DREAM Unlimited Corp

TSX:DRM

Earnings Call Analysis

Amidst 2023 Challenges, 2024 Looks Promising

Following a year with heightened interest rates impacting long-term rates and office buildings, the company appears to have navigated these challenges, with the expectation of a stronger year ahead. They are set to enhance liquidity by around CAD 150 million post-tax, thanks to an anticipated sale, and are looking for additional liquidity opportunities. Western Canada has exceeded expectations with a $40 million increase in presales at Alpine Park. The company's asset management business has also grown, up 40% in assets and 50% in revenue. The company plans to begin new construction projects, notably between 1,200 and 1,400 units in 2024, with Dream Unlimited's share exceeding $300 million in new apartments. While no new developments are slated for Toronto this year, preparations for a 2025 start are in progress. Despite the adjustments required in 2023, the company demonstrates strong fundamentals, with over 80% of its value derived from growing income properties, recurring income from asset management, and developments in land and housing.

Enhancing Income Properties, Asset Management Growth, and Western Canada Opportunities

Dream Unlimited Corp witnessed considerable transitions during the recent quarter, with an emphasis on expanding income properties and the asset management business. The company experienced growth in Western Canada, which hasn't been seen since before 2014. The quarter saw revenue in the recurring income segment increase to $58 million with a net operating income (NOI) of $26 million, contrasting with $43 million in revenue and $14 million in NOI from the previous year.

Dividend Adjustments Reflecting Market Realities

The fluctuations in the office real estate market, especially due to COVID-19 disruptions, resulted in Dream Impact Trust suspending dividends and Dream Office REIT halving its distributions. Dream Unlimited views this adjustment as a necessary action for cash preservation to ensure long-term health, given the recent challenges in the real estate sector.

Project and Sales Momentum in Western Canada

Western Canada is surpassing expectations with record presales and a substantial increase in income from assets. This region has contributed to the most significant level of presales in the company’s history, signaling reliable, burgeoning demands in this geographical segment.

Conservative Fiscal Management Amidst Risks

Although Dream Unlimited acknowledges continued risks, the company has navigated through the instability brought upon by higher interest rates and cap rate changes. With a strategic approach to managing these economic shifts, the corporation is positioned to maintain operations effectively within the current financial landscape.

Optimistic Outlook for 2024

A positive outlook for the upcoming first quarter was expressed, suggesting that 2024 could be rewarding for Dream Unlimited as it persists in reshaping the company and capitalizing on new ventures.

Increasing Liquidity While Eyeing Strategic Opportunities

Dream intends to enhance its liquidity, partly to cover operational risks associated with construction budget delivery but also to prepare for potential investment opportunities. The company is cautious about making large capital commitments and prefers leveraging partnerships for investment ventures.

Shifting Market Conditions Drive Long-Term Land Sales Strategy

Builders’ inventory needs have evolved, contributing to Dream sealing longer-term land sales, which simultaneously aids liquidity and risk management. This proactive approach aligns with market demands where builders seek stability in supply for the coming decades.

Shareholder Value Through Dividends and Potential Special Dividends

With a potential free cash flow of $100 million and a history of handling special dividends cautiously, Dream considers maintaining a dividend that is sustainable in the long term, acknowledging the company's Net Asset Value (NAV) and stock price. There is a chance that a portion of the proceeds from the sale of A Basin could be distributed as a special dividend to shareholders.

Appreciation for Stakeholder Commitment and Executive Contributions

The executive team expressed gratitude to stakeholders for their continued interest and support of the company. A notable departure from the team was also announced, with thanks given to Deb for her pivotal role over the last 3.5 years.

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon, ladies and gentlemen. Welcome to the Dream Unlimited Corp. Fourth Quarter Conference Call for Wednesday, February 21, 2024. 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 in 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 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.

[Michael Cooper, executive]

Thank you, and welcome, everybody. Dream Unlimited put out its year-end numbers about half an hour ago, and we wanted to use this time to guide you through what 2023 was like, and the changes that we've been making to the company, which are really quite substantial. So I thought we'd start by having Deb Starkman walk through the results, and then I'll talk about some of the strategic initiatives that we've been making. Deb?

[Deborah Starkman, executive]

Thanks, Michael, and good afternoon. I'll provide a brief overview of our results by operating segment for the quarter. In Q4, our recurring income segment generated revenue and net operating income of $58 million and $26 million, respectively, which was up from $43 million and $14 million in 2022. For the 12-month period, segment revenue and NOI increased by $45 million and $21 million over last year. The increase was primarily driven by the growth in our asset management platform and completed buildings in our multifamily rental pipeline. Included in revenue for the year ended December 31 is $71 million related to our asset management and development contracts with Dream Industrial REIT, Dream Office REIT, Dream Residential REIT and our partnership, up from $48 million in 2022.

We expect these revenues to continue to grow over time as we complete our development pipeline and activity -- and actively pursue new asset management opportunities. This quarter, in our development segment, we generated revenue and net margin of $50 million and $3 million, down by $75 million and $30 million from the prior year due to the timing of sales in Western Canada, which were primarily recognized in the third quarter of this year compared to fourth quarter in 2022.

As of today, we have commitments for an additional 336 lots and 195 acres through 2025, representing the highest level of presales in our history. As disclosed in our supplemental information package, these committed sales represent $186 million in revenue, $148 million of which will be recognized this year. On a consolidated basis, we generated adjusted loss before income taxes of $5 million for the quarter and earnings of $62 million for the year, down by $44 million from last year. The amounts are adjusted for equity account pickup for Dream Office REIT and a onetime net gain on land settlement recorded in 2022.

The decrease from the 2022 adjusted earnings before tax was due to the fair value losses on investment properties, higher interest expense on variable debt and fewer lot and acre sales in Western Canada, which were partially offset by higher asset management income. Earnings from Development can vary significantly quarter to quarter given seasonality and timing of occupancy.

We maintained strong liquidity and managed risk with $325 million in liquidity at December 31 and a conservative leverage ratio of 37% on an adjusted stand-alone basis. We expect that with the sale of A Basin, we'll add an additional $150 million of liquidity on closing. As of today, we hold interest in Dream Office REIT, Dream Impact Trust and Dream Residential REIT at 32%, 36% and 12%, inclusive of senior management holding. We remain committed to maintaining a conservative debt position and may use excess liquidity to purchase additional units through our NCIB, return capital to shareholders and fund potential new investments.

As we noted in our press release, we have increased our annual dividend from $0.50 per share to $0.60 per share, effective with the dividend payable on March 28 of this year. On a personal note, I'll be retiring for Dream at the end of March. I'm extremely proud to have been part of Dream during this period of incredible growth and will value the relationships I've built at the company. I also want to thank Michael and the Board for their strong leadership. I'll now turn the call back over to Michael.

[Michael Cooper, executive]

Thank you, Deb. I hope I'll remember to make some comments. Thank you, for everything you've done in the 3.5 years you've been here and if I don't, then I just said it.

For Dream Unlimited, we really made some major changes in our business. And the changes really are expanding our income properties dramatically, growing our asset management business dramatically and seeing improvements in Western Canada that we haven't seen literally since before 2014. So those 3 areas of business are by far the bulk of the value.

But I first want to talk about Dream Office and Dream Impact Trust, which last week had a rough week as we decided to suspend dividends at Dream Impact Trust and reduced the distributions at Dream Office by half. Dream Office, first, is in a sector that has had a hard time. There have been so many changes in the last 5 years with COVID and then post COVID with how people are using office space and all the changes in the business.

But I think our fundamental view is that there is going to be very little supply in the future. And we're going to start to see office REIT buildings being turned into something else, whether that's lab space like 720 Bay or George Brown College buying an office building and using it for institutional use or for the conversion into apartments.

So I think on the supply side, it's going to be flat to down over the next 5 or 6 years. On the demand side, as leases roll over, people are settling in to determine the amount of space that they need. So it still may be a little bit weak over the next couple of years, but we do expect that as businesses continue to grow, and we are seeing more people coming back to work, we'll start to see some demand increasing. And our view of it is, it doesn't take a lot of demand to move the needle when there's no new supply.

And on that, on September 6, when we did our Investor Day, we had said that we thought for the next 3 years, the condition will remain the same. And then in the last 24 months of our forecast, the 5-year forecast, we'd expect to hit maybe 93% occupancy, which is halfway between the occupancy we had and what we used to have pre-COVID. And we really estimated that we have tenant inducements halfway between what they've been now at the worst time and what they were at the best time.

And with just half the -- if inducements increase halfway to where they are at the worst time and occupancy goes to 93%, our view is in the underlying value of the office REIT goes to about $25. So that's basically the way we view the business. We think is we're making progress. But in the meantime, we've been using a lot of cash and wanted to preserve cash to make sure the company is as healthy as possible. On the liquidity front, in Dream Office, we have some development assets we've been looking at potentially selling or developing, and we've got a couple of income properties we're looking to sell.

But we have quite a bit of liquidity now, and we just want to make sure that we don't overburden the business with distributions that aren't sustainable. On Impact Trust, it's quite a different business because we have incredible assets there, both apartments and developments. The apartments are doing quite well. The existing apartments, whether they're brand new buildings or the value-add buildings. But we've got a fair amount of land that's taken longer to turn into developments. So we have both a cash drain holding land, and it's taken us longer to get to the income.

However, we have plans to move about half of that land into production or sell it, which will reduce our land loan by half. And we also are looking at starting some new apartments that I'll get into in a minute. So I think Impact Trust and Office are in very different situations. But in both cases, we thought it's very prudent to keep cash within the companies. Going back again to September 6, we showed a value of about $58 a share, of which the holdings in Dream Residential, Dream Impact Trust and Dream Office was just under $4.

And even with the distribution cuts and everything else that's happened since, that's probably gone from $4 to $2. So that's on the financial side what it means to Dream Unlimited, but our company is working very hard to make both Dream Impact and Dream Office great successes. That's all I'm going to say about that. I have spoken frequently about increasing liquidity. And prior to 2019, we used to have $100 million to $150 million of liquidity and felt that was pretty good. After 2019, we took it to $300 million. And I think we've decided that with continued increasing risk in the system, we'd like to have even more liquidity, and that really led us to sell -- entering into an agreement to sell A Basin, which I think we announced a couple of weeks ago. That transaction is subject to antitrust approval.

And when that is completed, when we close, we'd expect to increase our liquidity by about CAD 150 million after tax. And that will help us have more liquidity than before, but I think we may try to get even more liquidity for the balance of the year. We're looking at a couple of areas. So liquidity has been very important to us, and we're making the progress on that. Western Canada is going much better than we had anticipated even 3 months ago.

And in Calgary, we've had great presales at Alpine Park. We're very excited about that. And we now have the most presales we've ever had in our company's history, and it's even up about $40 million just from year-end. We're completing apartment buildings and they are leasing up very well. Townhouses are just getting finished now. They're leasing up very well. Our first single-family rental have leased up very well. Those are all in Saskatoon. And we have plans to continue to start new construction in each of those areas, more townhouses and more single-family rentals and another apartment building.

We're very excited because we expect by year-end to also start our first apartment building in Calgary at Alpine Park. And we're seeing a dramatic increase in income of our assets in Western Canada. And I think that's really going to help because the land development business tends to be pretty lumpy. And as we add more and more income properties, which I think is likely to have increased NOI by, let's say, $3 million a year, that's going to be a really steady influence on the results of Western Canada. So we think we're going to have higher quality earnings from there.

Our asset management business, I think, was up 40% in assets, 50% in revenue in 2023. It's tough fundraising. We've had a couple of big things happen. But we're working on a lot of things that may happen in 2024. It may not happen at all, they may spread into 2025, but we do expect to continue to see some growth in our assets under management and growth in our profitability. And what's great about those is it requires very little capital and the return is really on our ideas rather than on the use of our capital.

So that's very good. And then the third point is, in addition to the Western Canada, the development of land into income properties. Zibi is coming along. We finished Aalto 2, which is already 40% leased when we started leasing in December 15. The Common building, they're just getting occupancy as we speak, and that's about another 240 units, and we're just starting leasing on that. Maple, which is our 751-unit building in West Don Lands. It's about -- at least there is at about a similar level. And these are going to turn into stabilized income properties, all relatively soon.

For 2024, we're just about finalizing our financing with CMHC for the LeBreton Flats project, which is a huge accomplishment. In March or April, it looks very unlikely we're going to be able to develop it with the market conditions, but with the help of the waiver of HST and sort of a moderating income interest rate, we're ready to go. That's important. We're starting other building in Zibi. I mentioned some buildings in Western Canada. So I think this year will be between 1,200 and 1,400 units that we start. For Dream Unlimited, their share will likely be in excess of $300 million of new apartments.

We expect to continue to do some next year as well. And as these all finish, we're going to continue to grow our income properties very rapidly. What I didn't say was that we were starting [ any ] apartment buildings in Toronto this year. We're working very hard to put the ingredients in place to be able to start in 2025 and that will move the needle even more on the income properties. So in 2023, we kind of took our hits. It was in my quote that after 20 years of decreases in interest rates, we really got hit in 2023 with the long-term rates. We're starting to see cap rates change and office buildings were challenged.

So I think we sort of dealt with this reversal of that change, even though we had interest rates that are higher than they were 20 years ago. And I think we've sort of dealt with it already. We're managing in the current environment just fine. And throughout the last 20 years, within our industry, there's always been this question of what happens when interest rates go back to normal. And I would say that I think our company and the industry in general have fared much better than anybody would have said over the last 20 years.

So I think we're through a lot of that risk now. There's still a lot of risk in the system, but the risks that have been identified, I think we're -- we moved through it a lot. I think it's likely that the short-term rates will come down, I'm not sure about long-term rates, so they're probably going to be range bound, and we can make this work. So we think that we took the hit we needed to take in 2023. We've got a lot of things shaping up. One thing I didn't mention was we've got together with some builders. And in the first quarter, we sold the 2 parcels, 80% of 130 acres to builders.

We're still the developer, and we've gotten attractive prices, and we've moved the profits forward many years. So it's pretty sensational. This first quarter between some of the things we're doing is going to be a great first quarter, and it looks like 2024 is going to be a great year. So I look forward to keeping our investors up to speed on how we change the company.

But for those who think the company is complicated, I would say, something in excess of 80% of the value of the business is our growing income properties, our recurring income from asset management and our developments in land and housing. So hopefully that will please our investors, and we'll be able to report on the company in a way that makes it easier to understand. But notwithstanding the pain in 2023, 2024 is looking great. I'd be happy to answer any questions if anybody has any.

[Operator]

[Operator Instructions] The first question comes from Mark Rothschild with Canaccord Genuity.

[Mark Rothschild, analyst]

And Maybe I'll start by congratulating Deb and wish her well in her retirement.

[Deborah Starkman, executive]

Thanks very much.

[Mark Rothschild, analyst]

Michael, in regard to the liquidity and definitely some larger asset sales that you're completing, interest rates have risen and the company seems to be in fine condition. You've increased liquidity quite a bit already. Should we view some of these proceeds, it's maybe capital that could be used if an interesting, larger opportunity comes up? Or are you really focused and adamant on maintaining a much higher level liquidity than the company ever previously had?

[Michael Cooper, executive]

I think that we're serious about wanting more liquidity. But I love the way you asked the question. And I think that as we do developments in this environment, we think it's good to have that extra liquidity because we're getting loans that are very low cost, high leverage, they go for a long time, but we're taking on the risk on the -- delivering the construction on budget. So I think that we can literally get positive leverage putting the money in the bank compared to the loans that we have.

So I think having the extra liquidity gives us a lot of flexibility. As far as opportunities, I think there are tons of opportunities coming, and I think that Dream will use its capital sparingly, matched together with institutions to maybe do some big things. But I don't think Dream Unlimited has the capital or the desire to make big bets. So if we're looking to putting $30 million or $50 million into an idea with somebody else's couple of hundred million, we could do that. But we won't be spending $200 million or $300 million on an idea and use up a lot of our liquidity.

[Mark Rothschild, analyst]

Okay. Great. And maybe one other one. It seems like you've done some more forward-looking deals as far as selling land in Western Canada historically, I don't think you've done much of that, maybe you have many years ago. Are you being more aggressive now and selling bigger pieces of land to increase liquidity? Or is it just that's where the demand is in the market? Maybe more information on what's going on in Calgary. And then should we expect maybe more of that in '24 or '25?

[Michael Cooper, executive]

Yes. We're -- it's actually some things have changed. And I think what we're seeing is, our builder customers used to just look and say, "Hey, can I get some lots for next year?" And now what we're finding is, they want to block out land for the next 20 years. So I think it's much harder for the builders to get inventory. I know in the U.S., you've got land developers who sell to builders, and there is almost unlimited supply of lots to builders. They can use as much as -- they get as much as they need.

But in Canada, it's becoming increasingly important for builders to lock up a supply. So yes, it's great for liquidity. But in some ways, what we're doing is, we're putting -- we're sharing some of the profits. We're making sure that the builders have adequate runway for them knowing they have lots. And it happens to be very good for our risk management and liquidity. But I would say that we could not do this -- we could not introduce to the market and we want to sell land to builders 5 years out. It's the other way around. That's what builders are looking for now, and we're responding. As far as doing more of it, we may do some, we're looking at a few things. And we're kind of 50-50. It depends on each piece of land, but we would do more, yes.

[Operator]

The next question comes from Sam Damiani with TD Cowen.

[Sam Damiani, analyst]

And I'll echo congratulations and well, good wishes on your retirement, Deb. We're going to miss you. Maybe a question for you. Just on the dividend increase and continued share repurchases that we've seen, how is Dream looking at its payout ratio and use of capital, returning to shareholders and sort of how are you measuring that? And what's your goal?

[Michael Cooper, executive]

Is that for exiting Deb? Or is that for me?

[Sam Damiani, analyst]

You guys decide.

[Michael Cooper, executive]

Go ahead, Deb.

[Deborah Starkman, executive]

I think we're managing our liquidity fine. I think we take a look, and we feel comfortable and the Board approved the increase. So I don't think that -- I think we're prudent with the excess capital that we have. And we'll use it for share buybacks and potential distribution of special dividend. Michael?

[Michael Cooper, executive]

So the way I look at it is a number of different tasks. I think if you look at what we think of the NAV, the dividend is just over 1%. I think that's a sustainable amount. If you look at the stock price, it's just over 2%. We think that's an amount that's reasonable for the shareholders on an ongoing basis. So we kind of look at those 2 things. As far as the ability to payout or the payout ratio, Well, $0.60 on $40 million is basically $24 million. We're expecting to have about $100 million of free cash flow. So it's about 25%. And then on special dividends, when we sold Obico, we did a special dividend of 25% of the proceeds. So the 25% number is something that we kind of use as a rough hedge. So those 3 things we look at as potential for what's an appropriate payout. that's pretty specific, isn't it, Sam?

[Sam Damiani, analyst]

No, that's helpful. It really is. And then just switching over to AUM. Of course, you had a huge growth in fee income last year with the Summit deal. What's the environment like today? What are you seeing in terms of fundraising or other ways to grow AUM going forward in the near-to-medium term?

[Michael Cooper, executive]

I think the industry has been generally very -- it's difficult to raise new money. And I think that was '23 very difficult. I think 2024 is likely to be very difficult. But we are starting to see, like with the TRICON deal, you saw Blackstone, I don't know when the last time they did a deal of that scale was; and you saw TPG buy industrial. So I think we're starting to see the private equity fund that raise a lot of money starting to spend it.

We're seeing some of the sovereign wealth funds like the Japanese Sovereign Wealth fund that bought into [indiscernible]. So I think we're starting to see some people separating money to invest in Canada. And I'd say that for us, we think it's more likely that we'll be able to enter into some joint ventures of scale that it would be, let's say, to raise money for an open-ended fund.

So I think there's lots of opportunities starting -- so in the last question, the idea was, well, when we spent a lot of money, I think that there's lots of opportunities with a good idea to raise money for a specific use. And I think that's how we're likely going to grow our assets under management for the next...

[Sam Damiani, analyst]

And are you ruling out a special dividend from a A Basin proceeds? Or reserving your sort of decision on that for now?

[Michael Cooper, executive]

I think we want to -- we've got some other things. I think we look at how much liquidity we get to. And we would look at doing a special dividend to give something back to the shareholders. And I think it's in the materials we said that's part of the -- that's a use that we would look at.

[Operator]

[Operator Instructions] Since there are no more questions in phone line, this concludes the question-and-answer session. I would now like to turn the conference back over to Mr. Cooper for any closing remarks. Please go ahead.

[Michael Cooper, executive]

Thank you. And for the listeners, please feel free to reach out to Deb or me to ask any further questions. I also want to thank people who are following the company and I appreciate the time you put into it. And finally, I would like to thank Deb who joined us in the fall, 3.5 years ago, and she came here to help us. And I think that the idea was it will be for about 3-or-so years, she's done that. It's been great to have her here, and now she is stepping down. So it's been a big help, and she brought a lot of atmosphere to our company, and we're going to miss that. And we wish Deb every bit of success in the next portions of her life. Deb, thank you, and good night.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.