I think Dream Impact has failed and should be significantly restructured or privatized by DRM. Issues:
1) Impact concept is too vague it can feel like a label attached after-the-fact to something that was going to happen anyway, like “100% Gluten-Free construction materials used here!” A single mandate as as Affordable Hosing or Carbon Reduction or Social Inclusion could have retail investor appeal. MPCT has some of each of those, but the “impact” of key development projects is “TBD”. What is the social benefit of the Forma condos? Are they inclusive? Are they affordable? Maybe they can promote community wellness by adding a vaginal steam room to the spa? Victory Silos, 49 Ontario, “Berkeley Properties”, and 100 Steeles are all extremely attractive developments with TBD impact.
2) Undercapitalized. Dream has put extremely attractive development sites into MPCT, but MPCT's stretched balance sheet cannot support construction. MPCT will have to share the value creation with financially stronger third party partners.
3) Overhead is too high and fee compensation is opaque. I believe MPCT deserves to trade at a substantial discount unless/until it has a new management contract with DRM with a low base fee and then incentives for value realization (like the DIR contract).
4) Segment reporting obscures understanding. The “Recurring Income” segment includes projects like 49 Ontario and 100 Steeles where all the value is really in future development. The “Development & Investment Holdings” segment includes projects that will provide future recurring income.
It might be simplest if DRM privatizes MPCT and then launches a more focused Impact vehicle in 2-3 years when some of these projects have been completed.
Thanks for your comment. Always apprecaite your thoughts Koneko.:
1) I get your point here. I think the TBD on projects makes sense - this is a relatively new mission, and it makes sense that projects owned pre-change wouldn't have impacts ready to go. Maybe some of those end up not being impact projects - Gehry in particular I see that happening. I think having multiple impact angles is helpful, though I get how a "affordable housing REIT" for instance would be viewed more attractively by the market. And you're right, a lot of these good things were going to happen anyway, but I view that as a feature (and what made Dream Alternatives so easy to rebrand) versus a bug. As some of these TBD and legacy assets finish and are sold, the impact mission becomes straighter, easier to understand, and I think the Trust becomes better as a result.
2) No argument.
3) I don't think the fees are opaque, but agree they're high. A low base fee and high incentive might be a better option.
4) The reporting segments I think are fine. Lots of similar entities, Melcor Developments is an example off the top of my head, have assets in a development segment before completion then get transferred to the recurring income segment. I think the disclosures that 49 Ontario and 100 Steeles have in the tables, and the development projects listed as "build to hold" are adequate to disclose that those projects will someday change segments. I could see some people missing that value though.
Also, no argument that launching a new impact vehicle might have been better received than rebranding Dream Alternatives. But Alternatives held all these attractive assets, many of which like you mentioned were already going to be impact assets, so the rebranding made sense that way.
Maybe the development should all be at DRM and then sold to MPCT when generation of income and impact has stabilized - as Melcor has tried to do with Melcor REIT.
Starwood has an affordable housing business with third party capital (Woodford). It has a clear mandate, stabilized assets, and predictable return. If Dream could turn MPCT into something like that then I believe it would have more likelihood of growing over time.
It's unclear to me how Dream would get there from here. What price would be fair for privatization of MPCT? It would have to reflect termination fee on the management contract. And then DRM would have to write off the contract (which it has capitalized at $43mm).
I could go on complaining about MPCT (which I own) for a while. It's difficult for investors to attribute value to the development pipeline because Dream discloses too little information about development costs and projected yields.
If we imagine a world where DRM doesn't have the fundraising concerns I mentioned, I think privatizing MPCT, keeping the development projects in DRM, then spinning off a cleaner MPCT would definitely result in the new entity being valued better in the market. Complete developments in DRM, sell them to MPCT, then MPCT is just a REIT. Even with a 3rd party management agreement, assuming a half decent cost structure, I expect that would trade at least somewhat close to NAV.
But those fundraising concerns do exist. If Dream privatized Impact, it would almost have to pay NAV just to make unitholders whole and be able to say during future fundraising rounds (and to holders of Dream Office and Dream Residential) "a takeunder will not happen on our watch" and "Investors in the Impact Trust earned a good return. Investing and earning a good return with an impact mandate is possible". If Dream is taking it private at NAV (or at least close to it), I think the benefits are much lower. If it can't be taken under, I think you let it stay public until it trades "right" in your view as the asset manager.
1Q fee expense recognized in the financial statements = $1.768mm (1.5% of equity annualized)
1Q fee expense paid in units = 451,316 units (2.7% of equity annualized)
The unit expense is the true cost to investors and then the trust has direct costs above that.
I don't think this is sustainable so the challenge is to find a resolution fair for both DRM and MPCT. I would like to suggest a solution to Cooper and the trustees, but I am stumped as to what it would be. Any ideas?
I see how that could be seen as opaque - the difference is here is of course the $1.768mm you quote is after accounting for the fees Impact pays are lower on the income statement since the units are issued at NAV but the income statement records them at market value. The true fee is closer to the 2.7$ of equity you quote, though that estimate is a bit high. We also have to consider the fees you are quoting are not just the base fees, but fees related to developments, acquisitions, financing, etc (along with some costs above as you mentioned). But still, the cost is high no doubt.
A lot of what you write here is intelligent and honestly I kind of wish I thought of it myself. But, much of it can be put under the heading of "Marketing"--what is going to attract investors? And, personally, I don't care at all. One thing that's great about being a long term holder is all you need to worry about is the value today, how that value is going to grow in the future, and what could happen to change that. On those measures I'm very confident. Also I could note that the Impact Framework that MPCT uses is the same as DRM and it hasn't hurt them--it was instrumental in winning the Quayside and LeBreton deals.
Thanks for the article Tyler, always appreciate your content on the Dream entities. For the line below, do you have a sense on how much additional debt would be taken on to complete these projects? Hard to tell based on the expected occupancy dates. Think the debt amount in the $620M EV may just be costs incurred to date.
$300,000 per apartment and $250 per sq.ft for the commercial space (those values are pretty close to the hard costs according to Altus) being completed in the next 3 years is ~$270 million.
It's unknown whether those projects will add to debt. Dream Impact has said it needs roughly $40 million to fund its developments over the next two years Some portion of that will go to those projects. A lot of that $40 million will go to other projects. If you wanted to add some amount to the EV to account for the cost of those projects you could. Call it $630 million if you want. I think the various margins of safety I accounted for make that unnecessary - for instance many projects are going to return cash over the next three years, but I didn't account for any of that and that will at least offset the cost of those projects - but I get the thinking behind it.
I think Dream Impact has failed and should be significantly restructured or privatized by DRM. Issues:
1) Impact concept is too vague it can feel like a label attached after-the-fact to something that was going to happen anyway, like “100% Gluten-Free construction materials used here!” A single mandate as as Affordable Hosing or Carbon Reduction or Social Inclusion could have retail investor appeal. MPCT has some of each of those, but the “impact” of key development projects is “TBD”. What is the social benefit of the Forma condos? Are they inclusive? Are they affordable? Maybe they can promote community wellness by adding a vaginal steam room to the spa? Victory Silos, 49 Ontario, “Berkeley Properties”, and 100 Steeles are all extremely attractive developments with TBD impact.
2) Undercapitalized. Dream has put extremely attractive development sites into MPCT, but MPCT's stretched balance sheet cannot support construction. MPCT will have to share the value creation with financially stronger third party partners.
3) Overhead is too high and fee compensation is opaque. I believe MPCT deserves to trade at a substantial discount unless/until it has a new management contract with DRM with a low base fee and then incentives for value realization (like the DIR contract).
4) Segment reporting obscures understanding. The “Recurring Income” segment includes projects like 49 Ontario and 100 Steeles where all the value is really in future development. The “Development & Investment Holdings” segment includes projects that will provide future recurring income.
It might be simplest if DRM privatizes MPCT and then launches a more focused Impact vehicle in 2-3 years when some of these projects have been completed.
Thanks for your comment. Always apprecaite your thoughts Koneko.:
1) I get your point here. I think the TBD on projects makes sense - this is a relatively new mission, and it makes sense that projects owned pre-change wouldn't have impacts ready to go. Maybe some of those end up not being impact projects - Gehry in particular I see that happening. I think having multiple impact angles is helpful, though I get how a "affordable housing REIT" for instance would be viewed more attractively by the market. And you're right, a lot of these good things were going to happen anyway, but I view that as a feature (and what made Dream Alternatives so easy to rebrand) versus a bug. As some of these TBD and legacy assets finish and are sold, the impact mission becomes straighter, easier to understand, and I think the Trust becomes better as a result.
2) No argument.
3) I don't think the fees are opaque, but agree they're high. A low base fee and high incentive might be a better option.
4) The reporting segments I think are fine. Lots of similar entities, Melcor Developments is an example off the top of my head, have assets in a development segment before completion then get transferred to the recurring income segment. I think the disclosures that 49 Ontario and 100 Steeles have in the tables, and the development projects listed as "build to hold" are adequate to disclose that those projects will someday change segments. I could see some people missing that value though.
Also, no argument that launching a new impact vehicle might have been better received than rebranding Dream Alternatives. But Alternatives held all these attractive assets, many of which like you mentioned were already going to be impact assets, so the rebranding made sense that way.
Maybe the development should all be at DRM and then sold to MPCT when generation of income and impact has stabilized - as Melcor has tried to do with Melcor REIT.
Starwood has an affordable housing business with third party capital (Woodford). It has a clear mandate, stabilized assets, and predictable return. If Dream could turn MPCT into something like that then I believe it would have more likelihood of growing over time.
It's unclear to me how Dream would get there from here. What price would be fair for privatization of MPCT? It would have to reflect termination fee on the management contract. And then DRM would have to write off the contract (which it has capitalized at $43mm).
I could go on complaining about MPCT (which I own) for a while. It's difficult for investors to attribute value to the development pipeline because Dream discloses too little information about development costs and projected yields.
If we imagine a world where DRM doesn't have the fundraising concerns I mentioned, I think privatizing MPCT, keeping the development projects in DRM, then spinning off a cleaner MPCT would definitely result in the new entity being valued better in the market. Complete developments in DRM, sell them to MPCT, then MPCT is just a REIT. Even with a 3rd party management agreement, assuming a half decent cost structure, I expect that would trade at least somewhat close to NAV.
But those fundraising concerns do exist. If Dream privatized Impact, it would almost have to pay NAV just to make unitholders whole and be able to say during future fundraising rounds (and to holders of Dream Office and Dream Residential) "a takeunder will not happen on our watch" and "Investors in the Impact Trust earned a good return. Investing and earning a good return with an impact mandate is possible". If Dream is taking it private at NAV (or at least close to it), I think the benefits are much lower. If it can't be taken under, I think you let it stay public until it trades "right" in your view as the asset manager.
Here's why I think the fees are opaque:
1Q fee expense recognized in the financial statements = $1.768mm (1.5% of equity annualized)
1Q fee expense paid in units = 451,316 units (2.7% of equity annualized)
The unit expense is the true cost to investors and then the trust has direct costs above that.
I don't think this is sustainable so the challenge is to find a resolution fair for both DRM and MPCT. I would like to suggest a solution to Cooper and the trustees, but I am stumped as to what it would be. Any ideas?
I see how that could be seen as opaque - the difference is here is of course the $1.768mm you quote is after accounting for the fees Impact pays are lower on the income statement since the units are issued at NAV but the income statement records them at market value. The true fee is closer to the 2.7$ of equity you quote, though that estimate is a bit high. We also have to consider the fees you are quoting are not just the base fees, but fees related to developments, acquisitions, financing, etc (along with some costs above as you mentioned). But still, the cost is high no doubt.
I do not have a solution.
yep ...
A lot of what you write here is intelligent and honestly I kind of wish I thought of it myself. But, much of it can be put under the heading of "Marketing"--what is going to attract investors? And, personally, I don't care at all. One thing that's great about being a long term holder is all you need to worry about is the value today, how that value is going to grow in the future, and what could happen to change that. On those measures I'm very confident. Also I could note that the Impact Framework that MPCT uses is the same as DRM and it hasn't hurt them--it was instrumental in winning the Quayside and LeBreton deals.
Thanks for the article Tyler, always appreciate your content on the Dream entities. For the line below, do you have a sense on how much additional debt would be taken on to complete these projects? Hard to tell based on the expected occupancy dates. Think the debt amount in the $620M EV may just be costs incurred to date.
$300,000 per apartment and $250 per sq.ft for the commercial space (those values are pretty close to the hard costs according to Altus) being completed in the next 3 years is ~$270 million.
It's unknown whether those projects will add to debt. Dream Impact has said it needs roughly $40 million to fund its developments over the next two years Some portion of that will go to those projects. A lot of that $40 million will go to other projects. If you wanted to add some amount to the EV to account for the cost of those projects you could. Call it $630 million if you want. I think the various margins of safety I accounted for make that unnecessary - for instance many projects are going to return cash over the next three years, but I didn't account for any of that and that will at least offset the cost of those projects - but I get the thinking behind it.
Thanks Tyler!