Dream Impact Trust (MPCTUN) Earnings Call Transcript

Good afternoon, ladies and gentlemen. Welcome to the Dream Impact Trust Second Quarter Conference Call for Wednesday, August 3, 2022. During this call, management 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 the Trust's 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 the trust's filings with securities regulators, including its final long-form prospectus. These filings are also available on the website at www.dreamimpacttrust.ca. [Operator Instructions] Your host for today will be Mr. Michael Cooper, Portfolio Manager. Sir, you may begin.

Thank you very much, and I'd like to welcome everybody to Dream Impact Trust Second Quarter Conference Call. It's been a very exciting year, and I think we've made a lot of progress in a lot of areas. We continue to have a few challenges. I'm going to get into that in a minute, but I thought that first, Meaghan, can you speak to the financial results.

Sure. Good afternoon, everyone. I'd like to start by summarizing the quarter end results and then discussing our liquidity position. As it relates to earnings in the second quarter, the Trust recognized net income of $0.6 million compared to a net loss of $1.5 million in the prior year. On a segmented basis, the development segment generated net income of $0.5 million compared to a net loss of $0.6 million in the comparative period. The improvement relative to prior year was really driven by the net impact of foreign exchange on the Virgin Hotel, partially offset by sales and marketing expenses at Forma Condos and fair value adjustments on income properties under development in the prior year. In Ontario, we were [indiscernible] on sales for the East Tower at Forma, which as of today is now over half sold. Forma is located in the heart of the entertainment district in downtown Toronto and comprise 2,000 Condo units between both towers upon completion. Based on current development time lines, we anticipate first occupancies on the East Tower to be completed in 2028. This past April, the Trust acquired a 33% interest in the first phase of the building with [indiscernible] development referred to as the Library Parcel in Ottawa for a total investment of $1.3 million. The site is adjacent to a Light Rail Station in close proximity to 34-acre Zibi development. Being named the winning proponent as the Library Parcel continues to reinforce our proven track record and expertise of developing innovative solutions to bring forth affordable housing that is both sustainable and inclusive. As it relates to our recurring income segment, the Trust generated net income of $2.3 million compared to $0.5 million in the prior year. The increase in earnings was primarily driven by growth in the segment, specifically our commercial blocks at Citi. In addition, comparative results included a $1 million provision taken on our loan portfolio. Subsequent to the quarter, the Trust acquired a 50% interest in 70 Park, a 210-unit multifamily rental building located next to the Port Credit Go station and in close proximity to our Brightwater development. The site also includes land adjacent to the rental building, which is slated for redevelopment. The purchase price of $105 million at 100% for both the rental building and redevelopment land was funded through cash on hand from the Trust convertible debenture issuance and conventional financing. Inclusive of 70 Park in 2022, the Trust has invested $23.9 million to further grow our recurring income segment, adding an additional 290 multifamily rental units. Between now and 2025, as we continue to execute on our development pipeline, we anticipate adding an additional $500 million in high-quality residential and commercial assets to this segment. From a liquidity perspective, at June 30, the Trust had $30 million in cash on hand and $35 million available under our credit facility with $50 million drawn on the line. Cash on hand included the unutilized portion of our $40 million convertible debenture offering completed in the quarter. The convertible debenture carries a coupon of 5.75% and matures in 2027 and was done under Impact Financing Framework. The Trust debt-to-asset value as of June 30 was 25.7% or 57.4% when including equity-accounted investments, as of March 31, largely due to draws on the Trust Credit Facility. At quarter end, the Trust had $60 million of debt maturing in 2022, which has now been renewed and upsized modestly. With no other debt due this year and based on our current forecast, overall, we are comfortable with our near-term liquidity position, and we'll continue to monitor the impact of macroeconomic factors across our business segments. On that note, I'm going to turn the call back over to you, Michael.

Thank you, Meaghan. I want to point out a few areas of interest, and then I'll dig into a couple of examples of what's happening with the assets. Firstly, we completed $350 million of acquisitions and development completion to add to our recurring income. So in the last 12 or 14 months, that's been a pretty huge increase. And as we said in the press release, over the next 36 months, there's another $500 million of income properties being added. So our income properties are growing very rapidly, and they're very exciting assets. Next year, we expect early in the year Block 8 of West Don Lands, that's a 751-unit apartment building to start renting up. And we've got 2 more apartment buildings of Zibi, one in Ottawa, one in Gatineau and a small office building. So that's just in the next year. We're looking forward to having more and more recurring income assets, and more residential assets. And we've had quite a good time so far with our residential assets because for the most part, we locked in our debt and we're now starting to see rents increase rapidly. And for the assets that we're repositioning before we refinance them, the rents have gone up as that interest rates, although they're coming back down a bit now. And it looks like we'll meet or exceed the initial acquisition returns on those assets. Our income assets are doing well, and we're pleased with their progress. But I do want to give an update on some of the development assets. So a small one is Mutual Street, which is making great progress. It's on track. It's on time. We now completed the excavation, the building up to grade and we're starting to be above grade. So pretty soon it'll move fast, and we're pleased to get that going. As Meaghan mentioned, the Gehry Tower, we launched it in June -- middle of June, and we've been able to sell -- half the buildings are now -- half the building is now sold firm. It's a very large building, so it's massive sales. The sales price is very strong, and we hope to be in a position to lock in a lot of the construction prices later this summer and start construction this fall. And based on our results, the property will turn out to be more profitable than we had been planning up until now. And we're quite pleased that, that project looks as strong as it does. And people have been very excited to have a piece of Frank Gehry's biggest residential projects in the world. And one of its only projects in all of Canada. 100 Steeles is going to be 1.5 million square feet of density. We're working on the approval. We're making progress, and that will be condos and apartments. The TTC Line 1 is -- will be extended to Steeles and probably by the time we finish the building. So we're quite pleased with that asset. We -- as, I think, Meaghan mentioned it, that we won the Quayside [indiscernible] in February, and we're working to further that. With the Impact Trust in general, we're more focused on Impact assets than development assets going forward. So we'll probably buy a small part of the Quayside project to participate in it, but also -- we're only adjoining site Victory Silos, and there's a high likelihood that will develop all of that land together. So the Impact Trust will own enough of Quayside when we mix it together because of their ownership of Victory Silos. Now Victory Silos is a project we bought in 2017 has been very successful. We've got a zone per 1.3 million square feet. It's on the water. I'm turning around big numbers, but 1.3 million square feet in downtown Toronto on the water is a pretty special site. What may not be known is because it's been so much value added, it's our second highest investment in equity in our whole portfolio. It just trails behind the equity we have in Zibi. So it's been an important site for us. And as I was saying, with Quayside, we don't want to put too much money into that development because we'll put the 2 sites together, and we already have so much equity in Victory Silos. The West Don Lands, I mentioned Block 8, if you're around there, it's a 3-tower apartment is coming along great. And Block 347 is even a bit larger and it's now coming up. It should be a great soon. And if you're in that area, it's something to see because they're very large development sites. So all of our development projects are coming along well. Zibi's coming along well. LeBreton, it was pretty innovative, the financing that we did there to put together a not-for-profit plus our for-profit to create 41% of the project affordable housing and to be able to work with the not-for-profit and support them to be able to meet the requirements to get the debt. So we think that project is going to start pretty soon, and it will be a real model for what we do next. One thing to think about is with interest rates increasing, generally, what it means is all of the methods providing funding for affordable housing are not economic. And for apartments, to build apartments now, it takes even more capital, and it's a little bit riskier because you don't know what the takeout financing is going to be if you just do market. And condos, we're seeing are slowing down a bit. So what we have is we have a lot of projects that have 10-year fixed debt from CMHC at very low rates. And those buildings will be completed on time, on budget and with low interest rates are going to be very, very successful. Some of the other ones that we're starting now, like Gehry, we're getting prices on revenue side that will reflect increased costs. But as we get through the next little while, we're working very closely to see how we can work with the government to create more affordable housing. And I think the demand is so high, and it's such a national problem, there's going to be big opportunities there. So that's a nice link because I think we're making quite good progress on each of the assets and the values of our assets. But what we said from the beginning is we look at measuring both our impact as well as our financial results. And on the impact side, we're very pleased that we're hitting all of our goals, and we're delivering on them, and we're getting recognized for that when we get rezonings or working with different government bodies and it's coming along great, and it's leading to more opportunities. So all of that is really great. The Virgin Hotel in Las Vegas, owning a hotel during COVID has not been a great thing. And we're a passive investor in this. It's a significant asset for us. And our preference is to sell it. The business plan has always been to buy it, fix it and sell it. But it's been slowed down. So we are a little bit concerned about that. But otherwise, our portfolio is doing great, and we're thrilled that we have increasing recurring income. We're not happy with the stock price at all, and we've been surprised that it isn't performing better, considering the successes we've had. But we do think that as we continue to hit our goals, get more and more recurring income and have a market that may be more interested in stocks generally, we'll be able to get a bit of a tailwind. But for now, we're fighting the good fight, and we're meeting with investors. And hopefully, we're going to start to get some more traction with more recurring income and more progress on our impact. I think that ESG over the last 6 months has been somewhat discredited and what we're doing Impact where we're measuring how much affordable housing we're building, what the rental rates are, how much they're below market, how much people are saving. The work we're doing with the Canadian Infrastructure Bank to reduce our carbon emissions, plus to be building communities net zero. And also what we're doing in inclusion with the Dream Community Foundation is really getting momentum and I think that we'll start to see a belief in the company that we don't see now in the future, we're just not sure when that is. But we're spending a lot of time on marketing. We hope to have more traction. In the meantime, $500 million of recurring income assets being completed through development is a big deal. Hopefully, we'll find some opportunities to acquire a few properties along the way to add to the recurring income. But other than the stock price, we're pleased with the company, and we're going to be focused on improving the stock price as well. I think that's a general round about for the company. In 90 days, not that much happens. But we do want to report back to you, and we'd be happy to answer any questions at this time.

[Operator Instructions] We have our first question from Sairam Srinivas with Cormark.

Michael, my first question is for you in terms of capital allocation. So when you think about acquisitions versus development versus currently by unit prices and, therefore, repurchasing, what are your thoughts on the general capital allocation strategy?

I think that generally, we're well invested and I think that we'll be looking more and more at where we may be able to bring partners into some of our development assets, extract some of that capital and accelerate the focus on recurring income. But we don't have a big acquisition plan because I think we're already creating so many excellent assets just through development, I don't think we have to buy more.

That makes sense, Michael. And probably, just thinking of this from the perspective of the yield to expand. Currently, we have a 4.6% yield on the development projects. Considering the environment we are in currently, do you see a lot of room there to expand and therefore, reflect the rising cost environment as well as rising rates?

Sorry, Sai, you just cut out a little bit. Do you mind repeating the question?

Yes, of course. So generally considering both a rising cost as well as a rising rate environment, do you see further room and development yields to kind of expand to reflect that and give you a bit of an upside there?

That's an interesting question. We do pretty unique projects and I think that if you take a look at our proportionate balance sheet, I think we're at 57% debt. But a lot of that debt is very cheap government debt at very high ratio. So there, we don't have a lot of cost inflation. All the projects we're doing, I think we're on budget. So for the projects that we started, I think they're going to come out perfectly fine. For new projects, I don't know that development yields are going to get better, but I do think that the growth in the rents are likely to be better after that. So instead of rents going up by 1% under rent control, they might go up by 3%, and I think the market rents could go up a lot. So I don't -- I think you're going to see it in the inflation on the revenue side, not in the yield on costs.

That makes sense, Michael. And looking at Brightwater specifically, I know you've seen the headlines recently about condo projects being put on pause generally in Toronto. Do you think that something will impact the execution of that project or the time lines of the sales?

So the Brightwater is a really interesting project because it's 3,000 units in total, and we just do 1 chunk after another. So we're working on the retail center, and we've got great traction there. That's under construction now. We've got a couple of other buildings under construction, and we started to market the next phase. The margins on that one should be quite good. And in fact, just as a general comment, there's a real split as to whether we should be budgeting big increases in construction costs or if it's turned and it will be flat to maybe even down. So the inflation, a lot of it is kind of behind us on commodities and labor has gone up and maybe there'll be a better balance between people that are building buildings and the unions and contractors. So I'm not -- I'm kind of on the side that I don't think we're going to see a lot of costs getting out of control, but -- which goes into the pro Formas in a serious way. But I think with Brightwater, we're doing pretty good on sales. And when we got enough sales done, we'll start the building the sales price gives us a decent margin. So I think as long as we get the sales, I'm not too fussed about the construction cost. So I think that will turn out fine as long as we get to sales.

That's good color, Michael. And finally, my last question. I don't know briefly referred to the Virgin Hotel property. Is there -- can you give any color on the time line of the sale that expecting there?

I think at this point in time, I would use what we've currently given guidance on. I believe we've said 2024 materials. I think that's the best estimate right now.

We have our next question from Lorne Kalmar.

I was just wondering, we heard from one of the other REITs about the impact of the Toronto construction union strikes on their development pipelines or projects, I should say. Was there any impact for you guys?

You know what, the process is that there's all the different unions, some of them settled before, some of them were negotiating and settling, some that went on strike. They're only allowed to go on strike for 6 weeks. So yes, look, it's hard to find supplies. It's hard to work with -- everything is hard, but it's a lot better than being in the airline business, I can tell you. We've got a lot less delays than they have. And -- no seriously, like it's been a hassle, but are we 3 weeks behind? I don't even think we're 3 weeks behind in total. So I just think the rounding here. I don't think it's a big deal.

Fair enough. And then you guys mentioned that you did a pretty good job so far on the sales for Forma. How have those progressed kind of relative to expectations, both in terms of, I guess, the number of sales and the prices?

We've raised prices repeatedly. Basically, we had a 1-day event with Frank Gehry with group of the top brokers in the city and all the leads came from that. So we've been working for the last 7 weeks or 8 weeks now. Finishing it and now the rule is just keep getting tougher and tougher for condo sellers on money laundering rules. And now you got to make sure you don't sell to anybody and breach the prohibition on doing business with people from Russia. So what I would have made with, if you want to do it virtually now, you need to have facial recognition software to verify it's a person they say they are. So it's actually become a lot more burdensome to get all the paperwork done and signed off. So the process takes longer now than it used to. So literally, we had 1 day of sales and spent the last 8 weeks getting it all signed and waiting for the rescission period to go over. So we're actually closing the office for August. And in the fall, we're going to release some new units. And it went better than we expected. The prices are higher than we expected. We sold more. And I think what's really important is a lot of these brokers are very influential, and they have a big clientele and they're a little bit like in a discretionary money manager. So the people we dealt with have told their clients that if you're going to buy a condo this year, you should buy it at Forma, and they have a lot of influence. So it's been very successful and we're going to come out with new units, we'll be dealing with more brokers and we hope to see the sales continue into the fall. But it's a very successful project.

Okay. And then maybe just sticking with the theme here. I think you guys mentioned the fourth phase of Brightwater is now in the sales process. How has that been going?

It's been going steady. The way that form is sold is unlike any other opening in the Greater Toronto area. So that's just an exception, but it's been steady. And I don't remember the exact numbers, maybe 20% or so, more or less, and it would just keep grinding through it, and that's just how the Condo business is now.

Fair enough. And then maybe last one for me because I think last time we spoke, you guys had the trucker convoys outside [ Ottawa ], and saw you got occupancy up a little bit quarter-over-quarter. How has that been progressing? And when do you guys see that building stabilizing?

Yes, that's a great point. I mean I think the last 2 weeks, we've averaged 6 a week, and that's been a big change. We're doing a lot more promotions and the protesters are gone, it's no longer minus 20. And the building we're building beside it Block 11, earlier, they were breaking the rocks and banging stuff and putting in steel, and I think it was quite a commotion. So now that they are above grade and progressing, it's not as disruptive. So we're really seeing a pickup, and I can't tell you when we expect to be stabilized. But even since the June 30 numbers, we've made a lot of progress. I think we're at 43% leased right now. And I think we're going to see some big progress over the next 90 days.

Great. And then, sorry, just one last one. I think you mentioned the possibility of bringing in some additional partners to extract some equity from existing projects. Any projects in particular that you're looking at doing that with?

Yes. I mean, the one that's obvious is 49 Ontario as it's going to be -- as it's 100% owned by the Trust, it's an incredible site, but it'll probably be a $700 million or $800 million project. So we're making progress on the resorting of that asset, and that's the obvious one to look at, but there may also be others.

Our next question comes from Chris Koutsikaloudis.