Dream Impact Trust (MPCTUN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Dream Impact Trust Fourth Quarter Conference Call for Tuesday, February 15, 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. Mr. Cooper, please go ahead.

Thank you very much, and I'd like to welcome everybody to our Q4 Dream Impact Trust conference call. Today, as always, I'm with Meaghan Peloso, who will introduce the company through some comments on our financials. Meaghan?

Thank you, Michael, and good afternoon, everyone. As it relates to earnings in the fourth quarter, the Trust recognized net income of $27 million compared to $14.9 million in the prior year. On a segmented basis, in Q4, the recurring income segment generated net income of $29.6 million relative to $11.8 million. The increase in earnings was largely driven by fair value adjustments on our commercial properties, most notably 49 Ontario Street. 49 Ontario is an 88,000 square foot commercial building in downtown Toronto, currently in a rezoning phase. As of December 31, the Trust carried income property on its books at a fair value of $95 million, which is an increase of $25 million relative to prior year, and supported by a third-party appraisal. We anticipate rezoning for the site to be achieved within the next 2 years, and have applied for over 700,000 square feet of [ cubic length ]. In the fourth quarter, the Trust closed on an additional 220 multifamily rental units at 100% located in Downtown Toronto. Including this acquisition, over the course of 2021, the Trust has acquired a 32% interest in over 1,100 multifamily rental units, and 2 wholly owned commercial properties, comprising 55,000 square feet for total proceeds of $180 million. In addition, [ Ottawa, Gatineau at ] Zibi, also referred to as the Natural Sciences Building, achieved first tenant occupancy in the quarter, adding another 186,000 square feet of the Trust's recurring income segment. The Natural Sciences Building is currently 86% leased to the federal government of Canada for a lease term of 15 years. The Trust has a 50% interest in the asset. Through asset acquisitions and development execution, we have made good progress shifting our portfolio split to roughly 45-55 recurring income versus development and continue to work on achieving our 70-30 target. The accelerated growth of this segment is important to us as it provides enhanced stability for our operating cash flows, and provides very much a larger scale to achieve our Impact goals. Moving on to Development and Investment Holdings. In the fourth quarter, the Development segment generated net income of $1.2 million relative to net income of $10.2 million in the comparative period. The decrease in earnings was primarily driven by the change in net fair value gains on development projects under construction in addition to a gain on extinguishment of debt in 2020. This was partially offset by the impact of foreign exchange as well as fair value losses on a legacy investment in the prior year. Generally speaking, fair value gains on development projects or income properties with redevelopment potential are recognized when various milestones are achieved, such as obtaining rezoning. Roughly 1/3 of the Trust portfolio is currently in the rezoning process. Once achieved, we anticipate additional fair value gains to be realized on assets such as 49 Ontario, 100 Steeles, which is a 59,000 square foot retail site located near Yonge and Steeles along the Yonge Street North Subway extension, for which a zoning application has been submitted for over 1 million square feet. As of December 31, net asset value was $9.31 per unit, up from $8.99 per unit last year and compared to unitholders' equity of $8.25 per unit. The delta between NAV and unitholders equity is driven by a $69 million cumulative market value adjustment related to the Trust's Lakeshore East and Brightwater investments net of tax. As a reminder, both Lakeshore and Brightwater are recorded at cost on our balance sheet under equity accounted investments. Consistent with prior years as part of our annual evaluation process, both sites were externally appraised in the period, supported by land values of roughly $190 and $95 per square foot, respectively. Excluding write-downs on our legacy investments, the Trust generated a total return of approximately 9%, which includes distributions in its tax [ affected ]. As it relates to our Impact strategy, in 2021, we are pleased with the significant advancements being made in this area. Just to highlight a few key accomplishments. In the spring, we completed our Impact Management system and published our inaugural impact report. Completing the system was a significant undertaking and involved identifying impact pathways for each of the Trust's Impact investments, developing a proprietary scorecard to measure the output of each investment in evaluating each asset within this [ rubric ]. We also published our first disclosure statement, which is a requirement for Dream as a signatory to the operating principles for Impact Management, and completed the third-party verification of our Impact Management system. This fall, we are proud to release our social procurement strategy, which defines key targets to support equity seeking groups and help transform the supply chain to be more diverse and inclusive. All to say, we've made some great progress in 2021 as it relates to impact execution and value creation across the portfolio. On that note, I will now turn the call back over to Michael.

Thanks, Meaghan. We put together an investor presentation and put it up on the website yesterday. The purpose of the investor presentation was to present our business differently, and show you the progress we've made and why it's so important to us. I'll refer to it, but if you have it, that's great. On the cover it says the Trust aims to address climate change, the affordable housing crisis and the creation of a more inclusive society, all while generating market financial returns for our unitholders. So at the Impact Trust, we are totally focused on how do we operate and create real estate that's good for society while our stakeholders earn tremendous returns, at lease market returns. I think we're going -- I think we are where the world is going, and we're pushing very hard to do as much as we can to continue to be a leader in this area, and we've had phenomenal results. In case there's any uncertainty, I would say that I'm actually quite surprised about the Impact Trust's low stock price. With the progress we're making, with the quality of the assets, with being a leader in Impact, with the work we're doing, creating new policies in Canada, it actually is striking to me. Notwithstanding that, we're well capitalized. We've got incredible assets, and we have no need for further equity. But I am a little bit surprised that the market hasn't seeing the value of what we're doing. And I've been doing this for 25 years in public companies, and I don't think I've said much that a company is trading poorly, but I think this one is shocking to me. So I'm just going to walk through why I think that is so. Canada has targeted reductions in carbon emissions by 40% to 45%. In affordable housing, we know that there's 1.7 million households needed to have suitable housing for Canadians. And that with the largest immigration of all time coming to Canada, it is one of the most inclusive countries if you calculate it by people who come to our country. But there's a lot of focus on social inclusion to make our country more fair and provide fair opportunities to all. And our -- what we're focused on is how do we contribute to that. So with regards to the environmental, we do a lot of work on flood proofing and managing water. But -- and in fact, our goal is within the next 4 years to reduce our water consumption through all our properties by 20%. We measure how much greenhouse gas emissions we have. And our goal across the portfolio is to reduce greenhouse gas emissions by 20%. However, where we're using the -- we'll get into the minute the Canadian infrastructure banks financing, we're expecting to reduce carbon emissions by 40%. With regards to affordable housing, we currently have underway or completed 1,571 affordable housing units, which is a lot. I mean if you think about that that's 3,000 people. 3,000 people are paying 43% less than market on their rent. And as a group, they're saving $23 million a year. We expect that we're going to be able to increase that significantly, affecting more families, providing more families with savings and saving literally hundreds of millions of dollars in rent by affordable -- by providing affordable housing. On the inclusive side, the way we're trying to deal with it is we've come up with a procurement plan that includes making the local and underrepresented owned companies public, so that not only do we use them, but we make it easy for others to find them. We want to work to fill the gap with them so that they can be leading suppliers to us, and we expect to award 20% of all of our contracts to those groups, and we expect that we're going to increase the number of underrepresented people that work on our sites that are hired by us, hired by our suppliers. And so far, everything I've talked about are things that we can do that provides good to the society, but also a good financial return. In the inclusive area, which is things like tutoring, and I'll mention a little bit later, programming support. And as we've been working on our impact model, we realized that there are some areas that are not backed by getting the good financial returns. So I think as an investor, it's important to know that we only focus on how do we do good while getting good returns. The other areas that are also quite important, that's philanthropy, that's not investing. And our family has put up $25 million to create a foundation that will work in our communities as well as others, funding areas to make them more inclusive. As a result, we think we're going to do a remarkable job reducing greenhouse gas emissions, creating affordable housing for many, many families and providing a more inclusive community wherever we're active. We are the first traded vehicle in Canada that focus on impact investing, and we're one of the leaders in the world. Currently, we have about $1.2 billion of stabilized income-producing properties and active developments that align with our 3 impact verticals. We expect to get to 70% recurring income and 30% development, but we're working our way towards that. As for the most part, we are creating these impactful investments. We expect to get a 9% after-tax return from our work over the next 4 years, including assets that may not be producing any income during that period. So it's understated on a before-tax basis, it's well over 10%. I've said this a lot, but our real estate portfolio is comprised of irreplaceable assets. And we have a site 49 Ontario that we're in the process of getting rezoned for 600,000 or 700,000 square feet of density, of which 85% or 90% will be residential. We will end up having an amazing residential complex on Adelaide in Downtown Toronto, and it's really a sensational asset that would be highly sought after. We recently acquired Weston Common, we'll talk a little bit more about that, but that's another great asset. We bought it in a private transaction, and we've refinanced it. And I think those numbers are going to be great. Another example is the Natural Scientists Building in Zibi, which is the first net-zero building in Ottawa and the first one the federal government has moved into. They are thrilled with it. We've got about another 1.8 million square feet that we can build to commercial and we hope to do a lot more. Over the last 25 years, we've done quite a bit of impact investing, including things like the Pan Am Athletes' Village, and we've had exceptional returns. We've also been able to prove to governments that we can live up to what we say, both in terms of budgeting as well as timing as well as achieving the soft goals as much as the financials. Dream Unlimited has increased their stake in the Impact Trust of 29%. We are currently receiving our management fees and units from the Trust at net asset value. And we're quite content to be able to invest in this company at full net asset value, even though it's trading at a significant discount. In 2021, we did a lot of things. A lot of these things I was hoping would be legitimizing our business, such as getting the impact report published. Between that impact report and some of the other things we've done, there's now a Harvard case study on the Impact Trust that's taught in thousands of schools all over the world to focus on achieving market returns as well as doing good. We have got our GRESB score of 90 out of 100, which is one of the highest initial GRESB scores they've given out. We did a loan with the Canadian Infrastructure Bank, which is the very first loan that the Infrastructure Bank has done to decarbonize income properties. We went to the federal government with an idea we had to create affordable housing within existing apartments, and we worked very closely with them over an extended period of time. We created a pilot project where they would guarantee loans on favorable terms provided we achieve certain decarbonization as well as creating affordable housing within those buildings. That has been an incredible opportunity, but it also has led to November 1, the CMHC came out with a new policy called MLI Select, which started with our pilot, and they've expanded it since. And that is a nationwide program to increase the amount of affordable housing in Canada by providing attractive debt for companies that -- for owners who decarbonize their building and take market buildings and make them affordable. We're very proud of being able to help shape policy with the federal government. And as an Impact vehicle, the ability to not only benefit from the pilot project we did with CMHC, which was very valuable. It is very rewarding that we also can benefit from the impact of everything that comes after with the idea that we've developed with the federal government. Zibi, as everybody knows, is the first zero carbon community in the National Capital Region. In 2021, we got our district utility up and going, and it's now functioning providing net-zero heating and cooling. And as an organization, we decided that we want to work towards being net-zero by 2035. We have a lot of goals on the programming to get there, which we want all done in 2022. But we have every expectation that we're going to be able to achieve that. Just a couple of other ideas. As we talked about -- the Indigenous Hub that we're doing in Downtown Toronto consists of an apartment building, a condo building and event space. It is the very first Indigenous Hub that's being built in a major city. We work very closely with our partners to make terms with the First Nations group and with the City of Toronto, so that we could build a large enough building to provide them with the financing that would help them build this center. It's going to have health care, which will be both traditional health care that they're used to, that they've done for thousands of years, as well as Western health care. There will be a -- there's lot to promote business, to career development. We're very excited to support them. But I think that what we're doing there that's really amazing is, we're getting excellent prices per square foot for condos as part of this development. We're very excited that the apartment building will be ultimately successful. And we're really creating this First Nations-themed community right in Downtown Toronto, and people are really happy to be part of it. So that's a breakthrough in a lot of different ways. In the West Don Lands, we helped pioneer with Infrastructure Ontario, how the government can use land that's underutilized to create affordable housing. And we're building 2,300 units in total. But the first 770, the construction will be finished in 2022, and we hope to have that occupied in 2023. That's another building. We're working with the provincial government, working with CMHC. We've been able to get desirable financial terms, and we're building a great project. The numbers of people that will be affected positively by is huge, and the financial returns are going to be meaningful. And quite honestly, we'll be superior to buying an apartment building on market terms. What I thought was interesting in 2021 is we acquired about $260 million -- or developed $260 million of recurring assets. We've more than doubled the amount of recurring asset -- income assets that we have. And we're pleased that the pipeline of developments turns into income and everybody can see that. We're also pleased with apartments and commercial properties, we've been able to find a pipeline of Impact investments that are -- that we could get through acquisitions. That increased the total recurring income of the portfolio to 43% over our budget period that's going to 2025. We have another $470 million, which would more or less double the amount of income assets we have again. So I think that people can see that we really are making progress on taking land that has incredible development potential and turning into income assets. I'm just going to skip to the Victory Silos, which is a project -- it was acquired for $58 million. We financed it with $30 million of debt. I believe today's value is $250 million, it was basically $200 a square foot on 1.25 million square feet. This has happened over the last 4 years, maybe 5. That's a huge return on the equity. And what we end up with is the ability to build 1.3 million square feet of density on the water besides Quayside, and it's got to be one of the most desirable pieces of land in the city. And the Trust has already made a ton of value, even though there's been no income. But we think that's going to be exceptional. I mentioned 49 Ontario is exceptional. LeBreton Flats is a bid we won. It's on the entranceway to Zibi. And that was a really special bid. I think it's our best bid so far. It's going to have 40% affordable housing. We partnered with Multifaith, which is an affordable housing provider, and they're going to do half the affordable housing, we'll do the other half. The innovative financing we did has never been done before, but it allowed us to work with a not-for-profit and access not-for-profit financing as well as for-profit financing. And we're going to end up having -- in the affordable housing, we're now targeting who the recipients are. So here's going to be single mothers, First Nations, veterans, new Canadians and people with mental disabilities. The site is going to be exceptional. The math works and our team is very proud of being able to put together a structure that allows us to be so creative, and as I will continue to say, and make a fair or better than fair return for our investors. On Page 13 of the package, there's just some notes on the Dream Community Foundation. It is dedicated to improving the well-being of individuals, families and neighborhoods across the country. The foundation will support the impact -- our impact mandate with a specific focus on building inclusive communities through resident and community benefits, working in partnership with the Dream Group of companies and also with local not-for-profits. The foundation will support initiatives that fall under the following themes: affordable living, health and wellness, education, skills and culture and belonging. We hope to have a lot of concrete results on the foundation that will make our assets even more attractive. What I would say is we've seen this with renewable power that, when we start doing something that's very innovative, there are skeptics who do not see the value in it. When we sold our renewable power, the prices we received were really amazing because it had become something that was very strategic. As we continue to buy and transform existing assets into Impact assets, or take land and develop them into Impact assets, we're firmly of the view that the assets that we create will trade at a higher multiple than assets that don't have an Impact component. So I would say that based on the feedback on LeBreton, being able to do the first financing for creating affordable housing in existing buildings, creating the first financing for decarbonizing buildings with Canadian Infrastructure Bank. We've been able to do a lot of things that haven't been done before. We're putting it together in a way where a lot of people are going to make money. And based on feedback that we have, we're expecting there's going to be a lot more opportunities. Now based on the assets that we have now, I think we can get to about $2.8 billion worth of income properties. And we have enough capital between the capital that we have, plus the profits we make from developing condos, to be able to continue to run the business the way we are now. To affect more and more people positively and to get excellent returns on the capital without additional access to capital. You know in a perfect world, as we pursue these opportunities, we would love to be able to have the Impact Trust participate in them in the future. And I'm sure we will be able to find ways to do that. But we are pleased with the progress that we're making in the business, the returns we're generating and the acceptance of -- from institutions, financial institutions and governments in supporting the business that we're developing. So we're very excited about it. I hope that as you get more familiar with our business, you'll see the same value in it as we do. And we invite you to keep an eye on what we're doing. It's very different than what other people are doing. But I think you'll see as every quarter goes by, our business will become more and more familiar to you, and hopefully, will be more valuable to you. With that, Meaghan and I will be happy to answer any questions.

[Operator Instructions] And our first question is from Frederic Blondeau from Laurentian Bank.

Just looking at the cash position and the balance sheet as at Q4, and I guess expected NOI from the stabilized assets in 2022. How should we view the distribution level from here?

We have been planning on maintaining at this level. We look at the total return of the business the same we have pension fund would be, which is how much debt cash do they get and what the change in value is. So we were at $8.99 of NAV. During the year, we paid out $0.40, and we're now at $9.31. So that's a total return of $0.72. And we think that's pretty good. And at this point, our expectation is to continue looking at the business that way and paying the dividend as it is -- as we've been doing since 2014.

Okay. And so just to be sure, what would that mean in terms of the balance sheet? Like, I guess, what are you willing to do to keep that distribution?

We have the money to do it. Sorry, I don't understand the question, Fred.

You have $8 million of cash. And I'm expecting -- like how much do you expect in terms of NOI from your stabilized assets in 2022?

We're not saying that we're going to earn the money from the assets. We're saying that you take a look at the change in value after paying the distributions, and you have the distribution, that's the total return. What we think over the next 3 years, we should achieve our total distributions and operating cash. But last year was about 0. This year, I think it's about the same, it's getting a little bit better. And then after that, we start to see a big change. But that's how we look at it.

Got it. Now I was thinking more about 2022, but we can take that question offline. And then just looking at Dream's position and Dream Impact, can you remind us what would be the ultimate position in Dream Impact from these -- guess?

Beg your pardon?

Mr. Fred, just to clarify. Are you asking with Dream's ultimate position in tenant [indiscernible] in the Trust?

Yes. What would be the ultimate goal here?

Well, we've said that we're content to settle the management fees with units and net asset values, this year will be at $9.31. And we'll do that for the next 2 years. And based on everything I see now, we'd probably be content to do that for well beyond them 2. So it all depends on what other equity is in the company. But we're very excited to own more of this, to invest more capital in the business, and continue to grow our Impact focus, whether that's through our private fund, the Dream Unlimited or the Impact Trust.

Our next question is from Lorne Kalmar from TD Securities.

So just going on to the apartments, you guys obviously made some good headway, and you highlighted some of the financing programs that have enabled you to do that and should continue to enable you to do that. What's the outlook on the acquisition front for 2022?

We do not have a huge pipeline. We've been working pretty hard on getting some of these RFPs. And the other thing is, we went from 0 apartments to 1,200, and the team is managing it quite well, but we're putting all the systems in place. What we expect in the second half of the year to have a pretty robust pipeline, but we're not -- I don't think we have anything under contract or close to that right now.

Okay. And then on the Aalto Suites at Zibi, it looks like you guys got about 10% leases at year-end. How has that been going thus far in 2022? And how are rents kind of compared to pro forma?

So do you mean when it's minus 20, and the truckers have occupied the site next door, how is it going showing the apartment?

I guess when you put it that way, it's a bit of a silly question, but sure.

Yes. You're doing pretty good. Yes. Yes. So if you Googled it, you see that at Zibi, there are some trucks there and stuff like that. So I mean, I've never had a more hostile marketing environment. We are making progress, and we expect that actually when the weather turns and things normalize, people are going to love it. We're up a lot -- we're not a lot -- we're up meaningfully from year-end. And as far as the rents go -- because of the way we structure the transaction with the financing, our rents are rather static. And I think what we're finding is that tenants looking for a good building are really quite pleased with our offering in terms of the quality of the building, the location and then when they get to the rent, they're quite surprised that it's not higher. So it's a very fair rent. And I think it will be no problem leasing up to building.

So you saw, I guess, assuming hopefully, things clear up in a little bit, you guys think you can have stabilized in 2022?

I sure hope so. But just to be clear, we have a maximum rent we're allowed to charge. So you ask how is our rent compared to pro forma, it's perfect. It's exactly what we pro forma because that's the maximum we can charge.

Fair enough. Nothing wrong with that. And then maybe just lastly, you guys have obviously got the LeBreton Flats. Any update or expected timing on an update related to the Quayside land?

We have absolutely no information at this time.

That was the less exciting answer I was hoping for. But it will have to do.

[Operator Instructions] And we have a question from Bob Beiersdorfer from RBC Dominion.

Are any of your developments using some of this low-carbon concrete? 40% of construction is putting out the affluence and there's some very interesting technologies, CarbonCure in Halifax just won the XPRIZE. Are you guys looking at that? Are you currently using any similar technologies?

So what we do is we focus on what type of impacts we can make. We focus on what the pathways are to make those positive impacts. There's also negative pathways that -- one of them has to do with some of the construction issues. Amazon is using the carbon capture concrete in their new head office, which is an amazing, amazing building, but cost was no object. We're spending a lot of time on different materials. But I think carbon capture, the last I saw was 10x more expensive than normal concrete. And this is where our commitment to investors is, which is -- we need to be able to make economic returns, and we cannot make economic returns with carbon capture concrete. So we're reducing our carbon in other ways, but we are watching very closely at picking up technology and evolutions and developments to reduce the carbon emissions during construction. By the way, your $0.44 number is not just during construction, that's during construction and operation of buildings. And by the way, every time I added up all the different things that emit carbon, it turns out to be about 300%.

[Operator Instructions] And Michael, I see nothing further in queue. So I'll turn it back over to you if you wanted to do closing remarks.

Well, once again, I'd like to thank you all for spending time with us, and following the company. I hope you do sort of see that we're doing so many things that are innovative. I think there's a lot of things that we're doing that other people will do, and it will help address a lot of these social issues. And along the way, I think we're going to do quite well. One thing I didn't mention is the current stock price that we get to NAV within 4 years, I think it's about a 20% IRR. So I think there's lots of financial reasons and lots of social reasons to support the company. Dream Unlimited definitely is -- and we're quite pleased with our progress so far, and especially the acceptance by governments of -- our innovative way of doing business. So thank you for continuing to follow us.

And thank you, ladies and gentlemen. That concludes today's call. Thank you for participating, and you may now disconnect.