Dream Impact Trust (MPCTUN) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to the Dream Impact Trust Fourth Quarter Conference Call for Tuesday, February 14, 2023. During this call, management may make statements containing forward-looking information within the meaning of the 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. Mr. Cooper, please go ahead.

Thank you, operator, and good afternoon, everyone. Today, I'm here with Meaghan Peloso, our CFO. Last night, we released our results that included 2 difficult decisions and some other exciting progress. Our interest in the Las Vegas Hotel is a passive interest, meaning we really don't have much of a say. While the investment went through a thorough due diligence in 2018, with COVID and a very restrictive lending environment in the United States, we are doubtful on the value of the asset and our Board determined it was reasonable and conservative to reduce the equity investment to 0, although we will continue to try to achieve a return of some capital along the way. Over the years, we have maintained a $0.40 distribution. Generally, we've been able to pay out the distribution and maintain or increase our net asset value. However, with the amount of development we have, the distribution was not generated entirely from recurring income, some are generated by appreciation on our lands. After dialogue with the Board and taking into account feedback from investors, the Board decided to size the dividend to match the recurring income more or less generated by our income assets. This decision means that the company will maintain more capital than before, but it does affect the intrinsic value of the business. During 2022, we added about $100 million of new income properties that included completed developments and new acquisitions. Our apartments that we have bought and developed are performing very well. Over the next 3 years, we have another $500 million of completed buildings that will change the nature of the Trust as we double the amount of income properties. About $300 million of completed developments over this time period are in the West Don Lands. These profits are best-in-class purpose-built rentals and will also have about 500 affordable housing units, an indigenous health center and many amenities for the city and the nearby residents. The other $200 million is primarily purpose-built rental at Zibi, which provides net zero residences and affordable housing. Subsequent to these developments, we are making some very special and valuable new projects. Victory Silos was acquired for $58 million with a value today of $250 million for an increase of $192 million or [ $72 million ] of the Trust shares. During the time we've owned the site, Victory Silos has been rezoned for 1.3 million square feet on Toronto Waterfront. It will be an amazing development. 49 Ontario is a site that we acquired for $47 million, and we are nearing rezoning for an excess of 800,000 square feet. The value of this site has increased by $93 million and is 100% owned by Impact Trust. We're expecting to develop the site into a purpose-built rental with a partner to manage the equity requirements. In December, we finalized definitive documents to acquire Quayside, the world-class 13-acre site on Toronto Waterfront. We expect to close on the first phase next month. We are very pleased with the progress with governments and anticipate progressing through other approvals relatively quickly as the site is so important to all of the government agencies that we deal with. The assets described that will be completed soon, and the longer-term developments will create exceptional portfolio of income properties. In addition, our Frank Gehry-designed Forma launched in June of 2022 is one of the most successful launches ever with over $800 million of sales at a very high price per square foot. We have fixed 45% of the construction costs already and are finalizing the construction loan, and we've even started construction. Although we have owned the site for 5 years, with the improvements we have made to the design, our current pro forma is showing the highest profit since we bought this site. Meaghan, can you provide a review of our year-end results?

Sure. Thank you, Michael. Good afternoon, everyone. I'll start by briefly speaking to our financial results, liquidity position and significant activities in the period. In the fourth quarter, the Trust recognized a net loss of $44.9 million. Results included a fair value write-down on the Trust investment in the Virgin Hotel of $59.2 million. Excluding this write-down, the Trust generated earnings of $14.3 million, down from $27 million in the prior year. This was driven by the composition of fair value adjustments on commercial properties in each period and higher interest expense, partially offset by increased income contribution from our multifamily portfolio. As previously disclosed, the Trust has a 10% minority interest in the Virgin Hotel. This investment has always been passive in nature and considered noncore to the Trust portfolio. We originally acquired the investment in 2018, and the intent was always to exit the asset upon stabilization. The hotel was closed for most of 2020 for significant renovations and reopened in early 2021 in an environment with ongoing COVID restrictions. As of period end, we are required to fair value our investment in the hotel. The fair value loss incurred in the fourth quarter was driven by operating performance, near-term financing needs, capital needs and a contemplated capital reorganization by the hotel investor group among other factors. At this point in time, the Trust has no further capital obligations as it relates to this investment. Should additional capital be needed, we would not intend to contribute further as the hotel is not aligned with our impact strategy. Results on a segmented basis were as follows. In the fourth quarter, adjusting for the fair value loss in the hotels, the development segment generated net income of $0.5 million, down from $1.2 million in the comparative period. Income from this segment will fluctuate period to period and not contribute meaningfully to earnings until development milestones are achieved and/or project inventory is available for occupancy. Based on the Trust's current development pipeline, we anticipate more meaningful income from this segment upon first tenant occupancies at WDL Block 8 in the spring and Brightwater towards the end of 2023. As it relates to our recurring income segment, NOI from commercial properties was $2.7 million in the fourth quarter, down slightly from prior year due to a decline in occupancy rates. NOI for multifamily rental assets was $1.7 million in the fourth quarter, up from $0.8 million in the prior year, primarily due to the timing of third-party acquisitions and the completion of development blocks. In 2022, the Trust added an additional $98 million of assets to its recurring income segment, either through third-party acquisitions or block completions from its development pipeline. Based on our current development pipeline, we expect to bring on an additional $500 million of high-quality residential assets by 2026, which will contribute meaningfully to this segment. Included in the results for this segment was a fair value gain of $29 million on 49 Ontario driven by an increase in land value and density, partially offset by a fair value loss of $14.9 million on Sussex Center due to cap rate expansion. 49 Ontario is an 88,000 square foot commercial property owned 100% by the Trust located in downtown Toronto. We've applied for over 800,000 square feet of density on the site and anticipate achieving rezoning by mid-2023. Inclusive of the recently acquired Berkeley land assembly, the site was acquired for $47 million compared to its carrying value of $140 million as of December 31 and an appraised value of $160 million. NAV per unit as of December 31 was $8.25 down from $9.31 in the prior year. The most significant driver of this year-over-year change was the write-down on the hotel. Approximately 70% of NAV was supported by a third-party appraisal at year-end. NAV is higher than book equity per unit due to market value adjustments taken on our investments in Lakeshore East, Brightwater and 100 Steeles. In the period, a market value adjustment of $7 million was recognized relating to 100 Steeles specifically. This investment is a leasehold interest in a retail shopping center and future residential and mixed-use development located near the future Steeles station on the Yonge North subway extension. We believe the site continues to be more valuable given its proximity to the subway line, and we anticipate achieving approximately 1.5 million square feet of GFA once rebound in 2023. As of December 31, the Trust had [ $16 million ] (sic) [ $61.7 million ] of consolidated debt presented as current, which related to a mortgage on 49 Ontario and the Trust's credit facility. Subsequent to year-end, we closed on the refi of 49 Ontario for gross proceeds of $80 million. Proceeds were earmarked to repay the in-place mortgage and the Trust's credit facility. In addition, the Trust amended its credit facility reducing the borrowing capacity from $50 million to $25 million and extending the maturity date to April 2025. Upon completion of these 2 financing activities, the Trust had approximately $30 million in available liquidity, up significantly from December 31. We've also been working through the refinancing of Victory Silos and have now upsized the in-place loan from $35 million to $150 million. Given the size increase in value through the completed refinancing, we will be able to cover the Trust's equity requirement for Quayside with excess proceeds. The Trust has a 37.5% interest in Victory Silos. Effective with the Trust February 2023 distribution, we have revised our distribution from $0.40 per unit to $0.16 per unit on an annualized basis. We believe the revised distribution preserves additional liquidity for the Trust's development commitments and is better aligned with our strategy. In 2022, we generated roughly $15 million of NOI from our current recurring income assets. By 2026, with an additional $500 million of assets completed from development, we expect stabilized NOI to be over 2.5x our current level, which will be more than adequate to sustain our revised distribution level. On that note, I will turn the call back over to you, Michael.

Thank you, Meaghan. Our company now has assets that are over 90% impact. We also have a distribution that is backed by income properties. We now believe that the company is better positioned for our existing investors and also provides more opportunities to attract new impact investors as well. Our asset mix, distribution policy, returns and social benefits can now be marketed to specialized investors and institutions that have a focus on ESG. As we continue to grow our income properties, report on our social good and progress on our development pipeline, we will work to attract more investors that see the value of what we do in the company. At this time, Meaghan and I are happy to answer your questions.

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

I just had a question on the total CapEx for the Quayside acquisition. Are you guys open now discussing how much that's going to be?

So what we're going to say is that we've got documents to the government, the government is very sensitive. We'll report it afterwards. But it's a small amount of money, and the way we're dealing with it is the Impact Trust is going to acquire 12.5% of Quayside. It also owns 37.5% of Victory Silos. So in order to fund Quayside, us and our partner are refinancing Victory Silos, and the money that is refinanced since the Trust owns is a much smaller segment of Quayside, the transaction will actually result in getting some free cash flow for the Impact Trust, and that's going to happen in the next couple of weeks. So it's a small investment, but we're averaging down between the 2 sites.

Thanks for the color, Michael. Just looking at -- you guys obviously disclosed the exposure to variable debt on a consolidated basis. What does that number look like if you actually include all the development projects?

Sai, with our development assets or equity accounted investments of that, it's just under 60%. But we continue to look through various hedging strategies and work for those, but it was just under 60% as of December 31.

We have a number of projects that have government guaranteed debt at very high levels. And that's part of -- they're much more like infrastructure assets. As I mentioned, when I referred to 49 Ontario, our expectation is that a project like that will bring in another partner, well, bring in a partner to not have too much debt to be able to own a big chunk of that property for a long time without stressing the balance sheet. So we will be looking more and more at having partners in large sites.

We have our next question from Dennis Ruetz with Cormark -- I'm sorry, pardon me, Dennis Ruetz with Cornerstone Financial. My apologies. Dennis, perhaps you are muted on your end. Now we have Dennis Ruetz in queue. Just to be clear, sir, are you on the line? If not, I will move on to the next question. All right. We will take our next question. Our next question is from Sam Damiani with TD Securities.

Just maybe to start off, with the $0.16 new distribution, could you just give us a sense generally how you arrived at that specific number?

Sure, Sam. Overall, when we take a look at what our current recurring income assets can generate NOI as well as what's coming online from that pipeline list, we felt pretty comfortable coming up with the $0.16 distribution in terms of how we are able to sustain that going forward, and that's really the focus. We wanted to make sure that this was sustainable, it's covered by the segment, and then we can really focus on the development profit side to further grow the business. So that's really how we worked into it.

Yes. So Sam, we pretty much allocated capital to either the income assets or the development assets and we also allocated expenses. So for the income properties could be leasing costs, prorated debenture interest, the G&A, and we got to $0.16, looks like it's pretty sustainable.

Okay. Great. That's helpful. And just on the development spending, do you have a budget for this year and next year in terms of how much the Trust will spend on the development side?

Yes, the guidance that we've given over the next 2 years is about $45 million to $55 million.

And that's an annual number?

That's in total for the 2 years.

2 years. I'm sorry. And you mentioned West Don Lands, first occupancies coming up in the next few months, I guess. Have you started pre-leasing there or work towards that? And what's your sense as to how rents are or might be coming in versus pro forma?

We haven't started leasing yet, but we're getting ready. We did a pro forma in 2018, which is based on the 2018 rents in place at the time escalated by 3%. And the punchline is that today, rents seem to be $0.02 higher than we originally budgeted. But 2 years ago, we were 20% below. So even though it hasn't been a straight line, it looks as if we're going to do better on rents as well or better as what we budgeted, and we're pretty pleased with that. But it's also interesting because a number that you'll hear a lot is that rents in Toronto were up 20%, but that's just because they were down 20% the 2 years before that. So it's actually been exactly where we hoped it would be.

Our next question is from David Chrystal with Echelon.

Just on the kind of capital requirements and sources for the next couple of years, the $45 million to $55 million is your share of new equity required for ongoing projects, correct?

That's correct.

And so with $30 million of liquidity pro forma, the 49 Ontario refinancing, do you expect the balance will be from incremental debt or asset dispositions, whether whole asset dispositions or partial?

No, I mentioned earlier about a Victory Silos refinancing. I think we're pretty much set up by the end of next month for what we need for the next couple of years.

And so with the Victory Silos refinancing be significant enough excess cash flow over and above the Quayside acquisition to fund that, call it, a $15 million, $25 million shortfall?

Well, it's not a shortfall, but it's probably in that range. It's going to be finalized over the next couple of weeks.

Okay.

So yes, I think it is sufficient. But having said that, we -- I mentioned already that we're looking at partners for 49 Ontario, and we made big partners into Quayside late or stuff like that. So we've got a lot of flexibility. I think we are fully invested, but we really like the assets that we have. And then we want to be investing.

And on 49 Ontario, does the Q4 revaluation, the increase in value, does that reflect the expected '23 rezoning or should we expect more fair value gains there?

We need to wait until we actually have our rezoning accomplished. So there's still -- from what we think we do, we think there's still a cushion there.