Dream Residential Real Estate Investment Trust (DRRUN) Earnings Call Transcript & Summary

Good morning. It's 11:00. We will now call the meeting to order. My name is Vicky Schiff, and I am the Chair of the Board of Dream Residential REIT. Welcome to our inaugural annual meeting. I will act as the chair of the meeting. Robert Hughes will act as the Secretary of the meeting. With the consent of the meeting, I appoint [ Daniela Munoz ] and [ Jamie Bessich ] of Computershare Trust Company of Canada as scrutineers for the meeting. We will first proceed with our formal business. To expedite the formal part of the meeting, I will move and Shannon Macri, a unitholder will second all motions. After our formal business is concluded, our management team will make a brief presentation, and there will be an opportunity to ask questions. Please hold all questions that do not relate to the formal business of the meeting until that time. I have an affidavit from Computershare as to the mailing of the notice of availability of proxy materials and the form of proxy. Our circular and other meeting materials were made available through the notice and access system. I would ask the secretary to place the affidavit before the meeting and to keep the affidavit with the REIT's records. The scrutineers will advise that there are at least 2 individuals present who are unitholders, or who represent by proxy unitholders who own at least 10%. As a result, we have a requisite quorum of unitholders present, and I declare the meeting to be properly constituted for the transaction of business. The first item of business is the presenters -- the presentation of the REIT's 2022 annual report, which contains the REIT's audited financial statements for the period from February 24, 2022, when the REIT was formed to December 31, 2022, and the report of auditors therein. I note that the secretary has placed before the meeting a copy of the 2022 annual report. The next item of business is the election of the trustees. As stated in our circular, 5 trustees are to be elected at the meeting and 5 nominees are named. They are: [ Letter Ambroski ], P.J. Gavin, Fahad Khan, Brian Pauls and myself. Shannon will you please nominate the nominees?

I nominate the individuals listed in the Management Information Circular dated April 21, 2023, for election as trustees of the REIT to hold office for the upcoming term.

Thank you. As the REIT did not previously receive timely notice of any further nominations for persons for election as trustees in accordance with the declaration of trust, I declare the nominations closed. Are there any questions on the motion? Seeing none, based on the proxies received, I would mention that each of the 5 nominees received the majority of votes cast in favor of their election as trustee. After the meeting, we will issue a press release with the detailed voting results. Given the proxies received, and the number of persons nominated for elections as a trustee is equal to the number of trustees to be elected, I propose with the consent of the meeting not to take a formal vote on the election of the trustees. Therefore, I confirm that the motion has been carried and the 5 persons who were nominated have been elected as trustees by acclamation. The next item of business is the appointment of the auditors. The Audit Committee and the Board have recommended reappointment of PricewaterhouseCooper, charter professional accountants, as auditors. I move that PricewaterhouseCoopers LLP be appointed auditors of the REIT until the next Annual Meeting of Unitholders and the Board of Trustees be authorized to fix their remuneration. May I have a seconder.

I second the motion.

Are there any questions on the motion? Seeing none, the meeting will now vote on the motion. I propose to take a vote by show of hands. I would ask those unitholders and their proxy holders who are in favor of the motion to please raise your hand. Any votes withheld? The motion is carried. PricewaterhouseCoopers LLP have been reappointed as auditors and the Board authorized to fix their remuneration. The formal items of business as set out in the notice of meetings have now been dealt with. There is no further business to come before this meeting. I declare the formal part of the meeting to be concluded. I now invite the management team to make a short presentation, and after the presentation, we'll have some time for question and answers. Thank you.

Thank you, Vicky, and good morning, everyone. Thanks for joining us here today for Dream Residential REIT's inaugural AGM. Before we get started, I just want to say how incredibly excited I am to be part of the DRR management team. We're in for an exciting journey, and I also want to thank Jane Gavan once again for skillfully launching the IPO of this REIT and navigating through kind of some choppy waters through our inaugural year and just skillfully managing the company. Jane, it's exciting to work with you again and be a part of DRR's future. So I'm very proud of our accomplishments over the first year of operations, and I'm excited to work with the team and lead the REIT as we continue to pursue growth initiatives and value creation for our unitholders. Our portfolio was assembled over many years and is comprised of 16 garden-style properties located in the Midwest and Sunbelt U.S. markets. As an overview, DRR has 3,432 suites. We sit at 94% occupied. We have a current yield of 5.3%, and we have a low 30% leverage. Our strategy is very focused and has proven effective. We are centered on the following 4 pillars of growth: a professional on the ground in-house operations team, supported by the latest property management technology to drive rents and maximize NOI. We allocate capital to markets which have strong renter base and attractive market fundamentals to benefit from growth over the long term. Our in-house value-add program is an additional key driver of rental rate growth. We will also grow by accretive acquisitions when opportunities arise in our target markets. I'd like now to turn it over to Scott Schoeman, our Chief Operating Officer, to provide an overview on our markets and our properties. Scott?

Thank you, Brian. It's a pleasure to be here today for our first general meeting and to begin working with you as CEO of Dream Residential. I'm excited about our performance this year how we delivered on what we said we would deliver and how we are positioned for our future. DRR, as Brian mentioned, is composed of 16 suburban garden-style apartment communities concentrated within 3 the primary growth markets across the Midwest and the Sunbelt, including Greater Cincinnati, Greater Oklahoma City and Greater Dallas-Fort Worth. We refer to these markets as our operating hubs because DRR has full vertically integrated boots on the ground property management, construction management and regional leadership teams physically located in each of these 3 markets. The 3,400 suites consist of individually leased 1, 2 and 3-bedroom walk-up floor plans that average around 900 square feet per home, and rent for $1.25 per square foot or about $1,100 per month. Suburban garden-style apartment living blends the open space, independence and neighborhood feel of single family with the amenities, access, and community bonds found in urban areas. Our garden style apartment homes are located in desirable suburban neighborhoods accessible to jobs and everyday living essentials. Often spread over 10 to 20 acres with low-rise pitched roof buildings, these community-centric assets share common amenities such as outdoor pools, patios, fitness areas and club houses. They also provide open, less dense, more private living areas, larger floor plans and green space for pets and outdoor recreation. We are diversified across markets with each of the 3 existing markets strategically hand selected with favorable demographic and employment growth characteristics. Pro-business, low regulation, government dynamics and no rent control, there is no rent control in any area of our operation, and the fundamentals in each of our markets are attractive. 8 million people call the Dallas-Fort Worth Metro Area home. Dream Residential is in North Texas and the Sunbelt because it attracts business, it attracts new people, and it does not burden them with excessive taxes or regulation. Population migration, new companies and corporate relocations continue to drive the ever-increasing labor force that makes Dallas-Fort Worth our center of gravity as a strategic operating hub. Many of the assets held within DRR have been owned by our Dream Pulse partnership for years. We began acquiring multiresidential communities in the Greater Oklahoma City in 2017 for the same reason that we entered Dallas-Fort Worth, Sunbelt, attractive business environment and low cost of living. Oklahoma has diversified far beyond its initial energy-only days. Logistics, bioscience and information system services are rooted and flourishing. Today, one of the fastest growing and most technologically advanced HR platforms in the world is based in Oklahoma City, and Oklahoma is ranked first in the nation leading drone innovations across the entire aerospace industry. It has been ranked the #1 state for business, tax climate and boasts the lowest cost of doing business in the entire country. Oklahoma led most of the nation with one of the strongest rebounds post-pandemic and more recently, has been ranked top 10 in rent growth amongst the largest 100 markets nationwide. Like Dallas-Fort Worth and Oklahoma City, Cincinnati continues to benefit from corporate investment, population migration and strong sustained rent growth. Companies and people have been leaving high-tax, high-cost markets and relocating to markets like Cincinnati. Cincinnati ranked 9th nationally last year in the well-known U-Haul Relocation Growth Index that tracks customer one-way relocation moves. It had one of the largest net gains in the nation and jumped 15 spots from 2021. With 7 Fortune 500 companies investing in Cincinnati's future, this market continues to outperform nationally and within our portfolio. The U.S. multiresidential sector is deep and segmented. It is estimated that 50 million American households are renters and that there are more than 20 million rental properties, the vast majority of which, around 75%, are still owned by individuals and not institutions. Canada has 5 markets with populations greater than 1.5 million people. In the United States, there are almost 50 markets of that same magnitude or greater. Dream Residential is just getting started in 3 of those 50 markets. Our asset class is defensive and resilient. While rents in the luxury segment and coastal markets experienced negative rent reversion during the pandemic and even more recently as the economy slowed, Dream Residential's middle-income communities sustained positive rent growth throughout that duration and consistently surpassed national benchmarks in operations performance, such as occupancy and lease trade-outs as well as with rent and income growth. 12-month leases provide inflation protection and yet our residents are sticky and renewals are strong. For-sale housing affordability is the worst it's ever been in the United States. And housing availability for median income households is practically scarce. Our experience is this. When times are good, people move up into our communities. And when times are tough, people move from the high-end luxury segment down into our attainable communities. In either case, no matter the macro uncertainty, people need safe, inclusive, reasonably affordable communities in good areas to call home. Apartment rents in the expensive coastal and dense urban markets can push many Americans into a cost burdened financial condition where their basic housing expenses exceed 30% of their take-home income. The cost of living in our markets provides for a healthy margin, where annual rent accounts for about 19% of household growth, well below the 26% national average as well as the cost burden range of 30%. With rent levels measuring only 19% of income per month, Dream Residential provides middle market naturally occurring attainable housing for residents in good neighborhoods and strong submarkets. Our residents are first responders, they're teachers, they're manufacturers and other essential labor workforce, labor force citizens. They avoid big city rents, and they do not want to pay $1,000 more per month for new supply or luxury units within our local markets. Our business consists of assets that are attainable for most Americans, in demand in each of our markets and largely irreplaceable due to entitlement issues, construction cost and replacement cost. The attributes of our communities are in short supply. They are in high demand and they're, practically speaking, irreplaceable. That's why we like to say it's good to be in the middle of the middle. We have learned from our middle market residents that they value a modern living experience, and we have also learned how to provide that experience to our residents in a manner that is strongly accretive to our business. Economics do not allow tenants to pay cost burden rents, but economics do accommodate residents paying a $200 premium in exchange for upgraded in-suite renovations. Dream Residential, upon IPO, launched the value-add program to provide just that experience for our residents. Our vertically integrated in-house construction teams can renovate interior suites for thousands of dollars less per unit than third parties. Our redevelopment leaders, deep select turnover suites, 60 to 90 days in advance of lease expiration in order to take measurements to order long lead time appliances and the prestage standardized kits. Immediately upon vacancy, our field managers invest $17,000 in a construction program spanning 20 to 25 days that renews a classic dated rental into a modern, open-concept apartment home. It is a reasonably priced upgrade for our resident demographic, and it provides a handsome mid-teen rate of return that makes it appealing for us to reinvest in our assets. Where Shell Plaza in Urban Texas provides a good picture of what we do on a daily basis across 7 communities in 2 different markets. On the right side here, you can see how we transform the vintage interior into a modern, open air living space. Upgrades include luxury vinyl plank flooring, stone countertops, energy-efficient stainless-steel appliances and contemporary hardware. The program has caught on across our portfolio. During the first quarter of this year, almost 10% of our move-outs ended up signing new leases and moving back into a different, but newly upgraded apartment within the same community. In this, for Shell example, the new lease resulted in a $440 spread, a 34% premium on a $14,000 investment. These successes are not limited to Texas. At our Winchester Run Community in Oklahoma City, we renovated this 1-bedroom box into a sweeping space that rented 41% above the expiring lease. In the short IPO year of 2022, our in-house teams renovated 226 interior suites. This year, we expect to value-add over 400 suites. When we pull out organic rent growth and mark-to-market leases, we are conservatively seeing double-digit returns on invested capital attributed directly to this renovation program. During good times, a 14% return is good. During uncertain economic times, a 14% return on capital is exceptional. Growth markets, high demand sector, strong bond assets, safe, middle of the middle resident base, attractive value-add reinvestment returns, sustained benchmark beating income growth, Dream Residential delivers. Our positive impact will extend to the wallet, but also to the community and to the world. We are committed to net zero by 2050, and we have partnered with globally respected organizations to better our communities through ESG initiatives as well as sustainability and community programs. We are signatory to the UN principles for responsible investment and an official participating supporter of the task force on climate-related financial disclosures. It's been a privilege for me to share our operating business with you. I will now hand the stage to Derrick Lau, our Chief Financial Officer.

Thank you, Scott, and good morning. Scott has gone over our markets and assets. I will now provide an overview of our balance sheet and our financials. In an uncertain economic environment, our conservative balance sheet provides safety and security. We are focused on maintaining a strong and flexible balance sheet, which will allow us to execute on our strategic initiatives. Our leverage sits at 30%, which is well below our targeted range and compares favorably to the broader Canadian REIT sector. We have ample liquidity totaling over $80 million. This will allow us to scale in our target markets when appropriate as well as execute on our value-add program to drive rental rate growth and enhance the overall quality of our portfolio. Taking a closer look at our debt profile. We currently have no exposure to variable rate debt. Our average term to maturity is 6 years, with no maturities until 2025. Our average interest rate is 4%, which compares favorably in the current debt rate environments. Additionally, most of our debt is interest rate only. Together, these all provide an additional layer of safety. We began operations in May 2022. At that time, we prepared an ambitious IPO forecast. Despite the macroeconomic uncertainty over the last year, our portfolio has performed extremely well. Through our first full 3 quarters, we have delivered on our forecast, demonstrating the resiliency of our portfolio, the upside benefits of our value-add renovations and the capabilities of our in-house property management team who works day in and day out to ensure our business is operating at its highest potential. Over our IPO forecast, we are expecting 14% annualized NOI growth and an FFO payout ratio of 65%, resulting in a distribution that is well covered and safe. With a strong operations team and financial flexibility to execute on our stated strategies, we are well positioned to grow the business and generate returns for our unitholders. With that, I'll turn it back to Brian and the team, and we'll be happy to answer your questions.

Thank you, Derrick. On behalf of the management team and the Board, we really want to thank you for your attendance today and your support of Dream Residential REIT. We're very excited about the future. I'd be happy to open it up to any questions you might have. Yes, sir, in the back.

Okay. And it should be [ media ], they're obviously supplying [indiscernible] companies that are moving their head office and [ low trade ] income tax [indiscernible] in Florida is a part of that interaction that will [indiscernible] states like New York and New Jersey [indiscernible]. My question is this, you are, in fact, what about Florida? [indiscernible].

Paul, it's nice to see you again. We are in the markets you identified. They've been good markets for us. We've got a number of target markets. We've looked at Florida. Florida has its own challenges, particularly around insurance. Certainly, casualty losses that you mentioned are an impact to property values and to how they perform. I would say -- I wouldn't say never, but it's not literally our highest target markets, our first-tier target markets. It's performed well, but we're growing in the markets that we're currently in as well as some kind of low-hanging fruit in other markets that we'd like to expand in.

[indiscernible].

2/3 may dilute the senior population in Florida. I'm not sure. Yes. No, we have -- as Scott mentioned, we have we have a lot of workforce workers, nurses, doctors, teachers, first responders, all of those in a lot of our communities. So some are seniors, some aren't. Scott, you may want to comment on just the profile of our tenancy.

Sure. Our profile, as Brian mentioned, is very focused on what we would call the essential workforce. So these are people that are doing the essential things each day. Many of our residents work at hospitals or healthcare centers, many of them work it, for example, GE engineering, building aerospace engines, and Fortune 500 companies or industrial companies like Amazon and whatnot. So we certainly have some you called senior citizens in our communities and many of them have been enduring long-term residents, but we have a good blend.

Any other questions? No. Yes, sir, in the back.

[indiscernible].

Trevor, it's a good -- Trevor. It's a good question. I think one of the key points that Scott made in his presentation was there's a lot of the United States population that is rent burdened, meaning that their rent is more than 30% of their income, where we fall into a different class, more of a healthy class from a financial standpoint, so we have -- and Scott can comment a little bit about our collections and how our properties have performed. What we have seen is that tenants, they embrace the value-add program that we had. They have -- they're prepared and able to pay additional rent for higher quality finishes and that hasn't disrupted our rent collections or our occupancy. But Scott, you can comment further just on if we've seen any rise in delinquencies or bad debt because of consumer spending or consumer credit deterioration?

Sure. Thank you, Trevor. The trend in our portfolio has been opposite of that, it has been improving. So we're 96%, 97% collected each month, I think this entire calendar year. We did see, to your point, during the pandemic where the government intervened with some rent incentives and how that was distributed through local governments or local municipalities was a challenging environment and winning off of that was a little bit challenging, but that was in '21 and then early part of '22. So this portfolio is flourishing right now in collections.

Great. Great. Well, we want to thank you again for attending today. We appreciate your support of Dream Residential. Take care.