Dundee REIT plans to prune assets ahead of European acquisitions

A Square Foot exclusive interview with Michael Cooper

By Robert Frank

Towering after its record-breaking acquisition of Toronto’s Scotia Plaza, Dundee Real Estate Investment Trust (REIT) plans to increase the quality of its portfolio by selling off many of its properties, paving the way for overseas purchases.

“We expect to sell a lot of assets individually and then redeploy them in assets that we think our style of management would help increase the value of,” CEO Michael Cooper told The Square Foot during an exclusive interview.

After turning Dundee REIT into the largest buyer of office buildings in Canada during the past decade, Cooper said that he now sees new opportunities to acquire first-class property in Europe, particularly Germany.

Through its holdings in Dundee International REIT, the company already has a well-established beachhead in Germany, in the wake of Dundee International’s 2011 purchase of a portfolio of some 1,200 German post office properties.

“We have a chance to buy excellent quality properties at fair prices and then finance them at very low interest rates,” Cooper enthused.

“It’s a little hairy with news about Europe every day,” he acknowledged, “but I think that over the next number of years there will be a tremendous transfer of real estate ownership in Europe.

“In fact, I would say that it reminds me a little bit of what happened in Canada after 1992, where for years ownership transferred and there was good quality property available at fair prices.”

However, Cooper cautioned investors not to expect see these European opportunities realized overnight.

“Everything is much slower there. It’s a lengthy process to complete each transaction, compared to here,” he explained. “This is a long-term project, and it’s very exciting.”

Dundee’s rapid growth owes much to its circumspection. It acquired Scotia Plaza by successfully tapping into Canadian banks’ vast pool of stable, low-cost capital.

“We wanted to make sure that we [would] reduce risk,” Cooper recalled. “So when we did the deal, the plan was that we would do an equity issue and also the Bank of Nova Scotia would do a bought deal on the debt for the building. That way we would be able to buy the asset without taking on timing risk on debt or equity. That was very important to us.”

“So effectively our company just got bigger but we didn’t increase the debt on a percentage basis,” he continued. “That worked very well for us.”

Dundee REIT has had a knack for being in the right place at the right time, in a market that has supported the aggressive pursuit of cutting interest rates to the bone.

Likewise, the market has supported Dundee’s accent on prudence.

“Getting the capital lined up so that it didn’t make our business riskier was very important to us,” Cooper stressed.

“I’ve never seen a bought bond deal in real estate before. Scotia was great in doing that. They knew that we needed something like that in order to be competitive.”

Competitive indeed. With an investment bank undertaking the Scotia Plaza financing risk and Scotiabank — which rents 61 per cent of its space — committed to remain in the building for at least 13.5 years, Dundee’s main remaining risk is capital expenses: how much will it need to put into the building to retain its value?

“To us the value of Scotia [Plaza] is how it improves our company,” Cooper noted, “the value of the building and the feelings around the building make us feel really good about our company.”

“It’s good to run a company that gets more and more sound,” he added. “Scotia is one piece of the process [of improving] our company.

Though often perceived publicly as having a Midas touch, in private Cooper was modest.

 “I think that we try to target what makes sense for us and to be really efficient with our time” he conceded.

Cooper preferred to point to the value that he has delivered for his unitholders.

“We think that the return that Dundee REIT produces now—the fact that it’s about four times the bond rate—makes it very valuable,” he said.

“We are providing a lot of people with retirement income, and that is very important to us.”

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