixed-Use Development:

Dream’s Condo & Mixed-use development business builds condos in Toronto and mixed-use properties which include retail, office, and residential spaces. Dream’s condominium inventory consists of a total of 1,548 units that are under construction or in the pre-construction phase. It is important to note that 97% of units in inventory are pre-sold with secured financing, incrementally minimizing the risk of a turn in the Toronto real estate market.

1.2 – Asset Management Services and Equity Ownership:

Part of what makes Dream attractive is the management contracts that it owns for three listed Dream REITs (Dream Industrial, Dream Global, and Dream Alternative). Dream Unlimited also retains significant equity ownership in Dream Office, Global, and Alternative REITs which are valued at $367mln.

1.3 – Investment & Recreational Properties:

Dream owns a variety of investment and recreational properties that regularly generate NOI. Of note, Dream owns the iconic Broadview Hotel in Toronto’s East end, the Distillery District, and a ski hill in the Arapahoe Basin in Colorado. For FY 2017, Dream’s investment and recreational properties generated approximately $22mln of NOI.

The Broadview Hotel

Arapahoe Basin Ski Hill

1.4 – Renewable Energy and other:

Dream has a $55mln investment in Firelight Infrastructure Partners LP, an entity that invests in a variety of renewable energy projects across Canada. Dream’s investments in renewable energy represent an immaterial portion of total earnings.

2.0 – How does the company make money?

The following charts breakdown revenue and net income by segment:



Dream makes the majority of its income in three main business segments: Land Development, Housing Development and Asset Management Services.

2.1 – Land and Housing Development:

Under this business, Dream converts raw land to the stage where homes and commercial buildings may be constructed on the land. After converting the land into lots (i.e a plot of land upon which homes or commercial buildings may be built), the lots are sold to third party developers or transferred to Dream’s Housing Development business. Given that the Land Development business transfers land to the Housing business, it makes sense to consolidate both segment results and interpret their results as one. Both of these segments account for about 65% of revenues and 57% of net income. Both segments have a consolidated net margin of 24%.

2.2 – Asset Management Services:

As mentioned in the business description section, Dream manages four public REITs while also managing some third party assets. In aggregate, Dream manages about $7.9bln of fee-earning assets. Dream receives a base management fee (ranging from 0.25% and 0.35% depending on the fund) and acquisition/financing fees when funds complete a transaction. Dream’s Asset Management Business represents only 12% of revenues but has a disproportionate representation in net income (34%). This is largely due to the high margin nature of this business (about 80%).

2.3 – Other segments:

The remaining 23% of revenues or 9% of Net Income is represented by Condo development and income received from investment/recreational properties owned by Dream.

3.0 – Brief History:

Dream Unlimited has its roots in the iconic Dundee Corp. Ned Goodman (founder of Dundee Corporation and the Goodman family patriarch) and Michael Cooper (Dream Unlimited’s CEO) helped develop Dundee’s real estate business in 1996. Mr. Goodman and Mr. Cooper maintained a mentor-mentee relationship while Mr. Cooper ran Dundee Corp’s real estate business (previously known as Dundee Realty Corporation). Under Mr. Cooper’s leadership and Mr. Goodman’s guidance, Dundee purchased large tracts of land in Western Canada, developed condos in Toronto, and managed the Dundee family of REITs (now known as the Dream family of REITs). In 2013, Dundee spun off its real estate business in an IPO in what is now known as Dream Unlimited.

Since then, Dream has compounded book value per share at an annual rate of 20%.

Taking a look at the stock, Dream has de-rated significantly from its high of $17/share in 2014 to $7.70/share today.

This is largely due to the slowdown that was experienced in the land and housing development businesses as a result of weakness in Western Canadian economies as oil prices crashed.

Additionally, Dream Office REIT’s management contract was internalized in 2015, taking away a high margin revenue stream from the Asset Management business. 2014 and 2015 were rough years for Dream Office REIT and investors questioned the alignment of its general partner (Dream). As a result, Dream was forced to internalize the management contract. However, it is important to note that the Office REIT management contract was internalized at a whopping 7x trailing fees, awarded in the form of Dream Office units which were trading below NAV.

Today, Dream continues to develop its land holdings in Western Canada, manage the listed REITs, and build out investment properties that generate NOI to smooth out overall earnings of the business.

4.0 –Thesis:

4.1 – High quality fee stream from Asset Management Business:

As mentioned in the business description, Dream owns the management contracts for three listed REITs (Industrial, Alternatives, and Global). There are three primary reasons for why this portion of the business is attractive: 1) Very high margin with significant operating leverage 2) Recurring and sticky 3) Runway to grow AUM and ride the secular trend towards alternative asset classes.

Part of what makes this an attractive part of the business is that it is very high margin and highly scalable (i.e as AUM grows, there is material operating leverage). Taking a look at the asset management business net margin, Dream has been able to expand margins from 67% to about 80% in under five years.

Additionally, this revenue stream is fairly sticky (ie. the management of the listed REITs will most likely not be outsourced to another firm) and is recurring. Unlike the pressures that most public equity managers face, Dream cannot be replaced as an asset manager by a passive solution. Furthermore, the recurring and steady nature of this segment offsets volatility and lumpiness in the housing and land development businesses.

Furthermore, Dream is positioned well to take advantage of the increase in demand for alternative asset classes. AUM in alternative funds have grown by an annual rate of 11% over the past decade or so and are expected to continue to do so as institutions and individuals look for diversity and outsized returns outside of traditional fixed income and equity funds. Dream has a gem in its Dream Global REIT because it is one of the only publicly traded REITs that offer Canadian investors international real estate exposure. There is a runway for Dream (specifically the Global REIT) to grow AUM.

4.2 – Large land ownership provides long runway for cash flow generation:

While Dream’s land and housing business has struggled in recent years as a result of a slowdown in Western Canadian economies, the economy in Western Canada has shown signs of recovery and the housing business has returned to growth. As mentioned above, Dream owns an aggregate of about 10k acres in Western Canada, with all land situated within well-known city limits. This land was purchased for a total of $575mln. Management estimates that the land is worth multiples of what is was purchased for in the 90’s. While land and housing development businesses are generally negative carry businesses, Dream’s current valuation does not appreciate any upside from a recovery in Western Canada. We are already seeing a recovery in this business as revenue and net income in both land and housing has returned to growth. In 2017 we saw revenue grow by 53% and net income by 71%.

4.3 – Simply Too Cheap: Out of all the thesis points, perhaps the most compelling is the valuation. As we will see in the next section, under fairly reasonable assumptions, DRM trades far below its NAV.

5.0 – What is the company worth?

Given the many disparate businesses of Dream, it makes sense to do a sum of the parts/liquidation valuation. As you will see, under very conservative assumptions, Dream trades at a very large discount to fair value. The following graphic summarizes the valuation for Dream:

5.1- Land and Housing Development Business:

Under my NAV model, I conservatively assume that the land is worth what the company originally paid for it – $575mln. Additionally, in the housing business, I assume that the housing inventory is fairly valued.

5.2 – Asset Management Business and Equity Ownership in Listed REITs:

Under the asset management business, I apply a 9x earnings multiple on trailing Asset Management Net Income of $36mln. Under this assumption, the asset management business is worth $325mln. This is a more than reasonable assumption given that most asset managers in Canada (both public equity and alternative asset managers) trade at low teens multiples.

Dream also owns about $367mln worth of shares in listed Dream REITs.

5.3 –Investment and Recreational Properties:

Given that this segment represents highly cyclical and seasonal real estate assets, I applied a conservative 12% cap rate on $22mln of trailing NOI. This gives us a fair value of $179mln. It is important to note that, as Dream develops its land in Western Canada, it will build and own mixed-use commercial property in master planned communities. This will add significantly to the NOI generated under this segment.

5.4 – Other:

The remaining $570mln or so in asset value comes from condo inventory and other assets which consist of cash, receivables, and other small asset accounts.

In aggregate, the business holds about $2bln in assets and about $950mln in liabilities. This gives us a NAV or liquidation value of $1.1bln or $11/share. Under a downside case, I would assume a write-down on the value of land (30% haircut) and lower the multiple on the Asset Management Business to 7x earnings. Even under these assumptions, fair value comes out to $9/share or a 7% margin of safety.

As you can see, Dream trades at a very large discount to fair value under extremely conservative assumptions.

6.0 – Risks and where I could be wrong:

6.1 – Management overhang and investor perception: While Michael Cooper has created value for many shareholders, he has also destroyed value for others. Many investors have been burned on Dream’s Office REIT in ‘14/’15 when the real estate market turned in Western Canada. Mr. Cooper has also been known to be notoriously misaligned with shareholders. For these reasons Mr. Cooper’s reputation as a manager and steward of capital may be a material barrier to rerating. It is important to note that Mr. Cooper has rectified the majority of the alignment issues (e.g collapsing of convoluted share structure with Sweet Dream Corp, internalizing Dream Office REITs management fee, and increasing share ownership of listed REITs).

6.2 – Deterioration in Western Canada economic health: As we saw in 2014/2015, a deterioration in general economic health in Western Canada has severe impacts on the earnings of Dream’s land and housing development businesses. Further deterioration could not only impact the earnings of the business but could also impair the value of the underlying land that Dream owns. To account for this possibility and to be conservative, the base case NAV assumes that the land is worth what they originally paid for it ($575mln).

6.3 – Indirect exposure to Toronto RE via ownership in listed REITs: It is no secret that Toronto real estate is an expensive market. As a result of Dream’s ownership in listed REITs and Condo development projects, Dream has indirect exposure to Toronto real estate.

6.4 – Limited float leads to difficulty in institutional interest: While I have come to the conclusion that Dream is a cheap stock, this information does not benefit me unless another investor sees eye to eye with me. Perhaps one of the biggest barriers to a re-rating in the stock is the limited float combined with relatively small market capitalization. Currently, Dream’s float stands at a little less than 45% of shares outstanding (when including other large institutional holders). Limited float limits the ability for additional institutional interest and a subsequent re-rating in the stock. One of the primary drawbacks of a NAV re-rating play is that the longer it takes for the stock price to converge to NAV, the lower your IRR – time works against you.

7.0 – Catalysts:

Perhaps the most realistic catalyst for this name to re-rate to fair value is for the business to post higher headline EPS growth. The asset management or housing/land development business will drive this growth and will help attract the attention of other mainstream institutional investors. At this point, it seems like investor perception’s of DRM and Mr. Cooper are what is holding the stock back from re-rating. Mr. Cooper has rectified many of the alignment issues that his business had in the past. Growth in headline EPS will cause investor sentiment to turn and get behind Mr. Cooper. In the meantime, Dream is aggressively buying back shares.

8.0- Conclusion:

While this is by no means a traditional “compounder” or phenomenal business, the firm is simply too cheap. Dream provides a healthy risk reward with a visible catalyst for re-rating.

Disclosure: The author is currently an owner of Dream Unlimited (TSX: DRM). Please perform your own due diligence.