Dream Unlimited Corp. (DRM) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Dream Unlimited Corp. fourth quarter conference call for Wednesday, February 26, 2025. During this call, management of Dream Unlimited Corp. 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 Dream Unlimited Corp.'s control that could cause actual results to differ materially from those that are disclosed or implied by such forward-looking information. Additional information about these assumptions and risks and uncertainties is contained in Dream Unlimited Corp.'s filings with securities regulators, including its latest annual information form and MD&A. These filings are also available on Dream Unlimited Corp.'s website at www.dream.ca. [Operator Instructions] Your host for today will be Mr. Michael Cooper, CRO of Dream Unlimited Corp. Mr. Cooper, please go ahead.

Thank you, operator. Good morning, everybody, and welcome to Dream's year-end conference call. Today, I'm here with Meaghan Peloso, who is our Chief Financial Officer. And we also have Jose Maldonado speaking, who is the Head of our Strategy and Planning Group as well as oversees Western Canada -- our Western Canadian development business. I'll turn it over to them in a minute. But firstly, I just want to mention that over the last few years, I've been very focused on liquidity. I've been concerned about the uncertainty in our environment and tried to make our company safer. The uncertainty is at record levels right now and we don't know what's going to happen, but I can tell you that we're pretty well positioned. Every politician of every party is promoting ideas that are good for Western Canada. We're not an exporter but we do get affected by the overall strength of the Canadian economy, but generally, we're positioned quite well. For the year, we had our second highest profits in total dollars. The only year we did better was the year where we sold Dream Global. And if you take out Arapahoe Basin and extraordinary events of prior years, we have the highest ordinary income we've ever had at $2.86 per share. And a lot of the things that we've been working on, we're at the beginning of seeing the benefit. So we've been growing our asset management business, and it's improving but I think we're going to see more improvement in the future. We've been finishing a lot of apartment buildings and they're getting leased up. They're contributing a little bit but they're going to contribute more and more. And each year, we have more apartment buildings finished. And in both cases, the improvements that we make in 1 year, unlike our development business, which is sort of like a lot of onetime earnings, both in asset management and the recurring -- and the income properties, the money that we start to make the next year will continue to increase indefinitely. So we're pretty excited about the shape of the business. We're pleased with our liquidity. And I think we're kind of surprised that 2025 has started off being such a busy year. But before -- I'll make some final comments, but first, I'd like to turn it over to Jose to discuss the business.

Thank you, Michael, and good morning, everyone. I'm going to provide a quick overview of the 3 key segments in our business that make up 80% to 90% of our net asset value, being Western Canada land, asset management, and income properties. Starting with Western Canada land. We're finishing the year in 2024 with record profits for the land division since we went public in 2013. The division is producing a large amount of free cash flow and there's great momentum for 2025. We're paying close attention to changes in immigration, tariffs, among other things, but we have decent visibility into the year. As of today, we presold $105 million in revenue for 2025. By the end of next month, we hope to secure another $60 million of presales to builders based on early conversations we're having as of today. That will be a combined $165 million of presales that we hope to show by the next time that we will report. This will make up 80% of our financial targets for the division and we will have 9 months left to go. In 2025, we will begin preselling 2 new neighborhoods in Saskatchewan. In Saskatoon, we will be launching the sales of the Holmwood Suburban Centre, which is the second neighborhood after Brighton. Most of the will start to show up in 2026. However, in 2025, we sold 13 acres to the city to build a high school and a community center that will be the largest in the province and will be a great amenity to the community and our rental product. We will recognize that sale this year. In Regina, we're close to meeting the last milestone needed to start another new community called Coopertown. We have development approvals in place, and we're waiting to hear for approvals on the financing of the infrastructure costs funded by the city to get the community going. There's a decent probability we can start recognizing lot sales in this new neighborhood starting in 2026, and we can begin preselling lots at the end of this year. Moving on to asset management. We're making good progress in growing the division. In Q4, we closed on a $1 billion joint venture transaction of apartments in the Netherlands. We also announced, a couple of weeks ago, a new joint venture to purchase existing Canadian multifamily apartments with an institutional partner for up to $2 billion of assets. We will be closing on the first small transaction in this venture in the first half of the year. Our assets under management have grown to $27 billion by the end of 2024, up $3 billion from last year and $17 billion since the end of 2020 after the sale of Dream Global. There continues to be growth in the public vehicles, but the largest driver of growth is the private institutional business, where we're seeing the most traction for new ideas, particularly on the residential and the industrial side. Another area that's picking up steam is our development management business, which is much more lumpy in terms of earnings. We're getting closer and closer to the development of 49 Ontario and Quayside in Toronto, which are large-scale projects where Dream would earn a development management fee. Dream Office just announced an office conversion project in Calgary where Dream Unlimited will also be the development manager. Lastly, on our income property division, which is doing very well. We're continuing to grow this division, and in time, this could be our largest division as it continues to compound and grow assets through development. Today, we own around $850 million of income properties at our share on a stand-alone basis in our balance sheet, which excludes the indirect share in our securities or funds. The Distillery District in Toronto is about 1/4 of that, and the rest is mostly our retail and multifamily income properties in Toronto, Western Canada, and the Capital Region. We continue to see good risk-adjusted returns in developing income properties, especially purpose-built apartments. We have a large pipeline of units in the Capital Region and Western Canada in land we already own. In the Capital Region, we're looking at starting 1 new block this year in Quebec, which we'll own 50% of 220 units. We also began construction last quarter on a 250-unit apartment in Ottawa that Dream Unlimited will own 100%. Both projects are financed through the ACLP government program, where we will secure attractive financing rates over a 10-year period. In Saskatoon, where we now have experience building apartments, townhomes and single-family rentals, we really like the economics here. We're developing to a 6% yield, getting permanent take-out at 3.5%, 3.4% as of today, and getting most of our original equity out on takeout. We recently completed 2 projects in Brighton for a combined 120 apartments and 110 townhomes. We realized $6 million to $7 million of development profit in each, surpassing our budget. We developed just north of a 6% yield with land at fair market value, and we expect to realize that development and hold internal rate of return of 20% over 10 years. We're looking at replicating this program in Calgary starting this year. In 2025, we have our most aggressive program where we're looking to start 500 rental units in Western Canada and 70,000 square feet of retail, which we will own 100%. We're looking at approximately a cost base of $210 million to build this and a development profit of $30 million with land at fair market value or $40 million with land at cost. We won't require a lot of new equity outside of our existing land to develop these projects. Our commercial and income properties are performing well. In the Distillery, we did a large renewal for an expansion for 70,000 square feet at great rents. Our retail in Western Canada and Canary District is also performing pretty well. We're also looking at some dispositions of noncore mostly vacant retail assets to recycle capital and reduce leverage. I'll turn it over to Meaghan now.

Thanks, Jose. Hi, everyone. In the fourth quarter, we recognized pretax earnings of $168 million, an increase of $240 million over the comparative period. Now the increase was primarily attributable to a $157 million gain on the sale of A-Basin, which closed in the fourth quarter. The proceeds from the sale were used to pay down debt facilities and pay a special dividend in December. The fluctuation in earnings was further driven by the timing of lot sales and higher acre sales in Western Canada and lower losses incurred related to our investment in Dream Office REIT. On a segmented basis, in Q4, our income properties division generated revenue of $17.9 million, up from $14.1 million in the prior year. The increase in revenue was driven by the stabilization of 3 retail properties in Western Canada at the end of 2023 in addition to the opening of the Postmark Hotel earlier in the year. Net operating income was fairly consistent year-over-year as we incurred about $1 million in costs year-to-date to stabilize the Postmark Hotel. At the end of the fourth quarter, we acquired a partner's interest in the Broadview, Gladstone, and Postmark Hotels, carrying these assets on our book for an aggregate of $83 million as of December 31. We continue to grow our portfolio of multifamily assets, including those held to our interest in Dream Impact Trust and Dream Impact Fund. Our stabilized multifamily portfolio, which includes nearly 8,000 units, continues to perform well in the Canadian portfolio with approximately 97% occupied as of year-end. At 100% project level, we expect to add over 2,600 rental units to our portfolio through 2027, nearly all of which are actually under construction today. In the fourth quarter, our asset management business generated revenue and net margin of $18.2 million and $11.3 million compared to $23.8 million and $16.8 million in 2023. The decrease was really driven by the magnitude of development fees recognized in the prior year, partially offset by growth in base fees. Generally speaking, development activity was lower in the period, but this is really a function of timing as these are typically recognized in income when milestones are achieved. Since 2023, fee-earning assets under management has increased by over $2 million. As it relates to our development segment, in the fourth quarter, we generated revenue and net margin of $150.2 million -- or sorry, $151.2 million, excuse me, and $42.6 million on a stand-alone basis, up from $53.8 million and $4.3 million in 2023, largely driven by the timing of lot sales and an increase in acre sales. On a year-to-date basis, we completed 622 lot sales and 236 acre sales, which as Jose mentioned, has generated some of the strongest profit levels since going public, which is a great accomplishment for the division. In Saskatoon, we recently completed The Teal and a portion of Blocks 166 and JK in the fourth quarter, which adds 144 multifamily rental units to the recurring income portfolio. The recently completed developments are 93% leased as of February 24. We expect to continue or commence construction on 500 units within our Brighton community and launch our first 168-unit purpose-built rental building in Alpine Park in Calgary in 2025. We continue to make progress on our GTA development pipeline. In December, the City of Toronto announced the waiver of development charges on selected projects to support the advancement of purpose-built rentals across the city. Both 49 Ontario and Phase 1 at Quayside were named as part of this development charge waiver for a combined 2,500 units at 100% project level. This is a significant milestone for both projects and leads to considerable cost savings. We continue to make progress on innovative finance solutions for both of these projects. As of December 31, we had total liquidity of $367 million after returning $67 million to Dream shareholders during the year. Our fourth quarter liquidity is up from $257 million as of September 30, which is really due to A-Basin closing. Our preference right now is to maintain a robust liquidity position in light of the broader operating environment. Now with that, I'll open the call up for Michael, Jose, and I to answer any questions that people might have.

[Operator Instructions] And today's first question comes from Sam Damiani with TD Cowen.

Just want to, obviously, congratulate everyone for the strong operational results in the fourth quarter and last year. It's great to see everything kind of humming on all cylinders there. Maybe the first question, just to pick up where, Meaghan, you left off with the liquidity and it is quite high. It might even be record high. I didn't see any share repurchases in Q4 or post Q4. What are your thoughts on deploying some of that liquidity on buying back stock in the near term?

I think right now, our main focus is really to sit tight. I think it's something that we continuously evaluate. But at this point in time, we might have a little bit of activity in 2025 but it's not our main focus.

Yes, Sam, to make it really clear, we're looking at who's going to be the new leader. There's probably a new Prime Minister. There's threats of tariffs, financial coercion. I don't really know what enough liquidity is so I think that we're very glad with what we have. We did buy back a few shares in January. I suspect we'll continue to buy stock when we think it's tactical. But I would think that we would probably be buying back a lot more stock when things are more certain than they are right now. We do think the company is cheap. But I don't know, I heard them talk about a 25% tariff on all of Canada plus another 25% so it will be 50% on steel. We're going to be like -- we're going to have to give them stuff and money. So let's figure out what we're getting through first before we start spending dough.

Yes, that makes sense. And then I guess just on the asset management side, I think, Jose, you mentioned the first acquisition in the new apartment joint venture would firm up or close later, I think, this quarter is what you said. Just wondering how much capital do you think you might deploy in that strategy over the course of 2025.

It's hard to tell. We're starting with a small transaction of, I think it's around $60 million. We would probably do $100 million, $200 million, $300 million potentially this year but there's maybe more if there's bigger opportunities. But we're looking at that slowly to make sure it's the right return for our partner.

Yes. I think the high point, Sam, is that the values for apartments look fair but there's actually not that many happening. So when Jose's referring to a couple of hundred million of one-offs, I think that's true. Hopefully, we'll find some bigger opportunities from somebody who wants to get out of apartments or who has a need to come up with capital maybe for redemptions or something like that, so we'll see. But we're reviewing everything that is available, and we are going to be very prudent to make sure we do very well for our investors.

Appreciate it. And then last 1 for me on the same theme. Is there an opportunity to expand the industrial platform potentially into Europe this year?

I think that given the fact that raising equity in the public markets for Dream, industrial is out of the question at the current time and for some extended period of time. If we want to grow, we're going to have to find other capital. So that is an area that we are looking at. And hopefully -- I'm not good at time, like saying this year or maybe next year, but we are working on something like that. And I think that is something where we've proven our skill. I think European industrial looks very attractive. I think there's lots of people that would like to own more European industrial. So I think that's a reasonable outcome is that we'll find private money to invest in Europe as well.

And our next question today comes from Mark Rothschild with Canaccord.

Michael, maybe just continuing on the talk about liquidity and buying back shares. And the reasons you have for being cautious, you did increase the dividend. And while the amount that you increased that you're actually distributing is not a huge amount, it does say something. So can you just maybe talk a little bit more about what that's connected to? Is that based on growth in management fees, confidence in Calgary, how things that you have a lot of lot sales already for this year? Maybe just expand on that.

Well, the fact that increase is $2 million a year, I think that takes our total dividend to about $27 million. And I kind of targeted approximately, not like a formula, but approximately 25% should be available for dividends. Dividends is cash that goes to the shareholders, and the shareholders I know like them. When you buy back stock, I don't know if we've just seen it over and over again that the stock goes up sometimes and it goes back down. You could have bought it later. I'm going say it again, in the fall of 2019, we sold Dream Global, the management contract plus our shares. We got $515 million in cash. We bought back $125 stock -- $125 million of stock at $23.50 in January of 2020. And if we wouldn't have done that, we could have bought it back after that at a much lower price. So I think that we've been very aggressive with buying back stock over the years. I think it's been good overall. We're putting more money into income properties, which is going to have a real strong value year after year. But we do want to grow that first and we'll buy back stock. But I know this sounds like I'm in Grade 6, but when you get a dividend, you can spend it. When you buy back stock, the owners cannot spend it. So as there's less uncertainty, we'll definitely look at buying back stock and maybe in a massive way. But right now, we're going to keep going the way we're going.

Okay, great. Maybe just 1 more. It seems like you are having continued success with Western Canada land development selling lots. Can you maybe talk a little bit more about what you're seeing in the Calgary housing market? It sounds like there is some slowing but you guys still seem to be doing well.

Jose, do you want to address that?

Yes. There's some softening, for sure. I mean, we're watching migration and immigration trends. We benefited a lot from positive interprovincial migration. We will continue to see that on the nonpermanent resident side. The prairies in general are not as susceptible as maybe Central Canada or BC. I think the percentage of nonpermanent residents in the prairies are 5% or below, which is already at the target. But we are seeing a bit of a slowdown. Our builders feel there is still good momentum, still a lot of interest. And we're in a community in the southwest where there isn't a ton of competition unlike other areas of Calgary.

[Operator Instructions] Our next question today comes from Simon Kai, a private investor.

In the cash flow statement, it appears the cash taxes paid of about $125 million seems quite a bit higher than the prior year. And in the MD&A, it was noted that nearly half was deemed to be nonrecurring. Is there any more color you can share on what activities may have resulted in the much higher cash taxes this year?

Meaghan, do you want to answer that?

Sure, I'll take that. So the $125 million of cash taxes paid, as we had described, nearly half of that was a legacy accrual that we settled in, I believe, the second or third quarter of the year. So the remaining piece is really taxes paid in normal course and then the tax impact of the sale of A-Basin. So that's really the main composition of that $125 million. But the nonrecurring piece, we won't have going forward.

Nothing else for me.

And by the way, the settlement resulted -- we had over-accrued from what we actually paid so there was a bit of a gain on that. So it was unfortunate this event occurred in 2011. It took 13 years to settle it. But we had accrued for it the whole time so it is what it is but it was disappointing.

And our next question today is a follow-up from Sam Damiani with TD Cowen.

Just on Coopertown and Regina, that's been in the works for quite some time. As I recall, it's quite a large holding in the city. How could that play out in the future, maybe 2 to 3 years out in terms of annual lot sales contributing to the overall business? Could it be competitive with Saskatoon in terms of volumes? What's your outlook there?

Jose?

Regina is a fascinating market. I mean, that's a market where we have the largest position. There is no new communities in the works. Very low existing inventory, so the fundamentals are probably the best out of the 4 markets. That hasn't yet translated into an increased home price index or the same -- so the same demand dynamics we've seen in Saskatoon. But we're in a pretty good spot. Realistically, I think it will be a little bit less than Brighton, just the way things are today. So we're probably looking at around 150 to 200 lots a year.

Okay, that's helpful. And just for 2025, back to this year, sales were up last year over 2023. Do you expect more of a flattening on lot sales this year or a bit of a pullback, just given the softening comments that you made earlier?

For this year specifically, we think we'll do slightly better than last year but we won't have the Edmonton JV. So when you strip out the income that we've generated for the sale of those 2 parcels, we should be in better shape this year than last year.

And our next question today comes from Ian Gillespie, a private investor.

Is there an argument against simplifying the corporate structure? Do you have any string of pearls? I can understand the logic of having done that some years ago, but there doesn't seem to be much recognition for some of the subsidiary companies in the overall corporate structure. Is that something that you would -- you're looking at?

DRR announced that it's doing a strategic review and that it's looking at potentially selling itself to create higher value for the shareholders. So I mean, I think that's the type of thing that could make sense. I think that there are -- I think there's a benefit of having either separate public companies or separate investment funds. And Dream is set up pretty well the way it is. I'm not sure that, as an example, buying Dream Office would be better for the Dream Unlimited shareholders. So we're going to work with each one, I think, independently to the greatest outcome. So I think...

I was thinking of...

Go ahead.

I was thinking specifically about Dream Impact, for example, where you're not really in a position to take on some of the specific projects and Dream having to step in to do some of that on their behalf. And so this will presumably continue for a couple of years until things get stabilized. But in the interim, there is quite a large value gap that appears to exist.

Well, you know what, we found that in the public market, it's much more difficult than it used to be to acquire related party companies. And the value that the stock is trading at compared to the underlying value is too great and Dream is not going to pay a huge premium. We already own about 40% of the company. I think Impact Trust is in better shape than people think. I think what you're referring to is that in Ottawa, in 1 case, we have an investment fund owning half of a new building we're going to build, and they're going to assume -- they're going to buy out Impact Trust there. Dream Unlimited took on Block 204 on its own and is buying out Dream Impact there. But that's partly because Dream Impact wanted to participate in LeBreton Flats. So we are definitely doing things to keep moving developments forward and paying down land because that makes it better for everybody so times people are buying Dream Impact share, but Dream Impact is coming along pretty good. I mentioned it's been busy this year. Dream Impact has been among the busiest. And we announced the development waivers for Ontario, Quayside in November. That was the city announced in November but we mentioned in the January press release. We've mentioned that we're very close to finalizing the debt on for Ontario with CMIC. So there's a lot of things that are moving forward, but I don't see an occasion where Dream would take over Impact Trust. I don't think that the Dream shareholders would be better off by that because right now, we have 40% of the upside, so I think that works out pretty good.

And this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Cooper for any closing remarks.

I'd like to thank everybody for their interest, and your questions, we'll reflect upon them. Having said that, I think that in a pretty treacherous time, the company is coming together very well. The last call, I was speaking about Impact Trust. Developing land in downtown Toronto is very tough right now, and there's been a lot of land value degradation. Office buildings has had the same. So we have exposure to those. We've had big losses in those. But I think that we made up for that with the improvements in Western Canada, revenue properties and asset management. So we are pleased with the diversity in this kind of market. I think we're going to be cautious. All of the investments that we're making are really investments in what we already own, and as a result, we're turning land into income properties so we're going to be better for it. But we are being fairly prudent, very prudent stewards of capital. We look forward to reporting back to you after the first quarter, I think we're going to have a lot more to share. And Meaghan, Jose, and I are always available to answer questions between the quarters, too, if you like. Thank you very much for your time and attention. Have a good day.

This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.