Real estate executives are by their nature an optimistic bunch, but before Dundee REIT CEO Michael Cooper made his optimistic predictions for 2012 and beyond in a recent investor conference call, he prefaced it with a look back at comments his firm had made in previous third quarter earnings reports over the past five years.
The year 2006 was the first that Dundee began to see some worrisome trends which is shared with investors and analysts. By 2007 Dundee was “less confident which was part of the thought process that led to the sale of two-thirds of our portfolio.” Even then, Dundee was “way too optimistic about the economy and rental rates.” Luckily Dundee was sitting on a pile of capital.
The timing of the 2008 call, two months after Lehman Bros. collapsed and the general economic outlook was darkest “we believed that the worst was behind us,” Cooper told investors.
“In 2009, we saw the improvements that we were looking and had begun to once again grow our business externally” and the company no longer thought it necessary to keep emergency cash. A year ago, Dundee forecast that higher occupancy and rental rates would mean that property NOI (Net Operating Income) would increase faster than expected in both its portfolio and new acquisitions.
“I think the assessments we have made over the last five years were pretty good and we have managed our business in a thoughtful and steady manner,” the Dundee REIT chief said.
He said that people should not rule out major acquisitions from Dundee, even after massive acquisitions over the past two years. “At the end of 2010 we were very excited to have acquired a record $900 million of properties. At that time we had no idea that we would find some of the best opportunities ever this year.”
In the most recent quarter Dundee REIT spent $1.0 billion on acquisitions, consisting of the 2.7 million-square-foot Blackstone Portfolio and 700 de la Gauchetière, a 1.0 million sq. ft. Class A office building in Montréal. Its acquisitions increased its asset base by over one third. In the first nine months of the year, Dundee added 6.5 million sq. ft., primarily office properties, for a total of $1.5 billion.
As Dundee`s acquisitions show, the REIT remains upbeat about the future. “This year there is a lot of noise, but we do remain optimistic,” he added, describing the political and economic drama in Europe and the U.S. as the “Jersey Shore of the Atlantic.”
Despite the sound and fury in much of the developed world, he does not foresee a return to the down days of 2008. “It seems to me that we don’t have the same kind of problems that we had a few years ago. There are lots of areas that are improving the developing world and slow growth is the new norm.”
As for “drama free” Canada, “our government and banks have more flexibility than most countries and will also grow a little bit faster than most other developed countries. In a world that is far from perfect, Canada is perceived as relatively safe.”
With that background out of the way, Cooper said Dundee “is in its best shape ever. We are diversified across the country, we have 75% of our assets in central business areas, rents are improving and we have embedded growth in our properties.”
As well AFFO growth, a lower average interest rate on its $2-billion plus of debt and two large transactions “which are two of the most accretive events we have ever had” have positioned Dundee to predict significant growth in 2012.
While office property values have risen, driven in part by increasing capital from pension funds, the reduced cost of capital to Dundee to make acquisitions (down about 11%) has more than kept pace with rising prices.
“…we have no idea what we will find in 2012 but we do believe that we will find properties that will make our company better and increase our AFFO,” Cooper said.