Dream Unlimited Q3 2023 Earnings Call Transcript

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November 15, 2023

There are 5 speakers on the call.

Operator

Thank you for standing by. Welcome to the Dream Unlimited Corp. 3rd Quarter 2023 Results Conference Call for Wednesday, November 15, 2023. During this call, management of Dream Unlimited Corp. May make statements containing forward looking information within the meaning of applicable securities session.

Operator

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. Control that could cause actual results to differ materially from those that are disclosed in are implied by such forward looking information. Additional information about these assumptions and risks and uncertainties is contained in Dream Unlimited Corp. Filings with securities regulators, such as its latest annual information form and MD and A. These filings are also available on Dream Unlimited Corp.

Operator

Website at www.dream. Ca. Your host for today will be Mr. Michael J. Cooper, President and Chief Responsible Officer of Dream Unlimited Corp.

Operator

Mr. Cooper, please proceed.

Speaker 1

Thank you, operator, and good afternoon to everybody. Normally, we'll have a conference call in the Q3, but So much volatility, we thought it was a good idea. And we have a chance to tell you more about our business and answer questions. Also this quarter, we took the information from our September 6 Investor Day and created our first effort on a supplemental information package. We would like your feedback as we'll continue that for the year end and then I think we'll advance it further for Q1, so any feedback is appreciated.

Speaker 1

To start, Deb will speak about our results, I'll give some commentary, and then we'd love to answer questions afterwards. Deb?

Speaker 2

Thanks, Michael, and good afternoon. So as Michael said, Yesterday, we published our supplemental information package for the first time in an effort to provide investors with better insight into how we evaluate for various business lines. The supplement is a work in progress, and we'll continue to add disclosures in future quarters and welcome feedback on the content. Now I'll provide a brief overview of our results by operating segment for the quarter. In the 3rd quarter, in our recurring income segment, we generated revenue and net operating income of $44,000,000 $13,000,000 respectively, up from $34,000,000 $10,000,000 in 2022.

Speaker 2

Year to date, segment revenue and net operating income increased by 30,000,000 and $10,000,000 over last year. The increase was primarily driven by growth in our asset management platform and completing buildings in our multifamily rental pipeline. Included in revenue for the 9 months ended September 30 is $47,000,000 related to our asset management and development contracts with Dream Industrial REIT, Dream Office REIT, Dream Residential REIT and our partnership, up from $36,000,000 in 2022. We expect these revenues to continue to grow over time as we actively pursue new asset management opportunities. This quarter in our Development We generated revenue and net margin of $89,000,000 $16,000,000 respectively, up by $68,000,000 $18,000,000 from the prior year.

Speaker 2

Q3 results were largely driven by the timing of our sales in Western Canada as we achieved 400 loss sales this quarter. As of today, we have commitments for an additional 66 lots and 5 acres for 4th quarter in addition to 231 lots and 71 acres already committed through 2025. As disclosed in our supplemental information package, these committed sales represent $117,000,000 in revenue. On a consolidated basis, we generated adjusted earnings before income taxes of $4,000,000 for the quarter $66,000,000 year to date, down by $67,000,000 from the 9 months ended September 30, 2022. The amounts are adjusted for equity accounted pickup of Dream Office REIT and a $1,000,000 net gain on land settlement that was recorded in 2022.

Speaker 2

The decrease from year to date 2022 adjusted earnings before tax was due to fair value losses on investment properties, higher interest expense on variable rate debt and prior year occupancies at Canary Commons. Earnings for development can significantly vary quarter to quarter given seasonality and the timing of occupancy. This was partially offset by strong lot sales activity in Western Canada and higher base fees from our growing asset management platform. We maintained a strong liquidity and managed risk with $305,000,000 in liquidity and conservative leverage ratio of 36 on an adjusted stand alone basis. As of today, we hold interest in Tremont's REIT, Tremont Impact Trust and Tremresidential REIT at 33%, 35% 12%, respectively, in place of the senior management holdings.

Speaker 2

On an annualized basis, we received $16,500,000 in cash distributions from the Trust. As of November 13, the market value of our interest in the Trust is $148,000,000 approximately 20% of transcurrent market cap. We remain committed to maintaining a conservative debt position and may use excess liquidity to purchase additional units through our NCIB and fund potential new investments. So now I'll turn it back over to Michael.

Speaker 1

Thanks, Jeff. I mentioned that things are quite volatile. So if I add some comments as to how our business is changing. In Western Canada, we continue to sell lots in our communities. But I think the bigger change is that we're selling more parcel sites, Some to the typical buyers were building condos, but we're selling more to institutional uses like schools and utilities and other people that needs land as part of a growing community.

Speaker 1

So in a way, we've become a lot less subject The other thing that's changing is we're building a lot more rental units and the returns there are quite good. Our current plan is to continue building all of what we set out to because we own land, we need very little And we're building to 6 caps. And with today's debt rate, we could probably borrow a 4.5 when they're finished. So They are great properties. They've got good growth in the rents, and we've got a good spread.

Speaker 1

So Western Canada is looking very good, and we expect it to be stronger over the next few years than it has been in the last few years. Our asset management business increased quite a bit this year. We've been in the process of trying to grow it much more. We've been out seeing a lot of institutional clients literally all over the globe. And we've gotten quite a bit of traction in terms of conversations that we started.

Speaker 1

But it seems as if a lot of the sources of capital are relatively frozen in terms of making new decisions. So we hope that in 2024, a lot of this The groundwork that we've done this year will turn into completed transactions. I'm Vince, the income properties in Western Canada. We're actually building income properties and growing our portfolio everywhere. And it's adding a lot of value to our business.

Speaker 1

So primarily it's apartment buildings and This has a big retail distillery, and that's become a big part of our business. It's going to continue to become a big part of our business. And when you put those three groups together, our income assets, our asset management and our Western Canadian land and housing business, That's the major portion of our business. In regard to urban development in Toronto, It's been a lot more uncertain. Construction costs are higher than they've been here before, while we're seeing reasonable pricing everywhere else in the country.

Speaker 1

So construction costs are very high. Interest rates have been changing quite a bit. We'll see where they settle. They're down a lot in the last 3 weeks. We're hoping that they come down a lot more.

Speaker 1

And with the right interest rate, we can proceed with building purchase built rental. The condo market has had it's a bit patchy. And again, for us to move forward on developments, we have to have presales where we build condos. Condos is a lesser part of our business, but we still have a portion of condos. And right now, about half the projects That were planned on starting.

Speaker 1

I have indeed started. So we hope that we can start some of those projects, but we're going to be very cautious. In addition, we own a stake in Dream Office. And as everybody knows, office has gone through the most changes of any sector over the last few years. We're quite pleased with the buildings we own, how we've taken care of them.

Speaker 1

And now what the team is focused on is how do we reduce our CapEx and leasing costs to have a Sustainable model even through difficult times as we have now. And I think we're going to get there and I think we're Looking at the ability for the long run, but in the shorter term, we want to be very careful with what we do with the capital. The Impact Trust is where most of our development a lot of the development that Treatment Limited is doing It is based in Dream Impact Trust. It has $1,000,000,000 of income assets or development assets that turn into income assets or a condo that is majority sold, a majority price fixed. All of those $1,000,000,000 of assets require a no further Equity.

Speaker 1

Beyond that, we have another $250,000,000 for Communities, both the city and Brightwater, those would have land loans and have the opportunity to build many buildings. And they're not going as quick as we would like, but the product is great. So we're watching those closely. And the other $250,000,000 is Some passive investments in others and some land loans in great sites like Keyside, Victory Silo and Gary West. So amazing assets, but we're watching our capital very closely as the developments We want to make sure they're profitable enough to proceed and we want to make sure we have enough funding.

Speaker 1

And I guess with the changes in the market in the last year, That business has been hit. But impact in all of it is still a small proportion of the overall Dream Unlimited business. If I had to Say how Dream Unlimited is doing? Generally, it's doing quite good, 7.5 or 8 out of 10, Even though some of the businesses are challenged and we'll get through them, but overall, we're really quite pleased with how the business is doing. We like our liquidity.

Speaker 3

And as I

Speaker 1

said about office and impact, we have really good assets throughout the business. I'd be happy to answer any questions anybody could ask.

Operator

Thank you. We will now begin the question and answer session. Our first question is from Mark Straub with Canaccord Genuity. Please go ahead.

Speaker 4

Thanks and good afternoon. Western Canada Residential clearly is doing well. In regards to your land development there, do you expect the lot sales to pick up again In the next year or 2? And maybe as far as the multifamily residential developments that you're doing, which It's kind of a new thing, at least in Western Canada. How big do you want that pipeline to get?

Speaker 4

And how much are you willing to invest in development in that area over the next couple of years?

Speaker 1

Okay. I mean, quite honestly, this year we were Very conservative about how much land we serviced. It turns out that there was more interest, so we serviced a bit extra. So right now, we're planning I'm not serving as much for next year. What we don't want to do is have our builders with a lot of inventory.

Speaker 1

So I think where we are now is that we're expecting to be next year and then after that we expect it to pick up. On the second part, we're finishing our 2nd apartment building. In Brighton, it's 120 units and we're starting our 3rd building. The math is pretty simple. I think between land and cash, we need about $5,000,000 Our land is off at $2,500,000 or $3,000,000 So We're hardly investing any money to build in Western Canada.

Speaker 1

So we expect to do another build in the year in Saskatoon. We're also doing some townhouses and single family. So I think we're going to get to 200 units a year or more. And I think by next year at this time, We'll have started our first building in Calgary. And there, I think we could do another building here.

Speaker 1

So we're probably looking at 300 or 400 units of purpose built rental that we'll build in Western Canada and the amount of capital is very, very small.

Speaker 4

Okay. Maybe just moving on to a different area. The asset management business is something that you didn't address Too much in your comments, folks, on many other areas. Obviously, with the Summit transaction, that business grew quite a bit. Do you see a likelihood of additional opportunities to do transactions of that size or even close to that size over the coming year?

Speaker 4

Or is that really just should we look at that as maybe just an opportunistic transaction that came up and maybe it will come up again, but look at that as kind of unique?

Speaker 1

We thought Summit was a very valuable company and that was trading relatively well, But it wasn't trading for what it was worth. The issue with the public companies are, a lot of them are trading not well, but They're nowhere near the right IFRS value. That makes it very difficult to execute a transaction. So To buy a public company, you got to have the stars aligned and some it did. But you've seen a lot of companies use strategic reviews that go nowhere.

Speaker 1

And it's probably not worth as much as the company needs to sell them. So I would say it's a very unique transaction. We are busy looking at things now, but I'd also say We think $1,000,000,000 transaction was a big one. Dollars 6,000,000,000 is huge. I think it's the largest asset management transaction In real estate in Canadian history.

Speaker 1

So don't model 1 year.

Speaker 4

Okay, fine. And maybe just one last question for me. You have been slowly active on the share buyback program. Is that something that you would like to Consistently due over the next year or is it maybe there was some extra liquidity now or you thought the share price was a good opportunity or is this just Something that we should expect at a modest pace continue over the next year or 2.

Speaker 1

Starting January 1, you have to pay a tax when you buy back stock. And I'm having a hard time paying that tax. I mean, it's only 2%. But I wouldn't expect us buying in early January. I think we're going to have to Get used to all the new taxes and decide what we're prepared to do.

Speaker 1

So I would say generally buying back stock would be one of the Way to use capital, but I don't think we're going to be buying back as much stock as we used to. I don't I mean, literally, if we paid $100,000,000 it's $2,000,000 tax. I guess, we do do it, but don't love it. But also, we're really focused on liquidity as we get through this tough time. So we thought we'd buy some this year.

Speaker 1

I would bet we'd buy some more next year, but 300,000 units, 700,000 units something like that. But I'm not saying we will. I'm just saying that's the right magnitude, not 1,000,000.

Speaker 4

Okay, great. Thank you so

Operator

much. Our next question is from Sam Damiani with TD

Speaker 3

Thank you. Good afternoon, everyone. Just on a similar line of questioning, does the company today have enough liquidity To meet its needs and wants, I guess, over the next year or 2?

Speaker 1

Yes. It has enough liquidity under any security any incentive activities we've tested on.

Speaker 3

Okay, great. And just on a related question, here we are, whatever, sort of 5 months after the Dream Office Sid, I know there's lots of ins and outs and lots of things moving around within Dream Unlimited, but At a high level, how was that $100 plus 1,000,000 used within the company?

Speaker 1

I think it was used 100% to pay down debt.

Speaker 3

Okay. And if you had another $100,000,000 come into the company for whatever reason, would it also go to pay down debt?

Speaker 1

Yes. 1st, we've used it to pay down the housing line because we can only draw that down. We put it into construction. We pay down construction debt And we're on construction debt less.

Speaker 3

Got you. Okay. And then you did talk about impact and the economics of rental development. The company did put out a press release a few weeks ago Following the GST, PST rebate announcement, can you give us, I guess, a sense today as to how likely it is the company We'll start construction of some of those 1300 units over the next few months.

Speaker 1

We're working very hard with CFHC to get the documents finished for La Bretonne Flat. That's a big project. And if everything is the way it is today, We will start that immediately. I mentioned that we're starting in Saskatoon. And in Calgary, our expectation will start next year.

Speaker 1

We have a couple of sites in Ottawa, 1 in Ottawa, 1 in Gatineau. I expect we'll start the 1 in Gatineau. And in Ottawa, we're planning to start it, but it's totally dependent on interest rate. Now the interest rates aren't Important because of what it does to the project return. What it's really important to is the debt service coverage.

Speaker 1

So the higher the interest rates, the lower the amount of debt you can get and the larger amount of equity. And what we find is The extra interest that you pay with higher interest rates doesn't affect returns that high over 10 years. What really hurts is the amount of equity you have in a project. So in all our projects, what we're looking at is how much capital is required to build a building. And in some of them, higher debt eliminates the potential to build right now.

Speaker 1

But as far as the 1300 units, I think we'll start 1300 next year.

Speaker 3

Okay, great. And last one for me is on the Western Canada lots. Last year, the Q4 was a huge Quarter, I don't know if it was 80% of the year's volume in 1 quarter, but of course this Q3 was a very big volume quarter. How should we think about the 4th quarter in the context of the committed sales that you've announced yesterday?

Speaker 1

I just want to check that. I think we said some of those are for this year. So we've got the majority of our presales. I think we've got 66 presales for launch now for the balance of the year and 5 acres and the other part will be Those actions of how we were building. So there's still some to come, but the Q3 was most of it.

Speaker 3

Got it. Okay. Thank you. That's it for me. Thank

Speaker 1

you. Thank you.

Operator

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

Speaker 1

I'd like to thank everybody. Unfortunately, after The reporting season has lost my voice. If it wasn't the case, I would have provided more introductory remarks. But when I get it back,

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