Dream Impact Trust (MPCTUN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Dream Impact Trust Quarter 3 Conference Call for Friday, November 13, 2020. 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 files with securities regulators, including its final long-form prospectus. These filings are also available on the website at www.dreamimpacttrust.ca. Later, we will have a question-and-answer session. [Operator Instructions] Your host for today will be Mr. Michael Cooper, Profile Manager. Mr. Cooper, please go ahead.

Thank you very much, operator. Today, I'm going to ask Meaghan to speak to some of the facts. And then I wanted to introduce people to the Impact Trust and provide an update. And after that, we would be happy to answer your questions. So Meaghan, do you want to proceed?

Thank you, Michael, and good morning, everyone. During and subsequent to the third quarter, we achieved the following from a development perspective. In September, we successfully launched the first 2 condo buildings at Brightwater, a 72-acre waterfront community in Port Credit. The site was originally home to an oil refinery and required significant remediation work along with rezoning. We experienced strong demand, as 96% of units released have been sold at attractive pricing with occupancies expected in 2023. The 2 buildings launched to date represent 10% of total residential units expected for the project. From a leasing perspective, we executed commitments on approximately 40% of the total nonresidential GLA in the first phase of development, which comprises just over 100,000 square feet. Brightwater was awarded the best new community in planning or under development by the Building Industry and Land Development Association this year. The Trust has a 23% interest in this development. Zibi, the 34-acre waterfront community along the Ottawa River in one of the Trust's most significant impact investments. As of September 30, the Trust has invested nearly $70 million for 44% interest in this development. Block 10 is Zibi's first rental building located in Gatineau, Quebec. Block 10 is a 162-unit buildings, of which 149 units will be affordable and will also house Zibi's District Thermal Plant. Subsequent to the quarter, the Trust received credit approval to close on a 10-year loan, which would otherwise not be available for market rental projects. Although the interest rate on the loan is not obtained until their first draft, based on today's rates, the facility will cost us less than 1%. We are building to [indiscernible] cap on the asset and expect first tenant occupancies to be in early 2022. Block211 is 185,000 square foot commercial building in Ottawa leased to the federal government of Canada. Construction is on track for a November 2021 completion date. And we believe due to the strong tenant covenant and positive impact at Zibi, we will attract favorable [indiscernible]. On October 23, we obtained building approval for the West Don Lands Block 3, 4, 7 and 20 through a Municipal Zoning Order issued by the province of Ontario. The West Don Lands development includes Block 3, 4 and 7, Block 20 and Block 8 and will deliver nearly 2,300 purpose-built rental units, of which 30% will be affordable and 300,000 square feet in commercial space under the province's Affordable Housing Lands Program upon completion. The MZO approval was a significant milestone for the Trust, as it accelerates the development time line and securitization of density to deliver one of the largest affordable housing programs in Canada. We are currently working towards obtaining construction financing for Block 3, 4 and 7, and based on current development time lines, expect to break ground next spring. Block 8 is currently under construction with an expected completion date of 2023. In the third quarter, the Trust reported a nominal net loss compared to $2.9 million of net income in the comparative period. The change from prior year was largely attributable to lower recurring income from noncore asset sales and normal course loan repayments, lower development income due to the variability in completion time lines and noncash foreign exchange fluctuations. These items were partially offset by reduced G&A and fair value adjustments. Results for the period were in line with expectations due to our focus on the development segment, which inevitably will result in fluctuations in income and cash flow due to the long-term nature of our projects. As a significant portion of the Trust's portfolio is currently under development, we expect our operating results to be more meaningful in 2022 as certain income properties under construction come online, including Block 10 and Block 211 and Zibi. As we build our development pipeline, we expect our build-to-hold assets will further contribute to our recurring income. Over time, as we make progress on our developments and keep our best-in-class developed income properties, we anticipate that 70% of our assets will be income properties and 30% will be under development. From a liquidity perspective, the Trust currently has $120 million in cash on hand, which will be largely used to fund our ongoing development commitments, distributions and operating costs. We are currently changing the collateral base of the Trust's $50 million operating facility to be more aligned with our current portfolio base. Once completed, we expect to generate an additional $38 million of liquidity to acquire income properties meeting our impact criteria. Considering our portfolio's focus on development and in anticipation of the expiry of our agreement with Dream, pursuant to which Dream agrees to [indiscernible] an attractive payment of its management fees, the Trust is in discussions with Dream regarding an extension of such agreement. The proposed extension would provide that asset management fees will continue to be settled in units based on the Trust's net asset value for an additional 3-year period, among other certain amendments effective January 1, 2021. The extension would be subject to applicable regulatory and shareholder approval. By continuing to settle our asset management fees in units and deploying our enhanced liquidity to new income properties, we expect to improve the Trust's operating cash flows and cover the Trust's distributions between 2022 to 2025. Referring to Slide 2 in our conference call deck, I will now provide an update with respect to progress made on building out the processes and oversight structure for our impact management framework. Through Dream Unlimited, the Trust's asset manager, the Trust is now a signatory to the Operating Principles for Impact Management and a member of the Global Impact Investing Network. The principles of our framework for the design and implementation of specific processes to the management of investments targeting positive social and environmental impact. By aligning ourselves with these established standards, we're promoting transparency in formulizing our approach to measurement and reporting the impact we create. As we work through this, our intent is to set the bar with respect to impact-related disclosure and ultimately create a robust level of reporting, similar to that of our financial statements. Over the next 5-month period, in collaboration with experts and stakeholders in this field, we will be working towards publishing our annual disclosure statement outlining our core objectives and details on our measurement approach. As a reminder, our Dream Impact verticals: attainable and affordable housing, inclusive communities and resource efficiency. At a more granular level, we will also be identifying our impact pathways in developing our standard measurement scale. Consistent with the impact management project's 5 dimensions of impact, we'll identify the 5 pathways that are measurable, benefit people of the planet and increase during the investment horizon, which align with our core verticals. All of the pathways connect to the United Nations Sustainable Development Goals, which can be seen at the bottom left of the slide. From there, we will determine the extent to which the investment or asset will produce deep and lasting impact, followed by who will be affected, including how many and how well or underserved they are. These considerations are measured on a scale from 1 to 5. We then look at the contribution, effectively trying to determine how much we played in achieving the impact and whether it would have happen regardless, awarding a score of 0 to 3. We then aggregate the score to each asset in the portfolio to compare the impact of our various investments and determine a score for our entire portfolio. As we work through a measurement scale across the Trust portfolio, we are pleased to announce our target of net 0 greenhouse gas emissions across our properties by 2035, which is 15 years ahead of target set out by the Paris Agreement for climate change. By developing a systematic approach to impact measurement being transparent and rigorous in our reporting and listening to stakeholders throughout the process, we hope to be a leader in the impact investment deal. With that, I will now turn the call back over to Michael.

Thank you, Meaghan. I want to focus on the assets and the value, but I do want to reiterate that the work that Meaghan is discussing is really about the integrity of our impact investments. The rigor of our process, our transparency and our verification will open up the field for investors. So we'll be providing more details about that over the next 6 to 8 months, but it's a very meaningful part of creating global appeal for our business. But -- we attached a slide on Page 3 that shows 4 developments that we've been speaking about quite a bit. It's the West Don Lands, the Indigenous Hub, Zibi and Brightwater, which altogether are requiring about $183 million of equity. And we anticipate that they will provide a 15% IRR or averaged out to about $27.5 million a year for 10 years. And then other than Brightwater, those assets will be best-in-class assets, recurring income assets. And they will continue to provide current income plus growth for hundreds -- for -- in the case of West Don Lands for another 90 years. And they're going to be all the more relevant and valuable, because they not only are best-in-class assets, but they make positive contributions to society. We also own about $220 million of income properties that currently generate over a 10% -- an expected 10% annualized return, and these assets also have impact elements to them. We've been working on rezoning land. Dream Impact Trust has 8 sites in total that are currently being rezoned, and you can generate a lot of value. The 3 largest are 49 Ontario, which is currently an income-producing asset, it's on our books for $60 million. And with zoning, we expect it to be worth $120 million, and once we develop it, will add another $120 million of profit as we build mixed-use apartment and office property. Now this only should be achieved in 2022, and construction should start by 2025. Now to give meaning to the numbers I'm talking about, I just want to remind people that currently Dream Impact Trust has a market cap of $380 million, and we think we can get $240 million of value over the next 6 years or so out of this one site. The Victory Silos, which is on the waterfront in Toronto, was acquired in 2017 for $58 million, and the Impact Trust owns 37% of it. By the way, at 49 Ontario, the Impact Trust owns 100%. But the Victory Silos, the Impact Trust owns 38%. We're very close to agreeing with the city to be at 1.25 million square feet of density. Based on trades in the downtown area, not even taking into account that this site is on the water, we think the $250 a square foot is a fair value for density. That would create $300 million of value by the time they're zoned and had a site plan approval, which will take a couple of years. And as usual, we would expect to be able to double the land value through development, that's another $300 million. And the Trust owns 38% of it. So easily, we expect over $100 million of value creation from the rezoning and then another $100 million through the development process. Another great site we have is 100 Steeles, and we are expecting that we'll get to about 1.3 million square feet by 2023. This is in an area on the north side of Steeles. All the landowners are working together with the City of Vaughan to have the sites approved. We're going to build some commercial space, condos and apartments. And by the time our development is ready to be occupied, there's a Yonge Street Subway stop at Steeles that will just be steps away from our property. We're also 10% -- we also own 10% of the new Virgin Hotel in Las Vegas. It is being renovated and will open again in January with the larger open in March. The business is very well positioned for post-COVID, and upon stabilization, we will exit the site as we had originally planned. The Gehry development is in final predevelopment and we expect to launch in the spring of 2022. We also have some loans that we expect to be repaid over the next 18 months. Altogether, I expect that by the December 31 statements, we'll have an NAV of around $9. And from there, we expect to have quite phenomenal growth and value. Dream is very happy to own 27% of the business, and we're also very happy to increase our ownership further. This is a great company, simply based on the value of what it owns, and the future looks great. In addition, the business creates a meaningful and important positive impact on society, which we're thrilled to be a part of. [indiscernible] our work on setting up the impact framework. We had a kickoff meeting this week with outside consultants and about 40 members of the wider Dream team. Our goal is to create the most transparent and rigorous impact reporting and set new standards in this field to better help people see what we are accomplishing. We are also focused on increasing our operating cash flow to exceed our distributions from the period between 2022 and 2025 and beyond. To do this, we put in place attractive financing that will allow us to spend $40 million of cash we've been holding on existing income properties. We've also spoken with the Board of Impact, and Dream has signaled that they are prepared to accept units for the management fees and they'll commit to 3 years, and we'll accept them at net asset value. And this is subject to shareholder approval. We believe that these 2 changes alone will allow us to cover our distributions. But in the meantime, we will continue to seek other opportunities to increase our recurring income and to cover the distributions even more. Now I just want to review some of the things in the press release to provide some insights into the creative benefits of being an Impact investor. We did announce that the Ontario government had issued a ministerial zoning order, which allows the province to zone land directly rather than having the zoning done by the city. As West Don Lands is provincial land and we are building affordable housing, they wanted to approve as fast as possible. In addition, we have increased the total number of units from 1,500 originally to 2,200 and the affordable component from 450 units to almost 700. Being able to build more quickly allows us to get the affordable housing available faster, and the shorter time frame and increased certainty increases our returns. At our affordable Block 10 at Zibi, Meaghan mentioned that we've secured high leverage fixed 10-year debt at less than 1% based on the current rate. As we are building to an expected 4.5% cap rate, we're expecting an ongoing 30% running return on equity indefinitely. Finally, we are also able to get a commitment for a 20-year $20 million loan and a $3 million grant for our 0 carbon District Thermal Plant. All of these benefits are only available, because we are creating positive impacts and they contribute to Dream Impact Trust's ability to generate higher returns. At Dream, we have always focused on the double bottom line, of making lots of money and doing good. We already own many of the most significant impact assets in the country, and we are seeking more. The anticipated framework around impact investing provides us the language and vocabulary to articulate what we already have done historically. For me, internally and externally, to be able to explain ourselves clearly, with the global movement supporting what we do is a game changer. We're able to attract and retain phenomenal talent, because everyone is involved in exciting projects that do good. As people search for purpose in their work, they can find it at Dream. The authorities are very open to supporting impact projects, because they need to provide know -- they need private know-how and expertise. And the only way to make this sustainable, to make it larger scale is to make it attractive financially to private groups. Now all stakeholders, pensioners, pension funds, retail investors, high net worth investors, sovereign wealth funds, hedge funds are all feeling pressure to invest to make a difference, and this pressure is growing. We believe that we are at the very beginning of this movement. Now Meaghan also mentioned that we announced an intention to have net 0 greenhouse gas emissions by 2035. As she said, 15 years prior to the government of Canada's stated intention, the Paris Accord and many companies' already commitments. We think we can achieve this by expanding our Thermal District and we also have experience in renewable power. We think we can build green buildings, and we think we can make them more green. We have some other ideas that we're pursuing that will have huge payoffs. And we expect even better technology will be developed and that will make an even bigger contribution. Now I've said it before, but our focus is and always has been impact at scale. So there are a number of real estate groups who have acted in -- consistent with what we're trying to achieve in impact. But in order to have a real difference, it's got to be at scale, and that's our expertise. I think basically, every project I've mentioned so far has a build-out value in excess of $1 billion. Now, I just want to quote a couple of things. Number one, Mark Carney said that net 0 transition represents the greatest commercial opportunity of our lifetime. That's a pretty big statement. Yesterday or 2 days ago, Bruce Flatt said that Brookfield's impact strategy will grow to $100 billion. And just to be clear, because I think the newspapers have really focused on Mark Carney's role in ESG. His title that was announced in August as Vice Chair and Head ESG and Impact Fund Investing. So I don't know if you need it, but I think the stuff that we're talking about impact investing already had signatories of over $340 billion. Brookfield alone, they're going to add $100 million to that. This is the fastest growing asset class globally. And for those who we've spoken with, I think they've been reminded every 2 or 3 days in the papers that this class is everywhere. So we believe that the Impact Trust will be very successful. We're motivated to position our business to be attractive to investors early as this area continues to grow exponentially. That's why we're going to do everything we can to convince you that the distributions are safe and the value of the business is increasing, and we are your best vehicle for impact investing. We have made growing our impact footprint one of our highest priorities throughout our organization. We hope to grow our impact through the Impact Trust, through our own capital from Dream, co-investments from institutions. There's an abundance of capital for what we are doing. The Impact Trust has the potential to be the most financially successful and meaningful business we've ever created. Just to remind you, we created our European business Dream Global in 2011. We had a lot of skeptics at the time. It was interesting too, because the lead investors in our IPO weren't real estate dedicated investors. They were more global investors. It turned out to be a phenomenal success over the next 8 years when we sold it last year. We also entered into the renewable power field in 2005 at a time when people felt it was kind of a scam. And from 2005 to a few years ago, we developed over $2 billion of solar and wind assets, we generated over a 12% IRR on the equity and we exited at an approximate 7% IRR to the purchasers. But in my experience, there's nothing that we've ever embarked on that has the potential that impact investing has for us. The Impact Trust has the potential to be the most financially successful and meaningful business we've ever created. Our organization is singularly focused on Impact Trust as well as significantly focused on the Industrial REIT and Office REIT. But I do believe that for me personally, what we're doing in impact is likely to turn out to be the best thing we've ever done. As Meaghan mentioned, as we build out the assets we have, as we keep the recurring income assets, as we develop more income assets, we expect that we'll achieve 70% of our portfolio will be income properties. By the way, we would be happy to provide tours in Toronto or Ottawa. And in Toronto, we could show you the West Don Lands and the Indigenous Hub. The land that we're developing there is the same size as the distillery, and it's really exceptional. So if anybody is interested in seeing what we do, we'd love to show you. And with that, I'd be happy to answer any questions.

[Operator Instructions] Our first question comes from Fred from IA Securities.

It's Fred Blondeau, obviously. Great presentation. Just on the 2 income properties under negotiations, I was wondering if you could give us a sense of, first, I guess, the location will be GTA, but also pricing. And maybe a quick overview of the optionality relating to these 2?

I'm going to turn it over to Jamie. Do you want to address that?

Sure. It's Jim Cooper here. So the 2 assets are in Toronto. One is a value-add opportunity, and the other has a tenant in place. We think both are really attractively priced compared to -- just based on their current condition, we think that there's lots of opportunity to create great impact on both of the assets. And we're actively working with our tenants to do so.

And could you remind us how do you intend to finance these 2 acquisitions?

Well, these 2 acquisitions, we've got $120 million of cash on hand, but we will be looking to get first mortgages where we can get great rates. But I think that one signal that we're trying to make to everybody today is we're going to add to our income properties. And I think that as we grow, we're going to find opportunities -- sorry, when we talk about being able to cover our distributions, that's just with the assets we have now, plus these 2 that we talked about. We think we're going to be able to do a lot better over the next year.

No, that's totally fair. And on the same line of thoughts here, in terms of your income properties, how would you characterize your current acquisition pipeline like outside these 2, obviously?

These 2, we've been working on for a while. We're looking at assets now, but we're trying to fulfill the double aspiration of high returns plus good impact. So it's kind of a specialty. These 2 are really interesting boutique buildings that we think can make more significant in their communities. We think that as we apply some of the work that we're used to doing in Dream Office, we can get great rents. But we're just now really embarking on finding income properties for the Trust.

And given the opportunity you're seeing -- and Michael, you were mentioning that capital is lining up to be invested in this space. Would you consider -- I'm still talking about income properties here. Would you consider bringing external JV partners to, I guess, accelerate or execute on your acquisition pipeline of income properties?

So it's a great question, because the way that we look at impact, it is not essential that we're the one doing the developing or the work. So if there was great ideas, we would support them with equal enthusiasm if we were developing ourselves. And by the way, that's very different from most real estate players. But what we're trying to do is measure impact. And if we can help people achieve great impact and benefit from it financially, we would do that. But that would be more -- we do see people coming to us with ideas. We looked at one recently. We didn't think it was the right one. But we definitely would be happy to support people who are getting high returns and doing good.

That's great. And in the press release, you were mentioning West Don Lands Block 8 and Zibi Block 10. Have your views on construction costs evolve as recently in the light of rising material costs?

It's interesting too, because Block 10 and Block 8 are very -- the contracts are tendered for the most part. So we don't have too much exposure, but we are seeing that elsewhere. We're seeing that -- some of the enormous interest rate savings is going into the capital requirements -- the capital cost of a building. But it's still way better than it would have been a year ago. So I mean, the overall return on your equity is way better this year than last year.