Dream Impact Trust (MPCTUN) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to the Dream Impact Trust Third Quarter Conference Call for Thursday, November 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. Mr. Cooper, please go ahead.

Thank you, operator, and welcome to the Impact Trust Q3 conference call. We released our results on Monday, and happy to have the opportunity to tell you a little about the story and answer some questions. Overall, we're really quite excited about this business throughout the entire Dream Group of companies. Dream Impact Trust owns interest in some of our most exciting assets. And I thought this morning, I'd just start a little bit by talking -- this afternoon, just by talking about some of the assets. And Meaghan Peloso will go through some of the financials. And then after that, we can answer your questions. I'm not going to go through all the assets, but just to name a few, like the Victory Silos site, we bought it 5 years ago. We've got it zoned. It's on the water. We're getting close to ready to go. The authorities still have some work to do in that area to make it even more exciting. And then we won Quayside. So Quayside is the 12 or 13 acres next door to Victory Silos. So together, we've got 18 acres there. And we're getting very close to having the definitive documents completed for Quayside. And that's going to be an amazing project. Great opportunities, 4,300 units, 3.4 million square feet. And we hope to have that close in the next 6 to 7 months or so. The Gehry project, Forma, we launched it in June. I think we referred to it in August numbers. We had a very successful launch at a very high price. I think we're going to end up over $2,000 a square foot. We sold about 45% in the first opening. Then the balance of the summer, we were closed. We picked it up again, and it's going very well. We expect that we will be at our presale requirement, which could be -- which will be well in excess of $700 million of sales by Christmas. And we're also making great progress on the construction debt, and we're actually expecting to start construction on that tower a little bit later this month. 100 Steeles is a building that we bought with very little capital, but it's going to be a 1.5 million square foot residential development with some commercial, but it's working its way through the [ Vaughn ] approval process, but I think we're getting very close on that. And that's going to be a major, major project. We've got a variety of other investments. One thing I would say is our Virgin Hotel investment has not been participating in the recovery as Vegas as much as we would like. And we expect that, that investment is going to struggle, and we're trying to understand it better, but it's been a disappointing investment. On the office properties, for the most part, they've been going great. Sussex Center, the suburban in Mississauga, it hasn't been going great as the others, but all the others are doing wonderfully well with the biggest positive being 49 Ontario. We're working through the approval process. It's got an 80,000 -- 83,000 square foot office building on it. The site is an 1.5 acres. We bought the adjoining townhouses so that we have access to all 3 streets and we're expecting to get well in excess of 800,000 square feet of density predominantly residential. So that one has been great. And we got into the apartment business by buying existing apartments. The REIT -- the Trust has about $200 million of apartments at book, and they've been performing very, very well. And what we're seeing now is market rents for our buildings are ahead of our 2023 budgeted numbers over the last few months. So that's pretty exciting. So our [ occupancies ] going up, the rents are up. And I think we've said it many, many times, over the next 3 years, expect to add $500 million worth of income properties being like West Don Lands 8, that's going to be done in the next couple of months. And what's really interesting about West Don Lands is titled the site in 2018 and made some progress on it. We were able to get a loan, an RCFI loan from the federal government. That's got a fixed rate debt for 10 years. We're under construction, we should be on budget. And when COVID hit, apartment rents came off quite a bit, and we were well below the trend line. So if you take 2018 rents and inflate it by 3% a year, we just surpassed the trend line like this month. And with a few more months before we lease up, we think we'll be in good shape against our pro forma. Block 3/4/7 is very much under construction. It's even bigger. Block 8 is 751 units and block 3/4/7 is over 800. And that's coming along. We won the LeBreton Flats bid, and we're hoping to start construction in the second quarter of 2023, which is pretty exciting. And Zibi has been -- we made great progress. We've got great leasing going on in what we call Block 10 in Gatineau. Block 11 is [ actually ] like the 10th or 12th story. It's coming along great. Our first apartment building in Ontario is coming along great. So a lot of the exciting developments or income assets or even condos have been very good, and we're really pleased with how the business is going. Meaghan, do you want to address the financials?

Sure, happy to. Good afternoon, everyone. I'll briefly speak to our financial results and significant activities in the period. In the third quarter, the Trust recognized net income of $0.3 million compared to $2.2 million in the prior year. On a segmented basis, the development segment generated net income of $2.9 million compared to $4.2 million last year. The decrease year-over-year is due to the timing of prior year fair value gains recognized upon milestone achievement with no similar activity in the current period. This was partially offset by foreign exchange gains within the segment. As it relates to our recurring income segment, the Trust generated income of $1.2 million in the quarter comparable to prior year. Included in current period results were $2 million in fair value gains in the Trust multifamily portfolio, driven by accelerated lease-up activity at AaltoSuites and Zibi and rent growth across the Trust GTA portfolio. We're pleased to end the quarter with 93.5% of units occupied, up from 82.5% as of June 30, although a portion of this lift was attributable to the 70 Park acquisition in the period. During the quarter, the Trust completed the acquisition of a land assembly, which will be part of the overall redevelopment plan for the 49 Ontario site in downtown Toronto. As Michael mentioned, the Trust has submitted a rezoning application for over 800,000 square feet on the site which we anticipate achieving by the spring of 2023. In aggregate, 49 Ontario and the land assembly were carried on the Trust financial statements for $112 million as of September 30. In the period, we saw a decline in commercial occupancy rates and more specifically at Sussex Center, a 655,000 square foot building in Mississauga in which the Trust owns 50%. While we are seeing ongoing tour volume, vacancy rates of the asset are in line with commercial suburban GTA trends, and we will continue to monitor potential market softness. As of September 30, the Trust had $9 million of cash on hand and $24.9 million available under its credit facility. We are continuing to monitor the impact of cost escalations in our operations and construction projects and the impact of rising interest rates on our portfolio. Over 75% of the Trust's consolidated debt is subject to a fixed interest rate, which helps mitigate some of our exposure to rising rates. In addition, specific debt within our equity accounted investments, including West Don Lands Block 8 and Block 3, 4 and 7, it's highly leveraged government debt with on average an 8-year maturity period and fixed rate below 2%. Moving away from our financial results for the second consecutive year, we are pleased to achieve the 5-star rating from GRESB, which is recognition of our placement in the top 20% global benchmark. Third-party verification further supports our commitment to transparency, which is a key component to our impact management framework. We expect to publish our 2021 sustainability update report later in November. On that note, I'll turn the call back over to you, Michael.

Thanks, Meaghan. I think that the company is progressing, especially on the developments. I think we're creating best-in-class assets. They're having a big impact on the communities. And we're working -- making a lot of progress with various governments to support our activities. The Premier of Ontario came out recently with a number of changes to development, that will help us. We're expecting the federal government will as well. And we're also seeing changes in the city. And a lot of this has to do with the fact that it's so hard to create new housing with increasing interest rates, both because of the cost of building them as well as people's ability to afford buying them. So we're focused on a lot of apartments, and they look like a great asset class. I think yesterday or the day before, the federal government came out and said they wanted to hit 500,000 new immigrants a year. That's a lot of places that we need to create for them to have a place to stay. There's growth within our population. So we're really quite excited about the opportunities to participate in how to address the housing needs basically at every income level. And I think our company is really well positioned to do that. Our company doesn't change that much quarter-over-quarter. We don't have a lot more to say, but we'd be happy to answer your questions.

[Operator Instructions] And our first question comes from Sairam from Cormark.

My question was around Michael's comment on the last week of assets. Just going back on that, how should we think about monetization and in terms of timeline as well as the profit expecting on it?

So which asset were you referring to?

The Las Vegas [ analysis ].

The Las Vegas hotel. That's a great question. We invested in it with a pretty sophisticated group of investors a few years ago, the plan was to buy it from a distressed owner, invest in it and have a different approach to running it. And COVID hit, that was very difficult, but there's been other issues. But we invested it as a passive investor. We're working with the whole investor group as well as the private equity firm to try to create liquidity. But as a 10% holder, it's very difficult for us to do more than try to influence the group with our words. So I'd expect in the next 24 months or so, there will be an outcome. Because I think other investors are feeling more like us. But in the U.S., the financing market is a lot worse than here. So it's a bit of a hustle. But hopefully, [indiscernible] dealt with it in the next 12 to 24 months.

And probably, just shifting gears to the multifamily market. And obviously, you very well know in the public markets, especially for multicompany [ lease ] so the huge negative sentiment with respect to regulation and what it holds for the profitability in the near future. Has this been -- has relations been so much of a conversation when you're talking to the private markets and how they perceive the value of these multifamily assets.

I actually haven't heard the province of Ontario talking about it at all and maybe I missed it, but I haven't seen anything coming from the government itself. Right now, I would say that people are crazy. Everybody's talking about anything. It doesn't matter if it's true or not, all the conspiracy theories and nuttiness. So I don't really get distracted by how much people are spending time thinking about things. On this case, I mean, I guess the argument is rents are going up. I think I just said that since 2018, we just surpassed the 2018 rents increasing by 3%. So nobody mentioned anything when rents went down 20%. But now that they're getting back to where they were, people are saying they're going up pretty quickly. But I think the overall cost of rent is reasonable for a city like this. We are concerned about the cap on annual increases under rate control of 2.5% as our costs in some areas are going up more than that. But I think that I don't see the conservative government doing something that could effectively take away value from the owners of apartment buildings. But again, we can make a long list of things to be worried about and see 1 or 2 out of 100 happen. I don't think it's very productive. But I don't -- I mean other than hearing everybody repeat the same thing to each other. I haven't seen a source about this. Have you?

Yes. I think, Michael, it's mainly from the Fed and what came across back in March and April. And essentially, the entire question about monetization of housing and how they perceive the entire apartment landscape. .

The federal government does not have jurisdiction to put in place rent controls. What they were talking about was whether they should do something that makes REITs more taxable if they own apartments. I have been in discussions with the federal government about it particularly a concern to pension funds own apartments. And when pension funds own apartments, they're trying to maximize their returns. And if they have this tax on REITs, it will hurt REITs and not pension funds. Private equity, they own apartments and they use a fair amount of debt and have other mechanisms with a very lease delay paying tax. So they would be subject to this. So they're a big part of the market. And REITs are the only way for ordinary people to participate in ownership of apartments. So it seems to me that having a tax on REITs rather than pension funds and private equity firms is exactly the opposite of what the federal government stands for. But I'm not sure what the tax would be if they make it less of a flow-through. It's interesting because for me, when I invested in REIT, when Dream invested in a REIT, we're taxable. So whether -- like -- so we have to pay tax on a sale of an asset, we have to pay tax on our income. So I'm not sure how big a deal it is. I don't think that the federal government -- when I say I don't think we've been talking to them. I don't think they have a clear thought as to how this would work. So again, I'm not worried about it, and I'm not sure if they did it, it would make much of an effect.

Right. And so in terms of your discussions with, let's say, your private partners in terms of the Dream Impact fund and other private sources of lending. So I'm guessing there's a fair bit of disconnect between how the private market sees multi-family assets valued versus how the public market [indiscernible] . Is that fair to say?

I think there's a variety of views out there. We're pretty active all over the place. And I'd say that there has been some incredibly competitive sales processes that we've been in and that we've lost, we just couldn't keep up with it, and we're pretty bullish. And that -- a lot of that has to do with really excellent developments. There's a couple of big ones still coming. So we're seeing them to be like I'm saying 20 different groups that put in a few months to put proposals together. So that's very competitive. On residential land that's ready to go, it's been quite strong. Industrial properties have been quite good. But other than that, I think it's the stock market. The stock market sort of has everybody trading at a big discount. So in the private markets, we're seeing activity, it's varied, but generally, there's a pretty good idea. So it's got apartment. Maybe the cap rates are a little higher, but the rents are higher so the total dollars -- so if you had a property for $18 million, last year, it's probably worth $19 million this year because the NOI is higher and the cap rate might have gone from 3.3% to 3.5%. But that's only because everybody expects the rents to continue to grow quite rapidly and their value will continue. So in a way, my view would be you need to go from like 3.5% to 4.5% over 3 or 4 years as a cap rate. The NOI would grow by, let's say, 20% or 25% and the value of the building at the end of those 3 or 4 years would be higher than today. So I think that's what we're seeing with industrial and apartments is that there's quite good visibility on the demand and cap rates can go up and they will probably go up slower than rents go up. Okay. Just to follow up on that. You guys know much better than me, but I think the third quarter numbers by the vast majority of companies reporting so far are really quite impressive.

It's been a good quarter. It's been a good earnings season so far?

Yes. So what you'll see is in 2 days, people start to get pessimistic again.

Our next question comes from Sam Damiani from TD Securities.

You made some comments on the Forma condo project, Michael. I just wanted to clarify, did you say the sales were obviously off to a fantastic start back in the summer? Did you say you shut down the sales office for a bit and now it's reopened?

Yes. So what happened was -- we launched in the middle of June and like everything can happen. So we sold a bunch, but you get interest. So since the war in Russia, there's more security to identify your purchasers. So in some cases, we have to use facial recognition. And then China opened up to outsiders so a whole bunch of the people that agreed to purchase, they decided to go see their family. So I think what happened was from our sales event in the middle of June, it took about 6 weeks to finish up all the documents, and we closed it for the month of August and started again, I think we had a kickoff September 14.

Okay. Great. And what would be your threshold, I guess, for starting construction?

Oh I think we will be over 70% within 6 weeks.

That's great. And I guess -- And just on...

When I say that, I don't mean -- go ahead, Sam.

No, I was just going to say like with inflation and obviously, interest costs are up -- like how are you penciling out this and other projects going forward just given the changing market factors. And it's very confusing. We've touched on this already, but between immigration providing more demand and everything else. It's just -- something's got to give, it seems like, but like look, rents just have to rise by 50% or something. I don't know what's all going to make this all work?

Well, firstly and foremost, we should have about 40% to 50% of the cost fixed before year-end. And the other half, I mean things like the curtain wall, elevators, form work, those are pretty big ones. And some of the others aren't as -- we think they're more dependable. While there is a fair amount of inflation throughout the economy, it seems like all the commodities peaked literally a year ago. And when I talk to other developers, I think people are getting more and more comfortable that the pricing is reasonable where it is now and not to expect any big jumps in costs. Some people think there might be saving. So we're getting a lot of it done. We argue all the time is whether we try to do more or actually wait a little bit. Our project is a big project that lasted a long time. So a lot of the trades would like to have a 5-year project. We're getting good pricing. We're pleased with that. On the other things that you were talking about, I mean, it clearly seems like when interest rates went up, it meant that buying a home or building something is more expensive. If you want to build an apartment then you're going to have to lock in higher interest rates than you used to. So that makes it harder to build apartments and they want to do affordable housing, everything the government was doing barely works. So what I would say is I've never seen every level of government as focused on coming up with modifications that will increase the number of houses that get built. So in the federal budget, they were saying they need to double the number of housing starts in Canada between now and 2032 to hit what they thought were reasonable numbers. I think -- I'm not certain about this. But I think the Premier came out with numbers that -- or the conservative government of Ontario came up with numbers that were not quite double but pretty good. And their numbers were interesting. I think they want over the next 8 years, 238,000 new homes approved in Toronto, which is a good number. That's a big increase. What was shocking to me was they want 168,000 approved in Ottawa, which is great because we got Zibi and LeBreton. So I think we're looking at a new paradigm where the government is going to be trying to help engineer a supply to meet the demand.

Well, let's hope so. And just on the pipeline that impact has today the $500 million of product coming on stream over the next 3 years. Can you just confirm the capital needed to complete that is already secured and how would that play? How would that change with you rolling in Forma and maybe other projects?

I'll make it simple. For that $500 million, the equity requirement is 0. And for Forma, I think the equity requirement is $2 million.

$2 million?

I think it's an additional $2 million from what's already in it. Yes. One thing I'd say to you about for Forma that I think is the most interesting is we bought it 5 years ago, we've been working with Frank Gehry. We worked with the city. We try to make sure that we make a design that you can build and make money on -- and at this moment in time, our pro forma for Forma has the highest profit we've had in those 5 years, which to me is counterintuitive with everything that's happened, but it's really quite a unique project.

Hence the name. Okay. Well, this is great. Congrats on completing the land assembly on 49 Ontario as well, that will be interesting to see.

[Operator Instructions] Our next question comes from David Chrystal from Echelon Capital Markets.

Maybe just a quick follow-up on the last line of questioning there. If there's no equity needed for the $500 million of projects and only $2 million at Forma, where is the $55 million to $65 million over the next 2 years being spent? Which projects, if you can just give kind of some high-level numbers.

There's some at -- I think there's some at Quayside , there's some at 100 Steeles we'll be buying out the land. Where else do you have, Meaghan?

There'd be some additional capital allocated to future blocks of Zibi, that will be completed within that timeline of the $500 million as well as a little bit of equity for future blocks that are beyond 2025 construction start.

Okay. So it's more some of the longer-term projects that are going to need the initial equity injections.

Right. I mean the $500 million is under construction and you generally put the equity in when you start construction. So as long as you don't have a problem, once you started construction all the equities in, the money that we're putting in is for the next round of income properties that we're working on.

Yes. Okay. That makes sense. And so I guess if things go sideways or don't pencil out, then there's much less equity required over -- let's say, you were to push some of those projects out a few years, that 55 to 65 will come down considerably?

Yes, exactly.

Okay. Perfect. And then just probably a minor question, but I think on that $500 million of income properties, the expected development yield. We previously disclosed it. It wasn't in this quarter, but fair to say it hasn't really changed significantly?

No, not materially. I mean we target 75 to 100-point spread. So nothing significantly by way of...

75 to 100 basis point spread between market value and cost.

Yes. And market value would still be that kind of -- I know you gave a range this quarter. Previously, it was I think, 3.9% cap rate, would that still hold?

Yes. Yes. I also want to mention that what gets lost in that is we have the fixed rate financing at probably 1.75% for those projects. Maybe between 1.75% and 2% so that also helps the math work.

Yes. Yes, it makes sense. And that would be what Meaghan referenced there with kind of 8 term -- 8 years average term remaining sub-2% financing?

Yes, correct.

Okay. And maybe just higher level. You mentioned the federal government's obviously pushing for more supply and the Ontario government came out with their housing plan, calling for 1.5 million new homes. I would say their announcement was quite light on detail, but at a high level, seemed quite developer-friendly. Do you have any incremental color on what it might mean? I know there was some reference to reducing development charges, possibly reducing property taxes. There's a lot of moving parts, but no hard numbers. Do you have any incremental color?

The property taxes for apartments are twice as much as condos or houses. And single -- and houses have gone -- the tax rate has gone up very, very slow. So it seems for office buildings, taxes are high, but a tremendous amount of the city's budget is based on transactions like development charges, the land transfer tax. I think the city has got to have more recurring income to fund things, which is a discussion. As far as -- I think the point there is, if you have lower realty taxes and higher interest rates, maybe they net off so you can build more buildings. That was a surprise to me. I believe that the Premier's announcements were one phase. Another phase is they've gone with a strong mayor systems in Toronto and Ottawa. And I think that's to encourage the city to be able to be more responsive. And the other thing that's coming, I think, is that the federal government they have their own things. So I think the province came out and said, "Look, these are the kinds of things we want to do. We want to have less regulation, we want to be quicker." And I think what you'll see is the Feds and the province will come up with ways to subsidize the city, provided the city is doing the things that are better for our communities. And I'll just -- I do read the budgets, but in the 740-page budget this spring, there was a reference in the federal government. The federal government saying that they were going to try to connect transfer payments for housing and for transit to the approval of sufficient homes in the market. So what you're really hearing is the federal government and the province are saying, the city has to be more responsive, and we're going to -- with carrots and stick work to make it happen.

Okay. Makes sense. So I mean more to come, but you're probably incrementally positive, but hard to quantify.

Right. But part of the reason why it's hard to quantify is -- there -- I don't know this as a fact, but I believe it to be true that when you hear some of those development charges, you may find that the federal government and the provinces get involved with funding them a little bit differently or some of [ data ] are working with the city differently. So I think all you heard was that the Ontario government said, "We want to do these things," but I think you're going to hear from the Fed and the city. And until you hear from everybody, it's going to be hard to put the pieces together.

Okay. Makes sense. And then maybe just really quickly touching on the Vegas hotel. Do you think the $60 million carrying value, is that a the fair representation of the proceeds you could realize if you were to either sell your 10% stake on your own or if the full project were to be monetized through a sale? Or can you kindly give some color around that valuation?

I think it's challenging to say concretely whether or not we'd be able -- whether or not we'd be able to sell our ownership stake, given it's such a small passive investment, I think it would be challenging to back it on our own or to sell it on our own. At this point in time, I mean, we carry the investment at fair value. It's our best estimate today of what the proceeds would be upon an exit. So I mean, at this point in time, I can't really give more color because it's challenging to estimate and provide further clarity on what that value would be on [ sale additions ] beyond what we're carrying it at.

Yes. And I'd say that we're still finding out more things. We're working with the other investors. So we don't have a lot of information. And if we did, we would share it with you and probably reflect it in our financials.

Thank you. And we have no further questions in queue at this time. I'd like to turn the call back to Mr. Cooper for closing comments.

Well, I'd like to thank everybody for spending the time with us this afternoon. Really appreciate your interest and feel free to reach out to Meaghan and I, if you have any follow-ups. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.