Inside the buying of Dream Hard

Off the Record

What do Michael Cooper, chief executive of the Dream group of companies, and prominent value manager EdgePoint Investment Group Inc. have in common?

For one they know there is value in Dream Hard Asset Alternatives Trust, a TSXlisted mutual fund trust. Both have been steady buyers in the entity, which owns a portfolio of assets — largely real estate, but also renewable power. That entity also trades at a substantial discount to its net asset value

Over the past year, an entity called Dream Asset Management, has been a constant buyer of Dream Hard Asset’s trust units.

Dream Asset Management is itself a unit of Dream Unlimited, a publicly traded vehicle that serves as the manager of the Hard Asset Trust. Unlimited is also 32-per-cent owned by Cooper himself.

According to SEDI, Dream Asset Management has upped its stake in Hard Asset by more than 50 per cent. At the end of 2017, it owned 9.28 million units, up from just under six million units a year earlier. In all, the manager made more than 50 separate on-market purchases, at prices ranging from $5.70 to $6.36. Those numbers suggest it spent about $20 million buying the Hard Asset units.

EdgePoint, started by a group of former Trimark managers, has also been buying, so much so that last fall it filed an alternative report indicating it owned 7.438 million units — enough for a 10.27 per cent stake, a level at which it has to report.

That’s where the similarities end.

The purchases by Dream Asset Management have raised questions as to why it has been the Dream entity doing the bulk of the buying and not the issuer itself, Dream Hard Assets.

The latter does have a normal course issue bid facility in place allowing it to buy up to 6.596 million units. But for the 12 months ended Dec. 31, 2017, it bought back and cancelled a mere 800,230 units at a cost of $4.96 million. Given that the units are trading below NAV, those purchases generated a gain to retained earnings of $1.76 million. In other words it bought back about one-quarter of what the manager did.

It’s not as if Dream Hard Assets lacks adequate cash. At the end of 2017 it had $60.9 million in such balances. “Using this cash to buy back Hard Asset units at a discount to NAV would be a great way to increase NAV per share and reward shareholders, but for some reason Dream Unlimited is taking advantage of the undervaluation, not Hard Assets,” noted one investor.

Hard Assets has cash for some things. In 2017, according to its annual report, it spent $55.486 million buying units in Dream Office REIT, the centrepiece of the Dream group.

At one level that’s an unusual investment: Dream Office pays a 4.5-per-cent yield while Hard Assets has a 7-per-cent target.

So, why is Hard Assets not being more of a buyer under its normal course issuer bid (a move that would benefit the rest of the shareholders) and Dream Asset Management being a regular buyer with no benefits to Hard Asset unit-holders?

One possibility is Dream Unlimited receives fees as a result of its role as external manager for the Hard Assets trust. In 2017, under that contract $14.87 million made its way to Dream Unlimited. There are three parts to that agreement, a base annual fee, fees for acquisition and disposition and expense recoveries. In 2016, $12.4 million was paid under the contract. Hard Assets has no employees.

Reached Wednesday, Cooper said Dream Hard Assets is “in the market every day,” buying under its normal course issuer bid. “But it’s hard to buy,” he added. Dream Unlimited has been buying “because it likes the company and its long term prospects.”