Dream Impact Trust (MPCTUN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Dream Impact Trust Year-end Conference Call for Thursday, February 25, 2021. During this call, management of Dream Impact Trust may make statements containing forward-looking information within the meaning of applicable securities legislation. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Dream Impact Trust control that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. Additional information about these assumptions and risks and uncertainties is contained in Dream Impact Trust filings with securities regulators, including its annual information form and MD&A. These filings are also available on Dream Impact Trust's website at www.dreamimpacttrust.ca. Later in the presentation, we will have a question-and-answer session. [Operator Instructions] Your host for today will be Mr. Michael Cooper, Portfolio Manager of Dream Impact Trust. Mr. Cooper, please go ahead.

Thank you, operator, and good morning to everybody. Welcome to Dream Impact Trust Year-end Conference Call. Today, I'm with Meaghan Peloso and Jamie Cooper. Meg and I will start the conference call speaking about the business generally. And then after that, Meaghan, Jamie and I will speak about impact investing. I wanted to start just by making a few basic comments on the assets that we own. We have about 1 million square feet of recurring income assets that produce recurring income. And they're quite excellent assets. Not only are they high-quality assets that produce income now. There's a lot of upside in the future. One example is 49 Ontario, which is currently an 88,000 square foot building, we're in the process of rezoning the building and it would likely going to end up with over 600,000 square feet in -- of office and residential density. That area is very built up. We own 1.5 acre of land, and it's going to be an extremely valuable and exciting site to develop. In addition, in our income property on 100 Steeles. We're going through the development process. That's probably going to be between 1 million and 1.5 million square feet of residential development that we're intending to have some commercial -- some commercial apartments and condos. So we're very pleased with how those assets are performing, and we're very pleased with the value of those assets. In addition to the assets that are currently income-producing, we have a lot of development assets that are well underway. What we're expecting is, over the next few years, we're going to contribute to that 1 million square feet of recurring income with Block 2 and 3 in Zibi, Block 211 in Zibi, which is the federal government building in 2021 and 2022, and we expect to have Block 10 completed, which is a residential building in Gatineau, or residential apartment of Gatineau. Block 208, which is already leased. It's just been finished up. And by 2023, we expect to have 3 more buildings in Zibi plus Block 8, and that did pretty much double the amount of recurring income assets that we have. In addition to that, Brightwater was a very successful launch, and we sold 10% -- we introduced 10% of the density and 310 units in the marketplace, they sold that very quickly. And those will be finished in 2023 or 2024, and we'll have more buildings being completed for the next 8 years beyond that. We have great expectations that the Victory Silos site Lakeshore East will be zoned very soon. And it's also a very valuable site for condominiums and apartments. The Gehry site is going through committed adjustments. And the new design was made public about 10 days ago. The indigenous hub we're getting started on. In fact, yesterday was the launch of the condos, and we're quite excited to see the results of marking a condo at this time. So what you can see is we have a lot of assets that we think are great future. We can add a lot of value, and we think the company is highly valuable. Our net asset value according to the way that we calculated and published it is $8.99 and to support the future growth of the business, Dream Unlimited has agreed to receive all of its management fees in units at the net asset value to support the business, and we're very excited to own more of the business. That's a very quick overview. Meaghan, would you mind addressing the financial results for the year and the quarter.

Sure. Thank you, Michael, and good morning, everyone. Starting with our financial results in the fourth quarter, the trust recognized net income of $14.9 million compared to $19.9 million in the prior year. It's important to note the composition of our earnings relative to prior year is not directly comparable due to our extensive asset disposition program, loan repayments and the magnitude of occupancy income generated on active condos in 2019. On a segmented basis, in Q4, the development segment recorded net income of $10.2 million, which was comprised of gains within our [indiscernible] account investments, specifically WDL Block 347 in Frank Gehry, partially offset by ForEx on our investment in the Virgin Hotel Las Vegas and certain cost to complete adjustments on our legacy projects. The fair value gain on WDL was driven by dining and financing milestones achieved in the period. Whereas the gain on Frank Gehry was recognized on an extinguishment of debt at the project level, which happens inherently to us increasing our ownership in the project from 18% to 25%. With the exception of fair value changes, which may fluctuate period to period, we do not anticipate meaningful development profit again as for 2023, when the first building that freight water take occupancy. In the fourth quarter, the recurring income segment generated net income of $11.8 million compared with $25.8 million in the prior period. The decrease was driven by the difference in fair value gains year-over-year and reduced income contribution from our income properties and lending portfolio due to sales and normal course repayments. Included in results for the period was a $10 million fair value gain attributed to our income property for [indiscernible] Street. As of December 31, the assets carried on our books were just under $70 million, and we anticipate additional fair value gains and we achieve rezoning, which based on current timelines is expected in the next 2 years. As of December 31, NAV was $8.99 per unit compared to unitholders equity of $8.33. The delta was due to a $43 million cumulative market value adjustments related to the trust Lakeshore East and Brightwater investments, net of a related tax adjustments. As a reminder, both Lakeshore and Brightwater are recorded at cost in our balance sheet under equity accounting investments. Consistent with prior years as part of our annual evaluation process, both sides were externally appraised in the period reported by land values of roughly $175 and $85 per square foot, respectively. And this is challenge in 2020, we were extremely focused on managing risk and preserving liquidity. As of December 31, we had over $110 million in cash on hand and had a conservative leverage position at 13.6% on a consolidated basis. We're continuing to work through various liquidity initiatives, which include continuing to some of our management fees and units with Dream and in measuring our corporate credit facility, which we believe will improve the trends operating cash flow and provide further security for our ongoing distributions. From an operational perspective, with the exception of Virgin's Hotel, we were able to successfully navigate through the challenges created by COVID and believe it underlines fundamentals of our business that are in good shape. Development assets under construction had minimal delays, projects with sales launches were extremely successful. We achieved favorable doming outcome for certain pipeline developments and have capitalized on the low interest rate environment from a financing perspective. Shipping necessarily diverse tenant mix at our income properties included few issues from a rent perspective and have collection rates between 93% to 98% each month throughout the year. We realized significant repayments from both our imperator investments and our lending portfolio, which has further supported the trust's liquidity objectives. In line with its original redevelopment schedule, the Virgin Hotel was posted early February for construction and was somewhat uncased by the impact of COVID relative to the rest of the hospitality sector. However, the hotel was originally forecasted to reopen in late 2020, which was postponed due to ongoing COVID capacity restrictions. The Hotel is currently expected to reopen to the public on March 25. Over the last year, we bought back over 5 million units that are NCIB for nearly $25 million. While we continue to see a discount in our trading price relative to net asset value, we generated a total return in excess of 20% since [indiscernible] the fall. We're confident in the underlying value of our business and may continue to buy back units on an opportunistic basis. With that, I'll turn it back over to Michael.

Thank you very much, Meaghan. We ended 2020 with a different business and a different strategy than we started the year. The invasion of COVID made it increasingly obvious that our society was facing a public health crisis, a financial crisis and some justice crisis. As we considered what all of this meant, we realize that real estate has a very important role in making our society less damaging to the environment and our society also much fair. With 36% of global gas emissions being generated by real estate. It is clear our society will need to address real estate impact that we want to reduce carbon emissions by 30% by 2030 and to net 0 by 2050. Further, if we want the recovery to promote a fair society, we need to provide respectful home for more people at a cost at least sufficient monthly income to cover the cost of taking care of their families and elevating them. Further to have the greatest benefit, more people need to be included in all elements of our society to provide sufficient opportunities for everyone to have a fair chance to succeed. Dream Alternative Trust had many investments that are focused on affordable housing, includes safety and resource management. Further, Dream Unlimited has an excellent track record of creating wonderful inclusive communities. While working with every level of government to help them -- to help the government achieve their goals, while at the same time, we maximize our profits. The World Bank through our for profit divisions -- through their for profit division, IFC, work with major investors like BlackRock, [indiscernible] and Munich Reinsurance to create the operating principles of impact management in order to be able to provide a framework, measurement and verification for the impact investment class. With clear methods to understand goals, measure them and have them audited, the impact investment asset class, in-app legitimacy and foster massive future gross, which will provide significant positive impact to societies all around the world. The World Bank and large pools of capitals have a vested interest in creating a system to grow financial investments that would both create market returns and provide social good. Already, there's about $340 billion committed to the impact investment class. We have met with the World Bank to discuss what we are doing in the impact asset class ourselves. While they were very interested in what we were doing, during our meetings, it became obviously clear that they are very focused on how to increase the amount of assets that are committed to impact management. After our call, it also became obvious that their efforts, combined with the commitments to some of the leading global asset managers, means that this asset class is going to grow liquid fast. When we decided to transform Dream Alternative Trust into Dream Impact Trust, we knew that our federal governments want to support a greener and fair recovery, including more respectable housing for every Canadian. We also knew that we have been a principal investor in some of the most transformative public-private partnerships in Canadian history. But we didn't know how profound a change we are undertaking. Every day since we made the announce on October 13, we have seen the movement toward impact grow and grow and grow through initiatives like companies and governments. I believe that the opportunity ahead of us can only be limited by our imaginations and determination. Nor did we realize that we were the first public impact investment vehicle in the world. We've been working with a consulting group that's very experienced in Impact to create our own same framework with the goal of creating one of the most advanced frameworks in the world. The framework is what provides a method of measure of what we do and improving our legitimacy to other investors. As the world's largest pools of capital are keen to promote impact investing, and through our history of development of the distillery, the Canary District, Zibi, West Don Lands, the Indigenous Hub, Brightwater, repurposing our Toronto office buildings, our Western Canadian communities and generally conducting ourselves in a manner that is respectful and additive to our communities. We believe that we have the pedigree and track record to build a leading impact investment public vehicle. We're creating this framework we're putting tremendous financial and people resources into creating the sophisticated framework that the larger pools of capital may see as very persuasive for them to support our very first global public impact investment vehicle. We have great assets, a great track record of investing in capital with high returns while doing good. And a history of finding wonderful opportunities where others don't see them. With these large pools of capital and the world bank promoting impact investing, matched with our assets and track record and the Canadian government's commitments creating a fair and greener post-COVID world, with a capital to back it up, again, I believe that our opportunities are unlimited. We have met with many institutions. We've had generally positive feedback. When we get our framework, we'll be meeting with them again and showing them the work that we're doing. In addition, we'll be reaching out to large global investors and introduce them to what we're doing. I think that Meaghan will talk a little bit of the framework in a few minutes. We're expecting to be finished in May, and that will really give us the opportunity to promote the business. With that, I'd like to turn it over to Meaghan to walk through the framework that we're working on. Meaghan?

Sure. So for the last quarter, we've made significant progress really building out the framework that Michael was just discussing. Under our 3 impact verticals, attainable and affordable housing, inclusivity and resource efficiency, we've now identified our impact pathways and main KPIs for each of our qualifying impact assets. As Michael mentioned, we will be releasing or finalizing our framework by May, and we look forward to releasing our inaugural impact report at that time, along with our disclosure statement, which is the key deliverable of this inventory to the operating principles for impact management. As part of our framework, we'll be outlining a transparent and systematic approach to how we identify and measure the positive impact generated from our portfolio. Consistent with the impact management projects, 5 dimensions of impact, who will identify up to 5 pathways that are measurable. And I think people are planning an increase during the investment horizon, which aligns our core verticals. All of the pathways will connect to one of the United Nations Sustainable Development Goals. Our framework will consider the extent to which the invest in our asset will produce deep and lasting impact, followed by who will be affected, including how many and how well underserved they are. We'll also be acknowledging secondary negative pathways as part of this process. Secondary pathways are effectively byproducts of the initial benefit we sought out to achieve. Negative pathways are outputs or consequences associated with our actions. We believe it's critical to acknowledge both as it provides a full form perspective of mature impact for attaining and support the legitimacy of our work as we're not only favoring positive outcomes. We look forward to sharing our impact report with you this spring. Until then, as an example, within our 2020 annual report, we have included certain pathways identified Zibi for informational purposes. With that, I'm going to turn the call over to Jamie to provide further updates on our impact plan.

Thanks, Meaghan. So as Michael discussed in his opening comments, our existing portfolio is comprised of tremendous projects that we're developing to incorporate affordable and attainable housing, resource management and inclusiveness. But in addition to development properties, we believe that we can make significant impact on our communities by acquiring existing income properties and achieved good financial returns and significant impact by repositioning these assets. They also provide us with income upon acquisition that will help us scale the business and meaningfully contribute impact. With that, we are excited to announce our first asset acquisitions since we refocused the business. The Trust has acquired 100% interest in 2 income properties, 68 to 70 Clermont and 75 Stafford, which are both located in the Trinity-Bellwoods neighborhood in downtown Toronto. Their combined GLA is about 55,000 square feet and the gross purchase price is $31.8 million before closing adjustments and transaction costs. 68 to 70 in Clermont is a value-add office property that will be repositioned to a best-in-class boutique building with leading sustainability and accessibility features. The single tenant, which represents approximately 40% of the GLA is a woman founded and led business. We will seek to fill the remaining vacancy with like-minded tenants that will look to participate in our sustainability and inclusivity priorities to maximize our collective impact. The Stafford property is 100% leased to a single-tenant with an 8-year weighted average lease term. The 2 properties will provide a 5% average yield with the Stafford property immediately contributing to the trust recurring income. We received strong support from the lender community for both of these properties, given the quality of the assets and our planned impact initiatives. We have put in place attractive financing of both properties with 2 different lenders on more favorable terms than our initial underwriting. Investing in and retrofitting existing office buildings to increase their energy efficiency, decrease the greenhouse gas as amended and extend their life cycle will play an important role in our industry's contribution to Canada's net 0 goal established under the Paris Climate Agreement. The Trust is building a strategy to address its scope 1, 2 and 3 greenhouse gas emissions at each of its properties. The Trust has introduced baseline energy audits into our due diligence process for all new acquisitions. These audits provide a baseline from which we consider our new energy reduction targets. On the Clermont property, for example, we expect to decrease the building's greenhouse gas emissions by at least 20% over our baseline in the first 12 months with continued improvements thereafter. This captures our scope 1 and 2 emissions, the energy used by the building itself. We will also focus on scope 3 emissions. Being indirect emissions that occur within a company's value chain. And both properties will be installing secure by silo storage and end-of-trip facilities to decrease car related travel. We manage our portfolio to minimize the potential risks from climate change and other traditional ESG risk factors. We are also focused on identifying opportunities to have a direct positive impact on the communities we are active in. We will be introducing inclusivity goals for how we operate and manage each building. These may include seeking retail tenants that are valuable to the community, those that provide important services like childcare or small or ethical businesses. We will also introduce a framework to increase the number of businesses owned by or that employee indigenous black and other underrepresented communities within our supply chain, providing goods and services to our projects. For each impact initiative we implement, we'll establish goals, targets and metrics to measure our progress. We report on both our successes as well as areas we identify for improvement. As Meaghan mentioned, more details on these initiatives will also be provided in our inaugural impact report to be released later in May. With that, I'll hand it back to Michael.

Thank you, Jamie. We're planning on having another conference call when our first quarter numbers come out, where we can present the framework, and we'll have even more information to share. At this point, Jamie, Meg and I would be happy to answer any questions you may have.

[Operator Instructions] Our first question is from Lorne Kalmar of TD Securities.

On the on the newly created Impact fund that you guys announced, I believe, yesterday or the day before. I just wanted to get a little more clarity. Are there any differences or exclusivity between the funds and the trust? And maybe what type of investments or are there any type of investments that would go into the trust that wouldn't go into the fund and vice versa?

I'm glad you asked that question. Currently, new investments have been shared between the Impact Trust and Dream Unlimited. So with the private fund, the assets that Dream Unlimited would have invested in, the private fund will invest in. There's a different group of people that are interested in private equity versus public equities. There are some good reasons for it. But as the new vehicle only has Impact investments as we stated with 4s by a very specific mandate. It's going to take us a couple of years to get 3 in Dream Impact Trust to be a pure impact play. In addition, some people don't like the volatility of the public markets. And another issue is the Impact Trust is actually a taxable trust and the private fund is a partnership, so each investor makes their own decisions. The investors in the private fund are financial institutions, pension funds and asset managers and high net worth individuals. So they're very complementary, and it will actually continue very similarly to how Impact Trust and Dream Unlimited have shared assets in the past.

Okay. And then, I guess, would there be any opportunities for the trust to vend in any partial interest into the private fund or no?

Not really because generally to vend in the assets, the idea would be to take an interest in the fund. Dream Unlimited is quite keen to own part of the fund, but we think it's too complicated for the public vehicle to have an interest in the private vehicle.

Fair enough. That makes sense. And then maybe on the on the 2 recently announced acquisitions. I know you guys have plans for upgrades in terms of sustainability and reducing GHG emissions. What's sort of the return on investment you would expect on an upgrade like that?

Jamie, can you answer, firstly, what kind of returns you're expecting for the entire investments? And then if you have any information on returns on additional capital, that would be helpful.

Sure. Happy to. So the trust overall target is the 10% to 13% return on its equity that's in income properties. We expect both these properties to be exactly there, probably a little bit higher given some of the attractive financing that we have on the Clermont property since it's a repositioning. We expect it to perform quite well as too. But generally, the returns on the projects will be in that range. With respect to the capital invested overall, Clermont is a bit of a better example because it's more of a repositioning, there's more substantial capital. A lot of that will get passed through to tenants. Through energy efficiency savings that will result in lower growth -- lower additional rents being charged, and we'll be able to capture some of that under net rents. So we expect the returns that go into the repositioning of the building to align with a lot of the energy improvements that we're making. So it will be a very similar turn to the underlying building as well.

Okay. Great. And then maybe last one from me. Last one for me is, are you guys seeing any other opportunities like these 2 out there right now? Or are you guys keen to focus on the existing assets and developments?

I think, again, that question is a great opportunity. One of things we're focused on is ways to take existing assets that are income producing. And put an impact overlay that get this current income that's growing good return but much quicker than development. So that's one of the trusts that we are pursuing right now. We also -- I mean, we literally have taken the $600 million investment already $2.2 billion of assets through development. And as I mentioned earlier, we're going to start seeing in 2021, a lot of assets getting completed according to the current income. We're still looking at some development assets, for sure, and there's great opportunities. But the holy grail for us is, assets that we can buy that are income producing, reposition them and to make them much better for their communities.

Our next question is from Fred Blondeau of IA Securities.

Congratulations on the 2 new additions to the team that sounds exciting. Just coming back to your latest acquisition on the 2 office buildings. Can you give us somewhat of a time line for completion?

What I would say is, one of them is fully leased now, and we will be adding more impact in the building. It starts as a full building that gets us a good return. Jamie mentioned a desirable finance. And in both cases, we've got very attractive financing because our plans were consistent with what the banks want to end on for impact. So they're very attractive finances and will do quite well on the return on equity. The second building is repositioning, and we're going to invest a fair amount of money. And I think within 2 years or so, we expect to have a good cash return on it as well.

That's fair. And then pro forma, the acquisitions and the changes to your operating facility, what's your current cash position and acquisition capacity?

We've got a lot of developments. And we've got certain commitments for our capital, but I think we're still sitting on $100 million of cash, and we'll have another $40 million available on our line. So we think we easily have another $50 million that we could invest in to grow. And to still have enough capital to fulfill our other obligations.

So just on that subject, I mean, what should we be expecting in terms of acquisitions for the rest of 2021? And I guess, you'll be -- you continue to be focused on the GTA. But should we expect you guys to enter into new asset classes?

I think that the asset classes that we invest in now will be the great majority of what we do in the future. As far as geographically, we are currently looking in other investments in Canada and other than Ottawa and Toronto. But it's early. And I would say our internal target would be to invest another $50 million of equity into new investments for the trust.

And that would be a 2021 event, obviously, right?