Dream Office REIT chairman Michael Cooper.Simon Willms/The Globe and Mail
Michael Cooper presides over an incredible shrinking real estate empire.
But for someone who has just gone through one of the more difficult periods of his professional life – unloading billions of dollars' worth of property, including one of Canada's tallest skyscrapers – he is surprisingly upbeat. Optimistic, even.
Maybe that's because investors are beginning to reward Mr. Cooper for the massive changes he has brought to Dream Office Real Estate Investment Trust in a restructuring that has gone on for 18 months. In February, 2016, the REIT owned property worth $6.1-billion. It has since sold more than half of that portfolio, but its shares are up 45 per cent from their early-2016 lows.
"The thing is, when you make your company bigger, everybody's excited and you're hiring people," Mr. Cooper, the REIT's chairman, said.
"But when you make your company smaller, even though it's the right thing to do, it's just much harder," Mr. Cooper said in an interview at the company's main office in Toronto.
Dream Office REIT's grand restructuring was prompted in part by the crash in oil prices and investor confidence in Alberta. The REIT was heavily exposed to what became one of the worst markets for office space in the country; property values tumbled for the 45 properties the company owned in the province. The company announced earlier this year that it would sell 12 buildings in Calgary and Edmonton, valued at $200-million.
"There are investors that are happier now that they've improved the company and that it's more attractive now than it was previously, primarily because the risk has been reduced dramatically," said Mark Rothschild, an analyst at Canaccord Genuity who covers the company.
Now, to adapt to an increasingly competitive commercial real estate landscape, Mr. Cooper says the company is tilting its focus onto its stock in downtown Toronto. In June of this year, the REIT sold off its remaining 50-per-cent stake of Scotia Plaza, a 68-storey bank tower in the heart of Toronto's financial district, after five years of ownership. It was in that building the company got its start on the 56th floor.
When Dream Office REIT bought Scotia Plaza in 2012 for about $1.3-billion, the company was receiving a 7.2 per cent return on their equity according to Mr. Cooper. When they sold the rest of their stake, he says the company was receiving an 8.5 per cent return on equity over all.
While it wasn't the "home run" he was looking for, he said he was happy to sell it for a "decent" price and make some money along the way.
The REIT's chief sees a trend across the board of more conservative spending and cost cutting by public and private organizations that will factor into the company's next moves. "A big cost is space. Anything they can do to be more efficient face falls on the bottom lines," Mr. Cooper said. "So, tenants are very fierce to reduce their footprint and that's not so good for [the office industry]."
Nearly half of Dream Office REIT's current portfolio is located in downtown Toronto, including Adelaide Place and the Victory Building, where there hasn't been any slowdown at all. Vacancy rates are the lowest they've been in years. By focusing on the money-makers the company has there, the REIT has tried taking a quality-over-quantity approach. "In very simple terms, we want to have buildings that tenants want to be in," Mr. Cooper said. "Not buildings that you have to induce them to come into."
What this means for the company as it moves forward is redeveloping what it has. While the company and analysts, including Matt Kornack of National Bank Financial, have identified some properties that could have redevelopment opportunities, such as the Aviva and 438 University Avenue buildings in Toronto, getting to that step could take years.
"They've dealt with the capital structure side and now they like what they own," Mr. Kornack said. "But executing on redevelopment, it's not going to be tomorrow."
Mr. Cooper said it could be two years before Dream Office REIT can start a new project. As for what a redevelopment project could look like, the trend, at least in Toronto, is moving toward mixed-use buildings. While the REIT doesn't have anything in the works yet, Mr. Cooper pointed to a development at 488 University Ave. in Toronto as an example that he plans to learn from. Amexon Development Corp. and Core Architects Inc. are building a 37-storey condominium atop of an existing office building that has stood in that spot since 1968.
It's the kind of resourceful approach Mr. Cooper hopes to emulate when he figures out what do with his prime assets. "Real estate is an incredibly creative business," he said. "You could look at something and everyone sees something different."